-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QnVwRRynPuRqDgxHYUwaw0vAMJA5yaWtrtMGVkdi7v04eOf4Liv71Q6S1lg1US2L oTHGQiOrG+g4zabPobW6zw== 0001144204-04-006985.txt : 20040517 0001144204-04-006985.hdr.sgml : 20040517 20040517170517 ACCESSION NUMBER: 0001144204-04-006985 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: P COM INC CENTRAL INDEX KEY: 0000935493 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 770289371 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25356 FILM NUMBER: 04813370 BUSINESS ADDRESS: STREET 1: 3175 S WINCHESTER BLVD CITY: CAMPBELL STATE: CA ZIP: 95008 BUSINESS PHONE: 4088663666 MAIL ADDRESS: STREET 1: 3175 S WINCHESTER BLVD STREET 2: C/O P-COM INC CITY: CAMPBELL STATE: CA ZIP: 95008 10-Q 1 v03397_10q.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- - -------------------------------------------------------------------------------- FORM 10-Q - -------------------------------------------------------------------------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _______. Commission File Number: 0-25356 --------------- P-Com, Inc. (Exact name of Registrant as specified in its charter) --------------- Delaware 77-0289371 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 3175 S. Winchester Boulevard, Campbell, California 95008 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (408) 866-3666 --------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer as defined in the Exchange Act Rule 12b-2. YES [ ] NO [X] As of May 12, 2004 there were 268,382,190 shares of the Registrant's Common Stock outstanding, par value $0.0001 per share. Effective March 10, 2003, the Registrant's Common Stock was delisted from the NASDAQ Small Cap Market and commenced trading electronically on the OTC Bulletin Board of the National Association of Securities Dealers, Inc. This quarterly report on Form 10-Q consists of 34 pages of which this is page 1. The Exhibit Index appears on page 35. P-COM, INC. TABLE OF CONTENTS
Page PART I. Financial Information Number --------------------- ------ Item 1 Condensed Consolidated Financial Statements (unaudited) Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003................................................................. 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003 ................................................ 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 ................................................ 5 Notes to Condensed Consolidated Financial Statements ................................ 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................. 17 Item 3 Quantitative and Qualitative Disclosure about Market Risk ............................ 31 Item 4 Controls and Procedures............................................................... 32 PART II. Other Information ----------------- Item 1 Legal Proceedings ................................................................... 33 Item 2 Changes in Securities ............................................................... 33 Item 3 Defaults Upon Senior Securities ..................................................... 33 Item 6 Exhibits and Reports on Form 8-K .................................................... 33 Signatures ...................................................................................... 34
PART I - FINANCIAL INFORMATION ITEM 1. P-COM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, unaudited) March 31, December 31, 2004 2003 ------------ ------------ Current assets: Cash and cash equivalents $ 4,063 $ 6,185 Accounts receivable, net 6,059 4,801 Inventory 3,889 5,258 Prepaid expenses and other assets 2,982 2,216 Assets of discontinued operations - 40 ------------ ------------ Total current assets 16,993 18,500 Property and equipment, net 3,405 3,807 Goodwill 11,968 11,981 Other assets 277 277 ------------ ------------ Total assets $ 32,643 $ 34,565 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,188 $ 4,035 Other accrued liabilities 8,639 8,226 Loan payable to bank - 1 Deferred contract obligations 8,000 8,000 Liabilities of discontinued operations 298 313 ------------ ------------ Total current liabilities 21,125 20,575 ------------ ------------ Other long term liability - 6 ------------ ------------ Total liabilities 21,125 20,581 ------------ ------------ Series B Preferred Stock 1,413 1,361 Series C Preferred Stock 1,155 870 Series D Preferred Stock 2,000 2,000 ------------ ------------ Total Preferred Stock 4,568 4,231 ------------ ------------ Stockholders' equity: Common stock 27 20 Additional paid-in capital 373,620 373,186 Accumulated deficit (366,330) (363,173) Accumulated other comprehensive loss (293) (206) Common stock held in treasury, at cost (74) (74) ------------ ------------ Total stockholders ' equity 6,950 9,753 ------------ ------------ Total liabilities and stockholders' equity $ 32,643 $ 34,565 ============ ============ The accompanying notes are an integral part of these condensed consolidated financial statements. P-COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, unaudited)
Three months ended March 31, 2004 2003 ---------- ---------- Sales $ 6,837 $ 4,617 Cost of sales 5,099 8,225 ---------- ---------- Gross profit (loss) 1,738 (3,608) ---------- ---------- Operating expenses: Research and development/engineering 1,257 1,919 Selling and marketing 1,451 935 General and administrative 1,183 1,635 ---------- ---------- Total operating expenses 3,891 4,489 ---------- ---------- Operating loss (2,153) (8,097) Interest expense (75) (517) Other income (expense), net (113) 98 ---------- ---------- Loss from continuing operations (2,341) (8,516) Loss from discontinued operations (40) (1,858) ---------- ---------- Net loss (2,381) (10,374) Preferred stock accretions (776) - ---------- ---------- Net loss attributable to common stockholders (3,157) $ (10,374) ========== ========== Basic and diluted loss per common share: Loss from continuing operations (0.01) $ (0.23) Loss from discontinued operations (0.00) (0.05) ---------- ---------- Basic and diluted loss per common share (0.01) $ (0.28) ========== ========== Shares used in basic and diluted per share computation 244,607 36,538 ========== ==========
The accompanying notes are an integral part of these condensed consolidated finacial statements. P-COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, unaudited)
Three months ended March 31, 2004 2003 Cash flows from operating activities: Net loss $ (2,381) $ (10,374) Adjustments to reconcile net loss to net cash used in operating activities: Loss from discontinued operations 40 - Depreciation 421 1,470 Loss on disposal of property and equipment 7 - Inventory valuation and related charges - 3,460 Asset impairment and other restructuring charges - 2,003 Amortization of warrants 69 - Gain on vendor settlements (94) - Changes in operating assets and liabilities: Accounts receivable (1,241) 101 Inventory 1,336 639 Prepaid expenses and other assets (946) 24 Accounts payable 235 808 Other accrued liabilities 598 283 --------- ----------- Net cash used in operating activities (1,956) (1,586) --------- ----------- Cash flows from investing activities: Proceeds from sale of investment in Speedcom 100 - Loan to Speedcom - (400) Acquisition of property and equipment (63) - --------- ----------- Net cash used in investing activities 37 (400) --------- ----------- Cash flows from financing activities: Proceeds from sale of common stock, net - 307 Proceeds (payments) on bank loan (1) 115 Proceeds from convertible promissory note, net - 1,368 Payments under capital lease obligations (201) (193) --------- ----------- Net cash provided by (used in) financing activities (202) 1,597 --------- ----------- Effect of exchange rate changes on cash (1) 8 --------- ----------- Net increase (decrease) in cash and cash equivalents (2,122) (381) Cash and cash equivalents at beginning of the period 6,185 1,614 --------- ----------- Cash and cash equivalents at end of the period $ 4,063 $ 1,233 ========= ===========
The accompanying notes are an integral part of these consolidated financial statements. P-COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (in thousands, unaudited) Three months ended March 31 2004 2003 Supplemental cash flow disclosures : Cash paid for interest $ 20 $ 85 ----- ----- Non-cash investing and financing activities : Warrants issued in connection with convertible promissory notes $ - $ 538 ----- ----- Conversion of Series C Preferred stock into Common stock $ 439 $ - ----- ----- P-COM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of P-Com, Inc.'s (referred to herein, together with its wholly-owned subsidiaries, as "P-Com" or the "Company") financial condition as of March 31, 2004, and the results of their operations and their cash flows for the three months ended March 31, 2004 and 2003. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited 2003 consolidated financial statements, including the notes thereto, and the other information set forth therein, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. Operating results for the three-month period ended March 31, 2004 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2004. Liquidity and Management's Plans The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As reflected in the financial statements, for the three-month period ended March 31, 2004, the Company incurred a net loss of $2.4 million and used $2.0 million cash in its operating activities. As of March 31, 2004, the Company had stockholders' equity of $6.9 million, and accumulated deficit of $366.3 million. Also as of March 31, 2004, the Company had approximately $4.1 million in cash and cash equivalents, and a working capital deficiency of approximately $4.1 million. To address its working capital deficiency, management is currently executing a plan that involves the elimination or reduction of certain liabilities, the acquisition of additional working capital, increasing revenue and revenue sources, reducing operating expenses and, ultimately, achieving profitable operations. Management must be successful in its plan in order to continue as a going concern. Considering the uncertainty regarding P-Com's ability to materially increase sales, P-Com's known and likely cash requirements in 2004 will likely exceed available cash resources. As a result of this condition, management is currently evaluating (i) the sale of certain non-productive assets; (ii) certain opportunities to obtain additional debt or equity financing; and (iii) seeking a strategic acquisition or other transaction that would substantially improve P-Com's liquidity and capital resource position. P-Com may also be required to borrow from its existing Credit Facility in order to satisfy its liquidity requirements. 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) diversify its customer base; (iii) decrease costs of goods sold, and achieve higher operating margins; (iv) obtain additional debt or equity financing; (v) refinance the obligation due Agilent of approximately $1.7 million due December 1, 2004; (vi) negotiate agreements to settle outstanding claims; or (vii) otherwise consummate a transaction that improves its liquidity position, the Company will have insufficient capital to continue its operations. 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 LOSS PER SHARE For purposes of computing basic and diluted net loss per common share for the quarterly period ended March 31, 2004 and 2003, the weighted average common share equivalents do not include stock options with an exercise price that exceeds the average fair market of the Company's Common Stock for the period because the effect would be anti-dilutive. Because losses were incurred in the first quarter of 2004 and 2003, all options, warrants, and convertible notes are excluded from the computations of diluted net loss per share because they are anti-dilutive. 3. BORROWING ARRANGEMENTS On September 25, 2003, the Company renewed its Credit Facility with Silicon Valley Bank (the "Bank") 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 March 31, 2004 and December 31, 2003, no amounts were due to the Bank under the Credit Facility. The Company has an unsecured overdraft line with a bank in Italy, for borrowings up to $83,000, based on domestic trade receivables. Borrowings under this line bear interest at 4.5% per annum. As of March 31, 2004, no amounts were outstanding under this line. 4. BALANCE SHEET COMPONENTS Inventory MARCH 31, DECEMBER 31, 2004 2003 ----------- ------------ Raw materials $ 929 $ 3,219 Work-in-process 151 1,682 Finished goods 2,686 277 Inventory at customer sites 123 80 -------- -------- $ 3,889 $ 5,258 ======== ======== Inventory consists of the following (in thousands of dollars, unaudited): Other Accrued Liabilities Other accrued liabilities consist of the following (in thousands, unaudited): March 31, December 31, 2004 2003 --------------- ----------------- Purchase commitment $ 1,239 $ 1,238 Accrued warranty (a, b) 957 1,110 Accrued employee compensation 1,250 1,092 Value added tax payable 306 129 Customer advances 617 468 Lease obligations 2,146 2,335 Accrued rent 472 497 Deferred revenue 298 243 Other 1,354 1,114 --------------- ----------------- $ 8,639 $ 8,226 =============== ================= a) A summary of product warranty reserve activity for the quarterly period ended March 31, 2004 is as follows: Balance at January 1, 2004 $ 1,110 Additions relating to products sold 102 Payments (255) -------- Balance at March 31, 2004 $ 957 b) A summary of product warranty reserve activity for the quarterly period ended March 31, 2003 is as follows: Balance at January 1, 2003 $ 936 Additions relating to products sold 266 Payments (200) --------- Balance at March 31, 2003 $ 1,002 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 March 31, 2004 and 2003, 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. 5. INDEMNIFICATIONS Officer and Director Indemnifications As permitted under Delaware law and to the maximum extent allowable under that law, the Company has agreements whereby the Company indemnifies its current and former officers and directors for certain events or occurrences while the officer or director is, or was serving, at the Company's request in such capacity. These indemnifications are valid as long as the director or officer acted in good faith and in a manner that a reasonable person believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits the Company's exposure and enables the Company to recover a portion of any future amounts paid. As a result of the Company's insurance policy coverage, the Company believes the estimated fair value of these indemnification obligations is minimal. Other Indemnifications As is customary in the Company's industry, as provided for in local law in the U.S. and other jurisdictions, many of the Company's standard contracts provide remedies to its customers, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of our products. From time to time, the Company indemnifies customers against combinations of loss, expense, or liability arising from various trigger events related to the sale and the use of our products and services. In addition, from time to time, the Company also provides protection to customers against claims related to undiscovered liabilities or additional product liability. In the Company's experience, claims made under such indemnifications are rare and the associated estimated fair value of the liability is not material. 6. STOCKHOLDERS' EQUITY The authorized capital stock of P-Com was increased on December 2, 2003 to 700 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), 1,000,000 shares as Series B Convertible Preferred Stock (the "Series B Preferred Stock"), 10,000 shares as Series C Convertible Preferred Stock (the "Series C Preferred Stock"), and 2,000 shares of its Preferred Stock as Series D Convertible Preferred Stock (the "Series D Preferred Stock"). COMMON STOCK In January 2003, the Company sold 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. The Company did not sell any shares of Common Stock in the quarter ended March 31, 2004. For the quarter ended March 31, 2004, 58,517,500 shares of Common Stock were issued upon conversion of the Company's Series C Preferred Stock. SERIES B CONVERTIBLE PREFERRED STOCK On August 4, 2003, as a result of the restructuring of its Convertible Notes, the principal amount and accrued interest of $21,138,000 was converted into approximately 1,000,000 shares of Series B Convertible Preferred Stock with a stated value of $21.138 per share. Each share of Series B Convertible Preferred Stock converts into a number of shares of the Company's Common Stock equal to the stated value divided by $0.20. As of December 31, 2003 and March 31, 2004, there are approximately 108,406 shares of Series B Convertible Preferred Stock outstanding. The following table reflects changes in Series B Preferred Stock during the quarterly period ended March 31, 2004:
Shares Amount (In thousands) -------------------------------------------------- Balances as of December 31, 2003 108,406 $ 1,361 Preferred Stock accretions to accrete the carrying value to the redemption value $ 52 -------------------------------------------------- Balances as of March 31, 2004 108,406 $ 1,413 ==================================================
(a) The Company accretes its Series B Preferred Stock to redemption value through periodic charges to retained earnings. (b) The Series B Preferred Stock is classified as a mezzanine security, outside of stockholders' equity in the accompanying balance sheet due to the cash redemption provisions noted below. Under Statements of Financial Accounting Standards No. 150, this security would have been classified as equity. (c) As of March 31, 2004, outstanding Series B Preferred Stock is convertible into 11,457,487 shares of Common Stock. If declared, the holders of the Series B Convertible Preferred Stock shall be entitled to receive dividends payable out of funds legally available. Holders of Series B Convertible Preferred Stock shall share pro rata in all dividends and other declared distributions. The basis of distribution shall be the number of shares of Common Stock that the holders would hold if all of the outstanding shares of Series B Convertible Preferred Stock had converted into Common Stock. Any time after January 31, 2004 and subject to certain limitations, the Company may require the holders of Series B Convertible Preferred Stock to convert all outstanding shares of Series B Convertible Preferred Stock into shares of Common Stock, in accordance with the optional conversion formula, and all of the following conditions are met: o Closing bid price of the Common Stock for 10 consecutive trading days prior to delivery of the mandatory conversion Notice equals or exceeds $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; o Bankruptcy, insolvency, reorganization or liquidation proceedings shall be instituted by or against the Company; o Company sells substantially all of its assets; o Company merges, consolidates or engages in a business combination with another entity that is required to be reported pursuant to Item 1 of Form 8-K (unless the Company is the surviving entity and its capital stock is unchanged); o Company engages in transaction(s) resulting in the sale of securities whereby such person or entity would own greater than 50% of the outstanding shares of Common Stock of the Company (on a fully-diluted basis); o Company fails to pay any indebtedness of more than $250,000 to a third party, or cause any other default which would have a material adverse effect on the business or its operations. The Series B Convertible Preferred Stock ranks senior to the Common Stock, the Series A Preferred Stock and any class or series of capital stock of the Company created thereafter. The consent of the majority holders of the Series B Convertible Preferred Stock is required to create any securities that rank senior or pari passu to the Series B Convertible Preferred Stock. Upon a liquidation event, any securities senior to the Series B Convertible Preferred Stock shall receive a distribution prior to the Series B Convertible Preferred Stock and pursuant to the rights, preferences and privileges thereof, and the Series B Convertible Preferred Stock shall receive the liquidation preference with respect to each share. If the assets and funds for distribution are insufficient to permit the holders of Series B Convertible Preferred Stock and any pari passu securities to receive their preferential amounts, then the assets shall be distributed ratably among such holders in proportion to the ratio that the liquidation preference payable on each share bears to the aggregate liquidation preference payable on all such shares. If the outstanding shares of Common Stock are increased/decreased by any stock splits, stock dividends, combination, reclassification, reverse stock split, etc., the conversion price shall be adjusted accordingly. Upon certain reclassifications, the holders of Series B Convertible Preferred Stock shall be entitled to receive such shares that they would have received with respect to the number of shares of Common Stock into which the Series B Convertible Preferred Stock would have converted. If the Company issues any securities convertible for Common Stock or options, warrants or other rights to purchase Common Stock or convertible securities pro rata to the holders of any class of Common Stock, the holders of Series B Convertible Preferred Stock shall have the right to acquire those shares to which they would have been entitled upon the conversion of their shares of Series B Convertible Preferred Stock into Common Stock. The Series B Convertible Preferred Stock does not have voting rights. SERIES C CONVERTIBLE PREFERRED STOCK AND WARRANTS In October and December 2003, P-Com issued approximately 10,000 shares of Series C Convertible Preferred Stock with a stated value of $1,750 per share, together with warrants to purchase approximately 139.2 million shares of Common Stock. Each share of Series C Convertible Preferred Stock converts into a number of shares of the Company's Common Stock equal to the stated value divided by $0.10. As of December 31, 2003 and March 31, 2004, there are approximately 9,942 shares and 6,598 shares, respectively, of Series C Convertible Preferred Stock outstanding. The following table reflects changes in Series C Preferred Stock during the quarterly period ended March 31, 2004:
Shares Amount (In thousands) -------------------------------------------------- Balances as of December 31, 2003 Preferred Stock accretions to accrete the carrying 9,942 $ 870 value to the redemption value Conversion of Series C Preferred Stock into (3,344) (439) 58,517,500 shares of Common Stock Preferred Stock accretions to accrete the carrying $ 724 value to the redemption value -------------------------------------------------- Balances as of March 31, 2004 6,598 $1,155 ==================================================
(a) The Company accretes its Series C Preferred Stock to redemption value through periodic charges to retained earnings. (b) The Series C Preferred Stock is classified as a mezzanine security, outside of stockholders' equity in the accompanying balance sheet due to the cash redemption provisions noted below. Under Statements of Financial Accounting Standards No. 150, this security would have been classified as equity. (c) As of March 31, 2004, outstanding Series C Preferred Stock is convertible into approximately 115,475,105 shares of Common Stock. Holders of Series C Convertible Preferred Stock are entitled to receive, out of legally available funds, dividends at the rate of 6% per annum beginning on the first anniversary of their date of issuance and 8% per annum beginning on the second anniversary of their date of issuance. Dividends are payable semi-annually, either in cash or shares of P-Com Common Stock. Each share of Series C Convertible Preferred Stock is convertible into a number of shares of Common Stock equal to the stated value, plus any accrued and unpaid dividends, divided by an initial conversion price of $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 Preferred Stock in effect at the time of the dilutive issuance. The holders of Series C Preferred Stock may convert their shares into shares of Common Stock at any time. However, no holder of Series C Preferred Stock may convert its shares into shares of Common Stock if the conversion would result in the holder or any of its affiliates, individually or in the aggregate, beneficially owning more than 9.999% of P-Com's outstanding Common Stock. In the event a holder is prohibited from converting into Common Stock under this provision due to the 9.999% ownership limitation discussed above, the excess portion of the Series C shall remain outstanding, but shall cease to accrue a dividend. Subject to limitations above, the Series C Convertible Preferred Stock is also mandatorily convertible at the option of P-Com 180 days after the effective date of a registration statement covering the shares of Common Stock issuable upon the conversion of the Series C Convertible Preferred Stock, and upon the satisfaction of the following conditions: (i) for ten consecutive days, the Common Stock closes at a bid price equal to or greater than $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 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 March 31, 2004, approximately 3,344 shares of Series C Convertible Preferred Stock had been converted into approximately 58,517,500 shares of Common Stock and approximately 6,598 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 115,475,105 shares of Common Stock, subject to the limitation on conversion described above. The number of shares of Common Stock issuable upon conversion of the Series C Convertible Preferred Stock and exercise of the Series C-1 and Series C-2 Warrants are subject to adjustment for stock splits, stock dividends and similar transactions and for certain dilutive issuances. The investors of Series C were issued 7,000 Series C-1 Warrants and 7,000 Series C-2 Warrants for every share of Series C purchased. The C-1 Warrant shall have a term of five years and an initial exercise price of $.15 per warrant, increasing to $.18 per warrant beginning February 6, 2005. The Series C-2 Warrant shall have a term of five years and an initial exercise price of $.18 per warrant, increasing to $.22 per warrant beginning August 6, 2005. Subject to an effective registration statement, beginning twenty-four (24) months after the Effective Date, the Company may redeem the Series C-1 Warrants for $0.001 per Warrant if the Closing Bid Price of the Company's Common Stock is equal to or greater than $0.36 for ten (10) consecutive trading days. Beginning February 6, 2007, the Company may redeem the Series C-2 Warrants for $0.001 per Warrant if the Closing Bid Price of the Company's Common Stock is equal to or greater than $0.44 for ten (10) consecutive trading days. The Conversion Price of the Series C and the Exercise Price of the C-1 and C-2 Warrants shall be subject to adjustment for issuances of Common Stock at a purchase price less than the then-effective Conversion Price or Exercise Price, based on weighted average anti-dilution protection, subject to customary carve-outs. (See Common Stock Warrants, below) If P-Com completes a private equity or equity-linked financing (the "New Financing"), the Series C holders may exchange any outstanding Series C at 100% of face value for the securities issued in the New Financing. Such right shall be voided in the event the Company raises $5.0 million of additional equity capital at a price of not less than $.12 per share. For any equity or equity-linked private financing consummated within 12 months after the closing of the Series C Financing, the investors in the Series C shall have a right to co-invest in any private financing up to fifty (50%) percent of the dollar amount invested in the Series C Financing. The investors shall have five (5) trading days to respond. This co-investment provision shall not apply to the issuance of stock in situations involving bona-fide strategic partnerships, acquisition candidates and public offerings. Upon the occurrence of the following events, (each a "Redemptive Event"), the holders of Series C Preferred Stock may require the Company to purchase their shares of Series C Preferred Stock for cash: o the Company fails to remove any restrictive legend on any Common Stock certificate issued to Series C Preferred Stock holders upon conversion as required by the Certificate of Designation and such failure continues uncured for five business days after receipt of written notice; o the Company makes an assignment for the benefit of creditors or applies for appointment of a receiver for a substantial part of its usiness/property or such receiver is appointed; o bankruptcy, insolvency, reorganization or liquidation proceedings shall be instituted by or against the Company and shall not be dismissed within 60 days of their initiation; o the Company sells substantially all of its assets; o the Company merges, consolidates or engages in a business combination with another entity that is required to be reported pursuant to Item 1 of Form 8-K (unless the Company is the surviving entity and its capital stock is unchanged); o the Company engages in transaction(s) resulting in the sale of securities to a person or entity whereby such person or entity would own greater than fifty percent (50%) of the outstanding shares of Common Stock of the Company (calculated on a fully-diluted basis); o the Company fails to pay any indebtedness of more than $250,000 to a third party, or cause any other default which would have a material adverse effect on the business or its operations. The Series C Preferred Stock ranks senior to the Common Stock, the Series A Preferred Stock, the Series B Preferred Stock and ranks pari passu with the Series D Preferred Stock. The consent of the majority holders of the Series C Preferred Stock is required to create any securities that rank senior or pari passu to the Series C Preferred Stock. If P-Com liquidates, dissolves or winds up, the holders of Series C Preferred Stock and Series D Preferred Stock are entitled to receive the stated value of their shares plus all accrued and unpaid dividends prior to any amounts being paid to the holders of Series B Preferred Stock and P-Com Common Stock. In addition, the holders of Series C Preferred Stock are entitled to share ratably together with the holders of the Series D Preferred Stock, the Series B Convertible Preferred Stock and P-Com Common Stock in all remaining assets after the satisfaction of all other liquidation preferences. If the assets and funds for distribution are insufficient to permit the holders of Series C Preferred Stock and any pari passu securities to receive their preferential amounts, then the assets shall be distributed ratably among such holders in proportion to the ratio that the liquidation preference payable on each share bears to the aggregate liquidation preference payable on all such shares. If the outstanding shares of Common Stock are increased/decreased by any stock splits, stock dividends, combination, reclassification, reverse stock split, etc., the conversion price shall be adjusted accordingly. Upon certain reclassifications, the holders of Series C Preferred Stock shall be entitled to receive such shares that they would have received with respect to the number of shares of Common Stock into which the Series C Preferred Stock would have converted. If the Company issues any securities convertible for Common Stock or options, warrants or other rights to purchase Common Stock or convertible securities pro rata to the holders of any class of Common Stock, the holders of Series C Preferred Stock shall have the right to acquire those shares to which they would have been entitled upon the conversion of their shares of Series C Preferred Stock into Common Stock. The holders of Series C Preferred Stock are entitled to vote together with the holders of the Series D Preferred Stock and Common Stock, as a single class, on all matters submitted to a vote of P-Com's stockholders. The holders of Series C Preferred Stock are entitled to a number of votes equal to the number of shares of P-Com Common Stock that would be issued upon conversion of their shares of Series C Preferred Stock. SERIES D CONVERTIBLE PREFERRED STOCK P-Com has designated 2,000 shares of its Preferred Stock as Series D Convertible Preferred Stock. In December 2003, P-Com issued the 2,000 shares of Series D Convertible Preferred Stock to redeem $2 million of notes payable assumed from the SPEEDCOM asset acquisition. The Series D Preferred Stock has a stated value of $1,000 per share. Each share of Series D Preferred Stock is convertible into a number of shares of Common Stock equal to the stated value divided by an initial conversion price of $0.15. This conversion price is subject to adjustment for any stock splits, stock dividends or similar transactions. The holders of Series D Preferred Stock may convert their shares into shares of Common Stock at any time. However, no holder of Series D Preferred Stock may convert its shares into shares of Common Stock if the conversion would result in the holder or any of its affiliates, individually or in the aggregate, beneficially owning more than 9.999% of P-Com's outstanding Common Stock. As of December 31, 2003 and March 31, 2004, there are approximately 2,000 shares of Series D Convertible Preferred Stock outstanding. The following table reflects changes in Series D Preferred Stock during the quarterly period ended March 31, 2004: Amount Shares (In thousands) -------------------------------------- Balances as of December 31, 2003 2,000 $ 2,000 -------------------------------------- Balances as of March 31, 2004 2,000 $ 2,000 ====================================== (a) The Series D Preferred Stock is classified as a mezzanine security, outside of stockholders' equity in the accompanying balance sheet due to the cash redemption provisions noted below. Under Statements of Financial Accounting Standards No. 150, this security would have been classified as equity. (b) As of March 31, 2004, outstanding Series D Preferred Stock is convertible into 13,333,333 shares of Common Stock. Holders of Series D Preferred Stock are entitled to share pro-rata, on an as-converted basis, in any dividends or other distributions that may be declared by the board of directors of P-Com with respect to the Common Stock. If P-Com liquidates, dissolves or winds up, the holders of Series D Preferred Stock and the holders of Series C Preferred Stock are entitled to receive the stated value of their respective shares plus all accrued and unpaid dividends, pari passu, and prior to any amounts being paid to the holders of Series B Preferred Stock and P-Com Common Stock. In addition, the holders of Series D Preferred Stock are entitled to share ratably together with the holders of Series C Preferred Stock, Series B Preferred Stock and P-Com Common Stock in all remaining assets after the satisfaction of all other liquidation preferences. The holders of Series D Preferred Stock are entitled to certain rights and preferences with respect to the holders of P-Com Common Stock. The holders of Series D Preferred Stock are entitled to vote together with the holders of P-Com Common Stock and holders of Series C Preferred Stock, as a single class, on all matters submitted to a vote of P-Com's stockholders. The holders of Series D Preferred Stock are entitled to a number of votes equal to the number of shares of P-Com Common Stock that would be issued upon conversion of their shares of Series D Preferred Stock. Upon the occurrence of the following events, (each a "Redemptive Event"), the holders of Series D Preferred Stock may require the Company to purchase their shares of Series D Preferred Stock for cash: o the Company fails to remove any restrictive legend from certificates representing shares of P-Com Common Stock that are issued to holders who convert their shares of Series D Preferred Stock; o the Company makes an assignment for the benefit of creditors, or applies for or consents to the appointment of a receiver or trustee; o Any bankruptcy, insolvency, reorganization or other proceeding for the relief of debtors is instituted by or against P-Com and is not dismissed within 60 days; o the Company sells substantially all of its assets, merges or consolidates with any other entity or engages in a transaction that results in any person or entity acquiring more than 50% of P-Com's outstanding Common Stock on a fully diluted basis; o the Company fails to pay when due any payment with respect to any of its indebtedness in excess of $250,000; o the Company breaches any agreement for monies owed or owing in an amount in excess of $250,000 and the breach permits the other party to declare a default or otherwise accelerate the amounts due under that agreement; and o the Company permits a default under any agreement to remain uncured and the default would or is likely to have a material adverse effect on the business, operations, properties or financial condition of P-Com. 7. ASSET IMPAIRMENT AND OTHER RESTRUCTURING CHARGES The Company continually monitors its inventory carrying value in the light of the slowdown in the global telecommunications market, especially with regard to an assessment of future demand for its point - to - multipoint, and its other legacy product lines. In the 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. A summary of inventory reserve activities is as follows: Inventory Reserve --------- Balance at January 1, 2004 $ 26,178 Additions charged to Statement of Operations 820 Deductions from reserves (653) --------- Balance at March 31, 2004 $ 26,345 --------- 8. 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 period ended March 31, 2004 and 2003. Summarized results of PCNS are as follows (in thousands): THREE MONTHS ENDED MARCH 31, 2004 2003 -------- -------- Sales $ - $ 946 -------- -------- Loss from operations $ - $ (454) Gain (Loss) on disposition of discontinued operations (40) (1,404) -------- --------- (40) (1,858) Provision for income taxes - - Net profit (loss) $ (40) $ (1,858) ========= ========= The loss from the sale of the discontinued services unit was $40,000 for the three-months ended March 31, 2004, 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):
MARCH 31, DECEMBER 31, 2004 2003 --------- ------------ Total assets related to discontinued operations Cash $ - $ - Accounts receivable - - Inventory - - Prepaid expenses and other assets - - Property plant and equipment - - --------- ---------- Other assets - ========= ========== $ - $ - Total liabilities related to discontinued operations Accounts payable $ 183 $ 183 Other accrued liabilities 115 130 Loan payable to bank - - --------- ---------- $ 298 $ 313 ========= ==========
9. SALES BY GEOGRAPHIC REGION AND CONCENTRATIONS The breakdown of product sales by geographic region is as follows (in thousands): THREE MONTHS ENDED MARCH 31, 2004 2003 --------- --------- North America $ 480 $ 284 United Kingdom 2,015 1,577 Europe 1,400 632 Asia 470 1,756 Latin America 1,807 187 Other Geographic Regions 665 181 --------- --------- $ 6,837 $ 4,617 ========= ========= During the three-month period ended March 31, 2004 and 2003, four and one customers accounted for a total of 67% and 17% of our total sales, respectively. 10. COMPREHENSIVE LOSS Comprehensive loss is comprised of the Company's reported net loss and the currency translation adjustment associated with our foreign operations. Comprehensive loss was $3.2 million and $10.4 million for the three months ended March 31, 2004 and 2003, respectively. 11. 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 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. The Bankruptcy Court, P-Com and Winstar have agreed to settle all preference claims for $100,000. In June 2000, two former consultants to P-Com Italia S.p.A. filed a complaint against P-Com Italia in the Civil Court of Rome, Italy seeking payment of certain consulting fees allegedly due the consultants totaling approximately $615,000. The Civil Court of Rome has appointed a technical consultant in order to determine the merit of certain claims made by the consultants. P-Com believes that the claims are wholly without merit and, while no assurances can be given, that the claims will be rejected. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward-looking statements, which involve numerous risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, including without limitation, statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Certain Factors Affecting the Company" contained in this Item 2 and elsewhere in this Quarterly Report on Form 10-Q. Additional factors that could cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K, and other documents filed by us with the Securities and Exchange Commission. Overview. We supply broadband wireless equipment and services for use in telecommunications networks. Currently, we sell 2.4 GHz and 5.7 GHz spread spectrum radio systems, as well as 7 GHz, 13 GHz, 14 GHz, 15 GHz, 18 GHz, 23 GHz, 26 GHz, 38 GHz and 50 GHz radio systems. We also provide software and related services for these products. Additionally, prior to May 2003, we offered services, including engineering, furnishing and installation, program management, test and turn-up, and integration of telephone central offices' transmission and DC power systems, microwave, spread spectrum and cellular systems. During the quarter ended March 31, 2003, we decided to exit the services business as part of our strategy to reduce expenses and focus on our product business. On December 10, 2003, P-Com acquired the Wave Wireless Networking division of SPEEDCOM Wireless Corporation ("SPEEDCOM") and related assets, in consideration for the issuance to SPEEDCOM of 63,500,000 shares of P-Com's Common Stock, and the assumption of certain of its liabilities, including approximately $1.58 million in notes representing loans by P-Com to SPEEDCOM. Wave Wireless Networking ("Wave Wireless") specializes in manufacturing, configuring and delivering custom broadband wireless access networking equipment, including the SPEEDLAN family of wireless Ethernet bridges and routers, for business and residential customers internationally. The acquisition provides P-Com with complementary license - exempt point - to - point and point - to - multipoint wireless access systems for private networks and security and surveillance applications. While management believes that the worldwide slowdown in the telecommunications equipment industry has subsided, it has yet to show significant signs of recovery. As a result, our product sales have not recovered to levels necessary to achieve profitability, despite an increase in product sales of $2.2 million or 48% in the first quarter of 2004 compared to the same period in the previous year. Although our sales have increased, we continue to be burdened by high operating costs. As a result, we continue to focus on reducing our operating and other expenses by, among other things, consolidating our facilities, negotiating lower costs for materials, and outsourcing our product manufacturing. These cost reduction efforts, which include reductions resulting from the Company's exit from its services business, and reductions in personnel, have allowed us to reduce our operating loss by $0.6 million during the first quarter of 2004, or 13% compared to the same period in the previous year. Critical Accounting Policies Management's Use of Estimates and Assumptions. The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such differences could be material and affect the results of operations reported in future periods. Revenue Recognition. Revenue from product sales is recognized upon transfer of title and risk of loss, which is upon shipment of the product, provided no significant obligations remain and collection is probable. Provisions for estimated warranty repairs, returns and other allowances are recorded at the time revenue is recognized. Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses from the inability of our customers to make required payments. We evaluate our allowance for doubtful accounts based on the aging of our accounts receivable, the financial condition of our customers and their payment history, our historical write-off experience and other assumptions. In order to limit our credit exposure, we require irrevocable letters of credit and even prepayment from certain of our customers before commencing production. Inventory. Inventory is stated at the lower of cost or market, cost being determined on a first-in, first-out basis. We assess our inventory carrying value and reduce it if necessary, to its net realizable value based on customer orders on hand, and internal demand forecasts using management's best estimate given the information currently available. Our customers' demand is highly unpredictable, and can fluctuate significantly caused by factors beyond the control of the Company. Our inventories include parts and components that are specialized in nature or subject to rapid technological obsolescence. We maintain an allowance for inventories for potentially excess and obsolete inventories and gross inventory levels that are carried at costs that are higher than their market values. If we determine that market conditions are less favorable that those projected by management, such as an unanticipated decline in demand not meeting our expectations, additional inventory write-downs may be required. Property and Equipment. Property and equipment are stated at cost and include tooling and test equipment, computer equipment, furniture, land and buildings, and construction-in-progress. Depreciation is computed using the straight-line method based upon the useful lives of the assets ranging from three to seven years, and in the case of buildings, 33 years. Leasehold improvements are amortized using the straight-line method based upon the shorter of the estimated useful lives or the lease term of the respective assets. Impairment of Long- Lived Assets, other than Goodwill. In the event that facts and circumstances indicate that the long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation were required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down is required. A $599,000 impairment valuation charge in connection with property and equipment for our Point-to-Multipoint product line was charged to restructuring charges in the first quarter of 2003, and a further $2.5 million impairment charge for the Point-to-Multipoint property and equipment was recorded in the second quarter of 2003. Impairments of Goodwill. Goodwill resulting from the purchase of Wave Wireless will not be amortized into operations. Rather, such amounts will be tested for impairment at least annually. This impairment test is calculated at the reporting unit level, which, for P-Com is at the enterprise level. The annual goodwill impairment test has two steps. The first, identifies potential impairments by comparing the fair value of the Company, as determined using its trading market prices, with its carrying value, including goodwill. If the fair value exceeds the carrying amount, goodwill is not impaired and the second step is not necessary. If the carrying value exceeds the fair value, the second step calculates the possible impairment loss by comparing the implied fair value of goodwill with the carrying amount. If the implied goodwill is less than the carrying amount, a write-down will be recorded. In the event that management of P-Com determines that the value of goodwill has become impaired using this approach, an accounting charge for the amount of the impairment will be recorded. No impairment of goodwill resulted from this measurement approach immediately following the Wave Wireless acquisition. The Company will perform this test annually, on the first day of the fourth fiscal quarter of each year. Concentration of Credit Risk. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents and trade accounts receivable. The Company places its cash equivalents in a variety of financial instruments such as market rate accounts and U.S. Government agency debt securities. The Company, by policy, limits the amount of credit exposure to any one financial institution or commercial issuer. The Company performs on-going credit evaluations of its customers' financial condition to determine the customer's credit worthiness. Sales are then generally made either on 30 to 60 day payment terms, COD or letters of credit. The Company extends credit terms to international customers for up to 90 days, which is consistent with prevailing business practices. At March 31, 2004 and 2003, approximately 55% and 35%, respectively, of trade accounts receivable represent amounts due from three customers, respectively. RESULTS OF OPERATIONS Sales. For the three months ended March 31, 2004, total sales were approximately $6.8 million as compared to $4.6 million for the same period in the prior year. Despite the substantial increase in revenue in the quarter ended March 31, 2004 compared to the comparable period in 2003, our sales continue to be adversely affected by the continuing capital expenditure control measures implemented by North American and European telecommunication companies, and heightened competition from companies with which we compete. Approximately $3.5 million of our sales in the first quarter of 2004 came from Tel-Link out-of-warranty repair activities, compared to $2.1 million in the comparable period in 2003. P-Com's sales in the three-month period ended March 31, 2004 also benefited from approximately $0.9 million in revenue attributed to sales of products acquired in the fourth quarter of 2003 as a result of the acquisition of Wave Wireless. During the three months ended March 31, 2004, approximately 26% of our sales were to the Latin American market, and 14% of our sales were to the Asia-Pacific Rim areas and the Middle East combined. During the same period in 2003, we generated 4% of our sales to the Latin American market and 38% of our sales in the Asia-Pacific Rim and the Middle East combined. The United Kingdom market contributed 29% of the Company's revenue in the three months ended March 31, 2004, compared to 34% in the same period in 2003. Our next largest market is the European continent, which generated approximately 20% of the Company's revenue in the three months ended March 31, 2004, compared to 14% in the same period in 2003. The decrease in sales to the Asia-Pacific Rim areas and the Middle East in the three month period ended March 31, 2004, compared to the comparable period in 2003 is principally due to a substantial decrease in sales to China. This decrease is primarily attributable to decreased sales to the Company's product reseller in the China market. It is currently anticipated that sales to the China market through this product reseller will not return to levels experienced in prior quarters in the near term. The substantial increase in sales to the Latin American market in the quarter ended March 31, 2004 is attributable to sales to a leading wireless carrier in Latin America, which began ordering product from the Company beginning in the third quarter of 2003. Many of our largest customers use our product to build telecommunication network infrastructures. These purchases represent significant investments in capital equipment and are required for network rollout in a geographic area or market. Consequently, the customer may have different requirements from year to year and may vary its purchase levels from us accordingly. As noted, the continued worldwide weakness in the telecommunications industry is significantly affecting our customers' capital expenditures and consequently our revenue levels. Gross Profit (Loss). Gross profit (loss) for the three months ended March 31, 2004 and 2003, was $1.7 and $(3.6) million, respectively, or 25% and (78)% of sales in each of the respective quarters. Excluding the $3.5 million inventory charge and $0.6 million property and equipment impairment charge taken in the first quarter of 2003, the gross profit margins for the quarter ended March 31, 2003 would have been 10%. The higher gross margin during the quarter ended March 31, 2004 was attributable principally to a higher percentage of total revenue in the quarter 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 to total revenue during the three months ended March 31, 2004 compared to the comparable period in 2003. The Company's gross margins in the quarter ended March 31, 2004 also benefited from sales of Wave Wireless products. The Company acquired that product line in the fourth quarter of 2003. Research and Development. For the three months ended March 31, 2004 and 2003, research and development ("R&D") expenses were approximately $1.3 million and $1.9 million, respectively. As a percentage of sales, research and development expenses were at 18% for the three months ended March 31, 2004, compared to 42% for the three months ended March 31, 2003. The percentage decrease is due to significant expense reduction efforts as mentioned above. Selling and Marketing. For the three months ended March 31, 2004 and 2003, sales and marketing expenses were approximately $1.5 million and $0.9 million, respectively. The increase in sales and marketing expenses in the quarter ended March 31, 2004 is due to headcount additions and other related expenses, principally attributed to the acquisition of Wave Wireless in the fourth quarter of 2004, and higher commissions in light of increased sales. As a percentage of sales, selling and marketing expenses was 21% for the three months ended March 31, 2004, compared to 20% for the three months ended March 31, 2003. General and Administrative. For the three months ended March 31, 2004 and 2003, general and administrative expenses were approximately $1.2 million and $1.6 million, respectively. The decrease in general and administrative expense in the first quarter of 2004 is principally attributable to a realization of savings from cost reduction efforts that continued from 2003 to 2004, including reduced consulting and legal expenses, and facilities consolidation. As a percentage of sales, general and administrative expenses were 17% for the three months ended March 31, 2004, compared to 35% for the three months ended March 31, 2003. The percentage decrease is due to our success in significantly reducing our expenses throughout the year, as discussed above. Asset Impairment and Other Restructuring Charges. In the event that certain facts and circumstances indicate that the long-lived assets may be impaired, an evaluation of recoverability would be performed. When an evaluation occurs, management conducts a probability analysis based on the weighted future undiscounted cash flows associated with the asset. The results are then compared to the asset's carrying amount to determine if 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 determined that there was a need to reevaluate the carrying value of its property and equipment, which are held for sale, relating to its point - to - multipoint product line. The evaluation was performed in light of the continuing slowdown in the global telecommunications market for this product line. The evaluation resulted in a $2.5 million provision for asset impairment in the second quarter of 2003, and $0.6 million provision in the first quarter of 2003. In connection with the workforce reduction in May 2003, the Company recorded a $0.2 million charge in the second quarter of 2003 relating to a severance package given to certain of its executive officers. Loss on Discontinued Business. In the first quarter of 2003, we decided to exit our services business, PCNS. Accordingly, beginning in the first quarter of 2003, this business is reported as a discontinued operation and we recorded losses from its operations and from the disposal of the services business unit relating to writing down of assets to net realizable value. On April 30, 2003, the Company entered into an Asset Purchase Agreement with JKB to sell certain assets of PCNS. The Company is a guarantor of PCNS' obligations under its premises lease, through July 2007. As part of the sale to JKB, JKB agreed to sublet the premises from PCNS for one year beginning May 1, 2003. The terms of the sublease required JKB to pay less than the total amount of rent due under the terms of the master lease. As a result, the Company remained liable under the terms of the guaranty for the deficiency, and the total obligation under the terms of the master lease was approximately $1.5 million, and these were accrued in the second quarter of 2003 as loss on disposal of discontinued operations. In the third quarter of 2003, the Company reached a settlement agreement with the landlord for $0.3 million, and wrote-back the excess accrual of $1.2 million as a gain on discontinued operations. Interest Expense. For the three months ended March 31, 2004 and 2003, interest expense was $0.08 million and $0.5 million, respectively. Interest expense for the first quarter of 2004 was primarily for interest paid on capital leases. Other Income, Net. For the three-month period ended March 31, 2004, other income (loss), net, totaled $(0.1) million compared to an income of $0.1 million for the comparable three-month period in 2003. The loss in the three-month period March 31, 2004 was due to loss on foreign exchange rate. Provision (Benefit) for Income Taxes. We have not recorded the tax benefit of our net operating losses since the criteria for recognition has not been achieved. The net operating losses will be available to offset future taxable income, subject to certain limitations and expirations. LIQUIDITY AND CAPITAL RESOURCES Cash Used in Operations. During the three-month period ended March 31, 2004, we used approximately $2.0 million of cash in operating activities, primarily due to our net loss of $2.4 million, a $0.1 million non-cash gain from vendor settlements, which were offset by a $0.1 million non-cash loss related to amortization of warrants and loss on discontinued operations, and depreciation expenses of $0.4 million. Significant contributions to cash flow resulted from a net reduction in inventories of $1.3 million, and a net increase of accounts payable and other accruals of $0.8 million. These were partially offset by a net increase of $1.2 million in accounts receivable, and a net increase of $0.9 million in prepaid and other assets. During the three-month period ended March 31, 2003, we used approximately $1.6 million of cash in operating activities, primarily due to our net loss of $10.4 million, offset by a $1.4 million non-cash loss related to discontinued operations during the quarter, $3.5 million of inventory charges, $0.6 million of property and equipment impairment charge, and depreciation expenses of $1.5 million. Significant contributions to cash flow resulted from increases in accounts payable of $0.8 million and accrued liabilities of $0.3 million, a net reduction in inventories of $0.6 million, and a net reduction in trade receivables of $0.1 million. Cash from Investing Activities. During the three-month period ended March 31, 2004, we used approximately $.06 million of cash in investing activities, principally due to property and equipment acquisitions during the quarter. During the three-month period ended March 31, 2003, we used $0.4 million of cash in investing activities, resulting from a loan made to SPEEDCOM in connection with the $1.5 million convertible promissory note financing obtained in March 2003. Cash from Financing Activities. During the three-month period ended March 31, 2004, we used approximately $0.1 million of cash flows from financing activities, primarily from $0.2 million in payments related to capital lease obligations, that were offset by $0.1 million from the receipt of proceeds from the sale of Common Stock. During the three-month period ended March 31, 2003, we generated $1.6 million of cash flows from financing activities, primarily from (i) the issuance of convertible notes, which generated net proceeds of approximately $1.4 million, (ii) $0.3 million from the issuance of Common Stock, and (iii) $0.1 million from borrowings under the Credit Facility. The convertible notes were converted into Series C Preferred Stock in October 2003. The proceeds from financing activities were offset by capital lease payments totaling approximately $0.2 million. We do not have any material commitments for capital equipment. Additional future capital requirements will depend on many factors, including our plans to increase manufacturing capacity, working capital requirements for our operations, and our internal free cash flow from operations. Current Liquidity. As of March 31, 2004, our principal sources of liquidity consisted of borrowing availability under the Credit Facility, and approximately $4.1 million of cash and cash equivalents, compared to approximately $6.2 million in cash and cash equivalents at December 31, 2003. Available borrowings under the Credit Facility at March 31, 2004 were approximately $2.7 million, compared to $3.7 million at December 31, 2003. At March 31, 2004, our total liabilities were approximately $21.1 million, compared to $20.6 million at December 31, 2003. All of our liabilities at March 31, 2004 are current, resulting in negative working capital of approximately $4.1 million, compared to working capital of $2.1 million at December 31, 2003. To address its working capital position and ultimately return P-Com to profitability, management's plan is to continue its focus on increasing sales, settling outstanding obligations, controlling general and operating expenses, and reducing the cost of goods sold. Considering the uncertainty regarding P-Com's ability to materially increase sales, P-Com's known and likely cash requirements in 2004 will likely exceed available cash resources. As a result of this condition, management is currently evaluating (i) the sale of certain non-productive assets; (ii) certain opportunities to obtain additional debt or equity financing; and (iii) seeking a strategic acquisition or other transaction that would substantially improve P-Com's liquidity and capital resource position. P-Com may also be required to borrow from its existing Credit Facility in order to satisfy its liquidity requirements. If P-Com 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; (v) refinance the obligation due Agilent of approximately $1.7 million due December 1, 2004; (vi) negotiate agreements to settle outstanding claims; or (vii) otherwise consummate a transaction that improves its liquidity position, P-Com will have insufficient capital to continue its operations. Without sufficient capital to fund its operations, P-Com will no longer be able to continue as a going concern. P-Com's independent accountants' opinion on P-Com's consolidated financial statements for the year ended December 31, 2003 included an explanatory paragraph which raises substantial doubt about P-Com's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and clarification of recorded asset amounts or to the amounts and classification of liabilities that may be necessary if P-Com is unable to continue as a going concern. CERTAIN FACTORS AFFECTING THE COMPANY OUR WORKING CAPITAL POSITION HAS DETERIORATED, AND OUR BUSINESS HAS NOT SUFFICIENTLY RECOVERED. Our working captial position has deteriorated. Our core business product sales reduced sharply beginning with the second half of 2001, and are still significantly below levels necessary to achieve positive cash flow. From inception to March 31, 2004, our aggregate net loss is approximately $366.3 million. Our cash position has declined to $4.1 million at March 31, 2004, and is deteriorating. We have negative working capital of $4.1 million as of March 31, 2004. Our short-term liquidity deficiency could disrupt our supply chain, and result in our inability to manufacture and deliver our products, which would adversely affect our results of operations. Our independent accountants' opinion on our 2003 consolidated financial statements includes an explanatory paragraph indicating substantial doubt about our ability to continue as a going concern. To continue long term as a going concern, we will have to increase our sales, decrease costs and possibly induce creditors to forebear or to convert to equity, raise additional equity financing, and/or raise new debt financing. We may not accomplish these tasks. P-COM CANNOT SUSTAIN ITSELF AT THE CURRENTLY DEPRESSED SALES LEVELS. A continued severe worldwide slowdown in the telecommunications equipment and services sector is affecting us. Our customers, particularly systems operators and integrated system providers, are deferring capital spending and orders to suppliers such as our Company, and in general are not building out any significant additional infrastructure at this time. In the U.S., most Competitive Local Exchange Carriers ("CLECs") have declared bankruptcy and, internationally, 3G-network rollout and commercialization continue to experience delays. In addition, our accounts receivable, inventory turnover, and operating stability can be jeopardized if our customers experience financial distress. We do not believe that our core products sales levels sufficiently recover while an industry-wide slowdown in demand persists. Until product sales levels can sufficiently recover, our business, financial condition and results of operations will continue to be adversely affected. P-Com cannot sustain itself at the currently depressed sales levels, unless it is able to substantially reduce costs, or obtain additional debt or equity financing. OUR PROSPECTS FOR OBTAINING ADDITIONAL FINANCING ARE UNCERTAIN AND FAILURE TO OBTAIN NEEDED FINANCING WILL AFFECT OUR ABILITY TO PURSUE FUTURE GROWTH AND HARM OUR BUSINESS OPERATIONS, AND WILL AFFECT OUR ABILITY TO CONTINUE AS A GOING CONCERN. In the event the Company is unable to raise additional debt or equity financing, or otherwise improve its liquidity position, we will not be able to continue as a going concern. The Company's future capital requirements will depend upon many factors, including a re-energized telecommunications market, development costs of new products and related software tools, potential acquisition opportunities, maintenance of adequate manufacturing facilities and contract manufacturing agreements, progress of research and development efforts, expansion of marketing and sales efforts, and status of competitive products. Additional financing may not be available in the future on acceptable terms or at all. The Company's history of substantial operating losses could also severely limit the Company's ability to raise additional financing. In addition, given the recent price for our Common Stock, if we raise additional funds by issuing equity securities, additional significant dilution to our stockholders could result. If the Company is unable to increase sales, decrease costs, or obtain additional equity or debt financing, the Company may be required to close business or product lines, further restructure or refinance our debt or delay, further scale back or eliminate our research and development program, or manufacturing operations. We may also need to obtain funds through arrangements with partners or others that may require us to relinquish our rights to certain technologies or potential products or other assets. Our inability to obtain capital, or our ability to obtain additional capital only upon onerous terms, could very seriously damage our business, operating results and financial condition. P-COM RELIES ON A LIMITED NUMBER OF CUSTOMERS FOR A MATERIAL PORTION OF ITS SALES AND THE LOSS OF OR REDUCTION IN SALES TO ANY OF THOSE CUSTOMERS COULD HARM ITS BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATION. For the three-months ended March 31, 2004, sales to four customers accounted for 67% 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 March 31, 2004, three customers accounted for 55% of P-Com's total accounts receivable balances. Many of P-Com's significant recurring customers are located outside the U.S., primarily in the 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 P-Com's products or services, this may adversely affect P-Com's business, operations and financial condition. The financial difficulties of existing or potential customers may also limit the overall demand for P-Com's products and services. Current customers in the telecommunications industry have, from time to time, undergone financial difficulties and may therefore limit their future orders or find it difficult to pay for products sold to them. Any cancellation, reduction or delay in orders or shipments, for example, as a result of manufacturing or supply difficulties or a customer's inability to finance its purchases of P-Com's products or services, would adversely affect P-Com's business. Difficulties of this nature have occurred in the past and P-Com believes they will occur in the future. For instance, in July 2002, P-Com announced a multiple year $100.0 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 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 faces 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, Fresnel, Harris Corporation-Farinon Division, NEC, Sagem, Nortel, NERA, Nokia Telecommunications, SIAE, Siemens, and Proxim. Many of these companies have greater installed bases, financial resources and production, marketing, manufacturing, engineering and other capabilities than P-Com. P-Com faces actual and potential competition not only from these established companies, but also from start - up companies that are developing and marketing new commercial products and services. Some of P-Com's current and prospective customers and partners have developed, are currently developing or could manufacture products competitive with P-Com's products. 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 U.S., 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, therefore, P-Com typically permits orders to be modified or canceled with limited or no penalties. In periods of weak capital spending on the part of traditional customers, P-Com is at risk for curtailment or cancellation of purchase orders, which can lead to adverse operating results. Ordering materials and building inventory based on customer forecasts or non-binding orders can also result in large inventory write-offs, such as what occurred in 2000, 2001 and 2003. Global economic conditions have had a depressing effect on sales levels in the past four years. The soft economy and reported slowdown in capital spending in 2001, 2002 and 2003 in the U.S. and European telecommunications markets has had a significant depressing effect on the sales levels in each of these years. In fiscal 2003, P-Com's sales in the U.S. and Europe markets totaled approximately $13.1 million, compared to $13.3 million in 2002, and $50.8 million in 2001. P-COM DOES NOT HAVE THE CUSTOMER BASE OR OTHER RESOURCES OF MORE ESTABLISHED COMPANIES, WHICH MAKES IT DIFFICULT FOR IT TO ADDRESS THE LIQUIDITY AND OTHER CHALLENGES IT FACES. Although P-Com has installed and has in operation over 150,000 radio units globally, it has not developed a large installed base of its equipment or the kind of close relationships with a broad base of customers of a type enjoyed by larger, more developed companies, which would provide a base of financial performance from which to launch strategic initiatives and withstand business reversals. In addition, P-Com has not built up the level of capital often enjoyed by more established companies, so from time to time, it faces serious challenges in financing its continued operations. P-Com may not be able to successfully address these risks. FAILURE TO MAINTAIN ADEQUATE LEVELS OF INVENTORY COULD RESULT IN A REDUCTION OR DELAY IN SALES AND HARM P-COM'S RESULTS OF OPERATIONS. P-Com's customers have increasingly been demanding short turnaround on orders rather than submitting purchase orders far in advance of expected shipment dates. This practice requires that P-Com keep inventory on hand to meet market demands. Given the variability of customer needs and purchasing power, it is difficult to predict the amount of inventory needed to satisfy customer demand. If P-Com over-estimates or under-estimates inventory requirements to fulfill customer needs, or if purchase orders are terminated by customers, P-Com's results of operations could continue to be adversely affected. In particular, increases in inventory or cancellation of purchase orders could adversely affect operations if the inventory is ultimately not used or becomes obsolete. This risk was realized in the large inventory write-downs from 1999 to 2004. P-COM'S LIMITED MANUFACTURING CAPACITY AND SOURCES OF SUPPLY MAY AFFECT ITS ABILITY TO MEET CUSTOMER DEMAND, WHICH WOULD HARM ITS SALES AND DAMAGE ITS REPUTATION. P-Com's internal manufacturing capacity has been significantly reduced as a result of the substantial decline in sales since 2001, and management's decision to outsource much of the production of its products. Under certain market conditions, such as when there is high capital spending and rapid system deployment, P-Com's internal manufacturing capacity will not be sufficient to fulfill customers' orders, and its contract manufacturers may not be able to react to P-Com's demands on a timely basis. P-Com, or its contract manufacturers failure to manufacture, assemble and ship systems and meet customer demands on a timely and cost-effective basis could damage relationships with customers and have a material adverse effect on its business, financial condition and results of operations. In addition, certain components, subassemblies and services necessary for the manufacture of P-Com's systems are obtained from a sole supplier or a limited group of suppliers. Many of these suppliers are in difficult financial positions as a result of the significant slowdown that P-Com, too, has experienced. P-Com's reliance on contract manufacturers and on sole suppliers or a limited group of suppliers involves risks. From time to time, P-Com has experienced an inability to obtain, or to receive in a timely manner, an adequate supply of finished products and required components and subassemblies. This inability is due to the above factors and, in some cases, P-Com's financial condition. As a result, P-Com has less control over the price, timely delivery, reliability and quality of finished products, components and subassemblies. A significant ramp-up of production of products and services could require P-Com to make substantial capital investments in equipment and inventory, in recruitment and training of additional personnel and possibly in investment in additional manufacturing facilities. If undertaken, P-Com anticipates these expenditures would be made in advance of increased sales. In this event, operating results would be adversely affected from time-to-time due to short-term inefficiencies associated with the addition of equipment and inventory, personnel or facilities and these cost categories may periodically increase as a percentage of revenues. P-COM'S BUSINESS DEPENDS ON THE ACCEPTANCE OF ITS PRODUCTS AND SERVICES, AND IT IS UNCERTAIN WHETHER THE MARKET WILL ACCEPT AND DEMAND ITS PRODUCTS AND SERVICES AT LEVELS NECESSARY FOR SUCCESS. P-Com's future operating results depend upon the continued growth and increased availability and acceptance of micro-cellular, personal communications networks/personal communications services and wireless local loop access telecommunications services, in the U.S. and internationally. The volume and variety of wireless telecommunications services or the markets for and acceptance of the services may not continue to grow as expected. The growth of these services may also fail to create anticipated demand for P-Com's systems. Predicting which segments of these markets will develop and at what rate these markets will grow is difficult. Some sectors of the telecommunications market will require the development and deployment of an extensive and expensive telecommunications infrastructure. In particular, the establishment of personal communications networks/personal communications services networks requires significant capital expenditures. Communications providers may determine not to make the necessary investment in this infrastructure, or the creation of this infrastructure may not occur in a timely manner, as has been the case in 2001 through 2003. Moreover, one potential application of P-Com's technology, the use of its systems in conjunction with the provision of alternative wireless access in competition with the existing wireline local exchange providers, depends on the pricing of wireless telecommunications services at rates competitive with those charged by wireline operators. Rates for wireless access must become competitive with rates charged by wireline companies for this approach to be successful. Absent that, consumer demand for wireless access will be negatively affected. If P-Com allocates resources to any market segment that does not grow, it may be unable to reallocate capital and other resources to other market segments in a timely manner, ultimately curtailing or eliminating its ability to enter the other segments. Certain current and prospective customers are delivering services and features that use competing transmission media, such as fiber optic and copper cable, particularly in the local loop access market. To successfully compete with existing products and technologies, P-Com must offer systems with superior price and performance characteristics and extensive customer service and support. Additionally, P-Com must supply these systems on a timely and cost-effective basis, in sufficient volume to satisfy these prospective customers' requirements, in order to induce them to transition to P-Com's technologies. Any delay in the adoption of P-Com's systems and technologies may result in prospective customers using alternative technologies in their next generation of systems and networks. P-Com's financial condition may prevent P-Com from meeting this customer demand or may dissuade potential customers from purchasing from P-Com. Prospective customers may design their systems or networks in a manner that excludes or omits P-Com's products and technology. Existing customers may not continue to include P-Com's systems in their products, systems or networks in the future. P-Com's technology may not replace existing technologies and achieve widespread acceptance in the wireless telecommunications market. Failure to achieve or sustain commercial acceptance of P-Com's currently available radio systems or to develop other commercially acceptable radio systems would materially adversely affect P-Com. 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 93% of P-Com's sales in the three-month period ending March 31, 2004 were made to customers located outside of the United States. Historically, P-Com's international sales have been denominated in British pounds sterling, Euros or United States dollars. A decrease in the value of British pounds or Euros relative to United States dollars, if not hedged, will result in an exchange loss for P-Com if it has Euro or British pounds sterling denominated sales. Conversely, an increase in the value of Euro and British pounds sterling will result in increased margins for P-Com on Euro or British pounds sterling denominated sales as its functional currency is in United States dollars. For international sales that P-Com would require to be United States dollar-denominated, such a decrease in the value of foreign currencies could make its systems less price-competitive if competitors choose to price in other currencies and could adversely affect its financial condition. P-Com funds its Italian subsidiary's operating expenses, which are denominated in Euros. An increase in the value of Euro currency, if not hedged relative to the United States dollar, could result in more costly funding for P-Com's Italian operations, and as a result, higher cost of production to it as a whole. Conversely, a decrease in the value of Euro currency will result in cost savings for P-Com. Additional risks are inherent in P-Com's international business activities. These risks include: o changes in regulatory requirements; o costs and risks of localizing systems (homologation) in foreign countries; o availability of suitable export financing, particularly in the case of large projects which P-Com must ship in short periods; P-Com's bank line of credit allows this financing up to $4.0 million, subject to numerous conditions; o timing and availability of export licenses, tariffs and other trade barriers; o difficulties in staffing and managing foreign operations, branches and subsidiaries; o difficulties in managing distributors; o terrorist activities; 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. Regulatory bodies worldwide continue to adopt new standards for wireless telecommunications products. The delays inherent in this governmental approval process may cause the cancellation, postponement or rescheduling of the installment of communications systems by P-Com's customers and P-Com. The failure to comply with current or future regulations or changes in the interpretation of existing regulations could result in the suspension or cessation of operations. Those regulations or changes in interpretation could require P-Com to modify its products and services and incur substantial costs in order to comply with the regulations and changes. In addition, P-Com is also affected by domestic and international authorities' regulation of the allocation and auction of the radio frequency spectra. Equipment to support new systems and services can be marketed only if permitted by governmental regulations and if suitable frequency allocations are auctioned to service providers. Establishing new regulations and obtaining frequency allocation at auction is a complex and lengthy process. If PCS operators and others are delayed in deploying new systems and services, P-Com could experience delays in orders. Similarly, failure by regulatory authorities to allocate suitable frequency spectrum could have a material adverse effect on P-Com's results. In addition, delays in the radio frequency spectra auction process in the United States could delay P-Com's ability to develop and market equipment to support new services. P-Com operates in a regulatory environment subject to significant change. Regulatory changes, which are affected by political, economic and technical factors, could significantly impact P-Com's operations by restricting its development efforts and those of its customers, making current systems obsolete or increasing competition. Any such regulatory changes, including changes in the allocation of available spectra, could have a material adverse effect on P-Com's business, financial condition and results of operations. P-Com may also find it necessary or advisable to modify its systems and services to operate in compliance with these regulations. These modifications could be expensive and time-consuming. P-COM MAY ENTER INTO AGREEMENTS TO MERGE OR CONSOLIDATE WITH OTHER COMPANIES, AND IT MAY INCUR SIGNIFICANT COSTS IN THE PROCESS, WHETHER OR NOT THESE TRANSACTIONS ARE COMPLETED. P-Com signed an Agreement and Plan of Merger with Telaxis Communications Corporation, dated September 9, 2002. This merger agreement was terminated by mutual agreement on January 7, 2003. On January 27, 2003, P-Com signed a letter of intent to acquire privately held Procera Networks Inc., of Sunnyvale, California, in a stock-for-stock transaction. This acquisition effort was terminated in April 2003. On June 16, 2003, P-Com entered into an Asset Purchase Agreement with SPEEDCOM Wireless Corporation to acquire substantially all of the assets of SPEEDCOM (the "SPEEDCOM Acquisition"). The SPEEDCOM Acquisition closed on December 10, 2003. P-Com may not be able to close any strategic acquisition on the timetable it anticipates, if at all. P-Com has and may further incur significant non-recoverable expenses in these efforts. 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 negatively affected SPEEDCOM's sales in the fourth quarter of 2003 and the first quarter of 2004, and is expected to negatively affect its sales in the short term. In addition, the SPEEDCOM Acquisition is expected to continue 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. THE SPEEDCOM ACQUISITION WILL CONTINUE TO RESULT IN SIGNIFICANT COSTS TO P-COM. 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. THE NASDAQ SMALLCAP MARKET HAS DELISTED OUR STOCK AND THIS MIGHT SEVERELY LIMIT THE ABILITY TO SELL ANY OF OUR COMMON STOCK. NASDAQ moved our stock listing from the NASDAQ National Market to the NASDAQ Small Cap Market effective August 27, 2002 due to our failure to meet certain listing requirements, including a minimum bid price of $1.00 per share. We subsequently failed to meet certain NASDAQ Small Cap Market quantitative listing standards, including a minimum $1.00 per share bid price requirement, and the NASDAQ Listing Qualifications Panel determined that our stock would no longer be listed on the NASDAQ Small Cap Market. Effective March 10, 2003, our Common Stock commenced trading electronically on the OTC Bulletin Board of the National Association of Securities Dealers, Inc. This move could result in a less liquid market available for existing and potential stockholders to trade shares of our Common Stock and could ultimately further depress the trading price of our Common Stock. Our Common Stock is subject to the Securities Exchange Commission's ("SEC") "penny stock" regulation. For transactions covered by this regulation, broker-dealers must make a special suitability determination for the purchase of the securities and must have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, the rules generally require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer is also subject to additional sales practice requirements. Consequently, the penny stock rules may restrict the ability of broker-dealers to sell the company's Common Stock and may affect the ability of holders to sell the Common Stock in the secondary market, and the price at which a holder can sell the Common Stock. OUR STOCK PRICE HAS BEEN VOLATILE AND HAS EXPERIENCED SIGNIFICANT DECLINE, AND MAY CONTINUE TO BE VOLATILE AND DECLINE. In recent years, the stock market in general, and the market for shares of small capitalization technology stocks in particular, have experienced extreme price fluctuations. These fluctuations have often negatively affected small cap companies such as P-Com, and may impact our ability to raise equity capital in periods of liquidity crunch. Companies with liquidity problems also often experience downward stock price volatility. We believe that factors such as announcements of developments related to our business (including any financings or any resolution of liabilities), announcements of technological innovations or new products or enhancements by us or our competitors, developments in the emerging countries' economies, sales by competitors, sales of significant volumes of our Common Stock into the public market, developments in our relationships with customers, partners, lenders, distributors and suppliers, shortfalls or changes in revenues, gross margins, earnings or losses or other financial results that differ from analysts' expectations, regulatory developments, fluctuations in results of operations could and have caused the price of our Common Stock to fluctuate widely and decline over the past two years during the telecommunication recession. The market price of our Common Stock may continue to decline, or otherwise continue to experience significant fluctuations in the future, including fluctuations that are unrelated to our performance. 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 March 31, 2004, the last reported sale price of P-Com common stock was $0.06. Future sales of P-Com's Common Stock, particularly shares issued upon the exercise or conversion of outstanding or newly issued securities upon exercise of its outstanding options, could have a significant negative effect on the market price of P-Com's Common Stock. If the market price of P-Com Common Stock continues to decrease, P-Com may not be able to conduct additional financings in the future on acceptable terms or at all, and its ability to raise additional capital will be significantly limited. THE CONVERSION OR EXERCISE OF P-COM'S OUTSTANDING CONVERTIBLE SECURITIES WILL HAVE A SIGNIFICANT DILUTIVE EFFECT ON P-COM'S EXISTING STOCKHOLDERS. In March, May and July 2003, P-Com issued warrants to purchase approximately 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 additional stockholder approval. This downward adjustment mechanism is designed to protect the holders of these securities from having their investments diluted by future issuances of P-Com Common Stock at a lower price per share. This is accomplished by issuing an increased number of shares of P-Com Common Stock to these security holders upon the conversion or exercise of those securities. If the market price of P-Com Common Stock continues to decline and P-Com is forced to continue raising capital through dilutive equity financings, the holders of these convertible securities will be protected from any dilution that may occur but, as a result, P-Com's other stockholders will be diluted to a greater extent than if these convertible securities did not exist. 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. In addition, P-Com is required to reserve shares of Common Stock for issuance upon conversion or exercise of P-Com's outstanding convertible securities. P-Com has also reserved shares of Common Stock for issuance under its 1995 Stock Option/Stock Issuance Plan. As a result, P-Com will have little or no flexibility to act in the future with respect to financing programs, acquisitions, forward stock splits and other corporate purposes without the delay and expense involved in obtaining stockholder approval each time an opportunity requiring the issuance of shares of Common Stock arises. Such a delay could cause P-Com to lose the opportunity to pursue one or more of these transactions. Moreover, P-Com's stockholders may refuse to grant the necessary approval. P-COM'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. P-COM HAS ADOPTED ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION OF P-COM. P-Com's stockholder rights plan, certificate of incorporation, equity incentive plans, bylaws and Delaware law may have a significant effect in delaying, deferring or preventing a change in control and may adversely affect the voting and other rights of other holders of P-Com Common Stock. The rights of the holders of P-Com Common Stock will be subject to, and may be adversely affected by, the rights of any other preferred stock that may be issued in the future, including the Series A Junior Participating Preferred Stock that may be issued pursuant to the stockholder rights plan, upon the occurrence of certain triggering events. In general, the stockholder rights plan provides a mechanism by which the share position of anyone that acquires 15% or more (or 20% or more in the case of the State of Wisconsin Investment Board and Firsthand Capital Management) of P-Com's Common Stock will be substantially diluted. Future issuance of stock or additional preferred stock could have the effect of making it more difficult for a third party to acquire a majority of P-Com's outstanding voting stock. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have international sales and facilities and are, therefore, subject to foreign currency rate exposure. Historically, our international sales have been denominated in British pounds sterling, Euro and U.S. dollars. The functional currencies of our wholly-owned foreign subsidiaries are the local currencies. Assets and liabilities of these subsidiaries are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at average exchange rates for the period. Accumulated net translation adjustments are recorded in stockholders' equity. Foreign exchange transaction gains and losses are included in the results of operations, and were not material for all periods presented. Based on our overall currency rate exposure at March 31, 2004, a near-term 10% appreciation or depreciation of the U.S. dollar would have an insignificant effect on our financial position, results of operations and cash flows over the next fiscal year. We do not use derivative financial instruments for speculative or trading purposes. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. As of the end of the quarter ended March 31, 2004, the Company's management, including its chief executive officer and chief financial officer, has evaluated the effectiveness of the Company's disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). Based on that evaluation, the Company's chief executive officer and chief financial officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2004 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. (b) Changes in internal control over financial reporting. There were no changes in the Company's internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) that occurred during the most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the Company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On June 20, 2003, Agilent Financial Services, Inc. filed a complaint against the Company for Breach of Lease, Claim and Delivery and Account Stated, in Superior Court of the State of California, County of Santa Clara. The amount claimed in the complaint is approximately $2.5 million, and represents accelerated amounts due under the terms of capitalized equipment leases of the Company. On June 27, 2003, the parties filed a Stipulation for Entry of Judgment and Proposed Order of Dismissal of Action With Prejudice. Under the terms of the Stipulation, the Company paid Agilent $50,000 on July 15, 2003 and $100,000 on September 1, 2003, and is obligated to pay $50,000 per month for fourteen months, from October 1, 2003, up to and including November 1, 2004, and $1,725,000 on December 1, 2004. As a result of the Stipulation, judgment under the Complaint will not be entered unless and until the Company defaults under the terms of the Stipulation. In the event the Company satisfies each of its payment obligations under the terms of the Stipulation, the Complaint will be dismissed, with prejudice. On April 4, 2003, Christine Schubert, Chapter 7 Trustee for Winstar Communications, Inc. et al, filed a Motion to Avoid and Recover Transfers Pursuant to 11 U.S.C. Sections 547 and 550, in the United States Bankruptcy Court for the District of Delaware and served the Summons and Notice on July 22, 2003. The amount of the alleged preferential transfers to P-Com is approximately $13.7 million. P-Com 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. The Bankruptcy Court, P-Com and Winstar have agreed to settle all preference claims for $100,000. In June 2000, two former consultants to P-Com Italia S.p.A. filed a complaint against P-Com Italia in the Civil Court of Rome, Italy seeking payment of certain consulting fees allegedly due the consultants totaling approximately $615,000. The Civil Court of Rome has appointed a technical consultant in order to determine the merit of certain claims made by the consultants. P-Com believes that the claims are wholly without merit and, while no assurances can be given, that the claims will be rejected. Other than the ongoing 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. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 10.1 Employment Letter Agreement, dated April 7, 2004, between P-Com, Inc. and Elsbeth Kahn. 31.1 Certification of Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a). 31.2 Certification of Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a). 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K On March 2, 2004, we filed a Form 8-K current report announcing the receipt of $2.0 million in orders from a wireless telecommunications company in Latin America. On February 5, 2004, we filed a Form 8-K current report to announce its partnership with Velocitech to manage the production of license-exempt products developed by P-Com's Wave Wireless Networking Division. On February 2, 2004, we filed a Form on Form 8-K to announce our financial results for the fourth quarter and fiscal year ended December 31, 2003. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. P-COM, INC. By: /s/ Sam Smookler ---------------- Sam Smookler President and Chief Executive Officer (Duly Authorized Officer) Date: May 15, 2004 By: /s/ Daniel W. Rumsey -------------------- Daniel W. Rumsey Interim Chief Financial Officer (Principal Financial Officer) Date: May 15, 2004 EXHIBIT INDEX 10.1 Employment Letter Agreement, dated April 7, 2004, between P-Com, Inc. and Elsbeth Kahn. 31.1 Certification of Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a). 31.2 Certification of Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a). 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. EX-10.1 2 v03397_ex10-1.txt April 7, 2004 Ms. Elsbeth Kahn 1226 Kotenberg Ave. San Jose, CA 95125 Dear Beth, P-Com, Inc., a Delaware corporation (the "Company") is pleased to offer you a position of employment with the Company. The basic terms are as follows: 1. TITLE AND DUTIES. You will be employed as Vice President, License Exempt Products, reporting to the President & Chief Executive Officer. 2. COMMENCEMENT DATE. Your employment with the Company will commence on April 19th 2004 (the "Commencement Date"). 3. SALARY. The Company will pay you a base salary of $150,000 per year ("Base Salary"). 4. BONUS. At the beginning of each fiscal year of the Company, the President of the corporation will establish certain objectives and performance-related goals to be met by you during that fiscal year (the "Stated Goals"). You will receive an annual cash bonus equal to 50% of your Base Salary for each fiscal year in which the Company meets or exceeds its Stated Goals, beginning with fiscal year 2004 (the "Annual Bonus"). The bonus achievement for 2004 will be pro-rated in accordance with the time you have been employed by P-COM for calendar year 2004. For the year 2004, you will receive a minimum guaranteed bonus of $ 20,000.00, payable after the company completes closing of its books for 2004. 5. COMMON STOCK. Subject to approval by the Board of Directors, you will be granted options to purchase 1,800,000 shares of the Company's common stock, par value $0.0001 per share (the "Common Stock"), The exercise price of the Options shall be equal to the then existing fair market value of the Common Stock as determined by the Board of Directors on the date that the Options are granted. The Options shall be subject to and governed by the terms and conditions contained in the Company's 1995 Stock Option/Stock Issuance Plan, as amended (the "1995 Plan"). . 6. MEDICAL AND DENTAL BENEFITS. Beginning on the Commencement Date, you will be entitled to medical and dental insurance coverage under the Company's medical and dental insurance plans, which are subject to change from time to time in the sole discretion of the Company. -1- 7. TERMINATION FOR CAUSE. The Company may terminate your employment under this letter agreement for "cause" at any time during the Term. As used herein, "cause" means personal dishonesty, breach of fiduciary duty, any material breach of the terms of this letter agreement, gross negligence or willful misconduct in the performance of your duties, willful breach or habitual neglect of duties, fraud, conviction of a felony, incarceration for 30 or more consecutive days, or mental or physical disability that renders you unable to perform your duties for 90 consecutive days in any 12-month period, all as determined by the Company. In the event that the Company terminates your employment for cause, this letter agreement shall terminate and be of no further force or effect, and the Company shall have no further obligation to you hereunder. 8. TERMINATION WITHOUT CAUSE. In the event that the Company terminates your employment without cause, (a) the Company shall continue to pay you your Base Salary for a period of six months following such termination; (b) the Company shall continue to provide you with medical and dental insurance coverage, as provided in Section 6 above, for a period of one year following such termination, provided, that such continued coverage is allowed under the Company's contract with its medical and dental insurance plan carrier(s); and (c) the Options granted to you, pursuant to Section 5 above, shall continue to vest in accordance with the terms and conditions contained therein for a period of two years following the date of such termination. 9. TERMINATION FOLLOWING A CHANGE OF CONTROL. 9.1 SEVERANCE BENEFITS. Notwithstanding anything herein to the contrary, in the event that your employment with the Company is terminated for any reason (with or without cause) at any time within12 months following a Change of Control (as defined below), (a) the Company shall continue to pay you your Base Salary for a period of one year following such termination; (b) the Company shall continue to provide you with medical and dental insurance coverage, as provided in Section 6 above, for a period of one year following such termination, provided, that such continued coverage is allowed under the Company's contract with its medical and dental insurance plan carrier(s); and (c) the Options granted to you, pursuant to Section 5 above, shall automatically accelerate so that each such Option will become fully vested and immediately exercisable for the total number of shares of Common Stock subject to that Option, and such Options shall remain exercisable until the expiration of their terms, as set forth therein. 9.2 DEFINITION OF CHANGE OF CONTROL. For purposes of this letter agreement, "Change of Control" shall mean any of the following transactions effecting a change in ownership or control of the Company: (a) A merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the Company's jurisdiction of incorporation; -2- (b) The sale, transfer or other disposition of all or substantially all of the assets of the Company in complete liquidation or dissolution of the Company, (c) Any reverse merger in which the Company is the surviving entity but in which securities representing 50% or more of the total combined voting power of the Company's outstanding securities are transferred to person or persons different from the persons holding those securities immediately prior to such merger, (d) The acquisition, directly or indirectly by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than thirty percent (30%) of the total combined voting power of the Company's outstanding securities pursuant to a tender or exchange offer made directly to the Company's stockholders. 9.3 OTHER PROVISIONS. An action following a change of control that results in a reduction of your level of responsibility or a change in your place of employment which is more than fifty (50) miles from your place of employment before the change of control and is effected without your written concurrence will entitle you to the benefits described in Section 9.1 (Severance Benefits) of this document. 10. DEATH. In the event of your death, the payments to which you are entitled under this letter agreement will be made, on the applicable due dates hereunder, to the executors or administrators of your estate. If you die before you exercise all the Options, such Options may be exercised, within 12 months after your death, by the executors or administrators of your estate or by persons to whom the Options are transferred pursuant to your will or in accordance with the laws of inheritance. In no event, however, may any such Option be exercised after the expiration date specified therein. 11. GENERAL CREDITOR STATUS. The payments and benefits to which you become entitled hereunder will be paid, when due, from the general assets of the Company, and no trust fund, escrow arrangement or other segregated account will be established as a funding vehicle for such payment. Accordingly, your right (or the right of the personal representatives or beneficiaries of your estate) to receive any payments or benefits hereunder will at all times be that of a general creditor of the Company and will have no priority over the claims of other general creditors. 12. WITHHOLDING TAXES AND OTHER DEDUCTIONS. To the extent required by law, the Company shall withhold from any payments due to you under this letter agreement any applicable federal, state or local taxes and such other deductions as are prescribed by law. -3- 13. MISCELLANEOUS. This letter agreement will be binding upon you and the Company, its successors and assigns (including, without limitation, the surviving entity in any Change of Control) and is to be construed and interpreted under the laws of the State of California. Except as set forth herein, this letter agreement supersedes all prior agreements between you and the Company relating to the subject of your employment with the Company and may only be amended by written instrument signed by you and an authorized officer of the Company. If any provision of this letter agreement as applied to any party or to any circumstance should be adjudged by a court of competent jurisdiction to be void or unenforceable for any reason, the invalidity of that provision will in no way affect (to the maximum extent permissible by law) the application of such provision under circumstances different from those adjudicated by the court, the application of any other provision of this letter agreement, or the enforceability or invalidity of this letter agreement as a whole. Should any provision of this letter agreement become or be deemed invalid, illegal or unenforceable in any jurisdiction by reason of the scope, extent or duration of its coverage, then such provision will be deemed amended to the extent necessary to conform to applicable law so as to be valid and enforceable or, if such provision cannot be so amended without materially altering the intention of the parties, then such provision will be stricken and the remainder of this letter agreement will continue in full force and effect. 14. ATTORNEY FEES. In the event legal proceeding should be initiated by you or by the Company with respect to any controversy, claim or dispute relating to the interpretation or application of the provisions of this letter agreement or any benefits payable hereunder, the prevailing party in such proceedings will be entitled to recover from the losing party reasonable attorney fees and costs incurred in connection with such proceedings or in the enforcement or collection of any judgment or award rendered in such proceedings. For purposes of this provision, the prevailing party means the party determined by the court to have most nearly prevailed in the proceedings, even if that party does not prevail in all matters, and does not necessarily mean the party in whose favor the judgment is actually rendered. If you accept the above-described offer, please sign a copy of this letter where indicated below and mail or fax it to me. You will be required to sign a Proprietary Information and Inventions Agreement as well as to present proper documentation regarding proof of your identify and authorization to work in the United States upon your acceptance. This offer, if not accepted, will expire April 14th 2004. -4- P-Com believes that a mutually beneficial relationship will result from your positive response to this offer of employment. We look forward to your acceptance and a long and rewarding association. Sincerely, Sam Smookler, President and Chief Executive Officer ACCEPTED AND AGREED TO AS SET FORTH ABOVE: - ----------------------- Elsbeth Kahn Dated: ----------------- -5- EX-31.1 3 v03397_ex31-1.txt EXHIBIT 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO EXCHANGE ACT RULE 13a-14(a) I, Sam Smookler, certify that: 1. I have reviewed this quarterly report on Form 10-Q of P-Com, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financing reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 15, 2004 /s/ Sam Smookler - ---------------- President and Chief Executive Officer EX-31.2 4 v03397_ex31-2.txt EXHIBIT 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO EXCHANGE ACT RULE 13a-14(a) I, Daniel W. Rumsey, certify that: 1. I have reviewed this quarterly report on Form 10-Q of P-Com, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financing reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 15, 2004 /s/ Daniel W. Rumsey - -------------------- Interim Chief Financial Officer EX-32.1 5 v03397_ex32-1.txt EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Sam Smookler, Chief Executive Officer of P-Com, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of P-Com, Inc. on Form 10-Q for the period ended March 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of P-Com, Inc. By: /s/ Sam Smookler ------------------ Name: Sam Smookler Title: President and Chief Executive Officer (Duly Authorized Officer) EX-32.2 6 v03397_ex32-2.txt EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Daniel W. Rumsey, Interim Chief Financial Officer of P-Com, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of P-Com, Inc. on Form 10-Q for the period ended March 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of P-Com, Inc. By: /s/ Daniel W. Rumsey ---------------------- Name: Daniel W. Rumsey Title: Interim Chief Financial Officer (Principal Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----