================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
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 Number)
Incorporation or Organization)
3175 S. Winchester Boulevard, Campbell, California 95008
(408) 866-3666
(Address and Telephone Number of Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 par value
Preferred Stock Purchase Rights
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. YES [X] NO [_]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, as of February 28, 2002, was approximately $9,227,700 (based
upon the closing price for shares of the Registrant's Common Stock as reported
by the Nasdaq National Market on that date. Shares of Common Stock held by each
executive officer, director and holder of 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
On February 28, 2002, approximately 84,958,300 shares of the Registrant's
Common Stock, $0.0001 par value, were outstanding.
Part I
Item 1. Business
The following Business section contains forward-looking statements, which
involve risks and uncertainties. Forward-looking statements are characterized by
words such as "plan," "expect," "believe," "intend," "would" and similar words.
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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations-- Certain Risk Factors Affecting the Company" and
elsewhere in this Annual Report on Form 10-K.
Overview
P-Com develops, manufactures, and markets Point-to-Multipoint, Point-to-Point,
and Spread Spectrum radio systems for the worldwide telecommunications market.
Cellular and Personal Communications Services ("PCS") providers employ our
Point-to-Point systems for backhaul between remote tower sites and switching
centers in their growing global markets. Network service providers and Internet
service providers are able, through the deployment of P-Com equipment and
systems, to respond to the increasing global demands for high-speed wireless
access services, such as Internet access associated with Business-to-Business
and E-Commerce business processes. Through deployment of our systems, network
providers can quickly and efficiently establish integrated Internet, data,
voice, and video services for their customers, then expand and grow those
services as demand increases. Our market is a subset of the global telecom,
cellular, PCS, Wireless Internet access, and private network markets. Because of
the number of sub-markets for various products within the nations of the world,
reliable market statistics are not readily available.
Most of our revenue is currently derived from our Point-to-Point products. We
believe that in the future our Point-to-Multipoint and Spread Spectrum products
will generate an increasing share of our revenue.
Our wholly owned subsidiary, P-Com Network Services, Inc.("PCNS"), provides
engineering, installation support, program management and maintenance support
services to the telecommunications industry in the United States. Network
service providers (wireless and traditional wireline) outsource these tasks to
approved service suppliers on a project-by-project basis. Microwave service
projects are typically short in duration--one to two weeks--and primarily
involve logistical installation or maintenance of millimeter wave radio systems.
Central office services projects involve ordering materials and substantial
man-hour commitments and can last up to three months.
Since January 1, 2000, we have acted to strengthen our core business by raising
$61.2 million in private equity financings and raising additional capital by
disposing of several previously acquired businesses (Technosystem, Cemetel,
Control Resources, and RT Masts), which we determined no longer fit with our
business plan and strategy. Our sales, total assets, working capital and
employee headcount contracted sharply in 2001 due to a slowdown affecting the
entire telecommunications infrastructure equipment industry and the financial
distress of several of our potential customers.
1
Industry background
There is a growing demand for multimedia communications infrastructure globally,
particularly in the Asia-Pacific rim areas. In the last several years, Internet
usage has grown significantly, and has become the key driver, along with demand
for global telephone accessibility. Communication networks' expansion is
required. Speed, reliability and economies of scale are the key elements
inherent in commercially successful networked systems globally. Broadband
Wireless Access ("BWA") is an efficient and particularly economical means to
meet this growing demand for information transfer. P-Com's BWA products and
services are targeted to add value to the integrated service providers and
wireless telephone operators globally. Our products are designed to be frequency
specific by country where required.
The BWA market has developed into two commercially recognized architectures for
voice and data transmission: Point-to-Point and Point-to-Multipoint. P-Com has
developed and sold equipment in commercial quantities for both formats. BWA
providers have just begun to utilize high frequency Point-to-Multipoint systems
as produced by P-Com.
Although P-Com believes the overall markets within which it competes are in a
long-term growth phase, P-Com cannot ensure the proliferation of its products or
guarantee a given market share of the global telecom equipment market in future
years. Currently there is a significant slowdown in the entire
telecommunications equipment industry and demand for BWA products is deeply
depressed. Additionally, there are competing technologies which service the
communication sector's hardware demands. P-Com does not provide products for
wireline sub-sectors of the telecommunications market, including wireline
systems and cable systems.
Drivers of Broadband Wireless Access Growth
Global deregulation of telecommunications markets and the related set-aside of
radio frequencies for BWA transmission have spurred competition to supply
wireless-based systems as a cost effective alternative to traditional wireline
service delivery systems. New network service providers are operating in the
United States and other high demand markets to create integrated digital network
solutions to meet the growing demand for multi-purpose efficient
telecommunications systems. Broadband wireless systems are competitive due to
the relatively short set up and deployment time compared to wireline
alternatives, high return on capital investment, and ability to "turn on"
customers quickly once the transmission hardware and software infrastructure are
in place. There are less capacity restraints for transmission levels compared to
T1/E1 lines and DSL alternatives with lower potential of "stranded capital
costs" as ultimate user locales expand or change over time. Incumbent exchange
carriers can also create more flexible systems via adjunct buildouts of BWA
systems which integrate with their existing trunk lines.
In the United States, incumbent Regional Bell Operating Companies ("RBOC") were
traditionally the sole providers of the copper wire interconnection network that
connected business and residential subscribers to the Public Switched Telephone
Network ("PSTN"), commonly known as the "last mile" connection. The
Telecommunications Act of 1996 required incumbent telephone companies to lease
portions of their networks, including this last mile, to Competitive Local
Exchange Carriers ("CLECs"), with the intention to create a competitive
telecommunications industry domestically. Although the CLECs have generally been
unsuccessful to date, additional competition has risen between traditional
telephone companies and cable television operators expanding services into the
others' traditional markets.
2
The initial market deregulation in the United States has fostered similar
deregulation actions globally. Newly allocated frequencies have been auctioned
or apportioned for BWA usage. Service providers of the new systems are
differentiating themselves from "commodity" status of existing private or
state-owned wireline carriers through deploying and marketing integrated,
digital, high-speed access services to business and residential customers. Based
upon providers' choice to deploy BWA as the quickest, most economical and
scalable means of providing reliable, cost effective telecommunications service,
the demand for this technology portends significant growth globally.
In most locales, P-Com's Point-to-Point and Point-to-Multipoint radio systems
are marketed to spectrum license holders who hold rights to transmit via BWA.
Such license holders have various options from competing technologies and
equipment providers who are in direct competition with P-Com for the business.
P-Com also markets a line of spread spectrum radios, which are used by
unlicensed service providers, primarily in Asian, South American and African
markets.
Global Privatization and Deregulation: Stimuli to Broadband Wireless Access
Growth
In many parts of the world, communication services are either inadequate or
non-existent due to the lack of existing infrastructure. Additionally, many such
countries have privatized the state-owned telecommunications monopoly and opened
their markets to competitive network service providers. In these markets, we
believe competitive service providers often find deployment of BWA the quickest,
most economical and scalable means of provisioning reliable, modern
telecommunications services.
For the communications service providers of the world to be able to utilize
P-Com's BWA systems (which include P-Com's Point-to-Multipoint and
Point-to-Point radio systems), they must own the licenses required to operate
such systems. Once the service provider has obtained the license, they must then
determine from a number of competing systems (including non-BWA systems), the
one that appears best suited for their particular application.
Network Architecture Bottlenecks
Fiber optic networks have received much attention because of the speed and
quality associated with such technology. Increasingly, network service providers
are constructing fiber optic interoffice backbones to meet the significant
demand created by Internet and data, video conferencing, and voice services. To
satisfy the growing user demand for high-speed access, the fiber optic channels
would (if not supplemented by other systems) have to extend all the way into the
buildings in which the users reside. Such is the case today in only about ten
percent of the commercial buildings within the United States, and that number is
not expected to grow much because of the extremely high cost to extend fiber
optic channels to buildings. Instead, the fiber optic channel usually ends short
of the building, at the beginning of the "last mile". Thus, users are often
forced to use slower dial-up modem connections and ISDN (Integrated Services
Digital Network) services, or ADSL (Asymmetrical Digital Subscriber Line)
service, subject to its distance limitations. This local access "bottleneck"
denies users the real benefits afforded by fiber optic backbones because the
highest speed which users can experience is that of the local access portion of
their end-to-end connection. To overcome such limitations in a quick and
efficient manner, we believe BWA is attractive to incumbent and competitive
carriers alike because the local access speed restrictions are obviated, and
because wireless systems can be installed and become operational in weeks as
compared to months or years for wired infrastructure, and at a much reduced
cost.
3
Wireless Access Solutions
Point-to-Multipoint BWA service is a wireless technology that provides the high
speed symmetrical access service This service is drawing significant attention
and growing interest because it can be rapidly deployed; it is highly efficient,
reliable, and scalable; it is cost effective because it can serve many
subscribers from one hub, and can be expanded as demand for service dictates.
Nonetheless, the traditional system providers' buildout approach has resulted in
P-Com's and its competitors' Point-to-Multipoint products only gradually gaining
market share in the BWA market.
Point-to-Point BWA is a dedicated link wireless technology enabling symmetrical
voice and data services between a subscriber and the network. For each new
subscriber using this service, the network service provider provides a separate
set of dedicated access equipment. Backhauls between mobile wireless towers and
the mobile switching office on cellular phone networks are a typical application
for Point-to-Point equipment. As mobile service usage continues to grow,
cellular service providers will have to continue to scale down existing cells
into smaller ones to reuse precious spectrum. With each such division of cells
comes opportunity for new wireless Point-to-Point applications because of the
need for more backhauls.
Certain limitations are common to all BWA systems like those provided by P-Com.
Among the more common of these limitations are the requirement for line-of-sight
between the hubs and the remote sites; spacing between the hubs and the remote
stations; signal transmit/receive power level interference; poor performance if
there is improper antenna alignment; and adjacent cell interference due to
improper power levels. Professional execution of path and limitations. P-Com
Network Services can provide the professional engineering and installation
services required for wireless access system operation, which adds an element of
competitive advantage for P-Com.
The P-Com Strategy
Our goal is to be the leading worldwide supplier of high-performance
Point-to-Multipoint, Point-to-Point, and Spread Spectrum wireless access
equipment. Our strategy to accomplish this objective is to:
o Focus on Point-to-Multipoint, Point-to-Point, and Spread Spectrum
microwave Markets. P-Com designs products specifically for the millimeter
wave and spread spectrum microwave frequency bands. We have designed
P-Com's core architecture to optimize the systems for operation at
millimeter and microwave frequencies.
o Focus on full Engineering, Furnishing and Installation ("EF&I") in Central
Office operations for DC power and transmission in the U.S domestic
market.
o Continue expansion of our identified global market opportunities. We have
met the standards established by the European Telecommunications Standards
Institute ("ETSI") and achieved regulatory approval for our systems in
Argentina, Australia, Austria, Brazil, Canada, China, the Czech Republic,
Latvia, France, Germany, Greece, Hungary, Italy, Japan, Mexico, Spain, and
the United Kingdom, as well as the United States. We maintain sales and/or
support offices in major international markets.
o Build and sustain manufacturing cost advantage. We have designed our
system architecture to reduce the number of components incorporated into
each system, and to permit the use of common components across the range
of our products. Such an approach assists in manufacturing cost reduction
4
through volume component purchases and through enablement of a
standardized manufacturing process. Utilization of turnkey contract
manufacturers eliminates expensive in-house manufacturing assembly, and
provides ability to scale up or down as conditions dictate.
o Leverage and maintain software leadership. We differentiate our systems
through proprietary software embedded in the IDU ("InDoor Unit") and ODU
("OutDoor Unit"), and in the Windows and SNMP-based software tools. This
software is designed to allow us to deliver to our customers a high level
of functionality that can be easily reconfigured by the customer to meet
changing needs. Software tools are also used to facilitate network
management.
Range of Product Choices
We offer access providers around the world a range of wireless systems that
encompass Point-to-Multipoint BWA, Point-to-Point BWA, and Spread Spectrum
systems. Our systems utilize a common architecture in the millimeter wave and
spread spectrum microwave frequencies, including 2.4 GHz, 5.7 GHz, 7 GHz, 13
GHz, 14 GHz, 15 GHz, 18 GHz, 23 GHz, 24 GHz, 26 GHz, 28 GHz, 31 GHz, 38 GHz, and
50 GHz. Both FDMA (Frequency Division Multiple Access) and TDMA (Time Division
Multiple Access) technologies are designed into our Pont-to-Multipoint systems.
Point-to-Multipoint and Point-to-Point BWA systems operate in specific radio
frequency bands uniquely allocated by the telecommunications authorities of the
nations of the world. To participate in the BWA markets of the world, BWA
manufacturers must provide systems that conform to these national frequency
specifications systems. The systems are subjected to stringent testing and must
pass local homologation procedures. The greater the number of frequencies
provided for by the BWA manufacturer, the greater the manufacturer's potential
market penetration.
One of the main objectives of the access providers which buy BWA products from
us or our competitors is the establishment of an access system that enables them
to derive from their allocated frequency bandwidth the maximum amount of
revenue-producing traffic, also known as "throughput." The greater the
"throughput" capability of a BWA system, the greater the access provider's
revenue production potential.
Access providers determine from studies of their market whether to provide a
Point-to-Multipoint or Point-to-Point system, or a combination of both, to best
meet their business plan objectives. Additionally, access providers determine if
TDMA or FDMA, or a combination of both, best satisfies their engineering
requirements. Although TDMA appears to offer the most cost effective use of
bandwidth, FDMA has the advantage of being easier to deploy and allows providers
to better guarantee service levels to their customers. It is not yet clear which
will be the eventual dominant technology either throughout the world or in
specific geographic regions. As a result, P-Com has elected to offer both FDMA
and TDMA. P-Com provides greater versatility for the customer and higher levels
of network flexibility by allowing both FDMA and TDMA to be simultaneously
deployed within a section.
CLECs, ISPs, and other carriers are currently identifying how
Point-to-Multipoint technology might most effectively integrate into existing
and newly built systems. As a result the products required are evolving as well.
All equipment provider companies in this market must be aware and able to react
to product developments to remain competitive. Broad market trends are sometimes
difficult to identify during the current industry wide slowdown because only
relatively small volumes of PMP are being ordered.
5
We provide both Point-to-Multipoint and Point-to-Point systems in a broad range
of frequencies and provide both TDMA and FDMA capability, as stated above.
P-Com's competitors' generally provide either Point-to-Multipoint or
Point-to-Point, but seldom both. Through provision of such a broad range of
design options, and through the application of a network management system that
is common across all of our systems, we give BWA service providers broader
design latitudes than those available from many competing systems and enables
providers to tailor their purchases to help maximize their "throughput." In
addition, our relatively broad range of product offerings tends to cushion P-Com
against the risk that a particular frequency or standard might, for whatever
reason, come to dominate all marketplace alternatives, or be mandatory for a
particular country or project.
Software embedded in our systems allows the user to easily configure and adjust
system settings such as frequency, power, and capacity without manual tuning and
mechanical adjustments. Software provided with our systems includes
sophisticated diagnostics, maintenance, network management, and system
configuration tools.
We first produced and marketed our Point-to-Point systems in 1993. P-Com's
Point-to-Multipoint systems became commercially available in 1999, and P-Com's
Spread Spectrum Systems became available through our acquisition of Cylink
Corporation assets in 1998. The revenue mix in 2001 for the Point-to-Point,
Point-to-Multipoint, and Spread Spectrum systems are 74.3%, 12.5%, and 13.2% of
total product sales respectively.
Services
P-Com Network Services, Inc. ("PCNS") is an installation services company
providing three distinct services lines in the United States: Central Office DC
Power Services, Central Office Transmission Services, and Wireless Services.
PCNS installs and services a wide variety of central office DC power and
transmission equipment produced and distributed by several manufacturers.
Typically, Central Office Group projects involve full engineering, furnishing
and installation (EF&I) services. PCNS also installs millimeter wave radio
equipment produced by several manufacturers. Installations are generally
performed in commercial buildings and consist of site preparation/construction,
equipment installation and equipment commissioning into a customer network. Both
the Central Office Group and Wireless Group offer full program or project
management of appropriate complexity and length of time. Central Office projects
are performed primarily in the Mid-Atlantic region. PCNS Wireless projects are
generally performed in areas surrounding PCNS field offices in Los Angeles and
San Francisco, CA; Salt Lake City, UT; Phoenix, AZ, Denver, CO; Kansas City, KS;
Milwaukee, WI; Detroit, MI; Atlanta, GA; Tampa, FL; and Dulles, VA.
Due to the curtailment of capital spending by the Regional Bell Operating
Companies ("RBOC"), PCNS's business declined significantly in second half of
2001.
Manufacturing and Testing
Our Campbell, California facility received its initial ISO 9001 registration in
December 1993, and was subsequently recertified in December of 1999. Our ISO
9001 registration for its United Kingdom sales and customer support facility was
received in 1996 and recertified in 1999; our ISO 9001 registration for its
Tortona facility in Italy was first received in 1996 and recertified in 2000.
Our production facility in Melbourne, Florida and its former Dietzenbach,
Germany repair center were ISO 9001 certified in 1999.
Once a system reaches commercial status, we contract with one or more of several
turnkey fabricators to build radio system units in commercial
6
quantities. Utilization of such fabricators relieves us of expensive investments
in manufacturing facilities, equipment, and parts inventories. This strategy
enables us to quickly scale to meet varying customer demands and changes in
technology.
We test manufacture systems in our California and Florida locations prior to
shipment to its customers. Testing includes the complete IDU-ODU (indoor-outdoor
unit) assembly, thereby providing customers completely tested end-to-end systems
unit.
Sales Channels and P-Com Customers
Our wireless access systems are sold internationally and domestically directly
through our own sales force, as well as through strategic partners,
distributors, systems providers, and original equipment manufacturers ("OEMs").
Our services are sold directly through PCNS internal sales force.
Our customers include:
o Verizon
o Orange Personal Communications System ("OPCS")
o Mercury One-2-One
o D2 Vodafone (Mannesmann)
o AT&T Local Services
o Lucent Technologies
o Tellabs
o Siemens
o New Century Global Network (Japan)
o NEC USA
o Sonatel C&E (India)
o Science Technology Park India
o Philcom Corporation (Phillipines)
o Sonatel (Senegal)
o Guangzhou Broadband (China)
o China Mobile
During 2001, sales to Verizon, OPCS and Mercury One-2-One accounted for
approximately 18%, 16% and 13% of our total sales, respectively. We expect that
sales to relatively few customers will continue to account for a high percentage
of our sales in the foreseeable future. Although the composition of the group
comprising our largest customers may vary from period to period, the loss of a
significant customer or a major reduction in orders by any significant customer,
including reductions due to market, economic or competitive conditions in the
telecommunications industry, may have a material adverse effect on our business,
financial condition and results of operations. While we generally enter into
written agreements with our major customers, they generally do not provide for
minimum purchase commitments. Our ability to maintain or increase our sales in
the future will depend, in part upon our ability to obtain orders from new
customers as well as the financial condition and success of our customers, the
telecommunication industry and the economy in general. Economic conditions in
the industry are currently depressed.
We operate in two segments: Product Sales and Service Sales. The Product Sales
segment consists of organizations located primarily in the United States, the
United Kingdom, and Italy, which develop, manufacture and/or market network
access systems for use in the worldwide wireless telecommunications market. The
Service Sales segment, located in the United States (and UK prior to February
2001), performs engineering, furnishing installation and program management
services through its Central Office Group and Wireless Group. See Note 8 to the
Consolidated Financial Statements for additional information regarding the
operations of our operating segments, as well as the allocation of sales by
geographic customer destination.
7
Our backlog was approximately $5.9 million as of December 31, 2001, as compared
to approximately $41.9 million as of December 31, 2000. The decrease was due to
severe reduction in capital spending in the United States and globally within
the telecommunications industry and the bankruptcy of a significant customer,
Winstar Communications Inc.("Winstar") in April 2001. We include in backlog only
those firm customer commitments to be shipped within the following twelve
months. A significant portion of our backlog scheduled for shipment in the
twelve months following December 31, 2001 can be cancelled since orders are
often made substantially in advance of shipment, and most of our contracts
provide that orders may be cancelled with limited or no penalties up to a
specified period before shipment, and in some cases at any time. Therefore,
backlog is not necessarily indicative of future sales for any particular period.
Technology
P-Com's technological approach to Point-to-Multipoint, Point-to-Point, and
Spread Spectrum radio systems is, we believe, meaningfully different from
conventional approaches. Through use of proprietary digital signal processing,
frequency conversions, antenna interface technology, and proprietary software
and custom application-specific integrated circuits, produces highly integrated,
feature-rich systems. The results of this integrated design are reliability and
cost advantages. The microprocessor and embedded software in both the IDU and
ODU enclosures enable flexible customization to the user's specific
telecommunications requirements.
Wireless transmission of voice, data and video traffic has become a desirable
alternative to wired solutions due to its advantages in the ease and cost of
implementation and maintenance. P-Com's Point-to-Point technology uses
four-level ("FSK") modulation which is spectrally efficient and very impervious
to interference. This robust quality results in improved frequency reuse
distances which is beneficial to operators of large-scale Point-to-Point radio
network deployments.
FSK modulation is generated with low-component-count circuitry, and it is
therefore very cost-effective. It is also reasonably insensitive to circuit
linearity and can therefore be multiplied to higher frequencies without
degradation. This in turn enables a range of high frequency millimeter wave
bands to be supported with inexpensive circuitry. This technology is also quite
suitable for high-volume manufacturing.
Our Point-to-Point and Spread Spectrum microwave radios consist of three primary
assemblies: the IDU, the ODU and the antenna. The IDU houses the digital signal
processing and the interfaces to the ODU via a single coaxial cable. The ODU, a
radio frequency ("RF") enclosure, establishes the specific transmit and receive
frequencies and houses the proprietary P-Com frequency converter. The antenna
interfaces directly to the ODU via a proprietary P-Com wave-guide transition
technology.
We believe our millimeter wave technology is meaningfully different from that
contained in most conventional systems. When transmitting, our IDU sends signal
to the ODU where it is received by the IF processor, routed to the transmit
converter and mixed with a synthesized frequency source. This signal is then
amplified and passed through to our proprietary frequency converter to establish
the appropriate millimeter wave frequency. The signal is then routed to the
antenna for transmission to the millimeter wave radio system at the receiving
end. At the receiving end, the incoming signal is routed to the frequency
converter and mixed in the down-converter with the same frequency that was used
when transmitting. The signal is passed to the IDU where it is sent to the
end-user's equipment.
8
Our spread spectrum products use biphase shift keying ("BPSK"), minimal shift
keying ("MSK"), quadrature phase shift keying ("QPSK") or quadrature amplitude
modulation ("QAM") in the IDU. This signal is converted into a microwave
frequency in the ODU, or in the case of some products, a single, stand-alone
terminal can be installed indoors or outdoors. This signal is then routed to the
antenna to be transmitted. The receiving antenna captures the signal power and
routes it to the ODU. The ODU down-converts the signal to be demodulated in the
IDU.
Our architecture is designed to achieve reliability, cost, installation and
maintenance benefits over conventional approaches. We employ a common
architecture in the ODU for all stages of the system other than the frequency
converter used to establish the millimeter wave frequency at which the system
operates. Finally, in our systems, the IDU and ODU are connected with a single
coaxial cable, in contrast to many conventional systems that require multiple
cable connections.
P-Com's Point-to-Multipoint radios provide further software configurable
options. The system is comprised of Base Station equipment transmitting to many
Remote Terminals within a sector. This "downlink" carries Asynchronous Transfer
Mode ("ATM") cells over the link. The return, or up-link from the Remote to the
Base Station, can operate in either FDMA or TDMA mode. This gives the network
service provider the option of selecting the most efficient transmission method
for the type of traffic to be carried. FDMA is efficient for constant bit rate,
high-capacity traffic, while TDMA is more suitable for fractional rate, or
bursty type data. The system can operate concurrently in both modes within the
sector thereby providing the network access operator the flexibility to design
systems that uniquely match the specific traffic profiles within individual
sectors.
The transport of ATM cells over the link allows multimedia transmission to be
supported, including voice, data, fax, IP, Frame Relay, 10 BaseT, and many other
services.
The modulation of each carrier can also be software configured from 4-level to
16- or 64-level QAM, as well as QPSK. This provides the network provider with
the capability to best match the capacity demands of customers with the range
trade-off of each modulation level. Such flexibility enables operators to
optimally use the available spectrum.
The modular design of this Point-to-Multipoint system allows the user to start
with a low capacity installation, and then by plugging cards into the sector
IDU, to increase the number of carriers, and hence capacity, within the sector.
This is achieved without the duplication of any of the more expensive microwave
ODU equipment.
All of these innovations result in a highly flexible, yet cost-effective,
Point-to-Multipoint system that enables network system providers to optimize
spectrum utilization, and correspondingly, revenue generation.
Research and Development
P-Com has a continuing research and development program in order to enhance its
existing systems and related software tools and to introduce new systems. We
invested approximately $19.8 million, $20.2 million and $32.4 million in 2001,
2000, and 1999, respectively, in research and development efforts and expects to
continue to invest significant resources in research and development. Our
research and development efforts can be classified into two distinct efforts:
(1) increasing the functionality of its Point-to-Point and Point-to-Multipoint
radio systems under development by adding additional
9
frequencies and capacities to its product portfolio, modifying its network
management system software offering, and developing other advancements to its
radio systems under development, and (2) integrating new functionality to extend
the reach of its products into the customers' networks, such as access
technology which allows the customer to manage telecommunications services at
its site and integrate voice, data, video and facsimile in one offering. There
can be no assurance that current efforts will result in new product
introductions or modifications to existing products. The wireless communications
market is subject to rapid technological change, frequent new product
introductions and enhancements, product obsolescence, changes in end-user
requirements and evolving industry standards. Our ability to be competitive in
this market will depend in significant part upon its ability to develop
successfully, introduce, and sell new systems and enhancements and related
software tools on a timely and cost effective basis that respond to changing
customer requirements. The Company has experienced and may continue to
experience delays from time to time in completing development and introduction
of new systems, and enhancements or related software tools. There can be no
assurance that errors will not be found in our systems after commencement of
commercial shipments, which would result in the loss of or delay in market
acceptance. The inability of the Company to introduce in a timely manner new
systems, enhancements, or related software tools that contribute to sales could
have a material adverse effect on our business, financial condition, and results
of operations.
Sales and Marketing
Our sales and marketing efforts are directed from our executive offices in
Campbell, California. We have sales and customer support facilities in the
United Kingdom and Italy that serve as bases for the European market and in
China and Singapore for the Asian market. Internationally, we use a variety of
sales channels, including system providers, OEMs, dealers and local agents. We
also sell directly to its customers. In addition, we have established agent
relationships in numerous other countries in the Asia/Pacific region, the Middle
East, South America, and Europe.
Typically, our sales process commences with the solicitation of bids by
prospective customers. If selected to proceed further, we may provide systems
for incorporation into system trials, or may proceed directly to contract
negotiations. When system trials are required and successfully completed, we
then negotiate a contract with the customer to set technical and commercial
terms of sale. These terms of sale govern the purchase orders issued by the
customer as the network is deployed.
The Company believes that due to the complexity of its radio systems, a high
level of technical sophistication is required on the part of our sales and
marketing personnel. In addition, we believe that customer service is
fundamental to its success and potential for follow-on business. New customers
are provided engineering assistance for installation of the first units as well
as varying degrees of field training depending upon the customer's technical
aptitude. All customers are provided telephone support via a 24-hour customer
service help desk. Our customer service efforts are supplemented by our system
providers.
The Company believes that it must continue to expand its sales and marketing
organization worldwide. Any significant sales growth will be dependent in part
upon our expansion of marketing, sales and customer support capabilities which
will require significant expenditures to build the necessary infrastructure.
Competition
The worldwide wireless communications market is very competitive. P-Com's
wireless radio systems compete with other wireless telecommunications products
and alternative telecommunications transmission media, including copper and
10
fiber optic cable. We have experienced competition worldwide from a number of
leading telecommunications companies that offer a variety of competitive
products and services, including Alcatel Network Systems, Floware, DMC Stratex
Networks, Ericsson, Harris-Farinon Division, Nokia, Nortel, SIAE, Hughes Network
Systems, and Western Multiplex Corporation, many of which have substantially
greater installed bases, financial resources and production, marketing,
manufacturing, engineering and other capabilities than P-Com. We face actual and
potential competition not only from these established companies, but also from
start-up companies that are developing and marketing new commercial products and
services, such as DSL. We may also face competition in the future from new
market entrants offering competing technologies. Our results of operations may
depend in part upon the extent to which customers, which choose to rely on
wireless strategies, elect to purchase from outside sources rather than develop
and manufacture their own radio systems. There can be no assurance that such
customers will rely on, or expand, their reliance on the Company as an external
source of supply for their radio systems. Recently, certain of our competitors
have announced the introduction of competitive products, including related
software tools, and the acquisition of other competitors and competitive
technologies. Competition is especially intense during the current period of
depressed demand for telecommunications infrastructure equipment. We expect our
competitors to continue to improve the performance and lower the price of their
current products, and to introduce new products or new technologies that provide
added functionality and other features. New product introductions and
enhancements by our competitors could cause a significant decline in sales or
loss of market acceptance of our systems or intense price competition, or make
our systems or technologies obsolete or noncompetitive. The Company has
experienced significant price competition and expects such price competition to
intensify in view of the current market downturn, and this may materially
adversely affect its gross margins and its business, financial condition and
results of operations. The Company believes that to be competitive, it will
continue to be required to expend significant resources on, among other items,
new product development and enhancements.
The principal elements of competition in our market, and the basis upon which
customers may select our systems, include price, performance, software
functionality, and ability to meet delivery requirements and customer service
and support.
Government Regulation
Radio communications are subject to extensive regulation by the United States
and foreign governmental agencies and international treaties. Our systems must
conform to a variety of domestic and international requirements established to,
among other things, avoid interference among users of radio frequencies and to
permit interconnection of equipment. Each country has a different regulatory
process. Historically, in many developed countries, the limited availability of
frequency spectrum has inhibited growth of wireless telecommunications networks.
In order for the Company to operate in a foreign jurisdiction, it must obtain
regulatory approval for its systems and comply with different regulations in
each jurisdiction. Regulatory bodies worldwide are continuing the process of
adopting new standards for wireless communication products. The delays inherent
in this governmental approval process may cause the cancellation, postponement
or rescheduling of the installation of communications systems by the Company and
its customers, which in turn may have prevent or delay the sale of systems by
the Company to such customers.
The failure to comply with current or future regulations or changes in the
interpretation of existing regulations could result in suspension or cessation
of in the country operations in the particular jurisdiction. Such regulations or
such changes could require the Company to modify its products and incur
11
substantial costs and delays to comply with such time-consuming regulations and
changes. In addition, the Company also affected to the extent that domestic and
international authorities regulate the allocation and auction of the radio
frequency spectrum. Equipment to support new services can be marketed only if
permitted by suitable frequency allocations, auctions and regulations, and the
process of establishing new regulations is complex and lengthy. To the extent
PCS operators and others are delayed in deploying these systems, we could
experience delays in orders. Failure by the regulatory authorities to allocate
suitable frequency spectrum could have a material adverse effect on our
business, financial condition and results of operations.
The regulatory environment in which we operate is subject to significant change.
Regulatory changes, which are affected by political, economic and technical
factors, could significantly impact our operations by restricting development
efforts by our customers, making current systems obsolete or increasing the
opportunity for additional competition. Any such regulatory changes, including
changes in the allocation of available spectrum, could have a material adverse
effect on our business and results of operations. We might deem it necessary or
advisable to modify its systems to operate in compliance with such regulations.
Such modifications could be extremely expensive and time consuming.
Intellectual Property
We rely on a combination of patents, trademarks, trade secrets, copyrights and a
variety of other measures to protect its intellectual property rights. We
currently hold fourteen U.S. patents and five U.S. copyrights on software. We
generally enter into confidentiality and nondisclosure agreements with service
providers, customers and others, and attempts to limit access to and
distribution of its proprietary technology. We also enter into software license
agreements with its customers and others. However, there can be no assurance
that such measures will provide adequate protection for our trade secrets or
other proprietary information, that disputes with respect to the ownership of
its intellectual property rights will not arise, that our trade secrets or
proprietary technology will not otherwise become known or be independently
developed by competitors or that we can otherwise meaningfully protect its
intellectual property rights. There can be no assurance that any patent owned by
the Company will not be invalidated, circumvented or challenged, that the rights
granted thereunder will provide competitive advantages to the Company or that
any of our pending or future patent applications will be issued with the scope
of the claims sought by the Company, if at all. Furthermore, there can be no
assurance that others will not develop similar products or software, duplicate
our products or software or design around the patents owned by us or that third
parties will not assert intellectual property infringement claims against the
Company. In addition, there can be no assurance that foreign intellectual
property laws will adequately protect our intellectual property rights abroad.
Failure to protect our proprietary rights could have a material adverse effect
on its business, financial condition and results of operations.
Litigation may be necessary to enforce our patents, copyrights and other
intellectual property rights, to protect our trade secrets, to determine the
validity of and scope of the proprietary rights of others or to defend against
claims of infringement or invalidity. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on our business, financial condition and results of operations regardless
of the outcome of the litigation. There can be no assurance that infringement,
invalidity, right to use or ownership claims by third parties or claims for
indemnification resulting from infringement claims will not be asserted in the
future or that such assertions will not materially adversely affect our
business, financial condition and results of operations. If any
12
claims or actions are asserted against the Company, we may seek to obtain a
license under a third party's intellectual property rights. There can be no
assurance, however, that a license will be available under reasonable terms or
at all. In addition, should we decide to litigate such claims, such litigation
could be extremely expensive and time consuming and could materially adversely
affect our business, financial condition and results of operations, regardless
of the outcome of the litigation.
Employees
As of February 28, 2002, the Company and our subsidiaries employed a total of
356 employees, including 116 in Operations, 95 in Research and Development, 54
in Sales and Marketing, 21 in Quality Assurance and 70 in Administration. We
believe that future results of operations will depend in large part on its
ability to attract and retain highly skilled employees. None of our employees
are represented by a labor union, and we have not experienced any work stoppages
to date. P-Com Germany employed 15 prior to its closure in July 2001. RT Masts
employed 170 before it was sold in February 2001. Due to the drastic downturn in
the U.S. CLEC market, we decreased our workforce in the first, second, third and
fourth quarters of 2001 by 41, 118, 136 and 17 employees, respectively.
Item 2. Properties
Location of Square Date Lease
Lease Facility (1) Functions Footage Expires
------------------ --------- ------- -------
HEADQUARTERS Administration 61,000 November 2005
Campbell, CA Customer Support/
Sales/Engineering/
Manufacturing
Campbell, CA Manufacturing/Research 25,000 September 2002
San Jose, CA Warehouse 34,000 September 2003
Redditch, England Sales/Customer Support 5,500 June 2005
Watford, England Research/Development 7,500 April 2008
Redditch, England Warehouse 6,800 September 2004
Dulles, VA Administration 8,750 October 2007
Sterling, VA Sales/Customer 15,000 July 2007
Support/Warehouse
Orange, CA Services 3,400 February 2002
Phoenix, AZ Services 2,540 January 2003
Denver, CO Services 2,000 July 2003
Englewood, CO Administration 2,000 July 2003
Melbourne, Florida Research/Development 36,250 July 2004
Beijing, China Sales/Customer Support 4,200 July 2002
Singapore Sales and Customer Support 11,000 October 2002
(1) All locations support product sales except Orange, CA; Phoenix, AZ;
Englewood, CO; Sterling, VA and Dulles, VA, which support services sales.
P-Com Italia, S.p.A., owns and maintains its corporate headquarters in Tortona,
Italy. This facility, approximately 36,000 square feet, provides design, test,
manufacturing, mechanical and warehouse functions.
13
Item 3. Legal Proceedings
In September and October 1998, several putative class action complaints were
filed in the Superior Court of California, County of Santa Clara, on behalf of
P-Com stockholders who purchased or otherwise acquired its Common Stock between
April 1997 and September 11, 1998. The plaintiffs alleged various state
securities laws violations by P-Com and certain of its officers and directors.
The complaints sought compensatory, punitive and other damages, attorneys' fees
and injunctive and/or equitable relief.
On December 3, 1998, the Superior Court of California, County of Santa Clara,
entered an order consolidating all of the above complaints. On June 30, 2000 the
Superior Court issued a notice of ruling certifying this matter as a class
action.
We reached an agreement in principle on October 25, 2001 to settle the
consolidated securities class action suit. On February 8, 2002, pursuant to that
agreement in principle, the court entered final judgment approving the
settlement. Under the terms of the settlement, all claims against the Company
and all other defendants will be dismissed without admission of liability or
wrong doing by any party. The settlement was funded entirely by our directors
and officers liability insurance.
Item 4. Submission of Matters to a Vote of Security Holders
None
14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our Common Stock is quoted in the Nasdaq National Market under the symbol PCOM.
To maintain the listing of our common stock on The Nasdaq National Market, we
are required to meet certain listing requirements, including a minimum bid price
of $1.00 per share. We received a letter of notice dated June 20, 2001 from the
Nasdaq National Market stating that due to our minimum bid price levels
remaining under the $1 level for 30 consecutive trading days, we could be
subject to a delisting procedure should the bid price continue to remain under
the $1 level for an additional 90-day period, unless our stock attains a bid
price of $1 or more for a period of ten consecutive days during such 90-day
period. Shortly after September 11 Nasdaq issued a moratorium on the minimum bid
price requirement until January 2, 2002. We received a new letter of notice
dated February 14, 2002 from Nasdaq stating that due to our minimum bid price
levels remaining under $1 for 30 consecutive days, we were again put on notice
that it is subject to delisting procedures. Management received in September
2001 shareholders' approval for a reverse stock split calling for one share of
newly issued Common Stock to be issued in place of each five shares of existing
stock as of the date at which the reverse stock split is effected. We have not
implemented the reverse stock split in part because there is no assurance that
it would enable us to achieve and maintain compliance with the minimum bid price
requirement. If we fail to meet the minimum bid process for 10 consecutive days
during the grace period, our Common Stock may be delisted from the NASDAG
National Market. Even if we are able to comply with the minimum requirement,
there is no assurance that in the future we will continue to satisfy NASDAQ
listing requirements, with the result that our common stock may be delisted from
The Nasdaq National Market. Should our common stock be delisted from NASDAQ
National Market, it would likely be traded on Nasdaq Small Cap Market, and if
delisted from The Nasdaq Small Cap Market, would likely be traded on the
"Over-the-counter Bulletin Board" of the National Assocoation of Securities
Dealers, Inc. However, this alternative could result in a less liquid market
available for existing and potential shareholders to exchange shares of our
stock and could ultimately further depress the trading price of our Common
Stock.
The following tables sets forth the range of high and low sale prices, as
reported on the Nasdaq National Market for each quarter in 2001 and 2000. These
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not necessarily represent actual transactions.
As of Feb 28, 2002, there were 517 stockholders on record of our Common Stock.
Price Range of Common Stock
---------------------------
High Low
---------- ----------
Year Ended December 31, 2000:
First Quarter $ 23.72 $ 9.00
Second Quarter 15.00 5.56
Third Quarter 8.44 5.18
Fourth Quarter 6.13 1.53
Year Ended December 31, 2001:
First Quarter $ 5.50 $ 1.25
Second Quarter 1.49 0.55
Third Quarter 0.69 0.26
Fourth Quarter 0.38 0.14
15
Recent Sales of Unregistered Securities
In July 2001 the Company issued 3,797,468 shares of Common Stock to two existing
stockholders at a per share price of $0.79, for an aggregate proceed of $3.0
million. The unregistered shares were priced at an amount greater that the
public market trading price of the Common Stock and was based on the pro forma
calculation of Adjusted Net Tangible Book Value ("NTBV") per share. There were
no underwriters or commissions involved, and the Company relied on the
provisions of Securities Action section 4(2).
Dividends
To date, we have not paid any cash dividends on shares of our Common Stock. We
currently anticipate that we will retain any available funds for use in the
operation of our business, and do not anticipate paying any cash dividends in
the foreseeable future.
Item 6. Selected Financial Data
The selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The balance sheet data as of December 31, 2001 and 2000 and the
Statement of Operations data for the years ended December 31, 2001, 2000, and
1999, have been derived from the audited financial statements included in Item 8
of this document.
16
Statement of Operations Data
2001(2) 2000(3)(4) 1999(5) 1998(6) 1997
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Sales:
Product $ 73,236 $ 183,606 $ 116,409 $ 118,948 $ 169,453
Service 30,838 50,795 40,470 43,597 30,157
--------- --------- --------- --------- ---------
Total sales 104,074 234,401 156,879 162,545 199,610
--------- --------- --------- --------- ---------
Cost of sales:
Product 94,890 160,965 107,378 93,829 96,948
Service 23,624 38,170 28,274 30,777 18,968
--------- --------- --------- --------- ---------
Total cost of sales 118,514 199,135 135,652 124,606 115,916
--------- --------- --------- --------- ---------
Gross profit (loss) (14,440) 35,266 21,227 37,939 83,694
--------- --------- --------- --------- ---------
Operating expenses:
Research and development 19,800 20,241 32,431 38,882 27,854
Selling and marketing 7,776 11,972 17,135 19,224 12,795
General and administrative 33,371 26,893 25,179 24,260 11,029
Goodwill amortization 8,034 19,598 6,547 5,023 1,380
Restructuring and other charges -- -- 3,300 4,332 --
Acquired in-process research
and development(8) -- -- -- 15,442 --
--------- --------- --------- --------- ---------
Total operating expenses 68,981 78,704 84,592 107,163 53,058
--------- --------- --------- --------- ---------
Income (loss) from operations (83,421) (43,438) (63,365) (69,224) 30,636
Interest expense (1,961) (4,750) (8,175) (8,652) (1,811)
Gain on sale of a subsidiary 9,814 -- -- -- --
Other income (expense), net (545) (6,977) (2,537) 1,446 1,988
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes,
extraordinary item and cumulative
effect of accounting change (76,113) (55,165) (74,077) (76,430) 30,813
Provision (benefit) for income
taxes (575) 11,140 1,407 (11,501) 11,018
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before extraordinary item and
cumulative effect of accounting change (75,538) (66,305) (75,484) (64,929) 19,795
Discontinued operations(7):
Loss from operations -- (4,000) (13,903) (2,869) (904)
Loss on disposal -- -- (26,901) -- --
--------- --------- --------- --------- ---------
-- (4,000) (40,804) (2,869) (904)
Extraordinary gain on retirement of notes -- 1,890 13,239 5,333 --
Cumulative effect of accounting change(3) -- (1,534) -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (75,538) $ (69,949) $(103,049) $ (62,465) $ 18,891
========= ========= ========= ========= =========
Charge related to Preferred Stock discount -- -- -- (1,839) --
Loss on Conversion of Preferred Stock to
Common Stock -- -- (18,521) -- --
Net income (loss) applicable to Common
Stockholders $ (75,538) $ (69,949) $(121,570) $ (64,304) $ 18,891
Basic income (loss) from Continuing
Operations (1) $ (0.91) $ (0.85) $ (1.32) $ (1.50) $ 0.47
Diluted income (loss) from Continuing
Operations (1) $ (0.91) $ (0.85) $ (1.32) $ (1.50) $ 0.44
Basic net income (loss) applicable to
Common Stockholders (1) $ (0.91) $ (0.90) $ (2.13) $ (1.49) $ 0.45
Diluted net income (loss) applicable to
Common Stockholders (1) $ (0.91) $ (0.90) $ (2.13) $ (1.49) $ 0.42
17
Balance Sheet Data (in thousands)
2001 (2) 2000(3)(4) 1999(5) 1998 (6) 1997
--------- --------- --------- --------- --------
Cash and cash equivalents $ 7,103 $ 27,541 $ 11,629 $ 29,241 $ 88,145
Working capital (10,185) 76,823 31,984 78,967 196,279
Total assets 92,234 216,219 218,746 315,217 305,521
Long-term debt 769 30,290 39,858 97,769 101,690
Mandatorily redeemable
Preferred Stock -- -- -- 13,559 --
Mandatorily Redeemable
Common Stock Warrants -- -- -- 1,839 --
Retained earnings
(accumulated deficit) (294,460) (218,922) (148,973) (45,924) 18,380
Stockholders' equity $ 24,256 $ 95,247 $ 89,215 $ 99,409 $148,297
(1) See Note 9 of Notes to Consolidated Financial Statements for an
explanation of the method used to determine share and per share amounts.
(2) In 2001, we recorded charges of approximately $30 million related to
excess inventory and inventory purchase commitments, $5.8 million related
to a write-down of goodwill and other intangibles, and a $11.6 million
increase in bad debt expense related to a customer bankruptcy.
(3) We recorded a non-cash charge of approximately $1.5 million on January 1,
2000 to account for the cumulative effect of the accounting change made to
comply with SAB 101. See Note 2 of Notes to Consolidated Financial
Statements.
(4) In 2000, we recorded charges of approximately $21.7 million related to
excess inventory and inventory purchase commitments, $15.0 million related
to a write-down of goodwill, and a $9.9 million increase in the valuation
allowance against the carrying value of deferred tax assets.
(5) In 1999, we recorded restructuring and other charges of approximately
$36.5 million.
(6) In 1998, we recorded restructuring and other charges of approximately
$26.6 million.
(7) Losses from discontinued operations in 1999 were in part attributable to
Technosystem, which was reclassified to discontinued operations in the
third quarter of 1999. The gain on disposal in 2001 was from the sale of
RT Masts in February 2001.
(8) In connection with the acquisition of substantially all of the assets of
the Cylink Wireless Group in 1998, $15.4 million of purchase price
attributed to in-process research and development was expensed.
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which involve risks and
uncertainties. 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 7 and elsewhere in this Annual Report on Form 10-K.
Overview
We supply equipment for wireless access to worldwide telecommunications
networks, and engineering, furnishing wireless and installation services in the
U.S. central office and wireless telecommunication market. We were founded in
April 1991 to develop, manufacture, market and sell millimeter wave radio
systems for wireless networks. Currently, we ship 2.4 GHz and 5.7 GHz spread
spectrum (unlicensed) radio systems, as well as 7 GHz, 13 GHz, 14 GHz, 15 GHz,
18 GHz, 23 GHz, 26 GHz, 38 GHz and 50 GHz Point-to-Point radio systems. Our
performance in 2001 reflects the most challenging period the telecommunications
equipment and services industry has experienced. Over-capacity resulting in a
severe reduction in capital spending in the United States and globally within
the telecommunications industry and the bankruptcy of a significant customer,
Winstar Communications Inc ("Winstar") in the first quarter of 2001 has
dramatically impacted our equipment sales this year. Our service revenue was
also negatively impacted by certain major customers implementing spending
control programs since mid-2001. The net loss in 2001 was also increased by
inventory related charges to product costs of sales of $30 million, accounts
receivable valuation charges of $11.6 million primarily due to the bankruptcy of
Winstar, and a goodwill and other intangibles impairment write-off of $5.8
million. We instituted cost reduction programs since the first quarter of 2001,
including a headcount reduction of approximately 310 employees or 34% compared
to previous year's headcount and termination of facility leases. These were
insufficient to offset the impact of reduction in revenue. Our services business
was profitable in 1999 and 2000 and nearly broke even in 2001; our product
business had significant losses in all these years.
In February 2000, we completed the divestiture of two Italian subsidiaries,
Technosystem, S.p.A. and Cemetel S.r.L., resulting in additional losses for the
first quarter of approximately $4.0 million and $3.5 million, respectively.
In 2001 we revised our method for recognizing revenue for sales of radio systems
as a result of the adoption of Staff Accounting Bulletin ("SAB") No. 101
"Revenue Recognition in Financial Statements." We previously recognized revenue
upon shipment of product, provided no significant obligations remained and
collection was probable. This was changed to recognition upon transfer of title
and risk of loss, which is generally upon shipment of the product provided no
significant obligations remained and collection was probable. In accordance with
SAB No. 101, we recorded a non-cash charge of approximately $1.5 million on
January 1, 2000 to account for the cumulative effect of the accounting change.
The cumulative effect of this accounting change primarily resulted from
contracts where revenue had historically been recognized upon shipment, however,
under the terms of the underlying contracts, title and risk of loss did not
transfer until either delivery or subsequent receipt of payment. Under our
revised revenue recognition method, revenue relating to such sales is deferred
until both title and risk of loss is assumed by the customer. As a result of
this change, approximately $12.0 million in revenue and $10.5
19
million in related costs originally recognized in 1999 were deferred and
re-recognized in the first quarter of 2000.
Critical accounting policies
Managements discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
Revenue recognition
Revenue from product sales is recognized upon transfer of title and risk of
loss, which is upon shipment of the product provided no significant obligations
remain and collection is probable. Provisions for estimated warranty repairs,
returns and other allowances are recorded at the time revenue is recognized.
Revenue from service sales is recognized ratably over the contractual period or
as the service is performed.
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
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.
20
Goodwill
Our business acquisitions have typically resulted in goodwill, which affects the
amount of future period amortization expense and possible impairment expense
that the Company will incur. The determination of the value of goodwill requires
management to make estimates and assumptions that affect the Company's
consolidated financial statements. In assessing the recoverability of the
Company's goodwill, management must make assumptions regarding estimated future
cash flows and other factors to determine the fair value of the respective
assets. If these estimates or their related assumptions change in the future,
the Company may be required to record impairment charges for these assets not
previously recorded. On January 1, 2002 the Company adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
and will be required to analyze its goodwill for impairment during the first six
months of fiscal 2002, and then on a periodic basis thereafter. During the year
ended December 31, 2001, the Company recorded an impairment loss related to
goodwill of $5.8 million.
Accounting for Income Taxes
We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely that not to be realized. While we consider historical levels
of income, expectations and risks associated with estimates of future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, in the event that we determine that we would
be able to realize deferred tax assets in the future in excess of the net
recorded amount, an adjustment to the deferred tax asset would increase income
in the period such determination was made.
Years Ended 2001, 2000 and 1999
Sales
Sales consist of revenues from radio systems, repairs and support services
offered, as well as central office and transmission infrastructure service
support for major telecom providers.
In 2001, 2000 and 1999, sales were approximately $ 104.1 million, $234.4
million, and $156.9 million, respectively. The 55.6% decrease in sales from 2000
to 2001 was primarily due to dramatically decreased product sales to Competitive
Local Exchange Carriers ("CLEC") customers, on which we had heavily relied. Most
CLECs are now in financial distress. The worldwide market for telecommunication
equipment has also contracted substantially in 2001. Our sales were especially
slow in the third and fourth quarters of 2001, probably due in part to
post-September 11 caution exhibited by customers in the purchasing processes.
Our United States based service sales were similarly affected by certain major
customers implementing spending control programs beginning mid-2001, and we sold
our United Kingdom based services business in February 2001. The 49.4% increase
in sales from 1999 to 2000 was primarily due to increased radio system delivery
levels under a large order from Winstar in the second half of the year and 25%
increase in the services business sales in the U.S. and UK combined.
Our 2001 sales fell significantly in each of our product categories. During
2001, the Tel-Link Point-to-Point product line represented 52.2% of our total
sales, compared to 61.0% of our total sales during 2000 and 59.0% during 1999.
The Spread Spectrum (unlicensed) product line represented approximately 9.3% of
our total sales in 2001, as compared to 8% during 2000 and 11.3% of our total
sales during 1999. Our Point-to-Multipoint product line, which was introduced in
late fourth quarter 1999, represented 8.8% of our total sales in 2001, 6% in
2000 and only approximately $1.1 million of sales in 1999. Total sales for the
Point-to-Multipoint line of approximately $9 million in 2001 and
21
$13.9 million in 2000 did not meet our expectations. Customers, particularly in
the U.S. CLEC markets, did not place orders equivalent to forecasted orders.
However, these same customers increased their Point-to-Point radio orders to
bring actual sales levels for this line higher than originally forecasted for
2000. The bankruptcy of our major U.S. based CLEC customer, Winstar, in the
first quarter of 2001 adversely impacted our equipment sales in the U.S. for the
remainder of the year.
Sales to Orange Personal Communications Services ("OPCS") accounted for
approximately 16%, 7% and 20% of total sales in 2001, 2000 and 1999,
respectively. Sales to Mercury One-to-One and Verizon accounted for
approximately 13% and 18% of 2001 sales, respectively. Sales to Winstar
accounted for approximately 6%, 28% and 11% of total sales in 2001, 2000 and
1999, respectively. Sales to Bosch Telecom accounted for approximately 13% of
total sales in 1999. Sales to Lucent Technologies accounted for approximately
12% of total sales in 2000.
During 2001, we generated 45.2% of our sales in the United States, 31.1% in the
United Kingdom, and 15.8% in Asia. The Unites States share remained relatively
high, despite poor product sales in the United States, due to the US central
services business representing a relatively larger share of the total sales mix
compared to the geographically-dispersed products business sales in 2001. During
2000, we generated 55.9% of our sales in the United States, 24.3% in the United
Kingdom, 7.8% in Continental Europe and Middle East markets, and 12.0% in other
geographic regions, particularly in the Pacific Rim. The increased United States
share was due primarily to product sales to Winstar and other CLECs. During
1999, we generated 30.8% of our sales in the U.S., 34.5% in the United Kingdom,
18.0% in Europe excluding the UK, 6.1% in Asia, and 10.7% in other geographic
regions.
Product sales for 2001 were $73.2 million, a decrease of $110.4 million or 60%,
when compared to 2000. Product sales for 2000 were $183.6 million during the
year, an increase of $67.2 million or 57.7%, when compared to 1999 levels.
Product sales represented 70.4%, 78.3% and 74.2% of sales in 2001, 2000 and
1999, respectively. The decrease in 2001 product sales was due to bankruptcy of
our major CLEC customer, Winstar, and the worldwide contraction of the
telecommunications equipment market in 2001. The increase in 2000 product sales
resulted from larger orders from U.S. CLEC customers and an order from a China
based customer under a multi-year contract for Point-to-Multipoint products
announced in mid-2000.
Service sales for 2001 decreased approximately $20 million or 39.3% when
compared to 2000 due to certain major customers implementing spending controls
from mid-2001 through the remainder of the year, and the sale of the RT Masts
service unit in February 2001. RT Masts' revenues were approximately $20 million
and $18 million in 2000 and 1999, respectively. Service sales for 2000 increased
approximately $10.3 million or 25.5% from the prior year levels of installation
services in the U.K., and a significant increase in central office maintenance
work performed by the U.S. service group for a major RBOC group.
Service sales represented 29.6%, 21.7% and 25.8% of total sales in 2001, 2000,
and 1999, respectively. The increased percentage in 2001 was due to lower levels
of equipment sales compared to 2000; On dollar level basis, services' sales also
declined in 2001.
Many of our largest customers use our products and services to build
telecommunication network infrastructures. These purchases are significant
investments in capital equipment and are required for a phase of the rollout in
a geographic area or a market. Consequently, the customer may have
22
different requirements from year to year and may vary its purchases from us
accordingly.
We provide our customers with significant volume price discounts, which would
lower the average selling price of any particular product line as more units are
sold to a given customer up to a maximum discount level offered. In addition, we
expect that the average selling price of any particular product line will also
decline as a given product matures and as competition increases in the future.
Accordingly, our ability to maintain or increase sales will depend upon many
factors, including our ability to increase unit sales volumes of our systems and
our ability to introduce and sell new systems at prices sufficient to compensate
for reduced revenues resulting from declines in the average selling price of our
more mature products. The significant worldwide contraction in the capital
spending of telecommunication equipment industry negatively affected our sales
in 2001. We expect this trend to continue into 2002. We were not able to adjust
operating expense levels drastically enough to result in a profitable operating
result in 2001, and given the sales level decline experienced, we could not
expect to be profitable at the sales levels experienced in 2001.
Gross Profit
Cost of sales consists primarily of costs related to materials, labor and
overhead, freight and duty, and in the case of the services business, direct
labor and materials. In 2001, 2000, and 1999, gross profit (loss) was $(14.4)
million, $35.3 million, and $21.2 million, respectively, or (13.8%), 15.0%, and
13.5% of sales, respectively.
In 2001, 2000, and 1999, product gross margins were affected by inventory and
other related charges of $30.0 million, $21.7 million, and $15.1 million,
respectively (See Restructuring and Other Charges below). Product gross profit
as a percentage of product sales, not including the effect of the inventory
charges described above, was approximately 11.4%, 23.9%, and 26.1% in 2001,
2000, and 1999, respectively. In 2001, the reduced gross profit margins related
to reduced economics of scale and to pricing pressure on the Point-to-Point
Tel-Link products as a result of the relative maturity of this legacy product
line, the global economic slowdown and availability of highly competitive
alternative products in the marketplace. Gross profit turned negative in the
second half of 2001. Unless sales recover significantly, coupled with the
existing cost cutting measures in place, we will remain unprofitable. In 2000,
the reduced gross profit margins related to high materials cost for the
Point-to-Multipoint products due to industry wide part shortages, and higher
overhead applied to sales due to lower than expected unit sales of the
Point-to-Multipoint line in the second half of 2000. Additionally, the
Point-to-Point Tel-Link products were subjected to margin pressure due to the
existence of highly competitive alternative product lines in the marketplace in
2000.
Service gross profit as a percentage of service sales was approximately 23.4%,
25.0%, and 30.1% in 2001, 2000, and 1999, respectively. The decrease in the
service gross percentage in 2001 was caused by the significant decline of US
sales in the second half without a corresponding decrease in expenses. The
decrease in service gross profit percentage in 2000 was due to fixed contract
rates charged in the UK market for RT Masts' largest customer and shifts in
service job type mix. Fourth quarter 2000 revenue in the U.S. service market was
heavily weighted to lower margin radio installation work directly related to our
higher sales volume of radios to Winstar.
Research and Development
Research and development expenses consist primarily of costs associated with new
product development. Our research and development activities include the
development of additional radio products, frequencies and upgrading operating
23
features and related software tools. Software development costs incurred prior
to the establishment of technological feasibility are expensed as incurred.
Software development costs incurred after the establishment of technological
feasibility and before general release to customers are capitalized, if
material. To date, all software development costs incurred after the
establishment of technological feasibility have been immaterial.
In 2001, 2000, and 1999, research and development expenses were approximately
$19.8 million, $20.2 million, and $32.4 million, respectively. As a percentage
of sales, research and development expenses increased from 8.6% in 2000 to 19.0%
in 2001, primarily due to lower sales level. Research and development expenses
in 2001 continued to be significant due to the substantial final development
efforts on the new Encore Point-to-Point and AirPro Gold Spread Spectrum
products in preparation for commercial rollout in 2001 and 2002. The percentage
however decreased from 20.7% in 1999 to 8.6% in 2000 due to our
Point-to-Multipoint development project being completed in the fourth quarter of
1999. The wind down of this development project resulted in reduced spending for
this project in 2000, and the fact that overall sales levels increased in 2000
compared to 1999. Our absolute dollar R&D costs are more consistent than the
percentages are due to the year-to-year sales swings.
Selling and Marketing
Selling and marketing expenses consist of salaries, sales commissions, travel
expenses, customer service and support expenses and costs related to business
development and trade shows. In 2001, 2000, and 1999, selling and marketing
expenses were $7.8 million, $12.0 million, and $17.1 million, respectively. As a
percentage of sales, selling and marketing expense increased from 5.1% in 2000
to 7.5% in 2001, primarily due to lower dollar sales levels. The decrease in
absolute dollar spending in 2000 was due to closure of the German subsidiary in
July 2001, and the cost control measures that were achieved since the first
quarter of 2001. As a percentage of sales, selling and marketing expenses
decreased from 10.9% in 1999 to 5.1% in 2000, primarily due to smaller marketing
staff levels as a result of the sales of Control Resources Corporation and
Technosystem subsidiaries in early 2000 and due to 2000's higher sales.
General and Administrative
General and administrative expenses consist primarily of salaries and other
expenses for management, as well as finance, accounting, data processing, legal
and other professional services. In 2001, 2000, and 1999, general and
administrative expenses, excluding a $11.6 million receivable valuation charge
in the first quarter of 2001 relating to the bankruptcy filing of Winstar, were
$21.8 million, $26.9 million and $25.2 million, respectively. As a percentage of
sales, general and administrative expenses increased from 11.5% in 2000 to 20.9%
in 2001 due to the inability to reduce fixed expenses in 2001 as rapidly as the
decrease in sales in our major markets during this period. General and
administrative expenses increased 6.8% in 2000 compared to 1999. The expansion
of the services business, predominantly in the U.S. market, significantly
increased the related administrative expenses overall level in 2000. General and
administrative expenses for the manufacturing operations were reduced in 2000 as
compared to 1999 due to better cost controls and due to significant write-offs
of accounts receivable in 1999 which did not recur in 2000.
Goodwill Amortization
Goodwill represents the excess of the purchase price over the fair value of the
net identifiable assets of acquired companies accounted for as purchase business
combinations. Goodwill is amortized on a straight-line basis over
24
the period of expected benefit of 20 years. In 2001, 2000 and 1999 goodwill
amortization was approximately $8.3 million, $19.6 million and $7.8 million,
respectively. In the second quarter of 2000, management reviewed the carrying
value of goodwill related to its 1998 acquisition of the Cylink Wireless Group.
Based upon its assessment of future value of revenue flows estimated to be
provided from this acquisition, a $15 million impairment charge was recorded.
Management also determined it appropriate to amortize the remaining goodwill
related to the Cylink Wireless Group over a 4 1/2 year period beginning in July
2000. Other than the impairment charge of $15 million, the amortization of
goodwill for 2000 totaled $4.6 million compared to $6.5 million in 1999. In 2001
management again reviewed the carrying value of goodwill related to Cylink.
Based on the changes to the forecast future cash flows and the replacement of
the Cylink spread spectrum products with its successor "AirPro Gold" line, we
determined that the residual goodwill arising from the acquisition of Cylink in
1998 was impaired and recorded a charge of $5.8 million in the third quarter of
2001. The remaining goodwill relates to PCNS and was being amortized over 20
years. Amortization of goodwill will cease effective January 1, 2002 due to
adoption of a new accounting principle, FAS 142. In connection with the adoption
of FAS 142, the Company will be required to perform a transitional goodwill
impairment assessment. The Company has not yet determined the effect the
goodwill impairment assessment will have on its financial position and results
of operations.
Restructuring and Other Charges
In the first quarter of 2001, we recorded a $10 million inventory related charge
to product cost of sales, and incurred a $11.6 million receivable valuation
charge, a direct result of the bankruptcy of Winstar. In the third quarter of
2001, we determined that there was a need to reevaluate our inventory carrying
value in the light of the significant slowdown in the global telecommunication
market, and the phasing out of and replacement of current product designs. The
evaluation included an assessment of future demand for certain of its lower
speed and lower frequency Tel-Link Point-to-Point products, and resulted in
total charges to product costs of sales of approximately $18 million in the
third quarter of 2001. Additionally $2 million was charged to product cost of
sales in the fourth quarter of 2001.
In the second quarter of 2000, we determined that there was a need to reevaluate
its inventory levels and related accrued liabilities in light of recent changes
in product and customer mix. The evaluation was prompted by a change in customer
mix away from the UK and other European markets and toward the U.S. market, and
the resulting anticipated decrease in demand for certain of its lower speed and
lower frequency Tel-Link Point-to-Point product line, and resulted in total
charges of approximately $21.7 million during the second quarter of 2000. These
charges consisted of increases to inventory reserve of approximately $17.4
million and accrued liabilities of approximately $4.3 million, both relating to
our product segment. In addition, we performed a review of the carrying value
and remaining life of long-lived assets associated with our product segment and
recorded write-downs of approximately $15.0 million of goodwill, and an
approximately $9.9 million write-off of deferred tax assets.
We increased inventory reserves and related purchases liabilities through
charges to product cost of sales in the second quarter of 2000. Of the $17
million charge for additional reserves, $15.4 million related to the
aforementioned Tel-Link Point-to-Point product line. An additional reserve of
approximately $1.0 million was added in the second quarter to adjust carrying
value of certain modules of the Point-to-Multipoint radio line.
25
Our management approved restructuring plans in 1999, which included initiatives
to integrate the operations of acquired companies, consolidate duplicate
facilities, and reduce overhead. Total accrued restructuring and other charges
of approximately $36.5 million were recorded in 1999, relating to these
initiatives, all relating to our product segment.
Operating expenses overall declined in fiscal 2000 due to cost reduction actions
and the sale of Control Resources Corporation in April 2000.
Interest Expense
In 2001, 2000, and 1999, interest expense was $2.0 million, $4.8 million and
$8.2 million, respectively. In 2001, interest expense primarily relates to the
4.25% Convertible Subordinated Notes (the "Notes"), due in November 2002, fees
incurred in setting up the Loan and Security Agreement with Foothill Capital
Corporation and interest on equipment leases. For 2000 and 1999, interest
expense consisted primarily of interest and fees incurred on the Notes and
borrowings under our bank lines of credit, interest on the principal amount of
equipment leases, and contractual penalties for late filing of the registration
statement in connection with the issuance of the Series B Convertible Preferred
Stock and the related warrants. Approximately $1.9 million was charged to
interest expense during the year related to amortization of fair value of
warrants issued to our lender group in January 2000. The reduction in interest
expense in 2001 and 2000 compared to prior year was primarily due to reduced
debt levels outstanding in these periods.
Gain on sale of a subsidiary
We recognized a gain of approximately $9.8 million in 2001 on the sale of RT
Masts in February 2001.
Other Income (Expense), net
In 2001, other expense was comprised primarily of losses related to the
write-down of property and equipment and foreign currency translation loss
offset by an earnout royalty payment related to the 2000 sale of the Control
Resources Corporation subsidiary, and investment income from available cash
balances. In 2000, other income and expense represents primarily a $3.5 million
loss in the first quarter on the sale of our Cemetel unit, foreign exchange
losses of approximately $5 million and the write-off of a 1998 investment in a
Poland-based telecom venture of $1.3 million. This was partially offset by
interest income on excess cash balances, and a gain of $2.6 million on the sale
of Control Resources Corporation in April 2000.
Sales contracts negotiated in foreign currencies have been primarily limited to
British Pound Sterling contracts and Euro (previously Deutschemark) contracts.
The impact of translating balance sheet accounts due to currency fluctuations in
the British Pound Sterling or Euro for 2001 and 2000 was related to
strengthening of the U.S. dollar versus these currencies through most of the
year. We may in the future be exposed to the risk of foreign currency gains or
losses depending upon the magnitude of a change in the value of a local currency
in an international market.
Provision (Benefit) for Income Taxes
In 2001, we recorded a net tax benefit of $(0.6) million relating to recovery of
prior year's federal income tax, offset by income taxes attributable to foreign
jurisdictions that had local taxable income for 2001.
In 2000 and 1999, we recorded tax provisions of $11.1 million and $1.4 million,
respectively, representing effective tax rates of (20.2)% and (1.4)%,
respectively. The tax provision for 2000 is comprised of a $9.9 million
write-off of deferred tax assets taken in 2000 and income taxes attributable to
foreign jurisdictions that had taxable income for 2000. The tax provision
26
for 1999 is comprised of income taxes attributable to foreign jurisdictions that
had taxable income for 1999. No benefit was recognized in 2001, 2000 or 1999 for
net operating losses incurred.
Discontinued Operations
In August 1999, we decided to divest our broadcast equipment business,
Technosystem. Accordingly, beginning in the third quarter of 1999, this business
was reported as a discontinued operation and the financial statement information
related to this business was presented on one line in the 1999 Consolidated
Balance Sheet, "net assets of discontinued operations", and in the "discontinued
operations" line of the Consolidated Statements of Operations. The "net assets
of discontinued operations" represented the assets intended to be sold, offset
by the liabilities anticipated to be assumed by the buyers of the business. The
disposition of Technosystem was completed by the end of the first quarter of
2000.
In 1999 we recorded an estimated loss on disposal of $26.9 million, including
the write-off of approximately $12.5 million of goodwill, related to the
disposal of Technosystem. Losses from discontinued operations were $4.0 million
and $13.9 million in 2000 and 1999, respectively.
Extraordinary Item
In January 2000, we repurchased $7.0 million of our Notes by issuance of 677,000
shares of newly issued common stock with a fair market value of $5.1 million.
The extraordinary gain resulting from this transaction amounted to $1.9 million.
In January and February of 1999, we repurchased an aggregate of $25.5 million of
our Notes for an aggregate of 2,792,000 shares of our Common Stock with a fair
market value of $18.3 million and recorded an extraordinary gain of $7.2
million. In December 1999, we repurchased an aggregate of $23.8 million of our
Notes for an aggregate of 2,359,000 shares of our Common Stock with a fair
market value of $17.8 million. This transaction resulted in an extraordinary
gain of $6.0 million.
Charge related to preferred stock discount
In June 1999, we exchanged all 15,000 shares of our Series B Convertible
Preferred Stock for 5,135,000 shares of redeemable Common Stock. We also
required outstanding mandatorily redeemable warrants to purchase 1,242,000
shares of Common Stock, which were held by the Series B Convertible Preferred
Stockholders, for new warrants with an exercise price of $3.00 per share rather
than $3.47 per share. We recorded a charge in 1999 of approximately $12.2
million resulting from these exchanges.
In November 1999, we entered into agreements with the former Series B preferred
shareholders to eliminate their redemption rights and their past and future late
registration premiums and penalties in exchange for 220,000 shares of Common
Stock, warrants to purchase 443,000 share of Common Stock, and a $400,000
promissory note convertible (with interest) into Common Stock at a conversion
price of approximately $4.72 per share. As a result of these transactions, we
recorded a charge in 1999 of approximately $6.3 million relating to these
agreements.
Liquidity and Capital Resources
Since our inception in August 1991, we have financed our operations and capital
requirements through net proceeds of approximately $89.5 million from our
initial and two follow-on public offerings of our Common Stock, three private
placements of Common Stock yielding approximately $18.2 million in August 2000,
$43.0 million in January 2000, $38.3 million in June 1999; an issuance of Common
Stock to two existing stockholders in July 2001 for $3 million; 4 preferred
stock financings aggregating approximately $32.2 million, including a $13.6
million preferred stock financing in 1998; notes with net
27
proceeds of approximately $97.5 million in 1997; and borrowings under bank lines
of credit and equipment lease arrangements.
In 2001, we used approximately $17.5 million of cash in operating activities,
primarily due to the net loss of $75.5 million, offset by depreciation and
amortization of goodwill aggregating $11.6 million, non-cash charges to cost of
sales for inventory related charges aggregating $30.0 million, the gain on
disposal of RT Masts of $9.8 million and an impairment charge related to
goodwill of $5.8 million. In addition, we experienced decreases in accounts
payable, other accrued liabilities, accounts receivable, inventories and prepaid
expenses related to lower levels of sales and related activities.
During 2001, we received net proceeds of approximately $6.3 million through
investing activities. The net proceeds resulted primarily from the sale of RT
Masts of $12.1 million, offset by acquisition of property and equipment of $2.9
million and an increase in restricted cash of $2.9 million.
In 2001, we used approximately $9.3 million in financing activities. We repaid
approximately $11.1 million of borrowings under our bank line of credit and
remitted $2.6 million under our capital lease obligations, and received
approximately $3 million in net proceeds from issuance of Common Stock in July
2001 to two existing stockholders.
Our principal sources of liquidity as of December 31, 2001 consisted of
approximately $7.1 million of cash and cash equivalents. Cumulative operating
losses have seriously affected our liquidity in 2001. The $2.9 million
restricted cash resulted from an attachment in the third quarter of 2001, as
part of a dispute with a vendor. The dispute has been fully resolved and the
attachment dissolved in February 2002, resulting in approximately $1.4 million
being released to us in 2002. At December 31, 2000, we had approximately $27.5
million in cash and cash equivalents. At December 31, 2000, we had outstanding
borrowings of approximately $11.0 million under our line of credit, which
expired and was paid off, with accrued interest, on January 31, 2001.
At December 31, 2001, we had negative working capital of approximately $10.2
million. The negative working capital resulted from classification of our 4.25%
convertible subordinated notes due in November 2002 to a current liability. We
are presently in negotiation with certain holders of the Notes to extend the
maturity due date and/or convert their Notes to Common Stock. We are presently
engaged in processes designed to raise additional equity capital and put in
place a working capital credit facility. If the Note holders elect to hold their
Notes until the November 2002 maturity date and demand payment, and we are
unable to find additional financing to pay the Notes at maturity, we will have
insufficient capital to continue to fund our operations. Even if the Note
holders give us relief, we might have insufficient capital to pay the notes to
fund our operations unless we generate sufficient revenues from new or existing
products, obtain additional equity financing and or obtain additional debt
financing.
In February 2001, we sold RT Masts, our U.K. services unit, for approximately
$12 million in cash at the date of sale; an additional $750,000 was retained in
escrow by the purchaser for six months to cover any contingencies; and a seven
year note receivable for $750,000, interest due annually at LIBOR. The $750,000
held in escrow was collected in the third quarter of 2001.
On March 29, 2001, the Company and Foothill Capital Corporation entered into a
Loan and Security Agreement with a borrowing capacity of up to $25 million. We
never borrowed under this Agreement. We were in default of certain financial
covenants as of December 31, 2001. The agreement was terminated in February
2002. We are currently seeking other debt financing sources, but there is no
guarantee that we will be successful due to the negative impact on us and our
financial statements of the current market downturn.
28
We are generally able to pay our debts and pay our obligations as they become
due. Nevertheless given the size and working capital needs of our business and
our recent history of losses, and the required repayment of the outstanding
Notes on November 1, 2002, additional funding will be needed. There can be no
assurance that any additional financing will be available to us on acceptable
terms, or at all, when required by us. Without sufficient capital to fund our
operations it is unlikely that we will be able to continue as a going concern
despite making significant reductions in our operating expense levels over the
past twelve months. In addition to receiving new funds, we need to significantly
increase sales, reach agreement with the holders of our 4.25% convertible
subordinated notes to extend the notes' maturity date and/or convert them to
equity, reduce our short-term liabilities (other than the notes) by inducing
large creditors to convert their receivables into our Common Stock or to offer
extended payment terms. There can be no assurance that we will be able to
increase sales, or reach such agreements with any or enough of our creditors. As
a result of these circumstances, our independent accountants' opinion on our
consolidated financial statements includes an explanatory paragraph indicating
that these matters raise substantial doubt about our ability to continue as a
going concern. If additional funds are raised (or liabilities are received)
through issuance of equity securities, further dilution to the existing
stockholders will result.
The following summarizes our contractual obligations at December 31, 2001, and
the effect such obligations are expected to have on our liquidity and cash flow
in future periods:
Less than One to Three to After five
one year three years five years years Total
Obligations (in $000):
Convertible subordinated notes $ 29,299 $ -- $ -- $ -- $ 29,299
Non-cancelable operating lease
obligations 3,654 9,948 1,121 -- 14,723
Capital lease obligations 2,282 700 -- -- 2,982
-------- -------- -------- -------- --------
Total $ 35,235 $ 10,648 $ 1,121 $ -- $ 47,004
-------- -------- -------- -------- --------
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued FASB
Statements Nos. 141 and 142 (FAS 141 and FAS 142), "Business Combinations" and
"Goodwill and Other Intangible Assets." FAS 141 replaces APB 16 and eliminates
pooling-of-interests accounting prospectively. It also provides guidance on
purchase accounting related to the recognition of intangible assets and
accounting for negative goodwill. FAS 142 changes the accounting for goodwill
from an amortization method to an impairment-only approach. Under FAS 142,
goodwill will be tested annually and whenever events or circumstances occur
indicating that goodwill might be impaired. FAS 141 and FAS 142 are effective
for all business combinations completed after June 30, 2001. Upon adoption of
FAS 142, amortization of goodwill recorded for business combinations consummated
prior to July 1, 2001 will cease, and intangible assets acquired prior to July
1, 2001 that do not meet the criteria for recognition under FAS 141 will be
reclassified to goodwill. The company adopted FAS 142 on January 1, 2002. In
connection with the adoption of FAS 142, we will be required to perform a
transitional goodwill impairment assessment. The Company has not yet determined
the effect the goodwill impairment assessment will have on its financial
position and results of operations.
29
In June 2001, the FASB issued FASB Statement No. 143 (FAS 143), "Accounting for
Asset Retirement Obligations". FAS 143 requires that the fair value of a
liability for an asset retirement obligation be realized in the period in which
it is incurred if a reasonable estimate of fair value can be made. Companies are
required to adopt FAS 143 for fiscal years beginning after June 15, 2002, but
early adoption is encouraged. We have not yet determined the impact this
standard will have on our financial position and results of operations.
In August 2001, the FASB issued FASB Statement No. 144 (FAS 144). "Accounting
for the Impairment or Disposal of Long-lived Assets". FAS 144 supersedes FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations -- Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment of
a business (as previously defined in that Opinion). This Statement also amends
APB No. 51, Consolidated Financial Statements, to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. We
adopted FAS 144 on January 1, 2002 do not expect the adoption of this standard
will have a material impact on our financial position and results of operations.
30
Certain Risk Factors Affecting The Company
Worldwide Industry Slowdown
A severe worldwide slowdown in the telecommunications equipment and services
sector is affecting us. Customers, specifically systems operators and integrated
system providers, are deferring capital spending and orders to suppliers such as
our Company, or canceling orders, and, in general, not building out any
significant additional infrastructure at this time. In addition, our accounts
receivable, inventory and stability can be jeopardized if our customers
experience financial distress. In the third quarter 2001, many large
telecommunications equipment manufacturers reduced or eliminated their estimates
of product sales levels for the remainder of 2001. We recorded large valuation
charges and other write-offs in the first quarter of 2001 because our largest
customer, Winstar Communications Inc., declared bankruptcy on April 18, 2001.
10% of our sales in the first quarter of 2001 were to Winstar. We recorded
additional write down of inventory on hand at September 30, 2001 to properly
state our inventory to its net realizable value, given current market conditions
and sales activity projections. Our services business' largest customer began a
slowdown and deferral of previously committed work orders as of the end of the
second quarter.
Deterioration of Business and Financial Positions
Due to the worldwide industry slowdown as noted above, our business and
financial positions have deteriorated significantly. Our core business product
sales levels were reduced sharply in the second half of 2001 and are unlikely
to recover while the industry-wide slowdown persists. Our December 31, 2001
cash, working capital, accounts receivable, inventory, total assets, employee
headcount, backlog and total stockholders' equity were all down very
substantially from levels as of December 31, 2000. Our working capital is
negative. Our gross margin on sales was negative in fiscal 2001 and in each of
the last two quarters of 2001. Our aggregate net loss for the last four fiscal
years is approximately $310,000,000. We have $29.3 million of Notes maturing in
November 2002 that our current resources would not enable us to pay. Our largest
customer declared bankruptcy in April 2001, leaving us with unpaid receivables
and inventory purchase obligations to our own suppliers.
Our independent accountants' opinion on our consolidated financial statements
includes an explanatory paragraph indicating substantial doubt, on the basis
described in that paragraph, about our ability to continue as a going concern.
We are able generally to pay our debts and meet our obligations as they become
due. Nevertheless to continue long-term as a going concern, we must ultimately
reach agreement with the holders of our 4.25% convertible subordinated notes to
extend the notes' maturity date and/or convert them into equity. In addition, to
continue long-term as a going concern we will have to increase our sales, induce
other creditors to forebear or to convert to equity, raise additional equity
financing, and/or raise new debt financing. We cannot guarantee that we will be
able to accomplish these things.
31
Nasdaq Delisting Notice
To maintain the listing of our common stock on The Nasdaq National Market we are
required to meet certain listing requirements, including a minimum bid price of
$1.00 per share. We received a letter of notice dated June 20, 2001 from the
Nasdaq National Market stating that due to our minimum bid price levels
remaining under the $1 level for thirty consecutive trading days, we is
therefore on notice that it could be subject to a delisting procedure should the
bid price continue to remain under the $1 level for an additional 90-day period,
unless our stock attains a bid price of $1 or more for a period of ten
consecutive days during such 90-day period. Shortly after September 11, NASDAQ
issued a moratorium on delisting process until Jan 2, 2002. Management received
in September 2001 shareholders' approval for a reverse stock split calling for
one share of newly issued Common Stock to be issued in place of each five shares
of existing stock as of the date at which the reverse stock split is effected.
Depending upon our stock price at implementation of the reverse stock split,
there can be no assurance that we will maintain compliance with the minimum bid
price. If we fail to meet the minimum bid process for 10 consecutive days during
the grace period, our Common Stock may be delisted from the NASDAQ National
Market. NASDAQ regulations provide that companies that are served with delisting
notices following the grace periods, may file an appeal with the NASDAQ
regulators, from which they are allowed a hearing procedure to present a current
business plan and other circumstances which can be considered in the final
delisting decision. Even if we are able to comply with the minimum requirement,
there is no assurance that in the future we will continue to satisfy The NASDAQ
listing requirements, with the result that our common stock may be delisted from
The NASDAQ National Market. Should our common stock be delisted from The NASDAQ
National Market, it would likely be traded on The NASDAQ Small Cap Market, and
if delisted from The NASDAQ Small Cap Market, would likely be traded on the
so-called "pink sheets" or the "Electronic Bulletin Board" of the NASDAQ
National Market. However, this alternative could result in a less liquid market
available for existing and potential shareholders to exchange shares of our
stock and could ultimately further depress the trading price of our Common
Stock.
We received a new letter of notice dated February 14,2002 from NASDAQ stating
that due to our minimum bid price levels remaining under $1 for 30 consecutive
days, we are again on notice that the Company is subject to delisting
procedures.
Small Player in Large Market
We do not have the customer base or other resources of more established
companies, which makes it more difficult for us to address the liquidity and
other challenges we face.
Although we have installed and have in operation over 150,000 radio units
globally, we have not developed a large installed base of our equipment or the
kind of close relationships with a broad base of customers of a type enjoyed by
older, more developed companies, which would provide a base of financial
performance from which to launch strategic initiatives and withstand business
reversals. In addition, we have not built up the level of capital often enjoyed
by more established companies, so from time to time we may face serious
challenges in financing our continued operation. We may not be able to
successfully address these risks.
32
Additional Capital Requirements
Even if we resolve our short term going concern difficulties, our future capital
requirements will depend upon many factors, including 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 continued
existence of a substantial amount of debt (including Notes which come due
November 1, 2002) could also severely limit our ability to raise additional
financing. In addition, given the recent price for our common stock, if we raise
additional funds by issuing equity securities, significant dilution to our
stockholders could result. We expect that if we reach agreements with the
holders of the Notes and or other short-term liabilities to convert into equity
financing in 2002, the new stock would be issued at a low price per share and
would be significantly dilutive to our current stock holders.
If adequate funds are not available, we may be required to close business or
product lines, restructure or refinance our debt or delay, scale back or
eliminate our research and development, acquisition or manufacturing programs.
We may also need to obtain funds through arrangements with partners or others
that may require us to relinquish rights to certain of our 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 and
further erode our stock price.
Rapid Technological Change
Rapid technological change, frequency of new product introductions and
enhancements, product obsolescence, changes in end-user requirements and
period-to-period demand, and evolving industry standards characterize the
communications market. Our ability to compete in this market will depend upon
successful development, introduction and sale of new systems and enhancements
and related software tools, on a timely and cost-effective basis, in response to
changing customer requirements. Recently, we have been developing our new
Point-to-Multipoint systems, and other upgraded products. Any success in
developing new and enhanced systems and related software tools will depend upon
a variety of factors. Such factors include:
o new product development to meet market demand;
o integration of various elements of complex technology;
o timely and efficient implementation of manufacturing and assembly
processes at turnkey suppliers and manufacturing cost reduction programs
for existing product lines;
o development and completion of related software tools, system performance,
quality and reliability of systems; and
o timely and efficient completion of system design.
We may not be successful in selecting, developing, manufacturing and marketing
new systems or enhancements or related software tools. For example, to date,
revenue generated through the sales of Point-to-Multipoint systems has not met
33
original expectations, and sales were down sharply in all product categories in
the second half of 2001.
Also, errors could be found in our systems after commencement of commercial
quantity shipments. Such errors could result in the loss of or delay in market
acceptance, as well as expenses associated with re-work of previously delivered
equipment.
Customer Concentration
In 2001, sales to 3 customers accounted for 47.4% of sales. Sales to one service
customer in the U.S. accounted for 62.0% of total service revenue, and 18% of
total sales. Our ability to maintain or increase our sales in the future will
depend, in part upon our ability to obtain orders from new customers as well as
the financial condition and success of our customers, the telecommunications
industry and the economy in general.
Our customer concentration also results in concentration of credit risk. In
December 31, 2001, four customers represented almost 62% of our total accounts
receivable. In 2001 Winstar, which was then our largest customer, declared
bankruptcy and we had to write off $11.6 million of Winstar receivables.
Many of our major product customers are located in foreign countries, primarily
in the United Kingdom, Europe and the Pacific Rim. Some of these customers are
implementing new networks and are themselves in the early 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 we cannot
supply in terms of long-term financing.
If our customers cannot finance their purchases of our products or services,
this may materially adversely affect our business, operations and financial
condition. Financial difficulties of existing or potential customers may also
limit the overall demand for our products and services. Both current customers
and potential future customers in the telecommunications industry have, from
time to time, reportedly undergone financial difficulties and may therefore
limit their future orders or find it difficult to pay our billings 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 our products or services, may materially adversely
affect our business. Difficulties of this nature have occurred in the past and
we believe they can occur in the future. Winstar which was our largest customer
declared bankruptcy in April 2001.
Finally, acquisitions in the communications industry are common, which further
concentrates the customer base and may cause some orders to be delayed or
cancelled.
Fluctuations in Operating Results
We have experienced and will continue to experience significant fluctuations in
sales, gross margins and operating results. The procurement process for most of
our current and potential customers is complex and lengthy. As a result, the
timing and amount of sales is often difficult to predict reliably. The sale and
implementation of our products and services generally involves a significant
commitment of senior management, as well as its sales force and other resources.
The sales cycle for our products and services typically involve technical
evaluation and commitment of cash and other resources and delays often occur.
Delays are frequently associated with, among other things:
o customers' seasonal purchasing and budgetary cycles, as well as their own
buildout schedules;
34
o compliance with customers' internal procedures for approving large
expenditures and evaluating and accepting new technologies;
o compliance with governmental or other regulatory standards;
o difficulties associated with customers' ability to secure financing;
o negotiation of purchase and service terms for each sale;
o price negotiations required to secure purchase orders; and
o education of customers as to the potential applications of our products
and services, as well as related product-life cost savings.
o The recent downward trends in sales, gross margins and operating results
are primarily due to the industry-wide downturn, however, rather than to
factors such as these.
Shipment delays
Due to logistics of production and inventory, a delay in a shipment near the end
of a particular quarter for any reason may cause sales in a particular quarter
to fall significantly below our and stock market analysts' expectations. A
single customer's order scheduled for shipment in a quarter can represent a
large portion of our potential sales for the quarter. Such delays have occurred
in the past due to, for example, unanticipated shipment rescheduling,
cancellations or deferrals by customers, competitive and economic factors,
unexpected manufacturing or other difficulties, delays in deliveries of
components, subassemblies or services by suppliers and failure to receive
anticipated orders. We cannot determine whether similar or other delays might
occur in the future, but expect that some or all of such problems might recur.
Uncertainty in Telecommunications Industry
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 US most CLECs are experiencing financial distress. If these new
service providers are unable to adequately finance their operations, they may
cancel or delay orders. Moreover, purchase orders are often received and
accepted far in advance of shipment and, as a result, we typically permit orders
to be modified or canceled with limited or no penalties. Any failure to reduce
actual costs to the extent anticipated when an order is received substantially
in advance of shipment or an increase in anticipated costs before shipment could
materially adversely affect our gross margin for such orders. Ordering materials
and building inventory based on customer forecasts or non-binding orders can
also result in large inventory write-offs, such as occurred in 2000 and 2001.
Global economic conditions have had a depressing effect on sales levels in past
years, including a significant slowdown in 1998. The soft economy and reported
slowdown in capital spending in 2001 in the U.S. telecommunications market again
had a significant depressing effect on the sales levels of products and services
in 2001.
35
Inventory
Our customers have increasingly been demanding short turnaround on orders rather
than submitting purchase orders far in advance of expected shipment dates. This
practice requires we to keep inventory on hand to meet such market demands.
Given the variability of customer need and purchasing power, it is difficult to
predict the amount of inventory needed to satisfy customer demand. If we over or
under-estimate inventory requirements to fulfill customer needs, our results of
operations could continue to be adversely affected. In particular, increases in
inventory could materially adversely affect operations if such inventory is
ultimately not used or becomes obsolete. This risk was realized in the large
inventory write-downs in 1999, 2000 and 2001.
Expenses
Magnifying the effects of any sales shortfall, a material portion of our
manufacturing related operating expenses is fixed and difficult to reduce should
sales not meet expectations.
Contract Manufacturers and Limited Sources of Supply
Our internal manufacturing capacity by design is very limited. We use contract
manufacturers in large part to produce its systems, components and subassemblies
and expect to rely increasingly on these manufacturers in the future. We also
rely on outside vendors to manufacture certain other components and
subassemblies. Our internal manufacturing capacity and that of our contract
manufacturers may not be sufficient to fulfill our orders. Our 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 its systems are obtained from a sole supplier or a limited group
of suppliers.
Our reliance on contract manufacturers and on sole suppliers or a limited group
of suppliers involves risks. We have experienced an inability to obtain an
adequate supply of finished products and required components and subassemblies.
As a result, we have reduced control over the price, timely delivery,
reliability and quality of finished products, components and subassemblies. We
do not have long-term supply agreements with most of ourmanufacturers or
suppliers. We have experienced problems in the timely delivery and quality of
products and certain components and subassemblies from vendors. Some suppliers
have relatively limited financial and other resources. Any inability to obtain
timely deliveries of components and subassemblies of acceptable quality or any
other circumstance would require we to seek alternative sources of supply, or to
manufacture finished products or components and subassemblies internally. As
manufacture of our products and certain of our components and subassemblies is
an extremely complex process, finding and educating new vendors could delay our
ability to ship our systems.
Management of Growth
To maintain a competitive market position, we are required to continue to invest
resources for growth. Currently, we are devoting significant resources to the
development of new products and technologies and is continuously conducting
evaluations of these products. We will continue to invest additional resources
in plant and equipment, inventory, personnel and other items, to begin
production of these products and to provide any necessary marketing and
administration to service and support bringing these products to
36
commercial production stage. Accordingly, in addition to the effect our recent
performance has had on gross profit margin and inventory levels, our gross
profit margin and inventory management may be further adversely impacted in the
future by start-up costs associated with the initial production and installation
of these new products. Start-up costs may include additional manufacturing
overhead, additional allowance for doubtful accounts, inventory and warranty
reserve requirements and the creation of service and support organizations.
Additional inventory on hand for new product development and customer service
requirements also increases the risk of further inventory write-downs if such
products do not gain reasonable market acceptance at normal gross profit margin.
Although we, through monitoring our operating expense levels relative to
business plan revenue levels, try to maintain a given level of operating
results, there are many market condition changes which have and may continue to
challenge our ability to maintain given levels of operating expenses to revenue
ratios.
Expansion of our operations and acquisitions in prior periods caused a
significant strain on our management, financial, manufacturing and other
resources and has from time to time disrupted its normal business operations.
Our ability to manage any possible future growth may again depend upon
significant expansion of our executive, manufacturing, accounting and other
internal management systems and the implementation of a variety of systems,
procedures and controls, including improvements or replacements to inventory and
management systems designed to help control and monitor inventory levels and
other operating decision criteria. In particular, we must successfully manage
and control overhead expenses and inventories, the development, introduction,
marketing and sales of new products, the management and training of our employee
base, the integration and coordination of a geographically and ethnically
diverse group of employees and the monitoring of third party manufacturers and
suppliers. We cannot be certain that attempts to manage or again expand our
marketing, sales, manufacturing and customer support efforts will be successful
or result in future additional sales or profitability.
Any failure to coordinate and improve systems, procedures and controls,
including improvements relating to inventory control and coordination with
subsidiaries, at a pace consistent with our business, could cause
inefficiencies, additional operational expenses and inherent risks, greater risk
of billing delays, inventory write-downs and financial reporting difficulties.
A significant ramp-up of production of products and services could require us to
make substantial capital investments in equipment and inventory, in recruitment
and training additional personnel and possibly in investment in additional
manufacturing facilities. If undertaken, we anticipate these expenditures would
be made in advance of increased sales. In such event, gross margins 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 such
cost categories may periodically increase as a percentage of revenues.
Decline in Selling Prices
We believe that average selling prices and gross margins for its systems and
services would decline in both the near and the long term relative from the
point at which a product is initially marketed and priced. Reasons for such
decline may include the maturation of such systems, the effect of volume price
discounts in existing and future contracts and the intensification of
competition.
If we cannot develop new products in a timely manner or fail to achieve
increased sales of new products at a higher average selling price, then we
37
would be unable to offset declining average selling prices. If we are unable to
offset declining average selling prices, our gross margins will decline.
Accounts Receivable
We are subject to credit risk in the form of trade accounts receivable. We could
be unable to enforce a policy of receiving payment within a limited number of
days of issuing bills, especially for customers in the early phases of business
development. Our current credit policy typically allows payment terms between 30
and 120 days depending upon the customer and the economic norms of the region.
We could have difficulties in receiving payment in accordance with our policies,
particularly from customers awaiting financing to fund their expansion and from
customers outside of the United States. In 2001, we recorded charges of $11.8
million for accounts receivable write-offs and reserves additions. Similar
write-offs may occur in the future, which could have a further material adverse
effect on our business, financial condition and results of operations.
Market Acceptance
Our future operating results depend upon the continued growth and increased
availability and acceptance of microcellular, PCN/PCS and wireless local loop
access telecommunications services in the United States and internationally. The
volume and variety of wireless telecommunications services or the markets for
and acceptance of such services may not continue to grow as expected. The growth
of such services may also fail to create anticipated demand for our systems.
Because these markets are relatively new, predicting which segments of these
markets will develop and at what rate these markets will grow is difficult. In
addition to our other products, we have recently invested significant time and
resources in the development of Point-to-Multipoint radio systems. If the
licensed millimeter wave, spread spectrum microwave radio or Point-to-Multipoint
microwave radio market and related services for our systems fails to grow, or
grows more slowly than anticipated, our business, financial condition and
results of operations could be materially adversely affected.
Certain sectors of the communications market will require the development and
deployment of an extensive and expensive communications infrastructure. In
particular, the establishment of PCN/PCS networks will require very large
capital expenditure levels. Communications providers may not make the necessary
investment in such infrastructure, and the creation of this infrastructure may
not occur in a timely manner. Moreover, one potential application of our
technology is 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 telephone
companies. Rates for wireless access must be competitive with rates charged
by wireline companies for this approach to be successful. If wireless access
rates are not competitive, consumer demand for wireless access will be
materially adversely affected. If we allocate resources to any market segment
that does not grow, we may be unable to reallocate resources to other market
segments in a timely manner, ultimately curtailing or eliminating our ability to
enter such 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, we must offer systems with superior
price/performance characteristics and extensive customer service and support.
Additionally, we must supply such systems on a timely and cost-effective basis,
in sufficient volume to satisfy such prospective customers' requirements and
otherwise overcome any reluctance on the part of such customers to transition to
new technologies. Any delay in the adoption of our
38
systems may result in prospective customers using alternative technologies in
their next generation of systems and networks.
Prospective customers may not design their systems or networks to include our
systems. Existing customers may not continue to include our systems in their
products, systems or networks in the future. Our technology may not replace
existing technologies and achieve widespread acceptance in the wireless
telecommunications market. Failure to achieve or sustain commercial acceptance
of our currently available radio systems or to develop other commercially
acceptable radio systems would materially adversely affect us.
Intensely Competitive Industry
The wireless communications market is intensely competitive. Our wireless-based
radio systems compete with other wireless telecommunications products and
alternative telecommunications transmission media, including copper and fiber
optic cable. We are experiencing intense competition worldwide from a number of
leading telecommunications companies. Such companies offer a variety of
competitive products and services and include Alcatel Network Systems, Bosch
Telekom, DMC Stratex Networks, Cerragon, Ericsson Limited, Harris
Corporation-Farinon Division, NEC, Nokia Telecommunications, SIAE, Siemens, and
Western Multiplex Corporation.
Many of these companies have greater installed bases, financial resources and
production, marketing, manufacturing, engineering and other capabilities than we
do face actual and potential competition not only from these established
companies, but also from start-up companies that are developing and marketing
new commercial products and services.
Some of our current and prospective customers and partners have developed, are
currently developing or could manufacture products competitive with our
products.
The principal elements of competition in our market and the basis upon which
customers may select our systems include price, performance, software
functionality, perceived ability to continue to be able to meet delivery
requirements, and customer service and support. Recently, certain competitors
have announced the introduction of new competitive products, including related
software tools and services, and the acquisition of other competitors and
competitive technologies. We expect competitors to continue to improve the
performance and lower the price of their current products and services and to
introduce new products and services or new technologies that provide added
functionality and other features. New product and service offerings and
enhancements by our competitors could cause a decline in sales or loss of market
acceptance of our systems. New offerings could also make our systems, services
or technologies obsolete or non-competitive. In addition, we are experiencing
significant price competition and expect such competition to intensify.
Uncertainty in International Operations
In doing business in international markets, we faces economic, political and
foreign currency fluctuations that are more volatile than those commonly
experienced in the United States. The majority of our sales to date have been
made to customers located outside of the United States.
Historically, our international sales have been denominated in British pounds
sterling or United States dollars. Certain of our international sales are
denominated in other foreign currencies, including Euro. A decrease in the
39
value of foreign currencies relative to the United States dollar could result in
decreased margins from those transactions if such decreases are not hedged. For
international sales that are United States dollar-denominated, such a decrease
could make its systems less price-competitive if competitors choose to price in
other currencies and could have a material adverse effect upon its financial
condition.
The Company funds its Italian subsidiary's operation expenses which are
denominated in Euro. An increase in the value of Euro currency if not hedged
relative to the United States dollar could result in more costly funding for our
Italian operations, and as a result higher cost of production to the Company as
a whole.
Additional risks are inherent in our international business activities. Such
risks include:
.. changes in regulatory requirements;
.. costs and risks of localizing systems (homologation) in foreign countries;
.. delays in receiving and processing components and materials;
.. availability of suitable export financing;
.. timing and availability of export licenses, tariffs and other trade
barriers;
.. difficulties in staffing and managing foreign operations, branches and
subsidiaries;
.. difficulties in managing distributors;
.. potentially adverse tax consequences;
.. foreign currency exchange fluctuations;
.. the burden of complying with a wide variety of complex foreign laws and
treaties;
.. difficulty in accounts receivable collections, if applicable; and
.. political and economic instability.
In addition, many of our customer purchase and other agreements are governed by
foreign laws, which may differ significantly from U.S. laws. Therefore, we may
be limited in our ability to enforce our rights under such agreements and to
collect damages, if awarded.
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
such markets. The successful expansion of our international operations in
certain markets will depend on our ability to locate, form and maintain strong
relationships with established companies providing communication services and
equipment in targeted regions. The failure to establish regional or local
relationships or to successfully market or sell our products in international
markets could limit our ability to expand operations. Our inability to identify
suitable parties for such relationships, or even if such parties are
40
identified to form and maintain strong relationships with them, could prevent us
from generating sales of products and services in targeted markets or
industries. Moreover, even if such relationships are established, we may be
unable to increase sales of products and services through such relationships.
Some of our potential markets include developing countries that may deploy
wireless communications networks as an alternative to the construction of a
limited wired infrastructure. These countries may decline to construct wireless
telecommunications systems or construction of such systems may be delayed for a
variety of reasons. Also, in developing markets, economic, political and foreign
currency fluctuations may be even more volatile than conditions in developed
areas.
Countries in the Asia/Pacific, African, and Latin American regions have recently
experienced weaknesses in their currency, banking and equity markets. These
weaknesses have adversely affected and could continue to adversely affect demand
for products.
Extensive Government Regulation
Radio communications are extensively regulated by the United States and foreign
governments as well as by international treaties. Our 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, we must
obtain regulatory approval for its systems and comply with differing
regulations. Regulatory bodies worldwide continue to adopt new standards for
wireless communications products. The delays inherent in this governmental
approval process may cause the cancellation, postponement or rescheduling of the
installation of communications systems by we and our customers. 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.
Such regulations or such changes in interpretation could require we to modify
our products and services and incur substantial costs to comply with such
regulations and changes.
In addition, we are also affected by domestic and international authorities'
regulation of the allocation and auction of the radio frequency spectrum.
Equipment to support new systems and services can be marketed only if permitted
by governmental regulations and if suitable frequency allocations are auctioned
to service providers. Establishing new regulations and obtaining frequency
allocation at auction is a complex and lengthy process. If PCS operators and
others are delayed in deploying new systems and services, we could experience
delays in orders. Similarly, failure by regulatory authorities to allocate
suitable frequency spectrum could have a material adverse effect on our results.
In addition, delays in the radio frequency spectrum auction process in the
United States could delay our ability to develop and market equipment to support
new services.
We operate in a regulatory environment subject to significant change. Regulatory
changes, which are affected by political, economic and technical factors, could
significantly impact our operations by restricting our development efforts and
those of its customers, making current systems obsolete or increasing
competition. Any such regulatory changes, including changes in the allocation of
available spectrum, could have a material adverse effect on our business,
financial condition and results of operations. We may also find it necessary or
advisable to modify our systems and services to
41
operate in compliance with such regulations. Such modifications could be
expensive and time-consuming.
Protection of Proprietary Rights
We rely on a combination of patents, trademarks, trade secrets, copyrights and
other measures to protect our intellectual property rights. We generally enter
into confidentiality and nondisclosure agreements with service providers,
customers and others to limit access to and distribution of proprietary rights.
We also enter into software license agreements with customers and others.
However, such measures may not provide adequate protection for our trade secrets
or other proprietary information for a number of reasons.
Any of our patents could be invalidated, circumvented or challenged, or the
rights granted thereunder may not provide competitive advantages to us. Any of
our pending or future patent applications might not be issued within the scope
of the claims sought, if at all. Furthermore, others may develop similar
products or software or duplicate our products or software. Similarly, others
might design around the patents owned by us, or third parties may assert
intellectual property infringement claims against us. In addition, foreign
intellectual property laws may not adequately protect our intellectual property
rights abroad. A failure or inability to protect proprietary rights could have a
material adverse effect on our business, financial condition and results of
operations.
Even if our intellectual property rights are adequately protected, litigation
may be necessary to enforce patents, copyrights and other intellectual property
rights, to protect our trade secrets, to determine the validity of and scope of
proprietary rights of others or to defend against claims of infringement or
invalidity. Litigation, even if wholly without merit, could result in
substantial costs and diversion of resources, regardless of the outcome. If any
claims or actions are asserted against us, we may choose to seek a license under
a third party's intellectual property rights. However, such a license may not be
available under reasonable terms or at all.
Dependence on Key Personnel
Our future operating results depend in significant part upon the continued
contributions of key technical and senior management personnel, many of who
would be difficult to replace. Future operating results also depend upon the
ability to attract and retain qualified management and technical personnel.
Competition for such personnel is intense, and we may not be successful in
attracting or retaining such personnel. Only a limited number of persons with
the requisite skills to serve in these positions may exist and it may be
increasingly difficult for us to hire such personnel. Nonetheless business
conditions forced us to reduce our workforce by 35% in 2001. It may be difficult
to reassemble the collective and individual strength of our previous workforce.
We have experienced and may continue to experience employee turnover for example
due to the 2001 layoffs. Such turnover could adversely impact our business.
Volatility of Stock Price
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. Such fluctuations have often been unrelated to the operating
performance of individual affected companies. Companies with liquidity problems
also often experienced 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
42
technological innovations or new products or enhancements by us or our
competitors, developments in the emerging countries' economies, sales by
competitors, sales 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 and general conditions in
our market, or the economy, could cause the price of our Common Stock to
fluctuate. The market price of our Common Stock may continue to decline
substantially, or otherwise continue to experience significant fluctuations in
the future, including fluctuations that are unrelated to our performance.
Dividends
We have never declared or paid cash dividends on our common stock, and we
anticipate that any future earnings will be retained for investment in the
business. Any payment of cash dividends in the future will be at the discretion
of our board of directors and will depend upon, among other things, our
earnings, financial condition, capital requirements, extent of indebtedness and
contractual restrictions with respect to the payment of dividends.
Change of Control Inhibition
Our stockholder rights ("poison pill") 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 common stock.
The rights of the holders of 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 ("poison pill")
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 (20% or more in the case of the State of
Wisconsin Investment Board and Firsthand Capital Management) of the Common Stock
will be substantially diluted. Future issuance of stock or any additional
preferred stock could have the effect of making it more difficult for a third
party to acquire a majority of our outstanding voting stock.
43
Item 7a. 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 United States dollars. The
functional currency 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 December 31, 2001, 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.
Interest Rate Risk
Our Notes bear interest at a fixed rate; therefore, our financial condition and
results of operations would not be affected by interest rate changes in this
regard. Interest earned on our cash balances is not material.
44
Item 8. FINANCIAL STATEMENTS
P-Com, Inc.
Index to Consolidated Financial Statements and Financial Statement Schedule
Page
Financial Statements:
Report of Independent Accountants 46
Consolidated Balance Sheets at December 31, 2001 and 2000 47
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000, and 1999 48
Consolidated Statements of Stockholders' Equity and
Comprehensive Loss for the years ended December 31, 2001,
2000, and 1999 49
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000, and 1999 51
Notes to Consolidated Financial Statements 52
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 76
All other schedules have been omitted because they are not required, are not
applicable, or the information is included in the consolidated financial
statements or notes thereto.
45
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of P-Com, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of P-Com,
Inc. and its subsidiaries at December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has an accumulated deficit that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. These financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting associated with revenue recognition effective
January 1, 2000.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
March 29, 2002
46
P-Com, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
December 31,
2001 2000
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 7,103 $ 27,541
Restricted cash 2,911 --
Accounts receivable, net of allowances of
$1,080 and $3,810, respectively 7,926 63,458
Inventory 31,946 62,838
Prepaid expenses and notes receivable 7,138 13,668
--------- ---------
Total current assets 57,024 167,505
Property and equipment, net 17,627 23,166
Goodwill and other assets 17,583 25,548
--------- ---------
Total assets $ 92,234 $ 216,219
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 8,143 $ 36,093
Other accrued liabilities 29,767 43,678
Convertible subordinated notes 29,299 --
Notes payable -- 10,911
--------- ---------
Total current liabilities 67,209 90,682
Other long-term liabilities 769 991
Convertible subordinated notes -- 29,299
--------- ---------
Total liabilities 67,978 120,972
--------- ---------
Commitments and contingencies (notes 12 and 13)
Stockholders' equity:
Series A Preferred Stock -- --
Common Stock, $0.0001 par value; 145,000 shares authorized at
December 31, 2001 and 2000, respectively; 84,824 and 80,631 shares issued
and outstanding at December 31, 2001 and 2000,
respectively 8 8
Additional paid-in capital 319,994 316,515
Accumulated deficit (294,460) (218,922)
Accumulated other comprehensive loss (1,286) (2,354)
--------- ---------
Total stockholders' equity 24,256 95,247
--------- ---------
Total liabilities and stockholders' equity $ 92,234 $ 216,219
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
47
P-Com, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
2001 2000 1999
---------- ---------- ----------
Sales:
Product $ 73,236 $ 183,606 $ 116,409
Service 30,838 50,795 40,470
---------- ---------- ----------
Total sales 104,074 234,401 156,879
---------- ---------- ----------
Cost of sales:
Product 94,890 160,965 107,378
Service 23,624 38,170 28,274
---------- ---------- ----------
Total cost of sales 118,514 199,135 135,652
---------- ---------- ----------
Gross profit (loss) (14,440) 35,266 21,227
---------- ---------- ----------
Operating expenses:
Research and development 19,800 20,241 32,431
Selling and marketing 7,776 11,972 17,135
General and administrative 33,371 26,893 25,179
Goodwill amortization 8,034 19,598 6,547
Restructuring charges -- -- 3,300
---------- ---------- ----------
Total operating expenses 68,981 78,704 84,592
---------- ---------- ----------
Loss from continuing operations (83,421) (43,438) (63,365)
Interest expense (1,961) (4,750) (8,175)
Gain on sale of a subsidiary 9,814 -- --
Other expense, net (545) (6,977) (2,537)
---------- ---------- ----------
Loss from continuing operations before income taxes,
extraordinary items and cumulative effect of accounting change (76,113) (55,165) (74,077)
Provision (benefit) for income taxes (575) 11,140 1,407
---------- ---------- ----------
Loss from continuing operations before extraordinary items
and cumulative effect of accounting change (75,538) (66,305) (75,484)
Discontinued operations:
Loss from operations -- (4,000) (13,903)
Loss on disposal -- -- (26,901)
---------- ---------- ----------
-- (4,000) (40,804)
Extraordinary gain on retirement of Notes -- 1,890 13,239
Cumulative effect of accounting change -- (1,534) --
---------- ---------- ----------
Net loss $ (75,538) $ (69,949) $ (103,049)
========== ========== ==========
Net loss applicable to Common Stockholders:
Net loss (75,538) (69,949) (103,049)
Loss on conversion of Preferred Stock to Common Stock -- -- (18,521)
---------- ---------- ----------
Net loss applicable to Common Stockholders $ (75,538) $ (69,949) $ (121,570)
========== ========== ==========
Basic and diluted loss per share:
Loss from continuing operations $ (0.91) $ (0.85) $ (1.32)
Loss from discontinued operations -- (0.05) (0.72)
Extraordinary gain on retirement of Notes -- 0.02 0.23
Cumulative effect of accounting change -- (0.02) --
Charges related to Preferred Stock discount and loss
on conversion of Preferred Stock to Common Stock -- -- (0.32)
---------- ---------- ----------
Basic and diluted net loss per share applicable to Common
Stockholders $ (0.91) $ (0.90) $ (2.13)
========== ========== ==========
Shares used in per share computations:
Basic and diluted 82,755 78,000 56,995
========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
48
P-Com, Inc.
Consolidated Statement of Stockholders' Equity and Comprehensive Loss
(in thousands)
Accumulated
Other
Retained Compre- Compre-
Common Stock Additional Earnings hensive hensive
----------------------- Paid-In (Accumulated Income Income
Shares Amount Capital Deficit) (Loss) (Loss) Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 45,870 5 145,246 (45,924) 82 99,409
Issuance of Common Stock, net of
issuance costs 10,068 1 38,274 -- -- 38,275
Issuance of Common Stock in
exchange for convertible notes 5,171 -- 36,095 -- -- 36,095
Charge to Common stockholders
resulting from the conversion of
redeemable Preferred Stock to
redeemable Common Stock -- -- (10,190) -- -- (10,190)
Charge to Common stockholders
resulting from repricing of
warrants -- -- (2,000) -- -- (2,000)
Charge to Common stockholders
resulting from penalties due
to certain Common stockholders -- -- (6,331) -- -- (6,331)
Issuance of Common Stock and
Common Stock warrants in
satisfaction of penalties
due to certain Common
stockholders 220 -- 4,886 -- -- 4,886
Reclassification of Mandatorily
redeemable Common Stock and
Common Stock warrants
resulting from the cancellation
of Redemption rights 5,135 1 29,007 -- -- 29,008
Issuance of Common Stock upon
exercise of stock options 725 -- 3,016 -- -- 3,016
Issuance of Common Stock under
employee stock purchase plan 211 -- 718 -- -- 718
Cumulative translation adjustment -- -- -- -- (622) (622) (622)
Net loss -- -- -- (103,049) -- (103,049) (103,049)
----------
Comprehensive income (loss) (103,671)
---------- ---------- ---------- ---------- ---------- ========== ----------
Balance at December 31, 1999 67,400 7 238,721 (148,973) (540) 89,215
The accompanying notes are an integral part of these
consolidated financial statements.
49
P-Com, Inc.
Consolidated Statement of Stockholders' Equity and Comprehensive Loss
(in thousands)
Accumulated
Other
Retained Compre- Compre-
Common Stock Additional Earnings hensive hensive
----------------------- Paid-In (Accumulated Income Income
Shares Amount Capital Deficit) (Loss) (Loss) Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 67,400 7 238,721 (148,973) (540) 89,215
Issuance of Common Stock for cash,
net of issuance costs of $125 10,531 1 61,206 -- -- 61,207
Issuance of warrants for
Common Stock in conjunction with
line of credit borrowings -- -- 1,902 -- -- 1,902
Conversion of notes payable to
Common Stock 677 -- 4,382 -- -- 4,382
Issuance of Common Stock upon
exercise of warrant 158 600 600
Stock based compensation
expense from acceleration of
option vesting -- -- 372 -- 372
Issuance of Common Stock upon
exercise of stock options 1,473 -- 8,098 -- -- 8,098
Issuance of Common Stock under
employee stock purchase plan 392 -- 1,234 -- -- 1,234
Cumulative translation adjustment -- -- -- -- (1,814) (1,814) (1,814)
Net loss -- -- -- (69,949) -- (69,949) (69,949)
----------
Comprehensive income (loss) $ (71,763)
---------- ---------- ---------- ---------- ---------- ========== ----------
Balance at December 31, 2000 80,631 8 316,515 (218,922) (2,354) 95,247
Issuance of Common Stock for cash 3,798 -- 3,000 -- -- 3,000
Stock-based compensation expense -- -- 29 -- -- 29
Issuance of Common Stock under
employee stock purchase plan 395 -- 450 -- -- 450
Cumulative translation adjustment -- -- -- -- 1,068 1,068 1,068
Net loss -- -- -- (75,538) -- (75,538) (75,538)
----------
Comprehensive income (loss) $ (74,470)
---------- ---------- ---------- ---------- ---------- ========== ----------
Balance at December 31, 2001 84,824 $ 8 $ 319,994 $ (294,460) $ (1,286) $ 24,256
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
50
P-Com, Inc.
Consolidated Statements of Cash Flows
(in thousands)
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net loss $ (75,538) $ (69,949) $(103,049)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 9,155 10,948 11,783
Amortization of goodwill and other intangible assets 2,411 4,598 7,798
Write-off of goodwill 5,855 15,000 --
Loss on disposal of property and equipment 1,386 6,206 2,157
Compensation expense related to stock options 29 372 --
Deferred income taxes -- 9,858 (180)
Inventory and other charges 30,000 21,679 15,100
Retirement of Notes -- (1,890) (13,239)
(Gain)Loss on sale of subsidiary (9,814) 855 --
Loss related to discontinued operations -- 4,000 26,901
Amortization of stock warrants 159 1,745 --
Cumulative effect of change in method of accounting -- 1,534 --
Accounts receivable charge 11,837 -- 21,400
Writedown of long term investment -- 1,320 --
Changes in assets and liabilities:
Accounts receivable 37,848 (23,034) (18,501)
Inventory 5,964 (36,940) 563
Prepaid expenses and notes receivable 7,007 473 3,800
Other assets -- 1,559 295
Accounts payable (28,454) 6,409 1
Other accrued liabilities (15,296) 8,282 17,946
Income taxes payable -- -- (2,189)
--------- --------- ---------
Net cash used in operating activities (17,451) (36,975) (29,414)
--------- --------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (2,862) (8,037) (6,054)
Cash paid on disposal of discontinued operations -- (2,000) --
Proceeds from sale of property and equipment -- 700 1,373
Proceeds from sale of subsidiary 12,088 6,860 --
Increase in restricted cash (2,911) -- --
--------- --------- ---------
Net cash provided by (used in) investing activities 6,315 (2,477) (4,681)
--------- --------- ---------
Cash flows from financing activities:
Payment of notes payable (11,070) (12,487) (21,525)
Proceeds from issuance of Common Stock, net of expenses 3,000 61,206 38,274
Proceeds from issuance of Common Stock under employee stock purchase
plan 450 -- --
Proceeds from exercise of stock options and warrants -- 9,932 3,734
Repayments of long-term obligations and capital leases (2,568) (1,223) (3,378)
Repayment from (issuance of) notes receivable 864 (250) --
--------- --------- ---------
Net cash provided by (used in) financing activities (9,324) 57,178 17,105
--------- --------- ---------
Effect of exchange rate changes on cash 22 (1,814) (622)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (20,438) 15,912 (17,612)
--------- --------- ---------
Cash and cash equivalents at beginning of year 27,541 11,629 29,241
--------- --------- ---------
Cash and cash equivalents at end of year $ 7,103 $ 27,541 $ 11,629
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
51
P-Com, Inc.
Notes to Consolidated Financial Statements
1. The Company and Summary of Significant Accounting Policies
The Company
P-Com, Inc. (the "Company") was incorporated in Delaware on August 23, 1991 to
engage in the design, manufacture and marketing of millimeter wave radio systems
for use in the worldwide wireless telecommunications market. The Company also
provides network services including system and program planning and management,
path design, and installation for the wireless communication market through its
service sales segment.
Liquidity
Through December 31, 2001 the Company has incurred substantial losses and
negative cash flows from operations and, as of December 31, 2001, had an
accumulated deficit of $294.5 million. For the year ended December 31, 2001 the
Company recorded a net loss of $75.5 million and used $17.5 million cash in
operating activities.
The Company's $29.3 million of 4.25% Convertible Subordinated Notes mature in
November 2002. In order to conserve cash, the Company has implemented cost
cutting measures and is currently in negotiation to extend repayment of (or
exchange for equity) the Notes, and is actively seeking additional debt and
equity financing. Additionally, the Company implemented restructuring programs
in the second and third quarters of 2001. If the Convertible Subordinated Note
holders elect to demand payment on their notes when due, the Company would have
insufficient capital to fund its operations. Even if the Notes are renegotiated,
if the Company fails to generate sufficient revenues from new and existing
products sales, induce other creditors to forebear or convert to equity, raise
additional capital or obtain new debt financing, the Company would have
insufficient capital to fund its operations. Without sufficient capital to fund
the Company's operations, the Company would no longer be able to continue as a
going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or to amounts and
classification of liabilities that may be necessary if the Company is unable to
continue as a going concern.
Summary of Significant Accounting Policies
Management's use of estimates and assumptions
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates,
and such differences could be material and affect the results of operations
reported in future periods.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Foreign currency translation
The functional currencies of our foreign subsidiaries are the local currencies.
Assets and liabilities of these subsidiaries are translated into 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.
52
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
Accumulated net translation adjustments are recorded as a component of
comprehensive income (loss) in stockholders' equity. Foreign exchange
transaction gains and losses are included in the results of operations in the
periods incurred, and were not material in all periods presented.
Fair value of financial instruments
The Company measures its financial assets and liabilities in accordance with
accounting principles generally accepted in the United States of America. The
estimated fair value of our Convertible Subordinated Notes was approximately 30%
of par or $8.8 million at December 31, 2001 compared to 70% of par or $20.4
million at December 31, 2000. The estimated fair value of cash, accounts
receivable and payable, and accrued liabilities at December 31, 2001 and 2000
approximated cost due to the short maturity of these assets and liabilities.
Cash and cash equivalents
The Company considers all highly liquid debt instruments with a maturity when
acquired of three months or less to be cash equivalents.
Restricted cash
As of December 31, 2001, the Company had $2.9 million of restricted cash
resulting from an attachment in the third quarter of 2001 related to a dispute
with a vendor.
Revenue recognition
Revenue from product sales is recognized upon transfer of title and risk of
loss, which is upon shipment of the product provided no significant obligations
remain and collection is probable. Provisions for estimated warranty repairs,
returns and other allowances are recorded at the time revenue is recognized.
Revenue from service sales is recognized ratably over the contractual period or
as the service is performed.
Inventory
Inventory is stated at the lower of cost or market, cost being determined on a
first-in, first-out basis. Inventory is reduced, if necessary, to its net
realizable value based on customer orders and demand forecasts using
management's best estimate given the information currently available.
Property and equipment
Property and equipment are stated at cost and include tooling and test
equipment, computer equipment, furniture, land and buildings, and
construction-in-progress. Depreciation is computed using the straight-line
method based upon the useful lives of the assets ranging from three to seven
years. 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.
Research and development and software development costs
Research and development costs are expensed as incurred. The Company's software
products are integrated into its hardware products. Software development costs
incurred prior to the establishment of technological feasibility are expensed as
incurred. Software development costs incurred subsequent to the establishment of
technological feasibility and before general release to customers are
capitalized, if material. To date, all software development costs incurred after
the establishment of technological feasibility have been immaterial.
53
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the
net assets of acquired companies accounted for as purchase business
combinations. Goodwill is amortized on a straight-line basis over the period of
expected benefit of 20 years.
Impairment of long-lived assets
In the event that facts and circumstances indicate that the long-lived assets
may be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the asset's carrying amount to determine if
a write-down is required.
Comprehensive income (loss)
Under SFAS 130, "Reporting Comprehensive Income", the Company is required to
display comprehensive income and its components as part of our full set of
financial statements. The measurement and presentation of net income did not
change. Comprehensive income comprises net income and other comprehensive
income. Other comprehensive income includes certain changes in equity of the
Company that are excluded from net income. Specifically, SFAS 130 requires
unrealized gains and losses on the Company's foreign currency translation, which
were reported separately in stockholders' equity, to be included in, accumulated
other comprehensive income. Comprehensive income (loss) in 2001, 2000 and 1999
has been reflected in the Consolidated Statement of Stockholders' Equity and
Comprehensive Loss.
Accounting for stock-based compensation
The Company accounts for stock-based employee compensation arrangements using
the intrinsic value method as prescribed in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and Financial
Accounting Standards Board Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation" ("FIN 44"). Accordingly, compensation
cost for stock options is measured as the excess, if any, of the fair value of
our stock at the date of grant over the stock option exercise price. The Company
accounts for stock issued to non-employees in accordance with the provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") and Emerging Issues Task Force Consensus No.
96-18, "Accounting for Equity Instruments that are offered to other than
employees for acquiring or in conjunction with selling goods or services" ("EITF
96-18"). Under SFAS No. 123 and EITF 96-18, stock option awards issued to
non-employees are accounted for at their fair value, determined using the
Black-Scholes option pricing method. The fair value of each non-employee stock
option or award is remeasured at each period end until a commitment date is
reached, which is generally the vesting date.
Concentration of credit risk
Financial instruments that potentially subject 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.
54
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
To date, the Company has sold most of its products in international markets.
Sales to several customers have been denominated in British pounds and Euro and,
at December 31, 2001 and 2000, amounts due from these customers represented
36.9% and 22%, respectively, of accounts receivable. Any gains and/or losses
incurred on the settlement of these receivables are included in the financial
statements as they occur.
The Company extends credit terms to international customers of up to 120 days,
which is consistent with local business practices. 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 120
day payment terms, COD or letters of credit.
At December 31, 2001 and 2000, approximately 61.9% and 66.0%, respectively, of
trade accounts receivable represent amounts due from four and three customers,
respectively. For the year ended December 31, 2001, 2000 and 1999, three, two
and three customers accounted for 44.1%, 40.0% and 44.0% of total sales
respectively.
Reclassifications
Certain amounts reported in prior years' consolidated financial statements have
been reclassified to conform with the current year presentation.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued FASB
Statements Nos. 141 and 142 (FAS 141 and FAS 142), "Business Combinations" and
"Goodwill and Other Intangible Assets." FAS 141 replaces APB 16 and eliminates
pooling-of-interests accounting prospectively. It also provides guidance on
purchase accounting related to the recognition of intangible assets and
accounting for negative goodwill. FAS 142 changes the accounting for goodwill
from an amortization method to an impairment-only approach. Under FAS 142,
goodwill will be tested annually and whenever events or circumstances occur
indicating that goodwill might be impaired. FAS 141 and FAS 142 are effective
for all business combinations completed after June 30, 2001. Upon adoption of
FAS 142, amortization of goodwill recorded for business combinations consummated
prior to July 1, 2001 will cease, and intangible assets acquired prior to July
1, 2001 that do not meet the criteria for recognition under FAS 141 will be
reclassified to goodwill. The Company will adopt FAS 142 on January 1,2002. In
connection with the adoption of FAS 142, the Company will be required to perform
a transitional goodwill impairment assessment. The Company has not yet
determined the effect the goodwill impairment assessment will have on its
financial position and results of operations.
In June 2001, the FASB issued FASB Statement No. 143 (FAS 143), "Accounting for
Asset Retirement Obligations". FAS 143 requires that the fair value of a
liability for asset retirement obligation be realized in the period in which it
is incurred if a reasonable estimate of fair market value can be made. Companies
are required to adopt FAS 143 for fiscal years beginning after June 15,2002, but
early adoption is encouraged. The Company has not yet determined the impact this
standard will have on its financial position and results of operations.
55
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
In August 2001, the FASB issued FASB Statement No. 144 (FAS 144). "Accounting
for the Impairment or Disposal of Long-lived Assets". FAS 144 supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Busines, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", for the disposal of
a segment of a business (as previously defined in that Opinion). This statement
also amends ARB No. 51, Consolidated Financial Statements, to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. The Company adopted FAS 144 on January 1, 2002. The Company does not
expect the adoption of this standard will have a material impact on its
financial position and results of operations.
2. Change in Method of Accounting
Effective January 1, 2000, the Company revised its method of accounting
associated with revenue recognition for sales of equipment as a result of the
adoption of Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in
Financial Statements." The Company previously recognized revenue upon shipment
of product, provided no significant obligations remained and collection was
probable. This policy was changed to recognition upon transfer of title and risk
of loss, which is generally upon shipment of the product provided no significant
obligations remain and collection is probable. In accordance with SAB No. 101,
the Company has recorded a non-cash charge of approximately $1.5 million ($1.5
million, after tax) on January 1, 2000 to account for the cumulative effect of
this change in method of accounting.
The cumulative effect of this change in method of accounting primarily resulted
from one contract where revenue had historically been recognized upon shipment,
however, under the terms of the underlying contract, title did not transfer
until subsequent receipt of payment. Under the Company's revised revenue
recognition method, revenue relating to such sales is deferred until title
transfers. Primarily as a result of this, approximately $12.0 million in revenue
and $10.5 million in related costs originally recognized in 1999 were deferred
and re-recognized in the first quarter of 2000.
The following table provides selected financial data for 1999 as reported and on
a Pro Forma basis assuming SAB No. 101 had been in effect for that year (in
thousands, except per share data):
1999
-------------------------
As Reported Pro Forma
----------- ---------
Loss from Continuing Operations Before Extraordinary
Items and Cumulative Effect of Accounting Change $ (75,484) $ (75,638)
Net Loss (103,049) (103,203)
Net Loss Applicable to Common Stockholders (121,570) (121,724)
Basic and Diluted Net Loss Applicable to Common Stockholders $ (2.13) $ (2.14)
56
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
3. Balance Sheet Components
Inventory consists of the following (in thousands of dollars):
December 31,
2001 2000
-------- --------
Raw materials $ 37,829 $ 36,366
Work-in-process 11,912 20,757
Finished goods 19,767 25,155
Inventory at customer sites 1,035 6,550
-------- --------
70,543 88,828
Less: Inventory reserves (38,597) (25,990)
-------- --------
$ 31,946 $ 62,838
======== ========
Property and equipment consists of the following (in thousands of dollars):
December 31,
Useful Life 2001 2000
------------ -------- --------
Tooling and test equipment 3 to 5 years $ 34,953 $ 41,839
Computer equipment 3 years 7,979 11,809
Furniture and fixtures 5 years 3,140 3,822
Land and buildings 5 to 7 years 2,337 2,923
Construction-in-process 799 --
-------- --------
49,208 60,393
Less: Accumulated deprecation and amortization (31,581) (37,227)
-------- --------
$ 17,627 $ 23,166
======== ========
The above amounts include items under capital leases and related accumulated
amortization of $7,158 and $1,979 at December 31, 2001 and $3,364 and $974 at
December 31, 2000, respectively.
Goodwill and other assets consist of the following (in thousands):
December 31,
Goodwill: 2001 2000
-------- --------
CSM(P-Com Network Services) $ 22,295 $ 22,295
Cylink 34,261 34,261
-------- --------
56,556 56,556
Less: Accumulated amortization (39,647) (31,616)
-------- --------
Net goodwill 16,909 24,940
Other assets 674 608
-------- --------
$ 17,583 $ 25,548
======== ========
In 2001 and 2000, management reviewed the carrying value of the goodwill related
to the business line acquired from Cylink. Based upon its assessment of future
cash flows estimated to be provided by the business line acquired from Cylink, a
$5.8 million and $15 million impairment charge was recorded in 2001 and 2000,
respectively.
57
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
Other accrued liabilities consist of the following (in thousands):
December 31,
2001 2000
-------- --------
Purchase commitment $ 10,002 $ 6,687
Deferred contract obligation (a) 8,000 8,000
Deferred revenue 2,280 11,920
Accrued employee benefits 1,238 2,440
Accrued warranty 2,843 6,323
Other 2,820 5,106
Income taxes payable 281 1,566
Lease obligations 2,095 1,428
Interest payable 208 208
-------- --------
$ 29,767 $ 43,678
======== ========
(a) Under a joint license and development contract, the Company determined that
a related Original Equipment Manufacturer ("OEM") agreement provided for
subsequent payments of $8 million specifically earmarked for marketing our
products manufactured under this joint license and development contract. As of
December 31, 2001 and 2000, payment obligations of $8 million under this
contract remained outstanding.
Other long-term liabilities consist of the following (in thousands):
December 31,
2001 2000
-------- --------
Capital lease obligations $ 680 $ 703
Other 89 288
-------- --------
$ 769 $ 991
======== ========
4. Borrowing Arrangements
On March 29, 2001, the Company and Foothill Capital Corporation entered into a
Loan and Security Agreement with a borrowing capacity of up to $25 million. The
Loan and Security Agreement was to mature in March 2004. Borrowings under the
Loan and Security Agreement were limited to 85% of eligible accounts receivable.
At December 31, 2001, there were no outstanding borrowings under the Loan and
Security Agreement. The Company was not in compliance with certain financial
covenants in this Loan and Security Agreement as of December 31, 2001. The
Agreement was terminated on February 6, 2002.
In January 2000 the Company entered into a secured line-of-credit agreement for
$12 million. The line matured and was repaid in full on January 31, 2001.
Borrowings under the line bore interest at the greater of prime rate plus 2% (8%
per annum at December 31, 2000). In connection with the loan agreement, the
Company issued the lender warrants to purchase 200,000 shares of common stock at
$5.71 per share. The warrants are fully exercisable, are subject to
anti-dilution clauses and expire on January 31, 2005. The Company recorded a
discount to amounts recorded under the loan agreement of approximately $2
million, which represented the estimated fair value of the warrants. Such
discount was amortized to interest expense over the term of the loan resulting
in $159,000 and $1,745,0000 of interest expense in 2001 and 2000, respectively.
58
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
The Company entered into a revolving line-of-credit agreement on May 15, 1998,
that provided for borrowings of up to $50.0 million. The maximum revolving
commitment, as amended, had been reduced to $30.0 million until maturity on
January 15, 2000. At December 31, 1999, the Company had been advanced
approximately $23.6 million and had used the remaining $3.4 million to secure
letters of credit under such line. In January 2000, the balance was paid in full
and the line-of-credit agreement was terminated. Borrowings under the line were
secured by the assets of the Company and bore interest at either a base interest
rate or a variable interest rate.
On November 5, 1997, the Company issued $100 million in 4 1/4% Convertible
Subordinated Notes (the "Notes") due November 1, 2002. The Notes are convertible
at the option of the holder into shares of our Common Stock at an initial
conversion price of $27.46 per share and at $24.73 per share subsequent to
October 2000. Interest on the Notes is paid semi-annually on May 1 and November
1 of each year. In 2000 and 1999, the Company issued Common Stock in exchange
for a portion of these Notes and recorded extraordinary gains as noted below.
A summary of Convertible Subordinated Note activity is as follows:
Shares Gain on
Amount Issued Conversion
---------- ---------- ----------
(millions) (thousands) (millions)
Issuance of $100 million in Convertible
Subordinated Notes in November 1997 100 -- $ --
---------- ---------- ----------
Balance at December 31, 1997 100 -- --
Conversion of Notes in December 1998 (14) 2,467 5
---------- ---------- ----------
Balance at December 31, 1998 86 2,467 5
Conversion of Notes in January and February 1999 (26) 2,812 7
Conversion of Notes in December 1999 (24) 2,359 6
---------- ---------- ----------
Balance at December 31, 1999 36 7,638 18
Conversion of Notes in January 2000 (7) 677 2
---------- ---------- ----------
Balance at December 31, 2000 and 2001 $ 29 8,315 $ 20
========== ========== ==========
5. Capital Stock
The authorized capital stock of the Company consists of 145 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). On March 15, 2002 the Company filed a proxy statement with
the Securities and Exchange Commission in connection with a solicitation of
shareholder consent for an amendment of the Company's certificate of
incorporation to increase the authorized shares of Common Stock to 345 million.
59
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
Preferred Stock
The Board of Directors has the authority to issue shares of Preferred Stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the holders of Common Stock.
Mandatorily Redeemable Convertible Preferred Stock and warrants
In December 1998, the Company completed a private placement of 15,000 shares of
the Series B Convertible Participating Preferred Stock (the "Series B") for
$1,000 per share and issued mandatorily redeemable warrants to purchase up to
1,242,000 shares of Common Stock at $3.47 per share. A portion of the proceeds
was allocated to the warrants based on their fair value and accounted for as a
discount to the Series B. The remainder of the proceeds was allocated to the
Series B. Because the Series B was immediately convertible into shares of Common
Stock, the discount was amortized as a reduction of income available to holders
of Common Stock in the amount of $1.8 million upon the issuance of the Series B.
The Company did not record a beneficial conversion feature related to Series B
because the conversion price, using the conversion terms that are most
beneficial to the holder, was greater than the market price of the Common Stock
on the date of issuance.
Pursuant to the registration rights agreement the Company entered into in
connection with the issuance of the Series B, as amended by the exchange
agreements, the Company was required to register the Series B for resale on or
before July 19, 1999. See additional discussion below regarding premiums and
penalties related to this requirement.
The mandatorily redeemable warrants issued in connection with Series B were
valued at $1,839,000 using the Black-Scholes option-pricing model with the
following assumptions used: expected volatility of 65%; a weighted-average
risk-free interest rate of 4.5% and a weighted-average expected life of 5 years.
The initial exercise price for the Common Stock underlying the warrants was
$3.47.
In June 1999, in connection with the conversion of the Series B to Common Stock,
the mandatorily redeemable warrants were exchanged for 1,242,000 non-mandatorily
redeemable warrants having an exercise price of$3.00. As a result of the
exchange and repricing of warrants, the Company recorded a $2.0 million charge
to loss attributable to Common Stockholders representing the difference in fair
value of the warrants before and after the exchange and repricing. The warrants
are immediately exercisable until the earlier of: (1) December 22, 2002, or (2)
the date of the closing of a consolidation, merger of other business combination
with or into another entity pursuant to which the Company does not survive. In
the event the Company merges or consolidates with any other company, the warrant
holders are entitled to similar choices as to the consideration they will
receive in such merger or consolidation as are provided to the holders of the
Series B. In addition, the number of shares issuable upon exercise of the
warrants is subject to an anti-dilution adjustment if the Company sells Common
Stock or securities convertible into or exercisable for Common Stock (excluding
certain issuances such as Common Stock issued under employee, director or
consultant benefit plans) at a price per share less than $3.47 (subject to
adjustment). These warrants were subsequently exchanged for Common Warrants as
discussed below.
60
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
Common Stock
In July 2001 the Company issued approximately 3,798,000 shares of unregistered
Common Stock at a per share price of $0.79, for aggregate proceeds of $ 3
million.
In January 2000, the Company sold approximately 7,531,000 shares of Common Stock
at a per share price of $5.71, for an aggregate purchase price of $43.0 million.
The shares were subsequently registered for resale in October 2000. As a result
of the late registration of these shares, the Company was required to issue the
holders warrants to purchase 1,358,000 shares of Common Stock at an exercise
price of $3.80 per share.
In August 2000, the Company sold 3,000,000 shares of unregistered Common Stock
at a per share price of $6.11, for an aggregate purchase price of $18.2 million.
The shares have subsequently been registered for resale.
In June 1999, the Company received net proceeds of $38.3 million from the sale
10,068,000 shares of unregistered Common Stock. The shares have subsequently
been registered for resale.
In June 1999, the Company exchanged 5,135,000 shares of mandatorily redeemable
Common Stock for all 15,000 shares of the Series B. As a result of this
exchange, the Company recorded a $10.2 million charge to loss attributable to
Common Stockholders representing the difference between the book value of the
Series B and the market value of the mandatorily redeemable common stock net of
incurred premiums and penalties relating to the non-registration of the Series
B. Upon the occurrence of certain events outside our control, each share of
Common Stock was redeemable at the holder's option at the greater of $4.00 per
share or the highest closing price during the period beginning on the date of
the holder's notice to redeem to the date on which the Company redeems the
stock. In connection with the exchange agreements, each holder of the Series B
agreed to waive all premiums which had been accrued and penalties which had been
incurred in connection with the Series B as of the date of exchange. As
discussed above, the Company also reacquired outstanding mandatorily redeemable
warrants to purchase 1,243,000 shares of Common Stock, which were held by the
holders of the Series B in exchange for new warrants to purchase 1,243,000
shares of Common Stock with an exercise price of $3.00 per share rather than
$3.47 per share.
In November 1999, the Company entered into agreements with the holders of the
mandatorily redeemable Common Stock to eliminate their redemption rights and
their past and future late registration premiums and penalties in exchange for
212,000 shares of Common Stock issued on November 16, 1999 at $4.72 per share,
warrants to purchase 443,000 shares of Common Stock issued on January 20, 2000
at an exercise price of $8.50 per share, and a $400,000 promissory note
convertible (with interest) into Common Stock at a conversion price of $4.72 per
share. As a result of this transaction, the Company recorded a $6.3 million
charge to loss attributable to Common Stockholders representing the difference
between the value of the redemption rights and the market value of the Common
Stock issued, the fair value of the warrants issued, and the convertible
promissory note net of accrued interest eliminated as part of the transaction.
This note was converted into approximately 95,000 shares of common stock in the
fourth quarter of 2000.
At December 31, 2001, the Company had 10,504,000 shares of Common Stock reserved
for issuance of warrants and options.
61
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
Common Stock Warrants
As a result of the issuance of the Common Stock on July 31, 2001, the warrant
exercise price and number of shares issuable mentioned below were adjusted in
accordance with the formula contained in the anti-dilution clauses of the
warrants.
A summary of issued and outstanding warrants to purchase Common Stock is as
follows:
Anti- Old New
Number (in dilution Exercise Exercise
thousands) adjustment Total Price Price
------------------------------------------------------------------
June 1999 - issuance 1,242 43 1,285 3.00 2.90
August 1999 -issuance 180 7 187 5.00 4.81
November 1999 issuance 443 -- 443 8.50 8.50
January 2000 - issuance 200 7 207 5.71 5.52
October 2000 - issuance 1,358 -- 1,358 3.80 3.80
October 2000 - exercise (158) -- (158) 3.80 3.80
-----------------------------------
Balance at December 31, 2001 3,265 57 3,322
===================================
Stockholder Rights Agreement
On September 26, 1997, the Board of Directors of the Company adopted a
Stockholder Rights Agreement (the "Agreement"). Pursuant to the Agreement,
Rights (the "Rights") were distributed as a dividend on each outstanding share
of its Common Stock held by stockholders of record as of the close of business
on November 3, 1997. Each right will entitle stockholders to buy Series A
Preferred at an exercise price of $125.00 upon certain events. The Rights will
expire ten years from the date of the Agreement.
In general, the Rights will be exercisable only if a person or group acquires
15% or more of the Company's Common Stock or announces a tender offer, the
consummation of which would result in ownership by a person or group of 15% or
more of the Company's Common Stock. In the case of the State of Wisconsin
Investment Board and Firsthand Capital Management, the threshold figure is 20%
rather than 15%. If, after the Rights become exercisable, the Company is
acquired in a merger or other business combination transaction, or sells 50% or
more of its assets or earning power, each unexercised Right will entitle its
holder to purchase, at the Right's then-current exercise price, a number of the
acquiring Company's common shares having a market value at the time of twice the
Right's exercise price. At any time within ten days after the public
announcement that a person or group has acquired beneficial ownership of 15% or
more of the Company's Common Stock, the Board, in its sole discretion, may
redeem the Rights for $0.0001 per Right.
6. Employee Benefit Plans
Stock Option Plans. On January 11, 1995, our Board of Directors adopted the 1995
Stock Option/Stock Issuance Plan (the "1995 Plan") as a successor to its 1992
Stock Option Plan (the "1992 Plan").
62
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
The 1995 Plan authorizes the issuance of up to 14,934,459 shares of Common Stock
as of December 31, 2001.
The 1995 Plan contains three equity incentive programs: a Discretionary Option
Grant Program, and a Stock Issuance Program for officers and employees of the
Company and independent consultants and advisors to the Company and an Automatic
Option Grant Program for non-employee members of our Board of Directors.
Options under the Discretionary Option Grant Program may be granted at not less
than 100% of the fair market value per share of common stock on the grant date
with exercise periods not to exceed ten years. The plan administrator is
authorized to issue tandem stock appreciation rights and limited stock
appreciation rights in connection with the option grants.
The Stock Issuance Program provides for the sale of common stock at a price not
less than 100% of fair market value. Shares may also be issued solely for
services. The administrator has discretion as to vesting provisions, including
accelerations, and may institute a loan program to assist participants with
financing stock purchases. The program also provides certain alternatives to
satisfy tax liabilities incurred by participants in connection with the program.
Under the Automatic Option Grant Program, as amended, participants will
automatically receive an option to purchase 40,000 shares of common stock upon
initially joining the Board of Directors and will receive an additional
automatic grant each year at each annual stockholders' meeting for 4,000 shares.
Each option will have an exercise price per share equal to 100% of the fair
market value of the common stock on the grant date. The shares subject to the
initial share option vest, and for options granted before November 2000 the
shares subject to the annual 4,000 share option will vest, in eight successive
equal quarterly installments upon the optionee's completion of each successive
3-month period of Board service over the 24-month period measured from the grant
date. Effective November 2000, the annual 4,000 share options will vest fully on
the grant date.
The following table summarizes stock option activity under the Company's 1995
Plan (in thousands, except per share amounts):
2001 2000 1999
--------------------- --------------------- ---------------------
Shares Price Shares Price Shares Price
--------- ------- --------- ------- --------- -------
Outstanding at beginning of year 7,616 $ 6.62 6,635 $ 6.36 7,862 $ 6.77
Granted 1,680 2.31 4,439 6.71 1,453 4.52
Exercised -- -- (1,473) 5.50 (725) 4.16
Canceled (2,114) 5.76 (1,985) 6.80 (1,955) 6.73
--------- --------- ---------
Outstanding at end of year 7,182 5.84 7,616 6.62 6,635 6.36
========= ========= =========
Options exercisable at year-end 3,672 7.22 2,611 7.49 3,909 7.03
========= ========= =========
Weighted-average fair value of
options granted during the year $ 2.03 $ 5.32 $ 4.52
63
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2001 (in thousands, except per share amounts):
Options Outstanding Options Exercisable
--------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Life Exercise Exercise
Prices Shares (in Years) Price Shares Price
------------ ------ ---------- -------- ------ --------
$ 0.10- 2.88 1,060 8.54 $ 1.29 245 $ 1.40
3.00- 4.75 2,345 7.88 3.43 1,032 3.51
5.00- 5.81 1,229 7.86 5.67 638 5.71
6.31- 7.25 1,220 7.62 6.83 659 6.86
8.25- 9.94 573 5.15 9.38 525 9.41
13.25-13.75 387 7.79 13.32 207 13.37
17.25-21.09 368 5.66 18.21 366 18.22
------ ------
7,182 7.59 $ 5.84 3,672 $ 7.22
====== ======
Employee Stock Purchase Plan. On January 11, 1995, our Board of Directors
adopted the Employee Stock Purchase Plan (the "Purchase Plan"), which was
approved by stockholders in February 1995. The Purchase Plan permits eligible
employees to purchase Common Stock at a discount through payroll deductions
during successive offering periods with a maximum duration of 24 months. Each
offering period shall be divided into consecutive semi-annual purchase periods.
The price at which the Common Stock is purchased under the Purchase Plan is
equal to 85% of the fair market value of the Common Stock on the first day of
the offering period or the last day of the purchase period, whichever is lower.
A total of 1,500,000 shares of Common Stock have been reserved for issuance
under the Purchase Plan. Awards and terms are established by our Board of
Directors. The Purchase Plan may be canceled at any time at the discretion of
our Board of Directors prior to its expiration in January 2005. Under the Plan,
the Company sold approximately 395,000, 392,000, and 211,000 shares in 2001,
2000, and 1999, respectively. The Board of Directors suspended the plan in
January 2002 pending allocation of additional shares.
Because the Company has adopted the disclosure-only provision of SFAS No. 123,
no compensation expense has been recognized for its stock option plan or for its
stock purchase plan. Had compensation costs for our two stock-based compensation
plans been determined based on the fair value at the grant dates for awards
under those plans, consistent with the method of SFAS 123, our net loss and net
loss per share would have been reduced to the pro forma amounts indicated as
follows:
2001 2000 1999
-------- -------- ---------
(restated)
Net loss applicable to common stockholders
As reported $(75,538) $(69,949) $(121,570)
Pro forma $(81,676) $(78,219) $(127,685)
Net loss per share
As reported - Basic and Diluted $ (0.91) $ (0.90) $ (2.13)
Pro forma - Basic and Diluted $ (0.99) $ (1.00) $ (2.24)
64
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants in 2001, 2000, and 1999, respectively: expected volatility of 125%, 95%,
and 96%; weighted-average risk-free interest rates of 4.1% 6.2%, and 5.4%,
weighted-average expected lives of 3.51, 3.71 and 3.28, respectively, and a zero
dividend yield.
The fair value of the employees' stock purchase rights was estimated using the
Black-Scholes model with the following assumptions for 2001, 2000, and 1999,
respectively: expected volatility of 157%, 95%,and 96% weighted-average
risk-free interest rates of 3.5%,6.2%,and 4.6%, weighted-average expected lives
of 0.5, 0.5, and 0.5 years and a dividend yield of zero. The weighted-average
fair value of those purchase rights granted in 2001, 2000, and 1999 was $5.47,
$6.03, and $5.74, respectively.
401(k) Plan
The Company sponsors a 401(k) Plan (the "401(k) Plan") which provides
tax-deferred salary deductions for eligible employees. Employees may contribute
up to 15% of their annual compensation to the 401(k) Plan, limited to a maximum
annual amount as set periodically by the Internal Revenue Service. The 401(k)
Plan permits, but does not require, the Company to make matching contributions.
To date, no matching contributions have been made.
7. Restructuring and Other Charges
In the first quarter of 2001, the Company recorded a $10 million inventory
related charge to product cost of sales, and incurred a $11.6 million receivable
valuation charge included in general and administrative expenses, as a result of
the bankruptcy of a major customer. In the third quarter of 2001, the Company
determined that there was a need to reevaluate its inventory carrying value in
the light of the significant slowdown in the global telecommunications market
and the phasing out of and replacement of current product designs. The
evaluation included an assessment of future demand for certain of its lower
speed and lower frequency Tel-Link Point-to-Point products, and resulted in
total charges to product cost of sales of approximately $18 million in the
quarter. A further $2 million was charged to product cost of sales in the fourth
quarter of 2001.
In the second quarter of 2000, the Company determined that there was a need to
reevaluate its inventory levels and related accrued liabilities in light of
recent changes in product and customer mix. The evaluation was prompted by a
change in customer mix away from the UK and other European markets and toward
the U.S. market, and the resulting anticipated decrease in demand for certain of
its lower speed and lower frequency Tel-Link Point-to-Point products, and
resulted in total charges of approximately $21.7 million during the second
quarter of 2000. These charges consisted of increases to inventory reserve of
approximately $17.4 million and accrued liabilities of approximately $4.3
million, both relating to our product segment. In addition, the Company
performed a review of the carrying value and remaining life of long-lived assets
associated with our product segment and recorded write-downs of approximately
$15.0 million of goodwill and an approximately $9.9 million write-off of
deferred tax assets in 2000.
65
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
The increase in inventory reserves and related purchases liabilities was charged
to product cost of sales in the second quarter of 2000. Of the $17 million
charge for additional reserves, $15.4 million related to the aforementioned
Tel-Link Point-to-Point product line. An additional reserve of approximately
$1.0 million was added in the second quarter of 2000 to adjust carrying value of
certain modules of the Point-to-Multipoint radio line.
During 1999, the Company's management approved restructuring plans, which
included initiatives to integrate the operations of acquired companies,
consolidate duplicate facilities, and reduce overhead. Total accrued
restructuring and other charges of approximately $36.5 million were recorded in
1999 relating to these initiatives, all relating to the Company's product
segment.
8. Segment Reporting
For purposes of segment reporting, the Company aggregates operating segments
that have similar economic characteristics and meet the aggregation criteria
specified in SFAS No. 131. The Company has determined that there are two
reportable segments: Product Sales and Service Sales. The Product Sales segment
consists of organizations located primarily in the United States, the United
Kingdom, and Italy, which develop, manufacture, and/or market network access
systems for use in the worldwide wireless telecommunications market. The Service
Sales segment consists of organizations primarily located in the United States,
which provide comprehensive network services including system and program
planning, and management, path design, and installation for the wireless
communications market.
In August 1999, the Company announced its intent to divest its broadcast
equipment business, Technosystem, and concluded that a measurement date had
occurred. Accordingly, beginning in the third quarter of 1999, this business was
reported as a discontinued operation and the amounts presented for prior periods
have been reclassified for appropriate comparability. Technosystem was divested
in the first quarter of 2000. As such, the segment information shown below does
not include Technosystem's financial information. On February 9, 2001, the
Company sold its RT Masts unit which was primarily engaged in providing site
preparation, installation, and which maintenance of wireless broadband radio
systems for cell phone services providers in the UK. RT Masts provided
approximately $20 million in revenues to P-Com's consolidated operations in 2000
and approximately $18 million in revenue in 1999 and has historically been
included as a component of our Service sales segment. Capital expenditures for
long-lived assets are not reported to management by segment and are excluded as
presenting such information is not practical. The following tables show the
operating results and identifiable assets of our operating segments (in
thousands):
66
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
For the Year Ended
December 31, 2001 Product Service Total
--------- --------- ---------
Sales $ 73,236 $ 30,838 $ 104,074
Loss from operations (83,210) (211) (83,421)
Depreciation 8,845 310 9,155
Identifiable assets 82,459 9,775 92,234
Interest expense, net 1,946 15 1,961
For the Year Ended
December 31, 2000 Product Service Total
--------- --------- ---------
Sales $ 183,606 $ 50,795 $ 234,401
Income (loss) from operations (46,701) 3,263 (43,438)
Depreciation 10,375 573 10,948
Identifiable assets 194,351 21,868 216,219
Interest expense, net 4,629 121 4,750
For the Year Ended
December 31, 1999 Product Service Total
--------- --------- ---------
Sales $ 116,409 $ 40,470 156,879
Income (loss) from operations (67,856) 4,491 (63,365)
Depreciation 11,010 773 11,783
Identifiable assets 196,712 22,034 218,746
Interest expense, net 8,086 89 8,175
The allocation of sales by geographic customer destination and property, plant
and equipment, net are as follows (in thousands):
% of
total
for 2001 2001 2000 1999
-------- -------- -------- --------
Sales:
United States 45.2% $ 46,989 $130,942 $ 48,248
United Kingdom 31.1% 32,361 57,061 54,172
Continental Europe 2.2% 2,289 18,135 28,183
Asia 15.8% 16,495 8,637 9,489
Other geographic regions
5.7% 5,940 19,626 16,787
-------- -------- -------- --------
Total 100.0% $104,074 $234,401 $156,879
======== ======== ======== ========
67
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
2001 2000
-------- --------
Property, plant, and equipment, net
United States $ 15,879 $ 20,462
United Kingdom 345 1,234
Italy 1,388 1,349
Other geographic regions 15 121
-------- --------
Total $ 17,627 $ 23,166
======== ========
9. Net Loss Per Share
For purpose of computing diluted net loss per share, weighted average common
share equivalents do not include stock options with an exercise price that
exceeds the average fair market value of our Common Stock for the period because
the effect would be antidilutive. Also, because losses were incurred in the
years 2001, 2000, and 1999, all options, warrants, and convertible notes are
excluded from the computations of diluted net loss per share because they are
antidilutive.
10. Income Taxes
Loss before extraordinary items, income taxes and cumulative effect of
accounting change consists of the following (in thousands):
Year Ended December 31,
2001 2000 1999
-------- -------- --------
Domestic $(77,087) $(55,511) $(67,120)
Foreign 974 346 (6,957)
-------- -------- --------
$(76,113) $(55,165) $(74,077)
======== ======== ========
The provision (benefit) for income taxes consists of the following (in
thousands):
Year Ended December 31,
2001 2000 1999
-------- -------- --------
Current:
Federal $ (1,131) $ -- $ --
State 13 -- 55
Foreign 543 1,282 1,532
-------- -------- --------
(575) 1,282 1,587
-------- -------- --------
Deferred:
Federal -- 8,792 (135)
State -- 1,066 (45)
-------- -------- --------
-- 9,858 (180)
-------- -------- --------
Total $ (575) $ 11,140 $ 1,407
======== ======== ========
68
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
Deferred tax assets consist of the following (in thousands):
December 31,
2001 2000
--------- ---------
Net operating loss carryforwards $ 70,810 $ 54,663
Credit carryforwards 10,267 4,302
Net operating loss carry forwards 13,235 12,177
Credit carryforwards 22,353 18,412
--------- ---------
Intangible assets 116,665 89,554
Valuation allowance (116,665) (89,554)
--------- ---------
Net deferred tax asset $ -- $ --
========= =========
The Company's net operating loss carry forwards included as a deferred tax asset
above are approximately $191 million and $115 million for 2001 and 2000,
respectively. These operating loss carry forwards will expire between 2005 and
2020 if not utilized beforehand.
For federal and state tax purposes, a portion of the Company's net operating
loss carry forwards may be subject to certain limitations on utilization in case
of change in ownership as defined by federal and state tax law.
Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their bases for
financial reporting purposes. In addition, future tax benefits, such as net
operating loss carry forwards, are recognized to the extent that realization of
such benefits is more likely than not. The Company has assessed its ability to
realize future tax benefits, and concluded that as a result of the recent
history of losses, it was more likely than not, that such benefits would not be
realized. Accordingly, the Company has recorded a full valuation allowance
against future tax benefits.
Reconciliation of the statutory federal income tax rate to our effective tax
rate is as follows:
Year Ended December 31,
2001 2000 1999
------- ------- -------
U.S. federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit 0.0 0.0 0.0
Change in valuation allowance 0.0 (17.9) 0.0
Foreign income taxes at different rate (0.7) (2.3) (1.5)
Net operating loss (35.0) (35.0) (35.0)
Other, net 0.0 0.0 0.1
------- ------- -------
(0.7)% (20.2)% (1.4)%
======= ======= =======
69
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
11. Acquisitions and Divestitures
On March 28, 1998, the Company acquired substantially all of the assets,
and on April 1, 1998, the accounts receivable of the Wireless Communications
Group of Cylink Corporation ("Cylink Wireless Group"), a Sunnyvale,
California-based company, for $46.0 million in cash and $14.5 million in a
short-term note, non-interest bearing unsecured subordinated promissory note due
July 6, 1998. The Cylink Wireless Group designs, manufactures and markets spread
spectrum radio products for voice and data applications in both domestic and
international markets. The Company accounted for this acquisition as a purchase
business combination. The results of the Cylink Wireless Group were included
from the date of acquisition.
During 1998, the Company acquired the remaining interest in Geritel and
the assets of Cemetel S.r.l., a service company located in Carsoli, Italy. These
acquisitions were not material to the consolidated financial statements or the
results of operations of the Company.
On February 24, 1997, the Company acquired 100% of the outstanding stock
of Technosystem, for aggregate payments of $3.3 million and the assumption of
long-term debt of approximately $12.7 million in addition to other liabilities.
The Company initially paid $2.6 million in cash, and an additional payment of
$0.7 million was made on March 31, 1998. Technosystem designs, manufactures and
markets equipment for transmitters and transponders for television and radio
broadcasting. In 1999 the Company announced its intention to dispose of
Technosystem and completed its disposition in 2000.
On March 7, 1997, the Company acquired substantially all of the assets of
Columbia Spectrum Management, L.P. ("CSM"), a Vienna, Virginia-based company,
for $7.8 million in cash and 797,000 shares of Common Stock valued at
approximately $14.5 million. CSM provides turnkey relocation services for
microwave paths over spectrum allocated by the Federal Communications Commission
for Personal Communications Services and other emerging technologies.
The Company accounted for its acquisitions of Technosystem and CSM based
on the purchase method of accounting. The results of these acquired entities are
included from the date of acquisition. Goodwill and other intangible assets
recorded as a result of the purchase of CSM and Technosystem are being amortized
over twenty and ten years, respectively, using the straight-line method.
On May 29, 1997, the Company acquired all of the outstanding shares of
capital stock of Control Resources Corporation, a provider of integrated network
access devices to network service providers, in exchange for 1,503,000 shares of
the Company's Common Stock.
On November 27, 1997, the Company acquired all of the outstanding shares
of capital stock of RT Masts Limited and Telematics in exchange for 766,000 and
248,000 shares of our Common Stock, respectively. RT Masts, located in
Wellingborough, Northhamptonshire, U.K. and Telematics, located in Herndon,
Virginia, supply, install and maintain telecommunications systems and structure
including antennas covering high frequency, medium frequency and microwave
systems.
70
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
The Company accounted for its acquisitions of Control Resources
Corporation, RT Masts and Telematics as poolings-of-interests.
In February 2000, the Company completed the divestiture of two Italian
subsidiaries, Technosystem, S.p.A. and Cemetel S.r.L., resulting in additional
losses for the first quarter of 2000 of approximately $4.0 million and $3.5
million, respectively.
In April 2000, the Company sold Control Resources Corporation resulting in a
gain of approximately $2.6 million.
On February 7, 2001 the Company sold RT Masts Limited, to SpectraSite Transco,
for approximately $12 million in cash, an additional $750,000 in a 6-month
escrow account, and a $750,000 note receivable due in 2008 with interest due
annually at LIBOR, realizing a gain of $9.8 million on the transaction.
Discontinued Operation
In August 1999, our Board of Directors decided to divest its broadcast equipment
business, Technosystem. Accordingly, beginning in the third quarter of 1999,
this business is reported as a discontinued operation and the financial
statement information related to this business has been presented on one line in
the 1999 Consolidated Balance Sheet, "net assets of discontinued operations,"
and in the "discontinued operations" line of the Consolidated Statements of
Operations for 2000 and 1999. The "net assets of discontinued operations"
represents the assets intended to be sold offset by the liabilities anticipated
to be assumed by the buyers of the business. The Statements of Operations
amounts related to Technosystem in prior periods have been reclassified to
discontinued operations.
Summarized results of Technosystem are as follows (in thousands):
Year Ended
December 31,
1999
----
Sales $ 6,483
========
Loss before income taxes (13,903)
Provision for income taxes --
--------
Net loss $(13,903)
========
71
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
12. Commitments
Obligations Under Capital and Operating Leases
In August 1998, the Company entered into a capital lease for equipment in the
amount of $1,600 with interest accruing at the rate of 6.3% per annum. The lease
is accounted for as a sale-leaseback transaction, which expires in January 2003.
In 2000, the Company entered into several capital leases for equipment in the
amount of $1,869 with interest accruing at 11%. These leases expire in 2002. In
2001, the Company entered into several capital leases for equipment in the
amount of $ 3,212 with interest accruing of 11%. Future minimum lease payments
required under these leases are as follows (in thousands):
Year Ending December 31,
------------------------
2002 $ 2,282
2003 700
--------
Total minimum lease payments 2,982
Less: Amount representing interest (207)
--------
Present value of net minimum lease payments $ 2,775
========
The present value of net minimum lease payments are reflected in the December
31, 2001 and 2000 balance sheets as a component of other accrued liabilities and
other long-term liabilities of $2,775 and $2,131, respectively.
The Company leases its facilities under non-cancelable operating leases which
expire at various times through 2008. The leases require the Company to pay
taxes, maintenance and repair costs. Future minimum lease payments under our
non-cancelable operating leases at December 31, 2001 are as follows (in
thousands):
Year Ending December 31,
------------------------
2002 $ 3,654
2003 3,290
2004 3,422
2005 3,236
2006 656
Thereafter 465
--------
$ 14,723
========
During 2001, 2000, and 1999, the amount of rent expense incurred by the Company
under non-cancelable operating leases was $4,196, $3,180, and $3,258,
respectively.
72
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
13. Contingencies
In September and October 1998, several class action complaints were filed in the
Superior Court of California, County of Santa Clara, on behalf of P-Com
stockholders who purchased or otherwise acquired its Common Stock between April
1997 and September 11, 1998. The plaintiffs alleged various state securities
laws violations by P-Com and certain of its officers and directors. The
complaints sought compensatory, punitive and other damages, attorneys' fees and
injunctive and/or equitable relief.
On December 3, 1998, the Superior Court of California, County of Santa Clara,
entered an order consolidating all of the above complaints. The Company reached
an agreement in principle on October 25, 2001 to settle the consolidated
securities class action suit. On February 8, 2002, pursuant to that agreement in
principle, the court entered final judgment approving the settlement. Under the
terms of the settlement, all claims against the Company and all other defendants
will be dismissed without admission of liability or wrong doing by any party.
The settlement was funded entirely by our directors and officers liability
insurance.
14. Supplemental Cash Flow Information
The following provides additional information concerning supplemental disclosure
of cash flow activities.
Year Ended December 31,
2001 2000 1999
-------- -------- --------
Supplemental cash flow information:
Cash paid for income taxes $ 353 $ 435 $ 3,900
======== ======== ========
Cash paid for interest $ 1,605 $ 2,725 $ 8,717
======== ======== ========
Non-cash transactions
During 2001 and 2000, $3,212 and $1,869 of fixed assets were acquired through
the assumption of capital lease liabilities respectively.
During 2000 and 1999 the Company issued shares of Common Stock in exchange for
Convertible Subordinated Notes. In conjunction with these transactions, the
Company recorded extraordinary gains of $1.9 million and $13.2 million for the
years ended December 31, 2000 and 1999, respectively. See Note 5 for additional
information.
As described more fully in Note 5, the Company exchanged Mandatorily Redeemable
Series B Convertible Preferred Stock for shares of Common Stock and repriced
certain warrants held by the holders of the Series B Convertible Preferred Stock
during June 1999. During November 1999, the Company issued shares of Common
Stock, warrants to purchase additional shares of Common Stock, and a promissory
note convertible into Common Stock in exchange for the elimination of certain
redemption rights and late registration premiums and penalties. In connection
with these transactions, the Company recorded charges of $18.5 million for the
year ended December 31, 1999, respectively, as adjustments to arrive at the net
loss applicable to Common Stockholders. See Note 5 for additional information.
73
P-Com, Inc.
Notes to Consolidated Financial Statements - Continued
During 1999, the Company issued shares of Common Stock and a promissory note in
conjunction with various acquisitions.
74
P-Com, Inc.
Selected Quarterly Financial Data - Unaudited
The following is in thousands, except per share data:
Three Months Ended
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
2001
Sales $ 59,173 $ 27,245 $ 10,251 $ 7,405
Gross profit (loss) $ 6,920 $ 3,725 $(19,529) $ (5,556)
Net loss $(10,187) $(10,154) $(37,271) $(17,926)
Net loss per common share:
Basic and diluted $ (0.13) $ (0.13) $ (0.44) $ (0.21)
The data for the first three quarters of 2000 is presented both as originally
reported by the Company and as restated to reflect the retroactive application
by the Company of new revenue recognition accounting policies in accordance with
SAB 101.
Three Months Ended
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
2000 - As Reported
Sales (1) $ 51,055 $ 48,833 $ 59,535 $ 74,978
Gross profit (loss) (1) $ 12,714 $ (9,343) $ 15,391 $ 16,504
Net income (loss) $(15,901) $(52,202) $ (2,071) $ 225
Net income (loss) per common share:
Basic and diluted $ (0.21) $ (0.68) $ (0.03) $ 0.00
2000 - As Restated
Sales (1) $ 60,459 $ 49,930 $ 61,031 N/a
Gross profit (loss) (1) $ 13,105 $ (9,382) $ 16,573 N/a
Net loss $(17,044) $(52,241) $ (889) N/a
Net loss per common share:
Basic and diluted $ (0.22) $ (0.68) $ (0.01) N/a
(1) Quarterly sales and gross profit amounts for the first quarter of 2000
reflect a reduction for sales and gross profit attributable to
Technosystem.
75
Schedule II
Valuation and Qualifying Accounts
Years ended December 31, 1999, 2000, and 2001
(in thousands)
Additions
Balance at Charged to Deductions
Beginning Statement from Balance at
Of Year of Operations Reserves End of Year
---------- ------------- ---------- -----------
Allowance for doubtful accounts:
Year ended December 31, 1999 $ 9,591 $ 11,284 $ (5,976) $ 14,899
Year ended December 31, 2000 14,899 696 (11,785) 3,810
Year ended December 31, 2001 3,810 11,837 (14,567) 1,080
Inventory related reserves:
Year ended December 31, 1999 $ 16,922 $ 15,400 $ (16,142) $ 16,180
Year ended December 31, 2000 16,180 17,361 (7,551) 25,990
Year ended December 31, 2001 25,990 30,000 (17,393) 38,597
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable
76
P-Com, Inc.
PART III
Item 10. Directors and Officers of the Registrant
The executive officers and directors of the Company, their ages as of March 31,
2002 and their positions and their backgrounds are as follows:
Name Age Position
---- --- --------
George P. Roberts 69 Chairman of the Board and Chief Executive Officer
Leighton J. Stephenson 53 Chief Financial Officer, Vice President
Alan T. Wright 53 Chief Operating Officer
Ben L. Jarvis 64 Executive Vice President and
General Manager, P-Com Network Services
Caroline Baldwin Kahl 44 Vice President and General Counsel
John R. Wood 46 Senior Vice President and Chief Technical Officer
Brian T. Josling 59 Director
John A. Hawkins 41 Director
Frederick Frommm 52 Director
Brig. General (Ret)
Harold Johnson 78 Director
Background
The principal occupations of each executive officer and director of the Company
for at least the last five years are as follows:
Mr. Roberts is a founder of the Company and has served as Chief Executive
Officer and Director since October 1991 to May 2001, and as interim Chief
Executive Officer since January 2002. Since September 1993, he has also served
as Chairman of the Board of Directors.
Mr. Stephenson has served as Vice President and Chief Financial Officer since
September 2000. From 1993 to 2000 he served as Chief Financial Officer,
Treasurer, and Secretary of Vallen Corporation, a Texas company engaged in
manufacturing and distribution of industrial safety products and services.
Mr. Wright has served as Chief Operating Officer since December 2001 and as
Executive Vice President of Operations from March 2000 to December 2001, and in
the same position from 1997 to 1998. From 1998 to 1999 he served as Senior
Operations Advisor and was a private investor from 1996 to 1997 and 1999 to
2000.
Mr. Jarvis has served as Executive Vice President and General Manager of P-Com
Network Services since May of 2000. From September of 1998 to November of 1999
he served as Senior Vice President of Operations for Alaska Communications
Systems. From 1996 to August of 1998, he served as Chief Operating Officer of
Amaritel S.A. DE C.V. and Vice President of Operations, CT Global, Inc.
Ms. Kahl has served as Vice President and General Counsel of the Company since
February 2000. From March 1997 to February 2000 she served as General Counsel to
P-Com Network Services, and from August 1994 to March 1997 as General Counsel
for Columbia Spectrum Management L.P., the predecessor of PCNS.
Mr. Wood was appointed Senior Vice President of Technology Strategies of the
Company in January 1997. From April 1993 to January 1997, Mr. Wood served as
77
Vice President, Engineering for the Company. Mr Wood was appointed Chief
Technical Officer in January 2002.
Mr. Josling has served as Director of the Company since September 1999. Since
December 2000 he has served as the President of Fuel Cells, Canada. From 1997 to
1999, Mr. Josling was a former division President for Rogers ATT, Canada's
national cellular telephone carrier, and was a senior executive with CSB and
Capitol EMI in the music entertainment industry.
Mr. Hawkins has served as a Director of the Company since September 1991. Since
August 1995, Mr. Hawkins has been a General Partner of Generation Capital
Partners, L.P., a private equity firm. He also currently serves on the Board of
Directors for Hotjobs, Inc.
Mr. Fromm has served as a Director of the Company since June 2001. In July 2000,
Mr. Fromm became president of Oplink Communications,Inc. From 1997 to 2000, Mr.
Fromm served as president and Chief Executive Officer at Siemens Telecom
Networks, Inc., a telecommunications equipment company. During this time Mr.
Fromm also oversaw the spin-off of Optisphere Networks, Inc. a wholly owned
subsidiary of Siemens ICN, leading that company as its first CEO.
General Johnson has served as a Director of the Company since June 2001. From
1997 to 1999, General Johnson served as Senior Vice President, Business
Development of The Fairchild Corporation. General Johnson is also a partner in
Aragon Ventures, LLC in Palo Alto, California, a company providing investment
capital to High Technology enterprises. He currently serves on the Board of
Directors for Accelerated Networks, Inc., Data Planet International S.A., and
KLT Telecom, Inc.
Board Committees and Meetings
The Board of Directors held 10 meetings and acted by unanimous written consent 7
times during the fiscal year ended December 31, 2001. The Board of Directors has
an Audit Committee and a Compensation Committee. Each director attended or
participated in 75% or more of the aggregate of (i) the total number of meetings
of the Board of Directors and (ii) the total number of meetings held by all
committees of the Board on which such director served during 2001.
The Audit Committee currently consists of three directors, Mr. Josling, Mr.
Fromm and Mr. Johnson, and is primarily responsible for approving the services
performed by our independent accountants and reviewing their reports regarding
our accounting practices and systems of internal accounting controls. The Audit
Committee held 4 meetings during 2001.
The Compensation Committee currently consists of two directors, Mr. Hawkins and
Mr. Fromm, and is primarily responsible for reviewing and approving our general
compensation policies and setting compensation levels for our executive
officers. The Compensation Committee also has the authority to administer our
Employee Stock Purchase Plan and our 1995 Stock Option/Stock Issuance Plan and
to make option grants thereunder. The Compensation Committee did not hold any
meetings and acted by unanimous written consent 13 times during 2001.
Director Compensation
Non-employee board members do not receive cash compensation for their services
as directors.
Under the Automatic Option Grant Program as now contained in our 1995 Stock
Option/Stock Issuance Plan (the "1995 Plan"), each individual who first joins
the Board as a non-employee will receive, at the time of such initial election
78
or appointment, an automatic option grant to purchase 40,000 shares of Common
Stock, provided such person has not previously been in our employ. In addition,
on the date of each annual stockholders meeting, each individual who continues
to serve as a non-employee Board member, whether or not such individual is
standing for re-election at that particular Annual Meeting, will be granted an
option to purchase 4,000 shares of Common Stock, provided such individual has
not received an option grant under the Automatic Option Grant Program within the
preceding six months. Each grant under the Automatic Option Grant Program will
have an exercise price per share equal to 100% of the fair market value per
share of our Common Stock on the grant date, and will have a maximum term of ten
(10) years, subject to earlier termination should the optionee cease to serve as
a Board of Directors member.
Item 11. Executive Compensation and Related Information
The following table provides certain information summarizing the compensation
earned for services rendered in all capacities to company and its subsidiaries
for each of the last three fiscal years by (i) our Chief Executive Officer, and
(ii) each of our four other most highly compensated executive officers, who were
executive officers on December 31, 2001 and whose salary and bonus for the
fiscal year ended December 31, 2001 (the "2001 Fiscal Year") was in excess of
$100,000 (collectively, the "Named Executive Officers").
2001 SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
Annual Compensation Securities
-------------------- Underlying
Salary Bonus Options
Name and Principal Position Year ($)(1) ($) (#)
--------------------------- ---- ------- ------ -------
George P. Roberts 2001 355,175 -- --
Chief Executive Officer and 2000 376,000 -- 375,000
Chairman of the Board of Directors 1999 376,000 -- --
James J. Sobczak 2001 309,069 -- 156,000
Former President & Chief Exec. Officer 2000 300,000 -- 100,000
1999 101,538 11,538 300,000
Alan T. Wright 2001 253,232 96,000 135,000
Chief Operating Officer 2000 164,307 25,000 190,000
1999 30,000 --
Ben L. Jarvis 2001 242,019 -- 70,000
Executive Vice President & 2000 151,538 -- 100,000
General Manager, P-Com Network Services 1999 -- -- --
Caroline Baldwin Kahl 2001 171,259 -- 60,000
Vice President & General Counsel 2000 145,961 -- 25,000
1999 115,615 46,000 --
Leighton J. Stephenson 2001 197,484 -- 50,000
VP Finance & Admin and Chief Financial Officer 2000 66,153 -- 225,000
1999 -- -- --
----------
(1) Includes amounts deferred under our 401(k) Plan.
The following table contains information concerning the stock option grants made
to each of the named Executive Officers for the 2001 Fiscal Year. No
79
stock appreciation rights were granted to these individuals during such fiscal
year.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable
% of Total Value at Assumed
Number of Options Annual Rates of Stock
Securities Granted to Individual Grant Price Appreciation for
Underlying Employees ---------------------------- Option Term (1)
Options in Fiscal Exercise Expiration -----------------------------
Granted (#) Year Price ($/Sh) Date 5% ($) 10% ($)
----------- ---------- ------------ ---------- ------------ ------------
George P. Roberts -- -- $ -- -- $ -- $ --
James J. Sobczak 56,000 3.53 3.28 02/09/11 115,558 292,846
100,000 6.30 .93 06/06/11 58,487 148,218
Alan T. Wright 60,000 3.78 3.28 02/09/11 123,812 313,763
70,000 4.72 .63 06/27/11 29,715 75,304
Ben L. Jarvis 70,000 4.41 3.28 02/09/11 144,447 366,057
Caroline Baldwin Kahl 60,000 3.78 3.28 02/09/11 123,812 313,763
Leighton J. Stephenson 50,000 3.15 3.28 02/09/11 103,176 261,469
(1) There can be no assurance provided to any executive officer or any other
holder of our securities that the actual stock price appreciation over the
ten-year option term will be at the assumed 5% and 10% levels or at any
other defined level. Unless the market price of the Common Stock
appreciates over the option term, no value will be realized from the
option grants made to the executive officers.
(2) Each option is immediately exercisable for all the option shares, but any
shares purchased under the option will be subject to repurchase by the
Company, at the option exercise price paid per share, should the
individual cease service with the Company prior to vesting in those
shares. Twenty-five percent (25%) of the option shares will vest upon the
optionee's continuation in service through one year following the grant
date and the balance of the shares will vest in thirty-six (36) successive
equal monthly installments upon the optionee's completion of each of the
next thirty-six (36) months of service thereafter. The shares subject to
the option will immediately vest in full should (i) the Company be
acquired by merger or asset sale in which the option is not assumed or
replaced by the acquiring entity or (ii) the optionee's employment be
involuntarily terminated within eighteen (18) months after certain changes
in control or ownership of the Company.
The table below sets forth certain information with respect to the named
Executive Officers concerning the exercise of options during 2001 and
unexercised options held by such individuals as of the end of such fiscal year.
No SARs were exercised during 2001 nor were any SARs outstanding at the end of
such fiscal year.
80
Aggregated Option Exercises in Last Fiscal Year
Fiscal Year-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised in-the-Money
Shares Value Options at FY-End (#) Options at FY-End (1)
Acquired Realized ------------------------------ ----------------------------
On Exercise ($) Exercisable Unexercisable Exercisable Unexercisable
Name (#) (2) (3)
---------------------- --------- --------- ---------- ------------- ----------- -------------
George P. Roberts -- $ -- 1,422,707 365,625 $ -- $ --
James J. Sobczak -- -- 258,580 341,420 -- --
Alan T. Wright -- -- 79,375 245,625 -- --
Ben L. Jarvis -- -- 59,060 128,336 -- --
Caroline Baldwin Kahl -- -- 61,243 75,834 -- --
Leighton J. Stephenson -- -- 70,312 204,688 -- --
(1) Based on the fair market value of the option shares at the 2001 Fiscal
Year-end ($0.33 per share based on the closing selling price on the NASDAQ
National Market as of December 31, 2001) less the exercise price.
(2) Based on the fair market value of the shares on the exercise date less the
exercise price paid for those shares.
(3) The options are immediately exercisable for all the options shares.
However, any shares purchased under the options are subject to repurchase
by the Company, at the original exercise price paid per share, upon the
optionee's cessation of service prior to vesting in such shares. As of
December 31, 2001, the following number of shares were unvested: Mr.
Roberts- 365,625 shares; Mr. Stephenson- 341,420 shares; Mr. Wright-
245,625 shares; Mr. Jarvis- 128,336 shares; and Ms. Kahl- 75,834 shares;
and Mr. Stephenson- 204,688 shares. The table shows these as
"unexercisable."
Employment Contracts, Termination of Employment Arrangements and Change of
Control Agreements
The Compensation Committee of the Board of Directors, as Plan
Administrator of the 1995 Stock Option/Stock Issuance Plan, has the authority to
provide for accelerated vesting of the shares of Common Stock subject to any
outstanding options held by the Chief Executive Officer and any other executive
officer or any unvested share issuances actually held by such individual, in
connection with certain changes in control of the Company or the subsequent
termination of the officer's employment following the change in control event.
The Company has entered into severance agreements (the "Agreements") with
George Roberts, Chairman of the Board of Directors and Acting Chief Executive
Officer, and Leighton J. Stephenson, Chief Financial Officer and Vice President,
Finance and Administration (individually, the "Officer" and collectively the
"Officers"), dated May 31, 2001 and December 7, 2000, respectively. Each of
these Agreements provides for the following benefits should the Officer's
employment terminate, either voluntarily or involuntarily, for any reason within
twenty-four (24) months following a
81
Change in Control: (a) a severance payment in an amount equal to two (2) times
his annual rate of base salary; (b) a bonus for Mr. Stephenson in an amount
equal to the greater of either (i) two (2) times the full amount of the
Officer's target bonus for the fiscal year in which the termination occurs or
(ii) two (2) times the full amount of his target bonus for the fiscal year in
which a Change in Control occurs, and a bonus for Mr. Roberts in an amount equal
to the target bonus specified for the fiscal year in which involuntary
termination occurs; (c) the shares subject to each outstanding option held by
the Officer (to the extent not then otherwise fully vested) will automatically
vest so that each such option will become immediately exercisable for all the
option shares as fully-vested shares (notwithstanding anything in this Form 10-K
to the contrary); and (d) the Company will, at its own expense, provide Mr.
Stephenson and his dependants with continued health care coverage from the
earlier of 24 months from termination or the first date that they are covered
under another employer's benefit program, and for Mr. Roberts and his dependents
continued health care coverage for their lives. A Change in Control will be
deemed to occur under the Agreements upon: (a) a merger or consolidation in
which securities possessing fifty percent (50%) or more of the total combined
voting power of our outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately prior to
such transaction, (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) a hostile take-over of the Company, whether
effected through a tender offer for more than twenty-five percent (25%) of our
outstanding voting securities or a change in the majority of the Board by one or
more contested elections for Board membership; or (d) the acquisition, directly
or indirectly by any person or related group of persons (other than 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 Securities Exchange Act of 1934) of securities possessing
more than thirty percent (30%) of the total combined voting power of our
outstanding securities pursuant to a tender or exchange offer made directly to
our stockholders. In addition, each Officer will be entitled to a full tax
gross-up to the extent one or more of the severance benefits provided under his
Agreement are deemed to constitute excess parachute payments under the federal
income tax laws.
The Company has entered into an Employment and Continuity of Benefits
Agreement with George P. Roberts, dated May 31, 2001, outlining his continued
employment with the Company as Chairman of the Board following his resignation
as Chief Executive Officer on May 30, 2001.
The agreement provides for (a) an employment period commencing May 31,
2001 through May 30, 2002. Should this agreement remain in effect through May
30, 2002 then Mr. Roberts' employment under this agreement shall automatically
renew for another one-year term commencing May 31, 2002 and continuing through
May 30, 2003, unless written notice of non-renewal is received from Mr. Roberts
on or before May 1, 2002; (b) termination of employment may be effected by (1)
resignation by Mr. Roberts with at least 60 days prior written notice, (2)
termination for cause by majority vote of the Board, or (3) failure of our
stockholders to re-elect Mr. Roberts to the Board; (c) cash compensation will be
paid to Mr. Roberts' in a base salary in accordance with the Company's payroll
practices for salaried employees; (d) a target bonus equal to a percentage of
Mr. Roberts base salary may be earned in accordance with our management
incentive program, and shall be determined by the Board; (e) throughout the
employment period, Mr. Roberts shall be eligible to participate in all benefit
plans that are made available to our executives and for which Mr. Roberts
qualifies.
The Company does not have any existing agreements with any named Executive
Officer that establish a specific term of employment for them, and their
82
employment may accordingly be terminated at any time at the discretion of the
Board of Directors, subject to the agreements described above.
In addition to the indemnification provisions contained in our Restated
Certificate of Incorporation and Bylaws, the Company has entered into separate
indemnification agreements with each of its directors and officers. These
agreements require the Company, among other things, to indemnify such director
or officer against expenses (including attorneys' fees), judgments, fines and
settlements (collectively, "Liabilities") paid by such individual in connection
with any action, suit or proceeding arising out of such individual's status or
service as a director or officer of the Company) other than Liabilities arising
from the willful misconduct or conduct that is knowingly fraudulent or
deliberately dishonest) and to advance expenses incurred by such individual in
connection with any proceeding against such individual with respect to which
such individual may be entitled to indemnification by the Company.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of our Board of Directors currently consists of Mr.
Fromm and Mr. Hawkins. Neither of these individuals was an officer or employee
of the Company at any time during the 2001 Fiscal Year or at any other time, and
neither had a business relationship with the Company.
No executive officer of the Company has ever served as a member of the board of
directors or compensation committee of any other entity that has or has had one
or more executive officers serving as a member of our Board of Directors or
Compensation Committee.
Report of the Compensation Committee of the Board of Directors on Executive
Compensation
"The Compensation Committee of the Board of Directors is responsible for
establishing the base salary and incentive cash bonus programs for our executive
officers. The Committee also has the exclusive responsibility for the
administration of our 1995 Stock Option/Stock Issuance Plan, under which grants
may be made to executive officers and other key employees of the Company.
Compensation Philosophy
Since the initial public offering of our Common Stock in March 1995, it has been
the Committee's policy and objective to provide our executive officers and other
key employees with competitive compensation opportunities based upon their
contribution to the financial success of the Company, the enhancement of
corporate and stockholder values, the market levels of compensation in effect at
companies with which the Company competes for executive talent and the personal
performance of such individuals. The primary factors that the Committee
considered in establishing the compensation levels of the executive officers for
the 2001 fiscal year are summarized below. The Committee may, however, in its
discretion, apply different factors in setting executive compensation for future
fiscal years.
It is the Committee's current objective to have a significant portion of each
officer's compensation contingent upon our performance as well as upon the
officer's own level of performance. Accordingly, the compensation package for
each executive officer and key employee is comprised of three elements: (i) base
salary that reflects individual performance and is designed primarily to be
competitive with salary levels in effect at a select group of companies with
which the Company competes for executive talent, (ii) annual performance awards
payable in cash and based upon our financial performance and the market
performance of our common stock and (iii) long-term equity incentive awards with
overlapping vesting schedules that strengthen the mutuality of interests
83
between the executive officers and our stockholders while fostering retention of
existing personnel.
The Committee recognizes that the highly-specialized industry sector in which
the Company operates is both extremely competitive and globally-challenging,
with the result that there is substantial demand for high-caliber, seasoned
executives with a high level of industry-specific knowledge and industry
contacts, especially overseas contacts. It is crucial that the Company reward
and be assured of retaining the executive personnel essential to the attainment
of our performance goals. For these reasons, the Committee believes our
executive compensation arrangements must remain competitive with those offered
by other companies of similar magnitude, complexity and performance records (the
"peer group") in order to provide adequate incentive to our executive officers
to continue to provide services to the Company.
Cash Compensation
A key objective of our current executive compensation program is to position its
key executives to earn annual cash compensation (base salary plus bonus)
equaling or exceeding that which the executive would earn at other peer group
companies. During 2001, the Committee reviewed and relied on technology industry
compensation surveys in its assessment of appropriate compensation levels.
The fiscal year 2001 base salaries for the named executive officers are based
upon a number of factors, including, without limitation, each executive's
performance and contribution to overall The Company performance and the levels
of base salary in effect for comparable positions with the peer group companies.
Base salary decisions are made as part of a formal review process. Generally,
the base salaries of our executive officers for the 2001 fiscal year ranged from
the 10th percentile to the 75th percentile of the salaries surveyed for
comparable positions at the peer group companies. In defining "peer group
companies," the Company considered companies with revenues between $100 million
and $200 million.
The annual incentive compensation provided to our executive officers is in the
form of cash bonuses based on the Committee's assessment of our financial
performance for the year and the individual officer's contribution to that
performance. For the 2000 fiscal year, the Committee recommended a bonus payment
of $95,000 to Alan Wright, Chief Operating Officer which was paid in 2001. No
cash bonus was awarded to any other executive officers. Along with all
employees, each executive officer's salary was reduced by 8% in April 2001.
Stock Options
Equity incentives are provided primarily through stock option grants under the
1995 Plan. The grants are designed to align the interests of each executive
officer with those of the stockholders and provide each individual with a
significant incentive to manage the Company from the perspective of an owner
with an equity stake in the business. Each grant allows the individual to
acquire shares of our Common Stock at a fixed price per share (the market price
on the grant date) over a specified period of time (up to 10 years). The shares
subject to each option generally vest in installments over a two-to-four-year
period, contingent upon the executive officer's continued employment with the
Company. Accordingly, the option will provide a return to the executive officer
only if the executive officer remains employed by the Company during the
applicable vesting period, and then only if the market price of the underlying
shares appreciates over the option term.
The number of shares subject to each option grant is set at a level intended to
create a meaningful opportunity for stock ownership based on the officer's
84
current position with the Company, the base salary associated with that
position, the size of comparable awards made to individuals in similar positions
within the industry, the individual's potential for increased responsibility and
promotion over the option term, and the individual's personal performance in
recent periods. The Committee will also take into account the executive
officer's existing holdings of our Common Stock and the number of vested and
unvested options held by that individual in order to maintain an appropriate
level of equity incentive. However, the Committee does not intend to adhere to
any specific guidelines as to the relative option holdings of our executive
officers.
Chief Executive Officer Performance and Compensation
In setting the base salary for Mr. Roberts for the 2001 fiscal year, the
Committee sought to achieve two objectives: (i) make his base salary competitive
with the base salaries paid to the chief executive officers of the same peer
group of companies which the Committee surveyed for comparative compensation
purposes for all other executive officers of the Company and (ii) make a
significant percentage of his total compensation package contingent upon The
Company performance. For the 2001 fiscal year, the base salary of Mr. Roberts
was set at the 75th percentile of the base salary levels in effect for those
other chief executive officers. As indicated above, the Committee decided not to
award any cash bonus to Mr. Roberts or for the 2001 fiscal year.
It is the Committee's view that the total compensation package provided to Mr.
Roberts for the 2001 fiscal year is competitive with the typical compensation
packages awarded to chief executive officers in the Company's peer group.
Mr. James J. Sobczak was elected Chief Executive Officer effective June 1, 2001.
Until then he had been our Chief Operating Officer, and his annual salary of
$303,600 remained the same as it had been as Chief Operating Officer. No cash
bonus was designated for Mr. Sobczak at the date he was elected to the position.
Mr. Sobczak was granted 56,000 stock options (14,000 ISO; 42,000 NQ) with
exercise price of $3.28 and 100,000 stock options (25,000 ISO; 75,000 NQ) with
exercise price of $0.93 during the fiscal year.
In the committee's view the total compensation package provided Mr. Sobczak for
the 2001 fiscal year is competitive with the peer group in the markets served,
in light of the Company's performance.
Mr. Sobczak resigned his position in January, 2002. He was granted base salary
continuation for the balance of 2002 under the terms of his resignation.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code, enacted in 1993, generally
disallows a tax deduction to publicly held companies for compensation exceeding
$1 million paid to certain of the corporation's executive officers. The
limitation applies only to compensation that is not considered to be
performance-based. The non-performance based compensation to be paid to our
executive officers for the 2001 fiscal year did not exceed the $1 million limit
per officer, nor is it expected that the non-performance based compensation to
be paid to our executive officers for fiscal 2002 will exceed that limit.
Options granted under our 1995 Plan are structured so that any compensation
deemed paid to an executive officer in connection with the
85
exercise of those options will qualify as performance-based compensation that
will not be subject to the $1 million limitation. Because it is very unlikely
that the cash compensation payable to any of our executive officers in the
foreseeable future will approach the $1 million limit, the Compensation
Committee has decided at this time not to take any other action to limit or
restructure the elements of cash compensation payable to our executive officers.
The Compensation Committee will reconsider this decision should the individual
compensation of any executive officer ever approach the $1 million level.
It is the opinion of the Compensation Committee that the executive compensation
policies and programs in effect for our executive officers provide an
appropriate level of total remuneration which properly aligns our performance
and the interests of our stockholders with competitive and equitable executive
compensation in a balanced and reasonable manner, for both the short and
long-term."
M. Frederick Fromm
Member, Compensation Committee
John A. Hawkins
Member, Compensation Committee
86
Stock Performance Graph for 1997 - 2001
The graph depicted below shows a comparison of cumulative total stockholder
returns for the Company, the Standard & Poor's 500 Index and the Standard &
Poor's Communications Equipment Manufacturers Index.
[PERFORMANCE GRAPH APPEARS HERE]
S&P 500 S&P Comm P-Com
Dec-96 100 100 100
Mar-97 102.68 87.76 105.25
Jun-97 120.61 111.39 137.5
Sep-97 129.64 161.6 144.33
Dec-97 133.36 116.46 130.29
Mar-98 151.97 135.02 176.46
Jun-98 156.98 61.81 195.5
Sep-98 141.37 26.37 147.7
Dec-98 171.47 26.9 229.5
Mar-99 180.02 51.48 245.6
Jun-99 192.71 35.34 319.02
Sep-99 180.68 47.26 319.05
Dec-99 207.56 59.71 503.98
Mar-00 212.13 124.89 490.26
Jun-00 206.68 38.4 444
Sep-00 204.68 44.73 355.54
Dec-00 188.66 20.68 220.37
Mar-01 166.29 8.65 124.19
Jun-01 176.03 3.72 101.25
Sep-01 150.19 1.82 71.84
Dec-01 166.24 2.23 80.98
(1) The graph assumes that $100 was invested on Jan. 1, 1997, in our Common
Stock and in each index, and that all dividends were reinvested. No cash
dividends have been declared on our Common Stock.
(2) Stockholder returns over the indicated period should not be considered
indicative of future stockholder returns.
Notwithstanding anything to the contrary set forth in any of our previous
filings made under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings made by
the Company under those statutes, neither the preceding Stock Performance Graph
nor the Compensation Committee Report is to be incorporated by reference into
any such prior filings, nor shall such graph or report be incorporated by
reference into any future filings made by the Company under those statutes.
12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information known to the Company with
respect to the beneficial ownership of our Common Stock as of February 28, 2002,
by (i) all persons who are beneficial owners of five percent (5%) or more of our
Common Stock, (ii) each director, (iii) the named Executive Officers, and (iv)
all current directors and executive officers as a group. Unless otherwise
indicated, each of the stockholders has sole voting and investment power with
respect to the shares beneficially owned, subject to community property laws,
where applicable, and has the same address as the Company.
87
Percentage
Shares of Shares
Beneficially Beneficially
Beneficial Owner Owned (#) Owned(1)
---------------- --------- --------
State of Wisconsin Investment Board (2) 15,700,000 18.5
P.O. Box 7842
Madison, WI 53707
Firsthand Capital Management, Inc (3) 11,602,370 13.7
101 Park Center Plaza, Ste. 1300
San Jose, CA 95113
Gruber & McBaine Capital Management, LLC (4) 6,028,122 7.1
50 Osgood Place, Penthouse
San Francisco, CA 94133
John A. Hawkins (5) 42,000
Brian T. Josling (6) 52,000 *
Frederick R. Fromm (7) 15,000 *
Gen. Harold R. Johnson (Ret.) (8) 15,000
George P. Roberts (9) 1,789,333 2.1
James J. Sobczak (10) 277,984 *
Alan T. Wright (11) 135,860 *
Ben L. Jarvis (12) 89,269 *
Leighton J. Stephenson (13) 112,123
Caroline Baldwin Kahl (14) 89,035 *
All current directors and executive officers 2,523,827 3.0
as a group (10 persons) (15)
* Less than one percent of the outstanding Common Stock.
(1) Percentage of ownership is based on 84,958,307 shares of Common
Stock outstanding on February 28, 2002. Shares of Common Stock
subject to stock options that are currently exercisable or will
become exercisable within 60 days after February 28, 2002 are deemed
outstanding for computing the percentage of the person or group
holding such options, but are not deemed outstanding for computing
the percentage of any other person or group.
(2) Pursuant to Section 13G/A, filed with the Securities and Exchange
Commission on February 13, 2002, the State of Wisconsin Investment
Board reported that as of December 31, 2001 it had sole voting power
over all 15,700,000 shares and sole dispositive power over all
shares.
(3) Pursuant to Section 13G, filed with the Securities and Exchange
Commission on January 28, 2002, Firsthand Capital Management
reported that as of December 31, 2001 it had sole voting power over
all 11,602,370 shares and sole dispositive power over all shares.
88
(4) Pursuant to Section 13G dated August 8, 2001, filed with the
Securities and Exchange Commission, Gruber & McBaine Capital
Management, LLC, Jon D. Gruber, J. Patterson McBaine, Thomas O.
Lloyd-Butler and Eric Swergold constitute a "group" within the
meaning of Section 13(d)(3) of the Exchange Act. Pursuant to a
Schedule 13G filed with the SEC on or about August 1, 2001, as of
July 31, 2001, (i) Gruber & McBaine Capital Management, LLC reported
that it had shared voting and dispositive power over 5,907,572
shares, (ii) Jon D. Gruber reported that he had shared voting and
dispositive power over 5,907,572 shares, and sole voting and
dispositive power over 85,200 shares, (iii) J. Patterson McBaine
reported that he had shared voting and dispositive power over
5,907,572 shares, and sole voting and dispositive power over 33,350
shares, (iv) Thomas O. Lloyd-Butler reported that he had shared
voting and dispositive power over 5,907,572 shares, and sole voting
and dispositive power over 2,000 shares, and (v) Eric B. Swergold
reported that he had shared voting and dispositive power over
5,907,572 shares. 157,902 of the 6,028,122 shares are subject to a
currently exercisable warrant.
(5) Includes 42,000 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
after February 28, 2002.
(6) Includes 52,000 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
after February 28, 2002.
(7) Includes 15,000 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
after February 28, 2002.
(8) Includes 15,000 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
after February 28, 2002.
(9) Includes 1,491,455 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
after February 28, 2002.
(10) Includes 274,664 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
after February 28, 2002.
(11) Includes 130,624 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
after February 28, 2002.
(12) Includes 89,269 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
after February 28, 2002.
(13) Includes 104,686 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
after February 28, 2002.
(14) Includes 83,326 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
after February 28, 2002.
89
(15) Includes 2,161,223 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
after February 28, 2002.
13. Certain Relationships and Related Transactions
All future transactions between the Company and its officers, directors,
principal stockholders and affiliates will be approved by a majority of the
independent and disinterested members of the Board of Directors, and will be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties.
90
PART IV
14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Annual Report on form
10-K:
1. Financial Statements. The following Consolidated Financial
Statements of P-Com, Inc. and its subsidiaries are included in Item
8 of this Annual Report on 10-K:
Page
Financial Statements:
Report of Independent Accountants 46
Consolidated Balance Sheets at December 31, 2001 and 2000 47
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000, and 1999 48
Consolidated Statements of Stockholders' Equity and Comprehensive
Loss for the years ended December 31, 2001, 2000, and 1999 49
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000, and 1999 51
Notes to Consolidated Financial Statements 52
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 76
All other schedules have been omitted because they are not required, are
not applicable, or the information is included in the consolidated
financial statements or notes thereto.
(b) No reports on Form 8-K were filed during the fourth quarter of 2001.
(c) Exhibits - See Exhibit list below.
91
INDEX TO EXHIBITS
Number Description
3.2 (1) Restated Certificate of Incorporation filed with the Delaware
Secretary of State on March 9, 1995.
3.2A Certificate of Amendment of Restated Certificate of Incorporation
filed with the Delaware Secretary of State in 2000.
3.2B (2) Certificate of Designation for the Series A Junior Participating
Preferred Stock, as filed with the Delaware Secretary of State on
October 8, 1997.
3.2C (3) Amended and Restated Certificate of Designation of the Series A
Junior Participating Preferred Stock, as filed with the Delaware
Secretary of State on December 21, 1998.
3.2D (3) Certificate of Designation for the Series B Convertible
Participating Preferred Stock, as filed with the Delaware Secretary
of State on December 21, 1998.
3.2E (3) Certificate of Correction of Certificate of Designations for the
Series B Convertible Participating Preferred Stock, as filed with
the Delaware Secretary of State on December 23, 1998.
3.2F (4) Certificate of Elimination of Series B Convertible Participating
Preferred Stock as filed with the Delaware Secretary of State on
June 15, 1999
3.3 (5) Bylaws of the Company.
4.1 (5) Form of Common Stock Certificate.
4.2 (6) Indenture, dated as of November 1, 1997, between the Registrant and
State Street Bank and Trust Company of California, N.A., as Trustee.
4.10 (7) Amended and Restated Rights Agreement, dated as of January 24, 2001
between the Company and BankBoston, N.A.
10.16*(8) 1995 Stock Option/Stock Issuance Plan, as amended. 1995 Stock
Option/Stock Issuance Plan, including forms of Notices of Grant of
Automatic Stock Option for initial grant and annual grants and
Automatic Stock Option Agreements, as amended.
10.17*(9) Employee Stock Purchase Plan, as amended.
Number Description
10.18 (5) Form of Indemnification Agreement by and between the Company and
each of its officers and directors and a list of signatories.
10.35**(17) Joint Development and License Agreement between Siemens
Aktiengesellschaft and P-COM, Inc. dated June 30, 1998,
10.60(12) Common Stock PIPES Purchase Agreement, dated January 6, 2000, by and
among P-Com and several investors.
10.61(12) Loan and Security Agreement, dated January 14, 2000, by and between
P-Com and Greyrock Capital.
10.62(12) Warrant to Purchase Stock, dated January 14, 2000, to Greyrock
Capital.
10.63(12) Registration Rights Agreement, dated January 14, 2000, by and
between P-Com and Greyrock Capital.
10.64(12) Antidilution Agreement, dated January 14, 2000, by and between P-Com
and Greyrock Capital.
10.65(12) Warrant to Purchase Stock, dated January 14, 2000 to Silicon Valley
Bank.
10.66(12) Registration Rights Agreements, dated January 14, 2000, by and
between P-Com and Silicon Valley Bank.
10.67(12) Antidilution Agreement, dated January 14, 2000, by and between P-Com
and Silicon Valley Bank.
10.74(13) Stock Purchase Warrant between P-Com, Inc. and Marshall Capital
Management, Inc., dated January 20, 2000.
10.76(13) Asset Purchase Agreement between Paradyne Networks, Inc., P-Com,
Inc. and Control Resources Corporation, dated April 5, 2000.
10.77*(13) Promissory note between James Sobczak and P-Com, Inc., dated May 3,
2000.
10.79(14) Letter of Cooperation between China PTIC and P-Com, Inc., dated July
12, 2000.
10.80(15) Common Stock PIPES Purchase Agreement dated August 11, 2000, by and
between the Company and State of Wisconsin Investment Board.
10.84(15) General Release and Settlement Agreement, dated as of August 28,
2000, by and between the Company and Robert E. Collins.
10.85*(16) Letter of Offer, dated August 31, 2000, by and between the Company
and Leighton J. Stephenson.
Number Description
10.86*(10) Severance Agreement dated December 7, 2000 by and between the
Company and Leighton J. Stephenson
10.87(4) Loan and Security Agreement by and between P-Com, Inc., P-Com
Network Services, Inc., and Foothill Capital Corporation, dated
March 29, 2001.
10.90*(4) Employment and Continuity of Benefits Agreement by and between
George Roberts and P-Com, Inc., dated May 31, 2001.**
10.91(11) Common Stock PIPES Agreement, dated July 25, 2001, by and among
P-Com, Inc., Gruber McBaine International, and Lagunitas Partners,
L.P.
21.1 List of subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
----------
* Compensatory benefit arrangement.
** Confidential treatment granted as to certain portions of these exhibits
(1) Incorporated by reference to the identically numbered exhibit included in
the Company's Registration Statement on Form S-1 (File No. 33-95392)
declared effective with the Securities and Exchange Commission on August
17, 1995.
(2) Incorporated by reference to exhibit 3 of the Company's Form 8-K filed
with the Securities and Exchange Commission on October 14, 1997.
(3) Incorporated by reference to the identically numbered exhibit to the
Company's Report on Form 8-K as filed with the Securities and Exchange on
December 24, 1998.
(4) Incorporated by reference to the identically numbered exhibit to the
Company's Report on Form 10-K as filed with the Securities and Exchange on
April 2, 2001.
(5) Incorporated by reference to the identically numbered exhibit included in
the Company's Registration Statement on Form S-1 (File No. 33-88492)
declared effective with the Securities and Exchange Commission on March 2,
1995.
(6) Incorporated by reference to the identically numbered exhibit included in
the Company's Registration Statement on Form S-3 (File No. 333-45463) as
filed with the Securities and Exchange Commission on February 2, 1998.
(7) Incorporated by reference to identical numbered exhibit to the Company's
Form 8-A/A as filed with the Securities Exchange Commission on May 7,
2001.
(8) Incorporated by reference to exhibit 99.1 included in the Company's
Registration Statement on Form S-8 (File No. 333-55604) as filed with the
Securities and Exchange Commission on February 14, 2001.
(9) Incorporated by reference to exhibit 99.1 included in the Company's
Registration Statement on Form S-8 (File No. 333-63762) as filed with the
Securities and Exchange Commission June 25, 2001.
(10) Incorporated by reference to the identically numbered exhibit of the
Company's Quarterly Report on Form 10-Q/A for the quarterly period ended
June 30, 2001.
(11) Incorporated by reference to the identically numbered exhibit of the
Company's Form 8-K as filed with the Securities and Exchange Commission on
August 9, 2001.
(12) Incorporated by reference to the identically numbered exhibit of the
Company's Form 8-K as filed with the Securities and Exchange Commission on
January 25, 2000.
(13) Incorporated by reference to the identically numbered exhibit included in
the Company's Registration Statement on Form S-3/A (File No. 333-70937) as
filed with the Securities and Exchange Commission on May 4, 2000.
(14) Incorporated by reference to the identically numbered exhibit included in
the Company's Registration Statement on Form S-3/A (File No. 333-70937) as
filed with the Securities and Exchange Commission on August 24, 2000.
(15) Incorporated by reference to the identically numbered exhibit of the
Company's Form 8-K as filed with the Securities and Exchange Commission on
August 11, 2000.
(16) Incorporated by reference to the identically numbered exhibit of the
Company's Quarterly Report on Form 10-Q/A for the quarterly period ended
September 30, 2000.
(17) Incorporated by reference to the identically numbered exhibit of the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 29, 2002 By: /s/ George P. Roberts
George P. Roberts
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
Chairman of the Board and
Chief Executive Officer
/s/ George P. Roberts (Principal Executive Officer) March 29, 2002
------------------------------
George P. Roberts
Vice President and
Chief Financial Officer
(Principal Financial Officer and
/s/ Leighton J. Stephenson Principal Accounting Officer) March 29, 2002
------------------------------
Leighton J. Stephenson
/s/ Brian T. Josling Director of the Company March 29, 2002
------------------------------
Brian T. Josling
/s/ John A. Hawkins Director of the Company March 29, 2002
------------------------------
John A. Hawkins
/s/ Frederick R. Fromm Director of the Company March 29, 2002
------------------------------
Frederick R. Fromm
/s/ BG (Ret) Harold R. Johnson Director of the Company March 29, 2002
------------------------------
Brig. Gen. Harold R. Johnson