As Filed with the Securities and Exchange Commission on January 30, 2004
Registration No.: 333-111405
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
Registration Statement
Under
The Securities Act of 1933
P-COM, INC.
(Exact name of Registrant as specified in its charter)
Delaware 3663 77-0289371
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
P-Com, Inc.
3175 S. Winchester Blvd.
Campbell, CA 95008
(408) 866-3666
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Samuel Smookler
Chief Executive Officer
P-Com, Inc.
3175 S. Winchester Boulevard
Campbell, CA 95008
(408) 866-3666
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
Copy to:
C. Thomas Hopkins, Esq.
Sheppard, Mullin, Richter & Hampton LLP
800 Anacapa Street
Santa Barbara, CA 93101
(805) 568-1151
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |_|
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. |_|
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class of Securities to be Amount of Shares Offering Price Per Aggregate Offering Amount of
Registered to be Registered Share (1) Price (1) Registration Fee
------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $0.0001
per share (2) 6,282,119 (3) $0.15 $942,317.85 $119.36
====================================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended, based upon
the average of the bid and asked prices per share of P-Com common stock, as
reported on the OTC Bulletin Board on January 23, 2004.
(2) Each share includes one right to purchase shares of P-Com's series A junior
participating preferred stock pursuant to P-Com's rights agreement dated October
1, 1997, as amended.
(3) Pursuant to Rule 416 under the Securities Act of 1933, as amended, this
registration statement also covers an additional indeterminate number of shares
of Common Stock that may be issued to prevent dilution resulting from stock
splits, stock dividends or similar transactions.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY................................................................................................1
P-Com's Business.........................................................................................1
The Offering.............................................................................................1
RISK FACTORS......................................................................................................4
STATEMENT REGARDING FORWARD-LOOKING INFORMATION..................................................................14
USE OF PROCEEDS..................................................................................................15
BUSINESS ........................................................................................................15
Overview................................................................................................15
Industry Background.....................................................................................16
Broadband Wireless Implementation.......................................................................16
Global Privatization and Deregulation: Stimuli to Broadband Wireless Access Growth......................17
Network Architecture Bottlenecks........................................................................17
The P-Com Strategy......................................................................................17
Range of Product Choices................................................................................18
Technology..............................................................................................19
Services................................................................................................20
Manufacturing and Testing...............................................................................20
Sales Channels and P-Com Customers......................................................................21
Research and Development................................................................................21
Sales and Marketing.....................................................................................22
Competition.............................................................................................22
Government Regulation...................................................................................23
Intellectual Property...................................................................................24
Employees...............................................................................................24
Properties..............................................................................................24
Legal Proceedings.......................................................................................25
Market Price and Dividend Information...................................................................26
P-Com's Quantitative and Qualitative Disclosures About Market Risk......................................27
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION..........................................................28
P-COM'S UNAUDITED PRO FORMA FINANCIAL INFORMATION................................................................31
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION...............................................................33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................35
Overview................................................................................................35
Critical Accounting Policies............................................................................35
i
Years Ended 2002, 2001 and 2000.........................................................................37
Nine Months Ended September 30, 2003 and 2002...........................................................41
Liquidity and Capital Resources.........................................................................43
Recent Accounting Pronouncements........................................................................48
MANAGEMENT.......................................................................................................48
Directors and Officers..................................................................................48
Background..............................................................................................49
Board Committees and Meetings...........................................................................51
Compensation Committee Interlocks and Insider Participation.............................................51
Director Compensation...................................................................................51
Executive Compensation..................................................................................51
Employment Contracts, Termination of Employment Arrangements and Change of Control Agreements...........54
Limitation of Liability and Indemnification of Directors and Officers...................................57
Certain Relationships and Related Transactions..........................................................57
PRINCIPAL STOCKHOLDERS...........................................................................................57
SELLING STOCKHOLDERS.............................................................................................59
PLAN OF DISTRIBUTION.............................................................................................65
DESCRIPTION OF CAPITAL STOCK.....................................................................................67
VALIDITY OF THE SHARES...........................................................................................72
EXPERTS .........................................................................................................73
CHANGE IN INDEPENDENT ACCOUNTANTS................................................................................73
WHERE YOU CAN FIND MORE INFORMATION..............................................................................73
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS......................................................................F-1
ii
SUBJECT TO COMPLETION. DATED JANUARY 30, 2004
The information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
[LOGO]
P-COM
608,532,358 Shares
P-COM, INC.
COMMON STOCK
The shares of common stock of P-com, Inc. covered by this prospectus may be sold
from time to time by the selling stockholders identified in this prospectus.
This prospectus relates to 608,532,358 shares of P-Com common stock, of which:
o 177,055,243 are shares of P-Com's common stock that are currently outstanding
and may in the future be sold from time to time by certain selling stockholders;
o 11,457,487 are shares that may in the future be issued to certain selling
stockholders upon conversion of P-Com's outstanding Series B Convertible
Preferred Stock;
o 206,257,028 are shares that may in the future be issued to certain selling
stockholders upon conversion of P-Com's outstanding Series C Convertible
Preferred Stock;
o 13,333,333 are shares that may in the future be issued to certain selling
stockholders upon conversion of P-Com's outstanding Series D Convertible
Preferred Stock; and
o 200,429,267 are shares that may in the future be issued to certain selling
stockholders upon the exercise of certain warrants to purchase shares of P-Com's
common stock.
P-Com will not receive any of the proceeds from the sale of the shares of common
stock by the selling stockholders. P-Com may receive proceeds from the exercise
of the warrants held by the selling stockholders if they opt to pay the exercise
price in cash rather than executing a cashless exercise.
The shares of common stock may be sold through broker-dealers or in privately
negotiated transactions in which commissions and other fees may be charged.
These fees, if any, will be paid by the selling stockholders. P-Com has no
agreement with any broker-dealer with respect to these shares and is unable to
estimate the commissions that may be paid in any given transaction. For a more
complete description of the methods of distribution that the selling
stockholders may use, see "Plan of Distribution" beginning on page 65.
P-Com common stock is traded on the OTC Bulletin Board of the National
Association of Securities Dealers, Inc. under the symbol "PCOM." On January 20,
2004, the last sale price of P-Com common stock was $0.17 per share.
An investment in the shares of P-Com common stock offered by this prospectus
entails a high degree of risk. See "Risk Factors" beginning on page 4 for
information that should be considered by prospective investors before buying
shares of P-Com common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
PROSPECTUS DATED JANUARY 30, 2004
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus, and
it may not contain all of the information that is important to you. You should
read the entire prospectus carefully, including the section entitled "Risk
Factors," the consolidated financial statements and the related notes included
elsewhere in this prospectus, before making an investment decision.
P-COM'S BUSINESS
P-Com develops, manufactures and markets microwave radios for point-to-point,
spread spectrum and point-to-multipoint applications for telecommunications
networks worldwide. Cellular and personal communications service providers
employ P-Com's point-to-point systems to transmit data between remote tower
sites and switching centers. Network service providers and Internet service
providers are able, through the deployment of P-Com's equipment and systems, to
respond to the demands for high-speed wireless access services, such as Internet
access associated with business-to-business and e-commerce business processes.
Through deployment of P-Com's systems, network providers can quickly and
efficiently establish integrated Internet, data, voice and video communications
for their customers, then expand and grow those services as demand increases.
On December 10, 2003, P-Com acquired the Wave Wireless Networking division of
SPEEDCOM Wireless Corporation ("SPEEDCOM") and related assets, in consideration
for the issuance to SPEEDCOM of 63,500,000 shares of P-Com's common stock, and
the assumption of certain of its liabilities. Wave Wireless Networking ("Wave
Wireless") specializes in manufacturing, configuring and delivering custom
broadband wireless access networking equipment, including the SPEEDLAN family of
wireless Ethernet bridges and routers, for business and residential customers
internationally. The acquisition provides P-Com with complimentary unlicensed
point-to-point and spread spectrum wireless access systems.
P-Com's executive offices are located at 3175 S. Winchester Boulevard, Campbell,
California 95008, and P-Com's telephone number is (408) 866-3666.
THE OFFERING
This prospectus relates to the registration for resale of up to 608,532,358
shares of P-Com's common stock that were issued or are issuable in connection
with the following transactions:
o In September 2002, P-Com issued a warrant to purchase up to 300,000 shares of
common stock to Silicon Valley Bank in connection with the opening of a credit
facility. The exercise price for the common stock underlying the warrant is
$0.10 per share.
o In April 2003, P-Com issued 1,500,000 shares of common stock to Liviakis
Financial Communications, Inc. in consideration for certain financial, public
and investor relations services provided to P-Com.
o In April 2003, P-Com issued 3,000,000 shares of common stock to Cagan McAfee
Capital Partners, LLC in consideration for certain investment banking and other
services provided to P-Com.
o In May 2003, P-Com issued 2,400,000 shares of common stock to one of its
vendors, HeliOss Communications, in consideration for the release of some of
P-Com's obligations to the vendor.
o In March, May and July 2003, P-Com issued Series A Warrants to purchase
3,668,000 shares of common stock at an initial exercise price of $0.12 per share
and Series B Warrants to purchase 5,132,000 shares of common stock at an initial
exercise price of $0.20 per share. However, no holder of Series A Warrants or
Series B Warrants may exercise any of these warrants if the exercise would cause
the holder or any of its affiliates, individually or in the aggregate, to
beneficially own more than 4.999% of P-Com's outstanding common stock. As of
January 20, 2004, none of the outstanding Series A Warrants or Series B Warrants
had been exercised. The number of shares of common stock
1
issuable upon exercise of these warrants is subject to adjustment for stock
splits, stock dividends and similar transactions and for certain dilutive
issuances.
o In August 2003, P-Com issued 1,000,000 shares of its common stock to one of
its landlords, Bryan Family Partnership II in consideration for the release of
some of P-Com's obligations to the landlord.
o In August 2003, P-Com issued approximately 1,000,000 shares of Series B
Convertible Preferred Stock, with a stated value of $21.138 per share, upon the
conversion of approximately $21 million of its 7% Convertible Subordinated Notes
due 2005. Each share of Series B Convertible Preferred Stock is convertible into
a number of shares of common stock equal to the stated value divided by a
conversion price of $0.20. The holders of the Series B Convertible Preferred
Stock are obligated to convert their shares into shares of common stock as soon
as reasonably practicable. However, no holder of Series B Convertible Preferred
Stock may convert its shares into shares of common stock if the conversion would
cause the holder or any of its affiliates, individually or in the aggregate, to
beneficially own more than 9.999% of P-Com's outstanding common stock. As of
January 20, 2004, approximately 891,594 shares of Series B Convertible Preferred
Stock had been converted into approximately 94,232,454 shares of common stock
and approximately 108,406 shares of Series B Convertible Preferred remained
outstanding. The shares of Series B Convertible Preferred Stock that remain
outstanding are convertible into approximately 11,457,487 shares of common
stock, subject to the limitation on conversion described above. The number of
shares of common stock issuable upon conversion of the Series B Convertible
Preferred Stock is subject to adjustment for stock splits, stock dividends and
similar transactions.
o In October and December 2003, P-Com issued and sold approximately 9,942 shares
of Series C Convertible Preferred Stock, with a stated value of $1,750 per
share. Together with the Series C Convertible Preferred Stock, P-Com also issued
Series C Warrants to purchase 139,194,124 shares of common stock, in the
aggregate. Each share of Series C Convertible Preferred Stock is convertible
into a number of shares of common stock equal to the stated value plus accrued
and unpaid dividends, if any, divided by an initial conversion price of $0.10.
Based on this conversion price, the outstanding shares of Series C Convertible
Preferred Stock are convertible into approximately 173,992,605 shares of P-Com's
common stock. However, no holder of Series C Convertible Preferred Stock or any
Series C Warrants may convert or exercise any of these securities into shares of
common stock if the conversion or exercise would cause the holder or any of its
affiliates, individually or in the aggregate, to beneficially own more than
9.999% of P-Com's outstanding common stock. As of January 20, 2004,
approximately 513 shares of Series C Convertible Preferred Stock had been
converted into approximately 8,986,983 shares of common stock and approximately
9,429 shares of Series C Convertible Preferred Stock remained outstanding and
none of the Series C Warrants had been exercised. The shares of Series C
Convertible Preferred Stock that remain outstanding are convertible into
approximately 165,055,622 shares of common stock, subject to the limitation on
conversion described above. The number of shares of common stock issuable upon
conversion or exercise of these securities is subject to adjustment for stock
splits, stock dividends and similar transactions and for certain dilutive
issuances.
o In December 2003, P-Com issued 2,000 shares of its Series D Convertible
Preferred Stock, with a stated value of $1,000 per share, in partial
consideration for the extinguishment of its obligations under three promissory
notes in the aggregate original principal amount of $2,000,000. Each share of
Series D Convertible Preferred Stock is convertible into a number of shares of
common stock equal to the stated value, divided by an initial conversion price
of $0.15. Based on this conversion price, the outstanding shares of Series D
Convertible Preferred Stock are convertible into approximately 13,333,333 shares
of P-Com's common stock. However, no holder of Series D Convertible Preferred
Stock may convert its shares into shares of common stock if the conversion would
cause the holder or any of its affiliates, individually or in the aggregate, to
beneficially own more than 9.999% of P-Com's outstanding common stock. As of
January 20, 2004, none of the outstanding shares of Series D Convertible
Preferred Stock had been converted into shares of common stock. The number of
shares of common stock issuable upon conversion of the Series D Convertible
Preferred Stock is subject to adjustment for stock splits, stock dividends and
similar transactions.
2
o In December 2003, P-Com consummated its acquisition of substantially all of
the assets of SPEEDCOM Wireless Corporation, and in consideration for those
assets, P-Com issued 63,500,000 shares of its common stock to SPEEDCOM Wireless
Corporation.
o In December 2003, P-Com issued 1,363,636 shares of its common stock to United
Manufacturing Assembly, Inc. ("UMAI"), in consideration for the reduction of
$150,000 in accounts payable to UMAI.
o In December 2003, P-Com issued warrants to purchase 350,000, 2,600,000, and
3,600,000 shares of its common stock to Carlos Belfiore, Samuel Smookler and
Cagan McAfee Capital Partners, LLC ("CMCP"), respectively, in consideration for
a reduction in the number of options granted to Messrs. Belfiore and Smookler
and CMCP. This reduction in the number of options was due to a limitation in the
maximum number of shares issuable to any single person or entity under P-Com's
1995 Stock Option/Stock Issuance Plan.
As part of each transaction described above, P-Com agreed to register the resale
of the shares of common stock issued and any shares of common stock that are
issuable upon the conversion or exercise of the convertible securities issued in
those transactions. P-Com is registering these shares of common stock for resale
by the selling stockholders named in this prospectus. The prices at which the
stockholders may sell their shares will be determined by the prevailing market
for the shares or in negotiated transactions. See the section entitled "Selling
Stockholders" on page 59 and the section entitled "Plan of Distribution" on page
65.
3
RISK FACTORS
An investment in P-Com common stock is subject to many risks. You should
carefully consider the risks described below, together with all of the other
information included in this prospectus, including the financial statements and
the related notes, before you decide whether to invest in P-Com common stock.
P-Com's business, operating results and financial condition could be harmed by
any of the following risks. The trading price of P-Com common stock could
decline due to any of these risks, and you could lose all or part of your
investment.
RISKS RELATED TO P-COM'S FINANCIAL CONDITION AND OPERATIONS
Continuing weakness in the telecommunications equipment and services sector has
adversely affected the operating results, future growth and stability of P-Com's
business. P-Com cannot sustain itself at the currently depressed sales levels.
The worldwide slowdown in the telecommunications equipment and services sector
has been severe, and continues. P-Com expects these conditions to continue to
adversely affect P-Com, its financial condition and results of operations.
Customers, particularly systems operators and integrated system providers, are
deferring capital spending and orders to suppliers, such as P-Com, and in
general are not building out any significant additional infrastructure at this
time. In the United States, most competitive local exchange carriers have
declared bankruptcy and, internationally, 3G network rollout and
commercialization continue to experience delays. In addition, P-Com's accounts
receivable, inventory turnover, and operating stability can be jeopardized if
its customers experience financial distress. P-Com does not believe that its
products sales levels can recover while an industry-wide slowdown in demand
persists.
Global economic conditions have had a depressing effect on sales levels in past
years, including a significant slowdown for P-Com in 1998 and 2001, 2002 and
2003. This slowdown shows no substantial signs of improvement. The soft economy
and slowdown in capital spending encountered in the United States, the United
Kingdom, continental Europe, parts of Asia, and other geographic markets have
had a significant depressing effect on the sales levels of telecommunications
products, such as P-Com's. These factors will continue to adversely affect
P-Com's business, financial condition and results of operations. P-Com cannot
sustain itself at the currently depressed sales levels, unless it is able to
substantially reduce costs, or obtain additional debt or equity financing. Any
additional reduction in sales may negatively affect operating revenue.
P-Com's business and financial positions have deteriorated significantly.
P-Com's business and financial positions have deteriorated significantly.
P-Com's core business product sales were reduced sharply beginning with the
second half of 2001. From inception to September 30, 2003, P-Com's aggregate net
loss is approximately $355.8 million. At September 30, 2003, P-Com's cash,
working capital, accounts receivable, inventory, total assets, employee
headcount, backlog and total stockholders' equity are all substantially below
levels of one year ago. P-Com has negative working capital of $12.2 million as
of September 30, 2003. P-Com's short-term liquidity deficiency could disrupt its
supply chain, and result in its inability to manufacture and deliver its
products, which would adversely affect its results of operations.
P-Com's independent accountants' opinion on its 2002 consolidated financial
statements includes an explanatory paragraph indicating substantial doubt about
P-Com's ability to continue as a going concern. To continue as a going concern,
P-Com will have to increase its sales, and possibly induce other creditors to
forebear or to convert to equity, raise additional equity financing, and/or
raise new debt financing. P-Com may not accomplish these tasks.
P-Com's prospects for obtaining additional financing are uncertain, and failure
to achieve profitability or obtain needed financing will affect its ability to
pursue future growth, harm its business operations and affect its ability to
continue as a going concern.
If P-Com is unable to achieve profitability or raise additional debt or equity
financing, it will not be able to continue as a going concern. Even if P-Com
resolves its going concern difficulties, its future capital requirements
4
will depend upon many factors, including a re-energized telecommunications
market, development costs of new products and related software tools, potential
acquisitions, maintenance of adequate manufacturing facilities and contract
manufacturing agreements, progress of research and development efforts,
expansion of marketing and sales efforts and status of competitive products.
Additional financing may not be available in the future on acceptable terms or
at all. P-Com's history of substantial operating losses will also severely limit
P-Com's ability to raise additional financing. In addition, given the recent
price of its common stock, if P-Com raises additional funds by issuing equity
securities, additional significant dilution to its stockholders will result.
If P-Com is unable to increase sales, decrease costs, or obtain additional
equity or debt financing, P-Com may be required to close business or product
lines, further restructure or refinance its debt or delay, scale back further or
eliminate its research and development program, or manufacturing operations.
P-Com may also need to obtain funds through arrangements with partners or others
that may require it to relinquish its rights to certain technologies or
potential products or other assets. P-Com's inability to obtain capital, or its
ability to obtain additional capital only upon onerous terms, could very
seriously damage its business, operating results and financial condition.
P-Com relies on a limited number of customers for a material portion of its
sales and the loss of or reduction in sales to any of those customers could harm
its business, financial condition and results of operation.
For the nine-month period ended September 30, 2003, sales to four customers
accounted for 56% of total sales. The loss of any one of these customers would
have an immediate and material effect on P-Com's sales. P-Com's ability to
maintain or increase its sales in the future will depend, in part upon its
ability to obtain orders from new customers as well as the financial condition
and success of its customers, the telecommunications industry and the global
economy. P-Com's customer concentration also results in concentration of credit
risk. As of September 30, 2003, four customers accounted for 67% of P-Com's
total accounts receivable balances. Many of P-Com's significant recurring
customers are located outside the United States, primarily in the Asia-Pacific
Rim areas, United Kingdom, continental Europe, and Latin America. Some of these
customers are implementing new networks and are themselves in the various stages
of development. They may require additional capital to fully implement their
planned networks, which may be unavailable to them on an as-needed basis, and
which P-Com cannot supply in terms of long-term financing.
If P-Com's customers cannot finance their purchases of its products or services,
this may adversely affect P-Com's business, operations and financial condition.
Financial difficulties of existing or potential customers may also limit the
overall demand for P-Com's products and services. Current customers in the
telecommunications industry have, from time to time, undergone financial
difficulties and may therefore limit their future orders or find it difficult to
pay for products sold to them. Any cancellation, reduction or delay in orders or
shipments, for example, as a result of manufacturing or supply difficulties or a
customer's inability to finance its purchases of P-Com's products or services,
would adversely affect P-Com's business. Difficulties of this nature have
occurred in the past and P-Com believes they can occur in the future. For
instance, in July 2002, P-Com announced a multiple year $100 million supply
agreement with an original equipment manufacturer in China. Even with an
agreement in place, the customer has changed the timing and the product mix
requested, and has cancelled or delayed most of its orders. Enforcement of the
specific terms of the agreement would be difficult and expensive within China,
and P-Com may not ultimately realize the total benefits currently expected in
the contract period.
Finally, acquisitions in the telecommunications industry are common, which tends
to further concentrate the potential customer base in larger companies.
P-Com faces substantial competition and may not be able to compete effectively.
P-Com is experiencing intense competition worldwide from a number of leading
telecommunications equipment and technology suppliers. These companies offer a
variety of competitive products and services and some offer broader
telecommunications product lines. These companies include Alcatel Network
Systems, Alvarion, Stratex Networks, Ceragon, Ericsson Limited, Harris
Corporation-Farinon Division, NEC, NERA, Nokia Telecommunications, SIAE,
Siemens, and Proxim. Many of these companies have greater installed bases,
financial resources and production, marketing, manufacturing, engineering and
other capabilities than P-Com does. P-Com
5
faces actual and potential competition not only from these established
companies, but also from start-up companies that are developing and marketing
new commercial products and services. Some of P-Com's current and prospective
customers and partners have developed, are currently developing or could
manufacture products competitive with P-Com's products. Nokia and Ericsson have
developed competitive radio systems, and there is new technology featuring free
space optical systems now in the marketplace.
The principal elements of competition in P-Com's market and the basis upon which
customers may select its systems include price, performance, software
functionality, perceived ability to continue to be able to meet delivery
requirements, and customer service and support. Recently, certain competitors
have announced the introduction of new competitive products, including related
software tools and services, and the acquisition of other competitors and
competitive technologies. P-Com expects competitors to continue to improve the
performance and lower the price of their current products and services and to
introduce new products and services or new technologies that provide added
functionality and other features. New product and service offerings and
enhancements by P-Com's competitors could cause a decline in sales or loss of
market acceptance of its systems. New offerings could also make P-Com's systems,
services or technologies obsolete or non-competitive. In addition, P-Com is
experiencing significant price competition and expects that competition to
intensify.
P-Com's operating results have been adversely affected by deteriorating gross
margins.
The intense competition for many of P-Com's products has resulted in a continued
reduction in its average selling prices. These reductions have not been offset
by a corresponding decrease in cost of goods sold, resulting in deteriorating
gross margins in some of its product lines. These deteriorating gross margins
may continue in the short term. Reasons for the decline include the maturation
of the systems, the effect of volume price discounts in existing and future
contracts and the intensification of competition.
If P-Com cannot significantly reduce costs, develop new products in a timely
manner or in the event it fails to achieve increased sales of new products at a
higher average selling price, then it may be unable to offset declining average
selling prices in many of its product lines. If P-Com is unable to offset
declining average selling prices, or achieve corresponding decreases in
manufacturing operating expenses, its gross margins will continue to decline.
P-Com's operating results could be adversely affected by continued decline in
capital spending in the telecommunications market.
Although much of the anticipated growth in the telecommunications infrastructure
is expected to result from the entrance of new service providers, many new
providers do not have the financial resources of existing service providers. For
example in the United States, most competitive local exchange carriers are
continuing to experience financial distress. If these new service providers are
unable to adequately finance their operations, they may cancel or delay orders.
Moreover, purchase orders are often received and accepted far in advance of
shipment and, as a result, P-Com typically permits orders to be modified or
canceled with limited or no penalties. In periods of weak capital spending on
the part of traditional customers, P-Com is at risk for curtailment or
cancellation of purchase orders, which can lead to adverse operating results.
Ordering materials and building inventory based on customer forecasts or
non-binding orders can also result in large inventory write-offs, such as what
occurred in 2000 and 2001, and continued to incur in 2003.
Global economic conditions have had a depressing effect on sales levels in the
past three years. The soft economy and reported slowdown in capital spending in
2001, 2002 and 2003 in the United States and European telecommunications markets
have had a significant depressing effect on the sales levels in each of these
years. In fiscal 2002, P-Com's sales in the United States and Europe markets
totaled $12.2 million, compared to $79.4 million in 2001. This trend continued
through 2003.
P-Com does not have the customer base or other resources of more established
companies, which makes it difficult for it to address the liquidity and other
challenges it faces.
Although P-Com has installed and has in operation over 150,000 radio units
globally, it has not developed a large installed base of its equipment or the
kind of close relationships with a broad base of customers of a type
6
enjoyed by larger, more developed companies, which would provide a base of
financial performance from which to launch strategic initiatives and withstand
business reversals. In addition, P-Com has not built up the level of capital
often enjoyed by more established companies, so from time to time it faces
serious challenges in financing its continued operations. P-Com may not be able
to successfully address these risks.
Failure to maintain adequate levels of inventory could result in a reduction or
delay in sales and harm P-Com's results of operations.
P-Com's customers have increasingly been demanding short turnaround on orders
rather than submitting purchase orders far in advance of expected shipment
dates. This practice requires that P-Com keep inventory on hand to meet market
demands. Given the variability of customer needs and purchasing power, it is
difficult to predict the amount of inventory needed to satisfy customer demand.
If P-Com over-estimates or under-estimates inventory requirements to fulfill
customer needs, or if purchase orders are terminated by customers, P-Com's
results of operations could continue to be adversely affected. In particular,
increases in inventory or cancellation of purchase orders could adversely affect
operations if the inventory is ultimately not used or becomes obsolete. This
risk was realized in the large inventory write-downs from 1999 to 2002, and a
$5.5 million write-down in the first two quarters of 2003.
P-Com's limited manufacturing capacity and sources of supply may affect its
ability to meet customer demand, which would harm its sales and damage its
reputation.
P-Com's internal manufacturing capacity, by design, is very limited. Under
certain market conditions, as for example when there is high capital spending
and rapid system deployment, P-Com's internal manufacturing capacity will not be
sufficient to fulfill customers' orders. P-Com would therefore rely on contract
manufacturers to produce its systems, components and subassemblies. P-Com's
failure to manufacture, assemble and ship systems and meet customer demands on a
timely and cost-effective basis could damage relationships with customers and
have a material adverse effect on its business, financial condition and results
of operations.
In addition, certain components, subassemblies and services necessary for the
manufacture of P-Com's systems are obtained from a sole supplier or a limited
group of suppliers. Many of these suppliers are in difficult financial positions
as a result of the significant slowdown that P-Com, too, has experienced.
P-Com's reliance on contract manufacturers and on sole suppliers or a limited
group of suppliers involves risks. P-Com has from time to time experienced an
inability to obtain, or to receive in a timely manner, an adequate supply of
finished products and required components and subassemblies. This inability is
due to the above factors and, in some cases, P-Com's financial condition. As a
result, P-Com has less control over the price, timely delivery, reliability and
quality of finished products, components and subassemblies.
A significant ramp-up of production of products and services could require P-Com
to make substantial capital investments in equipment and inventory, in
recruitment and training of additional personnel and possibly in investment in
additional manufacturing facilities. If undertaken, P-Com anticipates these
expenditures would be made in advance of increased sales. In this event,
operating results would be adversely affected from time-to-time due to
short-term inefficiencies associated with the addition of equipment and
inventory, personnel or facilities and these cost categories may periodically
increase as a percentage of revenues.
P-Com's business depends on the acceptance of its products and services, and it
is uncertain whether the market will accept and demand its products and services
at levels necessary for success.
P-Com's future operating results depend upon the continued growth and increased
availability and acceptance of micro cellular, personal communications
networks/personal communications services and wireless local loop access
telecommunications services in the United States and internationally. The volume
and variety of wireless telecommunications services or the markets for and
acceptance of the services may not continue to grow as expected. The growth of
these services may also fail to create anticipated demand for P-Com's systems.
Predicting which segments of these markets will develop and at what rate these
markets will grow is difficult.
7
Some sectors of the telecommunications market will require the development and
deployment of an extensive and expensive telecommunications infrastructure. In
particular, the establishment of personal communications networks/personal
communications services networks requires significant capital expenditures.
Communications providers may determine not to make the necessary investment in
this infrastructure, or the creation of this infrastructure may not occur in a
timely manner, as has been the case in 2001 through 2003. Moreover, one
potential application of P-Com's technology, the use of its systems in
conjunction with the provision of alternative wireless access in competition
with the existing wireline local exchange providers, depends on the pricing of
wireless telecommunications services at rates competitive with those charged by
wireline operators. Rates for wireless access must become competitive with rates
charged by wireline companies for this approach to be successful. Absent that,
consumer demand for wireless access will be negatively affected. If P-Com
allocates resources to any market segment that does not grow, it may be unable
to reallocate capital and other resources to other market segments in a timely
manner, ultimately curtailing or eliminating its ability to enter the other
segments.
Certain current and prospective customers are delivering services and features
that use competing transmission media, such as fiber optic and copper cable,
particularly in the local loop access market. To successfully compete with
existing products and technologies, P-Com must offer systems with superior price
and performance characteristics and extensive customer service and support.
Additionally, P-Com must supply these systems on a timely and cost-effective
basis, in sufficient volume to satisfy these prospective customers'
requirements, in order to induce them to transition to P-Com's technologies. Any
delay in the adoption of P-Com's systems and technologies may result in
prospective customers using alternative technologies in their next generation of
systems and networks. P-Com's financial condition may prevent P-Com from meeting
this customer demand or may dissuade potential customers from purchasing from
P-Com
Prospective customers may design their systems or networks in a manner that
excludes or omits P-Com's products and technology. Existing customers may not
continue to include P-Com's systems in their products, systems or networks in
the future. P-Com's technology may not replace existing technologies and achieve
widespread acceptance in the wireless telecommunications market. Failure to
achieve or sustain commercial acceptance of P-Com's currently available radio
systems or to develop other commercially acceptable radio systems would
materially adversely affect P-Com.
Due to P-Com's international sales and operations, P-Com is exposed to economic
and political risks and significant fluctuations in the value of foreign
currencies relative to the United States dollar.
As a result of P-Com's current heavy dependence on international markets,
especially in the United Kingdom, the European continent, the Middle East,
China, and Latin America, P-Com faces economic, political and foreign currency
fluctuations that are often more volatile than those commonly experienced in the
United States. Approximately 90% of P-Com's sales in the nine-month period ended
September 30,2003 were made to customers located outside of the United States.
Historically, P-Com's international sales have been denominated in British
pounds sterling, Euros or United States dollars. A decrease in the value of
British pounds or Euros relative to United States dollars, if not hedged, will
result in exchange loss for P-Com if it has Euro or British pounds sterling
denominated sales. Conversely, an increase in the value of Euro and British
pounds sterling will result in increased margins for P-Com on Euro or British
pounds sterling denominated sales as its functional currency is in United States
dollars. For international sales that P-Com would require to be United States
dollar-denominated, such a decrease in the value of foreign currencies could
make its systems less price-competitive if competitors choose to price in other
currencies and could adversely affect its financial condition. P-Com funds its
Italian subsidiary's operating expenses, which are denominated in Euros. An
increase in the value of Euro currency, if not hedged relative to the United
States dollar, could result in more costly funding for P-Com's Italian
operations, and as a result, higher cost of production to it as a whole.
Conversely, a decrease in the value of Euro currency will result in cost savings
for P-Com.
Additional risks are inherent in P-Com's international business activities.
These risks include:
o changes in regulatory requirements;
8
o costs and risks of localizing systems (homologation) in foreign countries;
o availability of suitable export financing, particularly in the case of large
projects which P-Com must ship in short periods; P-Com's bank line of credit
allows this financing up to $4.0 million, subject to numerous conditions;
o timing and availability of export licenses, tariffs and other trade barriers;
o difficulties in staffing and managing foreign operations, branches and
subsidiaries;
o difficulties in managing distributors;
o terrorist activities;
o recurrence of worldwide health epidemic similar to SARS, which significantly
affected P-Com's ability to travel and do business in Asia and the Pacific Rim
areas;
o potentially adverse tax consequences; and
o difficulty in accounts receivable collections, if applicable.
Due to political and economic instability in new markets, economic, political
and foreign currency fluctuations may be even more volatile than conditions in
developed countries. Countries in the Asia/Pacific, African, and Latin American
regions have in recent years experienced weaknesses in their currency, banking
and equity markets. These weaknesses have adversely affected and could continue
to adversely affect demand for P-Com's products.
P-Com's international operations subject P-Com to the laws, regulations and
local customs of the countries in which it conducts business, which may be
significantly different from those of the United States.
In many cases, local regulatory authorities own or strictly regulate
international telephone companies. Established relationships between
government-owned or government-controlled telephone companies and their
traditional indigenous suppliers of telecommunications often limit access to
these markets. The successful expansion of P-Com's international operations in
some markets will depend on its ability to locate, form and maintain strong
relationships with established companies providing communication services and
equipment in designated regions. The failure to establish these regional or
local relationships or to successfully market or sell P-Com's products in
specific international markets could limit its ability to compete in today's
highly competitive local markets for broadband wireless equipment.
In addition, many of P-Com's customer purchases and other agreements are
governed by a wide variety of complex foreign laws, which may differ
significantly from United States laws. Therefore, P-Com may be limited in its
ability to enforce its rights under those agreements and to collect damages, if
awarded in any litigation.
Governmental regulations affecting markets in which P-Com competes could
adversely affect its business and results of operations.
Radio communications are extensively regulated by the United States and foreign
governments as well as by international treaties. P-Com's systems must conform
to a variety of domestic and international requirements established to, among
other things, avoid interference among users of radio frequencies and to permit
interconnection of equipment. Historically, in many developed countries, the
limited availability of radio frequency spectrum has inhibited the growth of
wireless telecommunications networks. Each country's regulatory process differs.
To operate in a jurisdiction, P-Com must obtain regulatory approval for its
systems and comply with differing regulations.
9
Regulatory bodies worldwide continue to adopt new standards for wireless
telecommunications products. The delays inherent in this governmental approval
process may cause the cancellation, postponement or rescheduling of the
installment of communications systems by P-Com's customers and P-Com. The
failure to comply with current or future regulations or changes in the
interpretation of existing regulations could result in the suspension or
cessation of operations. Those regulations or changes in interpretation could
require P-Com to modify its products and services and incur substantial costs in
order to comply with the regulations and changes.
In addition, P-Com is also affected by domestic and international authorities'
regulation of the allocation and auction of the radio frequency spectrum.
Equipment to support new systems and services can be marketed only if permitted
by governmental regulations and if suitable frequency allocations are auctioned
to service providers. Establishing new regulations and obtaining frequency
allocation at auction is a complex and lengthy process. If PCS operators and
others are delayed in deploying new systems and services, P-Com could experience
delays in orders. Similarly, failure by regulatory authorities to allocate
suitable frequency spectrum could have a material adverse effect on P-Com's
results. In addition, delays in radio frequency spectrum auction process in the
United States could delay P-Com's ability to develop and market equipment to
support new services.
P-Com operates in a regulatory environment subject to significant change.
Regulatory changes, which are affected by political, economic and technical
factors, could significantly impact P-Com's operations by restricting its
development efforts and those of its customers, making current systems obsolete
or increasing competition. Any such regulatory changes, including changes in the
allocation of available spectrum, could have a material adverse effect on
P-Com's business, financial condition and results of operations. P-Com may also
find it necessary or advisable to modify its systems and services to operate in
compliance with these regulations. These modifications could be expensive and
time-consuming.
P-Com may enter into agreements to merge or consolidate with other companies,
and it may incur significant costs in the process, whether or not these
transactions are completed.
P-Com signed an Agreement and Plan of Merger with Telaxis Communications
Corporation, dated September 9, 2002. This merger agreement was terminated by
mutual agreement on January 7, 2003. On January 27, 2003, P-Com signed a letter
of intent to acquire privately held Procera Networks Inc., of Sunnyvale,
California, in a stock-for-stock transaction. This acquisition effort was
terminated in April 2003. On June 16, 2003, P-Com entered into an Asset Purchase
Agreement with SPEEDCOM Wireless Corporation to acquire substantially all of the
assets of SPEEDCOM (the "SPEEDCOM Acquisition"). The SPEEDCOM Acquisition closed
on December 10, 2003. P-Com may not be able to close any strategic acquisition
on the timetable it anticipates, if at all. P-Com has and may further incur
significant non-recoverable expenses in these efforts.
P-Com may not realize the intended benefits of the SPEEDCOM Acquisition if it is
unable to integrate SPEEDCOM's operations, products and personnel with its own
in a timely and efficient manner.
Achieving the benefits of the SPEEDCOM Acquisition will depend in part on the
integration of P-Com's and SPEEDCOM's operations, products and personnel in a
timely and efficient manner. In order for P-Com to provide enhanced and more
valuable products to its customers after the SPEEDCOM Acquisition, P-Com will
need to integrate both companies' development operations and product lines. This
integration may be difficult and unpredictable because P-Com's and SPEEDCOM's
products are highly complex, have been developed independently and were designed
without regard to integration. Successful integration of P-Com's and SPEEDCOM's
product development operations and product lines also requires coordination of
different development and engineering teams, as well as sales and marketing
efforts and personnel. This, too, may be difficult and unpredictable because of
possible cultural conflicts between the companies and different opinions on
product and technology decisions. If P-Com cannot successfully integrate
SPEEDCOM's operations, products and personnel with its own, P-Com may not
realize the expected benefits of the SPEEDCOM Acquisition, which could adversely
affect P-Com's business.
10
Integrating P-Com's and SPEEDCOM's operations is expected to negatively affect
SPEEDCOM's sales, and will divert management's attention away from its
day-to-day operations.
Integration of P-Com's and SPEEDCOM's operations, products and personnel is
expected to negatively affect SPEEDCOM's sales in the fourth quarter of 2003 and
the first quarter of 2004. In addition, the SPEEDCOM Acquisition is expected to
place a significant burden on P-Com's management and its internal and financial
resources. The negative affect on SPEEDCOM's sales during the fourth quarter of
2003 and first quarter of 2004, and the diversion of P-Com management's
attention and any difficulties encountered in the transition and integration
process, will negatively affect P-Com's financial condition, and could
negatively affect P-Com's business.
The SPEEDCOM Acquisition will continue to result in significant costs to P-Com.
The SPEEDCOM Acquisition has resulted, and will continue to result in
significant costs to P-Com. As of December 10, 2003, P-Com had loaned SPEEDCOM
approximately $1.58 million, which indebtedness was assumed by P-Com in
connection with the SPEEDCOM Acquisition. Transaction costs were approximately
$250,000. These costs consisted primarily of fees for attorneys, accountants,
filing fees and financial printers. Additional costs will be incurred in
connection with the integration of the assets and business of SPEEDCOM. In
addition to transaction costs, P-Com assumed approximately $630,000 in accounts
payable of SPEEDCOM, and assumed certain other liabilities in connection with
the SPEEDCOM Acquisition. These liabilities are expected to continue to affect
P-Com's financial condition in the short-term.
RISK RELATING TO CAPITAL MARKETS AND P-COM COMMON STOCK
The NASDAQ Small Cap Market has delisted P-Com's common stock and this may
severely limit the ability of P-Com's stockholders to sell any of their shares
of P-Com common stock.
NASDAQ moved P-Com's stock listing from the NASDAQ National Market to the NASDAQ
Small Cap Market, effective August 27, 2002, due to P-Com's failure to meet
certain listing requirements, including a minimum bid price of $1.00 per share.
P-Com subsequently failed to meet certain NASDAQ Small Cap Market quantitative
listing standards, including a minimum $1.00 per share bid price requirement,
and the NASDAQ Listing Qualifications Panel determined that P-Com common stock
would no longer be listed on the NASDAQ Small Cap Market. Effective March 10,
2003, P-Com's common stock commenced trading electronically on the OTC Bulletin
Board of the National Association of Securities Dealers, Inc. This move could
result in a less liquid market available for existing and potential stockholders
to trade shares of P-Com common stock and could ultimately further depress the
trading price of P-Com common stock.
P-Com's common stock is subject to the SEC's "penny stock" regulation. For
transactions covered by this regulation, broker-dealers must make a special
suitability determination for the purchase of the securities and must have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, the rules
generally require the delivery, prior to the transaction, of a risk disclosure
document mandated by the SEC relating to the penny stock market. The
broker-dealer is also subject to additional sales practice requirements.
Consequently, the penny stock rules may restrict the ability of broker-dealers
to sell shares of P-Com common stock and may affect the ability of holders to
sell P-Com common stock in the secondary market, and the price at which a holder
can sell P-Com common stock.
Issuing securities as a means of raising capital and the future sales of these
securities in the public market could lower P-Com's stock price and adversely
affect its ability to raise additional capital in subsequent financings.
P-Com has traditionally relied on debt and equity financings to meet its working
capital needs including the issuances of Series B Convertible Preferred Stock in
August 2003 and Series C Convertible Preferred Stock in October and December
2003. When the shares of common stock that are issuable upon conversion of these
securities are subsequently sold in the public market, the trading price of
P-Com common stock may be negatively affected. As of January 20, 2004, the last
reported sale price of P-Com common stock was $0.17. Future sales of P-Com's
common stock, particularly shares issued upon the exercise or conversion of
outstanding or newly issued
11
securities upon exercise of its outstanding options, could have a significant
negative effect on the market price of P-Com's common stock. If the market price
of P-Com common stock continues to decrease, P-Com may not be able to conduct
additional financings in the future on acceptable terms or at all, and its
ability to raise additional capital will be significantly limited.
The conversion or exercise of P-Com's outstanding convertible securities will
have a significant dilutive effect on P-Com's existing stockholders.
In March, May and July 2003, P-Com issued warrants to purchase approximately 8.8
million shares of its common stock. In August 2003, P-Com's remaining 7%
Convertible Subordinated Notes due 2005 were converted into 1.0 million shares
of Series B Convertible Preferred Stock, of which 889,393 shares were converted
into approximately 94 million shares of common stock in December 2003. The
remaining outstanding shares of Series B Convertible Preferred Stock are
convertible into approximately 11 million shares of P-Com common stock.
In October and December 2003, P-Com issued approximately 10,000 shares of Series
C Convertible Preferred Stock together with warrants to purchase approximately
139.2 million shares of common stock. These shares of Series C Convertible
Preferred Stock are convertible into approximately 174.0 million shares of
common stock. In December 2003, P-Com issued 2,000 shares of Series D
Convertible Preferred Stock which, in turn, are convertible into approximately
13.3 million shares of common stock. Although the conversion or exercise of
these securities is subject to limitations that prevent any single holder from
holding more than 4.999% or 9.999%, as the case may be, of P-Com's outstanding
common stock, the conversion or exercise of these securities will nevertheless
result in substantial dilution to P-Com's existing stockholders.
In December 2003, P-Com also issued 63,500,000 shares of its common stock in
connection with the SPEEDCOM Acquisition. This issuance resulted in substantial
dilution to P-Com's existing stockholders.
A recent amendment to P-Com's bylaws increases P-Com's ability to conduct
financing transactions using its equity securities and, as a result, may cause
further dilution to P-Com's stockholders.
At P-Com's 2003 annual meeting of stockholders, P-Com's stockholders approved a
proposal to amend P-Com's bylaws. As a result of this amendment, P-Com may issue
securities that are convertible into or exercisable for shares of P-Com common
stock at a conversion or exercise price that is subject to downward adjustment
without obtaining stockholder approval. This downward adjustment mechanism is
designed to protect the holders of these securities from having their
investments diluted by future issuances of P-Com common stock at a lower price
per share. This is accomplished by issuing an increased number of shares of
P-Com common stock to these security holders upon the conversion or exercise of
those securities. If the market price of P-Com common stock continues to decline
and P-Com is forced to continue raising capital through dilutive equity
financings, the holders of these convertible securities will be protected from
any dilution that may occur but, as a result, P-Com's other stockholders will be
diluted to a greater extent than if these convertible securities did not exist.
Due to the reservation of a substantial number of P-Com's authorized and
unissued shares of common stock, P-Com has little or no flexibility to issue
additional shares of stock in connection with financing programs, acquisitions
and other corporate purposes.
P-Com is authorized to issue a total of 700 million shares of common stock. Of
this amount, approximately 212.6 million shares of common stock are currently
outstanding. In addition P-Com is required to reserve approximately 431.5
million shares of common stock for issuance upon conversion or exercise of
P-Com's outstanding convertible securities. P-Com has also reserved
approximately 50 million shares for issuance under its 1995 Stock Option/Stock
Issuance Plan. As a result, P-Com will have little or no flexibility to act in
the future with respect to financing programs, acquisitions, forward stock
splits and other corporate purposes without the delay and expense involved in
obtaining stockholder approval each time an opportunity requiring the issuance
of shares of common stock arises. Such a delay could cause P-Com to lose the
opportunity to pursue one or more of these transactions. Moreover, P-Com's
stockholders may refuse to grant the necessary approval.
P-Com's stock price has been volatile and has experienced significant decline,
and it may continue to be volatile and continue to decline.
In recent years, the stock market in general, and the market for shares of small
capitalization technology stocks in particular, have experienced extreme price
fluctuations. These fluctuations have often negatively affected small cap
companies such as P-Com, and may impact its ability to raise equity capital in
periods of liquidity crunch. Companies with liquidity problems also often
experience downward stock price volatility. P-Com believes that factors such as
announcements of developments relating to its business (including any financings
or any resolution of liabilities), announcements of technological innovations or
new products or enhancements by P-Com or its competitors, developments in the
emerging countries' economies, sales by competitors, sales of significant
volumes of P-Com common stock into the public market, developments in its
relationships with customers, partners, lenders, distributors and suppliers,
shortfalls or changes in revenues, gross margins, earnings or losses or other
financial results that differ from analysts' expectations, regulatory
developments and fluctuations in results of operations could and have caused the
price of P-Com common stock to fluctuate widely and decline over the past two
years during the telecommunications recession. The market price of P-Com common
stock may continue to decline, or otherwise continue to experience significant
fluctuations in the future, including fluctuations that are unrelated to P-Com's
performance.
12
P-Com has adopted anti-takeover defenses that could delay or prevent an
acquisition of P-Com.
P-Com's stockholder rights plan, certificate of incorporation, equity incentive
plans, bylaws and Delaware law may have a significant effect in delaying,
deferring or preventing a change in control and may adversely affect the voting
and other rights of other holders of P-Com common stock.
The rights of the holders of P-Com common stock will be subject to, and may be
adversely affected by, the rights of any other preferred stock that may be
issued in the future, including the Series A Junior Participating Preferred
Stock that may be issued pursuant to the stockholder rights plan, upon the
occurrence of certain triggering events. In general, the stockholder rights plan
provides a mechanism by which the share position of anyone that acquires 15% or
more (or 20% or more in the case of the State of Wisconsin Investment Board and
Firsthand Capital Management) of P-Com's common stock will be substantially
diluted. Future issuance of stock or additional preferred stock could have the
effect of making it more difficult for a third party to acquire a majority of
P-Com's outstanding voting stock.
13
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This prospectus contains forward-looking statements that involve substantial
risks and uncertainties. In some cases you can identify these statements by
forward-looking words such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "should," "will," and "would" or similar words. You
should read statements that contain these words carefully because they may
discuss P-Com's future expectations, contain projections of P-Com's future
results of operations or of P-Com's financial position or state other
forward-looking information. P-Com believes that it is important to communicate
its future expectations to its investors. However, there may be events in the
future that P-Com is able to accurately predict or control. The factors listed
above in the section captioned "Risk Factors," as well as any cautionary
language in this prospectus, provide examples of risks, uncertainties and events
that may cause P-Com's actual results to differ materially from any expectations
that P-Com describes. Actual results or outcomes may differ materially from
those predicted in P-Com's forward-looking statements due to the risks and
uncertainties inherent in its business, including risks and uncertainties in:
o P-Com's ability to achieve positive cash flow given the Company's existing and
anticipated operating and other costs, and current sales trends;
o P-Com's ability to attract additional customers, therefore, decreasing its
reliance on a limited number of customers for a material portion of its sales;
o The possible need to raise additional equity capital, and whether that capital
is available on acceptable terms, if at all;
o P-Com's ability to negotiate repayment terms with many of its creditors, and
settle outstanding litigation;
o Market conditions including a continued severe worldwide slowdown in the
telecommunications equipment and services sector;
o Fluctuations in customer demand, pricing and competition;
o P-Com's reliance upon subcontractors;
o The ability of P-Com's customers to finance their purchases;
o The timing of new technology and product introductions;
o The risk of early obsolescence.
o P-Com's ability to protect its intellectual property; and
o obtaining and maintaining regulatory approval where required;
You should also consider carefully the statements under "Risk Factors" beginning
on page 4 and other sections of this prospectus and in the other documents filed
with the SEC, which address factors that could cause P-Com's actual results to
differ from those set forth in the forward-looking statements. You should not
place undue reliance on any forward-looking statements, which reflect P-Com's
management's view only as of the date of this prospectus. P-Com will not update
any forward-looking statements to reflect events or circumstances that occur
after the date on which such statement is made.
14
USE OF PROCEEDS
P-Com will not receive any of the proceeds from the sale of the shares of common
stock by the selling stockholders. If and when all or a portion of the Series B
Convertible Preferred Stock, Series C Convertible Preferred Stock and Series D
Convertible Preferred Stock are converted into shares of common stock, P-Com
will not receive any proceeds from the conversion. If and when all or a portion
of the warrants held by the selling stockholders are exercised, P-Com will
receive the proceeds from the exercise of those warrants to the extent that the
exercise price is paid in cash. However, warrants held by the selling
stockholders may be exercised through a cashless exercise, in which event, P-Com
will not receive any proceeds from the exercise. If these warrants are exercised
and the exercise price is paid in cash, P-Com will receive approximately $24.8
million, which would be used by P-Com for working capital and other general
corporate purposes.
BUSINESS
OVERVIEW
P-Com develops, manufactures, and markets microwave radios for point-to-point,
spread spectrum and point-to-multipoint applications for telecommunications
networks worldwide. Cellular and personal communications providers employ
P-Com's point-to-point systems for backhaul between remote tower sites and
switching centers. Network service providers and Internet service providers are
able, through the deployment of P-Com equipment and systems, to respond to the
demands for high-speed wireless access services, such as Internet access
associated with business-to-business and e-commerce business processes. Through
deployment of P-Com's systems, network providers can quickly and efficiently
establish integrated Internet, data, voice, and video communications for their
customers, then expand and grow those services as demand increases. The wireless
broadband networking market is a subset of the global telecommunications,
cellular, personal services communications, wireless Internet access, and
private network markets. Because of the number of sub-markets for various
products globally, reliable market statistics are not readily available.
P-Com's point-to-point, spread spectrum and point-to-multipoint products
contributed 71% (2001:74%) and 21% (2001:13%) and 8% (2001:13%) of P-Com's
equipment revenue, respectively, in 2002.
Since early 2000, because of a severe industry downturn related to curtailed
capital spending by operators and integrators of telecommunications systems
globally, P-Com has disposed of non-core businesses, (including Technosystem,
Cemetel, Control Resources, RT Masts and P-Com Network Services, Inc.), reduced
employee headcount sharply, closed non-essential offices, and reduced capital
expenditure significantly. Notwithstanding the downturn, P-Com raised $72
million in private equity financings during fiscal years 2000 to 2002, and
during the first nine months of 2003. P-Com currently has $4.0 million in
availability under a secured line of credit from a commercial bank. P-Com's
business has been severely distressed and it has endured the bankruptcy and
related loss of revenues and write-offs of its single largest customer in 2001.
Short-term demand levels for broadband wireless products such as P-Com's is
unclear. However, P-Com believes that should a market turnaround occur, wireless
equipment solutions such as those offered by P-Com will continue to be
attractive to broadband access providers from a viewpoint of cost efficiency,
applications and ease of deployment.
On December 10, 2003, P-Com acquired the Wave Wireless Networking division of
SPEEDCOM Wireless Corporation ("SPEEDCOM") and related assets, in consideration
for the issuance to SPEEDCOM of 63,500,000 shares of P-Com's common stock, and
the assumption of certain of its liabilities (the "Acquisition"). Wave Wireless
Networking ("Wave Wireless") offers custom broadband wireless access networking
equipment, including the SPEEDLAN family of wireless Ethernet bridges and
routers, for security-related government, business and residential customers in
the U.S. and internationally. Internet service providers, telecommunications
carriers and other service providers, and private organizations in the U.S. and
internationally use Wave Wireless' products to provide broadband "last-mile"
wireless connectivity in various point-to-point and point-to-multipoint
configurations at speeds up to 155 megabits per second and distances up to 25
miles. Wave Wireless' flagship product, SPEEDLAN 9000, offers two key features
as market differentiators: 128 bit over-the-air encryption and self-healing mesh
networking. Wave Wireless' products provide high-performance broadband fixed
wireless solutions specifically designed for building-to-building local area
network connectivity and wireless Internet distribution.
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Wave Wireless' wireless products are designed to meet the "backbone" and
"last-mile" needs of three distinct market sectors: the government/security
market, the service provider market and the enterprise market. Increasingly, the
private and the government sector have insisted on products that incorporates
security features, resulting in the development of new markets. Specifically, a
need has developed for video surveillance and secure communications - whether
voice or data. Video or VoIP (Voice over IP) can be transported with special
prioritization by the SPEEDLAN products and all data transported in a SPEEDLAN
network can be optionally encrypted with Department of Defense approved
encryption. The service provider market is comprised of various Internet service
providers and telecommunication carriers, which provide fixed wireless broadband
Internet connectivity to business and residential customers. The enterprise
market is comprised of corporations, schools, universities, governments and the
military, which need wireless campus-wide private data networks. In both cases,
Wave Wireless' wireless broadband products provide the user with lower cost of
ownership and significantly reduced installation time compared to alternative
wired solutions.
As a result of the SPEEDCOM Acquisition, P-Com is able to add the SPEEDLAN
product family to its unlicensed spread spectrum wireless product portfolio. In
addition, P-Com gains greater access to the enterprise and government markets
through sales channels established by Wave Wireless.
On January 29, 2004, P-Com released its results of operations for the fourth
quarter of 2003, which are described in the section entitled "Management's
Discussion and Analysis of Financial Conditions and Results of
Operations--Recent Results" beginning on page 47 of this prospectus.
P-Com was organized on August 23, 1991 as a Delaware Corporation.
INDUSTRY BACKGROUND
During the 1990s, the demand for additional multimedia infrastructure, and in
particular Internet usage growth, fueled network expansion using both wireline
and wireless protocols. Speed, reliability and economies of scale are the key
elements inherent in commercially successful networked systems. Broadband
wireless access was found to supply an efficient and particularly economical
means to meet this growing demand for information transfer. Wireless networks
are constructed using microwave radios and other equipment to connect cell
sites, wireline and other fixed asset systems. P-Com's broadband wireless
products and services are targeted to add value to the integrated service
providers and wireless telephone operators globally. P-Com's products are
designed to be frequency specific by country if required.
The broadband wireless market developed into two commercially recognized
architectures for voice and data transmission: point-to-point and
point-to-multipoint. P-Com has developed and sold equipment in commercial
quantities for both formats. P-Com does not provide products for wireline
sub-sectors of the telecommunications market, including wireline systems and
cable systems. Since 2000, system build out has been in a significant slowdown
in the United States, Latin America, and European telecommunications markets.
Demand for wireless broadband products is currently deeply depressed. P-Com
cannot ensure the proliferation of its products or guarantee a given market
share of the global telecommunications equipment market in future years.
Additionally, there are competing technologies which service the
telecommunication sector's hardware demands.
BROADBAND WIRELESS IMPLEMENTATION
Global deregulation of telecommunications markets and the related allocation of
radio frequencies for broadband wireless access transmission have spurred
competition to supply wireless-based systems as a cost-effective alternative to
traditional wireline service delivery systems. Broadband wireless systems are
competitive due to the relatively short set up and deployment time, high return
on capital investment, and ability to connect customers quickly once the
transmission hardware and software infrastructure are in place. Moreover,
network operators can mitigate the risk of "stranded capital costs" inherent in
wireline hardware. Such systems do not scale as well as the wireless
alternatives as user's needs expand or change over time.
End users who need to transport information from one location to another have a
choice of wired or wireless solutions. Wired solutions typically take the form
of lines that are leased from telephone companies. The associated lease payments
tend to be less attractive than the cost of ownership of a wireless digital
microwave system. Wireless transmission of voice, data and video traffic has
become a desirable alternative to wired solutions due to its advantages in cost,
speed of deployment, reliability, range, and ease of installation, especially in
developing countries. Incumbent telephone companies also are historically slow
to deploy leased lines, especially when the user is a cellular operator who
essentially competes directly with them. Wireless digital microwave radios,
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on the other hand, can be deployed immediately upon receiving location rights.
P-Com believes, particularly in a time of stringent capital asset
rationalization, the wireless choice will be economical and effective.
Global Privatization and Deregulation: Stimuli to Broadband Wireless Access
Growth
In many parts of the world, telecommunications services are inadequate,
unreliable or non-existent due to the lack of existing infrastructure.
Additionally, many such countries have privatized the state-owned
telecommunications monopoly and opened their markets to competitive network
service providers. P-Com believes competitive service providers in such markets
often find deployment of wireless broadband the quickest, most economical and
scalable means of providing reliable, modern telecommunications services.
NETWORK ARCHITECTURE BOTTLENECKS
Fiber optic networks have received much attention because of the speed and
quality associated with the technology. Increasingly, network service providers
are constructing fiber optic interoffice backbones to meet the significant
demand created by Internet and data, video conferencing, and voice services. To
satisfy the growing user demand for high-speed access, the fiber optic channels
would (if not supplemented by other systems) have to extend all the way into the
buildings in which the users reside. The fiber optic channel usually ends short
of the building, at the beginning of the "last mile." Thus, users are often
forced to use slower dial-up modem connections and ISDN (Integrated Services
Digital Network) services, or ADSL (Asymmetrical Digital Subscriber Line)
service, with its inherent distance limitations. This local access "bottleneck"
denies users the real benefits afforded by fiber optic backbones because the
highest speed that users can experience is that of the local access portion of
their end-to-end connection. To overcome such limitations in a quick and
efficient manner, P-Com believes a broadband wireless solution is attractive to
incumbent and competitive carriers alike because the local access speed
restrictions are not an issue with broadband wireless equipment.
THE P-COM STRATEGY
P-Com's goal is to be a leading worldwide supplier of high-performance
point-to-point licensed and spread spectrum point-to-point and
point-to-multipoint wireless access equipment. P-Com's strategy to accomplish
this objective is to:
o Focus on point-to-point licensed and spread spectrum point to point and
point-to-multipoint microwave markets. P-Com designs products specifically for
the millimeter wave (licensed) and spread spectrum (unlicensed) microwave
frequency bands. P-Com has designed P-Com's core architecture to optimize the
systems for operation at millimeter and microwave frequencies.
o Continue expansion of P-Com's identified global market opportunities. P-Com
has met the standards established by the European Telecommunications Standards
Institute ("ETSI") and achieved regulatory approval for P-Com systems in
Argentina, Australia, Austria, Brazil, Canada, China, the Czech Republic,
Latvia, France, Germany, Greece, Hungary, Italy, Japan, Jordan, Mexico, Saudi
Arabia, Spain, and the United Kingdom, as well as the United States. P-Com
continues to seek to obtain type approval in other countries as the markets
develop and the need arises. P-Com maintains international sales and/or support
offices in Italy, China, Singapore and the United Kingdom.
o Build and sustain manufacturing cost advantage. P-Com has designed its system
architecture to reduce the number of components incorporated into each system,
and to permit the use of common components and "building blocks" across the
range of P-Com products. This approach assists in manufacturing cost reduction
through volume component purchases and enabling a standardized manufacturing
process.
o Outsource manufacturing to reduce costs. Following the acquisition of Wave
Wireless, P-Com shut down Wave Wireless' manufacturing facility in Sarasota,
Florida, instead relying on a contract manufacturer to manufacture the SPEEDLAN
product beginning in January 2004. P-Com is looking at additional opportunities
to outsource manufacturing of its point-to-point product family. Utilization of
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turnkey contract manufacturers eliminates expensive in-house manufacturing
assembly, and provides ability to scale up or down as market conditions dictate.
o Exploit engineering synergies. Due to similarities among P-Com's product
lines, P-Com has created new design architectures that strive to obtain
commonality in different products. This approach reduces manufacturing costs and
affords improved time to market and feature sets.
o Maximize P-Com's customers' revenue. One of the main objectives of the access
providers who buy broadband wireless products from P-Com or P-Com's competitors
is the establishment of an access system that enables them to derive from their
allocated frequency bandwidth the maximum amount of revenue-producing traffic,
also known as "throughput." The greater the "throughput" capability of a
wireless broadband system, the greater the access provider's revenue production
potential. Because P-Com's products are scaleable, users can quickly maximize
throughput-utilizing software alone to meet network demands. This allows network
operators to make optimum use of their allocated frequency bandwidth, thus
maximizing revenue.
o Leverage and maintain software leadership. P-Com differentiates its systems
through proprietary software embedded in the Indoor Unit, Outdoor Unit, and in
the Windows and SNMP-based software tools. This software is designed to allow
P-Com to deliver to its customers a high level of functionality that can be
easily reconfigured by the customer to meet changing needs. Software tools are
also used to facilitate network management.
o Leverage the distribution and sales network established by Wave Wireless to
increase sales of P-Com's unlicensed point-to-point spread spectrum products in
domestic and international markets. Wave Wireless maintains a significant sales
presence both internationally and domestically. With the addition of Wave
Wireless' products, P-Com's sales force will now be able to offer a more
complete solution within the newly-enhanced sales channel.
RANGE OF PRODUCT CHOICES
Overview. P-Com offers access providers around the world a range of wireless
systems that encompass point-to-point wireless broadband, and point-to-point and
point-to-multipoint spread spectrum systems, with each product targeting a
specific market.
Point-to-point wireless broadband systems are typically deployed by cellular
operators for wireless cellular interconnect and backhaul. Cellular interconnect
comprises any of the wireless connections between a Base Station Transceiver,
Base Station Controller, and Mobile Switching Center. Backhaul, or the transport
of cellular traffic between mobile wireless towers and the mobile switching
office on cellular phone networks, is a typical application for point-to-point
equipment.
Point-to-point wireless broadband is a dedicated link wireless technology
enabling voice and data services between a subscriber and the network. For each
new subscriber using this service, the network service provider provides a
separate set of dedicated access equipment. As mobile service usage continues to
grow, cellular service providers will have to continue to scale down existing
cells into smaller ones to reuse precious spectrum. With each such division of
cells comes opportunity for new wireless point-to-point applications because of
the need for more backhauls.
Spread spectrum radios are license-free, that is it does not require the Federal
Communication Commission's approval (or other regulatory body in foreign
countries) before P-Com equipment is deployed, and they are generally less
expensive than licensed products. They are sold through Value Added Resellers
and system integrators for private and public networks, providing last-mile
wireless connectivity.
Internet service providers and system operators typically use
point-to-multipoint where bandwidth availability is critical to profitable
system operation. Point-to-multipoint broadband wireless service is a wireless
technology that provides the high-speed access service. This service can be
rapidly deployed; it is highly efficient,
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reliable and scalable; it is cost effective because it can serve many
subscribers from one hub; and it can be expanded as demand for service dictates.
Nonetheless, P-Com's and its competitors' point-to-multipoint products operating
in the high bandwidth licensed spectrum have not gained sufficient market share
in the wireless broadband market, and it is unclear when sales of these products
will materialize, if at all. However, the unlicensed point-to-multipoint market
remains strong, especially with the recent popularity of Wireless Internet
products.
The greater the number of frequencies provided for by the wireless broadband
manufacturer, the greater the manufacturer's potential market penetration.
P-Com's systems utilize a common architecture in the millimeter wave and spread
spectrum microwave frequencies, including 2.4 GHz, 5.7 GHz, 7 GHz, 13 GHz, 14
GHz, 15 GHz, 18 GHz, 23 GHz, 24 GHz, 26 GHz, 28 GHz, 31 GHz, 38 GHz and 50 GHz.
Wave Wireless. As a result of the acquisition of the Wave Wireless division of
SPEEDCOM Wireless Corporation, P-Com is able to offer additional wireless
broadband equipment, serving the enterprise market. Wave Wireless' high
performance wireless bridge/router systems connect existing enterprise local
area networks for point-to-point and point-to-multipoint, campus area, or
metropolitan area networks. Within the current product line, Wave Wireless
offers eight SPEEDLAN products, which use unlicensed radio frequencies to
communicate at 11 megabits per second at distances up to 25 miles, and two OEM
licensed microwave products, which use licensed radio frequencies to communicate
at 52 or 155 megabits per second at distances up to ten miles. Because the
performance and distance a particular product is capable of reaching varies
depending on the end-user's network configuration, topography, and other
engineering variables, these network performance values may vary from
application to application.
P-Com intends to develop additional SPEEDLAN products with smaller size, greater
functionality and greater ease of use for new markets, including developing a
next generation of fixed wireless broadband products, which are to be based on
the 802.11a/g and/or 802.16 standards, operating in the 5.7 gigahertz band.
P-Com expects that the new products will deliver throughput at rates up to 54
megabits per second, nearly five times as fast as today's SPEEDLAN products.
P-Com intends to utilize a proprietary board design and software acquired from
SPEEDCOM, utilizing many off the shelf radio components available from one of
several manufacturers of 54 megabits per second radio chip sets (currently being
developed).
TECHNOLOGY
P-Com's technological approach to point-to-point and spread spectrum digital
microwave radio systems is, in P-Com's opinion, meaningfully different from
conventional approaches. Through the use of proprietary designs, P-Com can
quickly produce highly integrated, feature-rich systems. The results of these
integrated designs are reliability, ability to customize customer specific
designs and continuing ability to be cost competitive, particularly in the
current market.
P-Com's products are optimized for streamlined components, immunity to noise and
interference, ease of high-volume manufacturing and installation. Yet P-Com's
radios contain superior features. Equally important, because critical components
and building blocks perform common functions across different product lines,
P-Com's design philosophy is to design sections of each radio in a way that
enable the designs to be reused with little or no modification in a different
product line.
P-Com's point-to-point and spread spectrum microwave radios consist of three
primary assemblies: the Indoor Unit, the Outdoor Unit and the antenna. The
Indoor Unit houses the digital signal processing and the interfaces to the
Outdoor Unit via a single coaxial cable. The Outdoor Unit, a radio frequency
drum or enclosure, which is installed outdoors, establishes the specific
frequencies for transmitting and receiving data. The antenna interfaces directly
to the Outdoor Unit via proprietary P-Com technology.
19
Software embedded in P-Com's systems allows the user to easily configure and
adjust system settings such as frequency, power, and capacity without manual
tuning and mechanical adjustments. Software provided with P-Com's systems
includes PC-based sophisticated diagnostics, maintenance, network management,
and system configuration tools.
Competing systems also employ the Indoor Unit/Outdoor Unit concept but P-Com's
products are differentiated by how P-Com implements the components within the
Indoor Unit and Outdoor Unit. By moving many frequency-sensitive components to
the Outdoor Unit, the user is afforded improved reliability, lower cost and
easier interchangeability.
P-Com believes that its spread spectrum products are industry leaders,
especially with P-Com's latest product release line of AirPro Gold (TM). AirPro
Gold represents P-Com's latest generation of license-free spread spectrum radios
that address many markets including wireless Internet and the voice and data or
E1 market. Rather than develop separate products for each market and
application, P-Com created a single radio architecture that offers that ability
to rapidly and reliably change the interface of the radio depending on the
application. By inserting a series of plug-in modules, the radio interface can
be changed to connect to different types of services. The simplest model, AirPro
Gold.Net, offers wireless Internet connectivity via an ethernet port to address
the wireless Internet and Hotspot markets. The voice and data market requires a
different network interface to connect to the network. By simply installing a
plug-in module, AirPro Gold.Net is transformed into a completely different
product, AirPro Gold E1. Thus the functionality is changed from a wireless
Internet radio to a 4 Mbps or E1 point-to-point radio. Additional advantages of
this architecture are simplified stocking and the ability to change the radio
interface as dictated by customer requirements. No other broadband wireless
radio company at present offers such diverse functionality.
SERVICES
On April 30, 2003, P-Com entered into an Asset Purchase Agreement with JKB
Global, LLP to sell certain assets of P-Com Network Services, Inc., P-Com's
discontinued service business. The total cash consideration was approximately
$105,000, plus the assumption of certain liabilities. The sale of P-Com Network
Services, Inc. was consummated on April 30, 2003.
MANUFACTURING AND TESTING
P-Com's Campbell, California facility received its initial ISO 9001 registration
in December 1993, and maintains a current certification. P-Com's ISO 9001
registration for the United Kingdom sales and customer support facility was
received in 1996 and it has current certifications; P-Com's ISO 9001
registration for the Tortona facility in Italy was first received in 1996 and it
has current certification. P-Com's production facility in Melbourne, Florida was
ISO 9001 certified in 1999. On December 15, 2003, P-Com successfully upgraded to
ISO 9001:2000. Once a system reaches commercial status, P-Com contracts with one
or more of several turnkey fabricators to build radio system units in commercial
quantities. Utilization of such fabricators relieves P-Com of expensive
investments in manufacturing facilities, equipment, and parts inventories. This
strategy enables P-Com to quickly scale to meet varying customer demands and
changes in technology.
P-Com tests and manufactures systems in P-Com's California, Italy and Florida
locations prior to shipment to its customers. Testing includes the complete
Indoor-Outdoor unit assembly, thereby providing customers with a completely
tested end-to-end system.
P-Com's designs make every effort to use components that are readily available
from multiple sources, but in some cases, components that are single source or
sole source must be used. Most manufacturers provide P-Com with advanced notice
of the discontinuation of a device, but in the current depressed economy some
manufacturers have discontinued components with little or no notice. When
components are discontinued it may cause a significant expense to redevelop a
replacement component and may even disrupt the flow of products from P-Com's
manufacturing facilities.
20
Beginning January 2004, P-Com intends to outsource manufacturing of Wave
Wireless' SPEEDLAN family of products, and is looking at additional
opportunities to outsource manufacturing of its point-to-point product family.
SALES CHANNELS AND P-COM CUSTOMERS
P-Com's wireless access systems are sold internationally and domestically
directly through its own sales force as well as through strategic partners,
distributors, systems providers, and original equipment manufacturers.
In 2002, P-Com's customers included:
Percentage
Customer of 2002 Revenue
-------- ---------------
Myntahl Corporation 14%
Orange Personal Communications System 11%
Vodafone (Mannesmann) 7%
During 2002, sales to Myntahl Corporation and Orange Personal Communications
System accounted for 14% and 11% of P-Com's total sales, respectively. During
the first nine months of 2003, sales to Myntahl Corporation, Orange Personal
Communications, Vodafone and T-Mobile accounted for 12%, 20%, 12% and 12%,
respectively, of total sales. P-Com expects that sales to a relatively small
number of customers will continue to account for a high percentage of its sales
in the foreseeable future. Although the composition of P-Com's largest customer
group may vary from period to period, the loss of a significant customer or a
major reduction in orders by any significant customer, through reductions due to
market, economic or competitive conditions in the telecommunications industry,
may adversely affect its business, financial condition, and results of
operations. While P-Com generally enters into written agreements with its major
customers, P-Com generally does not provide for minimum purchase commitments.
P-Com's ability to maintain or increase its sales in the future will depend, in
part, upon its ability to obtain orders from new customers as well as the
financial condition and success of P-Com customers, and the economy in general.
P-Com's product sales segment is located primarily in the United States, with
manufacturing and/or sales support operations in Italy, the United Kingdom,
Singapore, and China. P-Com develops, manufactures and/or market networks access
systems for use in the worldwide wireless telecommunications market.
P-Com's backlog was approximately $2.9 million as of December 31, 2002, as
compared to approximately $5.9 million as of December 31, 2001. The decrease was
due to continuing worldwide recession in capital spending within the
telecommunications industry and lack of forecast clarity from continuing
customers. P-Com includes in backlog only those firm customer commitments to be
shipped within the following twelve months. A significant portion of P-Com's
backlog scheduled for shipment in the twelve months following December 31, 2002
can be cancelled, since orders are often made substantially in advance of
shipment, and most of P-Com's contracts provide that orders may be cancelled
with limited or no penalties for a specified period before shipment. Therefore,
backlog is not necessarily indicative of future sales for any particular period.
RESEARCH AND DEVELOPMENT
P-Com has a continuing research and development program to enhance its existing
systems and related software tools and to introduce new systems. P-Com invested
approximately $12.7 million, $19.8 million and $20.2 million in 2002, 2001, and
2000, respectively, in research and development efforts. P-Com expects to
continue to
21
invest material resources in research and development to maintain superior
features creating value for many customers.
P-Com's research and development efforts can be classified into two distinct
efforts: (1) increasing the functionality of its point-to-point,
point-to-multipoint and spread spectrum radio systems under development by
adding additional frequencies and capacities to its product lineup, its network
management system software offering, and developing other advancements to radio
systems, and (2) integrating new functionality to extend the reach of its
products into the customers' networks, such as access technology which allows
the customer to manage telecommunications services at its site and to integrate
voice, data, video and facsimile in one offering. P-Com's current efforts may
not result in new product introductions or material modifications to existing
products. The wireless telecommunications market is subject to rapid
technological change, frequent new product introductions and enhancements,
product obsolescence, changes in end-user requirements and evolving industry
standards globally.
P-Com's ability to be competitive in this market will depend in significant part
upon its ability to successfully develop, introduce, and sell new systems and
enhancements and related software tools on a timely and cost effective basis
that respond to changing customer requirements. P-Com has experienced and may
continue to experience delays from time to time in completing development and
introduction of new systems, and enhancements for related software tools. P-Com
has in place a Product Qualification / Quality Assurance structure that ensures
product acceptance in the marketplace before and after commencement of
commercial shipments.
SALES AND MARKETING
P-Com's sales and marketing efforts are directed from P-Com's corporate offices
in Campbell, California. P-Com has sales operations and customer support
facilities in the United Kingdom and Italy that serve the European market, and
in China and Singapore for Asian markets. Internationally, P-Com uses a variety
of sales channels, including system providers, original equipment manufacturers,
dealers, and local agents. P-Com also sells directly to its customers. P-Com has
established agent relationships in numerous other countries in the Asia/Pacific
region, the Middle East, Latin America, and Europe.
Typically, P-Com's sales process commences with the solicitation of bids by
prospective customers. If selected to proceed further, P-Com may provide systems
for incorporation into system trials, or P-Com may proceed directly to contract
negotiations. When system trials are required and successfully completed, P-Com
then negotiates a contract with the customer to set technical and commercial
terms of sale. These terms of sale govern the purchase orders issued by the
customer as the network is deployed and/or enhanced.
P-Com believes that, due to the complexity of its radio systems, a high level of
technical sophistication is required on the part of P-Com's sales and marketing
personnel. In addition, P-Com believes that after-sale customer service programs
are fundamental to customer satisfaction and the potential for follow-on
business. New customers are provided engineering assistance for installation of
the initial units as well as varying degrees of field training depending upon
the customer's technical aptitude. All customers are provided telephone support
via a 24-hour customer service help desk. P-Com's customer service efforts are
supplemented by P-Com system providers.
COMPETITION
The worldwide wireless communications market is very competitive. P-Com's
wireless radio systems compete with other wireless telecommunications products
and alternative telecommunications transmission media, including copper and
fiber optic cable. P-Com has experienced competition worldwide from a number of
leading telecommunications companies that offer a variety of competitive
products and services, including Alcatel Network Systems, Alvarion, Stratex
Networks, Ericsson, Harris-Farinon Division, NEC, Nokia, Nortel, SIAE, Hughes
Network Systems and Proxim. Many of these companies have substantially greater
installed bases, financial resources and production, marketing, manufacturing,
engineering and other capabilities than P-Com.
P-Com may also face competition in the future from new market entrants offering
competing technologies. P-Com's results of operations may depend in part upon
the extent to which customers who choose to rely on
22
wireless strategies, elect to purchase from outside sources rather than develop
and manufacture their own radio systems. Customers may choose not to rely on, or
expand, their reliance on P-Com as an external source of supply for their radio
systems. Recently, some of P-Com's competitors have announced the introduction
of competitive products, including related software tools, and the acquisition
of other competitors and competitive technologies.
Competition is especially intense during the current period of depressed demand
for telecommunications infrastructure equipment. P-Com expects its competitors
to continue to improve the performance and lower the price of their current
products, and to introduce new products or new technologies that provide added
functionality and other features. New product introductions and enhancements by
P-Com's competitors prior to its introduction of competing technology could
cause a significant decline in sales or loss of market acceptance of P-Com
systems or intense price competition, or make P-Com systems or technologies
obsolete or noncompetitive. P-Com has experienced significant price competition
and expects price competition to intensify in view of the current market
downturn. This has adversely affect P-Com's gross margins and business,
financial condition and results of operations. P-Com believes that its ability
to continue to compete successfully is based on factors both within and outside
of P-Com's control. Timing of new product line introductions, performance
characteristics of P-Com's equipment and the ability of P-Com's own customers to
be successful all play key roles. P-Com will continue to be required to expend
significant resources on new product development, cost reduction and
enhancements.
The principal elements of competition in P-Com's market, and the basis upon
which customers may select P-Com's systems, include price, performance, software
functionality, and ability to meet delivery requirements and customer service
and support.
GOVERNMENT REGULATION
Radio telecommunications are subject to extensive regulation by the United
States and foreign governmental agencies and international treaties. P-Com's
systems must conform to a variety of domestic and international requirements
established to, among other things, avoid interference among users of radio
frequencies and to permit interconnection of equipment. Each country has a
different regulatory process. Historically, in many developed countries, the
limited availability of frequency spectrum has inhibited growth of wireless
telecommunications networks.
In order for P-Com to operate within a specific country's jurisdiction, P-Com
must obtain regulatory approval for its systems and comply with different
regulations in each jurisdiction. Regulatory bodies worldwide are continuing the
process of adopting new standards for wireless telecommunications products. The
delays inherent in this governmental approval process may cause the
cancellation, postponement or rescheduling of the installation of communications
systems by P-Com and its customers, which in turn may have prevented or delayed
the sale of systems by P-Com to such customers.
The failure to comply with current or future regulations or changes in the
interpretation of existing regulations could result in suspension or cessation
of operations in that particular jurisdiction. These regulations and changes
could require P-Com to modify its products and incur substantial costs and
delays to comply with these time-consuming regulations and changes. In addition,
P-Com is also affected by the regulation, allocation and auction of radio
frequency spectrum by domestic and international authorities. Equipment to
support new services can be marketed only if permitted by suitable frequency
allocations, auctions and regulations, and the process of establishing new
regulations is complex and lengthy. If personal communications service operators
and others are delayed in deploying their systems, P-Com could experience delays
in orders for its products. Failure by the regulatory authorities to allocate
suitable frequency spectrum could adversely affect P-Com's business, financial
condition and results of operations.
The regulatory environment in which P-Com operates is subject to significant
change. Regulatory changes, which are affected by political, economic and
technical factors, could significantly impact P-Com's operations by restricting
the development efforts of its customers, making current systems obsolete or
increasing the opportunity for additional competition. Any of these regulatory
changes, including changes in the allocation of available spectrum, could
adversely affect P-Com's business and results of operations. P-Com might deem it
necessary or advisable to modify its systems to operate in compliance with
applicable regulations. These modifications could be extremely expensive and
time consuming.
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INTELLECTUAL PROPERTY
P-Com relies on its ability to obtain and enforce combination of patents,
trademarks, trade secrets, copyrights, and a variety of other measures to
protect P-Com's intellectual property rights, including patents and copyrights
on it's proprietary software. P-Com generally enters into confidentiality and
nondisclosure agreements with service providers, customers and others, and to
limit access to and distribution of P-Com's proprietary technology. P-Com also
enters into software license agreements with its customers and others. However,
these measures may not provide adequate protection for P-Com's trade secrets and
other proprietary information. Disputes over the ownership of P-Com's
intellectual property rights may still arise and P-Com's trade secrets and
proprietary technology may otherwise become known or be independently developed
by competitors. Any patent owned by P-Com may be invalidated, circumvented or
challenged, the rights granted thereunder may not provide competitive advantages
to P-Com or any of P-Com's pending or future patent applications may not be
issued with the scope of the claims sought by P-Com, if at all. Furthermore,
others may develop similar products or software, duplicate P-Com's products or
software or design around the patents owned by P-Com, or third parties may
assert intellectual property infringement claims against P-Com. In addition,
foreign intellectual property laws may not adequately protect P-Com's
intellectual property rights abroad. Failure to protect P-Com's proprietary
rights could adversely affect P-Com's business, financial condition, and results
of operations.
Litigation may be necessary to enforce P-Com's patents, copyrights, and other
intellectual property rights, to protect P-Com's trade secrets, to determine the
validity of and scope of the proprietary rights of others or to defend against
claims of infringement or invalidity. This litigation could result in
substantial costs and diversion of resources and could adversely affect P-Com's
business, financial condition and results of operations regardless of the
outcome of the litigation. Infringement, invalidity, right to use or ownership
claims by third parties or claims for indemnification resulting from
infringement claims may be asserted in the future and these assertions may
adversely affect P-Com's business, financial condition, and results of
operations. If any claims or actions are asserted against P-Com, P-Com may seek
to obtain a license under a third party's intellectual property rights. However,
a license may not be available under reasonable terms or at all. In addition, if
P-Com decides to litigate these claims, the litigation could be extremely
expensive and time consuming and could adversely affect P-Com's business,
financial condition and results of operations, regardless of the outcome of the
litigation.
EMPLOYEES
As of January 1, 2004, P-Com and its subsidiaries employed a total of 149
employees, including 78 in Operations, 23 in Research and Development, 24 in
Sales and Marketing and 24 in Administration. Twenty-four of P-Com's employees
were added on December 10, 2003 as a result of the acquisition of Wave Wireless.
P-Com believes that future results of operations will depend in large part on
its ability to attract and retain highly skilled employees. None of P-Com's
employees are represented by a labor union, and P-Com has not experienced any
work stoppages to date.
24
PROPERTIES
Square
Location of Lease Facility Functions Footage Date Lease Expires
------------------------------ -------------------------- ------- ------------------
Headquarters, Campbell, CA Administration/Customer
Support/Sales/Engineering;
Manufacturer 61,000 November 2005
Redditch, England Warehouse 6,800 September 2004
Melbourne, FL (1) Research/Development 8,697 July 2004
Beijing, China Sales/Customer Support 3,180 July 2004
Sarasota, FL Sales/Customer Support 16,522 November 2015
Sarasota, FL Manufacturing 8,000 February 2006
Shanghai, China Sales/Customer Support 1,115 August 2004
(1) This facility's lease was amended in April 2003, reducing the square footage
from 22,225 to 8,697 square feet.
P-Com Italia, S.p.A., owns and maintains its corporate headquarters in Tortona,
Italy. This facility, consisting of approximately 36,000 square feet, provides
design, test, manufacturing, mechanical, and warehouse functions.
LEGAL PROCEEDINGS
On June 20, 2003, Agilent Financial Services, Inc. filed a complaint against
P-Com for Breach of Lease, Claim and Delivery and Account Stated, in the
Superior Court of the State of California, County of Santa Clara. The amount
claimed in the complaint is $2,512,509, and represents accelerated amounts due
under the terms of capitalized equipment leases of P-Com. On June 27, 2003, the
parties filed a Stipulation for Entry of Judgment and Proposed Order of
Dismissal of Action Without Prejudice. Under the terms of the Stipulation, P-Com
paid Agilent $50,000 on July 15, 2003, $100,000 on September 1, 2003, and is
obligated to pay monthly payments of $50,000 for fourteen months, from October
1, 2003, up to and including November 1, 2004, and $1,725,000 on December 1,
2004. As a result of the Stipulation, judgment under the Complaint will not be
entered unless and until P-Com defaults under the terms of the Stipulation. In
the event P-Com satisfies each of its payment obligations under the terms of the
Stipulation, the complaint will be dismissed, with prejudice.
On April 4, 2003, Christine Schubert, Chapter 7 Trustee for Winstar
Communications, Inc. et al, filed a Motion to Avoid and Recover Transfers
Pursuant to 11 U.S.C. ss.ss. 547 and 550, in the United States Bankruptcy Court
for the District of Delaware and served the Summons and Notice on July 22, 2003.
The amount of the alleged preferential transfers to P-Com is approximately $13.7
million. P-Com has filed a response to the Motion that the payments made by
Winstar Communications, Inc. are not voidable preference payments under the
United States Bankruptcy Code. Subject to approval by the Bankruptcy Court,
P-Com and Winstar have agreed to settle all preference claims for $100,000.
25
Other than the amounts claimed by Christine Schubert, Chapter 7 Trustee for
Winstar Communications, Inc., the amount of ultimate liability with respect to
each of the currently pending actions is less than 10% of P-Com's current
assets. In the event P-Com is unable to satisfactorily resolve these and other
proceedings that arise from time to time, its financial position and results of
operations may be materially affected.
MARKET PRICE AND DIVIDEND INFORMATION
P-Com's common stock was quoted in the NASDAQ National Market under the symbol
PCOM, until August 26, 2002. Due to P-Com's failure to meet certain listing
requirements, including a minimum bid price of $1.00 per share, NASDAQ moved
P-Com's stock listing from the NASDAQ National Market to the NASDAQ Small Cap
Market, effective August 27, 2002. Additionally, NASDAQ notified P-Com that,
subject to maintaining compliance with the various rules necessary for continued
listing on the NASDAQ Small Cap Market, P-Com's stock could be delisted from the
NASDAQ Small Cap Market unless it reached and maintained the minimum $1 bid
price for a period of 10 consecutive days by February 10, 2003. P-Com did not
meet this minimum bid price requirement, and effective March 10, 2003, P-Com's
common stock was delisted from the Small Cap Market and now trades on the OTC
Bulletin Board operated by the National Association of Securities Dealers, Inc.
This change could result in a less liquid market available for existing and
potential stockholders to trade shares of P-Com's common stock and could
ultimately further depress the trading price of its common stock.
In addition, P-Com's common stock is subject to the SEC's "penny stock"
regulation. For transactions covered by this regulation, broker-dealers must
make a special suitability determination for the purchase of the securities and
must have received the purchaser's written consent to the transaction prior to
the purchase. Additionally, for any transaction involving a penny stock, the
rules generally require the delivery, prior to the transaction, of a risk
disclosure document mandated by the SEC relating to the penny stock market. The
broker-dealer is also subject to additional sales practice requirements.
Consequently the penny stock rules may restrict the ability of broker-dealers to
sell P-Com's common stock and may affect the ability of holders to sell the
common stock in the secondary market, and the price at which a holder can sell
the common stock.
The following table sets forth the range of high and low sale prices, as
reported on the NASDAQ National Market, NASDAQ Small Cap Market and OTC Bulletin
Board for the first, second, and third quarters of 2003 and each quarter in 2002
and 2001. These quotations reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not necessarily represent actual transactions.
As of January 1, 2004, there were 807 holders of record of P-Com common stock.
Price Range of Common Stock
---------------------------
High Low
---- ---
2001:
First Quarter $1.10 $0.25
Second Quarter 0.30 0.11
Third Quarter 0.14 0.05
Fourth Quarter 0.08 0.03
2002:
First Quarter $0.37 $0.13
Second Quarter 0.36 0.09
Third Quarter 0.82 0.19
Fourth Quarter 0.38 0.15
2003:
First Quarter $0.31 $0.09
Second Quarter $0.13 $0.06
Third Quarter $0.36 $0.09
Fourth Quarter $0.28 $0.12
26
P-Com has not paid any cash dividends on shares of its common stock. P-Com does
not anticipate paying any cash dividends in the foreseeable future.
P-COM'S QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
P-Com has international sales and facilities and is, therefore, subject to
foreign currency rate exposure. Historically, P-Com's international sales have
been denominated in British pounds sterling, Euros, and United States dollars.
The functional currencies of P-Com's wholly owned foreign subsidiaries are the
local currencies. Assets and liabilities of these subsidiaries are translated
into United States dollars at exchange rates in effect at the balance sheet
date. Income and expense items are translated at average exchange rates for the
period. Accumulated net translation adjustments are recorded in stockholders'
equity. Foreign exchange transaction gains and losses are included in the
results of operations, and were not material for all periods presented. Based on
P-Com's overall currency rate exposure at September 30, 2003, a near-term 10%
appreciation or depreciation of the United States dollar would have an
insignificant effect on P-Com's financial position, results of operations and
cash flows over the next fiscal year. P-Com does not use derivative financial
instruments for speculative or trading purposes.
27
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following selected historical consolidated financial data for the years
ended December 31, 1998, 1999, 2000, 2001 and 2002 were derived from P-Com's
audited financial statements which as to 2000, 2001, and 2002 are included
elsewhere in this registration statement. The selected financial data for the
nine months ended September 30, 2002 and 2003 were derived from the unaudited
condensed consolidated financial statements of P-Com. In P-Com's opinion, the
unaudited interim financial data includes all adjustments, consisting of normal
recurring adjustments, necessary for the fair presentation of its interim
results of operation. The pro forma information is unaudited and has been
derived from the Unaudited Pro Forma Financial Information, beginning on page 29
of this registration statement. This information should be read in conjunction
with P-Com's Management's Discussion and Analysis of Financial Condition and
Results of Operations, beginning on page 33 of this registration statement, the
Unaudited Pro Forma Financial Information, beginning on page 29 of this
registration statement, and P-Com's financial statements and related notes,
beginning on page F-1 of this registration statement.
Year Ended December 31,
---------------------------------------------------------------------------------
Pro
Historical (1) Forma
------------------------------------------------------------------- --------
1998 1999 2000(6) 2001(5) 2002(4) 2002(3)
--------- --------- --------- -------- -------- --------
Consolidated Statements of Operations
Data:
Revenue, net $ 118,948 $ 116,409 $ 183,606 $ 73,236 $ 29,686 $ 37,362
Gross profit (loss) 25,119 9,031 22,641 (21,654) (1,091) 2,083
Loss from continuing operations (63,238) (66,647) (64,094) (75,327) (44,522) (48,971)
Net loss from continuing operations
applicable to common stockholders (65,077) (85,168) (64,094) (75,327) (44,522) (48,971)
Basic and diluted net loss from
continuing operations per common
share (7.52) (7.47) (4.11) (4.55) (1.74) (0.55)
Shares used in computing basic and
diluted net loss from continuing
operations per common share 8,650 11,399 15,600 16,551 25,546 89,046
Cash dividends declared -- -- -- -- -- --
28
Nine Months Ended September 30,
----------------------------------------
Historical Pro Forma
---------------------- ---------
2002 2003(2) 2003(3)
-------- -------- ---------
Consolidated Statements of Operations Data:
Revenue, net $ 22,292 $ 15,151 $ 18,883
Gross profit (loss) 3,029 (1,030) 283
Loss from continuing operations (22,862) (4,741) (8,307)
Net loss from continuing operations applicable to
common stockholders (22,862) (4,741) (8,307)
Basic and diluted net loss from continuing
operations per common share (0.97) (0.12) (0.08)
Shares used in computing basic and diluted net loss
from continuing operations per common share 23,323 39,884 103,384
Cash dividends declared -- -- --
29
December 31, September 30,
--------------------------------------------------------- -------------------------
Historical (1) Historical Pro Forma
--------------------------------------------------------- ---------- ----------
1998 1999 2000 2001 2002 2003 2003(3)
-------- -------- -------- -------- -------- -------- --------
Consolidated Balance Sheet
Data:
Cash and cash equivalents $ 26,460 $ 10,667 $ 25,754 $ 5,436 $ 1,276 $ 1,130 $ 1,313
Working capital (deficiency) 82,669 38,618 78,932 (9,171) (1,776) (12,176) (17,112)
Total assets 315,217 218,746 216,219 92,234 35,723 19,002 32,602
Long-term obligations, less
current portion 109,694 38,644 30,106 680 24,466 1,804 1,816
Redeemable preferred stock -- -- -- -- -- 11,626 11,626
Total stockholders' equity
(deficit) 99,409 89,215 95,247 24,256 (15,350) (20,092) (1,202)
(1) The historical financial information does not give effect to P-Com Network
Services, Inc. which is accounted for as a discontinued operation. The
historical financial information also do not give effect to the cumulative
effects of accounting changes of $(5,300) and $(1,534) during the years ended
December 31, 2002 and 2000, respectively.
(2) During the nine months ended September 30, 2003, P-Com recorded charges of
approximately $3.7 million related to excess and obsolete inventories and
related charges and $3.1 million related to the write down of fixed assets.
(3) The pro forma financial information gives effect to the acquisition of
substantially all of the assets of SPEEDCOM Wireless Corporation as if the
acquisition had occurred at the beginning of each period reflected.
(4) In 2002, P-Com recorded charges of approximately $5.8 million related to
excess and obsolete inventory and a write-down of goodwill carrying value
relating to the services business of $11.4 million.
(5) In 2001, P-Com recorded charges of approximately $30.0 million related to
excess inventory and inventory purchase commitments, $5.8 million related to a
write-down of goodwill and other intangibles, and $11.6 million increase in bad
debt expense related to a customer bankruptcy.
(6) In 2000, P-Com recorded charges of approximately $21.7 million related to
excess inventory and inventory purchase commitments, $15.0 million related to
write-down of goodwill, and a $9.9 million increase in the valuation allowance
against the carrying value of deferred tax assets.
P-COM'S UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined financial information of P-Com gives
effect to the acquisition of substantially all of the assets of SPEEDCOM
Wireless Corporation as if that transaction had occurred as of September 30,
2003 as it relates to the pro forma balance sheet and as of January 1, 2003 and
2002 as it relates to the pro forma statements of operations for the nine months
ended September 30, 2003 and the year ended December 31, 2002. The unaudited pro
forma financial information is based upon P-Com's assumptions and adjustments
that are described in the accompanying notes and do not include any adjustments
related to the integration of SPEEDCOM with P-Com. Pro forma financial
information is not necessarily indicative of the financial position or results
of operations that would have been achieved had the transaction occurred on the
aforementioned dates. The following pro forma financial information should be
read in conjunction with P-Com's financial statements and its management's
discussion and analysis included elsewhere in this registration statement.
P-Com's Unaudited Pro Forma Balance Sheet As of September 30, 2003
Pro Forma
P-COM SPEEDCOM Pro Forma for the
Historical Historical Adjustments Transaction
---------- ---------- ----------- -----------
Current assets:
Cash and cash equivalents ................. $ 1,105 $ 183 $ 1,288
Restricted cash ............................ 25 -- 25
Accounts receivable ........................ 4,918 293 5,211
Inventories ................................ 4,929 814 5,743
Other current assets ....................... 2,511 98 2,609
--------- -------- ------- ---------
Total current assets ......................... 13,488 1,388 14,876
Property and equipment ....................... 4,135 343 4,478
Intangible assets ............................ -- 889 (889)(b)
12,723(d) 12,723
Other assets ................................. 1,379 246 (1,100)(e) 525
--------- -------- ------- ---------
Total assets ................................. $ 19,002 $ 2,866 $10,734 $ 32,602
========= ======== ======= =========
Current liabilities:
Accounts payable ........................... $ 4,441 $ 904 $ 5,345
Accrued liabilities ........................ 16,766 1,199 (205)(c) 18,010
250(a)
Note payable ............................... 2,220 59 2,279
Convertible promissory notes ............... 2,237 -- 2,237
Notes payable-related parties .............. -- 4,117 4,117
--------- -------- ------- ---------
Total current liabilities .................... 25,664 6,279 45 31,988
Other long-term liabilities .................. 1,804 1,112 (1,100)(e) 1,816
--------- -------- ------- ---------
Total liabilities ............................ 27,468 7,391 (1,055) 33,804
--------- -------- ------- ---------
Redeemable preferred stock ................... 11,626 -- -- 11,626
--------- -------- ------- ---------
Stockholders' equity (deficit):
Preferred stock ............................ -- 5,456 (5,456)(f) --
Common stock ............................... 335,492 17,815 (17,815)(f) 342,756
7,264(a)
Accumulated deficit ........................ (355,765) (27,796) 27,796(f) (355,765)
Comprehensive items ........................ 181 -- 181
Total stockholders' deficit .................. (8,466) (4,525) 11,789 (1,202)
--------- -------- ------- ---------
Total liabilities and stockholders' deficit .. $ 19,002 $ 2,866 $10,734 $ 32,602
--------- -------- ------- ---------
See accompanying notes.
30
P-Com's Unaudited Pro Forma Statement of Operations Nine Months Ended
September 30, 2003
Pro Forma
P-COM SPEEDCOM Pro Forma for the
Historical Historical Adjustments Transaction
---------- ---------- ----------- -----------
Sales .............................................................. $ 15,151 $ 3,732 $ 18,883
Cost of sales ...................................................... 16,181 2,419 18,600
Gross margin ....................................................... (1,030) 1,313 283
Costs and expenses:
Research and development ......................................... 4,805 711 5,516
Selling and marketing ............................................ 2,645 1,757 4,402
General and administrative ....................................... 4,303 2,108 $ (208)(g) 6,203
Asset impairment and restructuring ............................... 3,712 3,712
Interest and other expense (income) .............................. (1,492) 511 (981)
(Gain) on debt extinguishment ................................... (10,262) -- (10,262)
-------- ------- ------ ---------
Total costs and expenses ......................................... 3,711 5,087 (208) 8,590
-------- ------- ------ ---------
Profit (loss) from continuing operations ........................... $ (4,741) $(3,774) $ 208 $ (8,307)
======== ======= ====== =========
Basic and diluted loss per common share from continuing operations . $ (0.12) $ (0.08)
-------- ------- ------ ---------
Weighted average common shares ..................................... 39,884 63,500(h) 103,384
======= ====== =========
See accompanying notes.
31
P-Com's Unaudited Pro Forma Statement of Operations Year Ended December 31, 2002
Pro Forma
P-COM SPEEDCOM Pro Forma for the
Historical Historical Adjustments Transaction
---------- ---------- ----------- -----------
Sales ............................................................... $ 29,686 $ 7,676 $ 37,362
Cost of sales ....................................................... 30,777 4,502 35,279
-------- ------- --------
(1,091) 3,174 2,083
Costs and expenses:
Research and development .......................................... 12,745 256 13,001
Selling and marketing ............................................. 6,621 3,463 10,084
General and administrative ........................................ 10,750 4,408 $ (277)(g) 14,251
(630)(i)
Impairments ....................................................... 11,409 -- 11,409
Interest and other ................................................ 2,376 403 2,779
-------- ------- ------ --------
Total costs and expenses .......................................... 43,901 8,530 (907) 51,524
-------- ------- ------ --------
Income tax benefit .................................................. 470 -- 470
Loss from continuing operations ..................................... $(44,522) $(5,356) $ 907 $(48,971)
-------- ------- ------ --------
Basic and diluted loss per common share from continuing operations .. $ (1.74) $ (0.55)
-------- --------
Weighted average common shares ...................................... 25,546 63,500(h) 89,046
-------- ------ --------
See accompanying notes.
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
NOTE 1. SPEEDCOM PURCHASE
P-Com, Inc. will account for the SPEEDCOM purchase transaction using the
purchase method of accounting. Under the purchase method of accounting, the
total purchase price, plus the fair value of assumed liabilities, is allocated
to the net tangible and identifiable intangible assets acquired, based upon
their respective fair values. The total estimated purchase price of $7,514,000
consists of 63,500,000 shares of P-Com, Inc. common stock, valued using market
values for such shares around the commitment date ($0.114), plus $250,000 of
estimated expenses. A final determination of the fair values of assets acquired
and liabilities assumed has not yet been completed. Accordingly, the allocations
reflected in the pro forma financial statements are preliminary and subject to
change. The preliminary estimated allocation that is reflected in the
accompanying pro forma financial statements as of September 30, 2003 is as
follows:
Current assets ....................................... $ 1,388,000
Property and equipment ............................... 343,000
Goodwill ............................................. 12,723,000
Other assets ......................................... 246,000
Assumed liabilities .................................. (7,186,000)
------------
$ 7,514,000
============
32
The pro forma purchase price has been allocated to the fair values of assets
acquired and liabilities assumed based upon management's best estimates, as
follows:
Current assets consist of accounts receivables that are recorded at estimated
net realizable value and work in process inventories that are recorded at
estimated selling prices, less cost to complete and a reasonable sales margin.
Property and equipment are recorded at estimated replacement costs.
Assumed liabilities are recorded at estimated net present values of future cash
outlays for liabilities due in over one year and the face values of future cash
outlays for all current liabilities.
GOODWILL
In accordance with Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, goodwill resulting from the purchase, if any, will
not be amortized into operations. Rather, such amounts will be tested for
impairment at least annually. In the event that management of P-Com determines
that the value of goodwill has become impaired, an accounting charge for the
amount of the impairment will be recorded.
NOTE 2. SUMMARY OF PRO FORMA ADJUSTMENTS
The pro forma adjustments in the unaudited pro forma financial information are
as follows:
a. These adjustments record the issuance of 63,500,000 shares of common stock,
valued at the average market price around the commitment date of the
transaction, and $250,000 of estimated expenses.
b. This adjustment combines the SPEEDCOM intangible asset amounts with goodwill
for purposes of final allocation upon completion of the transaction.
c. This adjustment eliminates certain accrued severance amounts, which are not
an assumed liability.
d. This adjustment records preliminary goodwill arising from the transaction,
which is subject to final allocation upon completion of the transaction.
e. These adjustments eliminate the investment balance between P-Com and
SPEEDCOM.
f. These adjustments eliminate SPEEDCOM equity accounts.
g. These adjustments eliminate the amortization of SPEEDCOM intangible assets.
h. These adjustments reflect the affect on loss per share of the P-Com common
stock issued in the transaction.
i. This adjustment eliminates severance expense, which is not an assumed
liability.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations contain forward-looking statements, which involve risks and
uncertainties. P-Com's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the section entitled "Risk Factors" beginning on
page 4 of this prospectus.
OVERVIEW
P-Com supplies broadband wireless equipment and services for use in
telecommunications networks. Currently, P-Com ships 2.4 GHz and 5.7 GHz spread
spectrum (unlicensed) radio systems, as well as 7 GHz, 13 GHz, 14 GHz, 15 GHz,
18 GHz, 23 GHz, 26 GHz, 38 GHz and 50 GHz point-to-point radio systems. P-Com's
performance in 2002 continued to be impacted by the capital expenditure level
reductions maintained by the telecommunications industry in the United States
and globally. The net loss in 2002 included inventory related charges to product
costs of sales of $5.8 million, and a goodwill impairment write-off of $16.9
million related to the carrying value of P-Com's services business subsidiary,
arising from P-Com's adoption of Financial Accounting Standard ("FAS") 142.
P-Com implemented cost reduction programs, including a headcount reduction of
approximately 186 employees or 48% compared to previous year's headcount and
termination of facility leases. These cost reductions were insufficient to
offset the impact of the reduction in revenue and continued low gross profit
margins in a depressed industry.
In the first quarter of 2003, P-Com decided to exit the services business.
Accordingly, this business is reported as a discontinued operation and P-Com
recorded losses from its operations for the year ended December 31, 2002, 2001,
and 2000.
On December 10, 2003, P-Com acquired the Wave Wireless Networking division of
SPEEDCOM Wireless Corporation ("SPEEDCOM") and related assets, in consideration
for the issuance to SPEEDCOM of 63,500,000 shares of P-Com's common stock, and
the assumption of certain of its liabilities. Wave Wireless Networking ("Wave
Wireless") specializes in manufacturing, configuring and delivering custom
broadband wireless access networking equipment, including the SPEEDLAN family of
wireless Ethernet bridges and routers, for business and residential customers
internationally. The acquisition provides P-Com with complimentary unlicensed
point-to-point and spread spectrum wireless access systems.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of P-Com's financial condition and results
of operations are based upon P-Com's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
P-Com to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, P-Com evaluates its estimates.
P-Com bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
P-Com believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements:
Management's use of estimates and assumptions
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the
34
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates, and such differences could be
material and affect the results of operations reported in future periods.
Fair value of financial instruments
P-Com measures its financial assets and liabilities in accordance with
accounting principles generally accepted in the United States. The estimated
fair value of cash, accounts receivable and payable, bank loans and accrued
liabilities at September 30, 2003 and December 31, 2002 approximated cost due to
the short maturity of these assets and liabilities.
REVENUE RECOGNITION
Revenue from product sales is recognized upon transfer of title and risk of
loss, which is upon shipment of the product, provided no significant obligations
remain and collection is probable. Revenue from equipment out-of-warranty repair
is recognized upon replacement of the defective unit with a repaired unit to the
customers. Provisions for estimated warranty repairs, returns and other
allowances are recorded at the time revenue is recognized.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
P-Com maintains an allowance for doubtful accounts for estimated losses from the
inability of its customers to make required payments. P-Com evaluates its
allowance for doubtful accounts based on the aging of its accounts receivable,
the financial condition of its customers and their payment history, P-Com's
historical write-off experience and other assumptions. In order to limit its
credit exposure, P-Com requires irrevocable letters of credit and even
prepayment from certain of its customers before commencing production.
INVENTORY
Inventory is stated at the lower of cost or market, cost being determined on a
first-in, first-out basis. P-Com assesses its inventory carrying value and
reduces it if necessary, to its net realizable value based on customer orders on
hand, and internal demand forecasts using management's best estimate given the
information currently available. Demand from P-Com's customers is highly
unpredictable, and can fluctuate significantly as a result of factors beyond
P-Com's control. P-Com's inventories include parts and components that are
specialized in nature or subject to rapid technological obsolescence. P-Com
maintains an allowance for inventories for potentially excess and obsolete
inventories and gross inventory levels that are carried at costs that are higher
than their market values. If P-Com determines that market conditions are less
favorable than those projected by management, such as an unanticipated decline
in demand not meeting its expectations, additional inventory write-downs may be
required.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and include tooling and test
equipment, computer equipment, furniture, land and buildings, and
construction-in-progress. Depreciation is computed using the straight-line
method based upon the useful lives of the assets ranging from three to seven
years, and in the case of buildings, 33 years. Leasehold improvements are
amortized using the straight-line method based upon the shorter of the estimated
useful lives or the lease term of the respective assets.
Impairment of long-lived assets
In the event that certain facts and circumstances indicate that the long-lived
assets may be impaired, an evaluation of recoverability would be performed. When
an evaluation occurs, management conducts a probability analysis based on the
weighted future undiscounted cash flows associated with the asset. The results
are then compared to the asset's carrying amount to determine if impairment is
necessary. The cash flow analysis for the property and equipment is performed
over the shorter of the expected useful lives of the assets, or the expected
life cycles of P-Com's product line. An impairment charge is recorded if the net
cash flows derived from the analysis are less than the asset's carrying value.
P-Com deems that the property and equipment is fairly stated if the future
35
undiscounted cash flows exceed its carrying amount. A $599,000 impairment
valuation charge in connection with property and equipment for P-Com's
point-to-multipoint product line was charged to restructuring charges in the
first quarter of 2003, and a further $2.5 million impairment charge for the
point-to-multipoint property and equipment was recorded in the second quarter of
2003.
Concentration of credit risk
Financial instruments that potentially subject P-Com to significant
concentrations of credit risk consist principally of cash equivalents and trade
accounts receivable. P-Com places its cash equivalents in a variety of financial
instruments such as market rate accounts and United States government agency
debt securities. P-Com, by policy, limits the amount of credit exposure to any
one financial institution or commercial issuer.
P-Com performs on-going credit evaluations of its customers' financial condition
to determine the customer's credit worthiness. Sales are then generally made
either on 30 to 60 day payment terms, cash on delivery or letters of credit.
P-Com extends credit terms to international customers of up to 90 days, which is
consistent with prevailing business practices.
At September 30, 2003 and December 31, 2002, approximately 67% and 43%,
respectively, of trade accounts receivable represent amounts due from four and
three customers, respectively.
ACCOUNTING FOR INCOME TAXES
P-Com records a valuation allowance to reduce its deferred tax assets to the
amount that is more likely than not to be realized. P-Com considers historical
levels of income, expectations and risks associated with estimates of future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance. In the event that P-Com
determines that it would be able to realize deferred tax assets in the future in
excess of the net recorded amount, an adjustment to the deferred tax asset would
increase income in the period the determination was made.
YEARS ENDED 2002, 2001 AND 2000
SALES
Sales consist of revenues from radio systems sales and out-of-warranty repairs
and support services offered.
In 2002, 2001 and 2000, sales were approximately $29.7 million, $73.2 million
and $183.6 million, respectively. The 59% decrease in sales from 2001 to 2002
was primarily due to the absence of sales to United States competitive local
exchange carriers, lack of continuing equipment sales to certain customers in
the United Kingdom and the overall decline in global spending for
telecommunications. The 60% decrease in sales from 2000 to 2001 was primarily
due to significantly decreased product sales to competitive local exchange
carrier customers, on which P-Com had heavily relied. P-Com's major customer,
Winstar, declared bankruptcy in April 2001.
Sales to Orange Personal Communications Services accounted for approximately
11%, 23% and 9% of total sales in 2002, 2001 and 2000, respectively. Sales to
Myntahl Corporation accounted for approximately 14% of total sales in 2002.
Sales to T-Mobile (previously known as Mercury-One-to-One) accounted for
approximately 18% of 2001 sales, and 4% of 2002 sales.
During 2002, P-Com generated 10% of its sales in the United States, 20% in the
United Kingdom, 51% in Asia, and 4% in other geographical regions. During 2001,
P-Com generated 22% of its sales in the United States, 44% in the United
Kingdom, 22% in Asia, particularly in the Pacific Rim and 12% in other
geographical regions. During 2000, P-Com generated 44% of its sales in the
United States, 31% in the United Kingdom, 10% in Continental Europe, and 15% in
other geographic regions, particularly in the Pacific Rim.
Many of P-Com's largest customers use its products and services to build
telecommunications network infrastructures. These purchases are significant
investments in capital equipment and are required for a phase of the
36
rollout in a geographic area or a market. Consequently, the customer may have
different requirements from year to year and may vary its purchases from P-Com
accordingly.
The significant worldwide contraction in the capital spending of the
telecommunications industry negatively affected P-Com's sales in 2002 and the
second half of 2001. This trend has continued in the nine-month period ended
September 30, 2003. P-Com was not able to adjust operating expense levels
drastically enough to result in a profitable operating result in 2002, and given
the sales level decline experienced, P-Com could not expect to be profitable at
the sales levels experienced in 2002.
GROSS PROFIT
Cost of sales consists primarily of costs related to materials, labor and
overhead, freight and duty. In 2002, 2001, and 2000, gross profit (loss) was
$(1.1) million, $(21.7) million and $22.6 million, respectively, or (4%), (30%),
and 12%, respectively.
In 2002, 2001, and 2000, product gross margins were negatively affected by
inventory and other related charges of $5.8 million, $30.0 million, and $21.7
million, respectively (see "Restructuring and Other Charges" below). Product
gross profit as a percentage of product sales, not including the effect of the
inventory charges described above, was approximately 15%, 11%, and 24% in 2002,
2001, and 2000, respectively. The higher gross margin in 2002 was due to a
reduction of direct production overhead and several sales transactions to the
Middle East market at improved prices. In 2001, the reduced gross profit margins
related to reduced economies of scale and to pricing pressure on the
point-to-point Tel-Link products as a result of the relative maturity of this
legacy product line, the global economic slowdown and availability of highly
competitive alternative products in the marketplace. Gross profit turned
negative in the second half of 2001. Unless sales recover significantly, despite
the cost cutting measures in place, P-Com will remain unprofitable.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of costs associated with new
product development. P-Com's research and development activities include the
development of additional radio products, frequencies and upgrading operating
features, and related software tools. Software development costs incurred prior
to the establishment of technological feasibility are expensed as incurred.
Software development costs incurred after the establishment of technological
feasibility and before general release to customers are capitalized, if
material.
In 2002, 2001, and 2000, research and development expenses were approximately
$12.7 million, $19.8 million and $20.2 million, respectively. As a percentage of
product sales, research and development expenses increased from 27% in 2001 to
43% in 2002, primarily due to the lower sales levels. Research and development
expenses in 2001 and 2002 continued to be significant due to the substantial
final development efforts on the new Encore point-to-point and AirPro Gold
spread spectrum products in preparation for commercial rollout in 2002. As a
percentage of product sales, research and development expenses increased from
11% in 2000 to 27% in 2001, primarily due to the lower sales levels.
SELLING AND MARKETING
Selling and marketing expenses consist of salaries, sales commissions, travel
expenses, customer service and support expenses, and costs related to business
development and trade shows. In 2002, 2001, and 2000, selling and marketing
expenses were $6.6 million, $7.6 million, and $11.4 million, respectively. As a
percentage of sales, selling and marketing expenses increased from 10% in 2001
to 22% in 2002, primarily due to lower sales levels. As a percentage of sales,
selling and marketing expenses increased from 6% in 2000 to 10% in 2001,
primarily due to the same reason, year-on-year basis.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries and other
expenses for management, as well as finance, accounting, data processing, public
company costs, legal, and other professional services. In 2002,
37
2001, and 2000, general and administrative expenses, were $10.7 million, $26.1
million (excluding a $11.6 million receivable valuation charge relating to the
bankruptcy filing of Winstar), and $18.2 million, respectively. As a percentage
of sales, general and administrative expenses were at 36% (excluding the $11.6
million receivable valuation charge) in 2001 as well as in 2002. As a percentage
of sales, general and administrative expenses increased from 10% in 2000 to 36%
in 2001 due to the decreased sales levels and the inability to reduce fixed
expenses as rapidly as the decrease in sales.
CHANGE IN ACCOUNTING PRINCIPLE
Goodwill represents the excess of the purchase price over the fair value of the
net assets of acquired companies accounted for as purchase business
combinations. P-Com adopted SFAS 142 on January 1, 2002, and, as a result,
stopped recording goodwill amortization but did record a transitional impairment
charge of $5.5 million in the first quarter of 2002, representing the difference
between the fair value of expected cash flows from the services business unit,
and its book value.
GOODWILL AMORTIZATION AND IMPAIRMENT
Under previous accounting treatment, goodwill was amortized quarterly upon a
fixed schedule. Goodwill was amortized on a straight-line basis over the period
of expected benefit of 20 years. In 2001 and 2000, goodwill amortization was
approximately $2.4 million and $4.1 million, respectively. In the second quarter
of 2000, management reviewed the carrying value of goodwill related to its 1998
acquisition of the Cylink Wireless Group. Based upon its assessment of future
value of revenue flows estimated to be provided from this acquisition, a $15
million impairment charge was recorded. Management also determined it
appropriate to amortize the remaining goodwill related to the Cylink Wireless
Group over a 4 1/2 year period beginning in July 2000. In 2001, management again
reviewed the carrying value of goodwill related to Cylink Wireless Group. Based
on the changes to the forecast future cash flows and the replacement of the
Cylink Wireless Group spread spectrum products with its successor AirPro Gold
line, P-Com determined that the residual goodwill arising from the acquisition
of Cylink Wireless Group in 1998 was impaired and recorded a charge of $5.6
million in the third quarter of 2001.
GOODWILL IMPAIRMENT
Management reviewed the carrying value of goodwill related to the services
business unit, and based upon its assessment of future cash value of revenue
flows and the current depressed business condition of the telecommunications
services market, recorded an $11.4 million impairment charge in the fourth
quarter of 2002.
RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 2002, P-Com determined that there was a need to
reevaluate its inventory carrying value in light of the continuing worldwide
slowdown in the global telecommunications market, especially with regard to an
assessment of future demand for P-Com's point-to-multipoint product range. This
resulted in a $5.8 million inventory charge to product cost of sales, of which
$5.0 million was for point-to-multipoint inventories, and $0.8 million was for
spread spectrum inventories.
In the first quarter of 2001, P-Com recorded a $10.0 million inventory related
charge to product cost of sales, and incurred a $11.6 million receivable
valuation charge, a direct result of the bankruptcy of Winstar. In the third
quarter of 2001, P-Com determined that there was a need to reevaluate its
inventory carrying value in the light of the significant slowdown in the global
telecommunication market, and the phasing out of and replacement of current
product designs. The evaluation included an assessment of future demand for
certain of P-Com's lower speed and lower frequency TelLink point-to-point
products, and resulted in total charges to product costs of sales of
approximately $18.0 million in the third quarter of 2001. Additionally $2.0
million was charged to product cost of sales in the fourth quarter of 2001.
In the second quarter of 2000, P-Com determined that there was a need to
reevaluate its inventory levels and related accrued liabilities in light of
recent changes in product and customer mix. The evaluation was prompted by a
change in customer mix away from the United Kingdom and other European markets
and toward the United
38
States market, and the resulting anticipated decrease in demand for certain of
P-Com's lower speed and lower frequency Tel-Link point-to-point product line,
and resulted in total charges of approximately $21.7 million during the second
quarter of 2000. These charges consisted of increases to the inventory reserve
of approximately $17.4 million and accrued liabilities of approximately $4.3
million, both relating to P-Com's product segment. In addition, P-Com performed
a review of the carrying value and remaining life of long-lived assets
associated with its product segment and recorded write-downs of approximately
$15.0 million of goodwill, and an approximately $9.9 million write-off of
deferred tax assets.
P-Com increased inventory reserves and related purchase liabilities through
charges to product cost of sales in the second quarter of 2000. Of the $17.0
million charge for additional reserves, $15.4 million related to the TelLink
point-to-point product line. An additional reserve of approximately $1.0 million
was added in the second quarter of 2000 to adjust the carrying value of certain
modules of the point-to-multipoint radio line.
LOSS ON DISCONTINUED BUSINESS
In the first quarter of 2003, P-Com decided to exit its service business, P-Com
Network Services, Inc. Accordingly, this business is reported as a discontinued
operation and P-Com recorded losses from its operations for the year ended
December 31, 2002, 2001 and 2000. On April 30, 2003, P-Com entered into an Asset
Purchase Agreement with JKB Global, LLC to sell certain assets of P-Com Network
Services, Inc. P-Com is a guarantor of P-Com Network Services, Inc.'s
obligations under its premises lease, through July 2007. As part of the sale to
JKB Global, LLC, JKB Global, LLC has agreed to sublet the premises from P-Com
Network Services, Inc. for one year beginning May 1, 2003. The terms of the
sublease required JKB Global, LLC to pay less than the total amount of rent due
under the terms of the master lease. As a result, P-Com remained liable under
the terms of the guaranty for the deficiency, and the total obligation under the
terms of the master lease was approximately $1.5 million. This amount was
accrued in the second quarter of 2003 as loss on disposal of discontinued
operations. In September 2003, P-Com entered into an agreement to terminate the
premises lease in consideration for the payment to the landlord of $240,000.
INTEREST EXPENSE
In 2002, 2001, and 2000, interest expense was $2.5 million, $1.9 million, and
$4.6 million, respectively. In 2002, interest expense primarily relates to the
borrowings on the bank line, the 4.25% Convertible Subordinated Notes, the
issuance of the 7% Convertible Subordinated Notes effective November 1, 2002,
note conversion expenses and interest on equipment leases. Approximately $0.8
million was charged to interest expense in 2002 (zero in 2001) related to
conversion of the 4.25% Convertible Subordinated Notes to common stock, in
compliance with SFAS 84. In 2001, interest expense primarily relates to the
4.25% Convertible Subordinated Notes, fees incurred in setting up the Loan and
Security Agreement with Foothill Capital Corporation and interest on equipment
leases. For 2000, interest expense consisted primarily of interest and fees
incurred on the 4.25% Notes and borrowings under P-Com's bank lines of credit,
interest on the principal amount of equipment leases, and contractual penalties
for late filing of the registration statement in connection with the issuance of
the Series B Convertible Preferred Stock and the related warrants. Approximately
$1.9 million was charged to interest expense in 2000 related to amortization of
the fair value of warrants issued to P-Com's lender group in January 2000. The
higher interest expense in 2002 compared to 2001 is due primarily to the
recognition of $771,000 of note conversion expenses in compliance with SFAS 84.
The reduction in interest expense in 2001 compared to the prior year was
primarily due to reduced debt levels outstanding in these periods.
GAIN ON SALE OF SUBSIDIARY
P-Com recognized a gain of approximately $9.8 million in 2001 on the sale of RT
Masts in February 2001.
OTHER INCOME (EXPENSE), NET
In 2002, other expense, net related primarily to losses on vendor settlements of
$1.2 million, and writing off of a notes receivable of $0.8 million. These were
partially offset by exchange gain arising from Euro and United
39
Kingdom pound denominated receipts when these currencies appreciated against
United States dollars and other miscellaneous income.
In 2001, other expense, net was comprised primarily of losses related to the
write-down of property and equipment and foreign currency translation loss
offset by an earn out royalty payment related to the 2000 sale of the Control
Resources Corporation subsidiary, and investment income from available cash
balances. In 2000, other expense, net represented primarily a $3.5 million loss
in the first quarter on the sale of P-Com's Cemetel unit, foreign exchange
losses of approximately $5.0 million and the write-off of a 1998 investment in a
Poland-based telecommunications venture of $1.3 million. This was partially
offset by interest income on excess cash balances, and a gain of $2.6 million on
the sale of Control Resources Corporation in April 2000.
PROVISION (BENEFIT) FOR INCOME TAXES
In 2002 and 2001, P-Com recorded a net tax benefit of $(0.5) million and $(0.6)
million, respectively, relating to recovery of prior year's federal income tax,
offset by income taxes attributable to foreign jurisdictions that had local
taxable income for both years.
In 2000, P-Com recorded tax provisions of $10.9 million, comprised of a $9.9
million write-off of deferred tax assets taken in 2000 and income taxes
attributable to foreign jurisdictions that had taxable income for 2000. No
benefit was recognized in 2002, 2001, and 2000 for net operating losses
incurred.
EXTRAORDINARY ITEM
In the second quarter of 2002, P-Com repurchased 4.25% Convertible Subordinated
Notes with a face value of $1.75 million for approximately $367,000 in cash.
In January 2000, P-Com repurchased $7.0 million of its 4.25% Convertible
Subordinated Notes by issuing 677,000 shares of newly issued P-Com common stock
with a fair market value of $5.1 million. The extraordinary gain resulting from
this transaction amounted to $1.9 million.
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
SALES
For the nine months ended September 30, 2003, total sales were approximately
$15.1 million, compared to $22.3 million for the same period in the prior year.
The decrease in total sales for the nine-month period ended September 30, 2003
as compared to 2002 was principally attributable to a $6.1 million decrease in
Point-to-Point and Spread Spectrum product shipments to the Asia-Pacific Rim
countries, and $0.9 million decrease in the Point-to-Multipoint sales to the
same market. The continuing capital expenditure control measures implemented by
North American and European telecommunication companies have continued to
adversely impact P-Com's sales. Approximately $3.0 million of P-Com's sales in
the third quarter of 2003 are from out-of-warranty repair activities, an
increase of $0.1 million over the previous quarter.
During the nine-month period ended September 30, 2003 and 2002, four and two
customers accounted for a total of 56% and 29% of P-Com's total sales,
respectively. During the nine months ended September 30, 2003, P-Com generated
approximately 28% of P-Com's sales in the Asia-Pacific Rim areas and the Middle
East combined. During the same period in 2002, P-Com generated 50% of P-Com's
sales in the Asia-Pacific Rim and the Middle East combined. The United Kingdom
market contributed 34% of the Company's revenue in the nine months ended
September 30, 2003, compared to 20% in the same period in 2002. P-Com's next
largest market is the European continent, which generated approximately 18% of
the Company's revenue in the nine months ended September 30, 2003, compared to
16% in the same period in 2002. Many of P-Com's largest customers use its
products to build telecommunication network infrastructures. These purchases
represent significant investments in capital equipment and are required for
network rollout in a geographic area or market. Consequently, the customer may
have different requirements from year to year and may vary its purchase levels
from P-Com accordingly. As noted, the worldwide slowdown in the
telecommunications industry is significantly affecting P-Com's customers and its
revenue levels.
40
GROSS PROFIT
For the nine months ended September 30, 2003 and 2002, gross profit was $2.7
million (excluding inventory and related charges of $3.7 million) and $3.0
million, or 18% and 14% of sales, respectively. The inventory and related charge
for the nine months ended September 30, 2003 relate to P-Com's legacy
Point-to-Point Tel-Link and Airlink products, and the Point-to-Multipoint
products. The charges were taken in view of the less favorable market conditions
for these products. The higher gross margin was attributable principally to a
higher percentage of total revenue during the nine-month period ended September
30, 2003 coming from the sale of unlicensed Spread Spectrum equipment and
Tel-Link out-of-warranty repairs, which provide higher gross margins compared to
licensed equipment, which contributed a greater percentage of total revenue
during the comparable nine-month period in 2002. Including the inventory and
related charges of $3.7 million, gross loss for the nine months ended September
30, 2003 is (7%).
RESEARCH AND DEVELOPMENT
For the nine months ended September 30, 2003 and 2002, R&D expenses were
approximately $4.8 million and $10.3 million, respectively. The decrease in R&D
expense was due to the restructuring of the Point-to-Multipoint operations,
reduced depreciation charges, reduced staffing levels and substantial completion
of product development efforts related to P-Com's Point-to-Point Encore and
AirPro Gold Spread Spectrum radios.
SELLING AND MARKETING
For the nine months ended September 30, 2003 and 2002, sales and marketing
expenses were approximately $2.7 million and $5.2 million, respectively. The
decrease in sales and marketing spending is due to lower commission payments in
light of decreased sales in the Asia-Pacific Rim areas, headcount reductions and
reduced traveling expenses.
GENERAL AND ADMINISTRATIVE
For the nine months ended September 30, 2003 and 2002, general and
administrative expenses were approximately $4.3 million and $8.7 million,
respectively. The decrease in general and administrative expense in the third
quarter of 2003 is principally attributable to a realization of savings from
cost reduction programs that continued from 2002 to 2003, including headcount
and salary reductions, reduced consulting and legal expenses, and facilities
consolidation.
ASSET IMPAIRMENT AND OTHER RESTRUCTURING CHARGES
In the event that certain facts and circumstances indicate that the long-lived
assets may be impaired, an evaluation of recoverability would be performed. When
an evaluation occurs, management conducts a probability analysis based on the
weighted future undiscounted cash flows associated with the asset. The results
are then compared to the asset's carrying amount to determine if impairment is
necessary. The cash flow analysis for the property and equipment is performed
over the shorter of the expected useful lives of the assets, or the expected
life cycles of P-Com's product line. An impairment charge is recorded if the net
cash flows derived from the analysis are less than the asset's carrying value.
P-Com deems that the property and equipment is fairly stated if the future
undiscounted cash flows exceed its carrying amount.
In the first and second quarter of 2003, the Company determined that there was a
need to reevaluate the carrying value of its property and equipment, which are
held for sale, relating to its Point-to-Multipoint product line. The evaluation
was performed in light of the continuing slowdown in the global
telecommunications market for this product line. The evaluation resulted in a
$2.5 million provision for asset impairment in the second quarter of 2003, and
$0.6 million provision in the first quarter of 2003.
In connection with the workforce reduction in May 2003, the Company recorded a
$0.2 million charge in the second quarter of 2003 relating to a severance
package given to certain of its executive officers.
41
The Company recorded a $0.4 million charge in the third quarter of 2003 for
liability relating to a terminated lease facility in the United Kingdom.
Loss on discontinued business
In the first quarter of 2003, P-Com decided to exit its services business, PCNS.
Accordingly, beginning in the first quarter of 2003, this business is reported
as a discontinued operation and P-Com recorded losses from its operations and
from the disposal of the services business unit relating to writing down of
assets to net realizable value. On April 30, 2003, the Company entered into an
Asset Purchase Agreement with JKB to sell certain assets of PCNS. The Company is
a guarantor of PCNS' obligations under its premises lease, through July 2007. As
part of the sale to JKB, JKB agreed to sublet the premises from PCNS for one
year beginning May 1, 2003. The terms of the sublease required JKB to pay less
than the total amount of rent due under the terms of the master lease. As a
result, the Company remained liable under the terms of the guaranty for the
deficiency, and the total obligation under the terms of the master lease was
approximately $1.5 million, and these were accrued in the second quarter of 2003
as loss on disposal of discontinued operations. In the third quarter of 2003,
the Company reached a settlement agreement with the landlord for $0.3 million,
and wrote-back the excess accrual of $1.2 million as a gain on discontinued
operations.
Change in accounting principle
Goodwill represents the excess of the purchase price over the fair value of the
net assets of acquired companies accounted for as purchase business
combinations. P-Com adopted FAS 142 on January 1, 2002, and, as a result,
recorded a transitional impairment charge of $5.5 million in the first quarter
of 2002, representing the difference between the fair value of expected cash
flows from the services business unit, and its book value.
INTEREST EXPENSE
For the nine months ended September 30, 2003 and 2002, interest expense was $1.6
million and $2.0 million, respectively. The lower expense in 2003 was due to
interest savings from the redemption of the Convertible Notes.
GAIN ON DEBT, RESTRUCTURING AND OTHER INCOME, NET
For the nine-month period ended September 30, 2003, other income, net, totaled
$13.4 million compared to $0.2 million for the corresponding period in 2002. The
higher amount in 2003 was due to $10.3 million of gain on redemption of the
Convertible Notes, and $2.1 million of gain from vendor settlements.
PROVISION (BENEFIT) FOR INCOME TAXES
P-Com has not recorded the tax benefit of its net operating losses since the
criteria for recognition has not been achieved. The net operating losses will be
available to offset future taxable income, subject to certain limitations and
expirations.
LIQUIDITY AND CAPITAL RESOURCES
Since P-Com's inception in August 1991, P-Com has financed its operations and
capital requirements through net proceeds of approximately $97.2 million from
its initial and two follow-on public offerings of P-Com common stock; $110.2
from private placements of P-Com common stock; $32.2 million from four preferred
stock financings; $97.5 million from the 4.25% Notes issued in 1997; and
borrowings under bank lines of credit and equipment lease arrangements.
In 2002, P-Com used approximately $14.5 million of cash in operating activities,
primarily due to the net loss of $54.3 million, offset by depreciation charges
of $6.6 million, non-cash charges to cost of sales for inventory related charges
aggregating $5.8 million, and an impairment charge related to goodwill of $16.9
million. In addition,
42
P-Com experienced decreases in inventories, other accrued liabilities, accounts
receivable, and prepaid expenses related to lower levels of sales and operations
level reductions caused by the current downturn.
During the nine-month period ended September 30, 2003, P-Com used approximately
$0.2 million of cash in operating activities, primarily due to P-Com's net loss
of $7.0 million, a $10.3 million non-cash gain arising from the redemption of
the Convertible Notes, and $2.1 million non-cash gain from vendor settlements.
These amounts were offset by a $3.7 million non-cash loss related to inventory
and related charges, $3.1 million of property and equipment impairment charges,
and depreciation expenses of $3.4 million. Significant contributions to cash
flow resulted from a net reduction in inventories of $4.1 million, a net
reduction in prepaid and other current assets of $2.2 million, and a net
increase of other accruals of $1.6 million. These were partially offset by a
reduction of accounts payable of $2.1 million.
During the nine-month period ended September 30, 2002, P-Com used approximately
$14.6 million of cash in operating activities, primarily related to the net loss
of $32.2 million, which was offset by $5.5 million of non-cash goodwill
impairment charges and depreciation expenses of $5.1 million. Other significant
contributions to cash flow from operations for the quarter ended September 30,
2003 were cash generated through a decrease in inventory of $8.3 million, and a
net reduction of prepaid expenses and other current assets of $3.1 million,
partially offset by the $1.4 million non-cash extraordinary gain on the
retirement of certain Convertible Notes, and a net reduction in payables and
other accrued liabilities of approximately $10.0 million, which resulted from
vendor settlements and a slowdown of overall payable balances occurring in the
period as a result of reduced orders from domestic CLEC customers, and
consolidation of operating facilities and related administrative expenses.
During 2002, P-Com received net proceeds of approximately $5.0 million through
investing activities. The net proceeds resulted primarily from the decrease in
restricted cash of $2.5 million, and proceeds from sale of property and
equipment of $0.3 million and a contribution of $2.9 million from changes in the
net assets of discontinued operations, offset by acquisition of property and
equipment of $0.6 million.
During the nine-month period ended September 30, 2003, P-Com used approximately
$1.8 million of cash from investing activities, due principally to the loans to
SPEEDCOM of $1.1 million, and $0.9 million arising from changes in the net
assets of discontinued operations, offset by a $0.4 decrease in restricted cash.
During the nine-month period ended September 2002, P-Com generated $5.4 million
from investing activities, mainly from a $2.9 million decrease in restricted
cash, and $3.0 million from changes in the net assets of the Company's
discontinued operations.
In 2002, P-Com received net proceeds of approximately $7.7 million through
financing activities. P-Com received approximately $7.3 million and $0.4 million
in June 2002 and December 2002, respectively, in net proceeds from the issuance
of P-Com common stock, and drew $2.6 million from P-Com's available bank line.
P-Com used $2.1 million to redeem a total face value of $3.5 million of the
4.25% Notes in June 2002 and in November 2002. P-Com further remitted $0.5
million under its capital lease obligations.
During the nine-month period ended September 30, 2003, P-Com generated $2.2
million of cash flows from financing activities, primarily through the receipt
of $2.6 million from bridge financings, and $0.3 million from the receipt of
proceeds from the sale of common stock. These were offset by payments of $0.7
million to the Bank under the Credit Facility and to lessors under capital
leases of the Company. During the nine-month period ended September 30, 2002,
P-Com generated $8.2 million of cash flows from financing activities, primarily
through the receipt of $7.3 million from the sale of common stock, and $1.6
million cash advances from the Bank under the Credit Facility, offset by
payments in connection with capital leases, and the repurchase of certain
Convertible Notes.
P-Com's principal sources of liquidity as of December 31, 2002 consisted of
approximately $0.9 million of cash and cash equivalents, and additional amounts
that P-Com may borrow under the existing credit facility with Silicon Valley
Bank. Cumulative operating losses have seriously affected P-Com's liquidity in
2002. At December 31, 2001, P-Com had approximately $2.5 million in cash and
cash equivalents. P-Com further had $2.9 million in restricted cash resulting
from an attachment, as part of a dispute with a vendor. The dispute had been
fully resolved and the attachment removed in February 2002, resulting in
approximately $1.4 million being released to P-Com at that time.
43
As of September 30, 2003 P-Com's principal sources of liquidity consisted of
approximately $1.1 million of cash and cash equivalents, and additional
borrowing availability under the Credit Facility.
At December 31, 2002, P-Com had negative working capital of approximately $1.8
million. The negative working capital resulted from P-Com's continuing operating
losses; higher loan from bank balance and a $5.5 million inventory write-down to
net realizable value. Unless P-Com is able to generate sufficient profitable
sales, or obtain new equity, P-Com may have insufficient working capital to fund
its operations.
At September 30, 2003, P-Com had negative working capital of approximately $12.2
million. The negative working capital resulted from P-Com's continuing operating
losses, a $5.5 million inventory write-down to net realizable value, higher
accrued liabilities, and a $2.2 million increase in convertible promissory note
balances. These convertible promissory notes were converted into Series C
Convertible Preferred Stock, in connection with the Series C Financing, which
the Company closed on October 3, 2003. The Series C Financing resulted in gross
proceeds to the Company of $11.0 million. Each share of Series C Convertible
Preferred Stock has a stated value of $1,750 per share. The Series C Financing
resulted in net proceeds of approximately $7.9 million, after deducting expenses
related to the Series C Financing, payment of certain claims, and the
elimination of certain vendor liabilities of the Company.
On September 20, 2002, P-Com and Silicon Valley Bank entered into a Credit
Facility Agreement for a total facility of $5.0 million, consisting of a $1.0
million borrowing line based on domestic receivables, and a Loan and Security
Agreement under the Export-Import ("EXIM") program for a $4.0 million borrowing
line based on export related inventories and receivables. The bank makes cash
advances equal to 70% of eligible accounts receivable balances for both the EXIM
program and domestic lines, and up to $1.2 million for eligible inventories
under the EXIM program. Advances under these loan agreements bear interest at
the bank's prime rate plus 2.5% per annum. The loan agreements expire on
September 20, 2003, and are secured by all receivables, deposit accounts,
general intangibles, investment properties, inventories, cash, property, plant
and equipment of P-Com. P-Com has issued a $4.0 million secured promissory note
underlying these loan agreements to the bank. As of December 31, 2002, the loan
amount payable to the bank was $2.9 million. P-Com was not in compliance with
the loan agreements' revenue and minimum tangible net worth covenants as of
December 31, 2002, and, on March 4, 2003, P-Com received a limited waiver from
the bank for the designated revenue default, and a limited forbearance from
exercising its rights and remedies arising from the tangible net worth default
until the earlier of (i) March 15, 2003, or (ii) the occurrence of an event of
default. On March 24, 2003, P-Com received a waiver from the bank of the
non-compliance with the minimum tangible net worth covenant as of December 31,
2002, and the cross default arising from the non-compliance. P-Com also received
from the bank in the same waiver agreement a limited forbearance from exercising
its rights and remedies arising from P-Com's non-compliance with the tangible
net worth covenant as of January 31, 2003 until the earlier of (i) April 15,
2003, or (ii) the occurrence of an event of default other than the January 2003
default. Under the terms of the forbearance, the bank reserved its right to
immediately cease extending credit without further notice, and the right, in its
discretion, to have the outstanding debt obligations bear interest at the
default rate of interest, which includes an additional 4% penalty charge.
On September 25, 2003, the Company renewed its Credit Facility with the Bank for
an additional year, until September 25, 2004. The Credit Facility consists of a
Loan and Security Agreement for a $1.0 million borrowing line based on domestic
receivables, and a Loan and Security Agreement under the Export-Import ("EXIM")
program for a $3.0 million borrowing line based on export related inventories
and receivables. The Credit Facility provides for cash advances equal to 70% of
eligible accounts receivable balances for both the EXIM program and domestic
lines, and up to $750,000 for eligible inventories (limited to 25% of eligible
EXIM accounts receivable), under the EXIM program. Advances under the Credit
Facility bear interest at the Bank's prime rate plus 3.5% per annum. The Credit
Facility is secured by all receivables, deposit accounts, general intangibles,
investment properties, inventories, cash, property, plant and equipment of the
Company. The Company has also issued a $4.0 million secured promissory note
underlying the Credit Facility to the Bank. As of September 30, 2003, the loan
amount payable to the Bank under the Credit Facility aggregated $2.2 million.
P-Com has an unsecured overdraft line with a bank in Italy, for borrowings up to
$83,000, based on domestic trade receivables. Borrowings under this line bear
interest at 4.5% per annum. As of September 30, 2003, the overdraft amount drawn
on this line was approximately $36,000.
44
On March 26, 2003, P-Com completed a bridge financing transaction in which it
issued $1.5 million of 10% convertible promissory notes with a maturity date of
one year from the date of issuance. These convertible promissory notes are
subordinated to the existing bank line of credit, but senior to the $22.4
million Convertible Subordinated Notes due 2005.
On May 28, 2003, P-Com completed a bridge financing transaction in which it
issued $0.3 million of 10% convertible promissory notes with a maturity date of
one year from the date of issuance. These convertible promissory notes are
subordinated to the existing bank line of credit, but senior to the $22.4
million Convertible Subordinated Notes due 2005.
On July 18, 2003, P-Com completed a bridge financing transaction in which it
issued $0.9 million of 10% convertible promissory notes with a maturity date of
one year from the date of issuance. These convertible promissory notes were
converted into shares of Series C Convertible Preferred Stock, in connection
with the Series C Financing, as discussed below. On August 4, 2003, as a result
of the restructuring of its Convertible Subordinated Notes due 2005, the
principal amount and accrued interest of $21,138,000 was converted into
approximately 1,000,000 shares of Series B Convertible Preferred Stock with a
stated value of $21.138 per share. Each share of Series B Convertible Preferred
Stock is convertible into a number of shares of P-Com common stock equal to the
stated value plus accrued and unpaid dividends, if any, divided by an initial
conversion price of $0.20. The holders of the Series B Convertible Preferred
Stock are obligated to convert their shares into shares of common stock as soon
as reasonably practicable. However, no holder of Series B Convertible Preferred
Stock may convert its shares into shares of common stock if the conversion would
cause the holder or any of its affiliates, individually or in the aggregate, to
beneficially own more than 9.999% of P-Com's outstanding common stock. As of
January 20, 2004, approximately 891,593 shares of Series B Convertible Preferred
Stock had been converted into approximately 94,232,454 shares of common stock
and approximately 108,406 shares of Series B Convertible Preferred remained
outstanding. The shares of Series B Convertible Preferred Stock that remain
outstanding are convertible into approximately 11,457,487 shares of common
stock, subject to the limitation on conversion described above. The number of
shares of common stock issuable upon conversion of the Series B Convertible
Preferred Stock is subject to adjustment for stock splits, stock dividends and
similar transactions.
On October 3 and December 18, 2003, P-Com raised approximately $13.8 million
from the issuance and sale of its Series C Convertible Preferred Stock (the
"Series C Financing"), resulting in net proceeds of approximately $9.9 million
after deducting expenses related to the Series C Financing, and payment of
certain claims related to P-Com's restructuring. Together with each share of
Series C Convertible Preferred Stock, P-Com also issued one Series C-1 Warrant
to purchase 7,000 shares of common stock and one Series C-2 Warrant to purchase
7,000 shares of common stock. The Series C-1 Warrants have a term of five years
and an initial exercise price of $0.15 per share, increasing to $0.18 per share
one year after the date of issuance. The Series C-2 Warrants have a term of five
years and an initial exercise price of $0.18 per share, increasing to $0.22 per
warrant 18 months after date of issuance. Dividends accrue on the Series C
Convertible Preferred Stock beginning 12 months after the closing, at 6% per
annum paid semi-annually in cash or common stock, at the option of P-Com, and
increasing to 8% per annum beginning 24 months after the closing. Each share of
Series C Convertible Preferred Stock is convertible at any time at the option of
the holder into a number of shares of common stock equal to its stated value of
$1,750 per share plus accrued and unpaid dividends, if any, divided by an
initial conversion price of $0.10. However, no holder of Series C Convertible
Preferred Stock may convert its shares into shares of common stock if the
conversion would cause the holder or any of its affiliates, individually or in
the aggregate, to beneficially own more than 9.999% of P-Com's outstanding
common stock. Subject to this limitation, the Series C Convertible Preferred
Stock is also mandatorily convertible at the option of P-Com 180 days after the
effective date of a registration statement covering the shares of common stock
issuable upon the conversion of the Series C Convertible Preferred Stock, and
upon the satisfaction of the following conditions: (i) for ten consecutive days,
the common stock closes at a bid price equal to or greater than $0.20; (ii) the
continued effectiveness of the registration statement; (iii) all shares of
common stock issuable upon conversion of the Series C Convertible Preferred
Stock and Series C-1 and Series
45
C-2 Warrants are authorized and reserved for issuance, are registered under the
Securities Act for resale by the holders, and are listed or traded on the OTC
Bulletin Board or other national exchange; (iv) there are no uncured redemption
events; and (v) all amounts accrued or payable under the Series C Convertible
Preferred Stock Certificate of Designation or registration rights agreement have
been paid. As of January 20, 2004, approximately 513 shares of Series C
Convertible Preferred Stock had been converted into approximately 8,986,983
shares of common stock and approximately 9,429 shares of Series C Convertible
Preferred Stock remained outstanding and none of the Series C Warrants had been
exercised. The shares of Series C Convertible Preferred Stock that remain
outstanding are convertible into approximately 165,005,622 shares of common
stock, subject to the limitation on conversion described above. The number of
shares of common stock issuable upon conversion of the Series C Convertible
Preferred Stock and exercise of the Series C-1 and Series C-2 Warrants is
subject to adjustment for stock splits, stock dividends and similar transactions
and for certain dilutive issuances.
The following summarizes P-Com's contractual obligations at December 31, 2002,
and the effect such obligations are expected to have on its liquidity and cash
flow in future periods:
Less Than One to Three to After
Obligations (in $000): One Year Three Years Five Years Five Years Total
------------------------------- --------- ----------- ---------- ---------- -------
Convertible subordinated notes $ -- $22,390 $ -- $ -- $22,390
Non-cancelable operating
lease obligations 3,001 6,788 466 -- 10,255
Loan payable to bank 2,908 -- -- -- 2,908
Senior subordinated secured
promissory notes 202 -- -- -- 202
Open purchase order
commitments 1,073 -- -- -- 1,073
Capital lease obligations 435 2,077 -- -- 2,512
------ ------- ---- -------- -------
TOTAL $7,619 $31,255 $466 $ -- $39,340
------ ------- ---- -------- -------
As a result of P-Com's default under certain capital lease obligations, the
total amount due has been accelerated to the current period.
The following summarizes P-Com's contractual obligations at September 30, 2003,
and the effect such obligations are expected to have on its liquidity and cash
flow in future periods:
Less Than One to Three to After
Obligations (in $000): One Year Three Years Five Years Five Years Total
---------------------------- --------- ----------- ---------- ---------- -------
Convertible promissory note $2,237 $ -- $ -- $-- $ 2,237
Non-cancelable operating
lease obligations 1,366 2,000 111 -- 3,477
Capital lease obligations 665 1,804 -- -- 2,469
Loan payable to banks 2,220 -- -- -- 2,220
Purchase order commitments 1,979 -- -- -- 1,979
------ ------ ---- --- -------
Total $8,467 $3,804 $111 $-- $12,382
------ ------ ---- --- -------
P-Com does not have any material commitments for capital equipment. Additional
future capital requirements will depend on many factors, including P-Com's plans
to increase manufacturing capacity, working capital requirements for its
operations and its internal free cash flow from operations.
Although the receipt of net proceeds from the Series C Financing and the debt
and other restructuring efforts have significantly improved the Company's
working capital position, its working capital deficit remains. Management
intends to focus on increasing sales, settling outstanding claims, controlling
general and operating expenses, and reducing the cost of goods sold, in order to
return the Company to profitability. To further increase sales, and position the
Company for future growth, additional financing may be required. No assurances
can be given that additional financing will continue to be available to P-Com on
acceptable terms, or at all. If the Company fails to (i) generate sufficient
revenues from new and existing products sales; (ii) diversify its customer base;
(iii) decrease its costs of goods sold, and achieve higher operating margins;
(iv) obtain additional debt or equity financing; or (v) negotiate agreements to
settle outstanding litigation and claims, the Company will have insufficient
capital to continue its operations. Without sufficient capital to fund its
operations, P-Com will no longer be able to continue as a going concern. P-Com's
independent accountants' opinion on P-Com's consolidated financial statements
for the year ended December 31, 2002 included an explanatory paragraph which
raises substantial doubt about P-Com's ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and clarification of recorded asset amounts or to the amounts and
classification of liabilities that may be necessary if the Company is unable to
continue as a going concern.
46
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Valuable Interest Entities. This interpretation clarifies rules relating to
consolidation where entities are controlled by means other than a majority
voting interest and instances in which equity investors do not bear the residual
economic risks. This interpretation was originally effective immediately for
variable interest entities created after January 31, 2003 and for interim
periods beginning after June 15, 2003 for interests acquired prior to February
1, 2003. However, the FASB is reviewing certain provisions of the standard and
has deferred the effective date for public companies to periods ending after
December 15, 2003. PCOM currently has no ownership in variable interest entities
and therefore adoption of this standard currently has no financial reporting
implications.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The statement amends and
clarifies accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. This
statement is designed to improve financial reporting such that contracts with
comparable characteristics are accounted for similarly. The statement, which is
generally effective for contracts entered into or modified after June 30, 2003,
did not have impact on P-Com' s financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. At September 30, 2003, P-Com had no such
financial instruments outstanding and therefore adoption of this standard had no
financial reporting implications. In August, October and December 2003, P-Com
issued shares of Series B Convertible Preferred Stock, Series C Convertible
Preferred Stock and Series D Convertible Preferred Stock, all of which have
certain terms that, while improbable, may require their mandatory redemption for
cash. P-Com believes that accounting for these securities as a mezzanine
security, outside of equity, under Staff Accounting Bulletin No. 64 (SAB 64) is
appropriate.
RECENT RESULTS
For the three-month period ended December 31, 2003, P-Com's net sales increased
to approximately $5.7 million, compared to $5.6 million for the previous quarter
and $7.4 million for the same period in 2002. Net sales for the year ended
December 31, 2003 were $20.8 million, compared to $29.7 million in 2002.
For the three-month period ended December 31, 2003, P-Com's operating expenses
were $3.5 million, compared to $3.6 million for the previous quarter and $6.0
million (excluding goodwill impairment charges of $11.4 million) for same period
in 2002. Operating expenses for the year ended December 31, 2003 were $19.0
million, compared to $41.5 million in 2002. The decreased losses in 2003 were
due to expense savings from cost control measures undertaken in the year,
including discontinuing the services business unit, facility consolidations,
headcount and salary reductions, and streamlining research and development
efforts, as well as a $6.5 million gain from the retirement of debt and a $2.2
million gain from settlements with some of P-Com's vendors.
For the-three month period ended December 31, 2003, P-Com's gross profit margin
was 22%, compared to 20% in the previous quarter and negative 56% in the same
period in 2002. The gross profit margin in the fourth quarter of 2002 included a
$5.5 million charge to inventory reserve. For the year ended December 31, 2003,
gross profit margin was 1%, compared to negative 4% for the year ended December
31, 2002. Excluding charges to inventory, gross profit margins were 19% and 15%,
for the years ended December 31, 2003 and 2002, respectively.
For the three-month period ended December 31, 2003, P-Com's operating loss was
$2.2 million, compared to a loss of $2.4 million in the previous quarter and a
loss of $10.1 million for the same period in 2002. P-Com's operating loss was
impacted by the integration of SPEEDCOM's Wave Wireless Division, which included
costs associated with the proxy solicitation, the closure of operations,
employee severance and other transaction-related costs. As a result, the amount
of cash used by P-Com in its operations in the fourth quarter is not expected to
recur in subsequent quarters.
Net loss for the three-month period ended December 31, 2003 was $5.9 million,
compared to a net profit of $9.4 million for the previous quarter and a net loss
of $22.1 million for the same period in 2002. The net profit in the third
quarter of 2003 was principally attributable to a non-cash, non-recurring gain
resulting from the conversion of debt into equity. Including a non-cash
accretion of $1.5 million for preferred stock, the net loss attributable to
common stockholders for the three-month period ended December 31, 2003 was $7.4
million, or $0.08 per common share, compared to $22.1 million, or $0.68 cents
per common share, for the same period in 2002. For the year ended December 31,
2003, the net loss attributable to common stockholders including the accretion
for preferred stock was $14.4 million, or $0.27 per common share, compared to
$54.3 million, or $2.13 per common share, for the year ended December 31, 2002.
As of December 31, 2003, P-Com's cash balances totaled $6.2 million, compared to
$1.1 million at the end of the previous quarter. The increase in cash is
principally attributable to the receipt of proceeds from the sale of P-Com's
Series C Convertible Preferred Stock in October and December of 2003.
As of December 31, 2003, P-Com had positive working capital of $5.8 million,
excluding deferred contract obligations of approximately $8.0 million, compared
to negative $4.2 million at the end of the previous quarter and negative $25.3
million at the end of the second quarter of 2002, in each case, excluding
deferred contract obligations of approximately $8.0 million. As discussed above,
the improvement in P-Com's working capital position is principally the result of
the receipt of proceeds from the sale of its Series C Convertible Preferred
Stock during the fourth quarter of 2003.
MANAGEMENT
DIRECTORS AND OFFICERS
P-Com's board of directors is authorized to have seven directors. The executive
officers and directors of P-Com, their ages as of January 15, 2004, their
positions and their backgrounds are as follows:
Name Age Position
------------------- --- --------------------------------------------------
George P. Roberts 70 Chairman of the Board
Samuel Smookler 63 Chief Executive Officer and Director
Daniel W. Rumsey 42 Acting Chief Financial Officer, Vice President and General Counsel
Don Meiners 42 Vice President - Operations
Carlos Belfiore 59 Vice President and Chief Technical Officer
Geoff Giese 50 Vice President of Sales and Marketing - License Exempt Products
Randall L. Carl 41 Senior Vice President of Sales and Marketing, Licensed Products
Brian T. Josling 60 Director
John A. Hawkins 43 Director
Frederick Fromm 54 Director
R. Craig Roos 58 Director
47
BACKGROUND
The principal occupations of each executive officer and director of P-Com for at
least the last five years are as follows:
GEORGE P. ROBERTS
Mr. Roberts is a founder of P-Com and has served as Chief Executive Officer and
a Director from October 1991 to May 2001, and as interim Chief Executive Officer
since January 2002. Mr. Roberts resigned from his position as interim Chief
Executive Officer on September 1, 2003. Since September 1993, he has also served
as Chairman of the Board of Directors. Mr. Roberts' term as a director of P-Com
ends upon the 2005 Annual Meeting of Stockholders.
SAMUEL SMOOKLER
Mr. Smookler has served as Chief Executive Officer and a Director of P-Com since
September 2003. Mr. Smookler served as Chief Executive Officer and Chairman of
Maxima Corporation, a developer of high capacity optical wireless transmission
systems from August 2002 to August 2003. Mr. Smookler served as Chief Executive
Officer and as a director of Stratex Networks from May 2000 through December
2001. Prior to such appointment, he served as President and Chief Operating
Officer of Stratex Networks from January 1998. Mr. Smookler was President and
Chief Operating Officer of Signal Technology Corporation, a manufacturer of
electronic components and subsystems, from February 1997 to January 1998. He
served as Vice President and General Manager of the Interconnection Products
Division of Augat Corporation, a manufacturer of telecommunications connection
products, from November 1994 to February 1997. Mr. Smookler served as General
Manager of a division of M/A-COM, Inc., a manufacturer of radio and microwave
communications products, from February 1992 to November 1994.
DANIEL W. RUMSEY
Mr. Rumsey was appointed Vice President and General Counsel in March 2003. In
April 2003, he became Acting Chief Financial Officer following the resignation
of Leighton Stevenson. Prior to joining P-Com, Mr. Rumsey was Vice President and
General Counsel of Knowledge Kids Network, Inc., a multi-media education
company. Knowledge Kids Network is part of the Knowledge Universe family of
companies. Prior to joining Knowledge Kids Network, Mr. Rumsey was the President
and General Counsel of Aspen Learning Systems and NextSchool, Inc., which he
joined in February 1997. Mr. Rumsey sold Aspen Learning Systems and NextSchool
to Knowledge Kids Network in 1999. Mr. Rumsey has an extensive legal and finance
background, dating back to 1987 when he served as a staff attorney in the U.S.
Securities and Exchange Commission's Division of Corporation Finance. He has
also served as Assistant General Counsel for Terra Industries, Inc. and
Associate General Counsel and Corporate Secretary of EchoStar Communications
Corporation. Mr. Rumsey received his J.D. from the University of Denver College
of Law in 1985, and his B.S. from the University of Denver in 1983.
CARLOS BELFIORE
Dr. Belfiore is currently Vice President - Engineering, and Chief Technical
Officer of P-Com. Prior to joining P-Com in November 2003, he was an independent
engineering consultant. Prior to that, Dr. Belfiore held various management and
technical leadership positions at Stratex Networks, which he joined in 1988,
including Senior Director IDU Development, Director of New Technology
Development, Director of Modem Development, and Senior Scientist. Prior to
joining Stratex, Dr Belfiore was with the Microwave Communication Division of
Harris Corporation, serving as Manager of Advanced Development and Principal
Development Engineer. Dr. Belfiore received a Ph.D. in electrical engineering
from University of Minnesota in 1976.
DON MEINERS
Mr. Meiners is currently Vice President - Operations of P-Com, and has held a
variety of management roles since he joined P-Com in 1992. These include Vice
President of Operations, Vice President Engineering, Vice President
48
Manufacturing and Vice President of Engineering Program Management. Prior to
P-Com, Mr. Meiners served in design engineering roles and project management for
Digital Microwave Corporation and Equitorial Inc. Mr. Meiners graduated from the
Missouri Institute Of Technology in 1983.
RANDALL L. CARL
Mr. Carl has held a variety of management roles since he joined P-Com in 1992.
These include Senior Vice President - Worldwide Sales, Vice President of Sales
Asia-Pacific, Vice President & General Manager of Point-to-Point Business Unit,
Vice President of Product Strategy and Vice President of Marketing. In August
1998, Mr. Carl left P-Com to serve as the Chief Operating Officer of Integrity
International Holdings, Inc., a national Internet service provider. In March
2000, Mr. Carl, left his position at Integrity International Holdings, Inc. and
returned to P-Com. Prior to P-Com, Mr. Carl served in technical marketing and
systems engineering roles for Digital Microwave Corporation and Avantek Inc. Mr.
Carl received his MBA from Santa Clara University in 1987, and his BA in
Business Administration from Azusa Pacific University in 1984.
GEOFF GIESE
Geoffrey Giese is currently Vice President - Sales and Marketing - Exempt
Licensed Products, a position he has held since he joined P-Com in October 1998.
Mr. Giese joined P-Com as part of the acquisition of Cylink Corporation in
October 1998. Mr. Giese was Vice President - Engineering at Cylink, which he
joined in 1994. Mr. Giese has over 20 years experience in the microwave radio
industry. Mr. Giese was graduated Summa Cum Laude with a B.S.E.E. degree from
Santa Clara University. He also studied Microwave and Advanced Semiconductor
Physics at Santa Clara University's Graduate School of Engineering.
BRIAN T. JOSLING
Mr. Josling has served as director of P-Com since September 1999. Since December
2000 until November 2002, he has served as the President of Fuel Cells, Canada,
the Canadian Association of fuel cell and hydrogen companies. Mr. Josling is a
professional corporate director having served on 12 boards in Canada and the
United States from 1993 to present. He also currently serves on the board of
directors of Membrane Reactor Technology Ltd., Wmode, Inc., and Conduit Ventures
Ltd.
JOHN A. HAWKINS
Mr. Hawkins has served as a director of P-Com since September 1991. He is a
Managing Partner of Generation Partners, L.P., which he co-founded in 1995.
Generation Partners is a $325 million private equity firm focused on providing
equity capital for technology-oriented growth companies through buyout, growth
equity and venture capital investments. Mr. Hawkins graduated with honors from
Harvard College as a John Harvard Scholar in 1982, and received his MBA from the
Harvard Graduate School of Business in 1986.
FREDERICK FROMM
Mr. Fromm has served as a director of P-Com since June 2001. Since May 2003, Mr.
Fromm has been President and Chief Executive Officer of Gluon Networks, Inc. a
telecommunications equipment company. From July 2000 to October 2001, he was
President, and from Nov. 2001 to October 2002 he was also Chief Executive
Officer of Oplink Communications, Inc., an optical components company. From
October 1998 to July 2000 he was President and Chief Executive Officer of
Siemens Information and Communications, Inc, a telecommunications equipment
company. From October 1996 to October 1998 he was President and Chief Executive
Officer of Siemens Telecom Networks, Inc. a telecommunications equipment
company.
R. CRAIG ROOS
Mr. Roos joined P-Com's Board of Directors in December 2003. Mr. Roos is founder
and sole owner of Roos Capital Planners, Inc., which he formed in 1979 and which
specializes in advisory services to the communications industry, primarily in
the fixed and mobile wireless area. Mr. Roos has served on the boards of several
companies in the wireless, communications, software, media, and
telecommunications industries. He served as chairman of MobileMedia Corporation
from 1993 until 1995. Mr. Roos also was a co-founder of Locate, a digital local
access carrier specializing in high-speed T-1 level radio carrier technologies.
Mr. Roos has testified before the United States Congress on telecommunications
issues and is a former chairman of the Alternative Local
49
Telecommunications Trade Association. Mr. Roos currently serves on the Board of
Directors of SPEEDCOM Wireless Corporation.
BOARD COMMITTEES AND MEETINGS
The board of directors has an Audit Committee and a Compensation Committee.
Audit Committee. The Audit Committee currently consists of three directors, Mr.
Josling, Mr. Fromm, and Mr. Roos. The committee is primarily responsible for
approving the services performed by P-Com's independent accountants and
reviewing their reports regarding P-Com's accounting practices and systems of
internal accounting controls.
Compensation Committee. The Compensation Committee currently consists of two
directors, Mr. Hawkins and Mr. Fromm, and is primarily responsible for reviewing
and approving P-Com's general compensation policies and setting compensation
levels for its executive officers. The Compensation Committee also has the
authority to administer P-Com's Employee Stock Purchase Plan and its 1995 Stock
Option/Stock Issuance Plan and to make option grants thereunder.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of P-Com's Compensation Committee has at any time been an
officer or employee of P-Com. None of P-Com's executive officers currently
serves, or in the past year has served, as a member of the board of directors or
Compensation Committee of any entity that has one or more executive officers
serving on P-Com's board of directors or Compensation Committee.
DIRECTOR COMPENSATION
Non-employee directors do not receive cash compensation for their services as
directors.
Under the Automatic Option Grant Program under P-Com's 1995 Stock Option/Stock
Issuance Plan, each individual who first joins the board of directors as a
non-employee director will receive, at the time of his or her initial election
or appointment, an automatic option grant to purchase 8,000 shares of common
stock, provided that the individual has not previously been employed by P-Com.
In addition, on the date of each annual stockholders meeting, each individual
who continues to serve as a non-employee director, whether or not such
individual is standing for re-election at that particular annual meeting, will
be granted an option to purchase 800 shares of common stock, provided that the
individual has not received an option grant under the Automatic Option Grant
Program within the preceding six months. Each grant under the Automatic Option
Grant Program will have an exercise price per share equal to 100% of the fair
market value per share of P-Com common stock on the grant date, and will have a
maximum term of ten (10) years, subject to earlier termination should the
optionee cease to serve as a member of the board of directors.
On August 13, 2003, under the Discretionary Option Grant Program, each member of
the board of directors received a discretionary option grant of 557,000 shares
of common stock at an exercise price of $0.11 per share. Each grant will vest
with respect to 25% of the option shares upon the optionee's completion of one
year of service as a director. The remaining option shares shall vest in a
series of thirty-six successive equal monthly installments upon the completion
of each additional month of service as a director, such date measured from the
anniversary date of the vesting commencement date.
EXECUTIVE COMPENSATION
The following table provides certain information summarizing the compensation
earned for services rendered in all capacities to P-Com and its subsidiaries for
each of the last three fiscal years by its "named executive officers," who
consist of P-Com's Chief Executive Officer and each of P-Com's four other most
highly
50
compensated executive officers, who where executive officers on December 31,
2003 and whose salary and bonus for the fiscal year ended December 31, 2003 was
in excess of $100,000. In addition, the table includes two additional
individuals who are former executive officers of P-Com for whom disclosure would
have been provided but for the fact that the individual was not serving as an
executive officer of P-Com at December 31, 2003.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
-------------
AWARDS
ANNUAL COMPENSATION ------------
------------------------------------------------------- SECURITIES
SALARY BONUS OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)
------------------------------------ ------ ------- -------- ---------------- ------------ ----------------
George P. Roberts (2) 2003 49,377 -- 74,922(3)(4) 557,000 --
Chairman of the Board of Directors 2002 145,670 -- -- 915,443 --
and Former Chief Executive Officer 2001 355,175 -- -- -- --
Samuel Smookler 2003 139,569 -- 53,083(4) 2,400,000(5) --
Chief Executive Officer and Director 2002 -- -- -- -- --
2001 -- -- -- -- --
Daniel W. Rumsey 2003 104,369 -- -- 2,200,000 8,000(6)
Vice President, Acting Chief 2002 -- -- -- -- --
Financial Officer and General Counsel 2001 -- -- -- -- --
Don Meiners 2003 103,699 -- -- 2,200,000 --
Vice President - Operations 2002 115,617 -- -- 29,497 --
2001 142,104 -- -- 2,000 --
Randall L. Carl 2003 136,800 36,252 -- 2,208,000 --
Senior Vice President, Sales and 2002 158,650 11,400 -- 45,000 --
Marketing - Licensed Products 2001 232,077 -- -- 5,000 --
Geoffrey Giese 2003 105,266 -- -- 1,700,000 --
Vice President of Sales and Marketing 2002 121,693 -- -- 22,500 --
-- Unlicensed Products 2001 142,245 -- -- 3,000 --
Alan T. Wright (7) 2003 98,787 -- -- -- 33,375(7)
Former Chief Operating Officer 2002 214,524 -- -- 65,000 --
2001 253,232 96,000 -- 27,000 --
Ben L. Jarvis (8) 2003 89,655 -- -- -- 19,810(8)
2002 203,807 -- -- 37,479 --
2001 242,019 -- -- 14,000 --
(1) Includes amounts deferred under P-Com's 401(k) Plan.
(2) Mr. Roberts resigned from his position as Chief Executive Officer effective
September 1, 2003. Mr. Roberts remains as Chairman of the board of
directors of P-Com.
(3) Mr. Roberts was provided with a leased company vehicle, resulting in
additional compensation to Mr. Roberts of $12,481, and was reimbursed for
$9,358 for the payment of taxes related to the taxable value of the
benefit.
(4) On October 8, 2003, Messrs. Roberts and Smookler each acquired 23.33 shares
of Series C Preferred Stock of P-Com convertible into 408,335 shares of
common stock, resulting in an effective purchase price of $0.10 per share
of common stock. The closing price per share of common stock as reported on
the OTC Bulletin Board on October 8, 2003 was $0.23 per share.
(5) Mr. Smookler was also granted a warrant to purchase 3,600,000 shares of
P-Com common stock on the same terms and conditions as this option.
(6) Prior to joining P-Com full time in April 2003, Mr. Rumsey was paid $8,000
as a consultant to P-Com.
(7) Mr. Wright's employment with P-Com was terminated effective July 24, 2003.
Following Mr. Wright's termination of employment, Mr. Wright was paid
severance through the remainder of 2003.
(8) Mr. Jarvis' employment with P-Com was terminated effective June 30, 2003.
Following Mr. Jarvis' termination of employment, Mr. Jarvis was paid
severance through the remainder of 2003.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option grants made
to each of the named executive officers in the 2003 fiscal year. No stock
appreciation rights were granted to these individuals during such fiscal year.
51
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM (1)
------------------------------------------------------------- ----------------------------
PERCENT OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES
OPTIONS IN FISCAL EXERCISE EXPIRATION
NAME GRANTED (#)(2) YEAR PRICE ($/SH) DATE 5% ($) 10% ($)
---------------------- -------------- ------------ ------------ ----------- ----------- -----------
George P. Roberts 557,000 2.1% .11 08/13/13 38,532 97,649
Sam Smookler 2,400,000 9.0% .19 09/02/13 286,775 726,746
Don Meiners 2,200,000 8.2% .11 08/13/13 152,193 385,386
Geoffrey Giese 1,700,000 6.3% .11 08/13/13 117,603 298,030
Daniel W. Rumsey 2,200,000 8.2% .11 08/13/13 152,193 385,686
Randall L. Carl 2,200,000 8.2% .11 08/13/13 152,193 385,686
8,000 .02% .15 03/05/13 755 1,912
Alan T. Wright -- -- -- -- -- --
Ben L. Jarvis -- -- -- -- -- --
(1) There can be no assurance provided to any executive officer or any other
holder of P-Com's securities that the actual stock price appreciation over the
ten-year option term will be at the assumed 5% and 10% levels or at any other
defined level. Unless the market price of P-Com common stock appreciates over
the option term, no value will be realized from the option grants made to the
executive officers.
(2) Each option is immediately exercisable for all the option shares, but any
shares purchased under the option will be subject to repurchase by P-Com, at the
option exercise price paid per share, should the individual cease service with
P-Com prior to vesting in those shares. Twenty-five percent (25%) of the option
shares will vest upon the optionee's continuation in service through one year
following the grant date and the balance of the shares will vest in thirty-six
(36) successive equal monthly installments upon the optionee's completion of
each of the next thirty-six (36) months of service thereafter. The shares
subject to the option will immediately vest in full should (i) P-Com be acquired
by merger or asset sale in which the option is not assumed or replaced by the
acquiring entity or (ii) the optionee's employment be involuntarily terminated
within eighteen (18) months after certain changes in control or ownership of
P-Com.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The table below sets forth certain information with respect to P-Com's named
executive officers concerning the exercise of options during 2003 and
unexercised options held by such individuals as of the end of such fiscal year.
No SARs were exercised during 2003 nor were any SARs outstanding at the end of
such fiscal year.
52
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT FISCAL
SHARES VALUE YEAR END(3) YEAR END ($) (1)
ACQUIRED ON REALIZED ------------------------------ ------------------------------
NAME EXERCISE (#) ($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------- ------------ -------- ----------- ------------- ----------- -------------
George P. Roberts -- -- 1,172,790 657,320.80 -- 16,710
Sam Smookler -- -- -- 2,400,000 -- --
Don Meiners -- -- 55,149 2,203,790 -- 66,000
Geoffrey Giese -- -- 41,837 1,703,163 -- 51,000
Daniel W. Rumsey -- -- -- 2,200,000 -- 66,000
Randall L. Carl -- -- 52,707 2,225,293 -- 66,000
Alan T. Wright -- -- -- -- -- --
Ben L. Jarvis -- -- -- -- -- --
(1) Based on the fair market value of the option shares at the 2003 fiscal
year-end ($0.14 per share based on the closing selling price on the NASDAQ
National Market as of December 31, 2003) less the exercise price.
(2) Based on the fair market value of the shares on the exercise date less the
exercise price paid for those shares.
(3) The options are immediately exercisable for all the options shares. However,
any shares purchased under the options are subject to repurchase by P-Com, at
the original exercise price paid per share, upon the optionee's cessation of
service prior to vesting in such shares.
Employment Contracts, Termination of Employment Arrangements and Change of
Control Agreements
The Compensation Committee of the Board of Directors, as Plan Administrator of
the 1995 Stock Option/Stock Issuance Plan, has the authority to provide for
accelerated vesting of the shares of common stock subject to any outstanding
options held by the Chief Executive Officer and any other executive officer or
any unvested share issuances actually held by such individual, in connection
with certain changes in control of P-Com or the subsequent termination of the
officer's employment following the change in control event.
P-Com has entered into severance agreements (the "Agreements") with George
Roberts, Chairman of the Board of Directors and former Chief Executive Officer,
and Ben L. Jarvis, formerly Executive Vice President and General Manager, P-Com
Network Services, Inc., (individually, the "Officer" and collectively the
"Officers"), dated May 31, 2001, and December 7, 2000 respectively. Each of
these Agreements provided for the following benefits should the Officer's
employment terminate, either voluntarily or involuntarily, for any reason within
twenty-four (24) months following a change in control: (a) a severance payment
in an amount equal to two (2) times his annual rate of base salary; (b) a bonus
for Mr. Roberts in an amount equal to the target bonus specified for the fiscal
year in which involuntary termination occurs; (c) the shares subject to each
outstanding option held by the Officer (to the extent not then otherwise fully
vested) will automatically vest so that each such option will become immediately
exercisable for all the option shares as fully-vested shares; and (d) P-Com
will, at its own expense, provide Mr. Roberts and his dependents continued
health care coverage for their lives. A change in control will be deemed to
occur under the Agreements upon: (a) an asset purchase or consolidation in which
securities possessing fifty percent (50%) or more of the total combined voting
power of P-Com's outstanding securities are transferred to a person or persons
different from the persons holding those
53
securities immediately prior to such transaction, (b) the sale, transfer or
other disposition of all or substantially all of the assets of P-Com in complete
liquidation or dissolution of P-Com; (c) a hostile take-over of P-Com, whether
effected through a tender offer for more than twenty-five percent (25%) of
P-Com's outstanding voting securities or a change in the majority of the Board
by one or more contested elections for Board membership; or (d) the acquisition,
directly or indirectly by any person or related group of persons (other than
P-Com or a person that directly or indirectly controls, is controlled by, or is
under common control with, P-Com), of beneficial ownership (within the meaning
of Rule 13d-3 of the Securities Exchange Act of 1934) of securities possessing
more than thirty percent (30%) of the total combined voting power of P-Com's
outstanding securities pursuant to a tender or exchange offer made directly to
P-Com's stockholders. In addition, each Officer will be entitled to a full tax
gross-up to the extent one or more of the severance benefits provided under his
Agreement are deemed to constitute excess parachute payments under the federal
income tax laws.
In addition to the above severance agreements, P-Com also entered into certain
benefits agreements, with Messrs. Jarvis and Alan T. Wright, P-Com's former
Chief Operating Officer, dated April 8, 2002. Each of these agreements provided
for the following benefits should the officers' employment terminate
involuntarily:
o salary continuation payments in an aggregate amount equal to the
greater of the officers' annual base salary in effect immediately prior to the
involuntary termination of the officer's base salary in effect as of January 1,
2002;
o unvested options held by the officers will continue to vest for a
period of one year following the date of the involuntary termination, and all
vested but unexercised options will remain exercisable until the expiration of
the one-year period following the date of the involuntary termination;
o a lump sum payment for all unpaid vacation days accrued by the
officer through the date of the involuntary termination; and
o indemnification of the officer to the same extent provided for other
officers and directors under P-Com's certificate of incorporation, bylaws,
indemnification agreements and insurance policies.
Mr. Jarvis' employment with P-Com was terminated effective June 30, 2003. In
connection with his termination, Mr. Jarvis entered into a letter agreement with
P-Com, dated August 18, 2003 thereby terminating his benefits agreement dated
April 18, 2002. The letter agreement provides for (a) severance payments
totaling $122,040.06 in bi-weekly installments, beginning July 1, 2003 and
ending July 1, 2005; (b) an amount equal to the cost to P-Com to continue health
care benefits under COBRA for a period of nine (9) months, such payments to be
paid in lieu of payments made by P-Com to continue his health care benefits
under COBRA; and (c) all outstanding unvested options to acquire common stock on
the termination date shall continue to vest and shall remain exercisable until
June 30, 2004. In the event that Mr. Jarvis finds employment paying an annual
salary equal to half of the aggregate severance payment during the twelve months
following July 1, 2003, the severance and COBRA payments shall terminate.
Mr. Wright's employment with P-Com was terminated effective July 24, 2003. In
connection with his termination, Mr. Wright entered into a letter agreement with
P-Com, dated August 18, 2003 thereby terminating his benefits agreement dated
April 18, 2002. The letter agreement provides for (a) severance payments
totaling $133,500 in bi-weekly installments, beginning July 11, 2003 and ending
July 11, 2005; (b) P-Com shall pay continuation of health benefits under COBRA
for a period of twelve (12) months from the date of termination. In the event
that Mr. Wright finds employment paying an annual salary equal to half of the
aggregate severance payment during the twelve months following August 1, 2003,
the severance and COBRA payments shall terminate.
P-Com entered into an Employment and Continuity of Benefits Agreement with
George P. Roberts, dated May 31, 2001, outlining his continued employment with
P-Com as Chairman of the Board following his resignation as Chief Executive
Officer on May 30, 2001. The agreement provided for (a) an employment period
commencing May 31, 2001 through May 30, 2002. Should this agreement remain in
effect through May 30, 2002 then Mr. Roberts' employment under this agreement
shall automatically renew for another one-year term commencing May 31, 2002 and
continuing through May 30, 2003, unless written notice of non-renewal is
received from Mr. Roberts
54
on or before May 1, 2002; (b) termination of employment may be effected by (1)
resignation by Mr. Roberts with at least 60 days prior written notice, (2)
termination for cause by majority vote of the Board, or (3) failure of P-Com's
stockholders to re-elect Mr. Roberts to the Board; (c) cash compensation will be
paid to Mr. Roberts' in a base salary in accordance with P-Com's payroll
practices for salaried employees; (d) a target bonus equal to a percentage of
Mr. Roberts base salary may be earned in accordance with P-Com's management
incentive program, and shall be determined by the Board; (e) throughout the
employment period, Mr. Roberts shall be eligible to participate in all benefit
plans that are made available to P-Com's executives and for which Mr. Roberts
qualifies.
P-Com has entered into a letter agreement with George P. Roberts, dated April
28, 2003, thereby extending the employment period under the Employment and
Continuity of Benefits Agreement with Mr. Roberts through May 30, 2005. The
letter agreement provides for the amendment of the Employment and Continuity of
Benefits Agreement upon the assignment of a new Chief Executive Officer of
P-Com. Effective September 1, 2003, due his resignation and the appointment of a
new Chief Executive Officer of P-Com, Mr. Roberts' salary will amount to half
his salary prior to recent reductions, with one half of the salary, $188,000,
paid in cash, and the other half paid in common stock of P-Com.
P-Com entered into an agreement with Sam Smookler, President and Chief Executive
Officer of P-Com, dated July 25, 2003, providing for the employment of Mr.
Smookler as President and Chief Executive Officer for a period of two years. The
agreement further provides for the payment to Mr. Smookler of a salary of
$36,000 per month beginning September 1 and continuing through December 31,
2003. Beginning January 1, 2004, Mr. Smookler is to be paid a base salary of
$250,000 per year. On September 2, 2004, Mr. Smookler will be paid a cash bonus
equal to 50% of his base salary. The agreement also provides for the grant of an
option to purchase 2% of P-Com's total number of shares of common stock issued
and outstanding as of September 2, 2003. By agreement with the Board of
Directors, this number was fixed at 5,000,000 shares, which amount was reduced
to 2,400,000 due to limitations in P-Com's 1995 Stock Option/Stock Issuance
Plan. P-Com granted Mr. Smookler a warrant to purchase 2,600,000 shares of
common stock, thereby making up the difference between the 5,000,000 shares
granted by the Board of Directors, and the 2,400,000 actually issued under the
Plan. In the event Mr. Smookler's employment is terminated at any time following
a change in control of P-Com, P-Com is obligated to pay Mr. Smookler his base
salary for a period of two years, and his options shall automatically accelerate
so that each option becomes fully vested and immediately exercisable for the
total number of shares subject to the option. A change in control will be deemed
to occur under the agreements upon: (a) a merger or consolidation in which P-Com
is not the surviving entity; (b) the sale, transfer or other disposition of all
or substantially all of the assets of P-Com in complete liquidation or
dissolution of P-Com; (c) a reverse merger in which P-Com is the surviving
entity but in which securities representing fifty percent (50%) or more of the
total combined voting power of P-Com's outstanding securities are transferred to
persons different from the persons holding those securities immediately prior to
such merger; and the acquisition, directly or indirectly by any person or
related group of persons of beneficial ownership of securities possessing more
than thirty percent (30%) of P-Com's outstanding voting securities pursuant to a
tender or exchange offer made directly to P-Com's stockholders.
P-Com entered into an agreement with Daniel Rumsey, its Vice President, General
Counsel and Acting Chief Financial Officer, on April 4, 2003. Under the terms of
the agreement, in the event Mr. Rumsey's employment with P-Com terminates at any
time by reason of an involuntary termination, P-Com is obligated to pay him
severance equal to the higher of his base salary on the date of the agreement,
or his base salary on the date of his involuntary termination, which amount is
obligated to be paid in a series of successive biweekly installments over the
twelve month period measured from the date of his involuntary termination. At
the time of his involuntary termination, each unvested option granted to Mr.
Rumsey shall continue to vest, and such options plus options already vested but
unexercised as of the date of his involuntary termination shall continue to be
exercisable in accordance with the 1995 Stock Option/Stock Issuance Plan from
the date of involuntary termination to the first anniversary date thereof. For
purposes of the agreement, an involuntary termination shall mean the termination
of his employment with P-Com (i) involuntarily upon his discharge or dismissal;
or (ii) voluntarily following his resignation following (a) a change in level of
management to which he reports, (b) a decrease or material change in his
responsibilities, or (c) a reduction in his base salary.
P-Com entered into an agreement with Dr. Carlos Belfiore, its Vice President of
Engineering and Chief Technical Officer, on October 20, 2003. Under the terms of
the agreement, Dr. Belfiore is paid a base salary of $138,000 per year. Dr.
Belfiore is also paid a cash bonus equal to 30% of his base salary on January
15, 2005. In
55
the event his employment ceases prior to January 15, 2005, the amount of his
bonus will be pro-rated for the number of days he is employed by P-Com since
October 20, 2003. The agreement also provides for the grant of an option to
purchase 2,750,000 shares of common stock of P-Com, which amount was reduced to
2,400,000 due to limitations in P-Com's 1995 Stock Option/Stock Issuance Plan.
P-Com granted Dr. Belfiore a warrant to purchase 350,000 shares of common stock,
thereby making up the difference between the 2,750,000 shares granted by the
Board of Directors, and the 2,400,000 actually issued under the Plan. In the
event Dr. Belfiore's employment is terminated at any time without cause, P-Com
is obligated to pay Dr. Belfiore his salary for six months following such
termination, and all options previously granted to Dr. Belfiore continue to vest
in accordance with their terms and conditions for a period of two years
following the date of such termination. Following a change in control of P-Com,
P-Com is obligated to pay Dr. Belfiore his base salary for a period of one year,
and his options shall automatically accelerate so that each option becomes fully
vested and immediately exercisable for the total number of shares subject to the
option. A change in control will be deemed to occur under the agreements upon:
(a) a merger or consolidation in which P-Com is not the surviving entity; (b)
the sale, transfer or other disposition of all or substantially all of the
assets of P-Com in complete liquidation or dissolution of P-Com; (c) a reverse
merger in which P-Com is the surviving entity but in which securities
representing fifty percent (50%) or more of the total combined voting power of
P-Com's outstanding securities are transferred to persons different from the
persons holding those securities immediately prior to such merger; and the
acquisition, directly or indirectly by any person or related group of persons of
beneficial ownership of securities possessing more than thirty percent (30%) of
P-Com's outstanding voting securities pursuant to a tender or exchange offer
made directly to P-Com's stockholders.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
In addition to the indemnification provisions contained in P-Com's certificate
of incorporation and bylaws, P-Com has entered into separate indemnification
agreements with each of its directors and officers. These agreements require
P-Com, among other things, to indemnify its directors and officers against
expenses (including attorneys' fees), judgments, fines and settlements
(collectively, "Liabilities") paid by such individual in connection with any
action, suit or proceeding arising out of such individual's status or service as
a director or officer of P-Com) other than Liabilities arising from the willful
misconduct or conduct that is knowingly fraudulent or deliberately dishonest)
and to advance expenses incurred by such individual in connection with any
proceeding against such individual with respect to which such individual may be
entitled to indemnification by P-Com.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 3, 2003, George P. Roberts, Samuel Smookler, Fred Fromm and Brian
Josling, P-Com's Chairman, Chief Executive Officer, and
Directors, respectively, participated in P-Com's preferred stock financing
transaction by purchasing shares of P-Com's Series C Convertible Preferred Stock
together with warrants to purchase shares of P-Com common stock. In addition,
R. Craig Roos, who joined the Board of Directors on December 10, 2003, similarly
participated in the Series C Convertible Preferred Stock transaction. Mr.
Roberts, Mr. Smookler, and Mr. Roos each purchased 23.3 shares of Series C
Convertible Preferred Stock, together with a Series C-1 Warrant to purchase
163,334 shares of P-Com common stock and a Series C-2 Warrant to purchase
163,334 shares of P-Com common stock, all for purchase price of $40,834. Mr.
Fromm and Mr. Josling each purchased 9.32 shares of Series C Convertible
Preferred Stock, together with a Series C-1 Warrant to purchase 65,252 shares of
P-Com common stock and a Series C-2 Warrant to purchase 65,252 shares of P-Com
common stock, all for the purchase price of $16,313. Mr. Roberts, Mr. Smookler,
Mr. Roos, Mr. Fromm and Mr. Josling's spouse and investment entity are both
included among the selling stockholders listed in this prospectus.
All transactions between P-Com and its officers, directors, principal
stockholders and affiliates must be approved by a majority of the independent
and disinterested members of the board of directors, and be on terms no less
favorable to P-Com than could be obtained from unaffiliated third parties.
PRINCIPAL STOCKHOLDERS
The following table presents information concerning the beneficial ownership of
P-Com's common stock, Series C Convertible Preferred Stock and Series D
Convertible Preferred Stock as of January 20, 2004 by each of the following:
56
o each person known by P-Com to be the beneficial owner of 5% of more
of its outstanding shares of common stock, Series C Convertible Preferred Stock
or Series D Convertible Preferred Stock;
o each of P-Com's named executive officers;
o each of P-Com's directors; and
o all of P-Com's executive officers and directors as a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power over
securities. Except in cases where community property laws apply or as indicated
in the footnotes to this table, P-Com believes that each stockholder identified
in the table possesses sole voting and investment power over all shares of
common stock, Series C Convertible Preferred Stock and Series D Convertible
Preferred Stock shown as beneficially owned by that stockholder. Percentage of
beneficial ownership is based on 212,672,887 shares of common stock, 9,942.42
shares of Series C Convertible Preferred Stock and 2,000 shares of Series D
Convertible Preferred Stock outstanding as of January 20, 2004. Shares of common
stock subject to warrants and options that are currently exercisable or
exercisable within 60 days of January 20, 2004, are considered outstanding and
beneficially owned by the stockholder who holds those warrants or options for
the purpose of computing the percentage ownership of that stockholder but are
not treated as outstanding for the purpose of computing the percentage ownership
of any other stockholder. Unless otherwise indicated below, the address of each
stockholder listed below is 3175 S. Winchester Boulevard, Campbell, California
95008.
SERIES C CONVERTIBLE SERIES D CONVERTIBLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
----------------------------------------- -------------------------- ---------------------------
SHARES
ISSUABLE
PURSUANT NUMBER OF
TO SHARES
WARRANTS BENEFICIALLY
AND OWNED
OPTIONS (INCLUDING
EXERCISABLE THE NUMBER
WITHIN 60 OF SHARES NUMBER OF NUMBER OF
DAYS OF SHOWN IN PERCENTAGE SHARES PERCENTAGE SHARES PERCENTAGE
NAME AND ADDRESS JANUARY THE FIRST OF SHARES BENEFICIALLY OF SHARES BENEFICIALLY OF SHARES
OF BENEFICIAL OWNER 20, 2004 COLUMN) OUTSTANDING OWNED (1) OUTSTANDING OWNED (2) OUTSTANDING
---------------------------- ------------ ------------ ------------- ------------ ------------ ------------- ------------
North Sound Legacy Fund LLC
1209 Orange Street
Wilmington, DE 19801 (3) 21,265,100 21,265,100 9.9% 2,332 23.4% 142.00 7.1%
North Sound Legacy
Institutional Fund LLC
1209 Orange Street
Wilmington, DE 19801 (3) 21,265,100 21,265,100 9.9% 2,332 23.4% 877.33 43.9%
North Sound Legacy
International Fund Ltd.
Bison Court, Roadtown
Tortola, BVI
Wilmington, DE 19801 (3) 21,265,100 21,265,100 9.9% 2,332 23.4% 980.67 49.0%
Burnham Hill Holdings, LLC
570 Lexington Avenue, 3rd
Floor
New York, New York 10022 9,520,000 18,520,000 8.7% -- -- -- --
Cagan McAfee Capital
Partners, LLC
10600 North De Anza
Boulevard, Suite 250
Cupertino, CA 95014 9,999,996 17,999,996 8.5% -- -- -- --
SDS Merchant Fund
53 Forest Avenue, 2nd Floor
Old Greenwich, CT 06870 -- -- -- 566 5.6% -- --
John A. Hawkins 37,566 37,566 * -- -- -- --
Brian T. Josling 172,234 288,232 * 163,334 -- -- --
Frederick R. Fromm 167,270 277,131 * 163,130 -- -- --
R. Craig Roos 326,668 326,668 * 408,335 -- -- --
George P. Roberts 1,540,568 1,875,667 * 408,335 -- -- --
Sam Smookler 326,668 601,663 408,335
Randall Carl 58,414 58,414 * -- -- -- --
Geoff Giese 44,024 44,071 *
John R. Wood 71,612 80,950 *
Daniel W. Rumsey -- -- *
All current directors and
executive officers as a
group (11 persons) 2,731,415 3,569,566 1.75% -- -- -- --
57
* Less than 1%.
(1) There are no outstanding warrants or options to purchase shares of Series C
Convertible Preferred Stock.
(2) There are no outstanding warrants or options to purchase shares of Series D
Convertible Preferred Stock.
(3) Includes shares beneficially owned by North Sound Legacy Fund LLC, North
Sound Legacy Institutional Fund LLC, and North Sound International Fund Ltd.
SELLING STOCKHOLDERS
The following table sets forth the names of the selling stockholders and the
number of shares of common stock being registered for sale as of the date of
this prospectus and sets forth the number of shares of common stock known by
P-Com to be beneficially owned by the selling stockholders. The following table
assumes that each selling stockholder will sell all of the shares of common
stock being offered by this prospectus for its account. However, P-Com is unable
to determine the exact number of shares that will actually be sold. The shares
of common stock offered by this prospectus may be offered from time to time by
the selling stockholders. This information is based upon information provided by
the selling stockholders, and is not necessarily indicative of beneficial
ownership for any other purpose. The number of shares of common stock
beneficially owned by the selling stockholders is determined in accordance with
the rules of the Securities and Exchange Commission.
For some of the selling stockholders, the number of shares of common stock being
sold in the offering will be greater than the number of shares of common stock
beneficially owned prior to the offering. This is due to a limitation on the
number of shares of common stock that these selling stockholders can hold at any
given time. Under the terms of the Series B Convertible Preferred Stock, Series
C Convertible Preferred Stock, Series D Convertible Preferred Stock and some of
P-Com's outstanding warrants, no holder of these securities may convert or
exercise these securities into shares of common stock, and P-Com may not issue
shares of its common stock to any of these holders, if the conversion or
exercise would cause the holder or any of its affiliates, individually or in the
aggregate, to beneficially own more than 4.999% or 9.999%, as the case may be,
of P-Com's outstanding common stock. Due to this limitation, some of the selling
stockholders do not beneficially own all of the shares of common stock that are
issuable upon conversion of their Series B Convertible Preferred Stock, Series C
Convertible Preferred Stock or Series D Convertible Preferred Stock or upon
exercise of some of their warrants, as the case may be. However, regardless of
this limitation, P-Com is obligated to register the resale of all of the shares
of common stock that are issuable upon conversion of these securities.
Consequently, some of the selling stockholders are shown in the table below as
selling a greater number of shares of common stock than they beneficially own.
58
With the exception of George Roberts, Samuel Smookler, Fred Fromm, Brian
Josling, and Craig Roos, none of the selling stockholders has had a material
relationship with P-Com within the past three years other than as a result of
its ownership of P-Com's securities. See "Certain Relationships and Related
Transactions" for information regarding the material relationships between Mr.
Roberts and Mr. Smookler and P-Com.
The term "selling stockholder" includes the stockholders listed below and their
transferees, assignees, pledgees, donees or other successors. The percent of
beneficial ownership for each selling stockholder is based on 212,672,887 shares
of common stock outstanding as of January 20, 2004. Shares of common stock
subject to warrants, options and other convertible securities that are currently
exercisable or exercisable within 60 days of January 20, 2004, are considered
outstanding and beneficially owned by a selling stockholder who holds those
warrants, options or other convertible securities for the purpose of computing
the percentage ownership of that selling stockholder but are not treated as
outstanding for the purpose of computing the percentage ownership of any other
selling stockholder.
SHARES
BENEFICIALLY
SHARES BENEFICIALLY OWNED AFTER
OWNED PRIOR TO THE THE
OFFERING SHARES OF COMMON STOCK BEING SOLD IN THE OFFERING OFFERING(1)
------------------ ---------------------------------------------------------- -----------
UPON
CONVERSION
UPON OF SERIES B
CONVERSION UPON OR
OF SERIES C EXERCISE UPON SERIES D
PREFERRED OF SERIES C EXERCISE PREFERRED
NAME OF SELLING COMMON STOCK WARRANTS OF OTHER STOCK
STOCKHOLDER NUMBER (2) $ STOCK (2)(3) (2)(3) WARRANTS (2)(3) NUMBER %
----------------------------------- ---------- ---- ------- --------- --------- -------- ------ ------ ---
Alan Ennis, Sandra Ennis 454,499 * 123,748 183,751 147,000 -- -- -- *
Alfred J. Anzalone Family Limited
Partnership 909,000 * 247,496 367,502 294,002 -- -- -- *
Allan L. Sparlin 303,000 * 82,499 122,501 98,000 -- -- -- *
Allen Solomon Rev Trust 807,998 * 219,996 326,668 261,334 -- -- -- *
Brian M. Herman 3,031,096 1.41% 549,990 816,670 653,336 1,011,100 -- -- *
Charles P Strogen 3,029,994 1.41% 824,985 1,225,005 980,004 -- -- -- *
Christopher P. Choma 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Claude & Hee Jin Ware 202,000 * 54,999 81,667 65,334 -- -- -- *
Dana Bowler 605,998 * 164,997 245,001 196,000 -- -- -- *
Dana Ennis 1,514,998 * 412,493 612,503 490,002 -- -- -- *
David & Michael Lega 202,000 * 54,999 81,667 65,334 -- -- -- *
David P. Garmus, Caren M. Garmus 353,499 * 96,248 142,917 114,334 -- -- -- *
Dennis & Cindy Pak 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Earl P. Correa 151,499 * 41,249 61,250 49,000 -- -- -- *
Fred & Delay Vallen 1,211,998 * 329,994 490,002 392,002 -- -- -- *
C/F Sean M. Callahan SEP/IRA 807,998 * 219,996 326,668 261,334 -- -- -- *
Frederic M. Bauthier 2,019,996 * 549,990 816,670 653,336 -- -- -- *
Gary Ziegler 505,000 * 137,498 204,168 163,334 -- -- -- *
George Manos 1,615,996 * 439,992 653,336 522,668 -- -- -- *
Gerald Ferro 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Greg Downes 404,000 * 109,998 163,334 130,668 -- -- -- *
Harry Falterbauer 3,029,994 1.41% 824,985 1,225,005 980,004 -- -- -- *
59
SHARES
BENEFICIALLY
SHARES BENEFICIALLY OWNED AFTER
OWNED PRIOR TO THE THE
OFFERING SHARES OF COMMON STOCK BEING SOLD IN THE OFFERING OFFERING(1)
------------------ ---------------------------------------------------------- -----------
UPON
CONVERSION
UPON OF SERIES B
CONVERSION UPON OR
OF SERIES C EXERCISE UPON SERIES D
PREFERRED OF SERIES C EXERCISE PREFERRED
NAME OF SELLING COMMON STOCK WARRANTS OF OTHER STOCK
STOCKHOLDER NUMBER (2) $ STOCK (2)(3) (2)(3) WARRANTS (2)(3) NUMBER %
----------------------------------- ---------- ---- ------- --------- --------- -------- ------ ------ ---
Harry Rosen FBO Rosen Rosen
Kreiling PA 401K PSP 1,211,998 * 329,994 490,002 392,002 -- -- -- *
Gregoire Dstreel 202,000 * 54,999 81,667 65,334 -- -- -- *
Jacob Kohannim 202,000 * 54,999 81,667 65,334 -- -- -- *
James C. Craig Jr 303,000 * 82,499 122,501 98,000 -- -- -- *
James E. Ducharme 252,501 * 68,749 102,084 81,668 -- -- -- *
James St. Clair 353,500 * 54,999 81,667 65,334 151,500 -- -- *
Jeffrey Cox 505,000 * 137,498 204,168 163,334 -- -- -- *
Jerome L. Dreyfuss 505,000 * 137,498 204,168 163,334 -- -- -- *
John A. Marrone 252,501 * 68,749 102,084 81,668 -- -- -- *
John M. Somody 2,019,996 * 549,990 816,670 653,336 -- -- -- *
John O. Johnston 1,009,998 * 274,995 408,335 326,668 -- -- -- *
John Simonelli 403,595 * 109,888 163,171 130,536 -- -- -- *
JRF Investments LLC 555,499 * 151,247 224,584 179,668 -- -- -- *
Julie L. Michel 3,029,994 1.41% 824,985 1,225,005 980,004 -- -- -- *
Louis Cristan, Kathy Cristan 605,998 * 164,997 245,001 196,000 -- -- -- *
Margaret & Donald Wisnasky 404,000 * 109,998 163,334 130,668 -- -- -- *
Market Pathways Financial 101,000 * 27,500 40,834 32,666 -- -- -- *
Martin & Linda Mennes 303,000 * 82,499 122,501 98,000 -- -- -- *
Michael J. Leja Revocable Trust 202,000 * 54,999 81,667 65,334 -- -- -- *
Monad Realty Inc. 454,499 * 123,748 183,751 147,000 -- -- -- *
Nathaniel Orme (IRA) 505,000 * 137,498 204,168 163,334 -- -- -- *
Nathaniel Orme 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Paul A. Kruger 3,029,994 1.41% 824,985 1,225,005 980,004 -- -- -- *
Paul Blizman 807,998 * 219,996 326,668 261,334 -- -- -- *
Paul Sanberg 151,499 * 41,249 61,250 49,000 -- -- -- *
Peter & Janis Hillcoff 908,090 * 247,248 367,134 293,708 -- -- -- *
Peter Yaskowitz 404,000 * 109,998 163,334 130,668 -- -- -- *
Philip C. Bird 1,262,499 * 343,744 510,419 408,336 -- -- -- *
Ralph Rybaki 2,019,996 * 549,990 816,670 653,336 -- -- -- *
Reginald T. Grzeskowiak & Nancy
Grzeskowiak 303,000 * 82,499 122,501 98,000 -- -- -- *
Robert Dombrowski 301,500 * 54,999 81,667 65,334 99,500 -- -- *
Robert E. Dettle 202,000 * 54,999 81,667 65,334 -- -- -- *
Ronald H. Wise 909,000 * 247,496 367,502 294,002 -- -- -- *
Rudolf Konegan 605,998 * 164,997 245,001 196,000 -- -- -- *
Salvatore Ianuzzi, Bonita Ianuzzi 505,000 * 137,498 204,168 163,334 -- -- -- *
Sam Eyde 6,059,988 2.79% 1,649,970 2,450,010 1,960,008 -- -- -- *
Samson Consulting Corp 202,000 * 54,999 81,667 65,334 -- -- -- *
Scot A. Kane 1,110,998 * 302,495 449,169 359,334 -- -- -- *
SDIRA FBO Alan E. Ennis (SEP/IRA) 454,499 * 123,748 183,751 147,000 -- -- -- *
SDIRA FBO David W. Komar ROL IRA 101,000 * 27,500 40,834 32,666 -- -- -- *
SDIRA FBO Davina Lockhart 505,000 * 137,498 204,168 163,334 -- -- -- *
John Green 359,211 * 54,999 81,667 65,334 157,211 -- -- *
SDIRA FBO John Green (Roth/IRA) 202,000 * 54,999 81,667 65,334 -- -- -- *
SDIRA FBO Robert Vaughan 303,000 * 82,499 122,501 98,000 -- -- -- *
SDIRA FBO Roger Lockhart 505,000 * 137,498 204,168 163,334 -- -- -- *
SDIRA FBO Rosa Maria Lukens 151,499 * 41,249 61,250 49,000 -- -- -- *
Steven J. Cooper 505,000 * 137,498 204,168 163,334 -- -- -- *
Thomas J. Franco 505,000 * 137,498 204,168 163,334 -- -- -- *
Thomas K. Beard 605,998 * 164,997 245,001 196,000 -- -- -- *
Tracy Standridge, Kay L. Standridge 202,000 * 54,999 81,667 65,334 -- -- -- *
Walter Kuharchik 1,009,998 * 274,995 408,335 326,668 -- -- -- *
William M. Levin 505,000 * 137,498 204,168 163,334 -- -- -- *
William Tonyes 101,000 * 27,500 40,834 32,666 -- -- -- *
W.M. Sherman 454,499 * 123,748 183,751 147,000 -- -- -- *
Jean Zurstrassen 202,000 * 54,999 81,667 65,334 -- -- -- *
Al Pokel 1,387,000 * 137,498 694,168 555,334 -- -- -- *
Alan Robbins 252,501 * 68,749 102,084 81,668 -- -- -- *
60
SHARES
BENEFICIALLY
SHARES BENEFICIALLY OWNED AFTER
OWNED PRIOR TO THE THE
OFFERING SHARES OF COMMON STOCK BEING SOLD IN THE OFFERING OFFERING(1)
------------------ ---------------------------------------------------------- -----------
UPON
CONVERSION
UPON OF SERIES B
CONVERSION UPON OR
OF SERIES C EXERCISE UPON SERIES D
PREFERRED OF SERIES C EXERCISE PREFERRED
NAME OF SELLING COMMON STOCK WARRANTS OF OTHER STOCK
STOCKHOLDER NUMBER (2) $ STOCK (2)(3) (2)(3) WARRANTS (2)(3) NUMBER %
----------------------------------- ---------- ---- ------- --------- --------- -------- ------ ------ ---
Alan Cohen 404,000 * 109,998 163,334 130,668 -- -- -- *
Allen Weiss 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Andrew J. Dauro 505,000 * 137,498 204,168 163,334 -- -- -- *
Ashraf Abdelaal 505,000 * 137,498 204,168 163,334 -- -- -- *
Bedding Discounts 252,501 * 68,749 102,084 81,668 -- -- -- *
Brian Judge & Diana Garehitorena 505,000 * 137,498 204,168 163,334 -- -- -- *
Dan Foley 567,000 * -- 315,000 252,000 -- -- -- *
Byron Rosenstein 505,000 * 137,498 204,168 163,334 -- -- -- *
Daryl Demsko 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Helen Jones Marital Trust 1,009,998 * 274,995 408,335 326,668 -- -- -- *
James K. Lehman 707,000 * 192,497 285,835 228,668 -- -- -- *
Jerdan Enterprises 7,069,986 3.25% 1,924,965 2,858,345 2,286,676 -- -- -- *
John C. Buser 505,000 * 137,498 204,168 163,334 -- -- -- *
Joseph R. McCandless 1,514,998 * 412,493 612,503 490,002 -- -- -- *
L. Berrick 252,501 * 68,749 102,084 81,668 -- -- -- *
Mario Cassara & Iris Cassara 505,000 * 137,498 204,168 163,334 -- -- -- *
Gary Miller 252,501 * 68,749 102,084 81,668 -- -- -- *
Michael P. Rucker 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Michel Pokel 2,300,500 1.07% 137,498 1,201,668 961,334 -- -- -- *
Norbert Olinger 505,000 * 137,498 204,168 163,334 -- -- -- *
North Metropolitan Radiology Assoc,
LLP 401K Profit Sharing Plan FBO:
Stuart Jacobson 505,000 * 137,498 204,168 163,334 -- -- -- *
Oscar Garza 505,000 * 137,498 204,168 163,334 -- -- -- *
Paul Russo III 505,000 * 137,498 204,168 163,334 -- -- -- *
Philip R. Clark 1,009,998 * 274,995 408,335 326,668 -- -- -- *
RA Schafer 505,000 * 137,498 204,168 163,334 -- -- -- *
Randy Tuggle 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Robert B. Kinney 505,000 * 137,498 204,168 163,334 -- -- -- *
Ronald L. Nilsen 252,501 * 68,749 102,084 81,668 -- -- -- *
Stuart Jacobson 2,524,996 1.18% 687,488 1,020,838 816,670 -- -- -- *
The Julius H. Roma Revocable Trust 505,000 * 137,498 204,168 163,334 -- -- -- *
Thomas Contino 1,009,998 * 274,995 408,335 326,668 -- -- -- *
William King 252,501 * 68,749 102,084 81,668 -- -- -- *
Wolfe LP 252,501 * 68,749 102,084 81,668 -- -- -- *
Arnold E. Ditri 2,019,996 * 549,990 816,670 653,336 -- -- -- *
Charles Bradley 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Corsair Capital Partners LP 11,614,978 5.25% 3,162,443 4,695,853 3,756,682 -- -- -- *
Corsair Long Short International LTD 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Don Zoltan 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Justin Yue Tang 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Leviticus Partners LP 3,635,992 1.69% 989,982 1,470,006 1,176,004 -- -- -- *
Neptune Partners LP 4,544,992 2.10% 1,237,478 1,837,508 1,470,006 -- -- -- *
Wardenclyffe Micro Cap Fund 2,019,996 * 549,990 816,670 653,336 -- -- -- *
Allan Rothstein 2,019,996 * 549,990 816,670 653,336 -- -- -- *
Capela Overseas LTD 2,019,996 * 549,990 816,670 653,336 -- -- -- *
Richard L. Taney 505,000 * 137,498 204,168 163,334 -- -- -- *
Strategic Partners Ltd. 1,009,695 * 274,913 408,212 326,570 -- -- -- *
Doug Levine 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Alan Sheinwald 505,000 * 137,498 204,168 163,334 -- -- -- *
Alpha Capital 10,099,980 4.59% 2,749,950 4,083,350 3,266,680 -- -- -- *
Bristol Investment Fund 13,699,980 6.13% 2,749,950 6,083,350 4,866,680 -- -- -- *
Bullbear Capital Partners LLC 2,019,996 * 549,990 816,670 653,336 -- -- -- *
Charles Pradilla 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Crestview Capital Fund II LP 9,980,986 4.52% 1,979,964 4,445,012 3,556,010 -- -- -- *
David & Marilyn Balk JT WR05 1,009,998 * 274,995 408,335 326,668 -- -- -- *
David Wiener Revocable Trust-- 96 807,998 * 219,996 326,668 261,334 -- -- -- *
David Wilstein and Susan Wilstein,
Trustees of the Century Trust dated
12/19/94 1,009,998 * 274,995 408,335 326,668 -- -- -- *
61
SHARES
BENEFICIALLY
SHARES BENEFICIALLY OWNED AFTER
OWNED PRIOR TO THE THE
OFFERING SHARES OF COMMON STOCK BEING SOLD IN THE OFFERING OFFERING(1)
------------------ ---------------------------------------------------------- -----------
UPON
CONVERSION
UPON OF SERIES B
CONVERSION UPON OR
OF SERIES C EXERCISE UPON SERIES D
PREFERRED OF SERIES C EXERCISE PREFERRED
NAME OF SELLING COMMON STOCK WARRANTS OF OTHER STOCK
STOCKHOLDER NUMBER (2) $ STOCK (2)(3) (2)(3) WARRANTS (2)(3) NUMBER %
----------------------------------- ---------- ---- ------- --------- --------- -------- ------ ------ ---
Global eMedicine, Inc., MPPP 2,019,996 * 549,990 816,670 653,336 -- -- -- *
Elaine Dines 605,998 * 164,997 245,001 196,000 -- -- -- *
Ellis International 3,029,994 1.41% 824,985 1,225,005 980,004 -- -- -- *
Eric T. Singer 1,686,398 * 315,557 468,564 374,852 527,425 -- -- *
F. Berdon Defined Benefit Plan 1,211,998 * 329,994 490,002 392,002 -- -- -- *
Gamma Opportunity Capital Partners, LP 2,809,998 1.31% 274,995 1,408,335 1,126,668 -- -- -- *
Gene Salkind 505,000 * 137,498 204,168 163,334 -- -- -- *
George Roberts 2,284,002 1.06% 335,099 408,335 326,668 -- -- -- *
Crescent International 6,059,988 2.79% 1,649,970 2,450,010 1,960,008 -- -- -- *
Greenwich Growth Fund LTD 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Gregg Sedun 504,696 * 137,415 204,045 163,236 -- -- -- *
Jack Gilbert 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Jared Shaw 505,000 * 137,498 204,168 163,334 -- -- -- *
Jeff Hermanson 505,000 * 137,498 204,168 163,334 -- -- -- *
Jeffrey Schnipper 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Jules Nordlicht 5,049,990 2.33% 1,374,975 2,041,675 1,633,340 -- -- -- *
M and M Capital, LLC 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Mark Capital LLC 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Mark Collins 468,639 * 127,598 189,467 151,574 -- -- -- *
Michael J. Weiss 505,000 * 137,498 204,168 163,334 -- -- -- *
Michael Kooper 505,000 * 137,498 204,168 163,334 -- -- -- *
Michael Liss 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Michael Loew 605,998 * 164,997 245,001 196,000 -- -- -- *
Northbar Capital Inc. 505,000 * 137,498 204,168 163,334 -- -- -- *
Platinum Partners Arbitrage Fund LP 8,079,984 3.70% 2,199,960 3,266,680 2,613,344 -- -- -- *
Platinum Partners Global Macro Fund LP 2,019,996 * 549,990 816,670 653,336 -- -- -- *
RHP Master Fund LTD 3,819,996 1.77% 549,990 1,816,670 1,453,336 -- -- -- *
Richard Melnick 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Richard Weiner 505,000 * 137,498 204,168 163,334 -- -- -- *
Robert and Sandra Neborsky 1,070,598 * 291,495 432,835 346,268 -- -- -- *
Robert Melnick 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Robert W. Duggan 3,332,994 1.55% 907,484 1,347,506 1,078,004 -- -- -- *
Ronald Shear 1,060,499 * 288,745 428,752 343,002 -- -- -- *
Samuel Smookler & Miriam Smookler 3,609,998 1.67% 274,995 408,335 326,668 2,600,000 -- -- *
Scott C. Paston 505,000 * 137,498 204,168 163,334 -- -- -- *
SF Capital Partners 15,149,970 6.77% 4,124,925 6,125,025 4,900,020 -- -- -- *
Stonestreet LP 5,049,990 2.33% 1,374,975 2,041,675 1,633,340 -- -- -- *
Vitel Ventures Corporation 4,039,992 1.87% 1,099,980 1,633,340 1,306,672 -- -- -- *
WEC Partners LLC 1,009,998 * 274,995 408,335 326,668 -- -- -- *
West End Convertible Fund LP 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Craig Roos 1,009,998 * 274,995 408,335 326,668 -- -- -- *
Fred Fromm 440,261 * 109,861 163,130 130,504 -- -- -- *
Margaret Josling (7) 380,232 * 109,998 163,334 65,334 -- -- -- *
TKB Ventures Ltd. (7) 380,232 * 109,998 163,334 65,334 -- -- -- *
Bridges & Pipes LLC 2,019,996 * 549,990 816,670 653,336 -- -- -- *
Richard & Beverly Mehrlich 2,019,996 * 549,990 816,670 653,336 -- -- -- *
Burnham Hill Holdings, LLC 15,607,520 7.01% 5,783,220 -- -- 9,824,300 -- -- *
Riaz Don 523,446 * 523,446 -- -- -- -- -- *
North Sound Legacy
Fund LLC (4)(5)(6) 21,265,100 9.99% 850,604 1,864,400 1,491,520 351,500 458,417 -- *
North Sound Legacy Institutional
Fund LLC (4)(5)(6) 21,265,100 9.99% 7,655,436 17,219,700 13,775,760 3,370,800 4,125,750 -- *
North Sound Legacy International
Ltd. (4)(5)(6) 21,265,100 9.99% 12,759,060 21,725,900 17,380,720 3,477,600 6,876,250 -- *
SDS Merchant Fund LP 19,420,000 8.37% -- 9,900,000 7,920,000 1,600,000 -- -- *
Cagan McAfee Capital Partners 15,599,996 7.08% 8,000,000 -- 3,999,996 3,600,000 -- -- *
Bryan Family Partnership LLP II 3,483,676 1.62% 1,000,000 1,379,818 1,103,858 -- -- -- *
62
SHARES
BENEFICIALLY
SHARES BENEFICIALLY OWNED AFTER
OWNED PRIOR TO THE THE
OFFERING SHARES OF COMMON STOCK BEING SOLD IN THE OFFERING OFFERING(1)
------------------ ---------------------------------------------------------- -----------
UPON
CONVERSION
UPON OF SERIES B
CONVERSION UPON OR
OF SERIES C EXERCISE UPON SERIES D
PREFERRED OF SERIES C EXERCISE PREFERRED
NAME OF SELLING COMMON STOCK WARRANTS OF OTHER STOCK
STOCKHOLDER NUMBER (2) $ STOCK (2)(3) (2)(3) WARRANTS (2)(3) NUMBER %
----------------------------------- ---------- ---- ------- --------- --------- -------- ------ ------ ---
HeliOss Communications, Inc. 2,400,000 1.13% 2,400,000 -- -- -- -- -- *
Liviakis Financial Communications 1,500,000 * 1,500,000 -- -- -- -- -- *
Woodmont Investments Limited 500,019 * 500,019 -- -- -- -- -- *
Newberg Family Trust 500,019 * 500,019 -- -- -- -- -- *
UMAI 1,363,636 * 1,363,636 -- -- -- -- -- *
Matthew Balk 764,144 * -- -- -- 764,144 -- -- *
Elliott Smith 50,000 * -- -- -- 50,000 -- -- *
Karl Brenza 50,000 * -- -- -- 50,000 -- -- *
Jeffrey Meshel 50,000 * -- -- -- 50,000 -- -- *
Michael Rapp 400,000 * -- -- -- 400,000 -- -- *
Phil Wagenheim 200,000 * -- -- -- 200,000 -- -- *
Broadband Capital Management 389,928 * -- -- -- 389,928 -- -- *
Hudson Valley Capital Management 868,578 * -- -- -- 868,578 -- -- *
Chris Shufeldt 45,564 * -- -- -- 45,564 -- -- *
Kimball & Cross Investment
Management Corp. 110,575 * -- -- -- 110,575 -- -- *
Sean Callahan 262,500 * -- -- -- 262,500 -- -- *
Mark Ford 289,315 * -- -- -- 289,315 -- -- *
Daniel Pietrof 25,000 * -- -- -- 25,000 -- -- *
Claude Ware 188,650 * -- -- -- 188,650 -- -- *
Thomas Corona 12,000 * -- -- -- 12,000 -- -- *
Roger Lockhart 25,000 * -- -- -- 25,000 -- -- *
Brad Reifler 607,108 * -- -- -- 607,108 -- -- *
Hilary Bergman 607,108 * -- -- -- 607,108 -- -- *
Gene Super 10,208 * -- -- -- 10,208 -- -- *
Silicon Valley Bank 300,000 * -- -- -- 300,000 -- -- *
Castle Creek Technology Partners LLC 9,040,500 4.08% -- 5,022,500 4,018,000 -- -- -- *
First Mirage, Inc. 1,795,500 * -- 997,500 798,000 -- -- -- *
Portside Growth and Opportunity Fund 1,800,000 * -- 1,000,000 800,000 -- -- -- *
Whalehaven Fund Ltd. 2,205,000 1.03% -- 1,225,000 980,000 -- -- -- *
John Jay Gebhardt 315,000 * -- 175,000 140,000 -- -- -- *
Judith Ellen Olinger Rev. Trust 441,000 * -- 245,000 196,000 -- -- -- *
Spectra Capital Management LLC 1,800,000 * -- 1,000,000 800,000 -- -- -- *
Robert Klein and Myriam Gluck 441,000 * -- 245,000 196,000 -- -- -- *
Rodd Friedman 630,000 * -- 350,000 280,000 -- -- -- *
Thomas A.Counts 441,000 * -- 245,000 196,000 -- -- -- *
Carlos Belfiore 350,000 * -- -- -- 350,000 -- -- *
SPEEDCOM Wireless Corporation 63,500,000 29.86% 63,500,000 -- -- -- -- -- *
63
* Less than 1%.
(1) Assumes that all shares being offered by each selling stockholder under this
prospectus are sold and that each selling stockholder acquires no additional
shares of common stock before the completion of this offering.
(2) The holders of the Series B Convertible Preferred Stock are subject to a
conversion blocker that caps the number of shares eligible for conversion so
that the holder will not beneficially own more than 9.999% of the outstanding
common stock. The holders of the Series C Convertible Preferred Stock and Series
D Convertible Preferred Stock are subject to the same conversion blocker upon
the conversion of their shares. The table reflects the blocker for the Series B
holders as they have converted into shares of common stock.
(3) Under an agreement between P-Com and the holders of the Series C Convertible
Preferred Stock, Series D Convertible Preferred Stock and P-Com's Series C
Warrants, P-Com is required to register the resale of a number of shares equal
to 125% of the shares of common stock initially issuable upon conversion or
exercise of these securities. This results in the following additional shares
being registered for resale by the selling stockholders, which are not reflected
in the table above:
Series C Convertible Preferred Stock 41,251,406
Series C Warrants 28,858,531
-----------
Total Additional Shares Being Registered 70,109,937
===========
(4) Convertible securities include shares of Series B Convertible Preferred
Stock and Series D Convertible Preferred Stock of the Company.
(5) For purposes of determining beneficial ownership in accordance with Rule
13d-3 of the Securities Exchange Act of 1934, as amended, this total includes
shares beneficially owned by North Sound Legacy Fund LLC, North Sound Legacy
Institutional Fund LLC and North Sound Legacy International Ltd.
(6) Each of these selling stockholders holds Series A Warrants and Series B
Warrants, which are subject to a limitation on conversion that prevents the
selling stockholder from exercising these warrants for shares of P Com common
stock if the exercise would cause any the selling stockholder or any of its
affiliates, individually or in the aggregate, to beneficially own more than
4.999% of P-Com's outstanding common stock.
(7) For purposes of determining beneficial ownership in accordance with Rule
13d-3 of the Securities Exchange Act of 1934, as amended, this total includes
shares beneficially owned by Margaret Josling and TKB Ventures.
PLAN OF DISTRIBUTION
P-Com is registering, on behalf of the selling stockholders, 177,055,243 shares
of outstanding common stock held by the selling stockholders, 231,047,848 shares
of common stock issuable upon conversion of its Series B Convertible Preferred
Stock, Series C Convertible Preferred Stock and Series D Convertible Preferred
Stock and 200,429,267 shares of common stock issuable upon exercise of
outstanding warrants held by the selling stockholders. P-Com issued these
securities to the selling stockholders in private placement transactions. The
selling stockholders named in the table above or their pledgees, donees,
transferees or other successors-in-interest who
64
receive convertible securities from the selling stockholders as a gift,
partnership distribution or other non-sale related transfer after the date of
this prospectus may sell the shares of common stock listed in the table above
from time to time. Each selling stockholder will act independently in making
decisions regarding the timing, manner and size of each sale. The sales may be
made on the OTC Bulletin Board, in the over-the-counter market, through put or
call option transactions relating to the shares, in negotiated transactions, or
a combination of such methods of sale or otherwise, at prices and on terms then
prevailing or at prices related to the then current market price. The selling
stockholders may effect these transactions by selling the shares of common stock
to or through broker-dealers, or not. The shares of common stock may be sold
through one or more of, or a combination of, the following:
o a block trade in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by such broker-dealer for
its account under this prospectus;
o "at the market" to or through market makers into an existing market for the
shares;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o through transactions in options, swaps or other derivative securities (whether
exchange-listed or otherwise);
o ordinary brokerage transactions and transactions in which the broker solicits
purchasers;
o in privately negotiated transactions; and
o any other method permitted by applicable law.
In addition, one of the selling stockholders, SPEEDCOM Wireless Corporation, has
advised P-Com that it may transfer its shares of P-Com common stock to one or
more of its creditors in satisfaction of amounts owed to those creditors and it
may also distribute its shares of P-Com common stock to its stockholders as a
dividend.
To the extent required, this prospectus may be amended or supplemented from time
to time to describe a specific plan of distribution. In effecting sales,
broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate in the resales.
The selling stockholders may enter into hedging transactions with broker-dealers
in connection with distributions of the shares. In these transactions,
broker-dealers may engage in short sales of the shares in the course of hedging
the positions they assume with the selling stockholders. The selling
stockholders may also sell shares short and redeliver the shares to close out
those short positions. The selling stockholders may enter into options or other
transactions with broker-dealers that require the delivery to the broker-dealer
of the shares. The broker-dealer may then resell or otherwise transfer the
shares covered by this prospectus. The selling stockholders also may loan or
pledge the shares to a broker-dealer. The broker-dealer may sell the shares so
loaned, or upon default the broker-dealer may sell the pledged shares under this
prospectus.
Broker-dealers or agents may receive compensation in the form of commissions,
discounts or concessions from the selling stockholders. Broker-dealers or agents
may also receive compensation from the purchasers of the shares for whom they
act as agents or to whom they sell as principals, or both. Compensation as to a
particular broker-dealer might be in excess of customary commissions and will be
in amounts to be negotiated in connection with the sale. Broker-dealers or
agents and any other participating broker-dealers or the selling stockholders
may be deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act of 1933, as amended (the "Securities Act"), in connection with
sales of the shares. Accordingly, any such commission, discount or concession
received by them and any profit on the resale of the notes or shares purchased
by them may be deemed to be underwriting discounts or commissions under the
Securities Act. Because the selling stockholders may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, the
selling stockholders will be subject to the prospectus delivery requirements of
the Securities Act. In addition, any shares covered by this prospectus which
qualify for sale in compliance with Rule 144 promulgated under the Securities
Act may be sold under Rule 144 rather than under this prospectus. The selling
stockholders have advised P-Com that they have not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of their
65
shares, and that there is no underwriter or coordinating broker acting in
connection with the proposed sale of the shares by the selling stockholders.
The shares will be sold only through registered or licensed brokers or dealers
if required under applicable state securities laws. In addition, in certain
states the shares may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
Under applicable rules and regulations under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), any person engaged in the distribution of
the shares may not simultaneously engage in market making activities with
respect to P-Com common stock for a restricted period before the commencement of
the distribution. In addition, the selling stockholders will be subject to
applicable provisions of the Exchange Act and the associated rules and
regulations under the Exchange Act, including Regulation M, provisions of which
may limit the timing of purchases and sales of the shares of P-Com common stock
by the selling stockholders.
P-Com will make copies of this prospectus available to the selling stockholders
and have informed the selling stockholders of the need to deliver copies of this
prospectus to purchasers at or before the time of any sale of the shares.
Upon being notified by a selling stockholder that a donee or pledgee or pledgee
who received convertible securities from a selling stockholder intends to sell
more than 500 shares of the common stock listed in the table above, P-Com will
file a supplement to this prospectus. P-Com will bear all costs, expenses and
fees in connection with the registration of the shares. The selling stockholders
will bear all commissions and discounts, if any, attributable to the sales of
the shares. The selling stockholders may agree to indemnify any broker-dealer or
agent that participates in transactions involving sales of the shares against
various liabilities, including liabilities arising under the Securities Act.
DESCRIPTION OF CAPITAL STOCK
This section describes the material terms of P-Com's capital stock and its
certificate of incorporation as currently in effect. This section also
summarizes relevant provisions of the Delaware General Corporation Law, which is
referred to as Delaware law.
AUTHORIZED CAPITAL STOCK
P-Com is currently authorized to issue a total of 702,000,000 shares of capital
stock consisting of:
o 700,000,000 shares of common stock, par value $0.0001 per share; and
o 2,000,000 shares of preferred stock, par value $0.0001 per share.
COMMON STOCK
Holders of P-Com common stock are entitled to one vote for each share held on
all matters submitted to a vote of the P-Com stockholders. Holders of P-Com
common stock are entitled to receive dividends, ratably, if any, as may be
declared by P-Com's board of directors out of legally available funds, subject
to any preferential dividend rights of any outstanding preferred stock. If P-Com
liquidates, dissolves or winds up, the holders of P-Com common stock are
entitled to share ratably in all assets remaining after satisfaction of
liabilities and the liquidation preference of any shares of preferred stock that
are outstanding at that time. Holders of common stock have no preemptive rights
and no right to convert their common stock onto any other securities. There are
no redemption or sinking fund provisions applicable to the P-Com common stock.
The rights, preferences and privileges of holders of P-Com common stock are
subject to, and may be adversely affected by, the rights of holders of shares of
any series of preferred stock which P-Com may designate and issue in the future
without further stockholder approval.
66
PREFERRED STOCK
The P-Com board of directors is authorized to issue from time to time, without
further stockholder approval, up to an aggregate of 2,000,000 shares of
preferred stock in one or more series and to fix or alter the designations,
preferences, rights and any qualifications, limitations or restrictions of the
shares of each series, including the dividend rights, dividend rates, conversion
rights, voting rights, term of redemption, including sinking fund provisions,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of any series. P-Com may issue P-Com
preferred stock in ways which may delay, defer or prevent a change in control of
P-Com without further action by P-Com stockholders and may adversely affect the
voting and other rights of the holders of P-Com common stock. The issuance of
P-Com preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of P-Com common stock, including the loss of voting
control to others.
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
P-Com has designated 500,000 shares of its preferred stock as Series A Junior
Participating Preferred Stock, which are issuable under certain circumstances
under P-Com's stockholder rights plan, which is described in more detail below.
No shares of Series A Junior Participating Preferred Stock are currently issued
or outstanding.
SERIES B CONVERTIBLE PREFERRED STOCK
P-Com has designated 1,000,000 shares of its preferred stock as Series B
Convertible Preferred Stock, of which approximately 108,406 shares were issued
and outstanding as of January 20, 2004. The holders of Series B Convertible
Preferred Stock are entitled to certain rights and preferences with respect to
the holders of P-Com common stock, including the following:
o Voting. Except as required by the Delaware law, the holders of Series B
Convertible Preferred Stock are not entitled to any voting rights.
o Conversion. The Series B Convertible Preferred Stock has a stated value of
$21.138 per share. Each share of Series B Convertible Preferred Stock is
convertible into a number of shares of common stock equal to the stated value
plus any accrued and unpaid dividends divided by an initial conversion price of
$0.20. This conversion price is subject to adjustment for any stock splits,
stock dividends or similar transactions. Pursuant to an agreement with P-Com,
the holders of Series B Convertible Preferred Stock are obligated to convert
their shares into shares of common stock as soon as reasonably practicable.
However, no holder of Series B Convertible Preferred Stock will be required to
convert its shares into shares of common stock if the conversion would cause the
holder or any of its affiliates, individually or in the aggregate, to
beneficially own more than 9.999% of P-Com's outstanding common stock.
o Dividends. Holders of Series B Convertible Preferred Stock are entitled to
receive dividends, if any, as may be declared by P-Com's board of directors out
of legally available funds. Holders of Series B Convertible Preferred Stock are
also entitled to share pro-rata, on an as-converted basis, in any dividends or
other distributions that may be declared by the board of directors with respect
to the common stock.
o Liquidation. If P-Com liquidates, dissolves or winds up, the holders of Series
B Convertible Preferred Stock are entitled to receive the stated value of their
shares plus all accrued and unpaid dividends prior to any amounts being paid to
the holders of P-Com common stock. In addition, the holders of Series B
Convertible Preferred Stock are entitled to share ratably together with the
holders of common stock in all remaining assets after the satisfaction of all
other liquidation preferences.
o Redemption. The holders of Series B Convertible Preferred Stock have the right
to require P-Com to purchase all of their shares of Series B Convertible
Preferred Stock upon the occurrence of certain events, such as the following:
67
o P-Com fails to remove any restrictive legend from certificates representing
shares of P-Com common stock that are issued to holders who convert their shares
of Series B Convertible Preferred Stock;
o P-Com makes an assignment for the benefit of creditors, or applies for or
consents to the appointment of a receiver or trustee;
o Any bankruptcy, insolvency, reorganization or other proceeding for the relief
of debtors is instituted by or against P-Com and is not dismissed within 60
days;
o P-Com sells substantially all of its assets, merges or consolidates with any
other entity or engages in a transaction that results in any person or entity
acquiring more than 50% of P-Com's outstanding common stock on a fully diluted
basis;
o P-Com fails to pay when due any payment with respect to any of its
indebtedness in excess of $250,000;
o P-Com breaches any agreement for monies owed or owing in an amount in excess
of $250,000 and the breach permits the other party to declare a default or
otherwise accelerate the amounts due under that agreement; and
o P-Com permits a default under any agreement to remain uncured and the default
would or is likely to have a material adverse effect on the business,
operations, properties or financial condition of P-Com.
SERIES C CONVERTIBLE PREFERRED STOCK
P-Com has designated 10,000 shares of its preferred stock as Series C
Convertible Preferred Stock, of which approximately,9,429 shares were issued and
outstanding as of January 20, 2004. The holders of Series C Convertible
Preferred Stock are entitled to certain rights and preferences with respect to
the holders of P-Com common stock, including the following:
o Voting. The holders of Series C Convertible Preferred Stock are entitled to
vote together with the holders of P-Com common stock, as a single class, on all
matters submitted to a vote of P-Com's stockholders. The holders of Series C
Convertible Preferred Stock are entitled to a number of votes equal to the
number of shares of P-Com common stock that would be issued upon conversion of
their shares of Series C Convertible Preferred Stock.
o Conversion. The Series C Convertible Preferred Stock has a stated value of
$1,750 per share. Each share of Series C Convertible Preferred Stock is
convertible into a number of shares of common stock equal to the stated value,
plus any accrued and unpaid dividends, divided by an initial conversion price of
$0.10. This conversion price is subject to adjustment for any stock splits,
stock dividends or similar transactions. The conversion price is also subject to
adjustment in the event that P-Com makes a dilutive issuance of common stock or
other securities that are convertible into or exercisable for common stock at an
effective per share purchase price that is less than the conversion price of the
Series C Convertible Preferred Stock that is in effect at the time of the
dilutive issuance. The holders of Series C Convertible Preferred Stock may
convert their shares into shares of common stock at any time. However, no holder
of Series C Convertible Preferred Stock may convert its shares into shares of
common stock if the conversion would cause the holder or any of its affiliates,
individually or in the aggregate, to beneficially own more than 9.999% of
P-Com's outstanding common stock.
o Dividends. Holders of Series C Convertible Preferred Stock are entitled to
receive, out of legally available funds, dividends at the rate of 6% per annum
beginning on the first anniversary of their date of issuance and 8% per annum
beginning on the second anniversary of their date of issuance. Dividends are
payable semi-annually, either in cash or shares of P-Com common stock.
68
o Liquidation. If P-Com liquidates, dissolves or winds up, the holders of Series
C Convertible Preferred Stock are entitled to receive the stated value of their
shares plus all accrued and unpaid dividends prior to any amounts being paid to
the holders of Series B Convertible Preferred Stock and P-Com common stock. In
addition, the holders of Series C Convertible Preferred Stock are entitled to
share ratably together with the holders of Series B Convertible Preferred Stock
and P-Com common stock in all remaining assets after the satisfaction of all
other liquidation preferences.
o Redemption. The holders of Series C Convertible Preferred Stock have the right
to require P-Com to purchase all of their shares of Series C Convertible
Preferred Stock upon the occurrence of certain events, such as the following:
o P-Com fails to remove any restrictive legend from certificates representing
shares of P-Com common stock that are issued to holders who convert their shares
of Series C Convertible Preferred Stock;
o P-Com makes an assignment for the benefit of creditors, or applies for or
consents to the appointment of a receiver or trustee;
o Any bankruptcy, insolvency, reorganization or other proceeding for the relief
of debtors is instituted by or against P-Com and is not dismissed within 60
days;
o P-Com sells substantially all of its assets, merges or consolidates with any
other entity or engages in a transaction that results in any person or entity
acquiring more than 50% of P-Com's outstanding common stock on a fully diluted
basis;
o P-Com fails to pay when due any payment with respect to any of its
indebtedness in excess of $250,000;
o P-Com breaches any agreement for monies owed or owing in an amount in excess
of $250,000 and the breach permits the other party to declare a default or
otherwise accelerate the amounts due under that agreement; and
o P-Com permits a default under any agreement to remain uncured and the default
would or is likely to have a material adverse effect on the business,
operations, properties or financial condition of P-Com.
SERIES D CONVERTIBLE PREFERRED STOCK
P-Com has designated 2,000 shares of its preferred stock as Series D Convertible
Preferred Stock, of which 2,000 shares were issued and outstanding as of January
20, 2004. The holders of Series D Convertible Preferred Stock are entitled to
certain rights and preferences with respect to the holders of P-Com common
stock, including the following:
o Voting. The holders of Series D Convertible Preferred Stock are entitled to
vote together with the holders of P-Com common stock and holders of Series C
Convertible Preferred Stock, as a single class, on all matters submitted to a
vote of P-Com's stockholders. The holders of Series D Convertible Preferred
Stock are entitled to a number of votes equal to the number of shares of P-Com
common stock that would be issued upon conversion of their shares of Series D
Convertible Preferred Stock.
o Conversion. The Series D Convertible Preferred Stock has a stated value of
$1,000 per share. Each share of Series D Convertible Preferred Stock is
convertible into a number of shares of common stock equal to the stated value
divided by an initial conversion price of $0.15. This conversion price is
subject to adjustment for any stock splits, stock dividends or similar
transactions. The holders of Series D Convertible Preferred Stock may convert
their shares into shares of common stock at any time. However, no holder of
Series D Convertible Preferred Stock may convert its shares into shares of
69
common stock if the conversion would cause the holder or any of its affiliates,
individually or in the aggregate, to beneficially own more than 9.999% of
P-Com's outstanding common stock.
o Dividends. Holders of Series D Convertible Preferred Stock are entitled to
share pro-rata, on an as-converted basis, in any dividends or other
distributions that may be declared by the board of directors with respect to the
common stock.
o Liquidation. If P-Com liquidates, dissolves or winds up, the holders of Series
D Convertible Preferred Stock and the holders of Series C Convertible Preferred
Stock are entitled to receive the stated value of their respective shares plus
all accrued and unpaid dividends, pari passu, and prior to any amounts being
paid to the holders of Series B Convertible Preferred Stock and P-Com common
stock. In addition, the holders of Series D Convertible Preferred Stock are
entitled to share ratably together with the holders of Series C Convertible
Preferred Stock, Series B Convertible Preferred Stock and P-Com common stock in
all remaining assets after the satisfaction of all other liquidation
preferences.
o Redemption. The holders of Series D Convertible Preferred Stock have the right
to require P-Com to purchase all of their shares of Series D Convertible
Preferred Stock upon the occurrence of certain events, such as the following:
o P-Com fails to remove any restrictive legend from certificates representing
shares of P-Com common stock that are issued to holders who convert their shares
of Series D Convertible Preferred Stock;
o P-Com makes an assignment for the benefit of creditors, or applies for or
consents to the appointment of a receiver or trustee;
o Any bankruptcy, insolvency, reorganization or other proceeding for the relief
of debtors is instituted by or against P-Com and is not dismissed within 60
days;
o P-Com sells substantially all of its assets, merges or consolidates with any
other entity or engages in a transaction that results in any person or entity
acquiring more than 50% of P-Com's outstanding common stock on a fully diluted
basis;
o P-Com fails to pay when due any payment with respect to any of its
indebtedness in excess of $250,000;
o P-Com breaches any agreement for monies owed or owing in an amount in excess
of $250,000 and the breach permits the other party to declare a default or
otherwise accelerate the amounts due under that agreement; and
o P-Com permits a default under any agreement to remain uncured and the default
would or is likely to have a material adverse effect on the business,
operations, properties or financial condition of P-Com.
P-COM STOCKHOLDER RIGHTS PLAN
P-Com currently has in effect a stockholder rights plan, which is governed by
the terms and conditions contained in the Amended and Restated Rights Agreement,
dated as of January 24, 2001, between P-Com and Fleet National Bank, as rights
agent. In the event that P-Com is acquired in a asset purchase or other business
combination transaction or 50% or more of its consolidated assets or earning
power are sold, each holder of P-Com common stock will have the right to receive
that number of shares of common stock of the acquiring company which at the time
of such transaction will have a market value of two times the exercise price of
the right. In the event that any person becomes the beneficial owner of 15% or
more of the outstanding shares of P-Com's common stock proper provision shall be
made so that each holder of P-Com common stock, other than the acquiring person,
70
will thereafter have the right to receive that number of shares of common stock
or preferred stock (or cash, other securities or property) of P-Com having a
market value of two times the exercise price of the right.
The rights plan has certain anti-takeover effects. The rights plan will cause
substantial dilution to a person or group that attempts to acquire P-Com on
terms not approved by P-Com's board of directors. The rights plan should not
interfere with any asset purchase or other business combination approved by the
board of directors because the rights granted to each holder of common stock may
be redeemed by P-Com prior to such asset purchase or other business combination.
Anti-Takeover Effects of Provisions of Delaware Law and P-Com's Certificate of
Incorporation and Bylaws
Provisions of Delaware law and P-Com's organizational documents could make the
acquisition of P-Com and the removal of incumbent officers and directors more
difficult. These provisions are expected to discourage some coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of P-Com to negotiate with it first. P-Com believes that the
benefits of increased protection of its potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure
P-Com outweigh the disadvantages of discouraging such proposals because, among
other things, that negotiation could result in an improvement of their terms.
P-Com is subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, this statute prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date that the person became
an interested stockholder unless (with certain exceptions) the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes an asset purchase, asset or stock sale, or other
transaction resulting in a financial benefit to the stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
P-Com's certificate of incorporation also provides that P-Com's board of
directors shall be classified into three classes of directors, with the term of
office of each class expiring in successive years. In any given year, only those
directors of a particular class will have their terms of office expire,
preventing the replacement or removal of a majority of the board in any single
election. Furthermore, under Delaware law, directors of a corporation with a
classified board may be removed only for cause unless the corporation's
certificate of incorporation provides otherwise. P-Com's certificate of
incorporation does not provide otherwise.
These provisions may have the effect of delaying, deferring or preventing a
change in control of P-Com without further action by its stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for P-Com's common stock is EquiServe Trust
Company, N.A.
QUOTATION
P-Com common stock is quoted on the OTC Bulletin Board under the symbol "PCOM."
The par value of P-Com's common stock is $0.0001 per share. The holders of the
common stock shall be entitled to receive dividends, when and as declared by the
board of directors of P-Com. The common stock is not redeemable (except for
repurchases of common stock held by employees upon termination of employment).
VALIDITY OF THE SHARES
The validity of the common stock offered hereby will be passed upon for P-Com by
Sheppard, Mullin, Richter & Hampton LLP, Santa Barbara, California.
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EXPERTS
The consolidated financial statements of P-Com, Inc. as of December 31, 2001 and
2002, and for the three years ended December 31, 2002, have been included herein
in reliance upon the report (which includes an explanatory paragraph relating to
the Company's ability to continue as a going concern as described in Note 1 to
the financial statements), of PricewaterhouseCoopers, LLP, independent auditors,
given on the authority of said firm as experts in accounting and auditing.
The financial statements of SPEEDCOM Wireless Corporation as of December 31,
2002 and the year then ended have been included herein in reliance upon the
report of Aidman, Piser & Company, P.A. independent certified public
accountants, appearing elsewhere herein, upon the authority of said firm as
experts in accounting and auditing.
CHANGE IN INDEPENDENT ACCOUNTANTS
On August 7, 2003, PricewaterhouseCoopers, LLP,("PricewaterhouseCoopers"), were
dismissed as the independent auditors of P-Com. On August 7, 2003, the Audit
Committee of P-Com's board of directors approved Aidman Piser & Company ("Aidman
Piser") as P-Com's new independent auditors.
The reports of PricewaterhouseCoopers on the financial statements of P-Com for
the past two fiscal years contained no adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principle. However, the reports of PricewaterhouseCoopers contained an
explanatory paragraph indicating that there was a substantial doubt about
P-Com's ability to continue as a going concern.
In connection with the audits for the two most recent fiscal years in the period
ended December 31, 2002 and through August 7, 2003, there were no disagreements
between P-Com and PricewaterhouseCoopers, on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of
PricewaterhouseCoopers would have caused them to make reference thereto in their
report on the financial statements for such years.
WHERE YOU CAN FIND MORE INFORMATION
P-Com files reports, proxy statements and other information with the Securities
and Exchange Commission ("SEC"). Copies of these reports, proxy statements and
other information may be inspected and copied at the public reference facilities
maintained by the SEC at:
Judiciary Plaza
Room 1024
450 Fifth Street, N.W.
Washington, D.C. 20549
Copies of these materials can also be obtained by mail at prescribed rates from
the Public Reference Room of the SEC at the address set forth above or by
calling the SEC at l-800-SEC-0330. The SEC maintains a website that contains
reports, proxy statements and other information about issuers, including P-Com,
that file electronically with the SEC. The address of the SEC's website is
http://www.sec.gov.
Information on any P-Com website or the website of any subsidiary of P-Com is
not part of this prospectus and you should not consider information contained on
P-Com's website as part of this prospectus, unless that information is also
contained in this prospectus.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Page
----
Financial Statements and Schedule--P-Com, Inc:
Report of Independent Auditors........................................................................... F-2
Consolidated Balance Sheets at December 31, 2002, 2001 and 2000.......................................... F-3
Consolidated Statements of Operations for the years ended December 31, 2002, 2001, and 2000.............. F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Loss for the years ended December 31,
2002, 2001, and 2000................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000.............. F-7
Notes to Consolidated Financial Statements............................................................... F-8
Schedule II -Valuation and Qualifying Accounts........................................................... F-36
Condensed Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002.................... F-37
Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2003 and 2002............................................................................ F-38
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and
2002................................................................................................... F-39
Notes to Condensed Consolidated Financial Statements..................................................... F-41
Financial Statements and Schedule--Speedcom Wireless Corporation:
Report of Independent Auditors.......................................................................... F-54
Balance Sheets as of December 31, 2002 and September 30, 2003 (unaudited)............................... F-55
Statements of Operations for the Year Ended December 31, 2002 and the Nine Month Periods Ended
September 30, 2003 and 2002 (unaudited)................................................................ F-56
Statement of Stockholder' (Deficit) Equity for the Year Ended December 31, 2002......................... F-57
Statements of Cash Flows for the Year Ended December 31, 2002 and the Nine Month Periods Ended
September 30, 2003 and 2002 (unaudited)................................................................ F-58
Notes to Financial Statements........................................................................... F-60
Schedule II -Valuation and Qualifying Accounts.......................................................... F-74
All other schedules have been omitted because they are not required, are not
applicable, or the information is included in the consolidated financial
statements or notes thereto.
F-1
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF P-COM, INC.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of P-Com,
Inc. and its subsidiaries at December 31, 2002, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. P-Com
conducted its audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that P-Com
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. P-Com believes that its audits provide a reasonable
basis for its opinion.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has an accumulated deficit that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. These financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for goodwill effective January 1, 2002.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting associated with revenue recognition effective
January 1, 2000.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 31, 2003, except as to Notes 1c, 12b, 17d, 17e, 17f and 17g as to which
the date is September 3, 2003.
F-2
P-COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, December 31, December 31,
2002 2001 2000
--------- --------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 861 $ 2,525 $ 25,754
Restricted cash 415 2,911 --
Accounts receivable, net of allowance of $379, $1,080 and $3,810,
respectively 4,797 5,508 48,614
Inventory 12,433 30,392 60,320
Prepaid expenses and other assets 3,402 7,016 13,242
Assets of discontinued operations 2,923 9,775 21,868
--------- --------- ---------
Total current assets 24,831 58,127 169,798
Property and equipment, net 10,511 16,596 20,970
Goodwill and others assets 381 17,511 25,451
--------- --------- ---------
Total assets $ 35,723 $ 92,234 $ 216,219
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 8,144 $ 8,007 $ 30,073
Other accrued liabilities 6,774 21,238 33,199
Note payable -- -- 10,911
Loan payable to bank 2,604 -- --
Deferred contract obligations 8,000 8,000 8,000
Convertible subordinated notes -- 29,299 --
Liabilities of discontinued operations 1,085 754 8,683
--------- --------- ---------
Total current liabilities 26,607 67,298 90,866
Long-term liabilities:
Convertible subordinated notes 22,390 -- 29,299
Other long term liabilities 2,076 680 807
--------- --------- ---------
Total liabilities 51,073 67,978 120,972
--------- --------- ---------
Stockholders' equity (deficit):
Series A Preferred Stock -- -- --
Common Stock 16 8 8
Additional paid-in capital 333,740 319,994 316,515
Accumulated deficit (348,766) (294,460) (218,922)
Accumulated other comprehensive loss (340) (1,286) (2,354)
--------- --------- ---------
Total stockholders' equity (deficit) (15,350) 24,256 95,247
--------- --------- ---------
Total liabilities and stockholders' equity $ 35,723 $ 92,234 $ 216,219
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
December 31, December 31, December 31,
2002 2001 2000
-------- -------- ---------
Sales $ 29,686 $ 73,236 $ 183,606
Cost of sales 30,777 94,890 160,965
-------- -------- ---------
Gross profit (loss) (1,091) (21,654) 22,641
Operating expenses:
Research and development 12,745 19,800 20,241
Selling and marketing 6,621 7,637 11,371
General and administrative 10,750 26,070 18,181
Receivable valuation charges _ 8,034 19,550
Goodwill impairment 11,409 _ _
-------- -------- ---------
Total operating expenses 41,525 61,541 69,343
-------- -------- ---------
Loss from continuing operations (42,616) (83,195) (46,702)
Interest expense (2,457) (1,946) (4,629)
Gain on sale of subsidiary -- 9,814 --
Gain on retirement of convertible notes 1,393 -- 1,890
Other expense, net (1,312) (618) (3,736)
Loss from continuing operations before income taxes, loss from discontinued (44,992) (75,945) (53,177)
operations and cumulative effect of change in accounting principle
Provision (benefit) for income taxes (470) (618) 10,917
-------- -------- ---------
Loss from continuing operations before loss from discontinued operations and (44,522) (75,327) (64,094)
cumulative effect of change in accounting principle
Loss from discontinued operations (4,284) (211) (4,321)
-------- -------- ---------
Loss on discontinued operations before cumulative effect of change in (48,806) (75,538) (68,415)
accounting principle
Cumulative effect of change in accounting principle (5,500) -- (1,534)
Net loss $(54,306) $(75,538) $ (69,949)
======== ======== =========
Basic and diluted loss per share:
Loss from continuing operations (1.74) (4.55) (4.11)
Loss from discontinued operations (0.17) (0.01) (0.28)
Cumulative effect of change in accounting principle (0.22) -- (0.10)
-------- -------- ---------
Basic and diluted net loss per share applicable to common stockholders $ (2.13) $ (4.56) $ (4.48)
======== ======== =========
Shares used in basic and diluted per share computation 25,546 16,551 15,600
======== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
P-COM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE LOSS
(In thousands)
Accumulated
Other
Common Stock Additional Comprehensive Comprehensive
--------------- Paid-In Accumulated Income Income
Shares Amount Capital Deficit (Loss) (Loss) Total
------ ------ ---------- ----------- ------------ ------------- ------
Balance at December 31, 1999 13,480 7 238,721 (148,973) (540) -- 89,215
Issuance of Common Stock for cash,
net of issuance costs of $125 2,106 1 61,206 -- -- -- 61,207
Issuance of warrants for Common
Stock in conjunction with line of
credit borrowings -- -- 1,902 -- -- -- 1,902
Conversion of notes payable to
Common Stock 135 -- 4,382 -- -- -- 4,382
Issuance of Common Stock upon
exercise of warrant 32 -- 600 -- -- -- 600
Stock based compensation
expense from acceleration of
option vesting -- -- 372 -- -- -- 372
Issuance of Common Stock upon
exercise of stock options 295 -- 8,098 -- -- -- 8,098
Issuance of Common Stock under
employee stock purchase plan 78 -- 1,234 -- -- -- 1,234
Cumulative translation adjustment -- -- -- -- (1,814) (1,814) (1,814)
Net loss -- -- -- (69,949) (69,949) (69,949)
-------
Comprehensive income (loss) (71,763)
------ --- -------- --------- ------- ======= --------
Balance at December 31, 2000 16,126 8 316,515 (218,922) (2,354) 95,247
Issuance of Common Stock for cash 760 -- 3,000 -- -- -- 3,000
Stock-based compensation expense -- -- 29 -- -- -- 29
Issuance of Common Stock under
employee stock purchase plan 79 -- 450 -- -- -- 450
Cumulative translation adjustment -- -- -- -- 1,068 1,068 1,068
Net loss -- -- -- (75,538) (75,538) (75,538)
-------
Comprehensive income (loss) (74,470)
------ --- -------- --------- ------- ======= --------
Balance at December 31, 2001 16,965 8 319,994 (294,460) (1,286) 24,256
Issuance of Common Stock for cash,
net of issuance costs of $821 14,797 7 7,706 -- -- -- 7,713
Issuance of warrants for Common
Stock in conjunction with line of
credit borrowings -- -- 64 -- -- -- 64
Issuance of Common Stock as
part of vendor settlements 1,281 1 1,272 -- -- -- 1,273
Conversion of notes payable to
Common Stock 1,367 3 4,186 -- -- -- 4,189
Issuance of warrants for Common
Stock for services rendered -- -- 480 -- -- -- 480
Issuance of Common Stock under
employee stock purchase plan 27 -- 35 -- -- -- 35
Cumulative translation adjustment -- -- -- -- 946 946 946
Net loss -- -- -- (54,306) (54,306) (54,306)
-------
Comprehensive income (loss) (53,360)
------ --- -------- --------- ------- ======= --------
Balance at December 31, 2002 34,438 $19 $333,737 $(348,766) $ (340) $(15,350)
====== === ======== ========= ======= ========
F-5
P-COM, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
2002 2001 2000
-------- -------- --------
Cash flows from operating activities:
Net loss $(54,306) $(75,538) $(69,949)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain (Loss) on sale of subsidiary -- (9,814) (2,645)
Depreciation 6,602 8,845 10,313
Loss on disposal of property and equipment 153 1,367 5,251
Deferred income taxes -- -- 9,858
Amortization of stock warrants 546 159 1,745
Compensation expense related to stock options -- 29 372
Notes conversion expense 771 -- --
Gain on retirement of convertible notes (1,393) -- (1,890)
Cumulative effect of change in accounting principle 5,500 -- 1,534
Write-off of notes receivable 159 -- --
Loss on discontinued operations 4,284 211 4,321
Amortization of goodwill -- 2,411 4,147
Goodwill impairment 11,409 5,621 15,000
Write-down of long term investments -- 234 1,320
Inventory valuation and other charge 5,770 30,000 21,679
Accounts receivable valuation charge -- 11,837 --
Changes in assets and liabilities:
Accounts receivable, net of reserve 979 31,088 (16,495)
Inventory 12,664 5,567 (38,648)
Prepaid expenses and other assets 3,874 6,953 1,602
Accounts payable 440 (23,581) 7,904
Other accrued liabilities (11,963) (15,634) 8,624
-------- -------- --------
Net cash used in operating activities (14,511) (20,245) (35,957)
-------- -------- --------
Cash flows from investing activities:
Acquisition of property and equipment (596) (2,502) (8,037)
Cash paid on disposal of discontinued operations -- -- (2,000)
Proceeds from sale of property and equipment 251 -- 700
Proceeds from sale of subsidiary -- 12,088 6,860
Increase (decrease) in restricted cash 2,496 (2,911) --
Net assets (liabilities) of discontinued operation 2,900 (435) (3,716)
-------- -------- --------
Net cash provided by (used in) investing activities 5,051 6,240 (6,193)
-------- -------- --------
Cash flows from financing activities:
Payments of Notes (2,111) (10,992) (12,487)
Proceeds from issuance of common stock, net of expenses 7,713 3,000 61,206
Proceed from exercise of stock options and warrants -- -- 9,932
Proceeds from Employee Stock Purchase Plan 35 450 --
Proceeds from loan payable to bank 2,604 -- --
Proceeds from (issuance of) notes receivable -- 864 (250)
Payments under capital lease obligations (497) (2,568) (193)
-------- -------- --------
Net cash provided by (used in) financing activities 7,744 (9,246) 58,208
-------- -------- --------
Effect of exchange rate changes on cash 52 22 (970)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (1,664) (23,229) 15,088
Cash and cash equivalents at beginning of the year 2,525 25,754 10,666
-------- -------- --------
Cash and cash equivalents at end of the year $ 861 $ 2,525 $ 25,754
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-6
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. THE COMPANY
P-Com, Inc. ("P-Com") was incorporated in Delaware on August 23, 1991 to
engage in the design, manufacture and marketing of millimeter network access
wave radio systems for use in the worldwide wireless telecommunications market.
P-Com also provides network services including system and program planning and
management, path design, and installation for the wireless communication market
through its service sales segment.
b. REVERSE STOCK SPLIT
On June 27, 2002, P-Com implemented a 1 for 5 reverse stock split of its
common stock. Unless specifically noted otherwise, all references to share and
per share data for all periods presented have been adjusted to give effect to
this reverse split.
c. DISCONTINUED OPERATIONS
As disclosed in note 12, the financial statements for December 31, 2002,
2001 and 2000 have been reclassified to reflect P-Com's services business unit
as a discontinued operation.
d. LIQUIDITY
Through December 31, 2002, P-Com has incurred substantial losses and
negative cash flows from operations and, as of December 31, 2002, had an
accumulated deficit of $348.8 million. For the year ended December 31, 2002,
P-Com recorded a net loss of $54.3 million and used $14.5 million cash in
operating activities. At December 31, 2002, P-Com had approximately $0.9 million
in cash and cash equivalents, drawn from the bank line discussed below. The loan
payable to the bank was $2.9 million (inclusive of $0.3 million in respect of
the discontinued services business) on December 31, 2002. In June 2002, P-Com
sold approximately 11,464,000 shares of unregistered common stock at a per share
price of $0.70, for an aggregate net proceeds of approximately $7.3 million. In
December 2002, P-Com sold approximately 3,333,333 shares of unregistered common
stock at a per share price of $0.15, for an aggregate net proceeds of
approximately $0.4 million.
In order to conserve cash, P-Com has implemented cost cutting measures and
is actively seeking additional debt and equity financing. On November 1, 2002,
P-Com issued $22,390,000 aggregate face value of 7% Convertible Subordinated
Notes due November 1, 2005, in exchange for the same amount of 4.25% Convertible
Subordinated Notes which matured on November 1, 2002. The 7% Convertible
Subordinated Notes are convertible into P-Com's common stock at $2.10 per share,
subject to adjustment. If P-Com fails to generate sufficient revenues from new
and existing products sales, induce other creditors to forebear or convert to
equity, raise additional capital or obtain new debt financing, P-Com would have
insufficient capital to fund its operations. Without sufficient capital to fund
its operations, P-Com would no longer be able to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or to amounts and
classification of liabilities that may be necessary if P-Com is unable to
continue as a going concern.
F-7
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d. LIQUIDITY (Continued)
On September 20, 2002, P-Com entered into a credit facility agreement with
Silicon Valley Bank for up to $5 million in borrowings. As of December 31, 2002,
the loan amount payable to Silicon Valley bank was $2.9 million (inclusive of
$0.3 million in respect of the discontinued services business). However as of
December 31, 2002, P-Com was not in compliance with the revenue and minimum
tangible net worth covenants provided in the Silicon Valley Bank documents, and
has on March 4, 2003 received a limited waiver from Silicon Valley Bank for the
designated revenue default, and a limited forbearance from exercising its rights
and remedies arising from the tangible net worth default until the earlier of
(i) March 15, 2003, or (ii) the occurrence of an event of default. On March 24,
2003, P-Com received a waiver from Silicon Valley Bank of the non-compliance
with the minimum tangible net worth covenant as of December 31, 2002 and the
cross default arising from the non-compliance. P-Com also received from Silicon
Valley Bank in the same agreement a limited forbearance from exercising its
rights and remedies arising from P-Com's non-compliance with the tangible net
worth covenant as of January 31, 2003; until the earlier of (i) April 15, 2003,
or (ii) the occurrence of an event of default other than the January 2003
default. Under the terms of the forbearance, Silicon Valley Bank reserved its
right to immediately cease extending credit without further notice, and the
right, in its discretion, to have the outstanding debt obligations bear interest
at the default rate of interest, which includes an additional 4% penalty charge.
e. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT'S USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates, and such
differences could be material and affect the results of operations reported in
future periods.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of P-Com and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION
The functional currencies of our foreign subsidiaries are the local currencies.
Assets and liabilities of these subsidiaries are translated into United States
dollars at exchange rates in effect at the balance sheet date. Income and
expense items are translated at average exchange rates for the period.
Accumulated net translation adjustments are recorded as a component of
comprehensive income (loss) in stockholders' equity. Foreign exchange
transaction gains and losses are included in the results of operations in the
periods incurred, and were not material in all periods presented.
F-8
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS
P-Com measures its financial assets and liabilities in accordance with
accounting principles generally accepted in the United States. The estimated
fair value of its Convertible Subordinated Notes was approximately 30% of par or
$6.7 million at December 31, 2002 compared to 30% of par or $8.8 million at
December 31, 2001. The estimated fair value of cash, accounts receivable and
payable, bank loans and accrued liabilities at December 31, 2002 and 2001
approximated cost due to the short maturity of these assets and liabilities.
CASH AND CASH EQUIVALENTS
P-Com considers all highly liquid debt instruments with a maturity when acquired
of three months or less to be cash equivalents.
RESTRICTED CASH
As of December 31, 2001, P-Com had $2.9 million of restricted cash resulting
from an attachment in the third quarter of 2001 related to a dispute with a
vendor. The dispute has been fully resolved and the attachment dissolved in
February 2002, resulting in approximately $1.4 million being released to P-Com,
and $1.5 million paid to the vendor.
As of December 31, 2002, P-Com has approximately $0.4 million of restricted cash
that is designated as cash collateral for the credit facility agreement with
Silicon Valley Bank.
REVENUE RECOGNITION
Revenue from product sales is recognized upon transfer of title and risk of
loss, which is upon shipment of the product provided no significant obligations
remain and collection is probable. Provisions for estimated warranty repairs,
returns and other allowances are recorded at the time revenue is recognized.
Revenue from service sales is recognized ratably over the contractual period or
as the service is performed.
INVENTORY
Inventory is stated at the lower of cost or market, cost being determined on a
first-in, first-out basis. Inventory is reduced, if necessary, to its net
realizable value based on customer orders and demand forecasts using
management's best estimate given the information currently available.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and include tooling and test
equipment, computer equipment, furniture, land and buildings, and
construction-in-progress. Depreciation is computed using the straight-line
method based upon the useful lives of the assets ranging from three to seven
years, and in the case of building, 33 years. Leasehold improvements are
amortized using the straight-line method based upon the shorter of the estimated
useful lives or the lease term of the respective assets.
F-9
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Research and development costs are expensed as incurred. P-Com's software
products are integrated into its hardware products. Software development costs
incurred prior to the establishment of technological feasibility are expensed as
incurred. Software development costs incurred subsequent to the establishment of
technological feasibility and before general release to customers are
capitalized, if material.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of the
net assets of acquired companies accounted for as purchase business
combinations. P-Com adopted FAS 142 on January 1, 2002, and as a result, stopped
recording goodwill amortization. P-Com periodically analyzes the carrying value
of goodwill, and recorded $11.4 million of impairment charges in the fourth
quarter of 2002 and $5.5 million of transitional impairment charges in the first
quarter of the year ended December 31, 2002, representing the difference between
the fair value of expected cash flows from the services business unit, and its
book value.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that the long-lived assets
may be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the asset's carrying amount to determine if
a write-down is required.
COMPREHENSIVE INCOME (LOSS)
Under SFAS 130, Reporting Comprehensive Income, P-Com is required to display
comprehensive income and its components as part of our full set of financial
statements. The measurement and presentation of net income did not change.
Comprehensive income comprises net income and other comprehensive income. Other
comprehensive income includes certain changes in equity of P-Com that are
excluded from net income. Specifically, SFAS 130 requires unrealized gains and
losses on P-Com's foreign currency translation, that were reported separately in
stockholders' equity, to be included in, accumulated other comprehensive income.
Comprehensive income (loss) in 2002, 2001 and 2000 has been reflected in the
Consolidated Statement of Stockholders' Equity and Comprehensive Loss.
ACCOUNTING FOR STOCK-BASED COMPENSATION
P-Com accounts for stock-based employee compensation arrangements using the
intrinsic value method as prescribed in Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB No. 25") and Financial
Accounting Standards Board Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation ("FIN 44"). Accordingly, compensation
cost for stock options is measured as the excess, if any, of the fair value of
its stock at the date of grant over the stock option exercise price. P-Com
accounts for stock issued to non-employees in accordance with the provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123") and Emerging Issues Task Force Consensus No.
96-18, Accounting for Equity Instruments that
F-10
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ACCOUNTING FOR STOCK-BASED COMPENSATION (Continued)
are offered to other than employees for acquiring or in conjunction with selling
goods or services ("EITF 96-18"). Under SFAS No. 123 and EITF 96-18, stock
option awards issued to non-employees are accounted for at their fair value,
determined using the Black-Scholes option pricing method. The fair value of each
non-employee stock option or award is remeasured at each period end until a
commitment date is reached, which is generally the vesting date.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject P-Com to significant
concentrations of credit risk consist principally of cash equivalents and trade
accounts receivable. P-Com places its cash equivalents in a variety of financial
instruments such as market rate accounts and United States Government agency
debt securities. P-Com, by policy, limits the amount of credit exposure to any
one financial institution or commercial issuer.
To date, P-Com has sold most of its products in international markets. Sales to
several customers have been denominated in British pounds sterling and Euro and,
at December 31, 2002, 2001 and 2000, amounts due from these customers
represented 29%, 59% and 48%, respectively, of accounts receivable. Any gains
and/or losses incurred on the settlement of these receivables are included in
the financial statements as they occur.
P-Com performs on-going credit evaluations of its customers' financial condition
to determine the customer's credit worthiness. Sales are then generally made
either on 30 to 90 day payment terms, COD or letters of credit. P-Com extends
credit terms to international customers of up to 90 days, which is consistent
with prevailing business practices.
At December 31, 2002 and 2001, approximately 43% and 56%, respectively, of trade
accounts receivable represent amounts due from three customers, respectively.
For the year ended December 31, 2002, 2001 and 2000, two, two and three
customers accounted for 26%, 41%, and 62% of total sales respectively.
f. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Among other matters, SFAS 145 rescinded SFAS No. 4, Reporting Gains
and Losses from Extinguishment of Debt thereby eliminating the requirement that
gains and losses from the extinguishment of debt be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect. As a
result, the criteria in APB Opinion No. 30, Reporting Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions will
be used to classify those gains and losses. SFAS 145 is effective for P-Com
commencing January 1, 2003. The adoption of SFAS 145 will result in the
reclassification of extraordinary gains on retirement of notes to interest
expense.
F-11
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
f. RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a liability
be recorded in the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosures about the guarantees that an entity has
issued, including a reconciliation of changes in the entity's product warranty
liabilities. The initial recognition and initial measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. P-Com believes that
the adoption of this standard will have no material impact on its financial
statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also requires
that disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the
pro forma effect in interim financial statements. The transition and annual
disclosure requirements of SFAS No. 148 are effective for P-Com's financial
statements for the year ending December 31, 2003. The interim disclosure
requirements are effective for interim periods commencing January 1, 2003. P-Com
believes that the adoption of this standard will have no material impact on its
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period commencing July 1, 2003. P-Com believes that the
adoption of this standard will have no material impact on its financial
statements.
In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS 146 requires that a liability for costs
associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. SFAS 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption is not expected to have a material impact on P-Com's
financial position and results of operations.
F-12
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. CHANGE IN ACCOUNTING PRINCIPLE
GOODWILL
Effective January 1, 2002, P-Com adopted Statements of Financial Accounting
Standards Nos. 141 and 142 ("SFAS 141" and "SFAS 142"), Business Combinations
and Goodwill and Other Intangible Assets, respectively. Pursuant to the
impairment recognition provisions of SFAS 142, P-Com conducted an evaluation of
the impact of adopting SFAS 142. Accordingly, under the transitional provisions
of SFAS 142, a goodwill impairment loss of $5.5 million was recorded related to
P-Com's services segment during the first quarter of 2002, representing the
difference between the fair value of expected cash flows from the services
business unit, and its book value. The fair value of the services segment was
estimated using a discounted cash flows model over a four-year period from 2002
to 2005. A residual value was calculated assuming that the services business
unit will continue as a going concern beyond the discrete projected period. A
discount factor of 25% was used to compute the present value of expected future
cash flows. The residual of the goodwill balance amount of $11.4 million was
also assessed to be impaired in the fourth quarter of 2002, and a charge was
recorded for the same amount.
The following sets forth a reconciliation of net loss and loss per share
information for the year ended December 31, 2002, 2001 and 2000 as adjusted for
the non-amortization provisions of SFAS 142 (in thousands, except per share
amounts):
For the year ended December 31,
------------------------------------
2002 2001 2000
-------- -------- --------
Reported net loss .................... $(54,306) $(75,538) $(69,949)
Add back: Goodwill amortization .... -- 2,411 $ 4,147
-------- -------- --------
Adjusted net loss .................... (54,306) (73,127) (65,802)
-------- -------- --------
Basic and diluted loss per share
Reported net loss .................... $ (2.13) $ (4.56) $ (4.48)
Add back: Goodwill amortization .... -- 0.15 0.27
-------- -------- --------
Adjusted net loss .................... $ (2.13) $ (4.42) $ (4.22)
======== ======== ========
Weighted average number of shares .... 25,546 16,551 15,600
======== ======== ========
F-13
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. CHANGE IN ACCOUNTING PRINCIPLE (Continued)
Changes in the carrying amount of goodwill for the year ended December 31, 2002,
2001 and 2000 are as follows (in $000):
2002 2001 2000
-------- -------- --------
Balance at January 1, ............. $ 16,909 $ 24,941 $ 44,088
Goodwill amortization expense ..... -- (2,411) (4,147)
Transition impairment ............. (5,500) -- --
Impairment charge ................. (11,409) (5,621) (15,000)
-------- -------- --------
Balance at December 31, ........... $ -- $ 16,909 $ 24,941
======== ======== ========
3. CHANGE IN ACCOUNTING PRINCIPLE
REVENUE RECOGNITION
Effective January 1, 2000, P-Com revised its method of accounting associated
with revenue recognition for sales of equipment as a result of the adoption of
Staff Accounting Bulletin ("SAB") No. 101 Revenue Recognition in Financial
Statements. P-Com previously recognized revenue upon shipment of product,
provided no significant obligations remained and collection was probable. This
policy was changed to recognition upon transfer of title and risk of loss, which
is generally upon shipment of the product provided no significant obligations
remain and collection is probable. In accordance with SAB No. 101, P-Com has
recorded a non-cash charge of approximately $1.5 million ($1.5 million, after
tax) on January 1, 2000 to account for the cumulative effect of this change in
method of accounting.
The cumulative effect of this change in method of accounting primarily resulted
from one contract where revenue had historically been recognized upon shipment,
however, under the terms of the underlying contract, title did not transfer
until subsequent receipt of payment. Under P-Com's revised revenue recognition
method, revenue relating to such sales is deferred until title transfers.
Primarily as a result of this, approximately $12.0 million in revenue and $10.5
million in related costs originally recognized in 1999 were deferred and
re-recognized in the first quarter of 2000.
F-14
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. BALANCE SHEET COMPONENTS
Inventory consists of the following (in thousands of dollars):
As of December 31,
-------------------------------------
2002 2001 2000
-------- -------- -------
Raw materials ...................... $ 36,599 $ 37,829 36,366
Work-in-process .................... 3,921 11,912 20,757
Finished goods ..................... 11,190 18,213 22,637
Inventory at customer sites ........ 290 1,035 6,550
-------- -------- -------
52,000 68,989 86,310
Less: Inventory reserves ........... (39,567) (38,597) (25,990)
-------- -------- -------
12,433 30,392 60,320
======== ======== =======
Property and equipment consists of the following (in thousands of dollars):
As of December 31,
-------------------------------------
Useful life 2002 2001 2000
----------- ------- ------- -------
Tooling and test equipment...... 3 - 5 years $32,658 $33,057 $37,545
Computer equipment.............. 3 years 8,033 7,979 11,809
Furniture and fixtures.......... 5 years 2,682 3,140 3,822
Land and buildings and leasehold
improvements.................... 5 to 7, and 33 years 1,754 2,293 2,863
Construction in process......... 118 799 --
------- ------- -------
45,245 47,268 56,039
Less: Accumulated depreciation and amortization............... (34,734) (30,672) (35,069)
------- ------- -------
$10,511 $16,596 $20,970
======= ======= =======
The above amounts include items under capital leases and related accumulated
amortization of $6,990 and $3,370 at December 31, 2002, $7,158 and $1,979 at
December 31, 2001, and $3,634 and $974 at December 31, 2000, respectively.
F-15
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. BALANCE SHEET COMPONENTS (Continued)
Goodwill and other assets consist of the following (in thousands):
As of December 31,
----------------------------------
2002 2001 2000
-------- -------- --------
Goodwill:
CSM(P-Com Network Services, Inc.) ........... $ 22,295 $ 22,295 $ 22,295
Cylink ...................................... 34,261 34,261 34,261
-------- -------- --------
56,556 56,556 56,556
Less: Accumulated amortization and impairment (56,556) (39,647) (31,615)
-------- -------- --------
Net goodwill ................................ -- 16,909 24,941
Other assets ................................ 381 602 510
-------- -------- --------
$ 381 $ 17,511 $ 25,451
======== ======== ========
In 2002, management reviewed the carrying value of the goodwill related to the
service business line. Based upon its assessment of future cash flows estimated
to be provided by the business line, the carrying value of the goodwill of $16.9
million was assessed as impaired and a charge for the full amount was recorded.
In 2001 and 2000, management reviewed the carrying value of the goodwill related
to the business line acquired from Cylink Wireless Group in 1998. Based on the
changes to the forecasted future cash flows and the replacement of the Cylink
spread spectrum products with the AirPro Gold line, it was determined that the
residual goodwill arising from the Cylink Wireless Group acquisition was
impaired and recorded a $5.6 million charge in 2001, and a $15 million charge in
2000.
Other accrued liabilities consist of the following (in thousands):
As of December 31,
-----------------------------
2002 2001 2000
------- ------- -------
Purchase commitment ........................... $ 2,195 $10,002 $ 6,687
Deferred revenue .............................. 290 2,280 11,920
Accrued employee benefits ..................... 860 1,013 1,678
Accrued warranty(b) ........................... 936 2,843 6,323
Income taxes payable .......................... 64 281 1,566
Lease obligations ............................. 435 2,095 1,428
Senior subordinated secured promissory note(a) 202 -- --
Interest payable .............................. 276 208 208
Other ......................................... 1,516 2,516 3,389
------- ------- -------
$ 6,774 $21,238 $33,199
======= ======= =======
F-16
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. BALANCE SHEET COMPONENTS (Continued)
(a) In lieu of the interest payment on the 4.25% Convertible Subordinated Notes
that were due on November 1, 2002, P-Com issued the Senior Subordinated Secured
Promissory Note to a note holder. The Senior Subordinated Secured Promissory
Note bears interest at 7% per annum, and matures on May 1, 2003. After maturity,
interest shall accrue at the rate of 9% per annum. The Senior Subordinated
Secured Promissory Note is secured against certain property and equipment.
(b) A summary of product warranty reserve activity is as follows (in thousands):
2002
-------
Balance at January 1, ...................................... $ 2,843
Additions relating to products sold ........................ 430
Payments ................................................... (2,337)
-------
Balance at December 31, .................................... $ 936
=======
Deferred contract obligations
Under a joint license and development contract, P-Com determined that a related
Original Equipment Manufacturer agreement provided for subsequent payments of
$8.0 million specifically earmarked for marketing our products manufactured
under this joint license and development contract. As of December 31, 2002 and
2001, payment obligations of $8.0 million under this contract remained
outstanding, and P-Com has in February 2003 written to contest the amount
claimed by the vendor.
Other long-term liabilities consist of the following (in thousands):
December 31,
--------------------------------
2002 2001 2000
------ ---- ----
Capital lease obligations ............. $2,076 $680 $703
Other ................................. -- -- 104
------ ---- ----
$2,076 $680 $807
====== ==== ====
F-17
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. BORROWING ARRANGEMENTS
On September 20, 2002, P-Com and Silicon Valley Bank entered into a Loan and
Security Agreement for a $1 million borrowing line based on domestic
receivables, and a Loan and Security Agreement under the Export-Import ("EXIM")
program for a $4.0 million borrowing line based on export related inventories
and receivables (together, the "Agreements"). Silicon Valley Bank makes cash
advances equal to 70% of eligible accounts receivable balances for both the EXIM
program and domestic lines, and up to $1.2 million for eligible inventories
under the EXIM program. Advances under these Agreements bear interest at the
bank's prime rate plus 2.5% per annum. The Agreements expire on September 20,
2003, and are secured by all receivables, deposit accounts, general intangibles,
investment properties, inventories, cash, property, plant and equipment of
P-Com. P-Com had also issued a $4 million secured promissory note underlying
these Agreements to Silicon Valley Bank. These Agreements supersede the Accounts
Receivable Purchase Agreement dated June 26, 2002. As of December 31, 2002, the
loan amount payable to Silicon Valley Bank under these Agreements aggregated
$2.9 million. P-Com is not in compliance with the Agreements' revenue and
minimum tangible net worth covenants as of December 31, 2002, and has on March
4, 2003 received a limited waiver from Silicon Valley Bank for the designated
revenue default, and a limited forbearance from exercising its rights and
remedies arising from the tangible net worth default until the earlier of (i)
March 15, 2003, or (ii) the occurrence of an event of default.
On March 24, 2003, P-Com received a waiver from Silicon Valley Bank of the
non-compliance with the minimum tangible net worth covenant as of December 31,
2002, and the cross default arising from the non-compliance. P-Com also received
from Silicon Valley Bank in the same waiver agreement a limited forbearance from
exercising its rights and remedies arising from P-Com's non-compliance with the
tangible net worth covenant as of January 31, 2003; until the earlier of (i)
April 15, 2003, or (ii) the occurrence of an event of default other than the
January 2003 default. Under the terms of the forbearance, Silicon Valley Bank
reserved its right to immediately cease extending credit without further notice,
and the right, in its discretion, to have the outstanding debt obligations bear
interest at the default rate of interest, which includes an additional 4%
penalty charge.
On March 29, 2001, P-Com and Foothill Capital Corporation entered into a Loan
and Security Agreement with a borrowing capacity of up to $25.0 million. The
Loan and Security Agreement was to mature in March 2004. Borrowings under the
Loan and Security Agreement were limited to 85% of eligible accounts receivable.
At December 31, 2002, there were no outstanding borrowings under the Loan and
Security Agreement. P-Com was not in compliance with certain financial covenants
in this Loan and Security Agreement as of December 31, 2001. The Loan and
Security Agreement was terminated on February 6, 2002.
In January 2000, P-Com entered into a secured line-of-credit agreement for $12.0
million. The line matured and was repaid in full on January 31, 2001. Borrowings
under the line bore interest at the greater of prime rate plus 2% (8% per annum
at December 31, 2000). In connection with the loan agreement, P-Com issued the
lender warrants to purchase 200,000 shares of common stock at $5.71 per share.
The warrants are fully exercisable, are subject to anti-dilution clauses and
expire on January 31, 2005. P-Com recorded a discount to amounts recorded under
the loan agreement of approximately $2.0 million, which represented the
estimated fair value of the warrants. Such discount was amortized to interest
expense over the term of the loan resulting in $159,000 and $1,745,0000 of
interest expense in 2001 and 2000, respectively.
F-18
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. BORROWING ARRANGEMENTS (Continued)
On November 5, 1997, P-Com issued $100 million in 4.25% Convertible Subordinated
Notes due November 1, 2002. The 4.25% Convertible Subordinated Notes were
convertible at the option of the holder into shares of P-Com common stock at an
initial conversion price of $27.46 per share and at $24.73 per share subsequent
to October 2000. Interest on the 4.25% Convertible Subordinated Notes is paid
semi-annually on May 1 and November 1 of each year. In 2002, 2000 and 1999,
P-Com issued common stock in exchange for a portion of these 4.25% Convertible
Subordinated Notes and recorded extraordinary gains as noted below. P-Com has
restructured the repayment of the 4.25% Convertible Subordinated Notes. As part
of the restructuring, P-Com, on November 1,2002 issued $22,390,000 aggregate
face value of 7% Convertible Subordinated Notes due November 1, 2005, in
exchange for the same amount of 4.25% Convertible Subordinated Notes. The 7%
Convertible Subordinated Notes are convertible to P-Com's common stock at $2.10
per share, subject to adjustment.
A summary of Convertible Subordinated Notes activity is as follows:
Gain on
Shares conversion
Amount issued or Redemption
------ ------ -------------
(Thousands) (Millions)
Issuance of $100 million in Convertible Subordinate Notes
in November 1997 ..................................... $ 100 -- $--
----- ----- ---
Balance at December 31, 1997 ............................ 100 -- --
Conversion of Notes in December 1998 .................... (14) 493 5
----- ----- ---
Balance at December 31, 1998 ............................ 86 493 5
Conversion of Notes in January and February 1999 ........ (26) 562 7
Conversion of Notes in December 1999 .................... (24) 472 6
----- ----- ---
Balance at December 31, 1999 ............................ 36 1,527 18
Conversion of Notes in January 2000 ..................... (7) 135 2
----- ----- ---
Balance at December 31, 2000 and 2001 ................... 29 1,662 20
Conversion of Notes in May and July 2002 ................ (3) 1,367 --
Redemption of Notes in June and November 2002 ........... (4) -- 1
----- ----- ---
Balance at December 31, 2002 ............................ $ 22 3,029 $21
===== ===== ===
F-19
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. CAPITAL STOCK
The authorized capital stock of P-Com consists of 69 million shares of common
stock, $0.0001 par value (the "Common Stock"), and 2 million shares of preferred
stock, $0.0001 par value (the "Preferred Stock"), including 500,000 shares of
which have been designated Series A Junior Participating Preferred Stock (the
"Series A") pursuant to the Stockholder Rights Agreement (see discussion below).
PREFERRED STOCK
The Board of Directors has the authority to issue shares of Preferred Stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the holders of Common Stock.
COMMON STOCK
In June 2002, P-Com sold approximately 11,464,000 shares of unregistered Common
Stock at a per share price of $0.70, for an aggregate net proceeds of
approximately $7.3 million. In December 2002, P-Com sold approximately 3,333,333
shares of unregistered Common Stock at a per share price of $0.15, for an
aggregate net proceeds of approximately $0.4 million. The shares have
subsequently been registered for resale.
In July 2001, P-Com issued approximately 759,600 shares of unregistered Common
Stock at a per share price of $3.95, for aggregate proceeds of $3.0 million.
In January 2000, P-Com sold approximately 1,506,200 shares of Common Stock at a
per share price of $28.55, for an aggregate purchase price of $43.0 million. The
shares were subsequently registered for resale in October 2000. As a result of
the late registration of these shares, P-Com was required to issue the holders
warrants to purchase 271,600 shares of Common Stock at an exercise price of
$19.00 per share.
In August 2000, P-Com sold 600,000 shares of unregistered Common Stock at a per
share price of $30.55, for an aggregate purchase price of $18.2 million. The
shares have subsequently been registered for resale.
At December 31, 2002, P-Com had 6,113,000 shares of Common Stock reserved for
issuance of warrants and options.
COMMON STOCK WARRANTS
As a result of the issuance of the Common Stock in May 2002 as part of vendor
settlements, the issuance of the Common Stock in June 2002 and December 2002 for
cash, the restructuring of the conversion price of the 4.25% Convertible
Subordinated Notes in November 2002, and warrants issued to Silicon Valley Bank
in May 2002 and September 2002, the warrant exercise price and number of shares
issuable mentioned below were adjusted in accordance with the formula contained
in the anti-dilution clauses of the warrants.
In March 2002, P-Com issued warrants to purchase 600,000 shares of common stock
to a consultant in connection with financial advisory services rendered. The
warrants were valued using Black Scholes option pricing model. The fair value of
$480,000 was expensed fully to general and administrative expense during the
year ended December 31, 2002.
In September 2002, in conjunction with the bank line of credit, P-Com issued
warrants to purchase 300,000 shares of common stock to Silicon Valley Bank. The
warrants were valued Black Scholes option pricing model. The fair value of
$64,000 was expensed fully during the year ended December 31, 2002.
F-20
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL STOCK (Continued)
A summary of issued and outstanding warrants to purchase Common Stock is as
follows:
Old New
Exercise Exercise
Number Anti-dilution Price Price
(in thousands) adjustments Total $ $
-------------- ----------- ----- -------- --------
June 1999 --issuance ....... 248 603 851 15.00 4.38
August 1999 --issuance ..... 36 104 140 25.00 6.43
January 2000 --issuance .... 88 88 42.50 42.50
January 2000 --issuance .... 40 52 92 28.55 12.44
October 2000 --issuance .... 272 272 19.00 19.00
October 2000 --exercise .... (32) (32) 19.00 19.00
March 2002 --issuance ...... 600 600 1.02 1.02
September 2002 --issuance .. 300 300 0.72 0.72
December 2002 --issuance ... 750 750 0.30 0.30
----- ---- ----
Balance at December 31, 2002 2,302 759 3,061
===== ==== ====
STOCKHOLDER RIGHTS AGREEMENT
On September 26, 1997, the Board of Directors of P-Com adopted a Stockholder
Rights Agreement (the "Rights Agreement"). Pursuant to the Rights Agreement,
Rights (the "Rights") were distributed as a dividend on each outstanding share
of its Common Stock held by stockholders of record as of the close of business
on November 3, 1997. Each Right will entitle stockholders to buy Series A
Preferred at an exercise price of $125.00 upon certain events. The Rights will
expire ten years from the date of the Rights Agreement.
In general, the Rights will be exercisable only if a person or group acquires
15% or more of P-Com's Common Stock or announces a tender offer, the
consummation of which would result in ownership by a person or group of 15% or
more of P-Com's Common Stock. In the case of the State of Wisconsin Investment
Board, Firsthand Capital Management, Alpha Capital and StoneStreet Limited
Partnership the threshold figure is 20% rather than 15%. If, after the Rights
become exercisable, P-Com is acquired in a merger or other business combination
transaction, or sells 50% or more of its assets or earning power, each
unexercised Right will entitle its holder to purchase, at the Right's
then-current exercise price, a number of the acquiring company's common shares
having a market value at the time of twice the Right's exercise price. At any
time within ten days after the public announcement that a person or group has
acquired beneficial ownership of 15% or more of P-Com's Common Stock, the Board,
in its sole discretion, may redeem the Rights for $0.0001 per Right.
F-21
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS
On January 11, 1995, P-Com's Board of Directors adopted the 1995 Stock
Option/Stock Issuance Plan (the "1995 Plan") as a successor to its 1992 Stock
Option Plan (the "1992 Plan").
The 1995 Plan authorizes the issuance of up to 2,986,892 shares of Common Stock
as of December 31, 2002.
The 1995 Plan contains three equity incentive programs: a Discretionary Option
Grant Program, and a Stock Issuance Program for officers and employees of P-Com
and independent consultants and advisors to P-Com and an Automatic Option Grant
Program for non-employee members of its Board of Directors.
Options under the Discretionary Option Grant Program may be granted at not less
than 100% of the fair market value per share of common stock on the grant date
with exercise periods not to exceed ten years. The plan administrator is
authorized to issue tandem stock appreciation rights and limited stock
appreciation rights in connection with the option grants.
The Stock Issuance Program provides for the sale of common stock at a price not
less than 100% of fair market value. Shares may also be issued solely for
services. The administrator has discretion as to vesting provisions, including
accelerations, and may institute a loan program to assist participants with
financing stock purchases. The program also provides certain alternatives to
satisfy tax liabilities incurred by participants in connection with the program.
Under the Automatic Option Grant Program, as amended, participants will
automatically receive an option to purchase 8,000 shares of common stock upon
initially joining the Board of Directors and will receive an additional
automatic grant each year at each annual stockholders' meeting for 800 shares.
Each option will have an exercise price per share equal to 100% of the fair
market value of the common stock on the grant date. The shares subject to each
such initial grant shall vest, in a series of eight equal quarterly installments
upon the optionee's completion of each three months of continued service as a
board member over the 24-month period measured from the option grant date. The
shares, which are subject to the annual 800 share option, are fully vested at
the grant date.
F-22
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFIT PLANS (Continued)
The following table summarizes stock option activity under P-Com's 1995 Plan (in
thousands, except per share amounts):
2002 2001 2000
---------------- ---------------- -----------------
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year ..... 1,436 $29.21 1,523 $33.10 1,327 $31.80
Granted ............................ 2,046 1.01 336 11.55 888 33.55
Exercised .......................... -- -- -- -- (295) 27.50
Canceled ........................... (430) 16.82 (423) 28.80 (397) 34.00
------ ------ ------
Outstanding at end of year ........... 3,052 12.05 1,436 29.20 1,523 33.10
====== ====== ======
Options exercisable at year-end ...... 1,190 24.53 734 36.10 522 37.45
====== ====== ======
Weighted-average fair value of options
granted during the year ............ $ 0.77 $10.15 $26.60
====== ====== ======
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2002 (in thousands, except per share amounts):
Options Outstanding Options Exercisable
------------------------------------ ---------------------
Range of Exercise Prices Shares Weighted- Weighted- Shares Weighted-
------------------------ ------ Average Average ------ Average
Remaining Exercise Exercise
Life Price Price
(in Years) ------ ------
----------
$ 0.37 - 14.38................................................. 2,040 7.18 $ 1.52 382 $ 2.42
15.00 - 23.75................................................. 403 6.72 17.21 311 17.27
25.00 - 29.06................................................. 186 6.78 28.37 137 28.46
31.56 - 36.25................................................. 202 6.64 34.15 151 34.20
41.25 - 49.69................................................. 97 3.64 47.19 97 47.19
66.25 - 68.75................................................. 51 6.63 66.79 39 66.90
86.25 - 105.45................................................. 73 4.67 91.12 73 91.12
----- ----- ------ ----- ------
3,052 6.87 $12.05 1,190 $24.53
===== ===== ====== ===== ======
F-23
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
On January 11, 1995, P-Com's Board of Directors adopted the Employee Stock
Purchase Plan (the "Purchase Plan"), which was approved by stockholders in
February 1995. The Purchase Plan permits eligible employees to purchase Common
Stock at a discount through payroll deductions during successive offering
periods with a maximum duration of 24 months. Each offering period shall be
divided into consecutive semi-annual purchase periods. The price at which the
Common Stock is purchased under the Purchase Plan is equal to 85% of the fair
market value of the Common Stock on the first day of the offering period or the
last day of the purchase period, whichever is lower. A total of 300,000 shares
of Common Stock have been reserved for issuance under the Purchase Plan. Awards
and terms are established by P-Com's Board of Directors. The Purchase Plan may
be canceled at any time at the discretion of its Board of Directors prior to its
expiration in January 2005. Under the Plan, P-Com sold approximately 27,000,
79,000, and 78,000, shares in 2002, 2001, and 2000, respectively. The Board of
Directors suspended the plan in January 2002.
Because P-Com has adopted the disclosure-only provision of SFAS No. 123, no
compensation expense has been recognized for its stock option plan or for its
stock purchase plan. Had compensation costs for its two stock-based compensation
plans been determined based on the fair value at the grant dates for awards
under those plans, consistent with the method of SFAS 123, P-Com's net loss and
net loss per share would have been reduced to the pro forma amounts indicated as
follows:
2002 2001 2000
---- ---- ----
Net loss applicable to common stockholders
As reported .......................... $(54,306) $(75,538) $(69,949)
Pro forma .............................. $(57,054) $(81,676) $(78,219)
Net loss per share
As reported --Basic and Diluted ........ $ (2.13) $ (4.55) $ (4.50)
Pro forma --Basic and Diluted .......... $ (2.23) $ (4.93) $ (5.01)
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants in 2002, 2001, and 2000, respectively: expected volatility of 158%, 125%,
and 95%; weighted-average risk-free interest rates of 3.1%, 4.1%, and 6.2%;
weighted-average expected lives of 4.0, 3.5, and 3.7; respectively, and a zero
dividend yield.
The fair value of the employees' stock purchase rights was estimated using the
Black-Scholes model with the following assumptions for 2002, 2001, and 2000,
respectively: expected volatility of 197%, 157%, and 95% weighted-average
risk-free interest rates of 1.7%, 3.5%, and 6.2%, weighted-average expected
lives of 0.5, 0.5, and 0.5 years and a dividend yield of zero. The
weighted-average fair value of those purchase rights granted in 2002, 2001, and
2000 was $0.83, $5.47, and $6.03, respectively.
401(K) PLAN
P-Com sponsors a 401(k) Plan (the "401(k) Plan") which provides tax-deferred
salary deductions for eligible employees. Employees may contribute up to 15% of
their annual compensation to the 401(k) Plan, limited to a maximum annual amount
as set periodically by the Internal Revenue Service. The 401(k) Plan permits,
but does not require, P-Com to make matching contributions. To date, no matching
contributions have been made.
F-24
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 2002, P-Com recorded a $5.8 million inventory related
charge to product cost of sales. P-Com determined that there was a need to
reevaluate its inventory carrying value in the light of the continuing world
wide slowdown in the global telecommunications market, especially with regard to
an assessment of future demand for the point-to-multipoint product range, and
this resulted in a $5.0 million charge to product cost of sales for
point-to-multipoint inventories, and a $0.8 million charge for spread spectrum
inventories.
In the first quarter of 2001, P-Com recorded a $10.0 million inventory related
charge to product cost of sales, and incurred an $11.6 million receivable
valuation charge included in general and administrative expenses, as a result of
the bankruptcy of a major customer. In the third quarter of 2001, P-Com
determined that there was a need to reevaluate its inventory carrying value in
the light of the significant slowdown in the global telecommunications market
and the phasing out of and replacement of current product designs. The
evaluation included an assessment of future demand for certain of its lower
speed and lower frequency Tel-Link point-to-point products, and resulted in
total charges to product cost of sales of approximately $18.0 million in the
quarter. A further $2.0 million was charged to product cost of sales in the
fourth quarter of 2001.
In the second quarter of 2000, P-Com determined that there was a need to
reevaluate its inventory levels and related accrued liabilities in light of
recent changes in product and customer mix. The evaluation was prompted by a
change in customer mix away from the United Kingdom and other European markets
and toward the United States market, and the resulting anticipated decrease in
demand for certain of its lower speed and lower frequency Tel-Link
point-to-point products, and resulted in total charges of approximately $21.7
million during the second quarter of 2000. These charges consisted of increases
to inventory reserve of approximately $17.4 million and accrued liabilities of
approximately $4.3 million, both relating to its product segment. In addition,
P-Com performed a review of the carrying value and remaining life of long-lived
assets associated with its product segment and recorded write-downs of
approximately $15.0 million of goodwill and an approximately $9.9 million
write-off of deferred tax assets in 2000.
The increase in inventory reserves and related purchases liabilities was charged
to product cost of sales in the second quarter of 2000. Of the $17.0 million
charge for additional reserves, $15.4 million related to the aforementioned
Tel-Link point-to-point product line. An additional reserve of approximately
$1.0 million was added in the second quarter of 2000 to adjust the carrying
value of certain modules of the point-to-multipoint radio line.
9. SALES AND PROPERTY AND EQUIPMENT BY GEOGRAPHIC REGION
The allocation of sales by geographic customer destination and property, plant
and equipment, net are as follows (in thousands):
% of total 2002 2001 2000
for 2002 ---- --- ----
--------
North America ........... 10% $ 2,949 $ 16,151 $ 80,147
United Kingdom .......... 20% 5,894 32,361 57,061
Europe .................. 15% 4,487 2,289 18,135
Asia .................... 51% 15,018 16,495 8,637
Other Geographic
Regions ................. 5% 1,338 5,940 19,626
--- ------- -------- --------
100% $29,686 $ 73,236 $183,606
=== ======= ======== ========
F-25
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SALES AND PROPERTY AND EQUIPMENT BY GEOGRAPHIC REGION (Continued)
2002 2001 2000
---- ---- ----
Property, plant and equipment, net
United States ......................... $ 9,060 $14,848 $18,266
United Kingdom ........................ 109 345 1,234
Italy ................................. 1,332 1,388 1,349
Other geographic regions .............. 10 15 121
------- ------- -------
Total ................................. $10,511 $16,596 $20,970
======= ======= =======
10. NET LOSS PER SHARE
For purposes of computing diluted net loss per share, weighted average common
share equivalents do not include stock options with an exercise price that
exceeds the average fair market value of its Common Stock for the period because
the effect would be antidilutive. Also, because losses were incurred in the
years 2002, 2001, and 2000, all options, warrants, and convertible notes are
excluded from the computations of diluted net loss per share because they are
antidilutive.
11. INCOME TAXES
Loss before discontinued operations, extraordinary items, income taxes and
cumulative effect of accounting change consists of the following (in thousands):
Year Ended December 31,
---------------------------------------------
2002 2001 2000
---- ---- ----
Domestic ................. $(46,086) $(76,919) $(58,653)
Foreign .................. (299) 974 346
-------- -------- --------
$(46,385) $(75,945) $(58,307)
======== ======== ========
F-26
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. INCOME TAXES (continued)
The provision (benefit) for income taxes consists of the following (in
thousands):
2002 2001 2000
----- ------- -------
Current:
Federal ................... $(503) $(1,131) $ --
State ..................... -- 13 --
Foreign ................... 33 543 1,282
----- ------- -------
(470) (575) 1,282
----- ------- -------
Deferred:
Federal ................... -- -- 8,792
State ..................... -- -- 1,066
----- ------- -------
-- -- 9,858
----- ------- -------
Total ..................... $(470) $ (575) $11,140
===== ======= =======
Deferred tax assets consist of the following (in thousands):
December 31,
-------------------------------------
2002 2001 2000
---- ---- ----
Net operating loss carryforwards ...... $ 80,082 $ 70,810 $ 54,663
Credit carryforwards .................. 11,183 10,267 4,302
Intangible assets ..................... 9,765 13,235 12,177
Credit carryforwards .................. 20,614 22,353 18,412
Intangible assets ..................... 121,644 116,665 89,554
Valuation allowance ................... (121,644) (116,665) (89,554)
--------- --------- --------
Net deferred tax asset ................ $ -- $ -- $ --
========= ========= ========
For federal and state tax purposes, a portion of P-Com's net operating loss
carry forwards may be subject to certain limitations on utilization in case of
change in ownership as defined by federal and state tax law.
Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their bases for
financial reporting purposes. In addition, future tax benefits, such as net
operating loss carry forwards, are recognized to the extent that realization of
such benefits is more likely than not. P-Com has assessed its ability to realize
future tax benefits, and concluded that as a result of the history of losses, it
was more likely than not, that such benefits would not be realized. Accordingly,
P-Com has recorded a full valuation allowance against future tax benefits.
F-27
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. INCOME TAXES (continued)
As of December 31, 2002, P-Com had a federal net operating loss carryforward of
approximately $220,000,000. If not utilized, the losses will begin to expire in
2017.
Reconciliation of the statutory federal income tax rate to its effective tax
rate is as follows:
2002 2001 2000
---- ---- ----
U.S. federal statutory rate ................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit 0.0 0.0 0.0
Change in valuation allowance ................. 0.0 0.0 (17.9)
Foreign income taxes at different rate ........ 0.5 (0.7) (2.3)
Net operating loss ............................ (35.0) (35.0) (35.0)
Other, net .................................... (1.4) 0.0 0.0
------ ------ ------
(0.9)% (0.7)% (20.2)%
====== ====== ======
12. ACQUISITIONS AND DIVESTITURES
a. On March 28, 1998, P-Com acquired substantially all of the assets, and on
April 1, 1998, the accounts receivable of the Wireless Communications Group of
Cylink Corporation ("Cylink Wireless Group"), a Sunnyvale, California-based
company, for $46.0 million in cash and $14.5 million in a short-term note,
non-interest bearing unsecured subordinated promissory note due July 6, 1998.
The Cylink Wireless Group designs, manufactures and markets spread spectrum
radio products for voice and data applications in both domestic and
international markets. P-Com accounted for this acquisition as a purchase
business combination. The results of the Cylink Wireless Group were included
from the date of acquisition.
During 1998, P-Com acquired the remaining interest in Geritel and the assets of
Cemetel S.r.l., a service company located in Carsoli, Italy. These acquisitions
were not material to the consolidated financial statements or the results of
operations of P-Com.
On February 24, 1997, P-Com acquired 100% of the outstanding stock of
Technosystem, for aggregate payments of $3.3 million and the assumption of
long-term debt of approximately $12.7 million in addition to other liabilities.
P-Com initially paid $2.6 million in cash, and an additional payment of $0.7
million was made on March 31, 1998. Technosystem designs, manufactures and
markets equipment for transmitters and transponders for television and radio
broadcasting. In 1999, P-Com announced its intention to dispose of Technosystem
and completed its disposition in 2000.
On March 7, 1997, P-Com acquired substantially all of the assets of Columbia
Spectrum Management, L.P., a Vienna, Virginia-based company, for $7.8 million in
cash and 797,000 shares of Common Stock valued at approximately $14.5 million.
Columbia Spectrum Management, L.P. provides turnkey relocation services for
microwave paths over spectrum allocated by the Federal Communications Commission
for personal communications services and other emerging technologies.
F-28
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. ACQUISITIONS AND DIVESTITURES (Continued)
P-Com accounted for its acquisitions of Technosystem and Columbia Spectrum
Management, L.P. based on the purchase method of accounting. The results of
these acquired entities are included from the date of acquisition. Goodwill and
other intangible assets recorded as a result of the purchase of Columbia
Spectrum Management, L.P. and Technosystem are being amortized over twenty and
ten years, respectively, using the straight-line method.
On May 29, 1997, P-Com acquired all of the outstanding shares of capital stock
of Control Resources Corporation, a provider of integrated network access
devices to network service providers, in exchange for 1,503,000 shares of
P-Com's Common Stock.
On November 27, 1997, P-Com acquired all of the outstanding shares of capital
stock of RT Masts Limited and Telematics in exchange for 766,000 and 248,000
shares of its Common Stock, respectively. RT Masts Limited, located in
Wellingborough, Northhamptonshire, U.K. and Telematics, located in Herndon,
Virginia, supply, install and maintain telecommunications systems and structure
including antennas covering high frequency, medium frequency and microwave
systems.
P-Com accounted for its acquisitions of Control Resources Corporation, RT Masts
Limited and Telematics as pooling-of-interests.
In February 2000, P-Com completed the divestiture of two Italian subsidiaries,
Technosystem, S.p.A. and Cemetel S.r.L., resulting in additional losses for the
first quarter of 2000 of approximately $4.0 million and $3.5 million,
respectively.
In April 2000, P-Com sold Control Resources Corporation resulting in a gain of
approximately $2.6 million.
On February 7, 2001, P-Com sold RT Masts Limited, to SpectraSite Transco, for
approximately $12.0 million in cash, an additional $750,000 in a 6-month escrow
account, and a $750,000 note receivable due in 2008 with interest due annually
at LIBOR, realizing a gain of $9.8 million on the transaction. RT Masts Limited
was primarily engaged in providing site preparation, installation, and
maintenance of wireless broadband radio systems for cell phone services
providers in the United Kingdom. RT Masts Limited provided approximately $20.0
million in revenues to P-Com's consolidated operations in 2000 and has
historically been included as a component of its service sales segment.
b. Loss on discontinued operations
In August 1999, P-Com announced its intent to divest its broadcast equipment
business, Technosystem, and concluded that a measurement date had occurred.
Accordingly, beginning in the third quarter of 1999, this business was reported
as a discontinued operation and the amounts presented for prior periods have
been reclassified for appropriate comparability. Technosystem was divested in
the first quarter of 2000. The additional loss of $4.0 million arising from
divesting Technosystem was recorded as loss from discontinued operations in the
Statement of Operations in the first quarter of 2000.
In the first quarter of 2003, P-Com committed to a plan to sell its services
business, P-Com Network Services, Inc.. The service business consists of
organizations primarily located in the United States, which provide
comprehensive network services including system and program planning, and
management, path design, and installation for the wireless communications
market. Accordingly, this business is reported as a discontinued operation and
the financial statement information related to this business has been presented
on one line, titled "Loss on Discontinued Operations" in the Consolidated
Statements of Operations for the years ended December 31, 2002, 2001 and 2000.
On April 30, 2003, P-Com entered into an Asset Purchase Agreement with JKB
Global, LLC to sell certain assets of P-Com Network Services, Inc. The total
cash consideration was approximately $105,000, plus the assumption of certain
liabilities.
F-29
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. ACQUISITIONS AND DIVESTITURES (Continued)
Summarized results of the combined discontinued businesses are as follows (in
thousands):
Year ended December 31,
-------------------------------------
2002 2001 2000
---- ---- ----
Sales .............................. $ 3,337 $ 30,838 $ 50,795
Loss from operations ............... $(4,284) $ (211) $ (4,321)
Provision for income taxes ......... -- -- --
------- -------- --------
Net loss ........................... $(4,284) $ (211) $ (4,321)
======= ======== ========
The assets and liabilities of the discontinued operations consisted of the
following (in thousands):
December 31,
--------------------------
2002 2001 2000
---- ---- ----
Total assets related to discontinued operations
Cash ............................................ $ 342 $ 4,578 $ 1,787
Accounts receivable .............................. 763 2,418 14,845
Inventory ........................................ 1,206 1,554 2,518
Prepaid expenses and other assets ................ 10 121 425
Property plant and equipment ..................... 529 1,031 2,196
Other assets ..................................... 73 73 97
------ ------- -------
$2,923 $ 9,775 $21,868
====== ======= =======
Total liabilities related to discontinued operations
Accounts payable ................................. $ 466 $ 136 $ 6,020
Other accrued liabilities ........................ 315 618 2,663
Loan payable to bank ............................. 304 -- --
------ ------- -------
$1,085 $ 754 $ 8,683
====== ======= =======
F-30
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS
OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES
In August 1998, P-Com entered into a capital lease for equipment in the amount
of $1,600 with interest accruing at the rate of 6.3% per annum. The lease is
accounted for as a sale-leaseback transaction, which expires in January 2003. In
2000, P-Com entered into several capital leases for equipment in the amount of
$1,869 with interest accruing at 11%. These leases expire in 2002. In 2001,
P-Com entered into several capital leases for equipment in the amount of $3,212
with interest accruing at 11%. In 2002, P-Com entered into several capital
leases for equipment in the amount of $459 with interest accruing at 7.25%.
Future minimum lease payments required under these leases are as follows (in
thousands):
Year Ending December 31,
------------------------
2003................................................................... $827
2004................................................................... 2,129
------
Total minimum lease payments........................................... 2,956
Less: Amount representing interest..................................... (444)
------
Present value of net minimum lease payments............................ $2,512
======
The present value of net minimum lease payments are reflected in the December
31, 2002 and 2001 balance sheets as a component of other accrued liabilities and
other long-term liabilities of $2,512 and $2,775, respectively.
P-Com leases its facilities under non-cancelable operating leases, which expire
at various times through 2008. The leases require P-Com to pay taxes,
maintenance and repair costs. Future minimum lease payments under its
non-cancelable operating leases at December 31, 2002 are as follows (in
thousands):
Year Ending December 31,
------------------------
2003 .................................................. $ 3,001
2004 .................................................. 3,215
2005 .................................................. 3,091
2006 .................................................. 482
2007 .................................................. 402
Thereafter ............................................ 64
-------
$10,255
=======
F-31
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES (CONTINUED)
During 2002, 2001, and 2000, the amount of rent expense incurred by P-Com under
non-cancelable operating leases was $3,230, $4,196, and $3,180, respectively.
14. CONTINGENCIES
In September and October 1998, several class action complaints were filed in the
Superior Court of California, County of Santa Clara, on behalf of P-Com's
stockholders who purchased or otherwise acquired its Common Stock between April
1997 and September 11, 1998. The plaintiffs alleged various state securities
laws violations by P-Com and certain of its officers and directors. The
complaints sought compensatory, punitive and other damages, attorneys' fees and
injunctive and/or equitable relief.
On December 3, 1998, the Superior Court of California, County of Santa Clara,
entered an order consolidating all of the above complaints. P-Com reached an
agreement in principle on October 25, 2001 to settle the consolidated securities
class action suit. On February 8, 2002, pursuant to that agreement in principle,
the court entered final judgment approving the settlement. Under the terms of
the settlement, all claims against P-Com and all other defendants were dismissed
without admission of liability or wrong doing by any party. The $16.0 million
settlement was funded entirely by its directors and officers liability
insurance.
15. SUPPLEMENTAL CASH FLOW INFORMATION
The following provides additional information concerning supplemental disclosure
of cash flow activities.
Year Ended December 31,
-------------------------------
2002 2001 2000
---- ---- ----
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes ................ $ -- $ 353 $ 435
======= ====== ======
Cash paid for interest .................... $ 1,829 $1,605 $2,725
======= ====== ======
NON-CASH TRANSACTIONS
During 2002 and 2001, $459 and $3,212 of fixed assets were acquired through the
assumption of capital lease liabilities respectively.
During 2002 and 2000, P-Com issued shares of Common Stock in exchange for
Convertible Subordinated Notes. In conjunction with these transactions, the
Company recorded Convertible Subordinated Notes conversion expense of $711 for
the year ended December 31, 2002, in accordance with FAS 84, and extraordinary
gain of $1.4 million and $1.9 million for the year ended December 31, 2002 and
December 31, 2000, respectively. See Note 5 for additional information.
During 2002, P-Com issued shares of Common Stock valued at $1.27 million in
connection with various settlement payment to vendors. P-Com also issued
warrants to purchase common stock to a consultant in lieu of services rendered,
to Silicon Valley Bank for the bank line of credit, to investors in conjunction
with the common stock issuances, and certain warrant holders anti-dilution
adjustments.
F-32
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. RELATED PARTY TRANSACTIONS
In June 2002, P-Com paid $2.5 million in professional fees, and in March 2002
issued 600,000 common stock warrants at an exercise price of $1.02 per share, to
Cagan McAfee Capital Partners in connection with services rendered for
restructuring of the 4.25% Convertible Subordinated Notes, financial advisory
services for arranging the Silicon Valley Bank line of credit and equity raising
transactions, and retainer fees. Cagan McAfee Capital Partners invested in
approximately 25% of the private equity placement of $8.25 million completed in
June 2002. P-Com further paid consulting fees totaling approximately $264,000 in
2002 to Cagan McAfee Capital Partners.
Myntahl Corporation, an appointed distributor in China also invested
approximately 13% of the private equity placement of $8.25 million completed in
June 2002. P-Com further has sales of approximately $4.2 million to Myntahl, and
paid approximately $0.5 million in commission and $0.2 million in consulting
fees to Myntahl during the year ended December 31, 2002.
17. SUBSEQUENT EVENTS
a. P-Com issued 2,100,000 common stock at $0.18 a share to an existing
stockholder for cash in January 2003.
b. Effective March 10, 2003, P-Com's Common Stock was delisted by the Nasdaq
SmallCap Market, and is now traded on the OTC Bulletin Board of the National
Association of Securities Dealers, Inc., under the symbol PCOM.OB.
c. On March 26, 2003, P-Com issued $1.5 million 10% Convertible Bridge Notes,
with maturity date of one year from the date of issuance. The 10% Convertible
Bridge Notes are automatically convertible to common stock upon P-Com completing
an additional $3 million minimum equity or equity-linked financing at a 10% or
20% premium to the face value of the 10% Convertible Bridge Notes, subject to
the execution of certain financing transactions. The 10% Convertible Bridge
Notes are subordinated to the existing secured bank line of credit, but senior
to the $22.4 million outstanding 7% Convertible Subordinated Notes, due November
1, 2005.
d. P-Com issued 4,500,000 shares of its Common Stock to two outside consultants
in April 2003 for investment banking advisory services and public and investor
relations services.
e. On April 30, 2003, P-Com entered into an Asset Purchase Agreement with JKB
Global, LLC to sell certain assets of P-Com Network Services, Inc. P-Com is a
guarantor of P-Com Network Services, Inc.'s obligations under its premises
lease, through July 2007. As part of the sale to JKB Global, LLC, JKB Global,
LLC has agreed to sublet the premises from P-Com Network Services, Inc. for one
year beginning May 1, 2003. The terms of the sublease required JKB Global, LLC
to pay less than the total amount of rent due under the terms of the master
lease. As a result, P-Com remained liable under the terms of the guaranty for
the deficiency, and the total obligation under the terms of the master lease was
approximately $1.5 million. This amount was accrued in the second quarter of
2003 as loss on disposal of discontinued operations. In September 2003, P-Com
entered into an agreement to terminate the premises lease in consideration for
the payment to the landlord of $240,000.
F-33
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUBSEQUENT EVENTS (Continued)
f. In July 2003, P-Com closed an additional Bridge Notes financing, resulting in
gross proceeds to P-Com of approximately $0.9 million. In connection with the
Bridge Notes financing, P-Com loaned to SPEEDCOM $500,000 in the form of a
two-year 10% note, which is convertible into Common Stock of SPEEDCOM.
g. On August 4, 2003, the principal amount and accrued interest of $21,138,000
due under the terms of the Convertible Subordinated Notes due 2005 converted
into 1,000,000 shares of Series B Convertible Preferred Stock with a stated
value of $21.138 per share. Each share of Series B Convertible Preferred Stock
converts into Common Stock of P-Com at $0.20 per share. The Series B Convertible
Preferred Stock contains certain provisions that may result in a mandatory cash
redemption. As a result, P-Com will reflect the carrying value of these
instruments as a mezzanine security outside of stockholders' equity. The holders
of the Series B Convertible Preferred Stock have agreed to exercise their
conversion options upon receipt of stockholder approval increasing the number of
authorized shares of Common Stock to allow for conversion, and upon completion
of an equity financing resulting in gross proceed to P-Com of at least $3.0
million.
F-34
P-COM, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 2000, 2001, AND 2002
(IN THOUSANDS)
Balance at Additions Deductions Balance at
Beginning Charged to From End of Year
of Year Statement Reserves -----------
------- of Operations --------
-------------
Allowance for doubtful accounts:
Year ended December 31, 2000 .. $14,899 696 (11,785) 3,810
Year ended December 31, 2001 .. 3,810 11,837* (14,567) 1,080
Year ended December 31, 2002 .. 1,080 258 (959) 379
Inventory related reserves:
Year ended December 31, 2000 .. $16,180 17,361 (7,551) 25,990
Year ended December 31, 2001 .. 25,990 30,000 (17,393) 38,597
Year ended December 31, 2002 .. 38,597 5,770 (4,800) 39,567
* $11.6 million was a direct result of the bankruptcy of Winstar.
F-35
PART I --FINANCIAL INFORMATION
ITEM 1.
P-COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
September 30, December 31,
2003 2002
--------- ---------
ASSETS (Restated)
Current assets:
Cash and cash equivalents $ 1,105 $ 861
Restricted cash 25 415
Accounts receivable, net 4,918 4,797
Inventory 4,929 12,433
Prepaid expenses and other assets 2,463 3,402
Assets of discontinued operation 48 2,923
--------- ---------
Total current assets 13,488 24,831
Property and equipment, net 4,135 10,511
Loan to Speedcom 1,100 --
Other assets 279 381
--------- ---------
Total assets $ 19,002 $ 35,723
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 4,441 $ 8,144
Other accrued liabilities 8,417 6,774
Deferred contract obligations 8,000 8,000
Loan payable to bank 2,220 2,604
Convertible promissory notes 2,237 --
Liabilities of discontinued operation 349 1,085
--------- ---------
Total current liabilities 25,664 26,607
Convertible subordinated notes -- 22,390
Other long-term liabilities 1,804 2,076
--------- ---------
Total liabilities 27,468 51,073
--------- ---------
Series B Preferred Stock 11,626 --
--------- ---------
Stockholders' equity (deficiency):
Common Stock 16 16
Additional paid-in capital 335,550 333,740
Accumulated deficit (355,766) (348,766)
Accumulated other comprehensive income (loss) 181 (340)
Common stock held in treasury at cost (74) --
--------- ---------
Total stockholders' equity (deficiency) (20,092) (15,350)
--------- ---------
Total liabilities and stockholders' equity $ 19,002 $ 35,723
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-36
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data, unaudited)
Nine months ended September 30,
2003 2002
-------- --------
(Restated)
Sales $ 15,151 $ 22,292
Cost of sales 16,181 19,263
-------- --------
Gross profit (loss) (1,030) 3,029
-------- --------
Operating expenses:
Research and development/engineering 4,805 10,266
Selling and marketing 2,645 5,190
General and administrative 4,303 8,665
Asset impairment and restructuring charges 3,712 --
-------- --------
Total operating expenses 15,465 24,121
-------- --------
Operating loss (16,495) (21,092)
Interest expense (1,625) (1,966)
Gain on debt extinguishment 10,262 1,393
Other income (expense), net 3,117 (1,197)
-------- --------
Loss from continuing operations before
loss from discontinued operations (4,741) (22,862)
Loss from discontinued operations (2,258) (3,860)
-------- --------
(6,999) (26,722)
Cumulative effect of change in accounting principle -- (5,500)
-------- --------
Net loss $ (6,999) $(32,222)
======== ========
Basic profit (loss) per share:
Loss from continuing operations $ (0.12) $ (0.97)
Loss from discontinued operations (0.06) (0.17)
Cumulative effect of change in accounting principle -- (0.24)
-------- --------
Basic net loss per share applicable to
Common Stockholders $ (0.18) $ (1.38)
======== ========
Shares used in Basic per share computation 39,884 23,323
======== ========
Diluted loss per share:
Loss from continuing operations $ (0.12) $ (0.97)
Loss from discontinued operations (0.06) (0.17)
Cumulative effect of change in accounting principle -- (0.24)
-------- --------
Diluted net loss per share applicable to
Common Stockholders $ (0.18) $ (1.38)
======== ========
Shares used in Diluted per share computation 39,884 23,323
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-37
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share data, unaudited)
Nine months ended September 30,
-------------------------------
2003 2002
-------- --------
Cash flows from operating activities: (Restated)
Net loss $ (6,999) $(32,222)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss from discontinued operations 2,258 3,860
Depreciation 3,382 5,049
(Gain) Loss on disposal of property and equipment (627) 153
Cumulative effect of change in accounting principle -- 5,500
Inventory valuation and related charges 3,734 2,505
Asset impairment and other restructuring charges 3,108 --
Amortization of discount on promissory notes 270 --
Amortization of warrants -- 480
Stock compensation expense 771 --
Gain on redemption of convertible notes (10,262) (1,393)
Notes conversion expenses -- 771
Gain on vendor settlements (2,060) --
Write-off of notes receivable 100 159
Changes in operating assets and liabilities:
Accounts receivable 279 (745)
Inventory 4,113 8,246
Prepaid expenses and other assets 2,185 3,116
Accounts payable (2,104) 1,266
Other accrued liabilities 1,613 (11,330)
-------- --------
Net cash used in operating activities (239) (14,585)
-------- --------
Cash flows from investing activities:
Loan to Speedcom (1,100) --
Acquisition of property and equipment (142) (498)
Decrease in restricted cash 390 2,911
Net asset of discontinued operation (907) 2,964
-------- --------
Net cash provided by (used in) investing activities (1,759) 5,377
-------- --------
Cash flows from financing activities:
Proceeds from sale of common stock, net 307 7,320
Proceeds (payments) on bank loan (688) 1,612
Proceeds from convertible promissory note 2,639 --
Payments under capital lease obligations (43) (368)
Redemption of convertible notes -- (384)
Proceeds from employee stock purchase plan -- 35
-------- --------
Net cash provided by financing activities 2,215 8,215
-------- --------
Effect of exchange rate changes on cash 28 2
-------- --------
Net increase (decrease) in cash and cash equivalents 244 (991)
Cash and cash equivalents at beginning of the period 861 2,525
-------- --------
Cash and cash equivalents at end of the period $ 1,105 $ 1,534
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-38
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CONTINUED
(In thousands, unaudited)
Nine months ended September 30,
-------------------------------
2003 2002
-------- ------
Supplemental cash flow disclosures: (Restated)
Cash paid for interest $ 174 $ 919
======== ======
Non-cash transactions :
Redemption of 7% Convertible notes by
issuance of Series B Preferred Stock $ 20,090 $ --
======== ======
Redemption of convertible notes by issuance
of common stock $ -- $2,707
======== ======
Redemption of convertible notes in exchange for
property and equipment $ 2,300 $ --
======== ======
Issuance of common stock for vendor
payments $ 360 $1,273
======== ======
Issuance of common stock for consulting services $ 450 $ --
======== ======
Issuance of warrants for consulting services $ -- $ 480
======== ======
Equipment purchased under capital leases $ -- $ 233
======== ======
Treasury stock acquired in exchange for
property and equipment $ 74 $ --
======== ======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
consolidated financial statements.
F-39
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation of P-Com,
Inc.'s (referred to herein, together with its wholly-owned subsidiaries, as
"P-Com" or the "Company") financial condition as of September 30, 2003, and the
results of their operations and their cash flows for the three and nine months
ended September 30, 2003 and 2002. These unaudited condensed consolidated
financial statements should be read in conjunction with the Company's audited
2002 consolidated financial statements, including the notes thereto, and the
other information set forth therein, included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002. Operating results for the
three-month and nine-month periods ended September 30, 2003 are not necessarily
indicative of the operating results that may be expected for the year ending
December 31, 2003.
Discontinued Operations
As more fully discussed in Note 11, the financial statements for December 31,
2002 and September 30, 2002 have been restated to reflect the Company's services
business unit as a discontinued operation.
Change in Accounting Principle
Effective January 1, 2002, the Company adopted the Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets." Pursuant to the impairment recognition provisions of SFAS 142, the
Company timely completed its evaluation of the effects of adopting SFAS 142.
Accordingly, under the transitional provisions of SFAS 142, a goodwill
impairment loss of $5.5 million was recorded related to the Company's Services
segment during the first quarter of 2002. The pro forma effects of this change
in accounting principle are not material to the accompanying financial
statements.
Liquidity and Management's Plan
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. As reflected in the financial statements, for the nine-month period
ended September 30, 2003, the Company incurred a net loss of $7.0 million and
used $0.2 million cash in its operating activities. As of September 30, 2003,
the Company has deficit stockholders' equity of $20.1 million, and accumulated
deficit of $355.8 million. At September 30, 2003, the Company had approximately
$1.1 million in cash and cash equivalents, drawn principally from a credit
facility ("Credit Facility") with Silicon Valley Bank (the "Bank"), and a
working capital deficiency of approximately $12.2 million. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern.
The negative conditions are partially mitigated by the results of the Company's
restructuring efforts, and by certain financing activities, as discussed below.
In January 2003, the Company sold 2.1 million shares of Common Stock to an
existing stockholder for aggregate net proceeds of $307,000. Additionally, the
Company closed a $1.5 million, $0.3 million and $0.9 million convertible note
financing in March 2003, May 2003, and July 2003, respectively, resulting in
aggregate net proceeds of $2.7 million (the "Bridge Notes").
On August 4, 2003, as a result of the restructuring of its Convertible
Subordinated Notes due 2005 ("Convertible Notes"), the principal amount and
accrued interest of $21,138,000 was converted into approximately 1,000,000
shares of Series B Convertible Preferred Stock with a stated value of $21.138
per share. Each share of Series B Convertible Preferred Stock converts into a
number of shares of the Company's Common Stock equal to the stated value divided
by $0.20, or approximately 105,690,000 shares of Common Stock assuming all
shares of Series B Convertible Preferred Stock are converted.
On August 9, 2003, the Company received a cash advance of $0.9 million. The
Company used part of the proceeds from the cash advance to satisfy agreements
entered into with numerous trade and other creditors of the Company, who had
agreed to accept a reduced amount relative to the Company's total indebtedness
to such trade and other creditors, as part of the Company's restructuring plan.
The cash advance was applied to the purchase of
F-40
Series C Convertible Preferred Stock, in connection with the Series C Financing,
as discussed below and in note 18 to the financial statements.
On September 25, 2003, the Company renewed its credit facility for an additional
year, until September 25, 2004. The renewed credit facility allows for maximum
borrowings of up to $4.0 million.
On October 3, 2003, the Company closed its Series C Convertible Preferred Stock
financing, resulting in gross proceeds to the Company of approximately $11.0
million (the "Series C Financing"). Each share of Series C Convertible Preferred
Stock has a stated value of $1,750 per share. The Series C Financing resulted in
net proceeds to the Company of approximately $7.9 million, after deducting
expenses related to the Series C Financing, the payment of certain claims, and
the elimination of certain vendor liabilities of the Company.
Although the receipt of net proceeds from the Series C Financing and the debt
and other restructuring efforts have significantly improved the Company's
working capital position, its working capital deficit remains. Management
intends to focus on increasing sales, settling outstanding claims, controlling
general and operating expenses, and reducing the cost of goods sold, in order to
return the Company to profitability. To further increase sales, and position the
Company for future growth, additional financing may be required. No assurances
can be given that additional financing will continue to be available to P-Com on
acceptable terms, or at all. If the Company is unsuccessful in its plans to (i)
generate sufficient revenues from new and existing products sales; (ii) decrease
its costs of goods sold, and achieve higher margins; (iii) obtain additional
debt or equity financing; and (iv) negotiate agreements to settle outstanding
litigation and claims, the Company will have insufficient capital to continue
its operations. Without sufficient capital to fund the Company's operations, the
Company will no longer be able to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or to amounts and classification of
liabilities that may be necessary if the Company is unable to continue as a
going concern.
2. NET PROFIT (LOSS) PER SHARE
As of September 30, 2003, options to purchase 2,383,955 shares of Common Stock
at an average exercise price of $11.29 were outstanding, and were not included
in the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the Common Stock.
The Company had also issued options to employees and consultants to purchase
33,440,000 shares of Common Stock at an average exercise price of $0.12 per
share. The options are contingent on shareholder approval of an amendment to the
Company's Articles of Incorporation to increase the number of shares of Common
Stock authorized, and an amendment to the Company's 1995 Stock Option/Stock
Issuance Plan ("Plan") to increase the number of shares of Common Stock
available for issuance under the Plan.
For purposes of computing diluted net loss per share, weighted average common
share equivalents do not include stock options with an exercise price that
exceeds the average fair market value of the Company's Common Stock for the
period because the effect would be anti-dilutive. Because losses were incurred
in the nine-month period ended September 30, 2003 and 2002, all options,
warrants, and convertible notes are excluded from the computations of diluted
net loss per share because they are anti-dilutive.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Valuable Interest Entities. This interpretation clarifies rules relating to
consolidation where entities are controlled by means other than a majority
voting interest and instances in which equity investors do not bear the residual
economic risks. This interpretation was originally effective immediately for
variable interest entities created after January 31, 2003 and for interim
periods beginning after June 15, 2003 for interests acquired prior to February
1, 2003. However, the FASB is reviewing certain provisions of the standard and
has deferred the effective date for public companies to periods ending after
December 15, 2003. PCOM currently has no ownership in variable interest entities
and therefore adoption of this standard currently has no financial reporting
implications.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The statement amends and
clarifies accounting and reporting for derivative instruments,
F-41
including certain derivative instruments embedded in other contracts, and
hedging activities. This statement is designed to improve financial reporting
such that contracts with comparable characteristics are accounted for similarly.
The statement, which is generally effective for contracts entered into or
modified after June 30, 2003, is not anticipated to have a significant effect on
the Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. At September 30, 2003, the Company had no
such financial instruments outstanding and therefore adoption of this standard
had no financial reporting implications. On August 4, 2003, the Company issued
shares of Series B Convertible Preferred Stock, which have certain terms that,
while improbable, may require their mandatory redemption for cash. The Company
believes that accounting for these securities as a mezzanine security, outside
of equity, under Staff Accounting Bulletin No. 64 ("SAB 64") is appropriate.
4. BORROWING ARRANGEMENTS
On September 25, 2003, the Company renewed its Credit Facility with the Bank for
an additional year, until September 25, 2004. The Credit Facility consists of a
Loan and Security Agreement for a $1.0 million borrowing line based on domestic
receivables, and a Loan and Security Agreement under the Export-Import ("EXIM")
program for a $3.0 million borrowing line based on export related inventories
and receivables. The Credit Facility provides for cash advances equal to 70% of
eligible accounts receivable balances for both the EXIM program and domestic
lines, and up to $750,000 for eligible inventories (limited to 25% of eligible
EXIM accounts receivable), under the EXIM program. Advances under the Credit
Facility bear interest at the Bank's prime rate plus 2.5% per annum. The Credit
Facility is secured by all receivables, deposit accounts, general intangibles,
investment properties, inventories, cash, property, plant and equipment of the
Company. The Company has also issued a $4.0 million secured promissory note
underlying the Credit Facility to the Bank. As of September 30, 2003, the loan
amount payable to the Bank under the Credit Facility aggregated $2.2 million.
The Company has an unsecured overdraft line with a bank in Italy, for borrowings
up to $83,000, based on domestic trade receivables. Borrowings under this line
bear interest at 4.5% per annum. The amount outstanding on this overdraft line
at September 30, 2003 was approximately $36,000.
5. CONVERTIBLE PROMISSORY NOTES AND WARRANTS
The Bridge Notes and Warrants consisted of the following components at the date
of issuance (in thousands, unaudited):
September 30
2003
-------
Convertible Bridge Notes $ 2,700
Amount allocated to warrants, net
of amortization (463)
-------
$ 2,237
=======
On March 26, 2003, the Company closed the $1.5 million (face value) Bridge Notes
and Warrants financing. On May 28, 2003 the Company received an additional
$300,000 (face value) Bridge Notes and Warrants financing. On July 18, 2003, the
Company completed another bridge financing transaction in which it issued $0.9
million of 10% convertible promissory notes with a maturity date of one year
from the date of issuance. These convertible promissory notes were converted
into Series C Convertible Preferred Stock, in connection with the Series C
Financing, as discussed in note 18 to the financial statements.
The Bridge Notes are convertible into Common Stock of the Company contingent
upon the completion of an equity-
F-42
based financing in an amount equal to at least $3.0 million, and stockholder
approval of an amendment to the Company's certificate of incorporation to
increase the number of shares of Common Stock. The Bridge Notes bear interest at
10% per annum, and the rate will increase to 13% per annum if they remain
outstanding six months after the issuance date. The $1.5 million Bridge Notes
mature on March 25, 2004, the $0.3 million Bridge Notes mature on May 27, 2004,
and the $0.9 million mature on July 18, 2004, and they are subordinated to
amounts due to the Bank under the Credit Facility. In connection with the Series
C Financing, as discussed in note 18 to the financial statements, the Bridge
Notes converted into Series C Convertible Preferred Stock on October 3, 2003.
In connection with the issuance of the $1.5 million Bridge Notes, the Company
issued detachable Series A Warrants, with a three-year term, to purchase a total
of 2,500,000 shares of the Company's Common Stock, at $0.12 per share, and
Series B Warrants, with a three-year term, to purchase 3,500,000 shares of the
Company's Common Stock, at $0.20 per share. In connection with the issuance of
the $0.3 million Bridge Notes, the Company issued detachable Series A Warrants,
with a three-year term, to purchase a total of 500,000 shares of the Company's
Common Stock, at $0.12 per share, and Series B Warrants, with a three-year term,
to purchase 700,000 shares of the Company's Common Stock, at $0.20 per share. In
connection with the issuance of the $0.9 million Bridge Notes, the Company
issued detachable Series A Warrants, with a three-year term, to purchase a total
of 668,000 shares of the Company's Common Stock, at $0.12 per share, and Series
B Warrants, with a three-year term, to purchase 932,000 shares of the Company's
Common Stock, at $0.20 per share. The exercise price of the Series A and Series
B Warrants could be reduced to $0.001 per share of Common Stock should the
Company fail to obtain stockholder approval for a proposed amendment to the
Company's Bylaws to permit the issuance of convertible securities with certain
conversion, exercise or exchange price adjustment provisions. The Company and
the investor group have agreed to extend the period of time that the Company has
to obtain stockholder approval to December 31, 2003. The Company allocated the
proceeds of compound instrument to the Bridge Notes and the Warrants based upon
their relative fair values. The fair value of the warrants was estimated using
the Black-Scholes model, with the following assumptions: expected volatility of
197%, weighted-average risk free interest rate of 2.12%, weighted average
expected lives of 3 years, and a zero dividend yield. The value of the warrants
has been disclosed in note 5 to the financial statements, and is being amortized
over the maturity period of the Bridge Notes to interest expense. The face value
of the Bridge Notes was considered their fair value for purposes of this
allocation. In addition, the conversion terms afforded the Bridge Notes resulted
in a beneficial conversion feature, represented by the amount that the market
value of the Common Stock on the commitment date exceeded the conversion rate.
The beneficial conversion feature amount, which exceeds the current carrying
value of the Bridge Notes, will be recorded when the contingencies referred to
in this Note are resolved, if ever. The carrying value of the Bridge Notes is
being accreted to their respective face values through periodic charges to
interest expense. Total amortization of the discounts amounted to $270,000 for
the nine-month period ended September 30, 2003.
6. BALANCE SHEET COMPONENTS
Inventory
September 30, December 31,
2003 2002
------- -------
(Restated)
Raw materials $ 2,592 $ 9,748
Work-in-process 990 1,580
Finished goods 1272 815
Inventory at customer sites 75 290
------- -------
$ 4,929 $12,433
======= =======
F-43
Inventory consists of the following (in thousands of dollars, unaudited):
Other Accrued Liabilities
Other accrued liabilities consist of the following (in thousands, unaudited):
September 30, December 31,
2003 2002
------------- ------------
(Restated)
Purchase commitment $1,238 $2,195
Advance from investors 1,300 --
Accrued warranty (a) 892 936
Accrued employee compensation 1,001 943
Value added tax payable 496 248
Customer advances 382 267
Lease obligations 665 435
Accrued rent 560 --
Deferred revenue 303 290
Senior subordinated secured promissory note (b) 202 202
Interest payable 129 276
Other 1,249 982
------ ------
$8,417 $6,774
====== ======
a) A summary of product warranty reserve activity is as follows:
Balance at January 1, 2003 $ 936
Additions relating to products sold 300
Payments (344)
-----
Balance at September 30, 2003 $ 892
=====
F-44
b) In lieu of the payment of interest due on certain of the Company's
4.25% Convertible Subordinated Notes due on November 1, 2002, the Company
issued a promissory note in the amount of approximately $0.2 million. The
promissory note bears interest at 7% per annum, and matured on May 1,
2003. After maturity, interest shall accrue at the rate of 9% per annum.
The promissory note is secured by certain property and equipment of the
Company. The note was subsequently repaid in October 2003.
Deferred Contract Obligations
In connection with a Joint Development and License Agreement ("JDL"), the
Company entered into an Original Equipment Manufacturer Agreement ("OEM") with a
vendor. Under the OEM, the Company agreed to pay the vendor $8.0 million for the
vendor's marketing efforts for Company products manufactured under the JDL. As
of September 30, 2003 and 2002, this $8.0 million payment obligation remains
outstanding because the vendor has not performed its marketing obligations. The
Company has written to contest the vendor's claim for $8.0 million and has
asserted additional claims against the vendor in the amount of $11,634,803,
exclusive of interest.
7. INDEMNIFICATIONS
Officer and Director Indemnifications
As permitted under Delaware law and to the maximum extent allowable under that
law, the Company has agreements whereby the Company indemnifies its current and
former officers and directors for certain events or occurrences while the
officer or director is, or was serving, at the Company's request in such
capacity. These indemnifications are valid as long as the director or officer
acted in good faith and in a manner that a reasonable person believed to be in
or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. The maximum potential amount of future payments the
Company could be required to make under these indemnification agreements is
unlimited; however, the Company has a director and officer insurance policy that
limits the Company's exposure and enables the Company to recover a portion of
any future amounts paid. As a result of the Company's insurance policy coverage,
the Company believes the estimated fair value of these indemnification
obligations is minimal.
Other Indemnifications
As is customary in the Company's industry, as provided for in local law in the
U.S. and other jurisdictions, many of the Company's standard contracts provide
remedies to its customers, such as defense, settlement, or payment of judgment
for intellectual property claims related to the use of our products. From time
to time, the Company indemnifies customers against combinations of loss,
expense, or liability arising from various trigger events related to the sale
and the use of our products and services. In addition, from time to time the
Company also provides protection to customers against claims related to
undiscovered liabilities or additional product liability. In the Company's
experience, claims made under such indemnifications are rare and the associated
estimated fair value of the liability is not material.
8. COMMON STOCK
In January 2003, the Company sold 2.1 million shares of Common Stock to an
existing stockholder at a per share price of $0.18, for aggregate net proceeds
of $307,000.
In April 2003, the Company issued 1,500,000 and 3,000,000 shares of Common Stock
to Liviakis Financial Communications Inc. ("Liviakis"), and Cagan McAfee Capital
Partners, LLC ("CMCP"). The Common Stock issued to CMCP was issued in
consideration for certain investment banking and other services provided to the
Company by CMCP, and the Common Stock issued to Liviakis was issued in
consideration for certain financial, public and investor relations services
provided to the Company by Liviakis. The Common Stock issued for these
F-45
services was valued at the market prices on the dates issued. Aggregate
compensation expense associated with these transactions during the nine months
ended September 30, 2003 amounted to $450,000.
In June 2003, the Company acquired 920,000 shares of Common Stock in exchange
for property and equipment valued at $74,000. These shares are held in treasury.
In August 2003, the Company issued 1,000,000 shares of Common Stock to a
landlord and 2,400,000 shares of Common Stock to a vendor, each in consideration
for the termination of certain obligations of the Company to the landlord and
the vendor.
9. SERIES B CONVERTIBLE PREFERRED STOCK
On August 4, 2003, as a result of the restructuring of its Convertible Notes,
the principal amount and accrued interest of $21,138,000 was converted into
approximately 1,000,000 shares of Series B Convertible Preferred Stock with a
stated value of $21.138 per share. Each share of Series B Convertible Preferred
Stock converts into a number of shares of the Company's Common Stock equal to
the stated value divided by $0.20. Certain holders of Series B Convertible
Preferred Stock have agreed to convert the Series B Convertible Preferred Stock
into Common Stock upon receipt of stockholder approval to increase the number of
authorized shares of the Company's Common Stock to allow for conversion.
Assuming conversion of all shares of the Series B Convertible Preferred Stock,
the Company will issue approximately 105,690,000 additional shares of Common
Stock.
If declared, the holders of the Series B Convertible Preferred Stock shall be
entitled to receive dividends payable out of funds legally available therefor.
Holders of Series B Convertible Preferred Stock shall share pro rata in all
dividends and other declared distributions. The basis of distribution shall be
the number of shares of Common Stock that the holders would hold if all of the
outstanding shares of Series B Convertible Preferred Stock had converted into
Common Stock.
Any time after January 31, 2004 and subject to certain limitations, the Company
may require the holders of Series B Convertible Preferred Stock to convert all
outstanding shares of Series B Convertible Preferred Stock into shares of Common
Stock, in accordance with the optional conversion formula, and all of the
following conditions are met:
o Closing bid price of the Common Stock for 10 consecutive trading days prior to
delivery of the mandatory conversion Notice equals or exceeds $0.40;
o Company shall have filed a registration statement covering all shares of
Common Stock issuable upon conversion of the Series B Convertible Preferred
Stock, declared effective by the SEC, and continuing effectiveness through and
including the date of the mandatory conversion;
o All shares of Common Stock issuable upon conversion of Series B Convertible
Preferred Stock are authorized and reserved for issuance; registered for resale
under the Securities Act; and listed on the Bulletin Board or other national
exchange; and
o All amounts, if any, accrued or payable under the Certificate of Designation,
Rights and Preferences of the Series B Convertible Preferred Stock ("Certificate
of Designation") shall have been paid.
Upon the occurrence of the following events, the holders of Series B Convertible
Preferred Stock may request the Company to purchase their shares of Series B
Convertible Preferred Stock for cash:
o Company fails to remove any restrictive legend on any Common Stock certificate
issued to Series B Convertible Preferred Stock holders upon conversion as
required by the Certificate of Designation;
o Company makes an assignment for creditors or applies for appointment of a
receiver for a substantial part of its business/property or such receiver is
appointed;
F-46
o Bankruptcy, insolvency, reorganization or liquidation proceedings shall be
instituted by or against the Company;
o Company sells substantially all of its assets;
o Company merges, consolidates or engages in a business combination with another
entity that is required to be reported pursuant to Item 1 of Form 8-K (unless
the Company is the surviving entity and its capital stock is unchanged);
o Company engages in transaction(s) resulting in the sale of securities whereby
such person or entity would own greater than 50% of the outstanding shares of
Common Stock of the Company (on a fully-diluted basis);
o Company fails to pay any indebtedness of more than $250,000 to a third party,
or cause any other default which would have a material adverse effect on the
business or its operations.
The Series B Convertible Preferred Stock ranks senior to the Common Stock, the
Series A Preferred Stock and any class or series of capital stock of the Company
created thereafter. The consent of the majority holders of the Series B
Convertible Preferred Stock is required to create any securities that rank
senior or pari passu to the Series B Convertible Preferred Stock. Upon a
liquidation event, any securities senior to the Series B Convertible Preferred
Stock shall receive a distribution prior to the Series B Convertible Preferred
Stock and pursuant to the rights, preferences and privileges thereof, and the
Series B Convertible Preferred Stock shall receive the liquidation preference
with respect to each share. If the assets and funds for distribution are
insufficient to permit the holders of Series B Convertible Preferred Stock and
any pari passu securities to receive their preferential amounts, then the assets
shall be distributed ratably among such holders in proportion to the ratio that
the liquidation preference payable on each share bears to the aggregate
liquidation preference payable on all such shares. If the outstanding shares of
Common Stock are increased/decreased by any stock splits, stock dividends,
combination, reclassification, reverse stock split, etc., the conversion price
shall be adjusted accordingly. Upon certain reclassifications, the holders of
Series B Convertible Preferred Stock shall be entitled to receive such shares
that they would have received with respect to the number of shares of Common
Stock into which the Series B Convertible Preferred Stock would have converted.
If the Company issues any securities convertible for Common Stock or options,
warrants or other rights to purchase Common Stock or convertible securities pro
rata to the holders of any class of Common Stock, the holders of Series B
Convertible Preferred Stock shall have the right to acquire those shares to
which the would have been entitled upon the conversion of their shares of Series
B Convertible Preferred Stock into Common Stock. The Series B Convertible
Preferred Stock does not have voting rights.
10. ASSET IMPAIRMENT AND OTHER RESTRUCTURING CHARGES
The Company continually monitors its inventory carrying value in the light of
the slowdown in the global telecommunications market, especially with regard to
an assessment of future demand for its Point-to-Multipoint, and its other legacy
product line. This has resulted in a $2.0 million charge to cost of sales for
its Point-to-Multipoint, Tel-Link Point-to-Point and Air-link Spread Spectrum
inventories during the second quarter of 2003. In the first quarter of 2003, the
Company recorded a $3.4 million inventory related charge to cost of sales, of
which $2.0 million was related to its Point-to-Multipoint inventories. These
charges were offset by credits of $1.8 million in the second quarter associated
with a write-back of accounts payable and purchase commitment liabilities
arising from vendor settlements.
In the event that certain facts and circumstances indicate that the long-lived
assets may be impaired, an evaluation of recoverability would be performed. When
an evaluation occurs, management conducts a probability analysis based on the
weighted future undiscounted cash flows associated with the asset. The results
are then compared to the asset's carrying amount to determine if an impairment
is necessary. The cash flow analysis for the property and equipment is performed
over the shorter of the expected useful lives of the assets, or the expected
life cycles of our product line. An impairment charge is recorded if the net
cash flows derived from the analysis are less than the asset's carrying value.
We deem that the property and equipment is fairly stated if the future
undiscounted cash flows exceed its carrying amount. In the first and second
quarter of 2003, the Company continued to reevaluate
F-47
the carrying value of property and equipment relating to its Point-to-Multipoint
product line, that are held for sale. The evaluation resulted in a $2.5 million
provision for asset impairment in the second quarter of 2003, and $0.6 million
provision in the first quarter of 2003. As a result of these adjustments, there
is no remaining net book value of property and equipment related to the
Point-to-Multipoint product line.
A summary of inventory reserve and provision for impairment of plant and
property activities is as follows:
Inventory Provision for
Reserve impairment
--------- -------------
Balance at January 1, 2003 $ 39,567 $ --
Additions charged to Statement of Operations 5,517 3,108
Deductions from reserves (17,910) (300)
Balance at September 30, 2003 $ 27,174 $ 2,808
In connection with a workforce reduction in May 2003, the Company accrued a $0.2
million charge relating to severance packages given to certain of its executive
officers. All pertinent criteria for recognition of this liability were met
during the period of recognition.
In the third quarter of 2003, the Company accrued $350,000 for liability arising
from a terminated lease facility in the United Kingdom, as discussed in note 16
to the financial statements
11. GAIN (LOSS) ON DISCONTINUED OPERATIONS
In the first quarter of 2003, the Company committed to a plan to sell its
services business, P-Com Network Services, Inc. ("PCNS"). Accordingly, beginning
in the first quarter of 2003, this business is reported as a discontinued
operation and the financial statement information related to this business has
been presented on one line, titled "Discontinued Operations" in the Consolidated
Statements of Operations for the three-month and nine-month period ended
September 30, 2003 and 2002. On April 30, 2003, the Company entered into an
Asset Purchase Agreement with JKB Global, LLC ("JKB") to sell certain assets of
PCNS. The total cash consideration was approximately $105,000, plus the
assumption of certain liabilities. The Company guaranteed PCNS' obligations
under its premises lease, through July 2007. As part of the sale to JKB, JKB
agreed to sublet the premises from PCNS for one year beginning May 1, 2003. The
terms of the sublease required JKB to pay less than the total amount of rent due
under the terms of the master lease. As a result, the Company remained liable
under the terms of the guaranty for the deficiency, under the terms of the
master lease of approximately $1.5 million, and the amount is accrued as loss on
disposition of discontinued operations in the second quarter of 2003, which was
the period that such loss was incurred. In the third quarter of 2003, the
Company reached an agreement with the landlord to settle the lease guarantee for
$0.3 million, and therefore wrote-back the excess $1.2 million accrual as a gain
in discontinued operations in the third quarter of 2003.
F-48
Summarized results of PCNS are as follows (in thousands):
Three Months Ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
------- ------- ------- -------
Sales $ -- $ 1,100 $ 1,065 $ 2,234
------- ------- ------- -------
Loss from operations $ -- $ (909) $ (702) $(3,860)
Gain (Loss) on disposition
of discontinued operations 1,367 -- (1,556) --
------- ------- ------- -------
1,367 (909) (2,258) (3,860)
Provision for income taxes -- -- -- --
------- ------- ------- -------
Net profit (loss) $ 1,367 $ (909) $(2,258) $(3,860)
======= ======= ======= =======
The gain from sales of the services business unit in the third quarter ended
September 30, 2003 was $1.37 million, arising from the write-back of excess
accrual on the lease guarantee subsequent to the settlement with the landlord.
The loss from the sale of the discontinued services unit was $1.6 million for
the nine-months ended September 30, 2003, principally due to the write-off of
assets upon the discontinuation of the services business unit.
The assets and liabilities of the discontinued operations consisted of the
following (in thousands):
September 30, December 31,
2003 2002
------ ------
Total assets related to discontinued operations
Cash $ 7 $ 342
Accounts receivable -- 763
Inventory -- 1,206
Prepaid expenses and other assets -- 10
Property plant and equipment -- 529
Other assets 41 73
------ ------
$ 48 $2,923
====== ======
Total liabilities related to discontinued operations
Accounts payable $ 191 $ 466
Other accrued liabilities 158 293
Loan payable to bank -- 326
------ ------
$ 349 $1,085
====== ======
F-49
12. SALES BY GEOGRAPHIC REGION AND CONCENTRATIONS
The breakdown of product sales by geographic region is as follows (in
thousands):
For Three Months Ended For Nine Months Ended
September 30 September 30
------------------- --------------------
2003 2002 2003 2002
------ ------- ------- -------
(Restated) (Restated)
North America $ 474 $ 535 $ 1,233 $ 2,296
United Kingdom 1,902 1,552 5,098 4,471
Europe 984 1,467 2,704 3,586
Asia 1,455 2,522 4,271 11,156
Other Geographic Regions 754 274 1,845 783
------ ------- ------- -------
$5,569 $ 6,350 $15,151 $22,292
====== ======= ======= =======
During the nine-month period ended September 30, 2003 and 2002, four and two
customers accounted for a total of 56% and 29% of our total sales, respectively.
13. EMPLOYEE STOCK OPTION EXPENSE
The Company continues to apply the intrinsic method in accounting for stock
based employee compensation and, accordingly, has reflected the appropriate
disclosure provisions of SFAS No. 123. Had stock-based compensation costs for
our two stock-based compensation plans been determined and reported on the fair
value method at the grant dates for awards under those plans, consistent with
the method of SFAS 123, our net loss and net loss per share would have been
reported as follows:
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net profit (loss) applicable to
common stockholders :
As reported $ 9,400 $ (9,003) $ (6,999) $ (32,222)
Pro forma $ 9,187 $ (9,963) $ (8,137) $ (35,524)
Net profit (loss) per share
As reported - Basic $ 0.22 $ (0.29) $ (0.18) $ (1.38)
Pro forma - Basic $ 0.22 $ (0.32) $ (0.20) $ (1.52)
Net profit (loss) per share
As reported - Diluted $ 0.06 $ (0.29) $ (0.18) $ (1.38)
Pro forma - Diluted $ 0.06 $ (0.32) $ (0.20) $ (1.52)
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants in 2003 and 2002, respectively: expected volatility of 197%, and 125%;
weighted-average risk-free interest rates of 2.1% and 4.1%; weighted-average
expected lives of 4.0 and 3.5; respectively, and a zero dividend yield.
14. COMPREHENSIVE LOSS
Comprehensive loss is comprised of the Company's reported net loss and the
currency translation adjustment associated with our foreign operations.
Comprehensive income (loss) was $9.6 million and $(9.0) million for the three
months ended September 30, 2003 and 2002, respectively. Comprehensive loss was
$(6.5) million and $(31.9) million for the nine months ended September 30, 2003
and 2002, respectively.
15. ACQUISITION OF ASSETS AND CERTAIN LIABILITIES OF SPEEDCOM
On June 16, 2003, the Company entered into a definitive agreement to acquire the
operating and certain other assets
F-50
of SPEEDCOM Wireless Corporation ("SPEEDCOM") in exchange for 63.5 million
shares of the Company's Common Stock and the assumption of certain liabilities,
including approximately $3.0 million in subordinated debt of SPEEDCOM. SPEEDCOM
manufactures, configures and delivers a variety of broadband fixed-wireless
products, including its SPEEDLAN family of wireless Ethernet bridges and
routers. Internet service providers, telecommunications carriers and other
service providers, and private organizations in the U.S. and more than 80
foreign countries worldwide, use SPEEDCOM's products to provide broadband
"last-mile" wireless connectivity in various point-to-point and
point-to-multipoint configurations for distances up to 25 miles. SPEEDCOM's
products provide high-performance broadband fixed wireless solutions
specifically designed for building-to-building local area network connectivity
and wireless Internet distribution.
The shares proposed to be issued to SPEEDCOM will equal approximately 11.5% of
the Company's outstanding Common Stock immediately upon closing, assuming the
conversion of the Series B Convertible Preferred Stock, as mentioned in Note 9
to the financial statements, the conversion of the Series C Convertible
Preferred Stock issued in connection with the Series C Financing, as discussed
in note 18 to the financial statements, and the exercise or conversion of all
outstanding convertible securities of the Company. The acquisition will enable
the Company to expand its Spread Spectrum product offerings and expand its
distribution network. The SPEEDCOM transaction is subject to stockholder
approval of SPEEDCOM, and requires approval by the Company's stockholders of an
increase in the number of authorized shares of Common Stock of the Company.
In anticipation of the acquisition, the Company advanced an aggregate of
$1,100,000 to SPEEDCOM under a series of 10% convertible promissory notes. The
Company carries the amounts due as non-current assets and currently plans to
apply the amounts to the ultimate purchase price of SPEEDCOM.
The acquisition was completed December 10, 2003.
16. CONTINGENCIES
On April 4, 2003, Christine Schubert, Chapter 7 Trustee for Winstar
Communications, Inc. et al, filed a Motion to Avoid and Recover Transfers
Pursuant to 11 U.S.C. Sections 547 and 550, in the United States Bankruptcy
Court for the District of Delaware and served the Summons and Notice on July 22,
2003. The amount of the alleged preferential transfers to the Company is
approximately $13.7 million. We have reviewed the Motion and believe that the
payments made by Winstar Communications, Inc. are not voidable preference
payments under the United States Bankruptcy Code. In the opinion of management,
the circumstances surrounding this matter do not rise to the level that the
Company is required to record a liability.
The Company's landlord at its former research and development facility in
Watford, England, Legal & General Property Ltd., has asserted a claim against
the Company for amounts due under the terms of the facilities lease for $328,000
which amount has been accrued as a liability of the Company. The lease expires
in April 2008. While no assurances can be given, the Company is currently
negotiating a settlement to terminate all obligations under the terms of the
lease.
The Brevard County of Florida has filed a tax lien encumbering all property,
plant and equipment owned by the Company located in the County for payment of
delinquent personal property taxes. The balance on September 30, 2003 claimed by
Brevard County is approximately $120,000. The Company is currently preparing an
amended property tax return to address the unpaid taxes. Although the Company is
negotiating this matter with the taxing authority, management has determined
that the criteria for liability recognition has been met and has recorded the
liability.
17. RELATED PARTY TRANSACTIONS
Myntahl Corporation, a stockholder of the Company, is also an appointed
distributor in China and acts as our agent in Mexico. The Company had sales of
approximately $0.8 million to Myntahl, and accrued approximately $73,000 in
commissions to Myntahl during the three months ended September 30, 2003. The
Company has sales of approximately $1.8 million to Myntahl, and incurred
approximately $142,000 in commissions to Myntahl during the nine-month period
ended September 30, 2003.
18. SUBSEQUENT EVENTS
On October 3, 2003, the Company closed its Series C Convertible Preferred Stock
financing, resulting in gross proceeds to the Company of $11.0 million (the
"Series C Financing"). Each share of Series C Convertible Preferred
F-51
Stock has a stated value of $1,750 per share. The Series C Financing resulted in
net proceeds to the Company of approximately $7.9 million, after deducting
expenses related to the Series C Financing, the payment of certain claims, and
the elimination of certain vendor liabilities of the Company. Dividends accrue
on the Series C Convertible Preferred Stock beginning 12 months after the
closing, at 6% per annum paid semi-annually in cash or Common Stock, at the
option of the Company, and increasing to 8% per annum beginning 24 months after
the closing. At the Company's option, the Series C Convertible Preferred Stock
is convertible one hundred eighty days after the effective date of the
registration statement registering the shares of Common Stock issuable upon the
conversion of the Series C Convertible Preferred Stock, and upon the
satisfaction of the following conditions: (i) for ten consecutive days, the
Common Stock closes at a bid price equal to or greater than $0.20; (ii) the
continued effectiveness of the registration statement covering the Common Stock
issuable upon conversion of the Series C Convertible Preferred Stock; (iii) all
shares of Common Stock issuable upon conversion of the Series C Convertible
Preferred Stock and Series C-1 and Series C-2 Warrants are authorized and
reserved for issuance, are registered under the Securities Act of 1933
("Securities Act") for resale by the holders, and are listed or traded on the
Bulletin Board or other national exchange; (iv) there are no uncured redemption
events; and (v) all amounts accrued or payable under the Series C Convertible
Preferred Stock Certificate of Designation or registration rights agreement have
been paid. Assuming conversion of all shares of the Company's Series C
Convertible Preferred Stock, the Company will issue approximately 150 million
additional shares of Common Stock.
The holders of the Series C Convertible Preferred Stock also received 7,000
Series C-1 Warrants and 7,000 Series C-2 Warrants for each share purchased. The
Series C-1 Warrants have a term of five years and an initial exercise price of
$0.15 per warrant, increasing to $0.18 per warrant on the first anniversary of
the closing date. The Series C-2 Warrants have a term of five years and an
initial exercise price of $0.18 per warrant, increasing to $0.22 per warrant
eighteen months after the closing date.
F-52
Report of Independent Certified Public Accountants
Board of Directors
SPEEDCOM Wireless Corporation
We have audited the accompanying balance sheet of SPEEDCOM Wireless Corporation
as of December 31, 2002 and the related statements of operations, changes in
stockholders' (deficit) equity and cash flows for the year then ended. Our audit
also included the schedule listed in the index to Consolidated Financial
Statements and Schedules. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SPEEDCOM Wireless Corporation
at December 31, 2002, and the results of its operations and its cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
The accompanying financial statements have been prepared assuming that SPEEDCOM
Wireless Corporation will continue as a going concern. As more fully described
in Note 2, the Company has incurred recurring operating losses, negative cash
flows from operations and has negative working capital and a stockholder's
deficit at December 31, 2002. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans with
respect to these conditions are also discussed in Note 2. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/s/ AIDMAN, PISER & COMPANY, P.A.
Tampa, Florida
January 31, 2003, except for Notes 2 and 18,
as to which the date is December 10, 2003
F-53
SPEEDCOM WIRELESS CORPORATION
BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
2002 2003
------------ ------------
Assets (unaudited)
Current assets:
Cash $ 346,361 $ 182,762
Accounts receivable, net of allowances of $162,738 and $67,602
at 2002 and 2003, respectively 520,164 292,999
Current portion of leases receivable 248,993 81,331
Inventories, net 1,523,734 814,431
Prepaid expenses and other current assets 53,039 16,428
------------ ------------
Total current assets 2,692,291 1,387,951
Property and equipment, net 625,400 342,874
Leases receivable, net of current portion -- 23,418
Other assets 112,117 223,120
Intellectual property, net 1,096,125 888,516
------------ ------------
Total assets $ 4,525,933 $ 2,865,879
============ ============
Liabilities and stockholders' (deficit) equity
Current liabilities:
Accounts payable $ 1,135,405 $ 903,825
Accrued expenses 930,949 1,174,412
Due to related parties 3,106,414 4,117,470
Current portion of deferred revenue 20,939 24,474
Current portion of notes and capital leases payable 64,606 59,085
------------ ------------
Total current liabilities 5,258,313 6,279,266
Deferred revenue, net of current portion 4,626 11,731
Notes and capital leases payable, net of current portion 14,100 1,100,000
Stockholders' (deficit) equity:
Common stock, $.001 par value, 250,000,000 shares
authorized, 14,490,664 shares issued and outstanding 14,490 14,490
Preferred stock, $4.50 stock liquidation value per share,
10,000,000 shares authorized, 3,835,554 shares issued and 5,455,702 5,455,702
outstanding
Additional paid-in capital 17,800,749 17,800,749
Accumulated deficit (24,022,047) (27,796,059)
------------ ------------
Total stockholders' (deficit) equity (751,106) (4,525,118)
------------ ------------
Total liabilities and stockholders' (deficit) equity $ 4,525,933 $ 2,865,879
============ ============
See accompanying notes.
F-54
SPEEDCOM WIRELESS CORPORATION
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 AND
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
December 31 September 30
------------ -------------------------------
2002 2003 2002
------------ ------------ ------------
(unaudited) (unaudited)
Net revenue $ 7,676,327 $ 3,731,747 $ 5,663,044
Cost of goods sold 4,502,460 2,418,795 3,219,074
------------ ------------ ------------
Gross margin 3,173,867 1,312,952 2,443,970
Operating costs and expenses:
Salaries and related 3,007,659 1,714,323 2,385,319
General and administrative 2,347,006 1,571,383 1,858,027
Selling expenses 1,017,760 586,037 689,644
Provision for bad debt 419,585 74,130 378,783
Depreciation and amortization 704,795 540,053 527,617
Severance costs 629,814 90,000 679,815
------------ ------------ ------------
8,126,619 4,575,926 6,519,205
------------ ------------ ------------
Loss from operations (4,952,752) (3,262,974) (4,075,235)
Other income (expense):
Interest expense (395,676) (493,946) (247,099)
Interest income 63,646 8,665 55,643
Other expense, net (71,045) (25,757) (65,530)
------------ ------------ ------------
(403,075) (511,038) (256,986)
------------ ------------ ------------
Net loss (5,355,827) (3,774,012) (4,332,221)
Cumulative undeclared dividends on preferred stock -- (251,570) --
------------ ------------ ------------
Net loss attributable to common stockholders $ (5,355,827) $ (4,025,582) $ (4,332,221)
------------ ------------ ------------
Basic and diluted net loss per common share $ (0.47) $ (0.28) $ (0.40)
------------ ------------ ------------
Shares used to compute basic and diluted net loss
per common share 11,431,626 14,490,664 10,839,563
------------ ------------ ------------
See accompanying notes.
F-55
SPEEDCOM WIRELESS CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
YEAR ENDED DECEMBER 31, 2002
Common Stock Common Stock Preferred Preferred Additional
Shares Amount Stock Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
---------------------------------------------------------------------------------------------------------------------------
January 1, 2002 10,122,113 $10,122 3,835,554 $5,455,702 $ 17,710,477 $(18,666,220) $ 4,510,081
Issuance of common stock
in connection with
the exercise of
Series B Warrants 3,849,957 3,850 -- -- 378 -- 4,228
Employee stock-based
compensation -- -- -- -- 97,359 -- 97,359
Exercise of stock options 59,375 59 -- -- 141 -- 200
Issuance of common stock
for repricing
agreement 459,219 459 -- -- (459) -- --
Stock issuance and
registration costs -- -- -- -- (7,147) -- (7,147)
Net loss -- -- -- -- -- (5,355,827) (5,355,827)
-----------------------------------------------------------------------------------------------
December 31, 2002 14,490,664 $14,490 3,835,554 $5,455,702 $ 17,800,749 $(24,022,047) $ (751,106)
===============================================================================================
See accompanying notes.
F-56
SPEEDCOM WIRELESS CORPORATION
STATEMENTS OF CASH FLOW
YEAR ENDED DECEMBER 31, 2002 AND
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
December 31 September 30
2002 2003 2002
---- ---- ----
(unaudited) (unaudited)
Operating activities
--------------------
Net loss $(5,355,827) $(3,774,012) $(4,332,221)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 704,795 540,053 527,617
Provision for bad debt 419,585 74,130 378,783
Write off of notes receivable-related party 274,965 -- 274,965
Provision for inventory obsolescence 166,545 -- 178,224
Employee stock-based compensation and common stock issued for
services 97,359 -- 97,359
Warrants issued for services -- -- 42,724
Changes in operating assets and liabilities:
Restricted cash 42,724 -- --
Accounts receivable 1,604,842 153,035 1,260,952
Leases receivable 939,765 144,244 883,945
Inventories 134,955 709,303 320,558
Prepaid expenses and other current assets 93,554 36,611 69,104
Other assets 9,987 (111,003) 9,987
Accounts payable and accrued expenses (1,438,022) 11,883 (1,635,779)
Deferred revenue (62,863) 10,640 (54,211)
----------- ----------- -----------
Net cash used in operating activities (2,367,636) (2,205,116) (1,977,993)
Investing activities
Purchases of equipment (26,451) (60,138) (9,939)
Proceeds from disposals of equipment 7,626 10,220 7,626
----------- ----------- -----------
Net cash used in investing activities (18,825) (49,918) (2,313)
Financing activities
Net (payments to) borrowings from factor (298,676) -- (298,676)
Proceeds from loans from and warrants issued to related parties 2,928,000 1,015,000 2,438,000
Payments of loans from related parties (105,919) (3,944) (102,147)
Proceeds from issuance of notes -- 1,100,000 --
Payments of notes and capital leases (68,625) (19,621) (61,737)
Proceeds from issuance of common stock and warrants 4,428 -- 4,428
----------- ----------- -----------
Net cash provided by financing activities 2,459,208 2,091,435 1,979,868
----------- ----------- -----------
Net increase in cash 72,747 (163,599) (438)
Cash at beginning of year 273,614 346,361 273,614
----------- ----------- -----------
Cash at end of year $ 346,361 $ 182,762 $ 273,176
=========== =========== ===========
See accompanying notes.
F-57
SPEEDCOM WIRELESS CORPORATION
STATEMENTS OF CASH FLOW
YEAR ENDED DECEMBER 31, 2002 AND
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
SUPPLEMENTAL CASH FLOW INFORMATION
December 31 September 30
2002 2003 2002
---- ---- ----
(unaudited) (unaudited)
Supplemental disclosure of cash flow information
Cash paid for interest $91,692 $12,124 $35,761
------- ------- -------
Supplemental disclosure of noncash investing and financing activities
Stock-based compensation and common stock issued for services $97,359 -- $97,359
------- ------- -------
Conversion of accounts payable to loans from related parties $44,363 -- $44,363
------- ------- -------
Conversion of accounts payable to notes payable $74,903 -- $74,903
------- ------- -------
See accompanying notes.
F-58
SPEEDCOM WIRELESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND SEPTEMBER 30, 2003
1. Business
SPEEDCOM Wireless Corporation (SPEEDCOM) was incorporated in Florida on March
16, 1994 and reincorporated in Delaware on September 26, 2000. Prior to the
sale, described in Note 2, SPEEDCOM manufactured, configured and delivered
custom broadband wireless networking equipment, including the SPEEDLAN family of
wireless Ethernet bridges and routers, for business and residential customers
internationally. Internet service providers, telecommunications service
providers and private organizations in over 80 countries use SPEEDCOM products
to provide "last-mile" wireless connectivity between multiple buildings at
speeds up to 155 Megabits per second and distances up to 25 miles.
2. Sale of Business and Management's Plans
The accompanying financial statements are prepared on a going-concern basis,
which assumes that SPEEDCOM will realize its assets and discharge its
liabilities in the normal course of business. As reflected in the accompanying
financial statements, SPEEDCOM incurred operating losses of approximately
$5,356,000, $3,774,000 and $ 4,332,000 and negative cash flows from operations
of approximately $2,368,000, $2,205,000 and $1.978,000 for the year ended
December 31, 2002 and nine months ended September 31, 2003 and 2002,
respectively. In addition, the Company has a working capital deficit of
approximately $4,891,000 as of September 30, 2003. SPEEDCOM has been reliant on
loans and advances from affiliated companies and P-Com, Inc. ("P-Com") which
have amounted to $2,928,000 and $2,115,000 during the year ended December 31,
2002 and the nine months ended September 30, 2003, respectively. These
conditions raise substantial doubt as to the ability of SPEEDCOM to continue its
normal business operations as a going concern.
On December 10, 2003, the Company completed the sale of all of its operating
assets to P-Com in exchange for 63,500,000 shares of P-Com common stock and
P-Com's assumption of approximately $5,250,000 of liabilities. Upon completion
of the sale, SPEEDCOM's only assets are the investment in P-Com common stock,
which applying recent trading prices, has a value of approximately $9,000,000,
and a receivable from P-Com of $75,000. While management of SPEEDCOM is
currently evaluating the effects of the sale, it is not currently expected to
result in a loss if current P-Com market prices continue.
Upon completion of the sale to P-Com, SPEEDCOM became a non-operating public
shell company. Management's plans with respect to the shell involve the
identification of and merger with business candidates. While management is
currently reviewing specific business candidates there can be no assurance that
a merger can be effected under acceptable terms. Until such a transaction can be
effected, operational capital will be provided by additional cash reserves and,
if necessary, the sale of some or all of the P-Com common stock.
Ultimately, the Company's ability to continue is dependent upon the successful
merger with another business candidate and the establishment of profitable
operations. The accompanying financial statements do not include any adjustments
that may arise as a result of this uncertainty.
3. Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The accompanying unaudited interim financial statements as of September 30, 2003
and the nine months ended September 30, 2003 and 2002 have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). Certain information and footnote disclosure normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted
F-59
pursuant to those rules and regulations. Unless otherwise noted interim
financial information included in the footnotes is unaudited.
In the opinion of management, the unaudited interim financial statements reflect
all adjustments (consisting of only normal and recurring adjustments) necessary
to present fairly the financial position, results of operations and cash flows
for those periods presented. Operating results for the nine months ended
September 30, 2003 are not indicative of the results that may be expected for
the year ended December 31, 2003.
Revenue Recognition
SPEEDCOM derived its revenue from short-term (generally two to four weeks in
duration) arrangements with customers to configure, assemble, and deliver
wireless communications products. SPEEDCOM recognized revenue upon shipment of
the products to the customer. Customers may exchange or return merchandise
within 30 days if the product is found to be non-functional upon delivery.
SPEEDCOM accrued a provision for estimated returns, based upon its actual
historical return experience, concurrent with revenue recognition. SPEEDCOM also
derived revenue from extended maintenance agreements, for periods of one to
three years. Revenue on extended maintenance agreements was deferred and
recognized on a straight-line basis over the term of the agreement. Shipping
costs billed to customers are included in revenue; the related shipping costs
are included in cost of goods sold.
Concentrations
Credit Risk: Financial instruments that are exposed to credit risk, as defined
by Statement of Financial Accounting Standards (SFAS) No. 107, DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS, consist principally of accounts receivable
and leases receivable. These accounts are highly concentrated among foreign
companies and companies in the telecommunications sector. Credit was extended to
these customers based on management's evaluation of the individual customer's
financial condition and generally collateral is not required. SPEEDCOM generally
requires prepayments or letters of credit from foreign customers to facilitate
currency exchange and minimize credit risk. Anticipated credit losses are
provided for in the financial statements based upon historical experience.
Customers: No customer accounted for more than 10% of SPEEDCOM's revenue for the
year ended December 31, 2002 or the nine months ended September 30, 2003. In
addition, no customer accounted for more than 10% of SPEEDCOM's gross accounts
receivable as of December 31, 2002 and September 30, 2003. However, one customer
accounted for 97% of SPEEDCOM's lease receivable as of December 31, 2002.
Suppliers: Many of the key hardware and software components necessary for the
assembly of SPEEDCOM's products are only available from a single supplier or
from a limited number of suppliers. SPEEDCOM has experienced delays and
shortages in the supply of components in the past and could experience delays
and shortages in the future. SPEEDCOM generally does not maintain a significant
inventory of components and does not have many long-term supply contracts with
its suppliers. As a result, there is a significant risk that SPEEDCOM, and any
successors, may not have access to materials to meet its customers'
requirements. SPEEDCOM, on an on going basis, searches for alternative vendors
or analyzes whether in house manufacturing would be more cost beneficial. In the
event that a single supplier became unavailable, and another supplier could not
be identified that manufactured the same product, SPEEDCOM would attempt to use
an alternative product in the assembly or redesign the finished product.
Allowance for Doubtful Accounts
SPEEDCOM records an allowance for doubtful accounts based on specifically
identified amounts that SPEEDCOM believes to be uncollectible. SPEEDCOM also
records additional allowance based on certain percentages of our aged
receivables, which are determined based on historical experience and
management's assessment of the general financial conditions affecting SPEEDCOM's
customer base. If SPEEDCOM's actual collections experience changes, revisions to
the allowance may be required. SPEEDCOM has a limited number of customers with
F-60
individually large amounts due at any given balance sheet date. Any
unanticipated change in one of those customer's credit worthiness or other
matters affecting the collectibility of amounts due from such customers, could
have a material affect on SPEEDCOM's results of operations in the period in
which such changes or events occur. After all attempts to collect a receivable
have failed, the receivable is written off against the allowance.
Factored Accounts Receivable
SPEEDCOM accounted for its accounts receivable factoring arrangement, which was
terminated during 2002, as a secured borrowing pursuant to SFAS No. 140,
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES. The related service charge is reflected in interest expense in
the period that the accounts receivable are transferred. Cash balances retained
by the lending institution are reflected in the accompanying financial
statements as restricted.
Inventories
Inventories consist of telecommunications equipment and related component parts
and finished assemblies ready for assembly and delivery. Inventories are
recorded at the lower of cost (using the first-in, first-out method) or net
realizable value. Labor and overhead costs related to assemblies in process are
included in the cost of finished assemblies.
Property And Equipment
Property and equipment are stated at cost. Depreciation and amortization are
calculated using the straight-line method over the estimated useful lives of
depreciable assets ranging from two to five years. Leasehold improvements are
amortized over the shorter of the useful life of the asset or the term of the
related lease agreement. Repairs and maintenance, which amounted to
approximately $43,000 for the year ended December 31, 2002, is charged to
expense as incurred. SPEEDCOM has no material commitments or plans for capital
additions or improvements.
Intellectual Property
Intellectual property is stated at cost. Amortization is calculated using the
straight-line method over the six-year term of the underlying contractual
agreement, which is less than the estimated useful life of the technology.
Impairments of Long-lived Assets
SPEEDCOM reviews long-lived assets to be held and used, consisting of property
and equipment and intellectual property, for impairment whenever events or
changes in circumstances indicate the asset may be impaired. In the event that
the impairment indicators, including market or industry conditions or financial
conditions, are identified, SPEEDCOM determines whether impairments are present
by comparing the net book value of long-lived assets to projected undiscounted
cash flows at the lowest discernable level for which cash flow information can
be projected. In the event that undiscounted cash flows are insufficient to
recover the net carrying value over the remaining useful lives, impairment
charges are calculated and recorded in the period first estimable using
discounted cash flows or other fair value information. During the periods
presented, there were no material impairment charges.
Financial Instruments
SPEEDCOM's significant financial instruments include cash, accounts receivable,
accounts payable and notes payable. SPEEDCOM believes that the carrying values
of financial instruments in the accompanying balance sheets approximate their
respective fair values.
Income Taxes
SPEEDCOM follows the liability method of accounting for income taxes in
accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES (SFAS 109). Under SFAS
109, deferred income taxes are recorded based
F-61
upon differences between the financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to affect taxable income. Valuation
allowances against the carrying value of net deferred tax assets are recorded
when management determines that recoverability of such amounts is not reasonably
assured.
Stock-Based Compensation
SPEEDCOM accounts for employee stock-based compensation using the intrinsic
method in accordance with Accounting Principles Board (APB) No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES (APB No. 25), and related interpretations.
Accordingly, in cases where exercise prices for stock option grants equal or
exceed the trading market value of the stock at the date of grant, SPEEDCOM
recognizes no compensation expense. In cases where exercise prices are less than
the fair value of the stock at the date of grant, compensation is recognized
over the period of performance or the vesting period. SPEEDCOM accounts for
non-employee stock-based compensation using the trading market price for common
stock and the Black-Scholes valuation model for stock options and warrants, in
accordance with SFAS No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION (SFAS No.
123).
The following table reflects supplemental financial information related to
stock-based employee compensation, as required by SFAS No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE (SFAS No. 148) (See Recent
Accounting Pronouncements, below):
Year Ended Nine Months Ended
December 31, September 30,
2002 2003 2002
---- ---- ----
(unaudited) (unaudited)
Stock-based employee compensation costs used in the determination
of net loss, as reported $ (97,359) -- $ (97,359)
----------- ----------- -----------
Net loss, as reported $(5,355,827) $(3,774,012) $(4,332,221)
Stock-based employee compensation costs that would have been
included in the determination of net loss if the fair value method
(Statement 123) had been applied to all awards (234,026) (84,711) (175,521)
----------- ----------- -----------
Unaudited pro forma net loss, as if the fair value method had been
applied to all awards $(5,589,853) $(3,858,723) $(4,507,742)
----------- ----------- -----------
Loss per share, as reported $ (0.47) $ (0.26) $ (0.40)
----------- ----------- -----------
Unaudited pro forma loss per share, as if the fair value method had
been applied to all awards $ (0.49) $ (0.27) $ (0.42)
----------- ----------- -----------
Advertising Costs
SPEEDCOM's policy is to expense advertising costs as incurred. During the year
ended December 31, 2002 SPEEDCOM incurred $71,805 in advertising expenses. Such
amount is included in selling expenses.
Research and Development Costs
SPEEDCOM's policy is to expense all research and development expenses as
incurred. Research and development expenses during the year ended December 31,
2002 totaled $256,170. Such amount is included in general and administrative
expenses.
Net Loss Per Share
SPEEDCOM has applied the provisions of SFAS No. 128, EARNINGS PER SHARE, which
establishes standards for computing and presenting earnings (loss) per share.
Basic earnings (loss) per share are computed by dividing net earnings (loss) by
the weighted average number of shares outstanding for the period. The
calculation of diluted earnings per share includes the effect of dilutive common
stock equivalents. No dilutive common stock equivalents existed in any year
presented.
F-62
Use Of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Recent Accounting Pronouncements
SFAS No. 148, ACCOUNTING FOR STOCK BASED COMPENSATION--TRANSITION AND
DISCLOSURE:
During December 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148. SFAS No. 148 establishes standards for two alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation under SFAS No. 123. SFAS No. 148 also amends and augments the
disclosure provisions of SFAS No. 123 and APB No. 28, INTERIM FINANCIAL
REPORTING to require disclosure in the summary of significant accounting
policies for all companies the effects of an entity's accounting policy with
respect to stock-based employee compensation on reported net income and earnings
per share in annual and interim financial statements. The transition standards
and disclosure requirements of SFAS No. 148 are effective for fiscal years and
interim periods ending after December 15, 2002.
SFAS No. 148 does not require SPEEDCOM to transition from the intrinsic approach
provided in APB No. 25. In addition, SPEEDCOM does not currently plan to
transition to the fair value approach in SFAS No. 123. However, SPEEDCOM has
adopted the additional disclosure requirements of SFAS No. 148 in this annual
report.
FASB Interpretation 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others
(Interpretation 45:)
During November 2002, the FASB issued Interpretation 45. Under Interpretation 45
guarantees, contracts and indemnification agreements are required to be
initially recorded at fair value. Current practice provides for the recognition
of a liability only when a loss is probable and reasonably estimable, as those
terms are defined under SFAS No. 5, ACCOUNTING FOR CONTINGENCIES. In addition,
Interpretation 45 requires significant new disclosures for all guarantees even
if the likelihood of the guarantor's having to make payments under the guarantee
is remote. The disclosure requirements are effective for financial statements of
interim and annual periods ending after December 15, 2002. The initial
recognition and measurement provisions of Interpretation 45 are applicable on a
prospective basis to guarantees, contracts or indemnification agreements issued
or modified after December 31, 2002.
SPEEDCOM currently has no guarantees, contracts or indemnification agreements
that would require fair value treatment under the new standard.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities
(SFAS No. 146):
During July 2002, the FASB issued SFAS No. 146. SFAS No. 146 addresses
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring) (EITF-94-3). SFAS No. 146
requires the recognition of a liability for costs associated with exit or
disposal activities when the liability is actually incurred. Under EITF 94-3,
such costs were generally recognized in the period in which an entity committed
to an exit plan or plan of disposal. While both standards covered costs
associated with one-time termination benefits (e.g. severance pay or stay-bonus
arrangements), SFAS No. 146 provides standards that provide for the timing of
recognition of these types of benefits. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002.
Management's plans with respect to the continuation of SPEEDCOM are described in
Note 2. During 2002,
F-63
SPEEDCOM incurred severance costs as described in Note 16. While SPEEDCOM's
accounting for the severance cost followed EITF 94-3, there would have been no
material difference had SFAS No. 146 been in effect.
SFAS No. 145 Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13 and
TECHNICAL CORRECTIONS (SFAS 145):
During April 2002, the FASB issued SFAS No. 145. SFAS No. 145 rescinds SFAS No.
4, Reporting Gains and Losses from Extinguishments of Debt (SFAS No. 4), which
required all gains and losses from extinguishments of debt to be aggregated and,
if material, classified as an extraordinary item, net of related income tax
effect. As a result of the rescission of SFAS No. 4, the classification of gain
and losses arising from debt extinguishments requires consideration of the
criteria for extraordinary accounting treatment provided in APB No. 30,
Reporting the Results of Operations. In the absence of SFAS No. 4, debt
extinguishments that are not unusual in nature and infrequent in occurrence
would be treated as a component of net income or loss from continuing
operations. SFAS No. 145 is effective for financial statements issued for fiscal
years beginning after May 15, 2002.
In April 2003, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The statement amends and
clarifies accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. This
statement is designed to improve financial reporting such that contracts with
comparable characteristics are accounted for similarly. The statement, which is
generally effective for contracts entered into or modified after June 30, 2003,
is not anticipated to have a significant effect on SPEEDCOM's financial position
or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. SPEEDCOM currently has no such financial
instruments outstanding or under consideration and therefore adoption of this
standard currently has no financial reporting implications.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Valuable Interest Entities. This interpretation clarifies rules relating to
consolidation where entities are controlled by means other than a majority
voting interest and instances in which equity investors do not bear the residual
economic risks. This interpretation was originally effective immediately for
variable interest entities created after January 31, 2003 and for interim
periods beginning after June 15, 2003 for interests acquired prior to February
1, 2003. However, the FASB is reviewing certain provisions of the standard and
has deferred the effective date for public companies to periods ending after
December 15, 2003. SPEEDCOM currently has no ownership in variable interest
entities and therefore adoption of this standard currently has no financial
reporting implications.
4. Leases Receivable
During the year ended December 31, 2002, SPEEDCOM converted two leases
receivable, recorded at approximately $1,290,000, into a single lease receivable
with approximately $336,000 due immediately, five payments of $50,000 due over a
five-month period and a balloon payment of approximately $328,000 due in August
2002. As a result of this restructuring, SPEEDCOM recorded a provision for bad
debt of approximately $395,000 for the year ended December 31, 2002. This lease
was restructured again in August 2002, extending the payment schedule through
May 2003. There are no further credit allowances considered by management to be
necessary for these transactions.
5. Inventories
A summary of inventories, net at December 31, 2002 and September 30, 2003 is as
follows:
F-64
2002 2003
---- ----
Component parts $ 800,485 $371,931
Completed assemblies 723,249 442,500
---------- --------
$1,523,734 $814,431
========== ========
SPEEDCOM recorded provisions to reduce inventories to the lower of the cost or
net realizable value of the inventories in the amounts of approximately $167,000
during the year ended December 31, 2002. Such reserves amounting to
approximately $234,000 and has been allocated to the appropriate categories of
inventories in the table, above.
6. Property and Equipment
A summary of property and equipment at December 31, 2002 is as follows:
2002
-----------
Computer and office equipment $ 1,085,154
Automobiles 7,600
Leasehold improvements 130,546
Furniture and fixtures 175,784
Store and warehouse 192,747
-----------
1,591,831
Less accumulated depreciation (966,431)
-----------
$ 625,400
===========
Property and equipment included computer and office equipment of $91,954
acquired under capital lease arrangements at December 31, 2002. Amortization and
depreciation expense of property and equipment amounted to $427,983 for the year
ended December 31, 2002. Amortization of assets under capital lease arrangements
is included in depreciation expense.
7. Intellectual Property
In January 2001, SPEEDCOM acquired worldwide rights to PacketHop(TM), a wireless
routing software developed by SRI International (SRI). Under the terms of the
agreement, SPEEDCOM obtained rights to SRI's PacketHop(TM) technology in the
fixed wireless infrastructure market for certain specific frequencies below 6
gigahertz. SRI received $360,000 in cash and a total of 325,000 shares of common
stock of SPEEDCOM that was issued in four tranches. Each tranch was measured on
the specific date that the stock was issued. As of September 30, 2003, the
$360,000 in cash and the value of the shares at the date of grant less
amortization are classified in intellectual property, net on the balance sheet
and are being amortized using the straight-line method over the six-year term of
the agreement. A summary of intellectual property balances at December 31, 2002
and September 30, 2003 is as follows:
2002 2003
---- ----
Intellectual property $ 1,599,500 $ 1,599,500
Less accumulated amortization (503,375) (710,984)
----------- -----------
$ 1,096,125 $ 888,516
=========== ===========
Supplemental amortization information for intellectual property is as follows:
Amortization expense:
Nine Months ended September 30, 2003 $207,609
========
Year ended December 31, 2002 $276,812
========
F-65
Estimate future amortization expense for the periods indicated:
Three months ended December 31, 2003 $ 69,203
========
Year ended December 31, 2004 $276,812
========
Year ended December 31, 2005 $276,812
========
Year ended December 31, 2006 $265,689
========
8. Accrued Expenses
A summary of accrued expenses at December 31, 2002 is as follows:
2002
--------
Accrued payroll $164,589
Accrued commissions 48,184
Severance costs 345,103
Accrued interest 228,677
Other 144,396
--------
$930,949
========
9. Related Party Transactions
Notes Receivable-Related Party/Sale of Assets
During 2001, SPEEDCOM sold its InstallGuys division to SPEEDCOM's then Chief
Executive Officer. In return, SPEEDCOM received two 6% secured promissory notes
totaling approximately $211,000. SPEEDCOM recorded a gain on the sale of
approximately $168,000. In October 2001, SPEEDCOM loaned InstallGuys an
additional $50,000 at 6% interest. The notes and interest were due in August
2004. As a stipulation to the separation agreement, as amended, between SPEEDCOM
and its former Chief Executive Officer, SPEEDCOM forgave all indebtedness owed
by InstallGuys. Consequently, SPEEDCOM charged the Notes receivable-related
party to severance expense during the year ended December 31, 2002.
Due to Related Parties
These matters relate to items due to related parties outstanding at December 31,
2002:
In March 2002, SPEEDCOM issued three promissory notes to each of SPEEDCOM's then
current outside Board members for $14,738, $13,875 and $15,750, respectively.
Each note bears an interest rate of 14% and carries an additional 2% penalty on
outstanding principal not paid by April 15, 2002. $29,919 of these notes has
been paid as of December 31, 2002.
During the year ended December 31, 2002, SPEEDCOM borrowed an aggregate
$2,928,000 under secured promissory notes from three institutional investors who
are shareholders. All tangible and intangible assets of SPEEDCOM secure the
notes. As a stipulation to these secured promissory notes, the term of all
outstanding Series B Warrants of SPEEDCOM dated August 23, 2001 was extended to
October 14, 2002. In October 2002, the Board of Directors extended the term of
these Series B Warrants to December 28, 2002. All Series B Warrants were
exercised before their December 28, 2002 expiration date. The notes bear an
interest rate of 15% and are payable on December 31, 2003. Prepayment is
permitted under the secured promissory notes with a 50% premium on the
outstanding principal amount.
During January 2003, SPEEDCOM borrowed an aggregate $340,000 from three
institutional investors who are shareholders. The promissory notes bear interest
at 15% and are payable on December 31, 2003.
As a stipulation of the preferred stock financing received in August 2001,
SPEEDCOM was required to file and
F-66
obtain SEC acceptance of a registration statement within a specified period of
time or incur penalties. As a result of obtaining acceptance from the SEC
nineteen days late, SPEEDCOM incurred a penalty of $163,970, payable to the
preferred stockholders. The penalty was accrued during 2001 and is included in
due to related parties at December 31, 2002 and 2001.
These matters relate to items due to related parties outstanding at September
30, 2003:
In March 2002, SPEEDCOM issued three promissory notes to each of SPEEDCOM's then
current outside board members for $14,738, $13,875 and $15,750, respectively.
Each note bears an interest rate of 14% and carries an additional 2% penalty on
outstanding principal not paid by April 15, 2002. $33,863 of these notes has
been paid as of September 30, 2003.
During the year ended December 31, 2002 and the nine months ended September 30,
2003, SPEEDCOM borrowed an aggregate $2,928,000 and $1,015,000, respectively
under secured promissory notes from institutional investors who are
shareholders. All tangible and intangible assets of SPEEDCOM secure the notes.
The notes bear an interest rate of 15% and are payable December 31, 2003.
Prepayment is permitted under the secured promissory notes with a 50% premium on
the outstanding principal amount.
As a stipulation of the preferred stock financing received in August 2001,
SPEEDCOM was required to file and obtain SEC acceptance of a registration
statement within a specified period of time or incur penalties. As a result of
obtaining acceptance from the SEC nineteen days late, SPEEDCOM incurred a
penalty of $163,970, payable to the preferred stockholders. The penalty was
accrued during 2001 and is included in due to related parties at September 30,
2003 and December 31, 2002.
Related Party Interest Expense:
Interest expense recorded during the years ended December 31, 2002 related to
related party notes, loans and other balances amounted to $212,330. Interest
expense recorded during the nine months ended September 30, 2003 and 2002
related to related party notes, loans and other balances amounted to
approximately $424,000 and $117,000, respectively.
10. Notes and Capital Leases Payable
A summary of notes and capital leases payable at December 31, 2002 and September
30, 2003 is as follows:
2002 2003
---- ----
12% convertible note (a) $ 40,000 $ 40,000
Convertible promissory notes (b) -- 1,100,000
Capital lease obligations 38,706 19,085
----------- -----------
78,706 1,159,085
Less current portion (64,606) (59,085)
----------- -----------
$ 14,100 $ 1,100,000
=========== ===========
(a) In January 2002, SPEEDCOM entered into a financial relations and consultant
contract whereby the consulting firm will receive a $10,000 convertible note
with a 12% coupon rate each month. This contract was cancelled in May 2002. The
notes are convertible at any time at $1.125 per common share. As of September
30, 2003, the note holder possesses rights to convert the notes to 45,000 shares
of restricted common stock.
(b) SPEEDCOM borrowed $1,100,000 from P-Com during the nine months ended
September 30, 2003 through convertible promissory notes, at a 10% interest rate
for the first six months and a 13% interest rate for the remainder of the term
of the notes. These notes are due March 21, 2005 ($400,000), July 17, 2005
($300,000), August 8, 2005 ($200,000), September 8, 2005 ($50,000), September
16, 2005
F-67
($50,000), September 24, 2005 ($50,000) and September 30, 2005 ($50,000). These
notes are convertible at $0.12 per common share.
Aggregate future maturities of notes and capital leases payable as of December
31, 2002 are as follows:
Year ending December 31:
Notes Leases
----- ------
2003 $40,000 $ 30,056
2004 -- 14,285
------- --------
Total maturities and payments $40,000 44,341
=======
Less amount representing interest (5,635)
Less current portion (24,606)
--------
$14,100
========
SPEEDCOM borrowed $400,000 in March 2003 from an accredited investor through a
convertible promissory note,
at a 10% interest rate for the first six months and a 13% interest rate for the
remainder of the term of the note, due March 21, 2005.
11. Income Taxes
SPEEDCOM has not realized a current tax benefit (consisting of federal and state
taxes) from its net operating losses during the year ended December 31, 2002.
Deferred tax benefits of approximately $2,008,000 and $2,664,000 for the years
ended December 31, 2002, respectively, were fully offset by the increases in the
valuation allowances in each period, since realization of those benefits is not
assured and does not meet the standards for recognition. Deferred tax benefits
included the benefits of net operating losses of approximately $1,717,000 during
the year ended December 31, 2002.
A reconciliation of the differences between the effective income tax rate and
the statutory federal tax rate follows:
2002
-------
Tax at U.S. statutory rate (35.00)%
State taxes, net of federal benefit (3.30)
Change in valuation allowance 38.44
Other (0.14)
-------
0.00%
=======
Significant components of deferred tax assets and liabilities are as follows:
2002
-----------
Deferred tax assets:
Net operating loss carryforwards $ 8,135,008
Accounts receivable 75,538
Intangible assets 109,168
Deferred revenue 9,620
Accrued expenses 160,380
Other 87,918
-----------
Gross deferred tax assets 8,577,632
Less: valuation allowance (8,577,632)
-----------
Net deferred tax asset $ --
===========
Accounting principles generally accepted in the United States of America require
a valuation allowance be recorded to reduce the deferred tax assets reported if,
based on the weight of the evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence,
F-68
management has determined that a valuation allowance is necessary at December
31, 2002 to fully offset the deferred tax asset.
At December 31, 2002, net operating losses available to be carried forward for
federal income tax purposes are approximately $21,618,000, expiring in various
amounts from 2013 through 2022. Utilization of SPEEDCOM's net operating losses
may be subject to substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code and similar state provisions.
Such annual limitation could result in the expiration of the net operating loss
before utilization. 12. Stockholders' Equity Preferred Stock Each share of
preferred stock is convertible into 2.25 shares of common stock, subject to
anti-dilution protection, discussed below. Beginning August 23, 2003, SPEEDCOM's
preferred stockholders are entitled to cumulative dividends at the rate of 14%
per year times the $3.38 ($4.50 if paid in stock) per share liquidation
preference. The cumulative, undeclared dividend in arrearage that the preferred
stockholders are entitled to as of September 30, 2003 is $251,570, assuming a
stock payout. SPEEDCOM's Board of Directors has established no record date for
the dividend.
Common Stock, Common Stock Warrants and Employee Stock Options
Non-employee Common Stock Warrants:
As of December 31, 2002, SPEEDCOM had the following warrants outstanding to
purchase common stock of SPEEDCOM:
Expiration Exercise
Number of Warrants Date Price
-------------------------------------------------------------------------------
3,668,448 8/23/2006 $2.50
513,333 6/11/2006 $2.50
11,500 1/21/2003 $5.40
135,000 6/24/2003 $3.25
150,000 3/31/2006 $6.00
o During the year ended December 31, 2002, 4,560,481 Series B Warrants were
exercised for 3,849,957 shares of common stock, which was net of certain
cashless exercises.
In June 2002, SPEEDCOM issued stock options to its former Chief Executive
Officer for the purchase of 500,000 common shares at $0.20 per share in
connection with the Officer's separation agreement that also provided for
on-going consulting services. The stock options had an original term of 40
months. SPEEDCOM accounted for this transaction as an issuance of options to a
non-employee and, accordingly, recognized severance costs for the fair value of
the options, amounting to $29,850 using the Black-Scholes option-pricing model
during the year ended December 31, 2002. These options were cancelled in
November 2002 as a result of a restructuring of the separation agreement.
o These matters relate to common stock issuances and common stock warrant
activity during the year ended December 31, 2002:
In January 2002, 459,219 shares of common stock were issued to three investors
pursuant to a repricing provision that applied to 83,000 shares of common stock
issued on and under an agreement dated October 30, 2000. The original shares
were issued for a price of $7.35 per share, or a total of $610,050. The
additional shares issued on the repricing date of January 16, 2002 were
calculated based on a reset price, which is the weighted average closing price
of SPEEDCOM common stock for the first ten trading days of January 2002;
provided that the reset
F-69
price was not less than $1.1251 or more than $1.19. Because the average price of
SPEEDCOM's common stock during the first ten trading days of 2002 was below the
$1.1251 reset floor, the total number of shares, as adjusted after repricing,
was determined by dividing $610,050 by such floor.
As discussed under employee stock-based compensation, below, SPEEDCOM issued
59,375 shares of common stock in connection with the exercise of 65,000 employee
stock options.
In December 2000, SPEEDCOM issued a retainer of $25,000 in cash and 25,000
shares of common stock with an ascribed value of $5.25 per share to H.C.
Wainwright & Co., Inc., a Boston-based investment banker. The retainers were for
services rendered through April 2001 in connection with raising capital for
SPEEDCOM. The amounts were charged against equity when the capital was raised in
2001.
Employee Stock-Based Compensation
In February 2002, SPEEDCOM issued stock options to employees for the purchase of
780,300 common shares at $0.60 per share. SPEEDCOM recorded $67,500 in
stock-based compensation expense in relation to these options during the year
ended December 31, 2002. These options vest in full one year from the issuance.
These options also vest upon a change of control transaction with the ability to
exercise the options for up to one year after vesting. Upon a change of control
and if the one-year performance period has not expired, the employee may
surrender the performance options for cash payment at the calculated change of
control common share transaction value for payment within 30 days by the
surviving company.
In 2002, 65,000 $0.01 employee stock options were exercised for 59,375 shares of
common stock.
At December 31, 2002, SPEEDCOM had 3,000,000 shares of common stock reserved for
issuance under employee incentive stock bonus, purchase or option plans. One
plan, initiated in July 1998, reserved 2,000,000 shares, and another plan,
initiated in September 2000, reserved 1,000,000 shares. Additional options of
904,480 are outstanding outside these two plans to Executive Officers. All full
time employees are eligible for both plans. Plan options have a term of 5 years
and vest 25% annually on the employee's anniversary date over a four-year
period. As of December 31, 2002 there were 799,987 shares unissued under both
plans.
F-70
Employee stock option activity was as follows during the years ended December
31, 2002:
2002
Weighted Average
Options Exercise Price
-------------------------------
Outstanding--
Beginning of year 3,771,285 $2.75
Granted at market price 1,460,300 0.44
Exercised (65,000) 0.01
Expired or cancelled (2,211,709) 2.13
---------- -----
Outstanding - end of year 2,954,876 $2.28
========== =====
Exercisable as of December 31 2,189,963 $2.63
========== =====
The weighted average exercise price of the options granted during 2002 is $0.44.
The range of exercise prices of outstanding options is $0.15 to $10.25. The
weighted average remaining contractual life of the options as of December 31,
2002 is 2.5 years.
Pro forma information regarding SPEEDCOM's stock option grants is presented in
Note 3. The fair market value for these options was estimated at the date of
grant using the Black-Scholes option-pricing model. In order to calculate the
fair value, the following assumptions were made: the expected dividend payment
rate used was zero, the expected option life used was five years, the volatility
used was 1.26 in 2002 and the risk free interest rate was assumed to be 2.96% in
2002. Because the options have a four-year vesting period, the pro forma effect
shown is not reflective of the reported net earnings or losses in future years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
Anti-Dilution Features
Under the anti-dilution provisions of our preferred stock, if SPEEDCOM issues
common stock or common stock equivalents at a purchase price, conversion price,
or warrant or option exercise price that is less than the lesser of the current
preferred stock conversion price of $1.125 per share or the current market
price, the conversion price of the preferred stock will be reduced using a
customary weighted average basis formula. Under the anti-dilution provisions of
7,160,810 outstanding warrants (1) the exercise price will be lowered to equal
the purchase price, conversion price, or warrant or option exercise price for
any common stock or common stock equivalent issued (other than to employees) at
a purchase price, conversion price, or warrant or option exercise price less
than the current per share exercise price of the applicable warrants ($0.12 in
the case of Series A Warrants), and (2) the number of warrants will be increased
by the same percentage as the percentage by which the exercise price is reduced.
Alternatively, (1) the exercise price will be reduced by the percentage by which
the purchase price, conversion price, or warrant or option exercise price of any
issued security (others than to employees) is less than the current market price
of the common stock, and (2) the number of warrants will be increased by the
same percentage as the percentage by which the exercise price is reduced, if
this formula results in a lower exercise price than the adjustment described in
the preceding sentence. Similar anti-dilution provisions apply to outstanding
warrants to acquire 1,002,026 shares of our common stock (as adjusted) at an
exercise price of $0.12 per share and $1,100,000 of P-Com convertible notes at
an exercise price of $0.12.
Effective with the issuance of the convertible notes discussed in Note 10, the
conversion prices of SPEEDCOM's warrants was decreased to $0.12 during the nine
months ended September 30, 2003, resulting in common shares of 8,162,836
issuable under these securities, if currently converted or exercised.
F-71
13. Leases
SPEEDCOM leases office and manufacturing facilities and computer and office
equipment under operating leases. Rent expense under operating leases, amounted
to $801,835 for the year ended December 31, 2002. Future noncancellable lease
payments under operating leases for each year ended December 31 are as follows:
2003-$760,480; 2004-$733,895; 2005-$719,543; 2006-$705,018; 2007-$704,760 and
thereafter-$6,166,650.
14. Employee Benefit Plan
SPEEDCOM has established a 401(k) profit-sharing plan. Employees 21 years or
older are eligible to participate in the plan. Participants may elect to
contribute, on a tax-deferred basis, up to the legal maximum of their
compensation. SPEEDCOM will contribute 25% matching after an employee has been
with SPEEDCOM for 90 days. SPEEDCOM's contribution to the plan was $28,955 for
the year ended December 31, 2002.
15. Provision for Bad Debt
During the year ended December 31, 2002, SPEEDCOM converted two of its leases
receivable, recorded at approximately $1,290,000, into a new lease receivable
with approximately $336,000 due immediately, five payments of $50,000 due over a
five month period and a balloon payment of approximately $328,000 due in August
2002. As a result of this restructuring of the leases, SPEEDCOM recorded a
provision for bad debt of approximately $395,000 for the year ended December 31,
2002. This lease was restructured again in August 2002, extending payments
through May 2003. An adjustment was not necessary for this additional
restructuring.
16. Severance Costs
During the year ended December 31, 2002, SPEEDCOM recorded severance costs of
approximately $630,000, in accordance with the separation agreements, as
amended, between SPEEDCOM and its former Chief Executive Officer and Chief
Operating Officer. The costs include severance pay and other employee benefits,
including amounts to be paid over future periods and the write off of Notes
receivable-related party.
During the nine months ended September 30, 2003, SPEEDCOM recorded severance
costs of $90,000 in accordance with the separation agreement between SPEEDCOM
and its former Vice President of Marketing and Product Development. The costs
include severance pay to be paid over future periods.
During the nine months ended September 30, 2002, SPEEDCOM recorded severance
costs of approximately $680,000 in accordance with the separation agreements, as
amended, between SPEEDCOM and its former Chief Executive Officer and Chief
Operating Officer. The costs include severance pay and other employee benefits
and the write off of notes receivable-related party, as described below.
17. Segment and Geographic Information
SPEEDCOM operated during all periods in a single operating segment when applying
the management approach defined in SFAS No. 131, DISCLOSURES ABOUT SEGMENTS.
SPEEDCOM's business and principal operations are domiciled in North America.
SPEEDCOM generated revenue in the following geographic areas: North America,
Latin America, Asia, Africa, Middle East, Europe and Australia. Revenues from
customers in foreign geographic areas represented 46% and 53% of total revenues
for the years ended December 31, 2002 and 2001, respectively. During 2002, 11%
and 14% of SPEEDCOM's revenues were derived from customers located in Asia and
Africa, respectively. During 2001, 16%, 15% and 12% of SPEEDCOM's revenues were
derived from customers located in Latin America, Asia and Africa, respectively.
No other foreign geographic area contributed 10% or greater of total revenues
for the year ended December 31, 2002 or the nine months ended September 30,
2003. SPEEDCOM has no significant property in any foreign geographic area.
F-72
No single customer accounted for 10% or more of SPEEDCOM's revenue for the year
ended December 31, 2002 or the nine months ended September 30, 2003.
18. Subsequent Events
In October 2003, SPEEDCOM borrowed $230,000 from P-Com through two convertible
promissory notes, at a 10% interest rate for the first six months and a 13%
interest rate for the remainder of the term of the notes, due October 14, 2005
($130,000) and October 22, 2005, ($100,000), respectively. These notes are
convertible at $0.12 per common share.
In October 2003, SPEEDCOM converted $570,000 of notes payable that were due
December 31, 2003, plus accrued interest of $102,163, into 5,601,358 shares of
SPEEDCOM common stock utilizing a conversion rate of $0.12. SPEEDCOM recorded a
gain on this conversion of approximately $336,000.
In October 2003, SPEEDCOM acquired software from JDK Technology for $50,000, to
be paid over time, which was an enhancement to the PacketHop(TM) technology. The
value of the software was classified in intellectual property and is being
amortized using the straight-line method over the remaining life of the
PacketHop(TM) technology.
On December 10, 2003, the Company completed the sale of all of its operating
assets to P-Com in exchange for 63,500,000 shares of P-Com common stock and
P-Com's assumption of approximately $5,250,000 of liabilities. Upon completion
of the sale, SPEEDCOM's only assets are the investment in P-Com common stock,
which applying recent trading prices, has a value of approximately $9,000,000,
and a receivable from P-Com of $75,000. While management of SPEEDCOM is
currently evaluating the effects of the sale, it is not currently expected to
result in a loss if current P-Com market prices continue.
F-73
SPEEDCOM WIRELESS CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 2002
(AMOUNTS IN THOUSANDS)
Additions Write Offs and
Balance at Charged to Deductions
Beginning Statement From Balance at
of Year of Operations Reserves End of Year
------- ------------- -------- -----------
Allowance for doubtful accounts:
Year ended December 31, 2002...................... $ 231 420 (488) $ 163
============================================================
Inventory related reserves:
Year ended December 31, 2002...................... $ 67 167 (--) $ 234
============================================================
F-74
608,532,358 Shares
P-COM, INC.
COMMON STOCK
[LOGO]
P-COM, INC.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
All costs and expenses incurred in connection with the sale and distribution of
the common stock being registered for sale will be paid by the Registrant. The
following is an itemized statement of these costs and expenses. All amounts
shown are estimates except for the Securities and Exchange Commission
registration fee.
SEC Registration Fee $ 6,940
Blue sky qualification fees and expenses 10,000
Printing and engraving 10,000
Legal fees and expenses 25,000
Accounting fees and expenses 25,000
Transfer agent and registrar fees 5,000
Miscellaneous expenses 10,000
--------
Total $ 9,194
========
----------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102 of the Delaware General Corporation Law allows a corporation to
include in its certificate of incorporation a provision that eliminates the
personal liability of the directors of that corporation to the corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except where the director breached the duty of loyalty, failed to act
in good faith, engaged in intentional misconduct or knowingly violated a law,
authorized the payment of a dividend or approved a stock repurchase in violation
of Delaware corporate law or obtained an improper personal benefit. The
Registrant's certificate of incorporation contains a provision that eliminates
the personal liability of its directors in accordance with Section 102 of the
Delaware General Corporation Law.
Section 145 of the Delaware General Corporation Law authorizes a court to award,
or a corporation's board of directors to grant, indemnification to directors and
officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act. Article VII of the Registrant's
bylaws provides for mandatory indemnification of its directors and permissible
indemnification of its officers, employees and other agents to the maximum
extent permitted under the Delaware General Corporation Law. The Registrant has
entered into indemnification agreements with its officers and directors, which
are intended to provide the Registrant's officers and directors with
indemnification to the maximum extent permitted under the Delaware General
Corporation Law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In July 2001, the Registrant issued 3,797,468 shares of its common stock to two
existing stockholders at a per share price of $0.79, for aggregate proceeds of
$3.0 million. The unregistered shares were priced at an amount greater that the
public market trading price of the common stock and was based on the pro forma
calculation of Adjusted Net Tangible Book Value per share. There were no
underwriters involved in the issuance and sale of these securities, and the
Registrant relied on the exemption from registration provided by Section 4(2) of
the Securities Act of 1933, as amended (the "Securities Act").
In December 2002, the Registrant issued 3,333,333 shares of common stock to two
investors at a per share price of $0.15, for aggregate proceeds of $500,000 in
cash. The unregistered shares were priced at an amount greater that the public
market trading price of the common stock and was based on the pro forma
calculation of Adjusted
II-1
Net Tangible Book Value per share. In conjunction with this common stock
issuance, the Registrant issued warrants to purchase up to 750,000 shares of
common stock to these two investors. The warrants have an exercise price of
$0.30 a share, an exercise period of 10 years from the date of issuance, are
fully vested and are immediately exercisable. There were no underwriters
involved in the issuance and sale of these securities, and the Registrant relied
on the exemption from registration provided by Section 4(2) of the Securities
Act.
On March 26, 2003, May 28, 2003, and July 18, 2003, the Registrant issued and
sold convertible promissory notes in the aggregate face amount of $2.7 million
to accredited investors for aggregate gross proceeds of $2.7 million in cash.
These convertible promissory notes mature one year from their respective dates
of issuance. Together with the convertible promissory notes, the Registrant
issued (i) Series A Stock Purchase Warrants for the purchase of up to 4,074,075
shares of the Registrant's common stock at an exercise price of $0.12 per share
and an exercise period of three years; (ii) Series B Stock Purchase Warrants for
the purchase of 5,703,704 shares of the Registrant's common stock at an exercise
price of $0.20 per share and an exercise period of three years; (iii) Series A-1
Stock Purchase Warrants for the purchase of 4,074,075 shares of the Registrant's
common stock at an exercise price of $0.0001 per share and an exercise period of
three years; and (iv) Series B-1 Stock Purchase Warrants for the purchase of
5,703,704 shares of the Registrant's common stock at an exercise price of
$0.0001 per share and an exercise period of three years. On December 2, 2003,
all of the outstanding Series A-1 Stock Purchase Warrants and Series B-1 Stock
Purchase Warrants were terminated in accordance with their terms, without ever
being exercised. On October 3, 2003, the holders of these convertible promissory
notes converted the aggregate outstanding principal amount of these notes into
shares of the Registrant's Series C Convertible Preferred Stock, which have a
state value of $1,750 per share, as further described below. There were no
underwriters involved in the issuance and sale of these securities, and the
Registrant relied on the exemption from registration provided by Section 4(2) of
the Securities Act.
On August 4, 2003, the Registrant issued approximately 1,000,000 shares of its
Series B Convertible Preferred Stock, with a stated value of $21.138 per share,
upon the conversion of approximately $22 million of its 7% Convertible
Subordinated Notes due 2005. The Series B Convertible Preferred Stock will bear
no dividends. Pursuant to an agreement with the Registrant, the holders of the
Series B Convertible Preferred Stock are required to convert their shares into
shares of common stock as soon as reasonably practicable. However, no holder of
Series B Convertible Preferred Stock is required to convert its shares into
shares of common stock if the conversion would cause the holder or any of its
affiliates, individually or in the aggregate, to hold more than 9.999% of
P-Com's outstanding common stock. Each share of Series B Convertible Preferred
Stock is convertible into a number of shares of the Registrant's common stock
equal to the stated value divided by $0.20. This conversion price is subject to
adjustment for stock splits, stock dividends and similar transactions. There
were no underwriters involved in the issuance and sale of these securities, and
the Registrant relied on the exemption from registration provided by Section
4(2) of the Securities Act.
On October 3, 2003, the Registrant issued and sold approximately 8553 shares of
its Series C Convertible Preferred Stock, with a stated value of $1,750 per
share, resulting in aggregate gross proceeds of approximately $14.6 million. On
December 18, 2003, the Registrant issued and sold approximately 1590 additional
shares of Series C Convertible Preferred Stock for aggregate gross proceeds of
approximately $2.8 million. Dividends will accrue on all outstanding shares of
Series C Convertible Preferred Stock, beginning on the first anniversary of
their respective dates of issuance, at 6% per annum paid semi-annually in cash
or common stock, at the option of the Registrant, and increasing to 8% per annum
beginning on the second anniversary of their respective dates of issuance. The
Series C Convertible Preferred Stock may be converted into shares of the
Registrant's common stock at any time at the option of their holders. However,
no holder of Series C Convertible Preferred Stock may convert its shares into
shares of common stock if the conversion would cause the holder or any of its
affiliates, individually or in the aggregate, to hold more than 9.999% of
P-Com's outstanding common stock. The outstanding shares of Series C Convertible
Preferred Stock are also mandatorily convertible at the option of the Registrant
beginning on the 180th day following the effective date of the registration
statement covering the sale of the shares of common stock issuable upon their
conversion, subject to certain conditions. Each share of Series C Convertible
Preferred Stock is convertible into a number of shares of the Registrant's
common stock equal to the stated value plus accrued dividends, if any, divided
by $0.10. This conversion price is subject to adjustment for stock splits, stock
dividends and similar transactions and for any dilutive issuances of common
stock or common stock equivalents. Together with each share of Series C
Convertible Preferred Stock, the Registrant also issued (i) one Series C-1
Warrant to purchase 7,000 shares of the Registrant's common stock at an initial
exercise price of $0.15 per share and an
II-2
exercise period of five years, and (ii) one Series C-2 Warrant to purchase 7,000
shares of the Registrant's common stock at an initial exercise price of $0.18
per share and an exercise period of 5 years. There were no underwriters involved
in the issuance and sale of these securities, and the Registrant relied on the
exemption from registration provided by Section 4(2) of the Securities Act.
On December 12, 2003, the Registrant issued 1,363,636 shares of its common stock
to United Manufacturing Assembly, Inc. ("UMAI"), in consideration for the
reduction of $150,000 in accounts payable to UMAI. There were no underwriters
involved in the issuance and sale of these securities, and the Registrant relied
on the exemption from registration provided by Section 4(2) of the Securities
Act.
On December 18, 2003, the Registrant issued warrants to purchase 350,000,
2,600,000, and 3,600,000 shares of its common stock to Carlos Belfiore, Samuel
Smookler and Cagan McAfee Capital Partners, LLC ("CMCP"), respectively, in
consideration for the reduction in the number of options granted to Messrs.
Belfiore and Smookler, and CMCP, due to a limitation in the maximum number of
shares issuable under the Registrant's 1995 Stock Option/Stock Issuance Plan.
There were no underwriters involved in the issuance and sale of these
securities, and the Registrant relied on the exemption from registration
provided by Section 4(2) of the Securities Act.
On December 18, 2003, the Registrant issued and sold 2,000 shares of its Series
D Convertible Preferred Stock, with a stated value of $1,000 per share, as
partial consideration for the extinguishment of its obligations under three
promissory notes in the aggregate principal amount of $3 million. The Series D
Convertible Preferred Stock will bear no dividends. The Series D Convertible
Preferred Stock may be converted into shares of the Registrant's common stock at
any time at the option of its holders. However, no holder of Series D
Convertible Preferred Stock may convert its shares into shares of common stock
if the conversion would cause the holder or any of its affiliates, individually
or in the aggregate, to hold more than 9.999% of P-Com's outstanding common
stock. Each share of Series D Convertible Preferred Stock is convertible into a
number of shares of the Registrant's common stock equal to the stated value,
divided by $0.15. This conversion price is subject to adjustment for stock
splits, stock dividends and similar transactions. There were no underwriters
involved in the issuance and sale of these securities, and the Registrant relied
on the exemption from registration provided by Section 4(2) of the Securities
Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits. See Index of Exhibits on page II-6.
(b) Schedules. The required schedules are set forth in Part I of this
Registration Statement.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by section 10(a)(3) of the Securities
Act;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the Registration Statement;
(2) that, for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered
II-3
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) to remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act,
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 14 of this Registration
Statement or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is therefore unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer, or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered hereunder,
the registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Campbell,
State of California, on this 30th day of January, 2004.
P-COM, INC.
By: /s/ Samuel Smookler
-------------------------------------
Samuel Smookler
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
Name Title Date
----------------------------- ------------------------------------------ ------------------
/s/ Samuel Smookler Chief Executive Officer (Principal January 30, 2004
----------------------------- Executive Officer)
Samuel Smookler
/s/ Daniel Rumsey Acting Chief Financial Officer, Vice
----------------------------- President and General Counsel (Principal
Daniel W. Rumsey Financial Officer and Principal Accounting
----------------------------- Officer) January 30, 2004
* Chairman of the Board January 30, 2004
-----------------------------
George P. Roberts
* Director January 30, 2004
-----------------------------
Frederick Fromm
* Director January 30, 2004
-----------------------------
Brian T. Josling
* Director January 30, 2004
-----------------------------
John A. Hawkins
/s/ R. Craig Roos Director January 30, 2004
-----------------------------
R. Craig Roos
*By: /s/ SAM SMOOKLER
-------------------------
As Attorney-in-Fact
II-5
INDEX OF EXHIBITS
Exhibit
Number Description of Document
------ -----------------------
3.1(1) Restated Certificate of Incorporation filed with the Delaware
Secretary of State on March 9, 1995
3.1A(2) Certificate of Amendment of Restated Certificate of Incorporation
filed with the Delaware Secretary of State on June 16, 1997
3.1B(3) Certificate of Designation for the Series A Junior Participating
Preferred Stock, as filed with the Delaware Secretary of State on
October 8, 1997
3.1C(4) Amended and Restated Certificate of Designation of the Series A
Junior Participating Preferred Stock, as filed with the Delaware
Secretary of State on December 21, 1998
3.1D(5) Certificate of Designation for the Series B Convertible
Participating Preferred Stock, as filed with the Delaware
Secretary of State on December 21, 1998
3.1E(6) Certificate of Correction of Certificate of Designations for the
Series B Convertible Participating Preferred Stock, as filed with
the Delaware Secretary of State on December 23, 1998
3.1F(7) Certificate of Elimination of Series B Convertible Participating
Preferred Stock as filed with the Delaware Secretary of State on
June 15, 1999
3.1G(8) Certificate of Amendment of Restated Certificate of Incorporation
filed with the Delaware Secretary of State on October 20, 2000
3.1H(9) Certificate of Amendment of Restated Certificate of Incorporation
filed with the Delaware Secretary of State on June 24, 2002
3.1I(10) Certificate of Designation, Preferences and Rights of Series B
Convertible Preferred Stock of P-Com, Inc., as filed with the
Delaware Secretary of State on July 29, 2003.
3.1J(11) Certificate of Designation, Preferences and Rights of Series C
Convertible Preferred Stock of P-Com, Inc., as filed with the
Delaware Secretary of State on September 24, 2003.
3.1I+ Certificate of Amendment of Restated Certificate of Incorporation
filed with the Delaware Secretary of State on December 3, 2003.
3.1J+ Certificate of Designation, Preferences and Rights of Series D
Convertible Preferred Stock of P-Com, Inc., as filed with the
Delaware Secretary of State on December 15, 2003.
3.2(12) Bylaws
3.2A+ Amendment to Bylaws, effective as of December 3, 2003.
4.1(13) Form of Common Stock Certificate
4.2(14) Amended and Restated Rights Agreement dated as of January 24, 2001
between Registrant and BankBoston, N.A.
4.3*(15) 1995 Stock Option/Stock Issuance Plan (as amended and restated
through July 17, 2002), including forms of Notices of Grant of
Automatic Stock Option for initial grant and annual grants and
Automatic Stock Option Agreements.
4.4*(16) Amendment to 1995 Stock Option/Stock Issuance Plan, effective as
of December 3, 2003.
4.5*(17) Employee Stock Purchase Plan, as amended
5.1 Opinion of Sheppard, Mullin, Richter & Hampton, LLP
10.18(18) Form of Indemnification Agreement by and between the Company and
each of its officers and directors and a list of signatories.
10.35#(19) Joint Development and License Agreement between Siemens
Aktiengesellschaft and P-Com, Inc. dated June 30, 1998.
II-6
Exhibit
Number Description of Document
------ -----------------------
10.74(20) Stock Purchase Warrant between P-Com, Inc. and Marshall Capital
Management, Inc., dated January 20, 2000.
10.90*(21) Employment and Continuity of Benefits Agreement by and between
George Roberts and P-Com, Inc., dated May 31, 2001.
10.92(22) Common Stock PIPES Agreement, dated June 26, 2002, by and among
P-Com, Inc and the investors signatory thereto.
10.93*#(23) General Release and Settlement Agreement by and between P-Com,
Inc. and James J. Sobczak dated May 1, 2002.
10.94*#(23) Severance Letter Agreement by and between P-Com, Inc. and Caroline
dated April 8, 2002.
10.95*#(23) Severance Letter Agreement by and between P-Com, Inc. and Alan T.
Wright dated April 8, 2002.
10.96*#(23) Form of Amendment to Change in Control Severance Agreement by and
between P-Com, Inc. and the officers P-Com listed as signatories
thereto.
10.97(23) Form of Letter of Intent regarding Proposed Restructuring of 4
1/4% Convertible Subordinated Notes due 2002 by and among P-Com,
Inc. and the beneficial holders of the Notes dated April 12, 2002.
10.98#(23) Engagement Letter Agreement by and between P-Com, Inc. and Cagan
McAfee Capital Partners dated December 10, 2001 and Addendum dated
June 13, 2002.
10.99(23) Warrant Issuance Agreement by and between P-Com, Inc. and Cagan
McAfee Capital Partners dated December 1, 2001.
10.100(23) Accounts Receivable Purchase Agreement by and between P-Com, Inc.
and Silicon Valley Bank dated June 26, 2002.
10.101#(23) OEM Agreement by and between P-Com, Inc. and Shanghai Datang
Mobile Communications dated July 1, 2002.
10.102(24) Registration Rights Agreement, dated November 1, 2002, between
P-Com, Inc. and the noteholders signatory thereto.
10.103(25) Indemnification Agreement between P-Com, Inc. and Caroline B. Kahl
dated September 19, 2002.
10.104(25) Agreement for Settlement and Release of Claims between SPC
Electronics America, Inc. and P-Com, Inc. dated April 3, 2002.
10.105(25) Agreement for Settlement and Release of Claims among Remec, Inc.,
Remec Wireless, Inc., and Remec Manufacturing Philippines, Inc.
and P-Com, Inc. and P-Com, Italia S.p.A. dated July 10, 2002.
II-7
Exhibit
Number Description of Document
------ -----------------------
10.106(25) Agreement for Settlement and Release of Claims by and between
EESA, Inc., EESA Europe S.r.l., and Eltel Engineering S.r.l. and
P-Com, Inc. and P-Com, Italia S.p.A. dated April 23, 2002.
10.107(25) Loan and Security Agreement between P-Com, Inc. and Silicon Valley
Bank dated September 20, 2002
10.108(25) Loan and Security Agreement (Exim Program) between P-Com, Inc. and
Silicon Valley Bank dated September 20, 2002.
10.109(25) Secured Promissory Notes issued to Silicon Valley Bank dated
September 20, 2002.
10.110(25) Warrant to Purchase Stock Agreement between P-Com, Inc. and
Silicon Valley Bank dated September 20, 2002.
10.111(25) Amendment to OEM Agreement between P-Com, Inc. and Shanghai Datang
Mobile Communication effective July 1, 2002.
10.112(26) Senior Subordinated Secured Promissory Notes issued to BBT Fund LP
dated November 1, 2002.
10.113(26) Addendum II to Engagement Letter, dated December 10, 2001, between
P-Com, Inc. and Cagan McAfee Capital Partners, effective as of
January 9, 2003.
10.114(26) Termination Agreement and Release among P-Com, Inc., XT
Corporation and Telaxis Communications Corp., dated January 7,
2003.
10.115(26) Consulting Agreement with Liviakis Financial Communications dated
February 3, 2003.
10.116(26) Engagement letter with HPC Capital Management dated February 6,
2003.
10.117(10) Securities Purchase Agreement, dated May 28, 2003, by and among
P-Com, Inc., North Sound Legacy Fund LLC, North Sound Legacy
Institutional Fund LLC and North Sound Legacy International Ltd.
10.118(10) Registration Rights Agreement, dated May 28, 2003, by and among
P-Com, Inc., North Sound Legacy Fund LLC, North Sound Legacy
Institutional Fund LLC and North Sound Legacy International Ltd.
10.119(10) Security Agreement, dated May 28, 2003, by P-Com, Inc. and North
Sound Legacy Institutional Fund LLC, as collateral agent for North
Sound Legacy Fund LLC, North Sound Legacy Institutional Fund LLC
and North Sound Legacy International Ltd.
10.120(11) Form of Securities Purchase Agreement, dated October 3, 2003, by
and among P-Com, Inc. and certain investors signatory thereto.
10.121(11) Form of Registration Rights Agreement, dated October 3, 2003, by
and among P-Com, Inc. and certain investors signatory thereto.
10.122(11) Form of Series C-1 Warrant 10.123(11) Form of Series C-2 Warrant
10.124+ Form of Registration Rights Agreement, dated as of October 3,
2003, by and among P-Com, Inc., P Investors LLC, Woodmont
Investments Ltd. and Newberg Family Trust.
10.125+ Form of Joinder Agreement, dated December 16, 2003, by and among
P-Com, Inc. and certain investors signatory thereto.
10.126+ Closing Memorandum, dated as of December 10, 2003, by and between
P-Com, Inc. and SPEEDCOM Wireless Corporation.
10.127+ Debt Conversion Agreement, dated as of December 10, 2003, by and
among P-Com, Inc., SPEEDCOM Wireless Corporation, North Sound
Legacy Fund LLC, North Sound Legacy Institutional Fund LLC and
North Sound Legacy International Ltd.
10.128 Form of Convertible Promissory Note, issued by P-Com to each of
North Sound Legacy Fund LLC, North Sound Legacy Institutional Fund
LLC and North Sound Legacy International Ltd.
10.129+ Note Repurchase Agreement, dated as of December 18, 2003, by and
among P-Com, Inc., North Sound Legacy Fund LLC, North Sound Legacy
Institutional Fund LLC and North Sound Legacy International Ltd.
10.130+ Form of Registration Rights Agreement, dated as of December 18,
2003, by and among P-Com, Inc., North Sound Legacy Fund LLC, North
Sound Legacy Institutional Fund LLC and North Sound Legacy
International Ltd.
10.131 Engagement Letter Agreement, dated as of August 25, 2003, between
P-Com, Inc. and Burnham Hill Partners, a division of Pali
Capital, Inc.
10.132* Severance Agreement, dated April 4, 2003, between P-Com, Inc. and
Daniel W. Rumsey.
10.133* Employment Letter Agreement, dated July 25, 2003, between P-Com,
Inc. and Samuel Smookler.
10.134* Employment Letter Agreement, dated October 20, 2003, between
P-Com, Inc. and Carlos Belfiore.
16.1(27) Letter from PricewaterhouseCoopers LLP to the Securities and
Exchange Commission, dated August 14, 2003, regarding the change
in the independent auditor of P-Com, Inc.
21.1(26) Subsidiaries of the Registrant
II-8
Exhibit
Number Description of Document
------ -----------------------
23.1 Consent of Aidman, Piser & Company, P.A.
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Sheppard, Mullin, Richter & Hampton LLP (included in
Exhibit 5.1)
24.1+ Power of Attorney (on signature page to initial filing of this
Registration Statement)
----------
* Compensatory benefit arrangement.
# Confidential treatment has been granted as to certain portions of these
exhibits.
+ Previously filed.
(1) Incorporated by reference to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 (File No. 33-95392) declared effective with the Securities
and Exchange Commission on August 17, 1995.
(2) Incorporated by reference to Exhibit 3.3 to the Registrant's Quarterly
Report on Form 10-Q (File No. 000-25356) for the quarterly period ended June 30,
1997, filed with the Securities and Exchange Commission on August 18, 1997.
(3) Incorporated by reference to Exhibit 3 to the Registrant's Current Report on
From 8-K (File No. 000-25356) filed with the Securities and Exchange Commission
on October 2, 1997.
(4) Incorporated by reference to Exhibit 3.2C of the Registrant's Form 8-A/A
filed with the Securities and Exchange Commission on December 22, 1998.
(5) Incorporated by reference to Exhibit 3.2D of the Registrant's Current Report
on Form 8-K filed with the Securities and Exchange Commission on December 24,
1998.
(6) Incorporated by reference to Exhibit 3.2E of the Registrant's Current Report
on Form 8-K filed with the Securities and Exchange Commission on December 24,
1998.
(7) Incorporated by reference to Exhibit 3.2F to the Registrant's Annual Report
on Form 10-K, for the fiscal year ended December 31, 2000, filed with the
Securities and Exchange Commission on April 2, 2001.
(8) Incorporated by reference to Exhibit 3.2A to the Registrant's Annual Report
on Form 10-K, for the fiscal year ended December 31, 2001, filed with the
Securities and Exchange Commission on April 1, 2002.
(9) Incorporated by reference to Exhibit 3.2G to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2002, filed with the
Securities and Exchange Commission on August 14, 2002.
(10) Incorporated by reference to the exhibits filed as part of the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003,
filed with the Securities and Exchange Commission on August 14, 2003.
(11) Incorporated by reference to the exhibits filed as part of the Registrant's
Current Report on Form 8-K, filed with the Securities and Exchange Commission on
October 7, 2003.
(12) Incorporated by reference to Exhibit 3.3A to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended on September 30, 2002, filed
with the Securities and Exchange Commission on November 14, 2002.
(13) Incorporated by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-1 (File No. 33-88492) declared effective with the Securities
and Exchange Commission on March 2, 1995.
(14) Incorporated by reference to Exhibit 4.10 to the Registrant's Form 8-A/A
filed with the Securities and Exchange Commission on May 7, 2001.
(15) Incorporated by reference to Exhibit 99.1 to the Registrant's Registration
Statement on Form S-8 (File No. 333-55604) filed with the Securities and
Exchange Commission on February 14, 2001.
(16) Incorporated by reference to Exhibit 4.4 to the Registrant's Registration
Statement on Form S-8 (File No. 111511) filed with the Securities and Exchange
Commission on December 23, 2003.
(17) Incorporated by reference to Exhibit 99.1 to the Registrant's Registration
Statement on Form S-8 (File No. 333-63762) filed with the Securities and
Exchange Commission on June 25, 2001.
(18) Incorporated by reference to the identically numbered exhibit to the
Registrant's Registration Statement on Form S-1 (File No. 33-88492) declared
effective with the Securities and Exchange Commission on March 2, 1995.
(19) Incorporated by reference to the identically numbered exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1998.
(20) Incorporated by reference to the identically numbered exhibit to the
Registrant's Registration Statement on Form S-3/A (File No. 333-70937) as filed
with the Securities and Exchange Commission on May 4, 2000.
II-9
(21) Incorporated by reference to the identically numbered exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2001, filed with the Securities and Exchange on December 24, 2001.
(22) Incorporated by reference to the identically numbered exhibit to the
Registrant's Current Report on Form 8-K, filed with the Securities and Exchange
Commission on June 26, 2002.
(23) Incorporated by reference to the identically numbered exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2002, filed with the Securities and Exchange Commission on August 14, 2002.
(24) Incorporated by reference to the identically numbered exhibit to the
Registrant's Current Report on Form 8-K, filed with the Securities and Exchange
Commission on November 6, 2002.
(25) Incorporated by reference to the identically numbered exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2002, filed with the Securities and Exchange Commission on
November 14, 2002.
(26) Incorporated by reference to the identically numbered exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
2002, filed with the Securities and Exchange Commission on March 31, 2003.
(27) Incorporated by reference to the identically numbered exhibit to the
Registrant's Current Report on Form 8-K, filed with the Securities and Exchange
Commission on August 14, 2003.
II-10