SOMERA COMMUNICATIONS INC - 10-Q Quarterly Report

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 Rule 12b-2 under the Act). Yes x No ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

The accompanying notes are an integral part of these condensed consolidated financial statements.

Somera Communications, Inc. (“Somera” or “the Company”) was formed in August 1999 and is incorporated under the laws of the State of Delaware. The predecessor company was Somera Communications, LLC, which was formed in California in July 1995. In November 1999, the Company raised approximately $107 million in net proceeds from its initial public offering. Since that time, the Company’s common stock has traded on the Nasdaq National market under the symbol SMRA.

The Company’s fiscal quarters reported are the 13 or 14-week periods ending on the Sunday nearest to March 31, June 30, September 30 and December 31. For presentation purposes, the financial statements and notes have been presented as ending on the last day of the nearest calendar month. The first quarter of 2005 and 2004 each consisted of 13-week periods.

The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, all of which are recurring in nature, which in the opinion of management, are necessary for a fair statement of the results of operations for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The balance sheet as of December 31, 2004 is derived from the audited financial statements as of and for the year then ended but does not include all notes and disclosures required by accounting principles generally accepted in the United States.

These financial statements should be read in conjunction with the financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

The Company’s revenues are derived from the sale of new and re-used telecommunications equipment and equipment related services. With the exception of equipment exchange transactions, whereby equipment for one operator’s network is taken in exchange for other equipment, equipment revenue is recognized upon delivery by the Company provided that, at the time of delivery, there is evidence of a contractual arrangement with the customer, the fee is fixed or determinable, collection of the resulting receivable is reasonably assured and there are no significant remaining obligations. Delivery occurs when title and risk of loss transfer to the customer, generally at the time the product is shipped to the customer.

The Company also generates service revenue, either in connection with equipment sales or through service only transactions. Revenue related to time and materials contracts is recognized as services are rendered at contract labor rates plus material and other direct costs incurred. Revenue on fixed price contracts is recognized using the percentage-of-completion method based on the ratio of total costs incurred to date compared to estimated total costs to complete the contract. Estimates of costs to complete include material, direct labor, overhead, and allowable general and administrative expenses. These estimates are reviewed on a contract-by-contract basis, and are revised periodically throughout the life of the contract such that adjustments to profit resulting from revisions are made cumulative to the date of the revision. The full amount of an estimated loss is charged to operations in the period it is determined that a loss will be realized from the contract. Revenue earned but not yet billed is included in other current assets in the accompanying condensed consolidated balance sheet. Unbilled receivables were $109,000 and $70,000 at March 31, 2005 and 2004, respectively. Revenue from services represented approximately 8.4% and 18.9% of total revenue for the three month periods ended March 31, 2005 and 2004, respectively.

Revenue for transactions that include multiple elements such as equipment and services bundled together is allocated to each element based on its relative fair value based on negotiated terms (or in the absence of fair value, the residual method) and recognized when the revenue recognition criteria have been met for each element. The Company recognizes revenue for delivered elements only when the following criteria are satisfied: (1) undelivered elements are not essential to the functionality of delivered elements, (2) uncertainties regarding customer acceptance are resolved, and (3) the fair value for all undelivered elements is known. Revenue is deferred when customer acceptance is uncertain, when significant obligations remain, or when undelivered elements are essential to the functionality of the delivered products.

The Company manages contracts whereby the Company pays for services rendered by third parties as an agent for its customers. The Company passes these expenses through to customers, who reimburse the Company for the expenses plus a management fee. Revenues related to these types of contracts include only management fees received from customers.

A reserve for sales returns and warranty obligations is recorded at the time of shipment and is based on the Company’s historical experience.

The Company supplies equipment to customers in exchange for re-used equipment or to customers from which re-used equipment was purchased under separate arrangements executed within a short period of time (“reciprocal arrangements”). For reciprocal

arrangements, the Company considers Accounting Principles Board (“APB”) No. 29, “Accounting for Nonmonetary Transactions,” and Emerging Issues Task Force (“EITF”) Issue No. 86-29, “Nonmonetary Transactions: Magnitude of Boot and Exceptions to the Use of Fair Value, Interpretation of APB No. 29, Accounting for Nonmonetary Transactions.” Revenue is recognized when the equipment received in accordance with the reciprocal arrangement is sold through to a third party. Revenues recognized under reciprocal arrangements were $16,000 and $122,000 for the three month period ended March 31, 2005 and 2004, respectively.

Research and development costs are charged to operations as incurred. Internal-use software development costs are accounted for in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”). SOP 98-1 generally requires that software development costs be expensed as incurred until the application development stage is reached, at which point external development and certain direct internal costs are capitalized and, when the software is placed in service, amortized over the estimated useful life, generally three years. The Company capitalized $108,000 software development costs during January 2004 through March 2004, primarily consisting of salaries for employees directly related to the development of the Company’s general ledger inventory module interface and integration with its outside repair service computer module. The project was completed in 2004 and there were no capitalized software development costs during January 2005 through March 2005.

The Company uses the intrinsic value method of Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees,” and its interpretations in accounting for its employee stock options. The Company amortizes stock based compensation arising from certain employee and non-employee stock option grants over the vesting periods of the related options, generally four years using the method set out in Financial Accounting Standards Board Interpretation No. 28 (“FIN 28”). Under the FIN 28 method, each vested tranche of options is accounted for as a separate option grant awarded for past services. Accordingly, the compensation expense is recognized over the period during which the services have been provided. This method results in higher compensation expense in the earlier vesting periods of the related options.

Pro forma information regarding net loss and net loss per share as if the Company recorded compensation expense based on the fair value of stock-based awards has been presented in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”, and are as follows for the quarters ended March 31, 2005 and 2004 (in thousands, except per share data):

The Company calculated the fair value of each option grant on the date of grant using the Black-Scholes option pricing model as prescribed by SFAS No. 123 “Accounting for Stock-based Compensation” as amended by SFAS No. 148,” Accounting for Stock-Based Compensation—Transition and Disclosure”, using the following assumptions:

Employee stock awards include employee stock options. Common shares outstanding plus shares underlying stock-based employee awards totaled 58.1 million shares at March 31, 2005, compared to 57.8 million shares outstanding at March 31, 2004. The weighted average exercise price of outstanding stock options at March 31, 2005 and March 31, 2004 was $3.13 and $4.94, respectively. The weighted average fair value of stock awards granted during the three month periods ended March 31, 2005 and 2004 was $1.43 and $2.84, respectively.

Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of shares and equivalent shares outstanding during the period. Equivalent shares, composed of shares issuable upon the exercise of options and warrants, are included in the diluted net loss per share computation to the extent such shares are dilutive. In the quarter ended March 31, 2005, there was no dilutive impact due to the recorded net loss.

Options to purchase 5,191,231 shares of common stock have been excluded from the calculation of net loss per share, diluted for the three month period ended March 31, 2005, and options to purchase 6,222,588 shares of common stock have been excluded from the calculation of net loss per share, diluted for the three month period ended March 31, 2004, as their effect would be anti-dilutive.

The Company increased its inventory reserve to $5.6 million as of March 31, 2005 to reduce the carrying value of inventory to current market prices. During the quarter ended March 31, 2005, the Company disposed of $665,000 of inventory that had previously been reserved. The Company did not receive any proceeds from the disposals. The Company incurred charges for excess and obsolete inventory totaling $506,000 during the three months ended March 31, 2005.

The Company’s goodwill balance of $1.8 million relates to the New Equipment reporting unit and no triggering events per SFAS No. 142 “Goodwill and Other Intangible Assets” have occurred during the quarter.

The Company’s intangible assets consist of non-compete agreements and no triggering events per SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” have occurred during the quarter. The following is a summary of the Company’s intangible assets with finite useful lives at March 31, 2005 (in thousands):

Amortization for the remaining portion of the year ending December 31, 2005 is expected to be $33,000.

The Company maintains a credit facility of $4.0 million with Wells Fargo HSBC Trade Bank, which provides for issuances of letters of credit, primarily for procurement of inventory. The credit facility terminated May 1, 2005. The credit agreement requires facility fees, which are not significant. As of March 31, 2005 and December 31, 2004, the Company was in compliance with all covenants. As of March 31, 2005 and December 31, 2004, the Company had no letters of credit outstanding. The Company had no long-term debt as of March 31, 2005 and December 31, 2004.

The Company is involved in legal proceedings with third parties arising in the ordinary course of business. Such actions may subject the Company to significant liability and could be time consuming and expensive to resolve. The Company is not currently a party to nor is aware of any such material litigation or other legal proceedings at this time that could materially impact the Company’s financial position, statement of operations, or liquidity.

The Company provides for future warranty costs for equipment sales upon product delivery. The specific terms and conditions of those warranties vary depending upon the product sold and country in which the Company does business. In general, the Company offers warranties that match the manufacturers’ warranty for that specific product. In addition, the Company offers a one-year warranty from the date of shipment for all equipment. The liability under these warranties is to repair or replace defective equipment. Longer warranty periods are provided on a very limited basis in instances where the original equipment manufacturer warranty is longer or its is a requirement to sell to specific customer or market.

Factors that affect the Company’s warranty liability include historical and anticipated rates of warranty claims and cost per claim. Adequacy of the recorded warranty liability is reassessed every quarter and adjustments are made to the liability if necessary.

Changes in the warranty liability, which is included as a component of “Other Accrued Liabilities” on the Condensed Consolidated Balance Sheet, during the period are as follows (in thousands):

The Company occasionally guarantees contingent commitments through borrowing arrangements, such as letters of credit and other similar transactions. The term of the guarantee is equal to the remaining term of the related debt, which is short-term in nature. No guarantees or other borrowing arrangements exist as of March 31, 2005. If the Company enters into guarantees in the future, the Company will assess the impact under FASB Interpretation No. 45 (“FIN No. 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”

At March 31, 2005, the accrued liability associated with the restructuring charge was $222,000 and consisted of the following lease obligations which expire in 2006 (in thousands):

The Company helps telecommunications operators buy and sell new and re-used equipment and provides equipment related services. In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” operating segments are identified as components of an enterprise for which separate discrete financial information is available that is evaluated by the chief operating decision maker or decision making group to make decisions about how to allocate resources and assess performance. The Company’s chief operating decision maker is the chief executive officer. To date the Company has reviewed its operations in principally three segments comprised of New equipment, Re-used equipment, and Services. The chief operating decision maker assesses performance based on the gross profit generated by each segment.

The Company does not report operating expenses, depreciation and amortization, interest expense, capital expenditures or identifiable net assets by segment. All revenues disclosed below are generated from external customers. Segment information is as follows (in thousands):

In March 2004, the Emerging Issues Task Force (“EITF”) amended and ratified previous consensus reached on EITF 03-01, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Issues.” This amendment, which was originally effective for financial periods beginning after June 15, 2004, introduced qualitative and quantitative guidance for determining whether securities are other-than-temporarily impaired. In September 2004, the Financial Accounting Standards Board’s (“FASB”) staff issued a number of positions (“FSP”) that focused primarily upon the application of EITF 03-01 to debt securities that are impaired solely due to interest rates and/or sector spreads. Subsequently, FASB suspended the effective date of the application of the majority of EITF 03-01 for an unspecified period, pending additional review. In the interim, the Company continues to apply earlier authoritative accounting guidance to the measurement and recognition of other-than-temporary impairments of its debt and equity securities.

In October 2004, the Emerging Issues Task Force (EITF) ratified its consensus on Issue No. 04-10, “Applying Paragraph 19 of FASB Statement No. 131, ‘Disclosures about Segments of an Enterprise and Related Information,’ in Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds”. EITF No. 04-10 addresses how an enterprise should evaluate the aggregation criteria of SFAS No. 131 when determining whether operating segments that do not meet the quantitative thresholds may be aggregated in accordance with SFAS No. 131. The EITF has delayed the effective date to coincide with an anticipated FSP that will address the meaning of “similar economic characteristics” in 2005. The Company is currently in the process of determining the impact of EITF No. 04-10 on its financial results.

The American Jobs Creation Act of 2004 (the “AJCA”) was signed into law on October 22, 2004. The AJCA contains numerous changes to U.S. tax law, both temporary and permanent in nature, including a potential tax deduction with respect to certain qualified domestic manufacturing activities, changes in the carryback and carryforward utilization periods for foreign tax credits and a dividend received deduction with respect to accumulated income earned abroad. The new law could potentially have an impact on the Company’s effective tax rate, future taxable income and cash and tax planning strategies, amongst other affects. In December 2004, the FASB issued Staff Position No. 109-1 (“FSP 109-1”), Application of FASB Statement No. 109, “Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” and Staff Position No. 109-2 (“FSP 109-2”), “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004”. FSP 109-1 clarifies that the manufacturer’s tax deduction provided for under the AJCA should be accounted for as a special deduction in accordance with SFAS No. 109 and not as a tax rate reduction. FSP 109-2 provides accounting and disclosure guidance for the repatriation of certain foreign earnings to a U.S. taxpayer as provided for in the AJCA. The Company is currently in the process of evaluating the impact that the AJCA will have on its financial position and results of operations.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs” (“SFAS 151”), which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 will be effective for inventory costs incurred beginning January 1, 2006. The Company does not believe the adoption of SFAS No. 151 will have a material impact on its consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153 (“SFAS 153”), “Exchanges of Nonmonetary Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions.” SFAS No. 153 requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of this standard to have a material effect on its consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based Payment”, which replaced SFAS No. 123 and superceded APB Opinion No. 25. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. The Company is required to adopt SFAS No. 123R no later than January 1, 2006. Under SFAS No. 123R, The Company must determine the appropriate fair value method to be used for valuing share-based payments, the amortization method of compensation cost and the transition method to be used at the date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation cost be recorded for all unvested stock options and nonvested stock at the beginning of the first quarter of adoption of SFAS No. 123R, whereas the retroactive method requires recording compensation cost for all unvested stock options and nonvested stock beginning with the first period restated. The Company is evaluating the requirements of SFAS No. 123R and expects that the adoption of SFAS No. 123R will have a material impact on its results of operations and earnings per share. The Company has not yet determined the method of adoption of SFAS No. 123R, or whether the amounts recorded in the consolidated statements of income in future periods will be similar to the current pro forma disclosures under SFAS No. 123.

In March 2005, the Securities and Exchange Commission released Staff Accounting Bulletin No. 107 (SAB 107), “Share-Based Payment.” SAB 107 provides the SEC’s staff position regarding the application of SFAS No. 123(R). SAB 107 contains interpretive guidance related to the interaction between SFAS No. 123(R) and SEC rules and regulations. SAB 107 outlines the significance of disclosures made regarding the accounting for share-based payments.

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (FIN 47). FIN 47 requires an entity to recognize a liability for a legal obligation to perform an asset retirement activity in which the timing and (or) method of the settlement are conditional on a future event. The liability must be recognized if the fair value of the liability can be reasonably estimated. This interpretation of SFAS No. 143, “Accounting for Asset Retirement Obligation”, is effective no later than the end of fiscal years ending after December 15, 2005. The Company is evaluating FIN 47 for any impact to the financial statements from the original 2003 adoption of SFAS No. 143.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion and analysis below contain trend analysis and other forward-looking statements regarding future revenues, cost levels, future liquidity and operations within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We may, from time to time, make additional written and oral forward-looking statements, including statements contained in our filings with the Securities and Exchange Commission and in our reports to stockholders. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below under “Certain Factors That May Affect Future Operating Results” and elsewhere in this Report as well as other factors discussed in our Form 10-K filed with the Securities and Exchange Commission on March 31, 2005 under the heading “Risk Factors.” We do not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. Readers should carefully review the risk factors described in this Report and in other documents we file from time to time with the Securities and Exchange Commission.

We provide telecommunications asset management services to telecommunications carriers to help maintain and extend the life of legacy networks at lower costs. Our successful management of equipment lifecycles should enable our customers, primarily wireless and wireline carriers throughout the world, to concentrate on the introduction of new technologies. Somera supports their legacy networks through the sourcing, servicing, and liquidation of equipment on a more cost-effective basis thereby optimizing return on assets.

(1) Equipment brokerage: Our core transaction business where we sell a combination of new and refurbished equipment from a variety of manufacturers at significant savings off manufacturers’ new list prices.

(2) Somera RecoveryPLUS^{^™}: A comprehensive repeatable program whereby we help carriers identify hidden value in their current under-utilized inventories to improve return on assets. Through this program, we catalog, assess and value these inventories and then develop a procurement and disposition strategy, which provides immediate measurable cash flow and expense relief to the carrier.

(3) Somera RepairPLUS: Services whereby we provide comprehensive repair and testing for wireless, wireline, and data products at significant savings and reduced cycle times.

(4) Somera LifecyclePLUS: A unique offering of customized operational, logistics, and technical services that enable carriers to outsource elements of network operations to drive down maintenance and operating expenses of mature technologies thereby enabling customers to focus more of their internal resources on core business strategies.

Somera RecoveryPLUS^™, Somera RepairPLUS, Somera LifecyclePLUS are emerging lines of business for Somera Communications. Revenue from these new initiatives was not significant during the three months ended March 31, 2005. Our significant revenue generators are equipment brokerage and services. As such, we currently report results along these segments lines.

Today’s business environment is transforming the way carriers are managing the equipment lifecycles of their legacy networks. This transformation is being fueled by the following trends in the telecommunications industry:

As a result, carriers are seeking new strategies to more effectively manage equipment lifecycles and improve return on assets. Based on a report by the Tyler Group, an international consulting firm, we believe the addressable market for business process outsourcing of

certain capabilities required to support asset management within the telecommunications industry, is approximately $9.0 billion, growing to approximately $12.0 billion by 2007. We believe growth in this market is likely to be fueled by a desire by carriers to increase their focus on core competencies, lower capital and operating costs, reduce risk, improve return on assets, and manage current technologies in parallel with next generation implementation. Growth in this segment is based on a combination of service and equipment needs. Our opportunity to grow in this segment will require Somera to strengthen our services business to offer a complete equipment lifecycle management suite.

Somera has worked with over 1,100 telecommunications carriers, providing asset management services to maintain and extend the life of legacy networks at a lower cost and optimize return on invested capital. Our core competencies in setting the market for equipment values and demand and facilitating the transition to new technologies, our proprietary information technologies systems and workflows, and operational scale and certifications, combined with our position as a publicly traded company, should provide a distinct competitive advantage to make Somera a low risk, high return investment solution to our customers.

Our strategy is comprised of four separate but synergistic business areas: Equipment Brokerage, Somera RecoveryPLUS^{^™}, Somera RepairPLUS, and Somera LifecyclePLUS.

The equipment brokerage business is the core transactional business that Somera was founded upon, providing new and refurbished equipment from a variety of manufacturers to carriers at significant savings typically ranging from approximately 25% to 60% off manufacturers’ list prices for new equipment. This allows our customers to make multi-vendor purchasing decisions from a single cost-effective source.

We offer carriers multiple categories of telecommunications infrastructure equipment to address their specific and changing equipment requirements, primarily for network maintenance and incremental network expansions. We support analog, T1/E1, T3/E3, SONET, SDH, TDMA, CDMA, and GSM for voice communications and WAN, LAN, international access servers, and various other data products for data communications. We have a database of over 14,000 different items from over 400 different manufacturers. Many of these items are either immediately available in our physical inventory or readily available from one of our supply sources, including carriers, resellers, and manufacturers. We offer to our customers many of the same terms and conditions of the original manufacturer’s warranty on all new equipment. On re-used equipment, we offer our own warranty which guarantees that the equipment will perform up to the manufacturer’s original specifications.

The new equipment we offer consists of telecommunications equipment primarily purchased directly from the original equipment manufacturer (“OEM”). The re-used equipment we offer consists primarily of equipment removed from the existing networks of telecommunications carriers, many of whom are also our customers. Our sources for re-used equipment are typically the original owners of such equipment, or resellers of such equipment and either the carrier, another third party, or a Somera trained professional removes the equipment from the network on behalf of the carrier.

Substantially all of our equipment sourcing activities are made on the basis of purchase orders rather than long-term agreements. Although we seek as part of our equipment resource planning to establish strategic contract relationships with operators, we anticipate that our operating results for any given period will continue to be dependent, to a significant extent, on purchase order based transactions.

Somera RecoveryPLUS^{^™} is a new program launched in the fourth quarter 2004 that leverages Somera’s strength in the valuation and disposition of excess and under-utilized inventories. RecoveryPLUS^{^™} helps carriers recover hidden value from these assets by either redeploying them back into the carriers’ network, thereby reducing the reliance on new equipment purchase for legacy network maintenance or remarketing these assets on the secondary market thereby generating a new source of capital to offset the expense of other equipment and services purchases. As a result, carriers are provided with immediate cash flow and expense relief and a more optimized return on assets.

The cataloguing, valuation, and disposition of excess inventories is not a core competency of our customers. Although they may have traditionally relied on the OEM to handle excess assets, carriers have come to recognize the need for a vendor-agnostic, single source who can aggregate the diverse technologies and manufacturers that reside in the network and who in turn, can develop and execute a strategy that will optimize the return on theses assets.

The basic execution of a RecoveryPLUS^{^™} program consists of dispatching Somera personnel to the carriers’ warehouses to discover and catalog under-utilized assets, build a database of this information, value the equipment, and develop a strategic framework for the disposition or redeployment of the equipment, including procurement of required equipment that the carrier does not have in inventory. The program is managed by a Somera Asset Manager (or “SAM”) that can be co-located inside the carriers’ organization and serves as the central point of contact dedicated to executing a RecoveryPLUS^{^™} program.

The metrics we use for valuation of inventory are based on the data that we capture in our proprietary global database known as COMPASS. The database consists of product information and its respective market value, the installed technology base within our customers’ networks, plans for network build-out and de-installation, and demand and supply of equipment on the secondary market. The data domiciled within our database and applied to the valuation and marketability process is captured primarily through our sales and purchase transactions and interactions with customers. The data is interpreted by our internal sales, product line marketing, and supply groups.

For those equipment assets identified for disposition, we offer the following programs:

Somera RepairPLUS supports our customers’ requirements for a high level of quality and reliability and a lower cost of ownership to address the demands of legacy network maintenance. Traditionally, carriers have relied on the original equipment manufacturer (OEM) to repair equipment. However, as OEMs have experienced staff reductions as a result of the telecommunications industry downturn, they have redirected more of their internal resources to their core competencies of new technology development and installation. Additionally, OEMs are outsourcing the manufacturing of product to third parties whose business model does not support the timely and cost-effective repair of equipment. As a result, carriers have experienced higher costs and longer turnaround times, which drives up the cost of network maintenance and increases the potential risk of revenue loss from network downtime. Therefore, we believe the opportunity exists to provide repair support that delivers cost savings, and faster turnaround times and mitigates risk to the carrier.

The Somera RepairPLUS capabilities include the repair and testing of a broad range of wireless, wireline, and data products and technologies. We have the ability to test products in-house or outsource with certified partners. Our repair and testing facilities are certified to ISO 9000:2001 and TL9000 standards representing our clear commitment to quality. In-house repair is conducted at our Execution and Deployment Center in Coppell, Texas.

Somera LifecyclePLUS is a unique suite of operational, logistics, and technical services that enable operators to outsource elements of their network operations to drive down maintenance and operating costs of legacy networks. These services can be customized to meet the unique requirements of the customer and include logistics management, custom configurations, installation/de-installation, spares management, and end-of-life management. We execute our LifecyclePLUS services strategy through a combination of internal expertise and outsourced services. Services are performed at our Execution and Deployment Center in Coppell, Texas. For the Europe, Middle East, and Africa (“EMEA”) region, services are managed at our facility in Amsterdam, The Netherlands.

Our ability to execute the core offerings of Equipment Brokerage, RecoveryPLUS^{^™}, RepairPLUS, and LifecyclePLUS is grounded in three key areas:

Somera’s business strategy supports the critical elements to lead the secondary market in the Americas, EMEA and Asia Pacific regions.

The following table sets forth, for the period indicated, income statement data expressed as a percentage of net revenue.

Equipment Revenue. Our equipment revenue consists of sales of new and re-used telecommunications equipment, including switching, transmission, wireless, data, microwave and power products, net of estimated provisions for returns. A substantial portion of our revenue is derived from sales to domestic telecommunications wireline and wireless carriers. Equipment revenue decreased 18.3% to $18.8 million in the three months ended March 31, 2005 from $23.0 million in the three months ended March 31, 2004, primarily due to lower sales volumes. Revenue from wireless customers increased $2.4 million or 25.4% to $11.9 million in the three months ending March 31, 2005 compared to the three months ending March 31, 2004. This increase was more than offset by a decrease in revenue to wireline customers of $6.8 million or 52.1% to $6.3 million in the current quarter compared to the same quarter in the prior year. Equipment revenue from customers in the United States decreased 23.9% to $13.5 million from $17.8 million in the three months ended March 31, 2005 while international equipment revenues were $5.3 million in the current quarter compared to $5.2 million in the same quarter the previous year. We believe the increase in domestic wireless revenue and the decrease in wireline revenue correspond to changes in spending patterns occurring in the domestic telecommunications industry. We believe industry spending on wireline telecommunications equipment is decreasing, while there is continued growth in the wireless sector.

Equipment revenue attributable to new equipment sales decreased 8.1% to $4.1 million in the three months ended March 31, 2005 from $4.5 million in the three months ended March 31, 2004. Equipment revenue attributable to re-used equipment sales decreased 20.8% to $14.7 million in the three months ended March 31, 2005 from $18.5 million in the three months ended March 31, 2004. These reductions were also due primarily to reduced equipment sales in the wireline sector.

Service Revenue. Service revenue decreased 67.8% to $1.7 million in the three months ended March 31, 2005 from $5.4 million in the three months ended March 31, 2004. Service revenue comprised 8.4% of total revenues in the first quarter of 2005 compared to 18.9% of total revenues in the first quarter of 2004. The decline in service revenues in the first quarter of 2005 reflects our decision in the fourth quarter of 2003 to reduce the amount of low-margin, low-value-added services products.

Equipment Gross Profit. Gross profit as a percentage of equipment revenue, or gross margin, was 36.4% in the three months ended March 31, 2005, up from 22.8% in the three months ended March 31, 2004. Gross profit on re-used equipment was $6.2 million, or 42.1% of re-used equipment revenue in the three months ended March 31, 2005 compared to $4.9 million or 26.3% of re-used equipment revenue in the three months ended March 31, 2004. Gross profit on new equipment sales in the three months ended March 31, 2005 was $659,000, or 15.9% compared to $391,000, or 8.7% in the three months ended March 31, 2004. The increase in equipment gross margin in the quarter ended March 31, 2005 was partially due to a write down of $1.8 million of wireless inventory in the first quarter of 2004 based on a lower of cost or market analysis on specific TDMA equipment. Additionally, we experienced higher than normal gross margins on a specific transaction with an international customer in the first quarter of 2005. In the first quarter of 2004, we entered into a large transaction with the strategic national wireless carrier that resulted in zero gross profit, resulting in lower re-used equipment gross margins in the first quarter of 2004.

Service Gross Profit. Gross profit as a percentage of service revenue increased to 49.1% for the three months ended March 31, 2005 compared to 22.8% for the three months ended March 31, 2004. The increase in gross profit on service revenue was primarily attributable to a shift away from certain lower margin repair services. Overall gross profit in terms of dollars of gross profit decreased by $374,000 to $850,000 in the three months ended March 31, 2005 compared to $1.2 million in the three months ended March 31, 2004, as a direct result of our decision to exit such lower margin business.

Sales and Marketing. Sales and marketing expenses consist primarily of sales personnel salaries, commissions and benefits, costs for marketing support to establish the Somera brand and augment sales strategies as well as costs associated with sales and marketing materials and promotions. Sales and marketing expenses increased to $5.8 million or 28.4% of net revenue in the three months ended March 31, 2005, from $5.6 million or 19.9% of net revenue in the comparable period in 2004. The increase in sales and marketing expense in the first quarter of 2005 was primarily due to increased consulting expense in conjunction with an increased emphasis on growing our international business in the current year.

General and Administrative. General and administrative expenses consist principally of facility costs including distribution and technical operations, salary and benefit costs for executive and administrative personnel, and professional fees. General and administrative expenses increased to $5.0 million or 24.3% of net revenue in the three months ended March 31, 2005, from $4.6 million or 16.3% of net revenue in the comparable period in 2004. This increase in general and administrative expenses was primarily related to increased accounting and consulting costs of $1.0 million and $155,000, respectively, on a year over year basis incurred as a result of Sarbanes Oxley compliance and other consulting projects and $296,000 in higher bad debt expense. These increases were somewhat offset by a decrease of $171,000 in payroll costs as a result of personnel reductions, a decrease of $123,000 in depreciation expense, a decrease of $104,000 in rent expense, and the realization of a $219,000 gain on sale of fixed assets in the current quarter.

Amortization of Intangible Assets. Intangible assets subject to amortization consist of customer contracts and non-compete covenants related to our acquisitions during 2000, 2001, and 2002 which were amortized on a straight-line basis over their estimated economic lives. Amortization of intangible assets remained consistent at $17,000 for the three months ended March 31, 2005 and 2004.

Other Expense, Net. Other expense, net, consists of investment earnings on cash and cash equivalent balances and realized foreign currency gains/(losses). Other expense, net, decreased to $114,000 in the three months ended March 31, 2005 from $206,000 in the three months ended March 31, 2004. The decrease was due primarily to higher interest income earned on our portfolio of investments in the first quarter of 2005 as compared to the first quarter of 2004. The decrease was due primarily to a lower balance of cash, cash equivalents and short-term investments in the first quarter of 2005 as compared to the first quarter of 2004.

Income Tax Provision. Income tax provision for the three month period ended March 31, 2005 totaled $13,000, which represents estimates of taxes due on income earned by our foreign subsidiaries. The income tax benefit generated by our losses in North America was offset by a valuation allowance. Under Generally Accepted Accounting Principles, we must establish valuation allowances against our deferred tax assets if it is determined that it is more likely than not that these assets will not be recovered. In assessing the need for a valuation allowance, both positive and negative evidence must be considered. It was determined that our cumulative losses reported in 2002 and 2003 represented significant negative evidence which required a full valuation allowance as of March 31, 2005. Income tax provision for the three month period ended March 31, 2004 totaled $26,000, which represents estimates of taxes due on income earned by our foreign subsidiaries.

Our principal source of liquidity is our cash and cash equivalents and short-term investments. Our cash and cash equivalents balance was $6.3 million at March 31, 2005 and $7.7 million at December 31, 2004 and our short-term investments balance at March 31, 2005 and December 31, 2004 was $28.9 million and $32.8 million, respectively.

We finance our operations primarily from our balance of cash, cash equivalents and short-term investments. Items impacting our operating cash flow included an increase in accounts receivable of $741,000, an increase in inventory of $2.0 million, an increase of $597,000 in other current assets, a decrease of $1.2 million in other accrued liabilities and a decrease of $259,000 in deferred revenue. Our operating cash flow was also impacted by an increase in accounts payable of $1.5 million and a $247,000 decrease in accrued compensations. The increase in accounts payable and inventory was due primarily to strategic purchases of inventory that have high market demand. We will continue to invest in inventory in future quarters to drive increases in our revenue. The increase in accounts receivable is due to slower collections of certain of our receivables, primarily from international customers. We expect to improve our collections on accounts receivables in future quarters. The increase in other current assets was also due to the purchase of prepaid inventory in conjunction with strategic purchases. The decrease in other accrued liabilities was due to first quarter payments on year end obligations related to Sarbanes Oxley consulting, certain tax accruals and recruiting costs. We believe our existing resources will allow us to adequately fund our recurring operations beyond the next year. Should we need additional capital outside our normal operating requirements, we believe our balance sheet is sufficiently strong to allow us access to additional resources in the capital markets.

Net cash used by operating activities for the three months ended March 31, 2004 was $5.1 million. The primary use of operating cash was the reported net loss of $4.1 million for the three months ended March 31, 2004, which was offset by non-cash charges of $1.9 million provision for excess and obsolete inventories and depreciation and amortization charges of $852,000. Significant sources of operating cash flows included a decrease in accounts receivable of $2.5 million. The decrease in accounts receivable was due to a continued focus on cash collections and decreasing revenues. Offsetting these operating cash flows was an increase in inventory of $2.1 million, a $1.8 million decrease in accounts payable, a $1.1 million decrease in accrued compensation, and a $672,000 decrease in deferred revenue.

Net cash provided by investing activities for the three months ended March 31, 2005, includes purchase of property and equipment of $719,000 and purchase of short-term investments of $12.9 million, offset by $16.8 million in proceeds from sale of short term investments and disposals of property and equipment of $273,000. Net cash provided by investing activities for the three months ended March 31, 2004, includes purchase of property and equipment of $711,000 and purchase of short-term investments of $5.5 million, offset by $6.5 million in proceeds from sale of short term investments.

Cash flows from financing activities for the three months ended March 31, 2005, included proceeds from stock option exercises of $144,000 and proceeds from employee stock purchases of $95,000. Cash flows from financing activities for the three months ended March 31, 2004 included proceeds from stock option exercises of $709,000 and proceeds from employee stock purchases of $138,000.

We do not currently plan to pay dividends, but rather to retain earnings for use in the operation of our business and to fund future growth. We had no long-term debt outstanding as of March 31, 2005.

The following summarizes our contractual obligations under various operating leases for both office and warehouse space as of March 31, 2005, and the effect such obligations are expected to have on our liquidity and cash flow in future periods. The remaining lease terms range in length from one to seven years with future minimum lease payments, net of estimated sublease income of $82,000, for the nine months ending December 31, 2005, as follows (in thousands):

Under the terms of the lease agreements, we are also responsible for internal maintenance, utilities and a proportionate share (based on square footage occupied) of property taxes.

We anticipate fluctuations in working capital in the future primarily as a result of fluctuations in sales of equipment and relative levels of inventory.

We believe that cash and cash equivalents and anticipated cash flow from operations will be sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months.

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our investors.

We have in the past, and may hereafter, be involved in legal proceedings and litigation with third parties arising in the ordinary course of business. Such actions by third parties may subject us to significant liability and could be time consuming and expensive to resolve. We are not currently a party to or aware of any such litigation or other legal proceedings that could materially harm our business.

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2004 Annual Report on Form 10-K, filed on March 31, 2005, in the Notes to the Consolidated Financial Statements, Note 2, and the Critical Accounting Policies section.

In March 2004, the Emerging Issues Task Force (“EITF”) amended and ratified previous consensus reached on EITF 03-01, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Issues.” This amendment, which was originally effective for financial periods beginning after June 15, 2004, introduced qualitative and quantitative guidance for determining whether securities are other-than-temporarily impaired. In September 2004, the Financial Accounting Standards Board’s (“FASB”) staff issued a number of positions (“FSP”) that focused primarily upon the application of EITF 03-01 to debt securities that are impaired solely due to interest rates and/or sector spreads. Subsequently, FASB suspended the effective date of the application of the majority of EITF 03-01 for an unspecified period, pending additional review. In the interim, we continue to apply earlier authoritative accounting guidance to the measurement and recognition of other-than-temporary impairments of its debt and equity securities.

In October 2004, the Emerging Issues Task Force (EITF) ratified its consensus on Issue No. 04-10, “Applying Paragraph 19 of FASB Statement No. 131, ‘Disclosures about Segments of an Enterprise and Related Information,’ in Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds”. EITF No. 04-10 addresses how an enterprise should evaluate the aggregation criteria of SFAS No. 131 when determining whether operating segments that do not meet the quantitative thresholds may be aggregated in accordance with SFAS No. 131. The EITF has delayed the effective date to coincide with an anticipated FSP that will address the meaning of “similar economic characteristics” in 2005. We are currently in the process of determining the impact of EITF No. 04-10 on its financial results.

The American Jobs Creation Act of 2004 (the “AJCA”) was signed into law on October 22, 2004. The AJCA contains numerous changes to U.S. tax law, both temporary and permanent in nature, including a potential tax deduction with respect to certain qualified domestic manufacturing activities, changes in the carryback and carryforward utilization periods for foreign tax credits and a dividend received deduction with respect to accumulated income earned abroad. The new law could potentially have an impact on our effective tax rate, future taxable income and cash and tax planning strategies, amongst other affects. In December 2004, the FASB issued Staff Position No. 109-1 (“FSP 109-1”), “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” and Staff Position No. 109-2 (“FSP 109-2”), “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004”. FSP 109-1 clarifies that the manufacturer’s tax deduction provided for under the AJCA should be accounted for as a special deduction in accordance with SFAS No. 109 and not as a tax rate reduction. FSP 109-2 provides accounting and disclosure guidance for the repatriation of certain foreign earnings to a U.S. taxpayer as provided for in the AJCA. We are currently in the process of evaluating the impact that the AJCA will have on our financial position and results of operations.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs” (“SFAS 151”), which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS 151 will be effective for inventory costs incurred beginning January 1, 2006. We do not believe the adoption of SFAS No. 151 will have a material impact on our financial statements.

In December 2004, the FASB issued SFAS No. 153 (“SFAS 153”), “Exchanges of Nonmonetary Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions.” SFAS No. 153 requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect the adoption of this standard to have a material effect on our consolidated financial statements.

be recorded for all unvested stock options and nonvested stock at the beginning of the first quarter of adoption of SFAS No. 123R, whereas the retroactive method requires recording compensation cost for all unvested stock options and nonvested stock beginning with the first period restated. We are evaluating the requirements of SFAS No. 123R and expect that the adoption of SFAS No. 123R will have a material impact on our results of operations and earnings per share. We have not yet determined the method of adoption of SFAS No. 123R, or whether the amounts recorded in the consolidated statements of income in future periods will be similar to the current pro forma disclosures under SFAS No. 123.

In March 2005, the Securities and Exchange Commission released Staff Accounting Bulletin No. 107 (SAB 107), “Share-Based Payment.” SAB 107 provides the SEC’s staff position regarding the application of SFAS 123(R). SAB 107 contains interpretive guidance related to the interaction between SFAS No. 123(R) and SEC rules and regulations. SAB 107 outlines the significance of disclosures made regarding the accounting for share-based payments.

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (FIN 47). FIN 47 requires an entity to recognize a liability for a legal obligation to perform an asset retirement activity in which the timing and (or) method of the settlement are conditional on a future event. The liability must be recognized if the fair value of the liability can be reasonably estimated. This interpretation of SFAS No. 143, “Accounting for Asset Retirement Obligation”, is effective no later than the end of fiscal years ending after December 15, 2005. We are evaluating FIN 47 for any impact to the financial statements from the original 2003 adoption of SFAS No. 143.

You should carefully consider the risks described below. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition, and results of operations could be materially harmed and the trading price of our common stock could decline. You should also refer to other information contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, including our consolidated financial statements and related notes.

Our operating results are likely to fluctuate in future periods, which might lead to reduced prices for our stock.

Our annual or quarterly operating results are difficult to predict and are likely to fluctuate significantly in the future as a result of numerous factors, many of which are outside of our control. If our annual or quarterly operating results do not meet the expectations of securities analysts and investors, the trading price of our stock could significantly decline. Factors that could impact our operating results include:

Our business depends upon our ability to match third party re-used equipment supply with telecommunications operators demand for this equipment and failure to do so could reduce our net revenue or increase our expenses.

Our success depends on our continued ability to match the equipment needs of telecommunications operators with the supply of re-used equipment available in the secondary market. We depend upon maintaining business relationships with third parties who can provide us with re-used equipment and information on available re-used equipment. Failure to effectively manage these relationships and match the needs of our customers with available supply of re-used equipment could damage our ability to generate net revenue. In the event operators decrease the rate at which they de-install their networks, choose not to de-install their networks at all, or choose to sell or otherwise provide re-used equipment to others, it would be more difficult for us to locate this equipment, which could negatively impact our net revenue. Alternatively, if we do not adequately match supply by making equipment purchases in anticipation of sales to our customers that do not materialize prior to the decline in market value of such inventory or obsolescence of such inventory, this could result in higher costs to us in the form of future inventory write-downs.

A continued downturn and/or consolidation in the telecommunications industry or an industry trend toward reducing or delaying additional equipment purchases due to cost-cutting and other pressures could reduce demand for our products.

We rely significantly upon customers concentrated in the telecommunications industry as a source of net revenue and re-used equipment inventory. Since 2001, we have experienced a general downturn in the level of capital spending by our telecommunications customers for the products and services we sell. This slow-down in capital spending could result in postponement of network upgrades and reduced sales to our customers. There can be no assurance that the level of capital spending in the telecommunications industry or by our customers specifically will increase or remain at current levels, or generate future net revenue levels at which our business would be profitable in future periods.

The market for supplying equipment and services to telecommunications operators is competitive, and if we cannot compete effectively, our net revenue and gross margins might decline.

Competition among companies who supply equipment and services to telecommunications operators is intense. We currently face competition primarily from four sources: OEMs, distributors, secondary market dealers and telecommunications infrastructure support services companies who sell new and re-used telecommunications infrastructure equipment and services. If we are unable to compete effectively against our current or future competitors, we may have to lower our selling prices and may experience reduced gross margins and loss of market share, either of which could harm our business.

Competition is likely to increase as new companies enter our market, as current competitors expand their products and services, as our competitors consolidate, and as our customers develop internal capabilities. Increased competition in the secondary market for telecommunications equipment could also heighten demand for the limited supply of re-used equipment, which would lead to increased prices for, and reduce the availability of, this equipment. Any increase in these prices could significantly impact our ability to maintain our gross margins.

We do not have many formal relationships with suppliers of telecommunications equipment and may not have access to adequate product supply.

For the three months ended March 31, 2005, 71.4% of our net revenue was generated from the sale of re-used telecommunications equipment. Typically, we do not have supply contracts to obtain this equipment and are dependent on the de-installation of equipment by operators to provide us with much of the equipment we sell. Our ability to buy re-used equipment from operators, distributors and secondary market dealers is dependent on our relationships with them. If we fail to develop and maintain these business relationships with operators or they are unwilling to sell re-used equipment to us, our ability to sell re-used equipment will suffer. In addition, in the three months ended March 31, 2005, one supplier accounted for 29.4% of our equipment purchases. In 2004, the same supplier accounted for 14.8% of our equipment purchases. If we are unable to continue to purchase a significant portion of our equipment from this supplier, then our equipment costs could increase, thereby adversely impacting our operating results.

Our customer base is concentrated and the loss of one or more of our key customers would have a negative impact on our net revenue.

Historically, a significant portion of our sales has been to relatively few customers. Sales to our ten largest customers accounted for 57.3% of our net revenue for the three months ended March 31, 2005 and 53.4% for the three months ended March 31, 2004. In addition, substantially all of our sales are made on a purchase order basis, and we do not have long term purchasing agreements with customers. We face a further risk that consolidation among our significant customers, such as the recently completed acquisition of AT&T Wireless by Cingular Wireless, and the recently announced acquisitions of AT&T by SBC Communications, MCI by Verizon Communications, Nextel by Sprint, and Western Wireless by Alltell, could result in more customer concentration and fewer sales opportunities that would adversely impact our net revenue. As a result, we cannot be certain that our current customers will continue to purchase from us. The loss of, or any reduction in orders from, a significant customer would have a negative impact on our net revenue.

We may be forced to reduce the sales prices for the equipment and services we sell, which may impair our ability to maintain our gross margins.

In the future, we expect to reduce prices in response to competition and to generate increased sales volume. As a result of the slow-down in the telecommunications market since 2001, some manufacturers reduced their prices of new telecommunications equipment. If manufacturers reduce the prices of new telecommunications equipment, we may be required to further reduce the price of the new and re-used equipment we sell. If we are forced to reduce our prices or are unable to shift the sales mix towards higher margin equipment and service sales, we will not be able to maintain current gross margins.

The market for re-used telecommunications equipment and telecommunications equipment lifecycle services is relatively new and it is unclear whether our equipment and service offerings and our business will achieve long-term market acceptance.

The market for re-used telecommunications equipment and telecommunications equipment lifecycle services is relatively new and evolving, and we are not certain that our current or potential customers will adopt and deploy re-used telecommunications equipment

in their networks or purchase the telecommunications equipment lifecycle services we offer. For example, with respect to re-used equipment that includes a significant software component, potential customers may be unable to obtain a license or sublicense for the software. Even if they do purchase re-used equipment, our potential customers may not choose to purchase re-used equipment from us for a variety of reasons. Our customers may also re-deploy their displaced equipment within their own networks or perform the services we offer internally, which would eliminate their need for our equipment and service offerings. These internal solutions would also limit the supply of re-used equipment available for us to purchase, which would limit the development of this market. Further, we have found that the sales cycle for our recently developed equipment lifecycle services offering is protracted due to the fact that this offering is new and involved multiple layers of our customers’ organizations. If we are unable to successfully sell our equipment lifecycle service offering to our customers or if the sales cycle for these services continues to be protracted, our business could suffer.

We may fail to continue to attract, develop and retain key management and sales personnel, which could negatively impact our business.

We depend on the performance of our executive officers and other key employees. The loss of key members of our senior management or other key employees could negatively impact our operating results and our ability to execute our business strategy. For example, in April 2004, we announced the appointment of David W. Heard as our president and chief executive officer and in March 2005, we announced the appointment of Kent Coker as our Senior Vice-President and Chief Financial Officer. Further we depend on our sales professionals to serve customers in each of our markets. The loss of key sales professionals could significantly disrupt our relationships with our customers. We do not have “key person” life insurance policies on any of our employees.

Our future success also depends on our ability to attract, retain and motivate highly skilled employees. Competition for employees in the telecommunications equipment and services industry is intense. Additionally, we depend on our ability to train and develop skilled sales people and an inability to do so would significantly harm our growth prospects and operating performance.

Our business may suffer if we are not successful in our efforts to keep up with a rapidly changing market.

The market for the equipment and services we sell is characterized by technological changes, evolving industry standards, changing customer needs and frequent new equipment and service introductions. Our future success in addressing the needs of our customers will depend, in part, on our ability to timely and cost-effectively:

Our failure in any of these areas could harm our business. Moreover, any increased emphasis on software solutions as opposed to equipment solutions could limit the availability of re-used equipment, decrease customer demand for the equipment we sell, or cause the equipment we sell to become obsolete.

The lifecycles of telecommunications infrastructure equipment may become shorter, which would decrease the supply of, and carrier demand for, re-used equipment, and telecommunications equipment lifecycle services, and which could increase our expenses.

Our sales of re-used equipment and services depend upon telecommunications operator utilization of existing telecommunications network technology. If the lifecycle of equipment comprising operator networks is significantly shortened for any reason, including technology advancements, the installed base of any particular model of equipment would be limited. This limited installed base would reduce the supply of, and demand for, re-used equipment and services we offer, which could decrease our net revenue. Additionally, to the extent that lifecycles for telecommunications equipment are shortened, equipment we hold in anticipation of future sales may, to an accelerating degree, become less valuable or obsolete and subject to an inventory write-down, which would increase our cost of sales levels.

Many of our customers are telecommunications operators that may at any time reduce or discontinue their purchases of the equipment and services we sell to them.

If our customers choose to defer or curtail their capital spending programs, it could have a negative impact on our sales to those telecommunications operators, which would harm our business. A significant portion of our customers are emerging

telecommunications operators who compete against existing telecommunications companies. These new participants only recently began to enter these markets, and many of these operators are still building their networks and rolling out their services. They require substantial capital for the development, construction and expansion of their networks and the introduction of their services. If emerging operators fail to acquire and retain customers or are unsuccessful in raising needed funds or responding to any other trends, such as price reductions for their services or diminished demand for telecommunications services in general, then they could be forced to reduce their capital spending programs.

If we fail to implement our strategy of purchasing equipment from and selling equipment and services to Regional Bell Operating Companies, our business will suffer.

One of our strategies is to develop and expand our relationships with Regional Bell Operating Companies, or RBOCs. We believe the RBOCs could provide us with a significant source of additional net revenue. In addition, we believe the RBOCs could provide us with a large supply of re-used equipment. We cannot assure that the implementation of this strategy will be successful. RBOCs may not choose to sell re-used equipment to us or may not elect to purchase this equipment or services from us. RBOCs may instead develop those capabilities internally or elect to compete with us and resell re-used equipment to our customers or prospective customers or competitors. If we fail to successfully develop our relationships with RBOCs or if RBOCs elect to compete with us, our revenue levels could suffer.

We intend to expand our business in international markets. This expansion will require significant management attention and financial resources to develop a successful international business, including sales, procurement and support channels. Following this strategy, we opened our European headquarters in the fourth quarter of 2000. However, we may not be able to maintain or increase international market demand for the equipment and services we sell, and therefore we might not be able to expand our international operations. Our experience in providing equipment and services outside the United States is increasing, but still developing. Sales to customers outside of the United States accounted for $5.3 million, or 25.6%, of our net revenue for the three months ended March 31, 2005 and $21.8 million, or 21.8%, of our net revenue in the fiscal year 2004.

If we do engage in selective acquisitions, we may experience difficulty assimilating the operations or personnel of the acquired companies, which could threaten our future growth.

If we make acquisitions in the future, we could have difficulty assimilating or retaining the acquired companies’ personnel or integrating their operations, equipment or services into our organization. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses. Moreover, our profitability may suffer because of acquisition-related costs, impairment of goodwill, or amortization of acquired other intangible assets. Furthermore, we may have to incur debt or issue equity securities in any future acquisitions. The issuance of equity securities would be dilutive to our existing stockholders.

Defects in the equipment we sell or failure to perform services at a high level of performance may seriously harm our credibility and our business.

Telecommunications operators require a strict level of quality and reliability from telecommunications equipment and service suppliers. Telecommunications equipment is inherently complex and can contain undetected software or hardware errors. If we deliver telecommunications equipment with undetected material defects, or if we perform services at lower than expected quality levels, our reputation, credibility and sales could suffer. Moreover, because the equipment we sell is integrated into our customers’ networks, it can be difficult to identify the source of a problem should one occur. The occurrence of such defects, errors or failures or failure to perform services adequately could also result in delays in installation, product returns, product liability and warranty claims and other losses to us or our customers. In some of our contracts, we have agreed to indemnify our customers against liabilities arising from defects in the equipment or services we sell to them. Furthermore, we supply most of our customers with warranties that cover the equipment and services we offer. While we may carry insurance policies covering these possible liabilities, these policies may not provide sufficient protection should a claim be asserted. A material product liability claim, whether successful or not, could be costly, damage our reputation and distract key personnel, any of which could harm our business.

Our strategy to outsource services could impair our ability to deliver our equipment on a timely basis.

While we have expanded our services capability, we still currently depend on, to a large degree, third parties for a variety of equipment-related services, including engineering, warehousing, repair, transportation, logistics, testing, installation and de-installation. This outsourcing strategy involves risks to our business, including reduced control over delivery schedules, quality and costs and the potential absence of adequate capacity. In the event that any significant subcontractor was to become unable or unwilling to continue to perform their required services, we would have to identify and qualify acceptable replacements. This process could be lengthy, and we cannot be sure that additional sources of third party services would be available to us on a timely basis, or at all.

Our quarterly net revenue and the price of our stock may be negatively impacted by the seasonal purchasing patterns of our customers.

Our quarterly net revenue may be subject to the seasonal purchasing patterns of our customers, which may occur as a result of our customers’ annual budgetary, procurement and sales cycles. If our quarterly net revenue fails to meet the expectations of analysts due to those seasonal fluctuations, the trading price of our common stock could be negatively affected.

Our ability to meet customer demand and the growth of our net revenue could be harmed if we are unable to manage our inventory needs accurately.

To meet customer demand in the future, we believe it is necessary to maintain or increase some levels of inventory. Failure to maintain adequate inventory levels in these products could hurt our ability to make sales to our customers. In the past, we have experienced inventory shortfalls on certain high demand equipment, and we cannot be certain that we will not experience such shortfalls again in the future, which could harm our ability to meet customer demand. Further, rapid technology advancement could make portions of our existing inventory obsolete and cause us to incur losses. In addition, if our forecasts lead to an accumulation of inventories that are not sold in a timely manner, our business could suffer.

The corruption or interruption of key software systems we use could cause our business to suffer if it delays or restricts our ability to meet our customers’ needs.

We rely on the integrity of key software and systems. Specifically we rely on our relationship management database which tracks information on currently or potentially available re-used equipment. This software and these systems may be vulnerable to harmful applications, computer viruses and other forms of corruption and interruption. In the event any form of corruption or interruption affects our software or systems, it could delay or restrict our ability to meet our customers’ needs, which could harm our reputation or business.

If we are unable to meet our additional capital needs in the future, we may not be able to execute our business growth strategy.

We currently anticipate that our available cash resources will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months. However, our resources may not be sufficient to satisfy these requirements. We may need to raise additional funds through public or private debt or equity financings to:

Any additional financing we may need might not be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our business could suffer if the inability to raise this funding threatens our ability to execute our business growth strategy. Moreover, if additional funds are raised through the issuance of equity securities, the percentage of ownership of our current stockholders will be reduced. Newly issued equity securities may have rights, preferences and privileges senior to those of investors in our common stock. In addition, the terms of any debt could impose restrictions on our operations.

We face the risk of future non-recurring charges in the event of impairment.

We adopted SFAS No. 142, “Goodwill and Other Intangible Assets”, beginning in January 2002 and, as a result, we no longer amortize goodwill. However, we will continue to have amortization related to other purchased intangibles, and we must evaluate our intangible assets, including goodwill, at least annually for impairment. For the three months ended March 31, 2005, our amortization charge for other intangibles was $17,000. In 2004, our amortization charge for other intangibles was $67,000. In June 2004, we completed our annual goodwill impairment test and determined that our goodwill was not impaired and no impairment charge was necessary. We may incur a similar charge in the future.

In the fourth quarter of 2003, we reviewed the future realizability of our deferred tax assets. We determined that our ability to generate sufficient future taxable income was uncertain. As such, we took a charge of $24.8 million to write off all of our short and long-term deferred tax assets. In 2004, we increased the valuation allowance by $8.6 million, primarily as a result of additional net operating loss carryforwards generated during the current year as we continue to provide for a full valuation allowance against our net deferred tax assets. We may incur a similar charge in the future.

New regulations related to equity compensation could adversely affect our operating results and affect our ability to attract and retain key personnel.

Since our inception, we have used stock options as an important component of our employee compensation packages. We believe that our stock option plan is an essential tool to link the long-term interests of our stockholders and employees, and serve to motivate management to make decisions that will, in the long run, give the best returns to stockholders. The Financial Accounting Standards Board (FASB) has implemented changes to United States generally accepted accounting principles that require us to record a charge to earnings for employee stock option grants, as well as other equity-based awards. The changes implemented by FASB relating to the accounting for equity compensation plans are scheduled to go into effect the first quarter of 2006. This accounting pronouncement will negatively impact our operating results and could affect our ability to raise capital on acceptable terms. For an illustrative example of the adverse impact this accounting change may have had on our recent operating results, please see Note 2—”Summary of Significant Accounting Policies: Stock-Based Compensation” to the condensed consolidated financial statements included elsewhere in this report. To the extent that new regulations make it more difficult or expensive to grant options to employees, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could materially and adversely affect our business.

Our facilities could be vulnerable to damage from earthquakes and other natural disasters.

Our office in Carpinteria, California, is located on or near known earthquake fault zones and our facilities worldwide are vulnerable to damage from fire, floods, earthquakes, power loss, telecommunications failures and similar events. If a disaster occurs that impacts our headquarters and execution and delivery center in Texas or our offices in the Netherlands, our ability to test and ship the equipment we sell would be seriously, if not completely, impaired, and our inventory could be damaged or destroyed, which would seriously harm our business. We cannot be sure that the insurance we maintain against fires, floods, earthquakes and general business interruptions will be adequate to cover our losses in any particular case.

Our officers and directors exert significant influence over us, and may make future business decisions with which some of our stockholders might disagree.

Our executive officers, directors and entities affiliated with them beneficially own an aggregate of approximately 26.7% of our outstanding common stock as of March 14, 2005. As a result, these stockholders will be able to exercise significant influence over all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change in our control.

Failure to comply with all of the requirements imposed by Section 404 of the Sarbanes-Oxley Act of 2002 could result in a negative market reaction.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on our internal control over financial reporting in our annual reports on Form 10-K. The annual report is required to contain an assessment by management of the effectiveness of our internal controls over financial reporting. In addition, the independent registered public accounting firm auditing a public company’s financial statements must attest to and report on management’s assessment of the effectiveness of the our internal controls over financial reporting. While we have expended and continue to expend significant resources in complying with Section 404, there is a risk that we will not be able to comply with all of the requirements imposed by Section 404. Further, if we fail to implement required new or improved controls, we may be unable to comply with the requirements of Section 404. If such actions were to occur, we cannot predict how the market or regulators will react.

We have reviewed the provisions of Financial Reporting Release No. 48 “Disclosure of Accounting Policies for Derivative Commodity Instruments and Disclosure of Quantitative and Qualitative Information about Market Risks Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments.” We had no holdings of derivative financial or commodity instruments as of March 31, 2005. In addition, we do not engage in hedging activities.

A significant amount of our revenue and capital spending is denominated in U.S. dollars. We invest our excess cash in short-term, money market certificates of deposits and other securities. Due to the short time the investments are outstanding and their general liquidity, our cash, cash equivalents, and short-term investments do not subject the Company to a material interest rate risk. As of March 31, 2005, we had no long-term debt outstanding.

As a significant amount of our revenue, purchases and capital spending is denominated in U.S. dollars, a strengthening of the U.S. Dollar could make our products less competitive in foreign markets. This risk could become more significant as we expand business outside the United States.

As an international company, we conduct our business in various currencies and are therefore subject to market risk for changes in foreign exchange rates. The Company’s primary exchange rate exposure is with the Euro against the U.S. Dollar. During the three months ended March 31, 2005, net revenue earned outside the United States accounted for 25.6% of total revenue. During the three months ended March 31, 2005, purchases outside the United States accounted for 13.8% of total purchases. As a result, we are exposed to foreign currency exchange risk resulting from foreign currency denominated transactions with customers, suppliers and non-U.S. subsidiaries.

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective to ensure that the information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 as amended, is recorded, processed, summarized, and reported within the time periods specified in SEC rules and regulations. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

From time to time, we may be involved in legal proceedings and litigation arising in the ordinary course of business. As of the date hereof, we are not a party to or aware of any litigation or other legal proceeding that could materially harm our business.

The following exhibits are filed as part of, or incorporated by reference into, this Report:

Pursuant to the requirements of Section 13 or 15(d) 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 on this 10th day of May, 2005.


SOMERA COMMUNICATIONS, INC.

By:		/s/ DAVID W. HEARD
		David W. Heard President and Chief Executive Officer


Class		Outstanding at May 1, 2005
Common Stock, $0.001 par value		50,232,544


PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004 (unaudited)	3

	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Month Periods Ended March 31, 2005 and 2004 (unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 2005 and 2004 (unaudited)	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27

Item 4.	Controls and Procedures	28

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3.	Defaults Upon Senior Securities	29

Item 4.	Submission of Matters to a Vote of Security Holders	29

Item 5.	Other Information	29

Item 6.	Exhibits	29

Signatures		30


	March 31, 2005			December 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	6,303		$	7,654
Short-term investments		28,909			32,757
Accounts receivable, net of allowance for doubtful accounts of $557 and $574 at March 31, 2005 and December 31, 2004, respectively		16,710			16,217
Inventories, net		11,472			10,027
Other current assets		2,473			1,876

Total current assets		65,867			68,531
Property and equipment, net		4,593			4,600
Other assets		142			148
Goodwill		1,760			1,760
Intangible assets, net		33			50

Total assets	$	72,395		$	75,089

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	13,854		$	12,396
Accrued compensation		2,750			2,503
Other accrued liabilities		9,925			11,139
Deferred revenue		464			723

Total current liabilities		26,993			26,761
Commitments and Contingencies (Note 5)
Stockholders’ equity:
Preferred stock ($0.001 par value per share; authorized 20,000 shares, no shares issued)
Common stock ($0.001 par value per share; authorized 200,000 shares, shares issued and outstanding: 50,233 and 49,872 at March 31, 2005 and December 31, 2004, respectively)		50			49
Additional paid-in capital		75,131			74,652
Unearned stock-based compensation		(289	)		(72	)
Accumulated other comprehensive loss		(104	)		(191	)
Accumulated deficit		(29,386	)		(26,110	)

Total stockholders’ equity		45,402			48,328

Total liabilities and stockholders’ equity	$	72,395		$	75,089


	Three Months Ended March 31,
	2005			2004
Revenues:
Equipment revenue	$	18,804		$	23,012
Service revenue		1,730			5,376

Total revenues		20,534			28,388

Cost of revenues:
Equipment cost of revenue		11,966			17,756
Service cost of revenue		880			4,152

Total cost of revenues		12,846			21,908

Gross profit		7,688			6,480

Operating expenses:
Sales and marketing		5,830			5,639
General and administrative		4,990			4,648
Amortization of intangible assets		17			17

Total operating expenses		10,837			10,304

Loss from operations		(3,149	)		(3,824	)
Other expense, net		114			206

Loss before income taxes		(3,263	)		(4,030	)
Income tax provision		13			26

Net loss		(3,276	)		(4,056	)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment		105			(6	)
Unrealized loss on investments		(18	)		—

Comprehensive loss	$	(3,189	)	$	(4,062	)

Net loss per share: basic and diluted	$	(0.07	)	$	(0.08	)

Weighted average shares: basic and diluted		49,935			49,519


	Three Months Ended March 31,
	2005			2004
Cash flows from operating activities:
Net loss	$	(3,276	)	$	(4,056	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		729			852
Provision for doubtful accounts		248			(48	)
Provision for excess and obsolete inventories		506			1,880
Amortization of stock-based compensation		21			7
Gain on disposal of assets		(219	)		—
Changes in operating assets and liabilities:
Accounts receivable		(741	)		2,527
Inventories		(1,951	)		(2,073	)
Other current assets		(597	)		(335	)
Other assets		6			—
Accounts payable		1,458			(1,804	)
Accrued compensation		247			(1,113	)
Deferred revenue		(259	)		(672	)
Other accrued liabilities		(1,214	)		(229	)

Net cash used in operating activities		(5,042	)		(5,064	)

Cash flows from investing activities:
Acquisition of property and equipment		(719	)		(711	)

Proceeds from disposal of property and equipment		273			—

Purchase of short-term investments		(12,933	)		(5,450	)
Sale of short-term investments		16,781			6,450

Net cash provided by investing activities		3,402			289

Cash flows from financing activities:
Proceeds from stock options exercises		144			709
Proceeds from employee stock purchase plan		95			138

Net cash provided by financing activities		239			847

Net decrease in cash and cash equivalents		(1,401	)		(3,928	)
Effect of exchange rate changes on cash and cash equivalents		50			6

Cash and cash equivalents, beginning of period		7,654			30,642

Cash and cash equivalents, end of period	$	6,303		$	26,720

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	Employee Stock Option Plan				Employee Stock Purchase Plan
	2005		2004		2005		2004
Risk-free interest rate	3.87	%	3.04	%	2.65	%	0.96	%
Expected life (in years)	5		5		0.50		0.50
Dividend yield	0	%	0	%	0	%	0	%
Expected volatility	83	%	82	%	48	%	85	%


	March 31, 2005			December 31, 2004
Inventories held for sale	$	17,076		$	15,620
Less: Reserve for excess and obsolete inventory		(5,604	)		(5,593	)

Inventories, net	$	11,472		$	10,027


	March 31, 2005		December 31, 2004
Other Accrued Liabilities:
Restructuring accrual (see Note 7)	$	222	$	288
Warranty reserve (see Note 6)		1,127		1,128
Income and other taxes payable		4,710		4,843
Other		3,866		4,880

	$	9,925	$	11,139


	Intangibles, net December 31, 2004		Accumulated Amortization			Intangibles, net March 31, 2005
Non-compete agreement	$	50	$	(17	)	$	33


	March 31, 2005			March 31, 2004
Balance as of beginning of period	$	1,128		$	915
Provision for warranty liability		479			592
Settlements		(480	)		(496	)

Balance as of end of period	$	1,127		$	1,011


	Balance at December 31, 2004		Payments		Balance at March 31, 2005
Lease obligations	$	288	$	66	$	222


	Three Months Ended March 31,
	2005		2004
Revenues:
Equipment revenue	91.6	%	81.1	%
Service revenue	8.4		18.9

Total revenues	100.0		100.0
Cost of revenues:
Equipment cost of revenue	58.3		62.6
Service cost of revenue	4.3		14.6

Total cost of revenues	62.6		77.2

Gross profit	37.4		22.8

Operating expenses:
Sales and marketing	28.4		19.9
General and administrative	24.3		16.3
Amortization of intangible assets	0.1		0.1

Total operating expenses	52.8		36.3

Loss from operations	(15.4	)	(13.5	)
Other expense, net	0.6		0.7

Loss before income taxes	(16.0	)	(14.2	)
Income tax provision	0.1		0.1

Net loss	(16.1	)%	(14.3	)%


	Nine Months Ending December 31, 2005		2006		2007		2008		2009		Thereafter
Gross restructuring related leases (see Note 7)	$	200	$	22	$		$	—	$	—	$	—
Operating Leases		1,418		1,444		1,344		1,408		1,300		683

Total commitments	$	1,618	$	1,466	$	1,344	$	1,408	$	1,300	$	683


Exhibit Number		Exhibit Title
3.1(a)		Amended and Restated Certificate of Incorporation of Somera Communications, Inc., a Delaware corporation, as currently in effect.

3.2(a)		Bylaws of Somera Communications, Inc., as currently in effect.

4.1(a)		Specimen common stock certificate.

10.20(b)		Employment Agreement between Somera Communications Sales, Inc. and Jay Hilbert, dated February 16, 2005.

10.20(c)		Employment Agreement between Somera Communications Sales, Inc. and Kent Coker, dated March 2, 2005, as amended March 14, 2005.

31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.

31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.

32.1		Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.