<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 0-25356
---------------
P-Com, Inc.
(Exact name of Registrant as specified in its charter)
---------------
Delaware 77-0289371
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3175 S. Winchester Boulevard, Campbell, California 95008
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 866-3666
---------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of November 11, 1999, there were 64,474,137 shares of the Registrant's Common
Stock, par value $0.0001 per share, outstanding.
This quarterly report on Form 10-Q consists of 48 pages of which this is page 1.
The Exhibit Index appears on page 48.
1
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P-COM, INC.
TABLE OF CONTENTS
Page
PART I. Financial Information Number
------
Item 1 Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998.............................................. 3
Condensed Consolidated Statements of Operations for the three and
nine month periods ended September 30, 1999 and 1998 ............. 4
Condensed Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 1999 and 1998 ........................ 6
Notes to Condensed Consolidated Financial Statements ............. 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 17
Item 3 Quantitative and Qualitative Disclosures About Market Risk ........ 44
PART II. Other Information
Item 1 Legal Proceedings ................................................. 45
Item 2 Changes in Securities ............................................. 45
Item 3 Defaults Upon Senior Securities ................................... 45
Item 4 Submission of Matters to a Vote of Security Holders ............... 45
Item 5 Other Information ................................................. 45
Item 6 Exhibits and Reports on Form 8-K .................................. 45
Signatures ................................................................. 47
2
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PART I - FINANCIAL INFORMATION
ITEM 1.
P-COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
ASSETS ------------------ -----------------
(restated)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 14,034 $ 29,033
Accounts receivable, net of allowance of $4,622 and $4,600, respectively 38,310 37,892
Inventory 42,784 68,812
Prepaid expenses and notes receivable 14,556 19,787
Net assets of discontinued operation 12,795 16,988
--------- ---------
Total current assets 122,479 172,512
Property and equipment, net 37,078 46,770
Deferred income taxes 9,678 9,678
Goodwill and other assets 52,184 71,526
--------- ---------
$ 221,419 $ 300,486
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 25,441 $ 30,679
Accrued employee benefits 2,883 2,532
Other accrued liabilities 13,810 7,857
Deferred liabilities 6,750 3,000
Accrual for loss on disposal of discontinued operation 8,898 --
Notes payable 26,557 46,360
--------- ---------
Total current liabilities 84,339 90,428
--------- ---------
Deferred liabilities, net of current portion 1,250 5,000
--------- ---------
Long-term debt 64,230 90,253
--------- ---------
Series B Mandatorily Redeemable Convertible Preferred Stock -- 13,559
--------- ---------
Mandatorily Redeemable Stock 13,559 --
--------- ---------
Mandatorily Redeemable Common Stock Warrants 3,839 1,839
--------- ---------
Stockholders' equity:
Series A Preferred Stock -- --
Common Stock 6 5
Additional paid-in capital 199,972 145,246
Accumulated deficit (145,240) (45,924)
Accumulated other comprehensive income (536) 80
--------- ---------
Total stockholders' equity 54,202 99,407
--------- ---------
$ 221,419 $ 300,486
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data, unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------- --------- --------- ---------
(restated) (restated)
<S> <C> <C> <C> <C>
Sales:
Product $ 30,012 $ 12,131 $ 79,996 $ 99,772
Service 10,046 9,874 29,414 26,000
--------- --------- --------- ---------
Total sales 40,058 22,005 109,410 125,772
--------- --------- --------- ---------
Cost of sales:
Product 22,536 27,584 82,121 82,449
Service 6,705 9,120 20,103 19,737
--------- --------- --------- ---------
Total cost of sales 29,241 36,704 102,224 102,186
--------- --------- --------- ---------
Gross profit (loss) 10,817 (14,699) 7,186 23,586
--------- --------- --------- ---------
Operating expenses:
Research and development 7,623 11,157 25,763 27,928
Selling and marketing 3,690 5,463 13,468 14,907
General and administrative 5,325 10,110 26,810 18,114
Goodwill amortization 2,054 1,946 6,162 4,738
Restructuring charge (167) 4,332 3,118 4,332
Acquired in-process research and development -- -- -- 15,442
--------- --------- --------- ---------
Total operating expenses 18,525 33,008 75,321 85,461
--------- --------- --------- ---------
Loss from operations (7,708) (47,707) (68,135) (61,875)
Interest expense (2,717) (2,165) (6,849) (5,673)
Interest income 288 185 470 1,413
Other income (expense), net (3,576) (760) (3,812) (564)
--------- --------- --------- ---------
Loss from continuing operations before extraordinary
item and income taxes (13,713) (50,447) (78,326) (66,699)
Provision (benefit) for income taxes 228 (8,839) 479 (11,610)
--------- --------- --------- ---------
Loss from continuing operations before extraordinary item (13,941) (41,608) (78,805) (55,089)
Extraordinary item: gain on retirement of Notes -- -- 7,284 --
--------- --------- --------- ---------
Loss from continuing operations (13,941) (41,608) (71,521) (55,089)
Discontinued operation:
Net income (loss) from discontinued operation of Technosystem,
S.p.A. to August 11, 1999 (678) 411 (4,364) 2,532
Loss on disposal of Technosystem including provision of
$2,000 for operating losses during phase-out period (21,780) -- (21,780) --
--------- --------- --------- ---------
Net loss (36,399) (41,197) (97,665) (52,557)
Charge related to conversion of Preferred Stock
to Common Stock -- -- (12,190) --
--------- --------- --------- ---------
Net loss attributable to holders of Common Stock $ (36,399) $ (41,197) $(109,855) $ (52,557)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(In thousands, except per share data, unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(restated) (restated)
<S> <C> <C> <C> <C>
Basic and diluted net loss attributable to holders of common
stock per share:
Loss from continuing operations before extraordinary item $ (0.21) $ (0.96) $ (1.41) $ (1.28)
Extraordinary item -- -- 0.13 --
Income (loss) from discontinued operation (0.01) 0.01 (0.09) 0.06
Loss on disposal of Technosystem (0.33) -- (0.40) --
Conversion of preferred stock -- -- (0.22) --
---------- ---------- ---------- ----------
Net loss $ (0.55) $ (0.95) $ (1.99) $ (1.22)
========== ========== ========== ==========
Shares used in per share computations:
Basic and diluted 65,330 43,459 55,133 43,204
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
-------- --------
(restated)
<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $(71,521) $(55,089)
Adjustments to reconcile net loss to net
cash used in continuing operations:
Depreciation 11,680 7,624
Amortization of goodwill 6,162 4,738
Loss on disposals of fixed assets 4,753 --
Deferred income taxes -- (13,829)
Restructuring and other unusual charges 33,190 --
Acquired in-process research and development -- 15,442
Non-cash effect of retirement of Notes (7,284) --
Change in assets and liabilities (net of acquisition balances):
Accounts receivable, net of charges (12,231) 29,962
Inventory, net of charges 4,651 (20,280)
Prepaid expenses and notes receivable 5,231 (6,827)
Goodwill and other assets 352 3,741
Accounts payable (5,238) (11,074)
Accrued employee benefits 351 (1,343)
Income taxes payable -- (2,269)
Deferred liabilities -- 6,554
Other accrued liabilities 5,594 4,670
-------- --------
Net cash used in continuing operations (24,310) (37,980)
Net cash used in discontinued operations (225) (8,574)
-------- --------
Net cash used in operating activities (24,535) (46,554)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment (6,312) (14,955)
Cash paid in business combinations, net of cash acquired -- (61,742)
-------- --------
Net cash used in investing activities (6,312) (76,697)
-------- --------
Cash flows from financing activities:
Payments under capital lease obligation (276) (58)
Proceeds from sale-leaseback transaction -- 1,557
Proceeds (payments) of notes payable (19,803) 55,356
Proceeds from the issuance of common stock, net of issuance costs 36,471 4,439
Proceeds from long-term debt 71 (1,637)
Increase in common stock 1 --
-------- --------
Net cash provided by financing activities 16,464 59,657
-------- --------
Effect of exchange rate changes on cash (616) (188)
-------- --------
Net decrease in cash and cash equivalents (14,999) (63,782)
Cash and cash equivalents at the beginning of the period 29,033 86,556
-------- --------
Cash and cash equivalents at the end of the period $ 14,034 $ 22,774
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE>
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands, unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
-------- --------
(restated)
<S> <C> <C>
Supplemental cash flow disclosures:
Cash paid for income taxes $ 346 $ 1,922
======== ========
Cash paid for interest $ 6,665 $ 5,851
======== ========
Promissory note issued in connection with the acquisition of Cylink,
net of amount withheld $ -- $ 9,682
======== ========
Exchange of Convertible Subordinated Notes for Common Stock $ 25,539 $ --
======== ========
Equipment purchased under capital lease $ 80 $ --
======== ========
Repricing of Warrants $ 2,000 $ --
======== ========
Write-off of Technosystem, S.p.A. goodwill $ 12,828 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
7
<PAGE>
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the
information and footnotes required by generally accepted accounting principles
for complete unaudited consolidated financial statements. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation of P-Com, Inc.'s
(referred to herein, together with its wholly owned and partially owned
subsidiaries, as "P-Com" or the "Company") financial condition as of September
30, 1999, and the results of its operations for the three and nine month periods
ended September 30, 1999 and 1998 and its cash flows for the nine month periods
ended September 30,1999 and 1998. These condensed consolidated financial
statements should be read in conjunction with the Company's audited 1998
consolidated financial statements, including the notes thereto, and the other
information set forth therein, included in the Company's Annual Report on Form
10-K/A (File No. 0-25356). Operating results for the nine-month period ended
September 30, 1999 are not necessarily indicative of the operating results that
may be expected for the year ending December 31, 1999.
Revision of financial statements and changes to certain information
P-Com, Inc. (the "Company") is amending, and pursuant to those amendments
has revised its 1998 and first quarter of 1999 financial statements, as
reflected in this filing, to revise the accounting treatment of certain
contracts with a major customer. Under a joint license and development contract
the Company recognized $10.5 million of revenue in 1998 and $1.5 million in the
first quarter of 1999 of this $12 million contract on a percentage of completion
basis. Recently, the Company determined that a related Original Equipment
Manufacturer ("OEM") agreement which requires payments of $8 million to this
customer in 1999 and 2000 specifically earmarked for marketing the Company's
products manufactured for this customer, should have offset a portion of the
revenue recognized previously. The net effect is to reduce 1998 revenue and
pretax income by $7.2 million and to reduce the first quarter of 1999 revenue
and pretax income by $0.8 million.
The effect of this revision to previously reported condensed consolidated
financial statements as of December 31, 1998 and for the three and nine month
periods ended September 30, 1998 is as follows (in thousands except per share
amounts, unaudited):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1998 September 30, 1998
Statements of Operations: As reported Restated As reported Restated
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Revenue $ 30,240 $ 22,005 $ 152,336 $ 125,772
Loss from operations $ (46,811) $ (47,707) $ (52,546) $ (61,875)
Net loss $ (40,696) $ (41,197) $ (46,003) $ (52,557)
Net loss per share
Basic and diluted $ (0.94) $ (0.95) $ (1.06) $ (1.22)
<CAPTION>
December 31, 1998
Balance Sheets: As reported Restated
----------- --------
<S> <C> <C>
Other accrued liabilities $ 10,318 $ 7,857
Deferred liabilities - current portion $ -- $ 3,000
Deferred liabilities, net of current portion $ -- $ 5,000
Total liabilities $ 192,410 $ 185,681
Accumulated deficit $ (38,783) $ (45,924)
Total stockholders' equity $ 106,550 $ 99,407
</TABLE>
The Company has also reclassified its Italian broadcast subsidiary,
Technosystem S.p.A, as a discontinued operation based on the Board of Directors
decision in the third quarter of 1999 to divest this business unit. Technosystem
S.p.A will
8
<PAGE>
no longer be included in the Company's financial statements on a line item
basis, but will be shown separately as a discontinued operation. The Company has
recorded a $21.8 million write-down based on its expectation of the ultimate
selling price. The write-down is classified along with the Technosystem S.p.A.
historical financial results as a discontinued operation. See Note 10 to the
Condensed Consolidated Financial Statements.
2. 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 the Company's Common Stock for the
period because the effect would be antidilutive. For the three and nine months
ended September 30, 1999, options to purch ase approximately 3,093,337 and
1,700,011 shares of Common Stock were excluded from the computation,
respectively. For the nine months ended September 30, 1999, the assumed
conversion of the 4 1/4% Convertible Subordinated Notes ("Notes") into 2,812,257
shares of Common Stock was not included in the computation of diluted net loss
per share because the effect would be antidilutive.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In September 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income and its components in a consolidated financial statement
that is displayed with the same prominence as other consolidated financial
statements. Comprehensive income as defined includes all changes in equity (net
assets) during a period from non-owner sources. Examples of items to be included
in comprehensive income, which are excluded from net income, include foreign
currency translation adjustments and unrealized gain/loss on available-for-sale
securities. The Company's total comprehensive net loss was as follows
(in thousands, unaudited):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss attributable to holders of Common Stock $ (36,399) $ (41,197) $(109,855) $ (52,557)
Other comprehensive income
(expense) 2,091 (1,981) (1,770) (933)
--------- --------- --------- ---------
Total comprehensive loss $ (34,308) $ (43,178) $(111,625) $ (53,490)
========= ========= ========= =========
</TABLE>
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP No. 98-1
requires that entities capitalize certain costs related to internal-use software
once certain criteria have been met. The Company is required to implement SOP
No. 98-1 for the year ending December 31, 1999. Adoption of SOP No. 98-1 is not
expected to have a material impact on the Company's financial position or
results of operations.
In September 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," effective beginning in the first quarter of
2000. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting under SFAS No. 133. The
Company is currently evaluating the impact of SFAS No. 133 on its financial
position and results of operations.
4. BORROWING ARRANGEMENTS
The Company entered into a revolving line-of-credit agreement on May 15,
1998, as amended, that provided for borrowings of up to $50.0 million. The
maximum revolving commitment, as amended, has been reduced to $30.0 million
until maturity on January 15, 2000. At September 30, 1999, the Company had been
advanced approximately $26.6 million and had used the remaining $3.4 million to
secure letters of credit under such line. Borrowings under the line are secured
by the assets of the Company and bear interest at either a base interest rate or
a variable interest rate. The agreement requires the Company to comply with
certain financial covenants, including the maintenance of specific minimum
ratios. Amendments to the bank credit agreement have allowed the Company
9
<PAGE>
to remain in compliance with the debt covenants through September 30, 1999.
Non-compliance could cause the Company to be in default under the bank credit
agreement. If a default is declared by the lenders, cross defaults will be
triggered on the Company's outstanding Notes and other debt instruments
resulting in accelerated repayments of such debts.
The Company's foreign subsidiaries had lines of credit available from
various financial institutions with interest rates ranging from 8% to 12%.
Generally, these foreign credit lines do not require commitment fees or
compensating balances and are cancelable at the option of the Company or the
financial institutions.
Technosystem, S.p.A. has a line of credit bearing interest at either a
base interest rate or a variable interest rate. The line of credit is guaranteed
by the Company. At September 30, 1999, $3.3 million had been drawn down under
this facility. The Company has reclassified its Italian broadcast subsidiary,
Technosystem S.p.A., as a discontinued operation based on the Board of Directors
decision in the third quarter of 1999 to divest this business unit. Technosystem
S.p.A. will no longer be included in the Company's financial statements on a
line item basis, but will be shown separately as a discontinued operation. See
Note 10 to the Condensed Consolidated Financial Statements.
5. CAPITAL STOCK
The Company raised gross proceeds of $15 million and $40 million,
respectively, through the issuance of Series B Convertible Preferred Stock and
warrants in December 1998, and through the sale of 10,067,958 newly issued
shares of Common Stock in June 1999 which were sold to third parties at a 7.5%
discount from the average of closing sale prices of Common Stock for the fifteen
day period ended June 17, 1999.
The Company retired approximately $38 million of its Notes between
December 1998 and February 1999 through the issuance of 5,279,257 shares of
Common Stock. The retirement of these notes resulted in an extraordinary gain of
approximately $7.3 million during the first quarter of 1999.
During June 1999, the Company exchanged all 15,000 shares of Series B
Convertible Preferred Stock for 5,134,795 shares of mandatorily redeemable
Common Stock and the Company also exchanged outstanding mandatorily redeemable
warrants to purchase 1,242,257 shares of Common Stock, which were held by the
holders of the Series B Convertible Preferred Stock, for new warrants to
purchase 1,242,257 shares of Common Stock with an exercise price of $3.00 per
share rather than $3.47 per share. Upon the occurrence of certain events outside
the Company's 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 Convertible Preferred Stock agreed to waive all
premiums which had been accrued and penalties which had been incurred in
connection with the Series B Convertible Preferred Stock as of the date of
exchange.
Pursuant to the registration rights agreement the Company entered into in
connection with the issuance of the Series B Convertible Preferred Stock, as
amended by the exchange agreements, the Company is required to make cash
payments to the exchange stockholders because their resale registration
statement was not declared effective on or before July 19, 1999. As of September
30, 1999, the penalty amount was $1.1 million, of which $0.3 million was paid,
and was continuing to accrue at a rate of $10,000 for each day after July 19,
1999 until the registration statement is declared effective. Additionally, the
Company recorded a charge in the second quarter of approximately $12.2 million
resulting from this exchange, increasing the loss attributable to common
stockholders when computing earnings (loss) per share.
In November 1999, the Company entered into agreements with the exchange
shareholders to eliminate their redemption rights and their past and future late
registration premiums and penalties in exchange for 219,605 shares of Common
Stock, warrants to purchase 443,000 shares of Common Stock, and a $400,000
promissory note convertible (with interest) into Common Stock at a conversion
price of $4.715625 per share.
10
<PAGE>
6. BALANCE SHEET COMPONENTS
Inventory consists of the following (in thousands, unaudited):
September 30, December 31,
1999 1998
------- -------
Raw materials $21,349 $30,811
Work-in-process 14,226 19,332
Finished goods 7,209 18,669
------- -------
$42,784 $68,812
======= =======
Property and equipment consist of the following (in thousands, unaudited):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
Tooling and test equipment $ 46,375 $ 46,274
Computer equipment 10,225 9,205
Furniture and fixtures 5,563 7,129
Land and buildings 3,270 3,465
Construction-in-process 3,419 4,878
-------- --------
68,852 70,951
Less - accumulated depreciation and amortization (31,774) (24,181)
-------- --------
$ 37,078 $ 46,770
======== ========
</TABLE>
Goodwill and other assets consist of the following (in thousands,
unaudited):
September 30, December 31,
1999 1998
-------- --------
Goodwill:
Technosystem $ -- $ 15,850
CSM 22,295 22,295
Cylink 34,261 34,261
Cemetel 4,360 4,360
-------- --------
60,916 76,766
Less- accumulated amortization (10,838) (7,698)
-------- --------
Net goodwill 50,078 69,068
Other assets 2,106 2,458
-------- --------
$ 52,184 $ 71,526
======== ========
7. RESTRUCTURING AND OTHER UNUSUAL CHARGES
During the third quarter of 1998, the Company's management approved
restructuring plans, which included initiatives to integrate the operations of
acquired companies, consolidate duplicate facilities, and reduce overhead.
Accrued restructuring costs of $4.3 million were recorded in the third quarter
of 1998 relating to these initiatives.
In the second quarter of 1999, the Company determined that there was a
need to reevaluate the Company's sales forecasts, and to size the business to
meet this decrease in forecasted sales over the next twelve months. The change
in forecast was prompted by the slower than expected recovery in the
telecommunications industry, and resulted in total charges of $36.5 million
during the second quarter of 1999. These charges consisted of $11.8 million in
accounts receivable write-offs and reserves, $3.3 million in facility and fixed
asset write-offs and other related charges, and an increase to inventory
reserves and related charges of approximately $21.4 million. The need for the
decrease in the sales forecast was evidenced by the Company's sales trends for
the last two quarters which did not meet management's initial expectations for
recovery and renewed growth throughout the telecommunications industry, and is
further evidenced by the modest growth in the revenues of several of the
Company's competitors.
The Company determined that accounts receivable write-offs and reserves,
totaling $11.8 million, were necessary after a customer-by-customer review of
all accounts more than 90 days past allowed payment terms. This
11
<PAGE>
charge was recorded as part of general and administrative expenses. All of the
accounts reserved or written-off were in the Product business segment and the
majority of these accounts were for customers of the Company's Tel-Link product
lines. These customers were located predominantly in the emerging countries of
Africa and Asia, which experienced significant economic turmoil starting in the
third quarter of 1998, and the write-off of a single customer receivable in
South Africa accounted for more than half of the increase during the quarter.
The Company will continue to pursue collection efforts with all of the reserved
accounts and is attempting to recover its inventory from the South African
customer.
The write-offs and charges for facilities and fixed assets, which were
recorded as part of general and administrative expenses, resulted from the
closure of sales offices in Mexico and the United Arab Emirates and the
consolidation from three to two facilities in Campbell, California. As a result,
certain fixed assets became idle and leased buildings were abandoned.
Approximately $3.0 million of the charge comprises the write-off of the
remaining book value of fixed assets that became idle and were not recoverable,
and lease termination payments associated with the abandoned facilities. This
amount does not include expenses, such as moving expenses or lease payments that
will benefit future operations. Additionally, approximately $0.3 million was
recorded for severance costs due to the elimination of 30 positions through an
involuntary reduction in force.
The increase in inventory and related reserves totaled approximately $21.4
million and was charged to Product Cost of Sales. Of this total, approximately
$15.4 million was required for excess and obsolete inventory primarily in the
Company's Tel-Link product lines. Furthermore, the reserves were required
primarily for excess and obsolete finished goods inventory. The Company makes no
distinction between excess and obsolete inventory at this time.
Included in the reserve for excess and obsolete inventory was $0.8 million
for the rework of excess semi-custom finished goods that were configured for
specific customer applications or geographic regions. The Company believes that
in some cases it can be less expensive to rework semi-custom finished goods than
to purchase new parts and it can reduce cash outlays for inventory and improve
cash flows. The costs required to perform rework include costs for material,
assembly, and re-testing of inventory by the Company's suppliers.
Additionally, accrued liabilities were increased by $6.0 million for a
charge to Product Cost of Sales for non-cancelable excess inventory purchase
commitments, also related primarily to the Company's Tel-Link product lines. As
customer demand is not anticipated to consume the inventory on hand within the
next twelve months, the Company will continue to attempt to sell the inventory
and will dispose of it when it is deemed to be unsaleable.
The Company's inventory levels were driven based upon forecasted sales
expectations worldwide. However, the Company's forecasts of recovery in its
business and in the telecommunications industry in general have not yet
materialized. In particular, forecasted sales in the emerging countries of Asia
and Africa have fallen short of expectations. Consequently, actual sales have
fallen short of forecast.
Beginning in the third quarter of 1999, the Company embarked on a program
to find buyers for excess and obsolete inventory at prices below cost and
consequently, has scrapped or sold approximately $3.5 million of this inventory.
The Company also is in the process of attempting to renegotiate the
non-cancelable purchase commitments with its suppliers.
The accrued restructuring and other unusual charges and amounts charged
against the accrual as of September 30, 1999 are as follows (in thousands,
unaudited):
<TABLE>
<CAPTION>
Beginning Expenditures Remaining
Accrual Additions and Write-offs Accrual
--------- ----------- -------------- --------
<S> <C> <C> <C> <C>
Severance and benefits $ 569 $ 300 $ (701) $ 168
Facility and fixed asset write-offs 879 3,000 (3,649) 230
Goodwill impairment 2,884 -- (2,884) --
-------- -------- -------- --------
Total restructuring charges 4,332 3,300 (7,234) 398
-------- -------- -------- --------
Inventory reserve 16,922 15,400 (14,818) 17,504
Non-cancellable purchase commitments reserve -- 6,000 (1,269) 4,731
-------- -------- -------- --------
Total inventory and related charges 16,922 21,400 (16,087) 22,235
-------- -------- -------- --------
Accounts receivable reserve 5,386 11,800 (5,386) 11,800
-------- -------- -------- --------
Total accrued restructuring and other unusual charges $ 26,640 $ 36,500 $(28,707) $ 34,433
======== ======== ======== ========
</TABLE>
12
<PAGE>
8. SEGMENT REPORTING
For purposes of segment reporting, the Company aggregates operating
segments that have similar economic characteristics and meet the aggregation
criteria of 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 an organization primarily located in the United
States, the United Kingdom, and Italy which provides comprehensive network
services including system and program planning and management, path design, and
installation for the wireless communications market.
As of August 11, 1999, the Company announced its intent to divest its broadcast
equipment business, Technosystem, S.p.A., and concluded that a measurement date
had occurred. Accordingly, beginning in the third quarter of 1999, this business
is being reported as a discontinued operation and the amounts presented for
prior periods have been restated for appropriate comparability. As such, the
segment information shown below does not include Technosystem's financial
information for both the three months and nine months ended September 30, 1999
and 1998. See Note 10 to the Condensed Consolidated Financial Statements.
The accounting policies of the operating segments are the same as those
described in the "Summary of Significant Accounting Policies" included in the
Company's Annual Report on Form 10-K/A. The Company evaluates performance based
on operating income. 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 operations of the Company's operating
segments (in thousands, unaudited):
13
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended Product Service
September 30, 1999 Sales Sales Total
- ---------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Sales $ 30,012 $ 10,046 $ 40,058
Income (loss) from continuing operations $ (9,463) $ 1,755 $ (7,708)
Depreciation $ (3,032) $ (233) $ (3,265)
Total assets $ 198,213 $ 23,206 $ 221,419
Interest expense $ (2,633) $ (84) $ (2,717)
<CAPTION>
For the Three Months Ended Product Service
September 30, 1998 Sales Sales Total
- ---------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Sales $ 12,131 $ 9,874 $ 22,005
Income (loss) from continuing operations $ (47,165) $ (542) $ (47,707)
Depreciation $ (2,119) $ (482) $ (2,601)
Total assets $ 275,783 $ 12,757 $ 288,540
Interest expense $ (2,135) $ (30) $ (2,165)
<CAPTION>
For the Nine Months Ended Product Service
September 30, 1999 Sales Sales Total
- ---------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Sales $ 79,996 $ 29,414 $ 109,410
Income (loss) from continuing operations $ (71,685) $ 3,550 $ (68,135)
Depreciation $ (10,727) $ (953) $ (11,680)
Total assets $ 198,213 $ 23,206 $ 221,419
Interest expense $ (6,591) $ (258) $ (6,849)
<CAPTION>
For the Nine Months Ended Product Service
September 30, 1998 Sales Sales Total
- ---------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Sales $ 99,772 $ 26,000 $ 125,772
Income (loss) from continuing operations $ (63,787) $ 1,912 $ (61,875)
Depreciation $ (6,973) $ (651) $ (7,624)
Total assets $ 275,783 $ 12,757 $ 288,540
Interest expense $ (5,550) $ (123) $ (5,673)
</TABLE>
A reconciliation of loss from continuing operations to loss before
extraordinary item and income taxes is as follows (in thousands, unaudited):
14
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Loss from continuing operations $ (7,708) $(47,707) $(68,135) $(61,875)
Interest expense (2,717) (2,165) (6,849) (5,673)
Interest income 288 185 470 1,413
Other income (expense), net (3,576) (760) (3,812) (564)
-------- -------- -------- --------
Loss from continuing operations before
extraodinary item and income taxes $(13,713) $(50,447) $(78,326) $(66,699)
======== ======== ======== ========
</TABLE>
The Company's product and service sales by category are as follows (in
thousands, unaudited):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Microwave radio transmission equipment $ 28,953 $ 10,835 $ 74,994 $ 94,691
Network monitoring equipment 1,059 1,296 5,002 5,081
Service 10,046 9,874 29,414 26,000
-------- -------- -------- --------
$ 40,058 $ 22,005 $109,410 $125,772
======== ======== ======== ========
</TABLE>
The breakdown of sales by geographic customer destination and property and
equipment, net, are as follows (in thousands, unaudited):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales:
United States $ 11,404 $ 10,783 $ 30,548 $ 32,151
United Kingdom 12,346 18 39,614 25,833
Europe 7,331 8,913 22,161 40,053
Africa -- 574 -- 16,816
Asia 5,204 767 6,294 8,194
Other geographic regions 3,773 950 10,793 2,725
-------- -------- -------- --------
$ 40,058 $ 22,005 $109,410 $125,772
======== ======== ======== ========
</TABLE>
At September 30,
1999 1998
------- -------
Property and equipment, net:
United States $29,166 $35,194
United Kingdom 2,754 2,876
Italy 4,939 3,412
Other geographic regions 219 278
======= =======
$37,078 $41,760
======= =======
9. CONTINGENCIES
The Company is a defendant in a consolidated class action lawsuit in which
the plaintiffs are alleging various securities laws violations by the Company
and certain of its officers and directors. The plaintiffs seek unspecified
damages based upon the decrease in market value of shares of the Company's
Common Stock. The Company believes the action is without merit and intends to
defend this action vigorously. This proceeding is at an early stage and the
Company is unable to speculate on its ultimate outcome. However, the ultimate
result of the matter described above could have a material adverse effect on the
Company's results of operations or financial position either through the defense
or result of such litigation.
10. DISCONTINUED OPERATION
15
<PAGE>
As of August 11, 1999, the Company announced its intent to divest its
broadcast equipment business, Technosystem, S.p.A., and concluded that a
measurement date had occurred. Accordingly, beginning in the third quarter of
1999, this business is being reported as a discontinued operation and the
financial statement information related to this business has been presented on
one line in the Condensed Consolidated Balance Sheets, "net assets from
discontinued operations", and in the "discontinued operations" line of the
Condensed Consolidated Statements of Operations. The "net assets from
discontinued operations" represents the assets intended to be sold offset by the
liabilities anticipated to be assumed by the buyers of the business. The amounts
presented for prior periods have been restated for appropriate comparability.
The Company anticipates an overall loss on the sale of Technosystem,
S.p.A. including a loss from operations during the phase-out period which is
estimated to end on or about December 31, 1999. Consequently, all losses
estimated at this time have been recognized by the Company and included as part
of the Condensed Consolidated Statements of Operations for the third quarter of
1999.
Summarized results of Technosystem, S.p.A. are as follows (in thousands,
unaudited):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended,
September 30, September 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales $ 831 $ 7,734 $ 4,709 $20,010
======= ======= ======= =======
Income (loss) before income taxes $(1,457) $ 483 $(5,144) $ 2,641
Provision for income taxes -- 72 -- 109
------- ------- ------- -------
Net income (loss) $(1,457) $ 411 $(5,144) $ 2,532
======= ======= ======= =======
</TABLE>
Net assets of Technosystem, S.p.A as reported in the Condensed
Consolidated Balance Sheets comprised the following (in thousands, unaudited):
September 30, December 31,
1999 1998
------- -------
Current assets $21,235 $25,225
Land, buildings and equipment, net 4,246 5,316
Other assets 403 318
------- -------
Total assets 25,884 30,859
------- -------
Current liabilities 11,700 11,355
Long-term borrowings 1,389 2,516
------- -------
Total liabilities 13,089 13,871
------- -------
Net assets of discontinued operation $12,795 $16,988
======= =======
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements which
involve numerous risks and uncertainties. The statements contained in this
Quarterly Report on Form 10-Q that are not purely historical may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, including without limitation, statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. The
Company's 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 Risk Factors Affecting the Company" contained in this Item
2 and elsewhere in this Quarterly Report on Form 10-Q. Additional factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in the Company's 1998 Annual Report on Form 10-K/A as amended,
and other documents filed by the Company with the Securities and Exchange
Commission.
Revision of financial statements and changes to certain information
P-Com, Inc. (the "Company") is amending, and pursuant to those amendments
has revised its 1998 and first quarter of 1999 financial statements, as
reflected in this filing, to revise the accounting treatment of certain
contracts with a major customer. Under a joint license and development contract
the Company recognized $10.5 million of revenue in 1998 and $1.5 million in the
first quarter of 1999 of this $12 million contract on a percentage of completion
basis. Recently, the Company determined that a related Original Equipment
Manufacturer ("OEM") agreement which requires payments of $8 million to this
customer in 1999 and 2000 specifically earmarked for marketing the Company's
products manufactured for this customer, should have offset a portion of the
revenue recognized previously. The net effect is to reduce 1998 revenue and
pretax income by $7.2 million and to reduce the first quarter of 1999 revenue
and pretax income by $0.8 million. See Note 1 to the Condensed Consolidated
Financial Statements.
The Company has also reclassified its Italian broadcast subsidiary,
Technosystem S.p.A. ("Technosystem"), as a discontinued operation based on the
Board of Directors decision in the third quarter of 1999 to divest of this
business unit. Technosystem's sales for the three months ended September 30,
1999 and 1998 were $0.8 million and $7.7 million respectively. For the nine
months ended September 30, 1999 and 1998 Technosystem's sales were $4.7
million and $20.0 million, respectively. The decrease in sales for both the
three month and nine month periods were primarily due to two factors. First,
many of Technosystem's existing and potential customers are located in
emerging markets with struggling economies, which has made it difficult for
these customers to meet the Company's credit terms. Second, many customers
have been unwilling to commit to a long-term investment in analog equipment,
when digital systems are on the verge of becoming available in many markets.
This has resulted in some customers deciding to delay new equipment purchases
until digital equipment becomes readily available in their market. As such,
the Company has decided to focus available resources on its core business
operations, resulting in the decision to divest of this business unit.
Technosystem will no longer be included in the Company's financial
statements on a line item basis, but will be shown separately as a discontinued
operation. The Company has recorded a $21.8 million write-down based on its
expectation of the ultimate selling price. The write-down is classified along
with the Technosystem historical financial results as a discontinued operation.
See Note 10 to the Condensed Consolidated Financial Statements. Except where
noted, the following comments are associated with the Company's continuing
business segments.
In early August 1999, the Company announced that it had determined that
Control Resources Corporation ("CRC") was not a part of the Company's long-term
strategic focus, and that accordingly it was evaluating alternatives for this
subsidiary, including possible disposition. CRC manufactures network monitoring
equipment and had sales of $5.0 million and $6.8 million, respectively, for the
nine months ended September 30, 1999 and for the year ended December 31, 1998.
Overview
P-Com, Inc. (the "Company") supplies equipment and services for access to
worldwide telecommunications and broadcast networks. The Company was founded in
August 1991 to develop, manufacture, market and sell millimeter wave radio
systems for wireless networks. Currently, the Company ships 2.4 GHz and 5.7 GHz
spread spectrum radio systems, as well as 7 GHz, 13 GHz, 14 GHz, 15 GHz, 18 GHz,
23 GHz, 26 GHz, 38 GHz and 50 GHz radio systems, and the Company also provides
software and related services for these products. Additionally, the Company
offers turnkey microwave relocation services, engineering, path design, program
management, installation and maintenance of communication systems to network
service providers. The Company's point-to-multipoint radio systems for use in
the telecommunications industry have reached the production stage and the
Company expects shipments of this product line will result in production
revenues beginning in the fourth quarter of 1999. The Company anticipates that
its ability to generate future revenues and profits will depend in large part on
the success of the point-to-multipoint product line.
The Company raised gross proceeds of $15 million and $40 million,
respectively, through the issuance of Series B Convertible Preferred Stock and
warrants in December 1998, and through the sale of 10,067,958 newly issued
shares of Common Stock in June 1999. The Company retired approximately $40
million of its 4 1/4% Convertible Subordinated Notes ("Notes") between December
1998 and February 1999 through the issuance of 5,279,257 shares of Common Stock.
During June 1999, the Company issued 5,134,795 shares of Common Stock in
exchange for all 15,000 shares of Series B Convertible Preferred Stock and the
Company also issued new warrants to purchase 1,242,257 shares of Common Stock
with an exercise price of $3.00 per share in exchange for 1,242,257 outstanding
warrants with an exercise price of $3.47 per share which were held by the
holders of the Series B Convertible Preferred Stock. In connection with the
exchange agreements, each holder of the Series B Convertible Preferred Stock
agreed to waive all premiums which had been accrued and penalties which had been
incurred in connection with the Series B Convertible Preferred Stock as of the
date of exchange.
Pursuant to the registration rights agreement the Company entered into in
connection with the issuance of the
17
<PAGE>
Series B Convertible Preferred Stock, as amended by the exchange agreements, the
Company was required to make cash payments to the exchange stockholders because
their resale registration statement was not declared effective on or before July
19, 1999. As of September 30, 1999, the penalty amount was $1.1 million, of
which $0.3 million was paid, and was continuing to accrue at a rate of $10,000
for each day after July 19, 1999 until the registration statement is declared
effective. Additionally, the Company recorded a charge in the second quarter of
approximately $12.2 million resulting from this exchange, increasing the loss
attributable to common stockholders when computing earnings (loss) per share.
The exchange agreements also provided, in some circumstances, for the Company to
pay further penalties and/or to be required to purchase the 5,134,795 shares of
Common Stock.
In November 1999, the Company entered into agreements with the exchange
shareholders to eliminate their redemption rights and their past and future late
registration penalties in exchange for 219,605 shares of Common Stock, warrants
to purchase 443,000 shares of Common Stock, and a $400,000 promissory note
convertible (with interest) into Common Stock at a conversion price of $4.715625
per share.
The net loss in the second quarter of 1999 included unusual charges of
$36.5 million which were related to the Company's Product Business Segment. The
net loss in the third quarter of 1998 included restructuring and other charges
of $26.6 million. The net loss in the first quarter of 1998 included acquired
in-process research and development expenses of approximately $15.4 million
related to the acquisition of the assets of the Cylink Wireless Group from
Cylink Corporation. The net loss in 1998 and 1999 was primarily due to the
worldwide downturn in the telecommunications equipment market as a whole which
began in the second half of 1998, in part due to the economic turmoil which
began in Asia. The Company experienced a sharp decrease in its sales beginning
in September 1998, and began a cost reduction program shortly thereafter. The
Company laid off a portion of its work force in September, October and November
of 1998, as well as in June of 1999, and increased its inventory reserves and
wrote down uncollectible accounts receivable, and certain of its facilities,
fixed assets and goodwill in the third quarter of 1998 as well as in the second
quarter of 1999.
During the third quarter of 1998, the Company's management approved
restructuring plans, which included initiatives to integrate the operations of
acquired companies, consolidate duplicate facilities, and reduce overhead.
Accrued restructuring costs of $4.3 million were recorded in the third quarter
of 1998 relating to these initiatives. The $4.3 million restructuring charge
consisted primarily of severance and benefits of approximately $0.6 million,
facilities and fixed assets impairments of approximately $0.9 million, and
goodwill write-off of approximately $2.9 million. In addition, the Company
recorded inventory reserves of $16.9 million (including $14.5 million in
inventory write downs related to the Company's existing core business and $2.4
million in other one-time charges to inventory relating to the elimination of
product lines).
In the second quarter of 1999, the Company determined that there was a
need to reevaluate the Company's sales forecasts, and to size the business to
meet this decrease in forecasted sales over the next twelve months. The change
in forecast was prompted by the slower than expected recovery in the
telecommunications industry, and resulted in total charges of $36.5 million
during the second quarter of 1999. These charges consisted of $11.8 million in
accounts receivable write-offs and reserves, $3.3 million in facility and fixed
asset write-offs and other related charges, and an increase to inventory
reserves and related charges of approximately $21.4 million. The need for the
decrease in the sales forecast was evidenced by the Company's sales trends for
the first two quarters of 1999 which did not meet management's initial
expectations for recovery and renewed growth throughout the telecommunications
industry, and is further evidenced by the modest growth in the revenues of
several of the Company's competitors.
The accrued restructuring and other unusual charges and amounts charged
against the accrual as of September 30, 1999 are as follows (in thousands,
unaudited):
18
<PAGE>
<TABLE>
<CAPTION>
Beginning Expenditures Remaining
Accrual Additions and Write-offs Accrual
-------- --------- -------------- --------
<S> <C> <C> <C> <C>
Severance and benefits $ 569 $ 300 $ (701) $ 168
Facility and fixed asset write-offs 879 3,000 (3,649) 230
Goodwill impairment 2,884 -- (2,884) --
-------- -------- -------- --------
Total restructuring charges 4,332 3,300 (7,234) 398
-------- -------- -------- --------
Inventory reserve 16,922 15,400 (14,818) 17,504
Non-cancellable purchase commitments reserve -- 6,000 (1,269) 4,731
-------- -------- -------- --------
Total inventory and other related charges 16,922 21,400 (16,087) 22,235
-------- -------- -------- --------
Accounts receivable reserve 5,386 11,800 (5,386) 11,800
-------- -------- -------- --------
Total accrued restructuring and other unusual charges $ 26,640 $ 36,500 $(28,707) $ 34,433
======== ======== ======== ========
</TABLE>
The following table sets forth items from the Consolidated Condensed
Statement of Operations as a percentage of sales for the periods indicated.
19
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales:
Product 74.9% 55.1% 73.1% 79.3%
Service 25.1 44.9 26.9 20.7
------ ------ ------ ------
Total sales 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of sales:
Product 56.3 125.4 75.0 65.5
Service 16.7 41.4 18.4 15.7
------ ------ ------ ------
Total cost of sales 73.0 166.8 93.4 81.2
------ ------ ------ ------
Gross profit (loss) 27.0 (66.8) 6.6 18.8
------ ------ ------ ------
Operating expenses:
Research and development 19.0 50.7 23.5 22.2
Selling and marketing 9.2 24.8 12.3 11.9
General and administrative 13.3 46.0 24.6 14.4
Goodwill amortization 5.1 8.8 5.7 3.8
Restructuring charge (0.4) 19.7 2.8 3.4
Acquired in-process research and development -- -- -- 12.3
------ ------ ------ ------
Total operating expenses 46.2 150.0 68.9 68.0
------ ------ ------ ------
Loss from operations (19.2) (216.8) (62.3) (49.2)
Interest expense (6.8) (9.8) (6.2) (4.5)
Interest income 0.7 0.8 0.4 1.1
Other income (expense), net (8.9) (3.5) (3.5) (0.4)
------ ------ ------ ------
Loss from continuing operations before extraordinary (34.2) (229.3) (71.6) (53.0)
item and income taxes
Provision (benefit) for income taxes 0.6 (40.2) 0.4 (9.2)
------ ------ ------ ------
Loss from contintuing operations before extraordinary item (34.8) (189.1) (72.0) (43.8)
Extraordinary item: gain on retirement of Notes -- -- 6.6 --
------ ------ ------ ------
Loss from continuing operations (34.8) (189.1) (65.4) (43.8)
Discontinued operation:
Net income (loss) from discontinued operation of Technosystem
to August 11, 1999 (1.7) 1.9 (4.0) (2.0)
Loss on disposal of Technosystem including provision of
$2,000 for operating losses during phase-out period (54.4) -- (19.9) --
------ ------ ------ ------
Net loss (90.9) (187.2) (89.3) (41.8)
Charge related to conversion of Preferred Stock -- -- (11.1) --
to Common Stock ------ ------ ------ ------
Net loss attributable to holders of Common Stock (90.9) (187.2) (100.4) (41.8)
====== ====== ====== ======
</TABLE>
Results of operations for the three and nine months ended September 30, 1999 and
1998
Sales. Sales for the three months ended September 30, 1999 were
approximately $40.1 million, compared to $22.0 million for the same period in
the prior year, an increase of $18.1 million or 82.3%. The increase during the
third quarter of 1999 was primarily due to an increase in Tel-link product
sales. Tel-Link product sales increased by $18.1 million or 369.4% from
approximately $4.9 million in the third quarter of 1998 to approximately $23.0
million in the third quarter of 1999, as the aberrational conditions of the
third quarter of 1998 were not repeated. This was evidenced by stronger overall
demand by the Company's larger customers for the Company's Tel-link product in
the third quarter of 1999 as compared with the same period in the prior year. Of
this increase, approximately $13.9 million is attributable to five major
customers. Sales for the non-Tel-Link product lines for the three months ended
September 30, 1999 and 1998 were approximately $7.0 million and $7.2 million,
respectively.
20
<PAGE>
Sales for the nine months ended September 30, 1999 and 1998 were
approximately $109.4 million and $125.8 million, respectively, a decrease of
$16.4 million or 13.0%. This decrease was primarily due to a $48.0 million, or
39%, decrease in sales for the first six months of 1999 as compared to the same
period in the prior year. For the nine months ended September 30, 1999 and 1998,
sales for the Tel-Link product line were approximately $67.1 million and $83.0
million, respectively, a decrease of 19.2%. For the nine months ended September
30, 1999 and 1998, sales for the non-Tel-Link product line were approximately
$12.9 million and $16.8 million respectively, a decrease of 23.2%. Though the
Company's Tel-link product sales improved in the third quarter of 1999, sales
for the first six months of 1999 were sluggish compared to the same period in
the prior year, primarily due to the market slow-down for the Company's product
lines which occurred in the third quarter of 1998. This resulted in an overall
decrease for the nine months ended September 30, 1999 as compared to the same
period in 1998.
Product sales for the three months ended September 30, 1999 were
approximately $30.0 million or 74.9% of total sales, and service sales were
approximately $10.1 million or 25.1% of total sales. For the corresponding
period in 1998, product sales were $12.1 million or 55.1% of total sales, and
service sales were $9.9 million or 44.9% of total sales. The increase in product
sales was primarily due to increased sales of the Tel-Link product line, and the
apparent beginnings of a general recovery in the telecommunications industry
resulting in a stronger overall demand for the Company's product in the third
quarter of 1999.
Product sales for the nine months ended September 30, 1999 were
approximately $80.0 million or 73.1% of total sales, and service sales were
approximately $29.4 million or 26.9% of total sales. Product sales for the nine
months ended September 30, 1998 were approximately $99.8 million or 79.3% of
total sales and service sales were approximately $26.0 million or 20.7% of total
sales. The increase in service sales in both the three month and nine month
periods was primarily due to the Company's increased presence in international
markets through acquisitions in the United Kingdom and Italy and from
introductions to new customers by the sales force, which offset the effect of
the worldwide downturn in the telecommunications market. The decrease in product
sales was primarily due to the decrease in Tel-link product sales, as discussed
above.
Sales to new customers during the third quarter of 1999 and for the first
nine months of 1999 were less than 20% of total sales. For the corresponding
periods in 1998, sales to new customers were less than 10% of total sales. For
the three months ended September 30, 1999, three customers accounted for 44.5%
of the sales of the Company. For the comparable period in 1998, four customers
accounted for 69.4% of the sales of the Company. For the nine months ended
September 30, 1999 and 1998, three customers accounted for 48.4% and 48.3% of
the sales of the Company, respectively.
Historically, the Company has generated a majority of its sales outside of
the United States. For the three months ended September 30, 1999, the Company
generated approximately $11.4 million or 28.5% of its sales in the U.S. and
approximately $28.7 million or 71.5% internationally. For the three months ended
September 30, 1998, the Company generated approximately $10.8 million or 49.0%
of its sales in the U.S. and approximately $11.2 million or 51.0%
internationally. For the nine months ended September 30, 1999, the Company
generated approximately $30.5 million or 27.9% of its sales in the U.S. and
approximately $78.9 million or 72.1% internationally. For the nine months ended
September 30, 1998, the Company generated approximately $32.2 million or 25.6%
of its sales in the U.S. and approximately $93.6 million or 74.4%
internationally. Many of the Company's largest customers use the Company's
products and services to build telecommunications network infrastructures. These
purchases represent significant investments in capital equipment and the amounts
purchased depend on the phase of the rollout in a geographic area or a market.
Consequently, the customer may have different purchasing requirements from
quarter to quarter, and may continue to vary the amount purchased from the
Company accordingly.
The Company acquired the assets of the Cylink Wireless Group on March 28,
1998 and April 1, 1998. Sales for the Cylink Wireless Group for the third
quarter of 1999 and 1998 were $5.5 million and $6.2 million, respectively. Sales
for the Cylink Wireless Group in the first three quarters of 1998 were
approximately $16.9 million, as compared with approximately $12.1 million during
the first three quarters of 1999. The decline in the Cylink Wireless Group's
sales is attributed primarily to saturation of the airwaves by spread spectrum
radios. Customers are now looking to replace these radios with higher capacity
models. As such, the decline is the result of the Cylink Wireless Group offering
these older generation products combined with the Company's decision to delay
research and development on newer generation products to replace them. As
discussed more fully in this Quarterly Report on Form 10-Q under "In-Process
Research and Development", several research projects acquired in the Cylink
Wireless Group acquisition have been delayed. Sales for the Cylink Wireless
Group are not
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expected to rebound before the year 2000. There can be no assurance that sales
for the Cylink Wireless Group will ever rebound.
The Company provides its 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. In addition, the Company
expects that the average selling price of any particular product line will also
decline as such product matures and as competition increases in the future.
Accordingly, the Company's ability to maintain or increase sales will depend
upon many factors, including its ability to increase unit sales volumes of its
systems and to introduce and sell new systems at prices sufficient to compensate
for reduced revenues resulting from declines in the average selling price of the
Company's more mature products.
Gross Profit. For the three months ended September 30, 1999 and 1998,
gross profit (loss) was approximately $10.8 million, or 27.0% of sales, and
approximately $(14.7) million, or (66.8)% of sales, respectively. The increase
in gross margin in the third quarter of 1999 compared to the corresponding
period in 1998 was, in part, due to the $16.9 million inventory charge which the
Company took in the third quarter of 1998. Normalized gross margin, not
including the effect of this inventory charge, was 27.0% and 10.0% for the three
months ended September 30, 1999 and 1998, respectively. This percentage increase
in normalized gross margin is mainly due to the increase in Tel-link product
sales in the third quarter of 1999, as compared to the same period in 1998.
Tel-link product sales and cost of sales for the third quarter of 1999 were
$23.0 million and $13.9 million, respectively. For the same period in 1998,
Tel-link product sales and cost of sales were $4.9 million and $5.4 million,
respectively. The lower demand and increased competition in the third quarter of
1998 drove prices for the Company's Tel-link product line down, resulting in
deteriorating margins during this period.
For the nine months ended September 30, 1999 and 1998, gross profit was
approximately $7.2 million or 6.6% of net sales, and approximately $23.6
million, or 18.8% of net sales, respectively. The gross margins were affected by
inventory and other related charges of $21.4 million and $16.9 million,
respectively. Normalized gross margin, not including the effect of these
inventory charges, was 26.1% and 32.2% for the nine months ended September 30,
1999 and 1998, respectively. This percentage decrease in normalized gross margin
is mainly due to the decrease in Tel-link product sales. Though the Company's
Tel-link product sales improved in the third quarter of 1999, sales for the
first six months of 1999 were sluggish compared to the same period in the prior
year, primarily due to the market slow-down for the Company's Tel-link product
line which occurred in the third quarter of 1998. The lower demand and increased
competition which began in the third quarter of 1998 continued to drive prices
for the Company's Tel-link product line down during the first six months of
1999, resulting in deteriorating margins during this period. This resulted in an
overall decrease in gross margin for the nine months ended September 30, 1999 as
compared to the same period in 1998. The remaining decline in gross margin for
the period was due to product rework charges which resulted in additional
unabsorbed manufacturing variances.
For the third quarter of 1999 and 1998, product gross profit (loss) as a
percentage of product sales was approximately 24.9% and (127.4)%, respectively.
Approximately one-hundred and forty percentage points of the one-hundred and
fifty-two percentage point increase in product gross profit was due to the
write-down of inventory of $16.9 million in the third quarter of 1998. The
remaining increase of twelve percentage points was due to manufacturing
variances and declining average selling prices for the industry sector which
generated lower margins. Service gross profit as a percentage of service sales
was approximately 33.3% and 7.6% for the third quarter of 1999 and 1998,
respectively. The increase in service gross profit percentage was due to changes
in the services provided related to changes in the customer mix.
For the nine months ended September 30, 1999 and 1998, product gross
profit (loss) as a percentage of product sales was approximately (2.6)% and
17.3%, respectively, for the reasons described above. The decrease in the
product gross profit was due primarily to the higher inventory reserve write-off
in the second quarter of 1999 compared to the write-off in third quarter 1998.
Service gross profit as a percentage of service sales was approximately 31.6%
and 24.2%, respectively. The increase in service gross profit percentage was due
to higher revenue related to the change in the customer mix as well as an
increased presence in international markets.
Research and Development. Research and development expenses consist
primarily of costs associated with personnel and equipment. The Company's
research and development activities include the development of additional
frequencies and varying operating features and related software tools. 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 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.
For the three months ended September 30, 1999 and 1998, research and
development expenses were approximately $7.6 million and $11.2 million,
respectively. As a percentage of sales, research and development
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expenses decreased from 50.7% in the three months ended September 30, 1998 to
19.0% in the corresponding period in 1999. The percentage decrease in research
and development expenses during the three months ended September 30, 1999 as
compared to the corresponding period in 1998 was primarily due to the Company's
1998 sales decline. The remaining decline is due to the Company's
point-to-multipoint development project, which was nearing completion in the
third quarter of 1999, resulting in reduced spending for this project as
compared to the same period in the prior year.
For the nine months ended September 30, 1999 and 1998 research and
development expenses were approximately $25.8 million and $27.9 million,
respectively. As a percentage of sales, research and development expenses
increased from 22.2% in the nine months ended September 30, 1998 to 23.5% in the
corresponding period in 1999, primarily due to the Company's sales decline. The
decrease in actual spending for this period was due to the Company's
point-to-multipoint development project, which was nearing completion, as
discussed above.
Though the Company is taking measures to reduce expenses where
appropriate, the Company intends to continue investing resources for the
development of new systems and enhancements (including additional frequencies
and various operating features and related software tools).
Selling and Marketing. Selling and marketing expenses consist of salaries,
investments in international operations, sales commissions, travel expenses,
customer service and support expenses, and costs related to advertising and
trade shows. For the three months ended September 30, 1999 and 1998, selling and
marketing expenses were approximately $3.7 million and $5.5 million,
respectively. As a percentage of sales, selling and marketing expenses decreased
from 24.8% in the three months ended September 30, 1998 to 9.2% in the
corresponding period in 1999. The decrease in selling and marketing expenses as
a percentage of sales was primarily due to the higher level of sales in the
third quarter of 1999 compared to the corresponding period in 1998.
Selling and marketing expenses for the nine months ended September 30,
1999 and 1998 were approximately $13.5 million and $14.9 million, respectively.
As a percentage of sales, selling and marketing expenses increased from 11.9% in
the nine months ended September 30, 1998 to 12.3% in the corresponding period in
1999. The increase in selling and marketing expenses as a percentage of sales
was primarily due to the lower level of sales in the first three quarters of
1999. The decrease in actual spending for this period was due to the Company
implementing a cost reduction program which included personnel reductions and
the closure of sales offices in the United Arab Emirates and Mexico in the
second quarter of 1999.
General and Administrative. General and administrative expenses consist
primarily of salaries and other expenses for management, finance, accounting,
legal and other professional services, and restructuring and other unusual
charges. For the three months ended September 30, 1999 and 1998, general and
administrative expenses were $5.3 million and $10.1 million, respectively. As a
percentage of sales, general and administrative expenses decreased from 46.0% in
the three months ended September 30, 1998 to 13.3% in the corresponding period
in 1999, mainly due to a higher level of sales in the three months ended
September 30, 1999 compared to the corresponding period in 1998. This decrease
in general and administrative expense was due primarily to the Company's expense
reduction efforts, including personnel reductions which occurred in the scond
quarter of 1999 and the third quarter of 1998, and the abandonment of one of the
Company's leased facilities which occurred in the second quarter of 1999.
General and administrative expenses for the nine months ended September
30, 1999 and 1998 were approximately $26.8 million and $18.1 million,
respectively. As a percentage of sales, general and administrative expenses
increased from 14.4% in the nine months ended September 30, 1998 to 24.6% in the
corresponding period in 1999. This increase in general and administrative
expense was due primarily to an unusual charge for accounts receivable write-
offs and reserves of $11.8 million and charges of $3.3 million for the
abandonment of one of its leased facilities in Campbell, California, which were
incurred in the second quarter of 1999. Additionally, the increase in general
and administrative expenses as a percentage of sales was due in part to a lower
level of sales in the nine months ended September 30, 1999 as compared to the
corresponding period in 1998.
Though the Company is taking measures to reduce expenses where
appropriate, the Company expects to continue to incur additional significant
ongoing expenses as a publicly owned company relating to legal, accounting and
other administrative services and expenses, including its class action
litigation. The Company expects general and administrative expenses to increase
in absolute dollars in 1999 as compared to 1998.
Goodwill Amortization. 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 based on the expected
revenue stream or on a straight-line basis over the period of expected benefit,
ranging from 3 to 20 years. For the three months ended September 30, 1999 and
1998, goodwill amortization was $2.1 million and $2.0 million, respectively.
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Goodwill amortization for the nine months ended September 30, 1999 and
1998 was $6.2 million and $4.7 million, respectively. The increase in goodwill
amortization for the nine months ended September 30, 1999 as compared to the
corresponding period in 1998 was due to the Company recording amortization
expense relating to the acquisition of the assets of the Cylink Wireless Group
on March 28 and April 1, 1998, which was recognized throughout all nine months
of the 1999 period.
The Company is currently evaluating and revising its business plan for the
Cylink Wireless Group, and based on anticipated changes to the Cylink Wireless
Group's expected revenue stream, an evaluation analysis of the recoverability of
the goodwill related to this acquisition may be required. Should a
determination be made which indicates that the goodwill balance is impaired, the
Company may be required to expense the impaired portion during the fourth
quarter of 1999.
In-Process Research and Development. The Company has had no expenses for
acquired in-process research and development in 1999.
On March 28, 1998, the Company acquired substantially all of the assets,
and on April 1, 1998, the accounts receivable, of the Cylink Wireless Group. The
total purchase price of the acquisition was $63.0 million including acquisition
expenses of $2.5 million. Of the purchase price, $15.4 million was assigned to
in-process research and development ("IPR&D") and expensed upon the consummation
of the acquisition. In-process research and development had no future use at the
date of acquisition and technological feasibility had not been established.
Various factors were considered in determining the amount of the
allocation of the purchase price to IPR&D such as estimating the stage of
development of each IPR&D project at the date of acquisition, estimating cash
flows resulting from the expected revenues generated from such projects, and
discounting the net cash flows, in addition to other assumptions. Developed
technology is being amortized over the expected revenue stream of the developed
products. The value of the acquired workforce is being amortized on a
straight-line basis over three years, and the remaining identified intangibles,
including core technology and other intangibles are being amortized on a
straight-line basis over ten years.
In addition, other factors were considered in determining the value
assigned to purchased IPR&D, which consisted of research projects in areas
supporting products which address the growing third world markets by offering a
new point-to-multipoint product, a faster, less expensive and more flexible
point-to-point product, and the development of enhanced Airlink products,
consisting of a Voice Extender, Data Metro II, and RLL Encoding products. At the
time of acquisition, these projects were estimated to be 60%, 85%, and 50%
complete, respectively.
During the second quarter of 1998, due to limited staff and facilities,
the Company delayed the research project for the new narrowband
point-to-multipoint project acquired from the Cylink Wireless Group and focused
available resources on the broadband point-to-multipoint project which is
targeted for a larger addressable market. The narrowband point-to-multipoint
project has a total remaining expected development cost of approximately $2.4
million and, due to the allocation of resources discussed above, is not expected
to be completed prior to the year 2000. The point-to-point project, discussed
above, which was acquired from the Cylink Wireless Group, was completed during
the third quarter of 1998 at an estimated total cost of $2.0 million. The
enhanced Airlink projects were completed during the first quarter of 1999 at an
estimated total cost of $0.6 million.
If the remaining projects are not successfully developed, the Company's
sales and profitability may be adversely affected in future periods.
Additionally, the failure of any particular individual project in-process could
impair the value of other intangible assets acquired. The Company expects to
begin to benefit from the purchased in-process technology in 1999.
Interest and Other Income (Expense). For the third quarter of 1999 and
1998, interest expense consisted primarily of interest and fees incurred on
borrowings under the Company's bank line of credit, interest on the principal
amount of the Company's Notes, 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. For the third quarter of
1998, interest expense also included finance charges and fees related to the
Company's receivables purchase agreements.
The Company incurred interest expense of $2.7 million during the
three-month period ended September 30, 1999 compared to $2.2 million during the
corresponding period in 1998. Additionally, the Company incurred interest
expense of $6.8 million during the nine-month period ended September 30, 1999
compared to $5.7 million during the corresponding period in 1998. The increase
in interest expense during the first three quarters of 1999 compared to the same
period in 1998 was due to an increase in borrowings under the Company's bank
line of credit, partially offset by a reduction in the principal balance of the
Notes, and fees charged for late filing of the registration statement in
connection with the issuance of the Series B Convertible Preferred Stock.
The Company generated interest income of $0.2 million during each of the
three-month periods ended September 30, 1999 and 1998. The Company generated
interest income of $0.5 million during the nine-month period ended September 30,
1999 compared to $1.4 million during the corresponding period in 1998. Interest
income consisted primarily of interest generated from the Company's cash in its
interest bearing bank accounts.
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Other income and expense consists primarily of translation gains and
losses relating to the financial statements of the Company's international
subsidiaries, the final Cylink Wireless purchase price dispute settlement, and
trade discounts taken. The Company incurred net other expenses of $3.6 million
during the three-month period ended September 30, 1999 compared to $0.8 million
during the corresponding period in 1998. Additionally, the Company incurred net
other expense of $3.8 million during the nine-month period ended September 30,
1999 compared to $0.6 million during the corresponding period in 1998.
During 1998 and the first three quarters of 1999, contracts negotiated in
foreign currencies were limited to British pound sterling contracts and Italian
lira contracts. The Company 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. The Company has entered into
foreign currency hedging transactions to reduce exposure to foreign exchange
risks. As of September 30, 1999, the Company had forward exchange contracts
valued at approximately $3.5 million. The forward contracts generally have
maturities of nine months or less.
Extraordinary Item. In January and February of 1999, the Company exchanged
an aggregate of $25.5 million of its Notes for an aggregate of 2,792,257 shares
of its Common Stock with a fair market value of $18.3 million and recorded an
extraordinary gain of $7.3 million in the first quarter of 1999.
Provision (Benefit) for Income Taxes. The Company's effective tax rates
for the first nine months of 1999 and the year ended December 31, 1998 were 0.0%
and 16.9%, respectively. The Company's effective tax rate is less than the
combined federal and state statutory rate, principally due to net operating
losses and tax credit carry forwards available to offset taxable income.
The Company accounts for income taxes under the liability method, which
recognizes deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts. The measurement of
deferred tax assets is reduced, if necessary, by the amount of any tax benefits
that, based on available evidence, the Company can not determine will more
likely than not be realized.
Though most of the Company's sales are to foreign customers, the majority
of the Company's pre-tax income is domestic as most sales take place in the
United States and then title transfers to the foreign customers.
Conversion of Preferred Stock. In June 1999, the Company exchanged all
15,000 shares of Series B Convertible Preferred Stock for 5,134,795 shares of
mandatorily redeemable Common Stock. The Company also exchanged outstanding
mandatorily redeemable warrants to purchase 1,242,257 shares of Common Stock,
which were held by the holders of the Series B Convertible Preferred Stock, for
new warrants with an exercise price of $3.00 per share rather than $3.47 per
share. The Company recorded a charge in the second quarter of approximately
$12.2 million resulting from this exchange, increasing the loss attributable to
common stockholders when computing earnings (loss) per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company used approximately $24.5 million to finance operating
activities during the nine months ended September 30, 1999, primarily due to the
net loss from continuing operations (excluding an extraordinary gain on the
retirement of Notes of $7.3 million) of $71.5 million. This net loss included
non-cash charges for depreciation, amortization, loss on disposals of assets,
and an unusual charge of $11.7 million, $6.2 million, $4.8 million, and $33.2
million, respectively. The remaining uses of cash were due to the increase in
accounts receivable of $12.2 million, and the decrease in accounts payable of
$5.2 million. These uses of cash were partially offset by a decrease in
inventory of $4.7 million, prepaid expenses and notes receivable of $5.2
million, and other assets of $0.3 million, and an increase in accrued employee
benefits, and other accrued liabilities of $0.3 million and $5.6 million,
respectively.
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The Company used approximately $6.3 million in investing activities during
the nine months ended September 30, 1999 to acquire capital equipment.
The Company generated approximately $16.5 million in its financing
activities during the nine months ended September 30, 1999. The net cash
generated consisted mainly of cash received of approximately $36.5 million, net
of issuance costs, from the issuance of 10.1 million newly issued shares of the
Company's Common Stock which were sold to a group of institutional investors,
and Common Stock issued pursuant to the Company's stock option and employee
stock purchase plans, offset by a payment of $20.0 million to reduce the
Company's bank line of credit.
At present, the Company does not have any material commitments for capital
equipment purchases. However, the Company's future capital requirements will
depend upon many factors.
In 1998, the Company entered into a receivables purchase agreement which
permitted the Company to sell up to $14 million in accounts receivable to two
banks. For this service, the banks received a fee of between 0.5% and 1.0% plus
interest of between 6% and 10% per annum. During July 1999, the Company
cancelled one of the purchase agreements with one of the banks. The remaining
agreement allows the Company to sell up to $7.0 million in accounts receivable
to the remaining bank. In 1999 and 1998, there were no material gains or losses
on accounts receivable sold without recourse. During the first quarter of 1999,
$13.6 million of the Company's accounts receivable were sold pursuant to such
contract. No accounts receivable balances were sold during the second or third
quarter of 1999. The Company may in the future utilize this facility as part of
managing its overall liquidity and/or third-party financing programs. However,
under the terms of the Company's revolving line-of-credit agreement, as amended
in November 1999, the Company may not utilize this facility at this time.
At September 30, 1999 and December 31, 1998, inventory was approximately
$42.8 million and $68.8 million, respectively. The decrease in inventory was
primarily due to the $21.4 million charge for excess and obsolete inventory on
hand and on order. Included in the reserve for excess and obsolete inventory was
$0.8 million to be spent for the rework of excess semi-custom finished goods
that were configured for specific customer applications or geographical regions.
At September 30, 1999, the Company had working capital of approximately
$38.1 million, compared to $65.1 million at December 31, 1998. The second
quarter 1999 inventory write-down, accounts receivable write-offs and reserves,
and 1999 operating losses adversely affected working capital. In recent
quarters, most of the Company's sales have been realized near the end of each
quarter, resulting in a significant investment in accounts receivable at the end
of the quarter. In addition, the Company expects that its investments in
accounts receivable and inventories will continue to be significant and will
continue to represent a significant portion of working capital. Significant
investments in accounts receivable and inventories will continue to subject the
Company to increased risks that have and could continue to materially adversely
affect the Company's business prospects, financial condition and results of
operations.
The Company raised gross proceeds of $40.0 million through the sale of
10,067,958 newly issued shares of Common Stock in June 1999 which were sold to
third parties at a 7.5% discount of the average closing sale prices of Common
Stock for the fifteen day period ended June 17, 1999.
In addition, the Company entered into a revolving line-of-credit
agreement on May 15, 1998 which provided for borrowings of up to $50.0 million.
The maximum revolving commitment, as amended, has been reduced to $30.0 million
until maturity on January 15, 2000. At September 30, 1999, the Company had
borrowed or had used as security for letters of credit, the entire amount
available under the line-of-credit. Borrowings under the line are secured by all
of the assets of the Company and its subsidiaries and bear interest at a
fluctuating interest rate per annum that is 3% above Union Bank of California's
announced commercial lending rate as in effect from time to time. This rate is
subject to adjustment under certain circumstances as provided in the line-of-
credit agreement. This interest rate may increase an additional 5% in the event
any default has occurred and is continuing under the line of credit agreement.
The agreement requires that the Company comply with certain financial covenants,
which include maintaining (i) minimum tangible net worth, (ii) minimum
profitability, (iii) minimum consolidated EBITDA, (iv) maximum consolidated
capital expenditures and (v) minimum ratio of consolidated quick assets to
consolidated current liabilities. Amendments to the bank credit agreement have
allowed the Company to remain in compliance with these covenants through
September 30, 1999. While the amendments to the covenants contained in the bank
credit agreement have been structured based on the Company's business plan to
permit the Company to continue to be in compliance with such covenants, should
the Company not meet its business plan or should the Company not be able to
raise adequate capital, it is possible that an event of default will occur under
the line-of-credit agreement. If a default is declared by the lenders, cross
defaults will be triggered on the Company's outstanding Notes and other debt
instruments resulting in accelerated repayments of such debts.
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In addition to the revolving line of credit, the Company's foreign
subsidiaries have lines of credit available from various financial institutions
with interest rates ranging from 8% to 12%. The Company guarantees a line of
credit which is used by Technosystem, S.p.A. At September 30, 1999 and December
31, 1998, $3.3 million and $3.5 million had been drawn down under this facility.
On November 5, 1997, the Company issued $100 million in Notes due November
1, 2002. The Notes are convertible at the option of the holder into shares of
the Company's Common Stock. On January 4 and February 2, 1999, the Company
issued 2,792,257 shares of Common Stock in exchange for $25.5 million of Notes
and recorded an extraordinary gain of $7.3 million in the first quarter of 1999.
Previously, $14.4 million of Notes had been retired.
At present, the Company is seeking alternative liquidity sources in view
of the maturity of its line of credit on January 15, 2000 because its current
lender has advised the Company that it does not wish to extend the line of
credit agreement. Alternatives for liquidity sources may include borrowings from
other financial institutions and additional capital infusions through the sale
of stock, the licensing of technology or the divestiture of certain business
units. The Company is pursuing the possibility of entering into a new line-of-
credit agreement to replace the existing line-of-credit agreement prior to its
expiration on January 15, 2000, and has recently opened negotiations with two
separate banks in order to pursue this possibility. Given the Company's
obligations to repay its bank and other debt obligations and its need for
working capital to fulfill its business plan, the Company is seeking to sell
Technosystem and CRC and may consider other dispositions and/or raising
additional equity capital. There can be no assurance that any additional
financing will be available to the Company on acceptable terms, or at all, when
required by the Company.
The Company has also reclassified its Italian broadcast subsidiary,
Technosystem, as a discontinued operation based on the Board of Directors
decision in the third quarter of 1999 to divest this business unit. Technosystem
will no longer be included in the Company's financial statements on a line item
basis, but will be shown separately as a discontinued operation. The Company has
recorded a $21.8 million write-down based on its expectation of the ultimate
selling price. The write-down is classified along with the Technosystem
historical financial results as a discontinued operation. See Note 10 to the
Condensed Consolidated Financial Statements.
In early August 1999, the Company announced that it had determined that
CRC was not a part of the Company's long-term strategic focus, and that
accordingly it was evaluating alternatives for this subsidiary, including
possible disposition.
CERTAIN RISK FACTORS AFFECTING THE COMPANY
Rapid Technological Change
Rapid technological change, frequent new product introductions and
enhancements, product obsolescence, changes in end-user requirements and
evolving industry standards characterize the communications market. The
Company's 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, the Company has been developing
point-to-multipoint radio systems. Any success in developing new and enhanced
systems, including point-to-multipoint systems, and related software tools will
depend upon a variety of factors. Such factors include:
o new product selection;
o integration of various elements of complex technology;
o timely and efficient implementation of manufacturing and assembly
processes and cost reduction programs;
o development and completion of related software tools, system
performance, quality and reliability of systems;
o development and introduction of competitive systems; and
o timely and efficient completion of system design.
The Company has experienced and continues to experience delays in customer
procurement and in completing development and introduction of new systems and
related software tools, including products acquired in acquisitions. Moreover,
the Company may not be successful in selecting, developing, manufacturing and
marketing new systems or enhancements or related software tools. Also, errors
could be found in the Company's systems after commencement of commercial
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. The Company's inability to introduce in a timely manner new systems
or enhancements or related software tools that contribute to sales could have a
material adverse effect on its business, financial condition and results of
operations.
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History of Losses
From inception to September 30, 1999, the Company had generated an
accumulated deficit of approximately $145.2 million. The decrease in retained
earnings from $18.4 million at December 31, 1997 to an accumulated deficit of
$145.2 million at September 30, 1999 was due primarily to the net loss of $55.3
million in 1998, as well as a net loss of $109.9 million in the first nine
months of 1999.
The net loss in the third quarter of 1999 included a loss on the
discontinuation of Technosystem, S.p.A of $21.0 million. The net loss in the
second quarter of 1999 included unusual charges of $36.5 million which were
related to the Company's Product Business Segment. The net loss in the third
quarter of 1998 included restructuring and other charges of $26.6 million. The
net loss in the first quarter of 1998 included acquired in-process research and
development expenses of approximately $15.4 million related to the acquisition
of the assets of the Cylink Wireless Group from Cylink Corporation. The net loss
in 1998 and 1999 was primarily due to the worldwide downturn in the
telecommunications equipment market as a whole which began in the second half of
1998, in part due to the economic turmoil which began in Asia. The Company
experienced a sharp decrease in its sales beginning in September 1998, as
compared to prior quarters. The Company laid off a portion of its work force in
September, October and November of 1998, as well as in June of 1999, and
increased its inventory reserves and wrote down uncollectible accounts
receivable, certain of its facilities, fixed assets and goodwill in the third
quarter of 1998 and in the second quarter of 1999.
To date, the Company generated sales of approximately $756.7 million
(including Technosystem S.p.A) since inception. From inception in October 1993
through December 31, 1996, sales were $234.1 million or 30.9% of sales to date.
For the period from January 1, 1997 through June 30, 1998, the Company entered
into a growth stage, resulting in sales of $336.7 million for this 18 month
period or 44.5% of total sales to date. Sales of $185.9 million or 24.6% of
total sales were generated in the 15 month period from July 1, 1998 through
September 30, 1999. The decrease in sales during the 15 months ended September
30, 1999 was primarily due to the worldwide downturn in the telecommunications
equipment market as a whole, which began in the second half of 1998, in part due
to the economic turmoil which began in the Pacific Rim countries. There can be
no assurance that the Company's revenue will return to or increase from the
levels experienced in 1997 or the first half of 1998, or that sales will not
decline.
In recent periods, the Company has been experiencing higher than
historical price declines. The decline in prices has had a significant downward
impact on the Company's gross margin. The Company expects pricing pressures to
continue for the next several quarters and also expects gross margins to
continue to be below comparable periods for the next several quarters.
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In recent periods, operating expenses increased more rapidly than the
Company had anticipated, and these increases also contributed to net losses.
Customer Concentration
For 1998 and the first three quarters of 1999, approximately two hundred
customers accounted for substantially all of the Company's sales, but only one
customer individually accounted for over 10% of the Company's 1998 sales. In the
third quarter of 1999, the Company had three customers which each individually
accounted for over 10% of the Company's sales. Sales to one customer accounted
for approximately 27.9% and 23.4% of the Company's sales in 1998 and the first
three quarters of 1999, respectively. Many of the Company's major customers are
located in foreign countries, primarily in the United Kingdom and Continental
Europe. 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.
If the Company's customers cannot finance their purchases of the Company's
products or services, then this may materially adversely affect the Company's
business, operations and financial condition. Financial difficulties of existing
or potential customers may also limit the overall demand for the Company's
products and services. Specifically, both current customers and potential future
customers in the telecommunications industry have reportedly undergone financial
difficulties and may therefore limit their future orders. 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 the Company's products or services, may materially adversely affect
the Company's business. Some difficulties of this nature have occurred in the
past and the Company believes they will occur in the future.
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
The Company has experienced and will continue to experience significant
fluctuations in sales, gross margins and operating results. The procurement
process for most of its 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 its products and services generally
involve a significant commitment of senior management, as well as its sales
force and other resources. The sales cycle for its products and services
typically involves 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;
o education of customers as to the potential applications of its
products and services, as well as related product-life cost savings;
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; and
o price negotiations required to secure purchase orders.
A single customer's order scheduled for shipment in a quarter can
represent a large portion of the Company's potential sales for such quarter. The
Company has at times failed to receive expected orders, and delivery schedules
have been deferred as a result of changes in customer requirements and
commitments, among other factors. As a result, the Company's operating results
for a particular period have been and could in the future be materially
adversely affected by a delay, rescheduling or cancellation of even one purchase
order. In addition, the Company's operating results may be affected by an
inability to obtain such large orders from single customers in the future.
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. 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, the Company
typically permits orders to be modified or canceled with limited or no
penalties. Any failure to reduce
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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 the Company's gross margin for such orders.
Inventory
The Company's customers have increasingly been requiring product shipment
upon ordering rather than submitting purchase orders far in advance of expected
shipment dates. This practice requires the Company to keep inventory on hand for
immediate shipment. Given the variability of customer need and purchasing power,
it is difficult to predict the amount of inventory needed to satisfy customer
demand. If the Company over- or under-estimates inventory requirements, its
results of operations could continue to be adversely affected. In particular,
increases in inventory could materially adversely affect operations if such
inventory is not used or becomes obsolete. This risk was realized in the large
inventory write-downs in the second quarter of 1999.
Shipment delays
Most of the Company's sales in recent quarters have been realized near the
end of each quarter. Accordingly, 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 the Company's and stock market analysts' expectations.
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. The Company cannot determine whether similar or
other delays might occur in the future, but expect that some or all of such
problems might recur.
Expenses
Magnifying the effects of any revenue shortfall, a material portion of the
Company's expenses are fixed and difficult to reduce should revenues not meet
expectations.
Volatility of Operating Results
If the Company or its competitors announce new products, services and
technologies, it could cause customers to defer or cancel purchases of its
systems and services. Additional factors have caused and will continue to cause
the Company's performance to vary significantly from period to period. These
factors include:
o new product introductions and enhancements and related costs;
o weakness in emerging-country markets, resulting in overcapacity;
o ability to manufacture and produce sufficient volumes of systems and
meet customer requirements;
o manufacturing efficiencies and costs;
o customer confusion due to the impact of actions of competitors;
o variations in the mix of sales through direct efforts or through
distributors or other third parties;
o variations in the mix of systems and related software tools sold and
services provided, as margins from service revenues are typically
lower than margins from product sales;
o operating and new product development expenses;
o product discounts;
o accounts receivable collection;
o changes in its pricing or customers' or suppliers' pricing;
o inventory write-downs and obsolescence;
o market acceptance by customers and timing of availability of new
products and services provided by the Company or its competitors;
o acquisitions, including costs and expenses thereof;
o use of different distribution and sales channels;
o fluctuations in foreign currency exchange rates;
o delays or changes in regulatory approval of systems and services;
o warranty and customer support expenses;
o severance costs;
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o consolidation and other restructuring costs;
o the pending stockholder class action lawsuit;
o the need for additional financing;
o customization of systems;
o general economic and political conditions; and
o natural disasters.
The Company's results of operations have been and will continue to be
influenced by competitive factors, including pricing, availability and demand
for competitive products and services. All of the above factors are difficult
for the Company to forecast, and any of them could materially adversely affect
its business, financial condition and results of operations.
Because of all of the foregoing factors, in some future quarter or
quarters the Company's operating results may continue to be below those
projected by public market analysts, and the price of its common stock may
continue to be materially adversely affected. Because of lack of order
visibility and the current trend of order delays, deferrals and cancellations,
the Company cannot assure that it will be able to achieve or maintain its
current or recent historical sales levels.
The Company incurred a net loss for each of the quarters in 1998, and for
the first three quarters of 1999. The Company may also incur operating and net
losses in subsequent periods, especially if market conditions continue
to be weak. Additionally, management continues to evaluate market conditions
in order to assess the need to take further action to more closely align the
Company's cost structure with anticipated revenues. Any subsequent actions could
result in further restructuring charges, inventory write-downs and provisions
for the impairment of long-lived assets.
Acquisition Related Risks
The Company may be unable to realize the full value of its past
acquisitions
Since April 1996, the Company has acquired nine complementary companies
and businesses. Integration and management of these companies into the Company's
business is ongoing. Some of these acquisitions have not resulted in the
benefits originally anticipated. The Company has encountered or expects to
encounter the following problems relating to such transactions:
o difficulty of assimilating operations and personnel of combined
companies;
o potential disruption of ongoing business;
o inability to retain key technical and managerial personnel;
o inability of management to maximize financial and strategic position
through integration of acquired businesses;
o additional expenses associated with amortization of acquired
intangible assets;
o difficulty in maintaining uniform standards, controls, procedures
and policies;
o impairment of relationships with employees and customers as a result
of integration of new personnel;
o risks of entering markets in which it has no or limited direct prior
experience; and
o operation of companies in different geographical locations with
different cultures.
The Company may not be successful in overcoming any or all of these risks
or any other problems encountered in connection with such acquisitions, and such
transactions may materially adversely affect its business, financial condition
and results of operations or require divestment of one or more business units or
a charge due to impairment of assets including, in particular, goodwill.
The Company may have to acquire new businesses
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As part of its overall strategy, the Company plans to continue
acquisitions of or investments in complementary companies, products or
technologies and to continue entering into joint ventures and strategic
alliances with other companies. Its success in future acquisition transactions
may, however, be limited. The Company competes for acquisition and expansion
opportunities against many entities that have substantially greater resources.
The Company may not be able to successfully identify suitable candidates, pay
for or complete acquisitions, or expand into new markets. Certain of the
Company's acquisitions have not produced the benefits originally anticipated by
the Company and such acquired entity. Once integrated, acquired businesses may
not achieve comparable levels of revenues, profitability, or productivity to the
Company's existing business, or the stand alone acquired company, or otherwise
perform as expected. Also, as commonly occurs with mergers of technology
companies during the pre-merger and integration phases, aggressive competitors
may also undertake formal initiatives to attract customers and to recruit key
employees through various incentives. Moreover, if the Company proceeds with
acquisitions in which the consideration consists of cash, a substantial portion
of its limited cash could be used to consummate its acquisitions. The occurrence
of any of these events could have a material adverse effect on the Company's
workforce, business, financial condition and results of operations. See
"-Management of Growth."
Accounting Issues Related to Acquisitions
It is anticipated that beginning in late 2000, all business acquisitions
must be accounted for under the purchase method of accounting for financial
reporting purposes. Many attractive acquisition candidates are technology
companies which tend to have insignificant amounts of tangible assets and
significant intangible assets, and the acquisition of these businesses would
typically result in substantial charges related to the amortization of such
intangible assets. All of the Company's past acquisitions to date,
except the acquisitions of CRC, RT Masts and Telematics, have been accounted for
under the purchase method of accounting, and as a result, a significant amount
of goodwill is being amortized. This amortization expense may have a significant
effect on the Company's financial results. In addition, the purchase-accounting
requirement may deter the Company from making important future acquisitions, or
may burden it with goodwill amortization if it does so.
Contract Manufacturers and Limited Sources of Supply
The Company's internal manufacturing capacity is very limited. The Company
uses contract manufacturers to produce its systems, components and subassemblies
and expects to rely increasingly on these manufacturers in the future. The
Company also relies on outside vendors to manufacture certain other components
and subassemblies. Its internal manufacturing capacity and that of its contract
manufacturers may not be sufficient to fulfill its orders. The Company's failure
to manufacture, assemble and ship systems and meet customer demands on a timely
and cost-effective basis could damage relationships with customers and have a
material adverse effect on its business, financial condition and results of
operations.
In addition, certain components, subassemblies and services necessary for
the manufacture of its systems are obtained from a sole supplier or a limited
group of suppliers. In particular, Eltel Engineering S.r.L. and Associates, and
Xilinx, Inc. are sole source or limited source suppliers for critical components
used in its radio systems.
The Company's reliance on contract manufacturers and on sole suppliers or
a limited group of suppliers involves risks. The Company has experienced an
inability to obtain an adequate supply of finished products and required
components and subassemblies. As a result, the Company has reduced control over
the price, timely delivery, reliability and quality of finished products,
components and subassemblies. The Company does not have long-term supply
agreements with most of its manufacturers or suppliers. The Company has
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 the Company to seek alternative sources of supply, or to
manufacture finished products or components and subassemblies internally. As
manufacture of its products and certain of its components and subassemblies is
an extremely complex process, finding and educating new vendors could delay the
Company's ability to ship its systems, which could damage relationships with
current or prospective customers and materially adversely affect its business,
financial condition and results of operations.
Management of Growth
Recently, in response to market declines and poor performance in its
sector generally and its lower than expected performance over the last several
quarters, the Company introduced measures to reduce operating expenses,
including reductions in its workforce in July, September and November 1998 and
June 1999. However, prior to such measures, the Company had significantly
expanded the scale of its operations to support then anticipated continuing
increased sales and to address infrastructure and other requirements. This
expansion included leasing additional space, opening branch offices and
subsidiaries in the United Kingdom, Italy, Germany, Mexico, the United Arab
Emirates, China and Singapore, opening design centers in the United Kingdom and
the United States, acquiring a large amount of inventory and funding accounts
receivable, and acquiring nine businesses. The
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Company has since closed the offices in Mexico and the United Arab Emirates. The
Company had also invested significantly in research and development to support
product development and services. Further, the Company had hired additional
personnel in all functional areas, including in sales and marketing,
manufacturing and operations and finance.
In addition, to prepare for the future, the Company is required to
continue to invest resources in its acquired and new businesses. Currently, the
Company is devoting significant resources to the development of new products and
technologies and is conducting evaluations of these products. The Company 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 these new
products. Accordingly, in addition to the effect its recent performance has had
on gross profit margin and inventory levels, its 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 the market for the Company's older products rebounds, the Company also
might choose to similarly build up (or build back) its infrastructure,
inventory, personnel, and other items, which would involve similar risks.
Expansion of its operations and acquisitions in prior periods have caused
and continue to impose a significant strain on the Company's management,
financial, manufacturing and other resources and have disrupted its normal
business operations. The Company's ability to manage any possible future growth
may depend upon significant expansion of its executive, manufacturing,
accounting and other internal management systems and the implementation of a
variety of systems, procedures and controls, including improvements relating to
inventory control. In particular, the Company must successfully manage and
control overhead expenses and inventories, the development, introduction,
marketing and sales of new products, the management and training of its employee
base, the integration and coordination of a geographically and ethnically
diverse group of employees and the monitoring of third party manufacturers and
suppliers. The Company cannot be certain that attempts to manage or expand its
marketing, sales, manufacturing and customer support efforts will be successful
or result in future additional sales or profitability. The Company must
efficiently coordinate activities in its companies and facilities in Rome and
Milan, Italy, the United Kingdom, California, New Jersey, Florida, Virginia and
elsewhere. For a number of reasons, the Company has in the past experienced and
may continue to experience significant problems in these areas. For example, the
Company has experienced difficulties due to the acquired businesses utilizing
differing business and accounting systems, currencies, and a variety of unique
customs, cultures, and language barriers. Additionally, the products and
associated marketing and sales processes differ for each acquisition.
Any failure to coordinate and improve systems, procedures and controls,
including improvements relating to inventory control and coordination with its
subsidiaries, at a pace consistent with the Company's business, could cause
continued inefficiencies, additional operational complexities and expenses,
greater risk of billing delays, inventory write-downs and financial reporting
difficulties. Such problems could have a material adverse effect on its
business, financial condition and results of operations.
A significant ramp-up of production of products and services could require
the Company 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, the Company anticipates
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 cost categories may periodically increase as a
percentage of revenues.
Decline in Selling Prices
The Company believes that average selling prices and possibly gross
margins for its systems and services will tend to decline in both the near and
the long term. 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. To offset declining average selling
prices, the Company believes it must take a number of steps, including:
o successfully introducing and selling new systems on a timely basis;
o developing new products that incorporate advanced software and other
features that can be sold at higher average selling prices; and
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o reducing the costs of its systems through contract manufacturing,
design improvements and component cost reduction, among other
actions.
If the Company cannot develop new products in a timely manner, fails to
achieve customer acceptance or does not generate higher average selling prices,
then the Company would be unable to offset declining average selling prices. If
the Company is unable to offset declining average selling prices, its gross
margins will decline.
Accounts Receivable
The Company is subject to credit risk in the form of trade account
receivables. The Company is often 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. In addition, many of its
foreign customers are granted longer payment terms than those typically existing
in the United States. The Company's current credit policy on customers both
domestically and internationally requires letters of credit and/or down payments
for those customers deemed to be a high risk and open credit for customers which
are deemed creditworthy and have a history of timely payments with the Company.
The Company's current credit policy typically allows payment terms between 30
and 90 days depending upon the customer and the cultural norms of the region.
The Company has had difficulties in the past in receiving payment in accordance
with its policies, particularly from customers awaiting financing to fund their
expansion and from customers outside of the United States. Such difficulties may
continue in the future, which could have a further material adverse effect on
its business, financial condition and results of operations.
The Company's bank line of credit agreement as amended in August 1999,
allowed the Company to sell up to $7 million of its accounts receivable at any
one time to a limited group of purchasers on a non-recourse basis. The Company
has in the past utilized such sales and may from time to time in the future sell
its receivables, as part of an overall customer financing program. However, this
agreement, as amended in November 1999, no longer permits the Company to sell
its accounts receivable at this time. Furthermore, the Company may not be able
to locate parties to purchase such receivables on acceptable terms or at all.
Product Quality, Performance and Reliability
Customers require very demanding specifications for quality, performance
and reliability. The Company has limited experience in producing and
manufacturing systems and contracting for such manufacture. As a consequence,
problems may occur with respect to the quality, performance and reliability of
the Company's systems or related software tools. If such problems occur, the
Company could experience increased costs, delays or cancellations or
rescheduling of orders or shipments, delays in collecting accounts receivable
and product returns and discounts. If any of these events occur, it would have a
material adverse effect on the Company's business, financial condition and
results of operations.
In addition, to maintain its ISO 9001 registration, the Company must
periodically undergo certification assessment. Failure to maintain such
registration could materially adversely affect its business. The Company
completed ISO 9001 registration for its United Kingdom sales and customer
support facility in 1996, its Geritel facility in Italy in 1996, and its
Technosystem facility in Italy in 1997. Other facilities are also attempting to
obtain ISO 9001 registration. Such registrations may not be achieved and the
Company may be unable to maintain those registrations the Company has already
completed. Any such failure could have a material adverse effect on its
business, financial condition and results of operations.
Changes in Financial Accounting Standards
The Company prepares its financial statements in conformity with United
States generally accepted accounting principles ("GAAP"). GAAP is subject to
interpretation by the American Institute of Certified Public Accountants, the
Securities and Exchange Commission and various bodies formed to interpret and
create appropriate accounting policies. A change in these policies can have a
significant effect on the Company's reported results, and may even affect its
reporting of transactions completed before a change is announced. Accounting
policies affecting many other aspects of the Company's business, including rules
relating to software and license revenue recognition, purchase and
pooling-of-interests accounting for business combinations, employee stock
purchase plans and stock option grants have recently been revised or are under
review by one or more groups. Changes to these rules, or the questioning of
current practices, may have a material adverse effect on the Company's reported
financial results or in the way it conducts its business.
In addition, the preparation of financial statements in conformity with
GAAP requires the Company to make estimates and assumptions that affect the
recorded amounts of assets and liabilities, disclosure of those assets and
liabilities at the date of the financial statements and the recorded amounts of
expenses during the reporting period. A change in the facts and circumstances
surrounding these estimates could result in a change to the estimates and impact
future operating results.
Market Acceptance
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The Company's 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 its 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 its other products, the Company has 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 the Company's systems fails to grow, or grows more slowly
than anticipated, the Company's business, financial condition and results of
operations will 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 expenditures. 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 the
Company's technology--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 become 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 the Company allocates resources to any market
segment that does not grow, it may be unable to reallocate resources to other
market segments in a timely manner, ultimately curtailing or eliminating its
ability to enter such 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, the Company must offer systems with
superior price/performance characteristics and extensive customer service and
support. Additionally, the Company 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
the Company's 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
the Company's systems. Existing customers may not continue to include the
Company's systems in their products, systems or networks in the future. The
Company's technology may not replace existing technologies and achieve
widespread acceptance in the wireless telecommunications market. Failure to
achieve or sustain commercial acceptance of the Company's currently available
radio systems or to develop other commercially acceptable radio systems would
materially adversely affect it. Also, industry technical standards may change
or, if emerging standards become established, the Company may not be able to
conform to these new standards in a timely and cost-effective manner.
Intensely Competitive Industry
The wireless communications market is intensely competitive. The Company's
wireless-based radio systems compete with other wireless telecommunications
products and alternative telecommunications transmission media, including copper
and fiber optic cable. The Company is experiencing intense competition worldwide
from a number of leading telecommunications companies. Such companies offer a
variety of competitive products and services and broader telecommunications
product lines, and include Adtran, Inc., Alcatel Network Systems, Bosch Telekom,
Adaptive Broadband, Inc., Digital Microwave Corporation (which has recently
acquired other competitors, including Innova International Corp. and MAS
Technology, Ltd.), Ericsson Limited, Harris Corporation-Farinon Division, Larus
Corporation, Lucent T.R.T., NEC, Nokia Telecommunications, Nortel/BNI, Philips
T.R.T., SIAE, Siemens, Utilicom and Western Multiplex Corporation.
Many of these companies have greater installed bases, financial resources
and production, marketing, manufacturing, engineering and other capabilities
than the Company does. In early 1998, the Company acquired the Cylink Wireless
Group which competes with a large number of companies in the wireless
communications markets, including U.S. local exchange carriers and foreign
telephone companies. The most significant competition for Cylink Wireless
Group's products in the wireless market is from telephone companies that offer
leased line data services. The Company faces actual and potential competition
not only from these established companies, but also from start-up companies that
are developing and marketing new commercial products and services.
The Company may also compete in the future with other market entrants
offering competing technologies. Some of the Company's current and prospective
customers and partners have developed, are currently developing or
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could manufacture products competitive with the Company's products. Nokia and
Ericsson have recently developed new competitive radio systems.
The principal elements of competition in its market and the basis upon
which customers may select the Company's systems include price, performance,
software functionality, ability 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.
The Company expects competitors to continue to improve the performance and lower
the price of their current products and services and to introduce new products
and services or new technologies that provide added functionality and other
features. New product and service offerings and enhancements by the Company's
competitors could cause a decline in sales or loss of market acceptance of its
systems. New offerings could also make the Company's systems, services or
technologies obsolete or non-competitive. In addition, the Company is
experiencing significant price competition and expects such competition to
intensify.
The Company believes that to be competitive, it will need to expend
significant resources on, among other items, new product development and
enhancements. In marketing the Company's systems and services, the Company will
compete with vendors employing other technologies and services that may extend
the capabilities of their competitive products beyond their current limits,
increase their productivity or add other features. The Company may not be able
to compete successfully in the future.
Uncertainty in International Operations
In doing business in international markets, the Company faces economic,
political and foreign currency fluctuations that are more volatile than those
commonly experienced in the United States and other areas. Most of the Company's
sales to date have been made to customers located outside of the United States.
In addition, to date, the Company has acquired three companies based in Italy,
Technosystem S.p.A., Cemetel S.p.A., and Geritel S.p.A., and two United Kingdom-
based companies, RT Masts and Telesys Limited, as well as the acquisition of the
assets of the Cylink Wireless Group, a division with substantial international
operations. Many of these acquired companies sell their products and services
primarily to customers in Europe, the Middle East and Africa. Currently, the
Company is working to sell Technosystem S.p.A. and is exploring the possibility
of disposing of CRC.
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The Company anticipates that international sales will continue to account for a
majority of its sales for the foreseeable future.
Historically, the Company's international sales have been denominated in
British pounds sterling or United States dollars. With recent acquisitions of
foreign companies, certain of the Company's international sales are denominated
in other foreign currencies, including Italian lira. A decrease in the value of
foreign currencies relative to the United States dollar could result in
decreased margins from those transactions. For international sales that are
United States dollar-denominated, such a decrease could make its systems less
price-competitive and could have a material adverse effect upon its financial
condition. The Company has in the past mitigated currency exposure to the
British pound sterling through hedging measures. However, any future hedging
measures may be limited in their effectiveness with respect to the British pound
sterling and other foreign currencies.
Additional risks are inherent in the Company's international business
activities. Such risks include:
o changes in regulatory requirements;
o costs and risks of localizing systems in foreign countries;
o delays in receiving components and materials;
o availability of suitable export financing;
o timing and availability of export licenses, tariffs and other trade
barriers;
o difficulties in staffing and managing foreign operations, branches
and subsidiaries;
o difficulties in managing distributors;
o potentially adverse tax consequences;
o foreign currency exchange fluctuations;
o the burden of complying with a wide variety of complex foreign laws
and treaties;
o difficulty in accounts receivable collections; and
o political and economic instability.
In addition, many of the Company's customer purchase and other agreements
are governed by foreign laws, which may differ significantly from U.S. laws.
Therefore, the Company may be limited in its ability to enforce its 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 the Company's international operations
in certain markets will depend on its 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 its products in international
markets could limit its ability to expand operations. The Company's inability to
identify suitable parties for such relationships, or even if such parties are
identified to form and maintain strong relationships with them, could prevent
the Company from generating sales of products and services in targeted markets
or industries. Moreover, even if such relationships are established, the Company
may be unable to increase sales of products and services through such
relationships.
Some of the Company's 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. If such events occur, any demand for
the Company's systems in these countries will be similarly limited or delayed.
Also, in developing markets, economic, political and foreign currency
fluctuations may be even more volatile than conditions in developed areas. Such
volatility could have a material adverse effect on its ability to develop or
continue to do business in such countries.
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, the availability and supply of product components to the
Company and, ultimately, its consolidated results of operations.
Extensive Government Regulation
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Radio communications are extensively regulated by the United States and
foreign laws as well as by international treaties. The Company's systems must
conform to a variety of domestic and international requirements established to,
among other things, avoid interference among users of radio frequencies and to
permit interconnection of equipment. Historically, in many developed countries,
the limited availability of radio frequency spectrum has inhibited the growth of
wireless telecommunications networks.
Each country's regulatory process differs. To operate in a jurisdiction,
the Company 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 the Company and
its 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 the Company to modify its products and services and
incur substantial costs to comply with such regulations and changes.
In addition, the Company is also affected by domestic and international
authorities' regulation of the allocation and auction of the radio frequency
spectrum. Equipment to support new systems and services can be marketed only if
permitted by governmental regulations and if suitable frequency allocations are
auctioned to service providers. Establishing new regulations and obtaining
frequency allocation at auction is a complex and lengthy process. If PCS
operators and others are delayed in deploying new systems and services, the
Company could experience delays in orders. Similarly, failure by regulatory
authorities to allocate suitable frequency spectrum could have a material
adverse effect on the Company's results. In addition, delays in the radio
frequency spectrum auction process in the United States could delay the
Company's ability to develop and market equipment to support new services.
The Company operates in a regulatory environment subject to significant
change. Regulatory changes, which are affected by political, economic and
technical factors, could significantly impact its operations by restricting its
development efforts and those of its customers, making current systems obsolete
or increasing competition. Any such regulatory changes, including changes in the
allocation of available spectrum, could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
may also find it necessary or advisable to modify its systems and services to
operate in compliance with such regulations. Such modifications could be
expensive and time-consuming.
Additional Capital Requirements
The precise extent of future capital requirements will depend upon many
factors, including the development of new products and related software tools,
potential acquisitions, maintenance of adequate manufacturing facilities and
contract manufacturing agreements, progress of research and development efforts,
expansion of marketing and sales efforts, and the 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
indebtedness incurred through the issuance of the Company's Notes and the
incurrence of debt under the Company's bank line of credit may affect the
Company's ability to raise additional financing. Given the recent price for the
Company's Common Stock, if additional funds are raised by issuing equity
securities, significant dilution to its stockholders could result.
The Company has, however, within the last 12 months retired approximately
$40.0 million of its Notes in exchange for approximately 5.3 million shares of
its Common Stock. By retiring the debt at a significant discount from its face
value, the Company realized an immediate improvement to its balance sheet, and
expects to improve future cash flow by reducing interest expense. The Company
may refinance or exchange a portion of the remainder of the Notes and/or the
bank debt or exchange a portion of the Notes for other forms of securities. In
December 1998, the Company also issued Series B Convertible Preferred Stock and
warrants to purchase up to 1,242,257 shares of its Common Stock in exchange for
a $15 million investment, and then in June 1999, exchanged 5,134,795 shares of
Common Stock for all 15,000 shares of Series B Convertible Preferred Stock.
Later in June 1999, the Company issued 10,067,958 shares of Common Stock to
institutional investors for $40.0 million. These transactions have had and may
continue to have a substantial dilutive effect on its stockholders and may make
it difficult for the Company to obtain additional future financing, if needed.
Class Action Litigation
A putative consolidated class action complaint 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 15, 1997 and September 11,
1998, alleges various state securities laws violations by the Company and
certain of its officers and
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directors. The state court complaint seeks unquantified compensatory, punitive
and other damages, attorneys' fees and injunctive and/or equitable relief.
An unfavorable outcome in securities law class action litigation could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations. Even if all of the litigation is resolved
in its favor, the defense of such litigation may entail considerable cost and
the significant diversion of efforts of management, either of which may have a
material adverse effect on the Company's business, financial condition and
results of operations.
Protection of Proprietary Rights
The Company relies on a combination of patents, trademarks, trade secrets,
copyrights and other measures to protect its intellectual property rights. The
Company generally enters into confidentiality and nondisclosure agreements with
service providers, customers and others to limit access to and distribution of
proprietary rights. The Company also enters into software license agreements
with customers and others. However, such measures may not provide adequate
protection for its trade secrets or other proprietary information for a number
of reasons.
Any of the Company's patents could be invalidated, circumvented or
challenged, or the rights granted thereunder may not provide competitive
advantages to the Company. Any of the Company's 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
the Company's products or software. Similarly, others might design around the
patents owned by the Company, or third parties may assert intellectual property
infringement claims against the Company. In addition, foreign intellectual
property laws may not adequately protect the Company's intellectual property
rights abroad. A failure or inability to protect proprietary rights could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Even if the Company's intellectual property rights are adequately
protected, litigation may be necessary to enforce patents, copyrights and other
intellectual property rights, to protect the Company's trade secrets, to
determine the validity of and scope of proprietary rights of others or to defend
against claims of infringement or invalidity. The Company has, through its
acquisition of the Cylink Wireless Group, been put on notice from a variety of
third parties that the Cylink Wireless Group's products may be infringing the
intellectual property rights of other parties. Any such intellectual property
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations. Litigation, even if wholly without merit,
could result in substantial costs and diversion of resources, regardless of the
outcome. Infringement, invalidity, right to use or ownership claims by third
parties or claims for indemnification resulting from infringement claims could
be asserted in the future and such assertions may materially adversely affect
the Company. If any claims or actions are asserted against the Company, the
Company may 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
The Company's future operating results depend in significant part upon the
continued contributions of key technical and senior management personnel, many
of whom would be difficult to replace. Future operating results also depend upon
the ability to attract and retain such specially qualified management,
manufacturing, quality assurance, engineering, marketing, sales and support
personnel. Competition for such personnel is intense, and the Company 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 the Company to hire such personnel.
The Company has experienced and may continue to experience employee
turnover due to several factors, including an expanding economy within the
geographic area in which the Company maintains its principal business offices.
Such turnover could adversely impact its business. The Company is presently
addressing these issues and intends to pursue solutions designed to provide
performance incentives and thereby retain employees. The loss of any key
employee, the failure of any key employee to perform in his or her position, its
inability to attract and retain skilled employees as needed or the inability of
its officers and key employees to expand, train and manage the Company's
employee base could all materially adversely affect the Company's business.
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Year 2000 Compliance
Numerous computer systems and software products are coded to accept only
two digit entries in the date code field. Beginning in the year 2000, these date
code fields will have to distinguish 21st Century dates from 20th Century dates.
As a result, in less than three months, computer systems and/or software used by
many companies may need to be upgraded to comply with such Year 2000 ("Y2K")
requirements.
Year 2000 Project Management Plan
The Company has utilized Y2K consultants to audit its revenue generating
facilities located in California, and Tortona, Italy and its subsidiaries CRC in
New Jersey and Technosystem in Rome, Italy. The consultants both reviewed the
Company's Y2K compliance efforts to date and identified areas warranting further
review. Based on the consultants' recommendations, the Company has embarked on a
global program to address its readiness for the century change. The Company has
created a Y2K project management office. A project manager directs the office
and supervises its functions. The Y2K project manager and the office's staff are
responsible for, among other tasks, business and continuity planning, vendor
compliance management, creating and maintaining an inventory of Y2K action
items, establishing and publishing standards, and maintaining a document
archive. The Y2K project management office also is responsible for creating and
managing a contingency plan which is scheduled to be established and implemented
by the end of November 1999.
The Company's compliance efforts to date have emphasized product and
infrastructure compliance. Vendor compliance has been addressed at several
locations. To date, the Company's business has been uninterrupted by, and the
Company has not delayed any projects as a result of, Y2K related complications.
Products
The inability of any of the Company's products to properly manage and
manipulate data in the Year 2000 could result in increased warranty costs,
customer satisfaction issues, potential lawsuits and other material costs and
liabilities. The Company has completed testing of all products in its radio
products operations. Products were tested according to various product-specific
standards. Based on these tests, all products in the Tel-Link, Air-Link, and
Spread Spectrum product lines have been found to be compliant in all material
respects. At the CRC facility, all products in the current line of Net Path,
Rivets, Network Series and Recovery Series product lines have been tested and
found to be compliant in all material respects. There can be no assurance,
however, that its testing procedures detect every potential Y2K complication.
CRC supports several older modem systems. These systems have not been tested for
Y2K compliance because the modems do not contain date sensitive fields in the
man-machine interface. Therefore, the changeover to the Y2K date field will have
no effect on this system. Since the modems are not Y2K sensitive, the Company
believes there is no need to pursue a potential remedy. Any complications which
arise as a result of an untested modem systems' potential Y2K failures could
result in increased warranty costs, customer satisfaction issues, potential
lawsuits and other material costs and liabilities.
Products produced at the Technosystem facility, including the radio and
television broadcast products under development, have been tested and are Y2K
compliant in all material respects. There can be no assurance that our testing
procedures detect every potential Y2K complication. The equipment manager
utilized by the transmission equipment manufactured at Technosystem is not Y2K
compliant. The equipment manager is an additional device which customers may
purchase and attach to the transmission system to verify that the transmission
device is running properly. The transmitters will continue to function properly
even if the equipment manager fails. However, if the equipment manager fails, it
will not perform its error detection function properly. The Y2K limitation
contained in the equipment manager can be corrected by shutting the device off
on January 1, 2000 and turning it on again. The Company has notified customers
who have purchased the equipment manager of its Y2K limitation and the remedial
procedures which must be implemented on January 1, 2000. Any complications which
arise as a result of the equipment manager's potential Y2K failures could result
in increased warranty costs, customer satisfaction issues, potential lawsuits
and other material costs and liabilities.
Infrastructure
The failure of any internal system to achieve Y2K readiness could result
in a material disruption to the Company's operations. While the Company has
completed evaluations of several of its internal systems and is in the process
of completing internal system review, it cannot be assured that its testing
procedures will detect every potential Y2K related failure at each of the
facilities listed below:
California, Florida, Italy, United Kingdom, Germany
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In November 1998, the Company installed a new internal manufacturing
resource planning business system (MRP) that is Y2K ready. The cost of the
upgrade was approximately $250,000. The Company's MRP system facilitates
accounting and manufacturing functions at the Company's California sites and the
Redditch, UK site. At the Tortona, Italy location, the MRP system facilitates
manufacturing functions only. The November 1998 Y2K upgrade corrected Y2K
limitations in the MRP system at each site at which it is utilized. The
Company's Florida, Watford, UK, and Frankfurt, Germany sites do not utilize the
MRP system. The Company's Tortona, Italy facility has a new mainframe in place
and Y2K compliant software has been installed. Data from the old system was
transferred over in September 1999, and training on the new system was completed
in October 1999. The cost of the new system is $80,000. The new system is fully
operational as of the end of September 1999. However, the Company is devising a
plan to ensure that accounting functions are performed manually in the event the
new system is not fully operational by December 31, 1999. Since the Company is
the only customer serviced by the Tortona, Italy site, and since the Company is
in the process of identifying an alternative source supplier in the event the
new accounting system is not installed by December 31, 1999, a failure in the
present system would have a minimal impact on the Company's customers.
Since November 1998, the Company has completed an evaluation of many of
its internal systems. Most of its internal systems have been found to be
compliant, however we cannot guarantee that Y2K related complications will not
arise. The HP UX operating system received a Y2K patch in September 1999. The
Server Operating Systems (Novell) received Y2K patches at the end of September
1999. Y2K verification procedures to determine the compliance status of the
Company's phone systems and automatic test equipment stations have been
completed, and these systems have been determined to be in compliance.
Verification of the Company's personal computers is estimated to be complete
by mid-November 1999. The Company's customer service database and QA database
were upgraded during the second quarter of 1999 and are Y2K compliant. Any
unforeseen circumstances which cause delay in upgrading any of the above
systems could result in increased warranty costs, potential customer
dissatisfaction, delayed production and/or supply, lawsuits and other material
costs and liabilities.
Network Services (Vienna, VA)
The internal systems at Network Services in Vienna, Virginia have been
tested and found to be compliant in all material respects; however, there can be
no assurance that Y2K related complications will not arise. Verification of the
Y2K status of personal computers was completed during the second quarter of
1999. Necessary upgrades to software were made in order to achieve Y2K
compliance.
Control Resources Corporation (Fair Lawn, NJ)
CRC's internal systems have been tested and have been found to be
compliant; however, there can be no assurance that Y2K related complications
will not arise. The MRP Business System Proprietary Server (OS Novell 3.11)
Corporate Server and Mail System were replaced with Y2K compliant servers during
second quarter 1999. The Defect Control System was replaced in September 1999
and is Y2K compliant. Verification of the compliance status of personal
computers was also completed in September 1999 and compliance status has been
achieved.
Technosystem (Rome, Italy)
The ERP business system has been found to be compliant, however there
can be no assurance that Y2K related complications will not arise. Since the
Company's management has decided to dispose of Technosystem by December 31,
1999, the Y2K verification project for personal computers has been put on
hold pending the outcome of the disposition.
Vendors
The Company has identified two single source suppliers whose failure to
obtain Y2K compliance could potentially impact customers. Since the Company has
not yet obtained assurances of Y2K compliance from these suppliers, the impact
of potential Y2K limitations experienced by these companies is merely
speculative at this time. The potential impact will only become manifest,
however, if both the single source supplier and an alternative source supplier
experience Y2K related failures. One of the two identified suppliers provides a
product which the Company uses in production of DS-3 IDUs; if this supplier were
to experience a Y2K failure, production of the product would be slowed. Sales of
DS-3 IDUs make up 3% to 4% of the Company's sales revenue. The additional
identified supplier produces a product which will be utilized in the
production of the Company's Encore product which is scheduled to begin
production in a limited capacity in the fourth quarter of 1999; if this
supplier experienced a Y2K related complication, Encore production would be
adversely affected.
The Company is cognizant of the risk posed by single source or large
volume suppliers that may not be addressing their Y2K readiness. The Company has
endeavored to minimize this risk by implementing a four phase plan. First, all
single source suppliers and large volume vendors were identified. Second, in
April 1999, the Company sent requests for Y2K compliance assurances to suppliers
so identified. Third, the Company will review
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suppliers' responses to its requests. Last, the Company will continue to pursue
assurances and/or receipt of a remedy from noncompliant suppliers. Since the
Company has always tried to follow the practice of alternative and multi-
sourcing our single source and large volume suppliers, we believe most products
and services we order will be available from an alternative source in the event
a single source or large volume supplier experiences a Y2K failure. However, the
Company can offer no assurance that reasonable alternative suppliers or
contractors will be available. Even if assurances are received from third
parties and/or alternative source suppliers are identified, a risk remains that
failures of systems and products of other companies on which we rely could have
a material adverse effect on our business, financial condition and results of
operations.
Critical suppliers have been identified at the California, Florida, United
Kingdom, Germany and Italy sites as well as at Network Services in Vienna,
Virginia and CRC. Evaluations of suppliers for these business units were
completed in September 1999 and they were found to be compliant; however, we
cannot be certain that Y2K failures will not affect these suppliers. There are
three critical suppliers for the Technosystem business unit. Evaluation of these
suppliers is scheduled to be completed by the end of November 1999.
Year 2000 Obligations: Potential Exposure
In April 1999, the Company established a Year 2000 limited warranty which
covers products that have been tested and certified as Y2K compliant by the
Company. The warranty is posted on the Company's website and has been sent to
customers in response to requests for Y2K assurances. Under the warranty, the
Company will repair or replace the Y2K certified product which experiences a Y2K
limitation. The warranty specifically disclaims liability for all consequential
and incidental damages resulting from a Y2K complication experienced by a Y2K
certified product.
The Company's exposure in the event of Y2K complications may be impacted
by Y2K provisions contained in outstanding agreements. For example, the
Company's bank line of credit, as amended, obligates the Company to perform acts
to ensure the Y2K compliance of its systems and adopt a remediation plan if
necessary by September 30, 1999.
Budget
The Company's budget for the Y2K Program is approximately $2.0 million and
has been approved by the Company's Board of Directors. Through September 30,
1999, the Company has spent $695,000 on Y2K related expenses. This figure
incorporates the following expenses: (1) $250,000 in November 1998 to upgrade
the MRP business system utilized by the California, Redditch, UK and Tortona,
Italy sites; (2) $24,000 in March 1999 to Y2K consultants; (3) $21,200 through
September 1999 in legal expenses; (4) $9,400 through September 1999 in travel
expenses to the Company's non-California sites for the purpose of assessing Y2K
compliance; (5) $21,100 through September of 1999 on miscellaneous items
including maintenance of the Y2K website and vendor compliance mailings; (6)
$80,000 in March 1999 to upgrade the Tortona, Italy maintenance system; (7)
$106,200 through September 30, 1999 on miscellaneous materials and equipment;
and (8) $184,000 through September 1999 in employee salaries.
The foregoing statements are based upon management's best estimates at the
present time, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, the
nature and amount of programming required to upgrade or replace each of the
affected programs, the rate and magnitude of related labor and consulting costs
and the success of the Company's external customers and suppliers in addressing
the Y2K issue. The Company's evaluation is ongoing and it expects that new and
different information will become available to it as that evaluation continues.
Consequently, there is no guarantee that all material elements will be Y2K ready
in time.
Volatility of Stock Price
In recent years, the stock market in general, and the market for shares of
small capitalization and technology stocks in particular, have experienced
extreme price fluctuations. Such fluctuations have often been unrelated to the
operating performance of affected companies. The Company believes that factors
such as announcements of developments related to its business, announcements of
technological innovations or new products or enhancements by the Company or its
competitors, developments in the emerging countries' economies, sales by
competitors, including sales to its customers, sales of its common stock into
the public market, including by members of management, developments in its
relationships with customers, partners, lenders, distributors and suppliers,
shortfalls or changes in revenues, gross margins, earnings or losses or other
financial results that differ from analysts' expectations (as recently
experienced), regulatory developments, fluctuations in results of operations and
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general conditions in its market or markets served by its customers or the
economy, could cause the price of its common stock to fluctuate, sometimes
reaching extreme and unexpected lows. The market price of its Common Stock may
continue to decline substantially, or otherwise continue to experience
significant fluctuations in the future, including fluctuations that are
unrelated to its performance. Such fluctuations could continue to materially
adversely affect the market price of its Common Stock.
Substantial Amount of Debt
In November 1997, through a private placement of the Company's Notes, the
Company incurred $100 million of indebtedness. In December 1998, January 1999
and February 1999, the Company retired approximately $40 million of such
indebtedness in exchange for approximately 5.3 million shares of its Common
Stock.
The Company entered into a revolving line-of-credit agreement on May 15,
1998, as amended, that provided for borrowings of up to $50.0 million. The
revolving commitment, as amended, has been reduced to $30.0 million until
maturity on January 15, 2000. The line of credit requires the Company to comply
with several financial covenants, including the maintenance of specific minimum
ratios. At periods in time since September 30, 1998, the Company has amended its
existing bank line of credit to prevent defaults with respect to several
covenants. Had these amendments not been made, the Company would have defaulted
on those covenants in its bank line, which would have triggered cross defaults
in the Notes, preferred stock instruments and other debt. While the amendments
to the covenants have been structured based on the Company's business plan that
would allow the Company to continue to be in compliance with such covenants,
should the Company not meet its business plan, or should the Company not be able
to raise adequate capital, it is possible that an event of default will occur
under the line-of-credit agreement. If a default is declared by the lenders,
cross defaults will be triggered on the Company's Notes and other debt
instruments resulting in accelerated repayments of such debts. Such events would
materially adversely affect the Company's business, financial condition and
results of operations.
As of September 30, 1999, its total indebtedness including current
liabilities was approximately $167.2 million and its stockholders' equity was
approximately $54.2 million.
The Company's ability to make scheduled payments of the principal and
interest on indebtedness will depend on future performance, which is subject in
part to economic, financial, competitive and other factors beyond its control.
There can be no assurance that the Company will be able to make payments on or
restructure or refinance its debt in the future, if necessary.
Dividends
Since the Company's incorporation in 1991, the Company has not declared or
paid cash dividends on its common stock, and the Company anticipates 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 the Company's board of
directors and will depend upon, among other things, its earnings, financial
condition, capital requirements, extent of indebtedness and contractual
restrictions with respect to the payment of dividends.
Change of Control Inhibition
Members of the Company's board of directors and executive officers,
together with members of their families and entities that may be deemed
affiliates of or related to such persons or entities, beneficially own
approximately 5% of the outstanding shares of common stock. As a practical
matter, these stockholders are able to influence the election of the members of
its board of directors and influence the outcome of corporate actions requiring
stockholder approval, such as mergers and acquisitions.
This level of ownership, together with the 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 of the Company 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 of the Common Stock will be substantially
diluted. Future issuance of the Series A preferred stock or any additional
preferred stock could have the effect of making it more difficult for a third
party to acquire a majority of its outstanding voting stock.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has international sales and facilities and is, therefore,
subject to foreign currency rate exposure. Historically, its international sales
have been denominated in British pounds sterling or United States dollars. With
recent acquisitions of foreign companies, certain of its international sales are
denominated in other foreign currencies, including Italian lira. The Company
enters into foreign forward exchange contracts to reduce the impact of currency
fluctuations of anticipated sales to British customers. The objective of these
contracts is to neutralize the impact of foreign currency exchange rate
movements on the Company's operating results. The gains and losses on forward
exchange contracts are included in earnings when the underlying foreign currency
denominated transaction is recognized.
The foreign exchange forward contracts described above generally require
the Company to sell foreign currencies for U.S. dollars at rates agreed to at
the inception of the contracts. The forward contracts generally have maturities
of nine months or less. These contracts generally do not subject the Company to
significant market risk from exchange rate movements because the contracts are
designed to offset gains and losses on the balances and transactions being
hedged. At September 30, 1999, the Company had forward contracts to sell
approximately $3.5 million in British pounds. The fair value of forward exchange
contracts approximates cost. The Company does not anticipate any material
adverse effect on its financial position resulting from the use of these
instruments.
The functional currency of the Company's wholly owned and majority-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 September 30, 1999, 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. In 1998, a near-term 10% appreciation or depreciation of the
U.S. dollar was also determined to have an insignificant effect. The Company
does not use derivative financial instruments for speculative or trading
purposes.
Interest Rate Risk
The Company's Notes bear interest at a fixed rate, therefore, the
Company's financial condition and results of operations would not be affected by
interest rate changes in this regard. The Company's revolving line of credit is
subject to interest at either a base interest rate or a variable interest rate
that is within 500 basis points of the base interest rate. A 500 basis point
increase over the base interest rate would not be material to the Company's
financial condition or results of operations. The Company will not be able to
renew its existing line-of-credit possible that any replacement lending facility
obtained by the Company might be more subject to interest rate changes.
44
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As disclosed in the Company's Forms 10-Q for the first and second quarters
of 1999, a consolidated amended class action complaint is pending against the
Company and certain of its officers and directors in the Superior Court of
California, County of Santa Clara.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Pier Antoniucci, President of the Company, and Michael Sophie, President
of the Company's Wireless Access Group, resigned their positions with the
Company at the end of September 1999. In September 1999, Brian T. Josling was
added to the Company's Board of Directors, to fill the vacancy created by Gill
Cogan's earlier resignation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
4.9(1) Amendment to Amended and Restated Rights Agreement
10.54 Employment Letter Agreement between P-Com, Inc. and James
Sobczak, dated August 18, 1999.
10.55 Severance Agreement between P-Com, Inc. and James Sobczak,
dated September 10, 1999.
10.56 Eighth Amendment to Credit Agreement dated August 3, 1999.
10.57 Stock Purchase Warrant agreement between P-Com, Inc. and
Castle Creek Technology Partners LLC, dated August 11, 1999.
10.58 Stock Purchase Warrant agreement between P-Com, Inc. and
Capital Ventures International, dated August 11, 1999.
10.59 Stock Purchase Warrant agreement between P-Com, Inc. and
Marshall Capital Management, Inc., dated August 11, 1999.
27.1 Financial Data Schedule.
<PAGE>
- ------------------
(1) Incorporated by reference to identically numbered exhibit to
the Company's Registration statement on Form 8-A/A filed with
the Securities and Exchange Commission on August 25, 1999.
(b) Reports on Form 8-K.
Report on Form 8-K filed on July 27, 1999 with respect to an event
of July 26, 1999, regarding the Company's plan to delay the
announcing of its earnings release and conference call originally
scheduled for July 26, 1999.
Report on Form 8-K filed August 11, 1999 with respect to events of
August 10, 1999, regarding the Company's press release announcing
its earnings for the second quarter ended June 30, 1999 and its
press release announcing the receipt of a point-to-multipoint
equipment order from Siemens and an amendment of the Company's
Mutual OEM Agreement with Siemens.
Report on Form 8-K filed September 1, 1999 with respect to an event
of August 30, 1999, regarding the Company's announcement of the
appointment of Jim Sobczak as President and Chief Operating Officer
effective September 7, 1999.
In addition, on August 4, 1999, the Company filed a Form 8-K/A
amendment with respect to a Form 8-K filed on April 19, 1998.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
P-COM, INC.
Date: November 17, 1999
By: /s/ George P. Roberts
-------------------------------------
George P. Roberts
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Date: November 17, 1999
By: /s/ Robert E. Collins
-------------------------------------
Robert E. Collins
Chief Financial Officer and Vice
President, Finance and Administration
(Principal Financial Officer)
47
<PAGE>
EXHIBIT INDEX
Exhibit No.
4.9(1) Amendment to Amended and Restated Rights Agreement
10.54 Employment Letter Agreement between P-Com, Inc. and James
Sobczak, dated August 18,1999.
10.55 Severance Agreement between P-Com, Inc. and James Sobczak,
dated September 10, 1999.
10.56 Eighth Amendment to Credit Agreement dated August 3, 1999.
10.57 Stock Purchase Warrant agreement between P-Com, Inc. and
Castle Creek Technology Partners LLC, dated August 11, 1999.
10.58 Stock Purchase Warrant agreement between P-Com, Inc. and
Capital Ventures International, dated August 11, 1999.
10.59 Stock Purchase Warrant agreement between P-Com, Inc. and
Marshall Capital Management, Inc., dated August 11, 1999.
27.1 Financial Data Schedule.
- ------------------------
(1) Incorporated by reference to identically numbered exhibit to
the Company's Registration statement on Form 8-A/A filed with
the Securities and Exchange Commission on August 25, 1999.
48
<PAGE>
EXHIBIT 10.54
August 18, 1999
Mr. Jim Sobczak
116 Gatehouse Dr.
Coraopolis, PA 15108
Dear Jim:
P-Com is please to offer you a position of employment with the Company. The
basic terms are as follows:
1. Title: President and Chief Operating Officer (please see enclosed
------
position description).
2. Salary: $25,000 per month. In addition to this salary you will be
-------
eligible for an annual bonus with a target of 45% of your annual
salary. The actual bonus amount will be determined by accomplishment of
mutually established objectives and Company performance.
3. Common Stock: Subject to the P-Com Board of Directors approval, you
-------------
will be granted options to purchase 300,000 shares of common stock. The
exercise price of such options shall be the then existing fair market
value of the shares as determined by the Board of Directors on the date
of such grant. The terms and conditions of this issuance shall be
governed by standard option agreement.
4. Commencement Date: Your starting date of employment with the Company
------------------
shall be a date mutually agreed upon by you and the company, and in any
event shall be on or prior to September 1, 1999.
5. Employee Stock Purchase Plan: You will be eligible to participate in
-----------------------------
the P-COM, Inc. Employee Stock Purchase Plan whereby you will be
eligible to purchase twice per year P-COM, Inc. common stock at a
discount price through a payroll deduction of up to 15% of you base
salary not to exceed $25,000.00.
6. Relocation Expenses: The company will reimburse you for all expenses
--------------------
connected with you relocation from Pittsburgh to California according
to the enclosed P-Com relocation policy.
7. Medical Benefits: You are entitled to medical insurance coverage under
-----------------
the Company's medical insurance plan commencing on your first date of
employment.
8. Employee at Will: Employment with the Company is not for a specific
-----------------
term and can be terminated by yourself or by the Company at any time
for any reason, with or without cause. We request that all of our
employees, to extent possible, give us
<PAGE>
advance notice if they intend to resign. Any contrary representation
that may have been made or which may be made to you is superseded by
this offer.
All offers for employment are contingent on the completion and approval of
relevant background investigations by P-Com, Inc. Investigations for business
necessity may include, but shall not be limited to criminal investigations,
driving record investigations and credit/financial background checks (if
applicable to the position). Applicants who do not accept or authorize such
investigations should not sign this employment offer.
If you accept the above-described offer, please mail or fax me an executed copy
of this letter where indicated below. You will be required to sign a copy
Proprietary Information and Inventions Agreement as well as to present copies of
proper documentation as proof of your identify and authorization to work in the
United States upon you acceptance.
This offer, if not accepted, will expire September 15, 1999.
P-Com believes that a mutually beneficial relationship will result from your
positive response to this offer of employment. We look forward to your
acceptance and a long and rewarding association.
Sincerely,
P-COM, Inc.
By: George Roberts
Chairman and CEO
I agree to the terms set forth above.
/s/ James Sobczak
- ------------------------------------------
(Signature)
James Sobczak
- ------------------------------------------
(Print Name)
August 20, 1999
- ------------------------------------------
(Date)
<PAGE>
EXHIBIT 10.55
September 10, 1999
Jim Sobczak
President and Chief Operating Officer
P-COM, Inc.
3175 South Winchester Boulevard
Campbell, CA 95008
Dear Jim:
We are pleased to inform you that the Board of Directors of P-Com,
Inc. (the "Company") has recently authorized and approved a special benefit
program for you and the other key executives. The purpose of this letter
agreement is to set forth the terms and conditions of your benefit package and
to explain the limitations which will govern the overall value of your benefits.
Your benefits will become payable in the event your employment
terminates, either voluntarily or involuntarily for any reason, within twenty-
four (24) months following certain changes in ownership or control of the
Company. To understand the full scope of your benefits, you should familiarize
yourself with the definitional provisions of Section I of this letter agreement.
The benefits comprising your package are detailed in Section II. Section III
addresses the treatment of any excise tax imposed in the event that any of your
benefits constitute excess parachute payments for purposes of the Federal tax
laws and Section IV deals with ancillary matters affecting your arrangement.
SECTION I - DEFINITIONS
For purposes of this letter agreement the following definitions will
be in effect:
1.1 Average Compensation means the average of your W-2 wages from the
Company for the five (5) calendar years completed immediately prior to the
calendar year in which the Change of Control is effected. Any W-2 wages for a
partial year of employment will be annualized, in accordance with the frequency
which such wages are paid during such partial year, before inclusion in your
Average Compensation. If any of your compensation from the Company during such
five (5)-year or shorter period was not included in your W-2 wages for U.S.
income tax purposes, either because you were not a U.S. citizen or resident or
because such compensation was excludible from income as foreign earned income
under Code Section 911 or as pre-tax income under Code Section 125 or 402(g),
then such compensation will nevertheless be included in your Average
Compensation to the same extent as if it were part of your W-2 wages.
1.2 Base Salary means the annual rate of base salary in effect for
you immediately prior to the Change in Control or (if greater) the annual rate
of base salary in effect at the time of your Termination.
<PAGE>
1.3 Board means the Company's Board of Directors.
1.4 Change in Control means any of the following transactions
effecting a change in ownership or control of the Company:
(i) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which
is to change the State in which the Company is incorporated,
(ii) 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,
(iii) any reverse merger in which the Company is the surviving
entity but in which securities possessing fifty percent (50%) or more of
the total combined voting power of the Company's outstanding securities are
transferred to person or persons different from the persons holding those
securities immediately prior to such merger,
(iv) a Hostile Take-Over, or
(v) the acquisition, directly or indirectly by any person or
related group of persons (other than the Company or a person that directly
or indirectly controls, is controlled by, or is under common control with,
the Company), of beneficial ownership (within the meaning of Rule 13d-3 of
the 1934 Act) of securities possessing more than thirty percent (30%) of
the total combined voting power of the Company's outstanding securities
pursuant to a tender or exchange offer made directly to the Company's
stockholders.
1.5 Code means the Internal Revenue Code of 1986, as amended.
1.6 Common Stock means the Company's common stock.
1.7 Disability shall mean your inability to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more.
1.8 Fair Market Value means, with respect to any shares of Common
Stock subject to any of your Options, the closing selling price per share of
Common Stock on the date in question, as reported on the Nasdaq National Market.
If there is no reported sale of Common Stock on such date, then the closing
selling price on the Nasdaq National Market on the next preceding day for which
there does exist such quotation shall be determinative of Fair Market Value.
1.9 Health Care Coverage means the continued health care coverage to
which you and your eligible dependents may become entitled under Section II of
this letter agreement upon the Termination of your employment.
1.10 Hostile Take-Over means either of the following transactions:
1
<PAGE>
(i) the successful acquisition by a person or a group of
related persons, other than the Company or a person controlling, controlled
by or under common control with the Company, of beneficial ownership (as
determined pursuant to the provisions of Rule 13d-3 under the 1934 Act) of
securities possessing more than twenty-five percent (25%) of the total
combined voting power of the Company's outstanding securities pursuant to a
transaction or series of related transactions which the Board does not at
any time recommend the Company's stockholders to accept or approve, or
(ii) a change in the composition of the Board over a period of
twenty-four (24) consecutive months or less such that a majority of the
Board ceases, by reason of one or more contested elections for Board
membership, to be comprised of individuals who either (I) have been members
of the Board continuously since the beginning of such period or (II) have
been elected or nominated for election as Board members during such period
by at least a two-thirds majority of the Board members described in clause
(I) who were still in office at the time such election or nomination was
approved by the Board.
1.11 Involuntary Termination means the termination of your employment
with the Company (or successor):
(i) involuntarily upon your discharge or dismissal,
(ii) voluntarily upon your resignation following (I) a change in
your position with the Company (or successor) which reduces your duties or
level of responsibility or otherwise changes the level of management to
which you report, (II) a reduction in your level of compensation (including
base salary, fringe benefits and target bonus under any incentive
performance plan) or (III) a change in your place of employment which is
more than fifty (50) miles from your place of employment prior to the
Change in Control, provided and only if such change or reduction is
effected without your written concurrence, or
(iii) by reason of your death or Disability.
1.12 1934 Act shall mean the Securities Exchange Act of 1934, as
amended.
1.13 Option means any option granted to you under the Plans which is
outstanding at the time of the Change in Control or your subsequent Termination.
Your Options will be divided into two (2) separate categories as follows:
Acquisition-Accelerated Options: any outstanding Option (or
-------------------------------
installment thereof) which automatically accelerates, pursuant to the
acceleration provisions of the agreement evidencing that Option, upon a change
in control or ownership of the Company under certain specified circumstances.
Severance-Accelerated Options: any outstanding Option (or installment
-----------------------------
thereof) which accelerates upon your Termination pursuant to Section II of this
letter agreement.
2
<PAGE>
1.14 Option Parachute Payment means, with respect to any Acquisition-
Accelerated Option or any Severance-Accelerated Option, the portion of that
Option deemed to be a parachute payment under Code Section 280G and the Treasury
Regulations issued thereunder. The portion of such Option which is categorized
as an Option Parachute Payment will be calculated in accordance with the
valuation provisions established under Code Section 280G and the applicable
Treasury Regulations and will include an appropriate dollar adjustment to
reflect the lapse of your obligation to remain in the Company's employ as a
condition to the vesting of the accelerated installment. In no event, however,
will the Option Parachute Payment attributable to any Acquisition-Accelerated
Option or Severance-Accelerated Option (or accelerated installment) exceed the
spread (the excess of the Fair Market Value of the accelerated option shares
over the option exercise price payable for those shares) existing at the time of
acceleration.
1.15 Other Parachute Payment means any payment in the nature of
compensation (other than the benefits to which you become entitled under Section
II of this letter agreement) which are made to you in connection with the Change
in Control and which accordingly qualify as parachute payments within the
meaning of Code Section 280G(b)(2) and the Treasury Regulations issued
thereunder. Your Other Parachute Payments will include (without limitation) the
Present Value, measured as of the Change in Control, of the aggregate Option
Parachute Payment attributable to your Acquisition-Accelerated Options (if any).
1.16 Plans means (i) the Company's 1992 Stock Option Plan, (ii) the
Company's 1995 Stock Option/Stock Issuance Plan, as amended or restated from
time to time, and (iii) any successor stock incentive plan subsequently
implemented by the Company.
1.17 Present Value means the value, determined as of the date of the
Change in Control, of any payment in the nature of compensation to which you
become entitled in connection with the Change in Control or the subsequent
Termination of your employment, including (without limitation) the Option
Parachute Payment attributable to your Severance-Acceleration Options, your
Severance Payments under Section II of this letter agreement and the Option
Parachute Payment attributable to your Acquisition-Accelerated Options. The
Present Value of each such payment will be determined in accordance with the
provisions of Code Section 280G(d)(4), utilizing a discount rate equal to one
hundred twenty percent (120%) of the applicable Federal rate in effect at the
time of such determination, compounded semi-annually to the effective date of
the Change in Control.
1.18 Severance Payments means the severance payments to which you may
become entitled under Section II in the event of a Termination following a
Change in Control, subject, however, to the dollar limitations of Section III.
1.19 Termination means a Voluntary Resignation or an Involuntary
Termination of your employment.
1.20 Voluntary Resignation means a resignation by you other than one
which constitutes an Involuntary Termination.
3
<PAGE>
SECTION II - BENEFITS
Upon the Termination of your employment within twenty-four (24) months
following a Change in Control, you will become entitled to receive the special
benefits provided in this Section II.
2.1 Payments
(a) Base Salary
You will be entitled to a Severance Payment in an amount equal to two
(2) times your Base Salary.
(b) Bonus
You will be entitled to an additional Severance Payment in an amount
equal to the greater of the following bonus amounts: (a) two (2) times the full
amount of the target bonus payable to you with respect to the fiscal year in
which the Termination occurs or (b) two (2) times the full amount of the target
bonus payable to you with respect to the fiscal year in which the Change in
Control occurs.
(c) Payment of Severance Payments
In the absence of a Hostile Take-Over, your Severance Payments will be
made at bi-weekly intervals following your Termination. However, these payments
will immediately terminate in the event you fail to abide by the restrictive
covenants set forth in Paragraph 2.4.
Should your Termination occur in connection with a Hostile Take-Over,
the Severance Payments will be made to you in a lump sum payment within thirty
(30) days after your Termination and the provisions of Paragraph 2.4 will not
apply.
All Severance Payments will be subject to the Company's collection of
all applicable federal and state income and employment withholding taxes.
2.2 Option Acceleration
Each of your outstanding Options will (to the extent not then
otherwise fully exercisable) automatically accelerate so that each such Option
will become fully vested and immediately exercisable for the total number of
shares of Common Stock at the time subject to that Option. Each such
accelerated Option, together with all your other vested Options, will remain
exercisable for fully-vested shares until the earlier of (i) the expiration date
of the ten (10)-year option term or (ii) the end of two (2) full years measured
from the date of your Termination or greater if set forth in the Option.
4
<PAGE>
2.3 Additional Benefits
(a) Health Care Coverage
The Company will, at its expense, provide you and your eligible
dependents with continued health care coverage under the Company's
medical/dental/vision plan until the earlier of (i) twenty-four (24) months
after the date of your Termination or (ii) the first date that you are covered
under another employer's health benefit program which provides substantially the
same level of benefits without exclusion for pre-existing medical conditions.
The coverage so provided you and your eligible dependents will be in full and
complete satisfaction of the continued health care coverage to which you or your
eligible dependents would otherwise, at your own expense, be entitled under Code
Section 4980B by reason of your termination of employment.
(b) Unpaid Benefits
You will receive an immediate lump sum payment of all unpaid vacation
days which you have accrued through the date of your Termination.
2.4 Restrictive Covenants
For the twenty-four (24)-month period following your Termination, you
will not:
(i) directly or indirectly, whether for your own account or as
an employee, director, consultant or advisor, provide services to any
business enterprise which is at the time in competition with any of the
Company's then-existing or formally planned product lines and which is
located geographically in an area where the Company maintains substantial
business activities;
(ii) directly or indirectly encourage or solicit any individual
to leave the Company's employ for any reason or interfere in any other
manner with the employment relationships at the time existing between the
Company and its current or prospective employees; or
(iii) induce or attempt to induce any customer, supplier,
distributor, licensee or other business affiliate of the Company to cease doing
business with the Company or in any way interfere with the existing business
relationship between any such customer, supplier, distributor, licensee or other
business affiliate and the Company.
You acknowledge that monetary damages may not be sufficient to
compensate the Company for any economic loss which may be incurred by reason of
your breach of the foregoing restrictive covenants. Accordingly, in the event
of any such breach, the Company will, in addition to the cessation of the
severance benefits provided under this agreement and any remedies available to
the Company at law, be entitled to obtain equitable relief in the form of an
injunction precluding you from continuing to engage in such breach.
None of the foregoing restrictive covenants will be applicable in the
event your Termination occurs in connection with a Hostile Take-Over.
5
<PAGE>
SECTION III - PARACHUTE PAYMENTS
3.1 Parachute Tax Gross-Up
Should the aggregate Present Value (measured as of the Change in
Control) of (i) the benefits to which you become entitled under Section II at
the time of your Termination (namely the Severance Payments, the Option
Parachute Payment attributable to your Severance-Accelerated Options and your
Health Care Continuation) and (ii) all Other Parachute Payments to which you are
entitled, exceed 2.99 times your Actual Average Compensation (the "Parachute
Limit") and thereby result in an excise tax liability under Section 4999 of the
Code, then the Company will provide you with a full tax gross-up with respect to
such excise tax liability. The amount of such tax gross-up will be determined
pursuant to the following formula:
X = Y 1 - (A + B + C), where
X is the total dollar payment (the "Tax Gross-Up") required to be
paid under this letter agreement,
Y is the total excise tax (the "Parachute Tax") imposed on you
pursuant to Section 4999 of the Code (or any successor provision)
with respect to the Severance Payments, the Option Parachute
Payment attributable to your Severance-Accelerated Options, your
Health Care Continuation and all Other Parachute Payments,
A is the excise tax rate in effect under Section 4999 of the Code
for excess parachute payments,
B is the highest combined marginal federal income and applicable
state income tax rate in effect for you, after taking into
account the deductibility of state income taxes against federal
income taxes to the extent allowable, for the calendar year in
which the Tax Gross-Up is paid, and
C is the applicable Hospital Insurance (Medicare) Tax Rate in
effect for you for the calendar year in which the Tax Gross-Up is
paid.
3.2 Initial Payment
Within ninety (90) days after each determination is made by the
Internal Revenue Service or your tax advisor that you have received a parachute
payment for which you are liable for a Parachute Tax, you will identify the
nature of such parachute payment to the Company and submit to the Company the
calculation of the Parachute Tax attributable to that payment and the Tax Gross-
Up to which you are entitled with respect to such tax liability. The Company
will pay such Tax Gross-Up to you (net of all applicable withholding taxes,
including any taxes required to be withheld under Section 4999 of the Code)
within ten (10) business days after your submission of the calculation of such
Parachute Tax and the resulting Tax Gross-Up, provided such calculations
represent a reasonable interpretation of the applicable law and regulations.
6
<PAGE>
3.3 Final Determination
In the event that your actual Parachute Tax liability is determined by
a Final Determination to be greater than the Parachute Tax liability taken into
account for purposes of the Tax-Gross-Up paid pursuant to this Section, then
within ninety (90) days following the Final Determination, you will submit to
the Company a new Parachute Tax calculation based upon the Final Determination.
Within ten (10) business days after receipt of such calculation, the Company
will pay you the additional Tax Gross-Up attributable to such excess Parachute
Tax liability.
3.4 Refund
In the event that your actual Parachute Tax liability is determined by
a Final Determination to be less than the Parachute Tax liability taken into
account for purposes of the Tax Gross-Up paid to you pursuant to this Section,
then you will refund to the Company, promptly upon receipt, any federal or state
tax refund attributable to the Parachute Tax overpayment.
3.5 Definition
For purposes of this section, a Final Determination means an audit
adjustment by the Internal Revenue Service that is either agreed to by you or
your estate or an adjustment that is sustained by a court of competent
jurisdiction in a decision with which you concur or with respect to which the
period within which an appeal may be filed has lapsed without a notice of appeal
being filed.
SECTION IV - MISCELLANEOUS PROVISIONS
4.1 Death
In the event of your death, the Severance Payments (including the
Parachute Payments) to which you become entitled under this letter agreement
will be made, on the due date hereunder, to the executors or administrators of
your estate. Should you die before you exercise all your outstanding Options,
then such Options may be exercised, within twelve (12) months after your death,
by the executors or administrators of your estate or by persons to whom the
Options are transferred pursuant to your will or in accordance with the laws of
inheritance. In no event, however, may any such Option be exercised after the
specified expiration date of the option term.
4.2 General Creditor Status
The payments and benefits to which you become entitled hereunder will
be paid, when due, from the general assets of the Company, and no trust fund,
escrow arrangement or other segregated account will be established as a funding
vehicle for such payment. Accordingly, your right (or the right of the personal
representatives or beneficiaries of your estate) to receive any payments or
benefits hereunder will at all times be that of a general creditor of the
Company and will have no priority over the claims of other general creditors.
7
<PAGE>
4.3 Indemnification
The indemnification provisions for officers and directors under the
Company certificate of incorporation, indemnification agreement, Bylaws and
insurance policies will (to the maximum extent permitted by law) be extended to
you with respect to any and all matters, events or transactions occurring or
effected during your employment with the Company.
4.4 Miscellaneous
This letter agreement will be binding upon the Company, its successors
and assigns (including, without limitation, the surviving entity in any Change
in Control) and is to be construed and interpreted under the laws of the State
of California. Except as set forth herein, this letter agreement supersedes all
prior agreements between you and the Company relating to the subject of
severance benefits payable upon a change in control or ownership of the Company,
including the Plans and the agreements evidencing the Options, and may only be
amended by written instrument signed by you and an authorized officer of the
Company. If any provision of this letter agreement as applied to any party or
to any circumstance should be adjudged by a court of competent jurisdiction to
be void or unenforceable for any reason, the invalidity of that provision will
in no way affect (to the maximum extent permissible by law) the application of
such provision under circumstances different from those adjudicated by the
court, the application of any other provision of this letter agreement, or the
enforceability or invalidity of this letter agreement as a whole. Should any
provision of this letter agreement become or be deemed invalid, illegal or
unenforceable in any jurisdiction by reason of the scope, extent or duration of
its coverage, then such provision will be deemed amended to the extent necessary
to conform to applicable law so as to be valid and enforceable or, if such
provision cannot be so amended without materially altering the intention of the
parties, then such provision will be stricken and the remainder of this letter
agreement will continue in full force and effect.
4.5 Attorney Fees
In the event legal proceeding should be initiated by you or by the
Company with respect to any controversy, claim or dispute relating to the
interpretation or application of the provisions of this letter agreement or any
benefits payable hereunder, the prevailing party in such proceedings will be
entitled to recover from the losing party reasonable attorney fees and costs
incurred in connection with such proceedings or in the enforcement or collection
of any judgment or award rendered in such proceedings. For purposes of this
provision, the prevailing party means the party determined by the court to have
most nearly prevailed in the proceedings, even if that party does not prevail in
all matters, and does not necessarily mean the party in whose favor the judgment
is actually rendered. If the Company materially breaches any of its obligations
under this letter agreement and fails to cure that breach within thirty (30)
days after written notice from you, you will then be entitled to reimbursement
from the Company for any reasonable expenses and attorney fees you incur in
having the Company subsequently cure that breach, whether or not legal
proceedings are actually commenced in connection with such breach.
8
<PAGE>
4.6 Independent Legal Counsel
By executing this letter agreement, you acknowledge that (i) this
agreement has been prepared by Brobeck, Phleger & Harrison LLP ("Brobeck")
acting in its capacity as legal counsel to the Company and (ii) you have had an
opportunity to seek advice from your own legal counsel with respect to the
matters contained herein and such individual counsel is not Brobeck.
Please indicate your acceptance of the foregoing provisions of this
letter agreement by signing the enclosed copy of this agreement and returning it
to the Company.
P-COM, INC.
BY: /s/ George P. Roberts
---------------------------
TITLE: Chairman of the Board of Directors
----------------------------------
and Chief Executive Officer
-----------------------------------
ACCEPTANCE
I hereby agree to all the terms and provisions of the foregoing letter
agreement governing the special benefits to which I may become entitled in
connection with certain changes in control or ownership of P-Com, Inc.
Signature: /s/ James Sobczak
---------------------
Dated: October 25, 1999
-------------------------
9
<PAGE>
Exhibit 10.56
EIGHTH AMENDMENT TO CREDIT AGREEMENT
THIS EIGHTH AMENDMENT TO CREDIT AGREEMENT ("Eighth Amendment") is
----------------
effective as of August 3, 1999, and is entered into by and among P-COM, INC., a
Delaware corporation ("Borrower"); the financial institutions signatory hereto
--------
(each individually a "Lender" and collectively the "Lenders"); UNION BANK OF
------ -------
CALIFORNIA, N.A., for itself, as a Lender, and as administrative agent for
Lenders (in such capacity, "Agent"); and BANK OF AMERICA NATIONAL TRUST AND
-----
SAVINGS ASSOCIATION (for itself, as a Lender, and as syndication agent for
Lenders (in such capacity, "Syndication Agent").
-----------------
RECITALS
--------
A. Borrower, Lenders, Agent, and Syndication Agent have entered into
that certain Credit Agreement dated as of May 15, 1998, as amended
(collectively, the "Credit Agreement"), pursuant to which Agent, Syndication
----------------
Agent, and Lenders agreed to provide financial accommodations to or for the
benefit of Borrower upon the terms and conditions contained therein. Unless
otherwise defined herein, capitalized terms or matters of construction defined
or established in the Credit Agreement shall be applied herein as defined or
established therein.
B. Events of Default have occurred and are continuing under Sections
--------
6.2(c), 6.2(d) and 6.2(w) of the Credit Agreement for the period ending and as
- ------ ------ ------
of June 30, 1999 (collectively, the "Applicable Defaults").
-------------------
C. Borrower has requested that Agent, Syndication Agent, and Lenders
waive the Applicable Defaults and make certain amendments to the Credit
Agreement in connection therewith. Agent, Syndication Agent, and Lenders are
willing to do so subject to the terms and conditions of this Eighth Amendment.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the continued performance by
Borrower of its promises and obligations under the Credit Agreement and the
other Loan Documents, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Borrower, Lenders, Agent, and
Syndication Agent hereby agree as follows:
1. Ratification and Incorporation of Credit Agreement and Other Loan
-----------------------------------------------------------------
Documents. Except as expressly modified under this Eighth Amendment, (a)
- ---------
Borrower hereby acknowledges, confirms, and ratifies all of the terms and
conditions set forth in, and all of its obligations under, the Credit Agreement
and the other Loan Documents, and (b) all of the terms and conditions set forth
in the Credit Agreement and the other Loan Documents are incorporated
1
<PAGE>
herein by this reference as if set forth in full herein. Without limiting the
generality of the foregoing, each of Borrower and each other Loan Party
acknowledges and agrees that as of August 3, 1999, the sum of (i) the aggregate
outstanding principal amount of all Loans, plus (ii) the aggregate outstanding
----
Letter of Credit Usage was $29,750,000. Each of Borrower and each other Loan
Party represents that it has no offset, defense, counterclaim, dispute or
disagreement of any kind or nature whatsoever with respect to the amount of such
Debt.
2. Amendments to Credit Agreement.
------------------------------
(a) The definition of "Qualified Financial Institution" is hereby
deleted in its entirety and the following is substituted therefor:
"Qualified Financial Institution": Any Lender, or any
-------------------------------
commercial bank organized under the laws of the United States of
America or of any State thereof and having a combined capital and
surplus of at least $100,000,000; provided, that, on and after the
--------
effective date of the Eighth Amendment to Credit Agreement, "Qualified
---------
Financial Institution" shall mean Silicon Valley Bank.
---------------------
(b) Section 2.5(a) is hereby amended by deleting the reference to
--------------
"$5,000,000" and substituting "$3,425,000" therefor.
(c) Clause (vii) of Section 6.1(b) is hereby deleted in its
--------------
entirety and the following is substituted therefor:
(vii) as soon as available, but in any event contemporaneously
with their delivery to any Qualified Financial Institution that
purchases Borrower's accounts receivable, copies of all receivables
agings, reports submitted to credit issuers, and accountings for the
sale, collection of, and rebates on account of any accounts receivable
transferred thereunder.
(d) Clause (iii) of Section 6.2(f) is hereby amended by deleting
--------------
the reference to "$25,000,000" and substituting "$7,000,000" therefor.
(e) Clause (ii) of Section 6.2(l) is hereby deleted in its
--------------
entirety and the following is substituted therefor:
(ii) the Borrower may assign and sell accounts receivable to
any Qualified Financial Institutions pursuant to the Receivables
Facilities; provided, that the total outstanding amount of all
--------
purchased receivables under the Receivables Facilities shall not
exceed $7,000,000 at any time; and provided, further, that the
-------- -------
Borrower shall not assign or sell any accounts receivable following
the occurrence and during the continuation of a Potential Event of
Default or an Event of Default;
2
<PAGE>
(f) Section 7.1 shall be amended as follows: (i) the word "or"
-----------
shall be added to the end of paragraph (m); and (ii) a new paragraph (n) shall
be added, which paragraph shall read as follows:
(n) the Borrower shall default on its obligations under (i)
that certain Exchange Agreement dated June 4, 1999, between Marshall Capital
Management, Inc. and Borrower, as modified by that certain waiver letter dated
August 6, 1999, (ii) that certain Exchange Agreement dated June 4, 1999, between
Capital Ventures International and Borrower, as modified by that certain waiver
letter dated August 9, 1999, or (iii) that certain Exchange Agreement dated June
4, 1999, between Castle Creek Technology Partners LLC and Borrower, as modified
by that certain waiver letter dated August 4, 1999, including, without
limitation, Borrower's obligations under Section 5(d)(ii) of each such Exchange
Agreement;
3. Delivery of Documents
---------------------
(a) Projections. On or before August 30, 1999, the Borrower
-----------
shall deliver to Agent an updated business plans and other projections, in form
reasonably satisfactory to Agent, with respect to the Borrower and its
Subsidiaries for the period from July 1, 1999 through and including December 31,
1999, it being understood that such business plans and other projections shall
constitute reasonable good faith estimates of the Borrower as to the matters
addressed therein but shall not constitute any guaranty, representation or
warranty as to such matters. If Borrower has not delivered such updated
projections to Agent and Lenders by such date, then such failure shall
constitute an Event of Default.
(b) Waiver Letters. On or before August 12, 1999, the Borrower
--------------
shall deliver to Agent waiver letters extending the deadlines established in
Section 5(d)(ii) of each of the Exchange Agreements referred to in Section 2(f)
of this Eighth Amendment, in form and substance reasonably satisfactory to
Agent. If Borrower has not delivered such waiver letters to Agent and Lenders by
such date, then such failure shall constitute an Event of Default.
4. Waivers by Agent and Lenders. Subject to satisfaction of each of
----------------------------
the conditions set forth in Section 5 of this Eighth Amendment, Agent and
---------
Lenders hereby waive the Applicable Defaults and agree that, with respect to the
Applicable Defaults only, no Default or Event of Default shall be deemed to have
occurred as a result thereof; provided, that such waiver shall not be deemed
--------
effective to the extent that any of the following has occurred (a) with respect
to the Applicable Default under Section 6.2(c), Consolidated Tangible Net Worth
--------------
as of June 30, 1999 is less than $45,000,000; (b) with respect to the Applicable
Default under Section 6.2(d), Consolidated Pre-Tax Income of the Borrower and
--------------
its consolidated Subsidiaries for the fiscal quarter ending June 30, 1999
reflects a loss in excess of $(60,000,000); or
(c) with respect to the Applicable Default under Section 6.2(w), Consolidated
--------------
EBITDA for the fiscal quarter ending June 30, 1999 is less than $(15,000,000).
5. Conditions to Effectiveness. This Eighth Amendment shall become
---------------------------
effective on August 3, 1999 (the "Effective Date"), only upon satisfaction of
--------------
each of the following conditions:
3
<PAGE>
(a) receipt by Agent of this Eighth Amendment duly executed by
Borrower, Bank of America National Trust and Savings Association, as Syndication
Agent and Lender, and Union Bank of California, N.A., as Agent and Lender;
(b) receipt by Agent of the attached Guarantor Consents
(individually, a "Guarantor Consent" and collectively, the "Guarantor
----------------- ---------
Consents"), duly executed by each Guarantor;
- --------
(c) receipt by Agent of the fully-executed Second Amendment to
Intellectual Property Security Agreement, in form and substance satisfactory to
Agent and its counsel;
(d) receipt by Agent of copies of resolutions, in form and
substance satisfactory to Agent and its counsel, of the Board of Directors or
other authorizing documents of Borrower, authorizing the execution and delivery
of this Eighth Amendment; and
(e) the absence of any Potential Events of Default or Events of
Default, after giving effect to Section 4 hereof.
---------
6. Representations and Warranties. In order to induce the Lenders
------------------------------
to enter into this Eighth Amendment, Borrower represents and warrants to Agent,
Syndication Agent, and Lenders that the following statements are true, correct
and complete as of the Effective Date of this Eighth Amendment:
(a) Corporate Power and Authority. Borrower has all requisite
-----------------------------
corporate power and authority to enter into this Eighth Amendment and to carry
out the transactions contemplated by, and perform its obligations under, the
Credit Agreement as amended by this Eighth Amendment (the "Amended Agreement").
-----------------
The Certificate of Incorporation and Bylaws of Borrower have not been amended
since the copies previously delivered to Agent, Syndication Agent, and Lenders.
(b) Authorization of Agreements. The execution and delivery of
---------------------------
this Eighth Amendment and the performance by Borrower of the Amended Agreement
have been duly authorized by all necessary corporate action on the part of
Borrower.
(c) No Conflict. The execution and delivery by Borrower of this
-----------
Eighth Amendment do not and will not contravene (i) any law or any governmental
rule or regulation applicable to Borrower, except to the extend not resulting in
a Material Adverse Effect, (ii) the Certificate of Incorporation or Bylaws of
Borrower, (iii) any order, judgment or decree of any court or other agency of
government binding on Borrower, or (iv) any material agreement or instrument
binding on Borrower, except to the extent not resulting in a Material Adverse
Effect.
4
<PAGE>
(d) Governmental Consents. The execution and delivery by
---------------------
Borrower of this Eighth Amendment and the performance by Borrower of the Amended
Agreement do not and will not require any registration with, consent or approval
of, or notice to, or other action to, with or by, any federal, state or other
governmental authority or regulatory body (except routine reports required
pursuant to the Securities Exchange Act of 1934, as amended (as such act is
applicable to any Loan Party), which reports will be made in the ordinary course
of business).
(e) Binding Obligation. This Eighth Amendment and the Amended
------------------
Agreement have been duly executed and delivered by Borrower and are the binding
obligations of Borrower, enforceable against Borrower in accordance with their
respective terms, except in each case as such enforceability may be limited by
bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar
laws and equitable principles relating to or affecting creditors' rights.
(f) Incorporation of Representations and Warranties From Credit
-----------------------------------------------------------
Agreement. The representations and warranties contained in Section 5.1 of the
- --------- -----------
Credit Agreement are correct in all material respects on and as of the Effective
Date of this Eighth Amendment as though made on and as of such date, except (a)
to the extent that a particular representation or warranty by its terms
expressly applies only to an earlier date, or (b) to the extent that Borrower or
any other Loan Party, as applicable, has previously advised Agent in writing as
contemplated under the Credit Agreement.
(g) Absence of Default. After giving effect to Sections 2, 3 and
------------------ ---------- -
4 of this Eighth Amendment, no event has occurred and is continuing or will
- -
result from the consummation of the transactions contemplated by this Eighth
Amendment that would constitute an Event of Default or a Potential Event of
Default.
7. Release.
-------
(a) Each Loan Party acknowledges that Agent, Syndication Agent,
and Lenders would not enter into this Eighth Amendment without the Loan Parties'
assurance that each Loan Party has no claims against Agent, Syndication Agent,
or Lenders, or any of such parties' shareholders, officers, directors,
employees, agents, or attorneys arising out of or related to the Loan Documents
or any other agreement between any Loan Party and any Lender. Except for the
obligations arising hereafter under the Amended Agreement, each Loan Party, for
itself and on behalf of its successors, assigns, and present and future
shareholders, officers, directors, employees, agents, and attorneys, hereby
remises, releases and forever discharges each of Agent, Syndication Agent, and
each Lender and their respective present and former shareholders, officers,
directors, employees, agents, attorneys, successors and assigns from any and all
claims, rights, actions, causes of action, suits, liabilities, defenses, damages
and costs that both (a) exist or may exist as of the Effective Date and (b)
arise from or are otherwise related to the Credit Agreement or the other Loan
Documents, any transaction contemplated thereby, the administration of the Loans
and other financial accommodations made thereunder, the collateral security
given in connection therewith, or any related discussions or negotiations, in
each case
5
<PAGE>
whether known or unknown, suspected or unsuspected. Each Loan Party waives the
provisions of California Civil Code section 1542, which states:
A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his settlement
with the debtor.
(b) The provisions, waivers and releases set forth in this
section are binding upon each Loan Party and each Loan Party's shareholders,
agents, employees, assigns and successors in interest. The provisions, waivers
and releases of this section shall inure to the benefit of each Lender, Agent,
Syndication Agent, and each such party's shareholders, agents, employees,
officers, directors, assigns and successors in interest as parties to the Credit
Agreement.
(c) The provisions of this section shall survive payment in full
of the obligations, full performance of all the terms of this Eighth Agreement
and the Loan Documents, or Agent's or any Lender's actions to exercise any
remedy available under the Loan Documents or otherwise.
(d) Each Loan Party warrants and represents that each such Loan
Party is the sole and lawful owner of all right, title and interest in and to
all of the claims released hereby and each such Loan Party has not heretofore
voluntarily, by operation of law or otherwise, assigned or transferred or
purported to assign or transfer to any Person any such claim or any portion
thereof. Each Loan Party shall indemnify and hold harmless each Lender, Agent,
and Syndication Agent, from and against any claim, demand, damage, debt,
liability (including payment of reasonable attorneys' fees and costs actually
incurred whether or not litigation is commenced) based on or arising out of any
assignment or transfer.
8. Entire Agreement. This Eighth Amendment, together with the
----------------
Credit Agreement and the other Loan Documents, is the entire agreement between
the parties hereto with respect to the subject matter hereof. This Eighth
Amendment supersedes all prior and contemporaneous oral and written agreements
and discussions with respect to the subject matter hereof.
9. Miscellaneous.
-------------
(a) Counterparts. This Eighth Amendment may be executed in
------------
identical counterpart copies, each of which shall be an original, but all of
which shall constitute one and the same agreement; signature pages may be
detached from multiple separate counterparts and attached to a single
counterpart so that all signature pages are physically attached to the same
document. Delivery of an executed counterpart of a signature page to this Eighth
Amendment by facsimile transmission shall be effective as delivery of a manually
executed counterpart thereof.
6
<PAGE>
(b) Headings. Section headings used herein are for convenience
--------
of reference only, are not part of this Eighth Amendment, and are not to be
taken into consideration in interpreting this Eighth Amendment.
(c) Recitals. The recitals set forth at the beginning of this
--------
Eighth Amendment are true and correct, and such recitals are incorporated into
and are a part of this Eighth Amendment.
(d) Governing Law. THIS EIGHTH AMENDMENT SHALL BE GOVERNED BY,
-------------
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF
CALIFORNIA APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT
REGARD TO THE PRINCIPLES THEREOF REGARDING CONFLICT OF LAWS.
(e) Effect. Upon the effectiveness of this Eighth Amendment,
------
from and after the date hereof, each reference in the Credit Agreement to "this
Agreement," "hereunder," "hereof," or words of like import shall mean and be a
reference to the Credit Agreement as amended hereby and each reference in the
other Loan Documents to the Credit Agreement, "thereunder," "thereof," or words
of like import shall mean and be a reference to the Credit Agreement as amended
hereby.
(f) No Novation. Except as expressly provided in this Eighth
-----------
Amendment, the execution, delivery, and effectiveness of this Eighth Amendment
shall not (i) limit, impair, constitute a waiver of, or otherwise affect any
right, power, or remedy of Agent or any Lender under the Credit Agreement or any
other Loan Document, (ii) constitute a waiver of any provision in the Credit
Agreement or in any of the other Loan Documents, or (iii) alter, modify, amend,
or in any way affect any of the terms, conditions, obligations, covenants, or
agreements contained in the Credit Agreement, all of which are ratified and
affirmed in all respects and shall continue in full force and effect.
(g) Conflict of Terms. In the event of any inconsistency between
-----------------
the provisions of this Eighth Amendment and any provision of the Credit
Agreement, the terms and provisions of this Eighth Amendment shall govern and
control.
7
<PAGE>
IN WITNESS WHEREOF, this Eighth Amendment to Credit Agreement has been
duly executed as of the date first written above.
P-COM, INC.
By: /s/ Robert E. Collins
-------------------------------------
Name: Robert E. Collins
-----------------------------------
Title: Vice President and
Chief Financial Officer
----------------------------------
UNION BANK OF CALIFORNIA, N.A.,
as Agent and a Lender
By: /s/ Patricia Lee
-------------------------------------
Name: Patricia Lee
-----------------------------------
Title: Vice President
----------------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Syndication Agent
and a Lender
By: /s/ M. Duncan McDuffie
--------------------------------------
Name: M. Duncan McDuffie
------------------------------------
Title: Managing Director
-----------------------------------
8
<PAGE>
GUARANTOR CONSENTS
Each of the undersigned hereby (i) ratifies and reaffirms, as of the
date hereof, all of the provisions of that certain Subsidiary Guaranty in favor
of Agent dated as of May 15, 1998 (the "Guaranty"), (ii) acknowledges receipt of
--------
a copy of the Eighth Amendment to Credit Agreement effective as of August 3,
1999 (the "Eighth Amendment"), (iii) consents to all of the provisions of the
----------------
Eighth Amendment, and (iv) acknowledges and agrees that nothing contained in the
Eighth Amendment in any way affects the validity and enforceability of the
Guaranty.
Effective as of August 3, 1999 CONTROL RESOURCES CORPORATION
By: /s/ Warren Lazarow
--------------------------
Name: Warren Lazarow
------------------------
Title: Secretary
-----------------------
Effective as of August 3, 1999 P-COM NETWORK SERVICES, INC.
By: /s/ Warren Lazarow
--------------------------
Name: Warren Lazarow
------------------------
Title: Secretary
-----------------------
Effective as of August 3, 1999 P-COM FINANCE CORPORATION
By: /s/ Warren Lazarow
--------------------------
Name: Warren Lazarow
------------------------
Title: Secretary
-----------------------
Effective as of August 3, 1999 P-COM UNITED KINGDOM, INC.
By: /s/ Warren Lazarow
--------------------------
Name: Warren Lazarow
------------------------
Title: Secretary
-----------------------
Effective as of August 3, 1999 TELEMATICS, INC.
By: /s/ Warren Lazarow
--------------------------
Name: Warren Lazarow
------------------------
Title: Secretary
-----------------------
9
<PAGE>
EXHIBIT 10.57
VOID AFTER 5:00 P.M. Eastern Standard
TIME ON August 11, 2004
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES
LAWS OF ANY STATE OF THE UNITED STATES. THE SECURITIES REPRESENTED HEREBY MAY
NOT BE OFFERED OR SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS, OR
UNLESS OFFERED, SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
Right to Purchase Shares of
Common Stock, par value $0.0001 per share
Date: August 11, 1999
P-COM, INC.
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received Castle Creek Technology
Partners LLC or its registered assigns, is entitled to purchase from P-Com,
Inc., a Delaware corporation (the "Company"), at any time or from time to time
during the period specified in Section 2 hereof, 100,000 fully paid and
nonassessable shares of the Company's common stock, par value $0.0001 per share
(the "Common Stock").
The Warrant exercise price per share of Common Stock (the "Exercise
Price") shall be equal to $5.00. The number of shares of Common Stock
purchasable hereunder (the "Warrant Shares") and the Exercise Price are subject
to adjustment as provided in Section 4 hereof.
The term "Closing Bid Price" and "Closing Trade Price" mean, for any
----------------- -------------------
security as of any date, the closing bid price and the closing trade price,
respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg
Financial Markets or a comparable reporting service of national reputation
selected by the Company and reasonably acceptable to the holder hereof (the
"Holder") if Bloomberg Financial Markets is not then reporting closing bid
- -------
prices or closing sale prices, as applicable, of such security (collectively,
"Bloomberg"), or if the foregoing does not apply, the last reported sale price
- ----------
of such security in the over-the-counter market on the electronic bulletin board
of such security as reported by Bloomberg, or, if no sale price is reported for
such security by Bloomberg, the average of the bid prices of any market makers
for such security as reported in the "pink sheets" by the National Quotation
Bureau, Inc. If the Closing Bid Price or Closing Trade Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Closing Bid Price or Closing Trade Price, as applicable, of such security on
such date shall be the fair market value as reasonably determined by an
investment banking firm selected by the
<PAGE>
Company and reasonably acceptable to the Holder with the costs of such
appraisal to be borne by the Company.
This Warrant is subject to the following terms, provisions, and
conditions:
1. Mechanics of Exercise. Subject to the provisions hereof, including,
---------------------
without limitation, the limitations contained in Section 7(f) hereof, this
Warrant may be exercised as follows:
(a) Manner of Exercise. This Warrant may be exercised by the
------------------
Holder, in whole or in part, by the surrender of this Warrant (or evidence of
loss, theft, destruction or mutilation thereof in accordance with Section
10(e) hereof), together with a completed exercise agreement in the form of
Exercise Agreement attached hereto as Exhibit 1 (the "Exercise Agreement"), to
the Company at the Company's principal executive offices (or such other office
or agency of the Company as it may designate by notice to the Holder), and
upon (i) payment to the Company in cash, by certified or official bank check
or by wire transfer for the account of the Company, of the Exercise Price for
the Warrant Shares specified in the Exercise Agreement or (ii) if the Holder
elects to effect a Cashless Exercise (as defined in Section 10(c) below),
delivery to the principal executive office of the Company ("Attention:
Corporate Secretary") of a written notice of an election to effect a Cashless
Exercise for the Warrant Shares specified in the Exercise Agreement. The
Warrant Shares so purchased shall be deemed to be issued to the Holder or
Holder's designees, as the record owner of such shares, as of the date on
which this Warrant shall have been surrendered, the completed Exercise
Agreement shall have been delivered, and payment (or notice of an election to
effect a Cashless Exercise) shall have been made for such shares as set forth
above.
(b) Issuance of Certificates. Subject to Section 1(c),
certificates for the Warrant Shares so purchased, representing the aggregate
number of shares specified in the Exercise Agreement, shall be delivered to
the Holder within a reasonable time, not exceeding three (3) business days,
after this Warrant shall have been so exercised (the "Delivery Period"). The
---------------
certificates so delivered shall be in such as may be denominations requested
by the Holder upon exercise and shall be registered in the name of Holder or
such other name as shall be designated by such Holder upon exercise. If this
Warrant shall have been exercised only in part, then, unless this Warrant has
expired, the Company shall, at its expense, at the time of delivery of such
certificates, deliver to the Holder a new Warrant representing the number of
shares with respect to which this Warrant shall not then have been exercised.
(c) Exercise Disputes. In the case of any dispute with respect to
-----------------
an exercise, the Company shall promptly issue such number of shares of Common
Stock as are not disputed in accordance with this Section. If such dispute
involves the calculation of the Exercise Price, the Company shall submit the
disputed calculations to a nationally recognized independent accounting firm
(selected by the Company) via facsimile within three (3) business days of
receipt of the Exercise Agreement. The accounting firm shall audit the
calculations and notify the Company and the converting Holder of the results
no later than ten (10) business days from the date it receives the disputed
calculations. The accounting firm's calculation shall be deemed conclusive,
absent manifest error. The Company shall then issue the appropriate number of
shares of Common Stock in accordance with this Section.
2
<PAGE>
(d) Fractional Shares. No fractional shares of Common Stock are to
-----------------
be issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be
issuable in an amount equal to the same fraction of the Exercise Price of a
share of Common Stock (as determined for exercise of this Warrant into whole
shares of Common Stock); provided that in the event that sufficient funds are
not legally available for the payment of such cash adjustment any fractional
shares of Common Stock shall be rounded up to the next whole number.
2. Period of Exercise. This Warrant is exercisable at any time or from
------------------
time to time on or after the date hereof and before 5:00 P.M., Eastern
Standard time on August 11, 2004 (the "Exercise Period").
---------------
3. Certain Agreements of the Company. The Company hereby covenants and
---------------------------------
agrees as follows:
(a) Shares to be Fully Paid. All Warrant Shares will, upon
-----------------------
issuance in accordance with the terms of this Warrant, be validly issued,
fully paid, and non-assessable and free from all taxes, liens, claims and
encumbrances, except such as are caused by the Holder.
(b) Reservation of Shares. During the Exercise Period, the Company
---------------------
shall at all times have authorized, and reserved for the purpose of issuance
upon exercise of this Warrant, a sufficient number of shares of Common Stock
to provide for the exercise of this Warrant.
(c) Certain Actions Prohibited. The Company will not, by amendment
--------------------------
of its charter or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities, or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed by it hereunder, but will at all
times in good faith assist in the carrying out of all the provisions of this
Warrant and in the taking of all such actions as may reasonably be requested
by the Holder of this Warrant in order to protect the exercise privilege of
the Holder of this Warrant, consistent with the tenor and purpose of this
Warrant. Without limiting the generality of the foregoing, the Company (i)
will not increase the par value of any shares of Common Stock receivable upon
the exercise of this Warrant above the Exercise Price then in effect, and (ii)
will take all such actions as may be necessary or appropriate in order that
the Company may validly and legally issue fully paid and nonassessable shares
of Common Stock upon the exercise of this Warrant.
4. Antidilution Provisions. During the Exercise Period, the Exercise
-----------------------
Price and the number of Warrant Shares shall be subject to adjustment from
time to time as provided in this Section 4. In the event that any adjustment
of the Exercise Price or number of Warrant Shares as required herein results
in a fraction of a cent or fraction of a share, as applicable, such Exercise
Price or number of Warrant Shares shall be rounded up or down to the nearest
cent or share, as applicable.
3
<PAGE>
(a) Adjustment of Exercise Price and Number of Shares upon Issuance
---------------------------------------------------------------
of Common Stock. Except as otherwise provided in Section 4(c) and 4(e) hereof,
- ---------------
if and whenever after the initial issuance of this Warrant, the Company issues
or sells, or in accordance with Section 4(b) hereof is deemed to have issued
or sold, any shares of Common Stock for no consideration or for a
consideration per share less than the Exercise Price (as then in effect) (a
"Dilutive Issuance"), then effective immediately upon the Dilutive Issuance,
the Exercise Price will be adjusted in accordance with the following formula:
E' = (E) (O + P/M) / (CSDO)
where:
E' = the adjusted Exercise Price;
E = the then current Exercise Price;
M = the greater of the then current Market Price and
the then Current Exercise Price;
O = the number of shares of Common Stock outstanding
immediately prior to the Dilutive Issuance;
P = the aggregate consideration, calculated as set
forth in Section 4(b) hereof, received by the
Company upon such Dilutive Issuance; and
CSDO = the total number of shares of Common Stock Deemed
Outstanding (as herein defined) immediately after
the Dilutive Issuance.
(b) Effect on Exercise Price of Certain Events. For purposes of
------------------------------------------
determining the adjusted Exercise Price under Section 4(a) hereof, the
following will be applicable:
(i) Issuance of Rights or Options. If, after the date hereof,
-----------------------------
the Company in any manner issues or grants any warrants, rights or options,
whether or not immediately exercisable, to subscribe for or to purchase Common
Stock or other securities exercisable, convertible into or exchangeable for
Common Stock ("Convertible Securities"), but not to include the issuance,
----------------------
grant or exercise of any stock or options which may hereafter be issued,
granted or exercised under any service provider benefit plan of the Company
now existing or to be implemented in the future, so long as the issuance of
such stock or options is approved by a majority of the non-employee members of
the Board of Directors of the Company or a majority of the members of a
committee of non-employee directors established for such purpose (such
warrants, rights and options to purchase Common Stock or Convertible
Securities are hereinafter referred to as "Options"), and the price per
-------
share for which Common Stock is purchasable or issuable upon the exercise of
such Options is less than the Exercise Price (as then in effect) on the date
of issuance of such Option or direct stock grant ("Below Market Options"), then
--------------------
the maximum total number of shares of Common Stock issuable upon the exercise
of all such Below Market Options (assuming full exercise, conversion or
exchange of Convertible Securities, if applicable) will, as of the date of the
issuance or grant of such Below Market Options, be deemed to be outstanding
and to have been issued and sold by the Company for such price per share. For
purposes of the preceding sentence, the price per share for which Common Stock
is issuable upon the exercise of such Below Market Options is determined by
dividing (i)
4
<PAGE>
the total amount, if any, received or receivable by the Company
as consideration for the issuance or granting of such Below Market Options,
plus the minimum aggregate amount of additional consideration, if any, payable
to the Company upon the exercise of all such Below Market Options, plus, in
the case of Convertible Securities issuable upon the exercise of such Below
Market Options, the minimum aggregate amount of additional consideration
payable upon the exercise, conversion or exchange thereof at the time such
Convertible Securities first become exercisable, convertible or exchangeable,
by (ii) the maximum total number of shares of Common Stock issuable upon the
exercise of all such Below Market Options (assuming full conversion of
Convertible Securities, if applicable). No further adjustment to the Exercise
Price will be made upon the actual issuance of such Common Stock upon the
exercise of such Below Market Options or upon the exercise, conversion or
exchange of Convertible Securities issuable upon exercise of such Below Market
Options.
(ii) Issuance of Convertible Securities.
----------------------------------
(A) If the Company in any manner issues or sells any
Convertible Securities, whether or not immediately convertible (other than
where the same are issuable upon the exercise of Options) and the price per
share for which Common Stock is issuable upon such exercise, conversion or
exchange (as determined pursuant to Section 4(b)(ii)(B) if applicable) is less
than the Exercise Price (as then in effect) on the date of issuance of such
Convertible Security, then the maximum total number of shares of Common Stock
issuable upon the exercise, conversion or exchange of all such Convertible
Securities will, as of the date of the issuance of such Convertible
Securities, be deemed to be outstanding and to have been issued and sold by
the Company for such price per share. For the purposes of the preceding
sentence, the price per share for which Common Stock is issuable upon such
exercise, conversion or exchange is determined by dividing (i) the total
amount, if any, received or receivable by the Company as consideration for the
issuance or sale of all such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, payable to the Company
upon the exercise, conversion or exchange thereof at the time such Convertible
Securities first become exercisable, convertible or exchangeable, by (ii) the
maximum total number of shares of Common Stock issuable upon the exercise,
conversion or exchange of all such Convertible Securities. No further
adjustment to the Exercise Price will be made upon the actual issuances of
such Common Stock upon exercise, conversion or exchange of such Convertible
Securities.
(B) If the Company in any manner issues or sells any
Convertible Securities with a fluctuating or re-setting conversion or exercise
price or exchange ratio (a "Variable Rate Convertible Security"), then the
----------------------------------
price per share for which Common Stock is issuable upon such exercise,
conversion or exchange for purposes of the calculation contemplated by Section
4(b)(ii)(A) shall be deemed to be the lowest price per share which would be
applicable assuming that (1) all holding period and other conditions to any
discounts contained in such Convertible Security have been satisfied, and (2)
the Market Price on the date of exercise, conversion or exchange of such
Convertible Security was 80% of the Market Price on the date of issuance of
such Convertible Security (the "Assumed Variable Market Price").
-----------------------------
5
<PAGE>
(iii) Change in Option Price or Conversion Rate. Except for
-----------------------------------------
the issuance, grant or exercise of any stock or options which may hereafter be
granted or exercised under any service provider benefit plan of the Company
now existing or to be implemented in the future, so long as the issuance of
such stock or options is approved by a majority of the non-employee members of
the Board of Directors of the Company or a majority of the members of a
committee of non-employee directors established for such purpose, if there is
a change at any time in (i) the amount of additional consideration payable to
the Company upon the exercise of any Options; (ii) the amount of additional
consideration, if any, payable to the Company upon the exercise, conversion or
exchange or any Convertible Securities; or (iii) the rate at which any
Convertible Securities are convertible into or exchangeable for Common Stock
(other than under or by reason of provisions designed to protect against
dilution), the Exercise Price in effect at the time of such change will be
readjusted to the Exercise Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for such
changed additional consideration or changed conversion rate, as the case may
be, at the time initially granted, issued or sold.
(iv) Treatment of Expired Options and Unexercised Convertible
--------------------------------------------------------
Securities. If, in any case, the total number of shares of Common Stock
- ----------
issuable upon exercise of any Options or upon exercise, conversion or exchange
of any Convertible Securities is not, in fact, issued and the rights to
exercise such Option or to exercise, convert or exchange such Convertible
Securities shall have expired or terminated, the Exercise Price then in effect
will be readjusted to the Exercise Price which would have been in effect at
the time of such expiration or termination had such Options or Convertible
Securities, to the extent outstanding immediately prior to such expiration or
termination (other than in respect of the actual number of shares of Common
Stock issued upon exercise or conversion thereof), never been issued.
(v) Calculation of Consideration Received. If any Common Stock,
-------------------------------------
Options or Convertible Securities are issued, granted or sold for cash, the
consideration received therefor for purposes of this Warrant will be the
amount received by the Company therefor, before deduction of reasonable
commissions, underwriting discounts or allowances or other reasonable expenses
paid or incurred by the Company in connection with such issuance, grant or
sale. In case any Common Stock, Options or Convertible Securities are issued
or sold for a consideration part or all of which shall be other than cash, the
amount of the consideration other than cash received by the Company will be
the fair market value of such consideration except where such consideration
consists of freely-tradeable securities, in which case the amount of
consideration received by the Company will be the Market Price thereof as of
the date of receipt. In case any Common Stock, Options or Convertible
Securities are issued in connection with any merger or consolidation in which
the Company is the surviving corporation, the amount of consideration therefor
will be deemed to be the fair market value of such portion of the net assets
and business of the non-surviving corporation as is attributable to such
Common Stock, Options or Convertible Securities, as the case may be. The fair
market value of any consideration other than cash or securities will be
determined in the good faith reasonable business judgment of the Board of
Directors.
6
<PAGE>
(vi) Exceptions to Adjustment of Exercise Price. No adjustment to
------------------------------------------
the Exercise Price will be made (i) upon the exercise of any warrants, options
or convertible securities issued and outstanding on the date hereof in
accordance with the terms of such securities as of such date; (ii) upon the
grant or exercise of any stock or options which may hereafter be granted or
exercised under any employee, consultant or director benefit plan of the
Company now existing or to be implemented in the future, so long as the
issuance of such stock or options is approved by a majority of the non-
employee members of the Board of Directors of the Company or a majority of the
members of a committee of non-employee directors established for such purpose;
or (iii) issuances of any equity securities pursuant to the Stockholders
Rights Plan and the Series A Preferred Stock, as amended.
(c) Subdivision or Combination of Common Stock. If the Company, at
------------------------------------------
any time after the initial issuance of this Warrant, subdivides (by any stock
split, stock dividend, recapitalization, reorganization, reclassification or
otherwise) its shares of Common Stock into a greater number of shares, then,
after the date of record for effecting such subdivision, the Exercise Price in
effect immediately prior to such subdivision will be proportionately reduced.
If the Company, at any time after the initial issuance of this Warrant,
combines (by reverse stock split, recapitalization, reorganization,
reclassification or otherwise) its shares of Common Stock into a smaller
number of shares, then, after the date of record for effecting such
combination, the Exercise Price in effect immediately prior to such
combination will be proportionately increased.
(d) Adjustment in Number of Shares. Upon each adjustment of the
------------------------------
Exercise Price pursuant to the provisions of this Section 4, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be
adjusted by multiplying a number equal to the Exercise Price in effect
immediately prior to such adjustment by the number of shares of Common Stock
issuable upon exercise of this Warrant immediately prior to such adjustment
and dividing the product so obtained by the adjusted Exercise Price.
(e) Major Transactions. Except in the case of a Common Stock Major
------------------
Transaction (as defined below), if the Company shall consolidate or merge with
any other corporation or entity (other than a merger in which the Company is
the surviving or continuing entity and its capital stock is unchanged and
unissued in such transaction (except for Common Stock constituting less than
twenty percent (20%) of the Company's Common Stock then outstanding)) or there
shall occur any share exchange pursuant to which all of the outstanding shares
of Common Stock are converted into other securities or property or any
reclassification or change of the outstanding shares of Common Stock (each of
the foregoing being a "Major Transaction"), then each holder of a Warrant
shall thereafter be entitled to (a) in the event that the Common Stock remains
outstanding or holders of Common Stock receive any common stock or
substantially similar equity interest, in each of the foregoing cases which is
publicly traded, retain its Warrant and such Warrant shall continue to apply
to such Common Stock or shall apply, as nearly as practicable, to such other
common stock or equity interest, as the case may be, or (b) regardless or
whether (a) applies, receive consideration, in exchange for such Warrant,
equal to the greater of, as determined in the sole discretion of such holder,
(i) the number of shares of stock or securities or property of the Company, or
of the entity resulting from such Major Transaction (the "Major Transaction
-----------------
Consideration"), to which a holder of the number of shares of Common Stock
- -------------
delivered upon the exercise of such Warrant would have been entitled upon such
Major Transaction had such holder exercised the Warrant (without regard to any
7
<PAGE>
limitations on conversion or elsewhere contained) on the trading date
immediately preceding the public announcement of the transaction resulting in
such Major Transaction and had such Common Stock been issued and outstanding
and had such Holder been the holder of record of such Common Stock at the time
of the consummation of such Major Transaction, and (ii) cash paid by the
Company in immediately available funds, in an amount equal to one hundred and
twenty five percent (125%) of the Black-Scholes Amount (as defined herein)
times the number of shares of Common Stock for which this Warrant was
exercisable (without regard to any limitations on exercise herein contained);
and the Company shall make lawful provision for the foregoing as a part of
such Major Transaction. In the event that the Company shall consolidate or
merge with any corporation in a transaction in which common stock of the
surviving corporation or the parent thereof (the "Exchange Securities") is
issued to the holders of Common Stock in such transaction in exchange for all
such Common Stock, and (a) the Exchange Securities are publicly traded, (b)
the average daily trading volume of the Exchange Securities reported by
Bloomberg during the ninety (90) day period ending on the date on which such
transaction is publicly disclosed is greater than two million dollars
($2,000,000) per day, (c) the historical one hundred (100) day volatility of
the Exchange Securities reported by Bloomberg during the period ending on the
date on which such transaction is publicly disclosed is greater than fifty
percent (50%) and (d) the last sale price of the Exchange Securities on the
date immediately before the date on which such transaction is publicly
disclosed is not less than sixty five percent (65%) of the last sale price of
the Exchange Securities on any day during the twenty (20) trading day period
ending on such date (in each case as reported by Bloomberg) (a "Common Stock
Major Transaction"), then each holder of a Warrant shall following
consummation of such transaction have the right to receive solely, in exchange
for such Warrant, consideration equal to the number of shares of stock or
securities or property issued or paid in such Common Stock Major Transaction
to which a holder of the number of shares of Common Stock which would have
been delivered upon exercise of such Warrant would have been entitled upon
such Common Stock Major Transaction had the holder of such Warrant exercised
(without regard to any limitations on conversion herein or elsewhere
contained) the Warrant on the trading date immediately preceding the public
announcement of the transaction resulting in such Common Stock Major
Transaction and had such Common Stock been issued and outstanding and had such
holder been the holder of record of such Common Stock at the time of the
consummation of such Common Stock Major Transaction; and the Company shall
make lawful provision for the foregoing as a part of such Common Stock Major
Transaction. No sooner than ten (10) business days nor later than five (5)
business days prior to the consummation of the Major Transaction or Common
Stock Major Transaction, as the case may be, (each, a "Transaction") but not
prior to the public announcement of such Transaction, the Company shall
deliver written notice ("Notice of Transaction") to each holder of a Warrant,
---------------------
which Notice of Transaction shall be deemed to have been delivered one (1)
business day after the Company's sending such notice by telecopy (provided
that the Company sends a confirming copy of such notice on the same day by
overnight courier) of such Notice of Transaction. Such Notice of Transaction
shall indicate the amount and type of the Transaction consideration which such
holder of a Warrant would receive under this Section. If the Major Transaction
Consideration does not consist entirely of United States currency, such holder
may elect to receive United States currency in an amount equal to the value of
the Major Transaction Consideration in lieu of the Major Transaction
Consideration by delivering notice of such election to the Company within five
(5) business days of such holder's receipt of the Notice of Transaction.
8
<PAGE>
The "Black-Scholes Amount" shall be an amount determined by
--------------------
calculating the "Black-Scholes" value of an option to purchase one share of
Common Stock on the applicable page on the Bloomberg online page, using the
following variable values: (i) the current market price of the Common Stock
equal to the closing trade price on the last trading day before the date of the
Notice of the Major Transaction; (ii) volatility of the Common Stock equal to
the volatility of the common Stock during the 100 trading day period preceding
the date of the Notice of the Major Transaction; (iii) a risk free rate equal to
the interest rate on the United States treasury bill or treasury note with a
maturity corresponding to the remaining term of this Warrant on the date of the
Notice of the Major Transaction; and (iv) an exercise price equal to the
Exercise Price on the date of the Notice of the Major Transaction. In the event
such calculation function is no longer available utilizing the Bloomberg online
page, the Holder shall calculate such amount in its sole discretion using the
closest available alternative mechanism and variable values to those available
utilizing the Bloomberg online page for such calculation function.
(f) Distribution of Assets. In case the Company shall declare or
----------------------
make any distribution of its assets (or rights to acquire its assets) to
holders of Common Stock as a partial liquidating dividend, by way of return of
capital or like events (including any dividend or distribution to the
Company's shareholders of cash or shares (or rights to acquire shares) of
capital stock of a subsidiary) (a "Distribution"), at any time after the
------------
initial issuance of this Warrant, then the Holder shall be entitled upon
exercise of this Warrant for the purchase of any or all of the shares of
Common Stock subject hereto, to receive the amount of such assets (or rights)
which would have been payable to the Holder had such Holder been the holder of
such shares of Common Stock on the record date for the determination of
shareholders entitled to such Distribution.
(g) Notices of Adjustment. Upon the occurrence of any event which
---------------------
requires any adjustment of the Exercise Price, then, and in each such case,
the Company shall give notice thereof to the Holder, which notice shall state
the Exercise Price resulting from such adjustment and the increase or decrease
in the number of Warrant Shares purchasable at such price upon exercise,
setting forth in reasonable detail the method of calculation and the facts
upon which such calculation is based. Such calculation shall be certified by
the chief financial officer of the Company.
(h) Minimum Adjustment of Exercise Price. No adjustment of the
------------------------------------
Exercise Price shall be made in an amount of less than 1% of the Exercise
Price in effect at the time such adjustment is otherwise required to be made,
but any such lesser adjustment shall be carried forward and shall be made at
the time and together with the next subsequent adjustment which, together with
any adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
(i) No Fractional Shares. No fractional shares of Common Stock are
--------------------
to be issued upon the exercise of this Warrant, but the Company shall pay a
cash adjustment in respect of any fractional share which would otherwise be
issuable in an amount equal to the same fraction of the Market Price of a
share of Common Stock; provided that in the event that sufficient funds are
not legally available for the payment of such cash adjustment any fractional
shares of Common Stock shall be rounded up to the next whole number.
9
<PAGE>
(j) Other Notices. In case at any time:
-------------
(i) the Company shall declare any dividend upon the Common
Stock payable in shares of stock of any class or make any other distribution
to all (or substantially all) of the holders of the Common Stock;
(ii) the Company shall offer for subscription pro rata to the
holders of the Common Stock any additional shares of stock of any class or
other rights;
(iii) there shall be any capital reorganization of the
Company, or reclassification of the Common Stock, or consolidation or merger
of the Company with or into, or sale of all or substantially all of its assets
to, another corporation or entity; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company; then, in each such case, the Company
shall give to the Holder (a) notice of the date on which the books of the
Company shall close or a record shall be taken for determining the holders of
Common Stock entitled to receive any such dividend, distribution, or
subscription rights or for determining the holders of Common Stock entitled to
vote in respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding-up and (b) in the case of
any such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding-up, notice of the date (or, if not then
known, a reasonable approximation thereof by the Company) when the same shall
take place. Such notice shall also specify the date on which the holders of
Common Stock shall be entitled to receive such dividend, distribution, or
subscription rights or to exchange their Common Stock for stock or other
securities or property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation, or winding-up, as the
case may be. Such notice shall be given at least 30 days prior to the record
date or the date on which the Company's books are closed in respect thereto,
but in no event earlier than public announcement of such proposed transaction
or event. Failure to give any such notice or any defect therein shall not
affect the validity of the proceedings referred to in clauses (i), (ii), (iii)
and (iv) above.
(k) Certain Definitions.
-------------------
(i) "Common Stock Deemed Outstanding" shall mean the number of
-------------------------------
shares of Common Stock actually outstanding (not including shares of Common
Stock held in the treasury of the Company), plus (x) in case of any adjustment
required by Section 4(a) resulting from the issuance of any Options, the
maximum total number of shares of Common Stock issuable upon the exercise of
the Options for which the adjustment is required (including any Common Stock
issuable upon the conversion of Convertible Securities issuable upon the
exercise of such Options), and (y) in the case of any adjustment required by
Section 4(a) resulting from the issuance of any Convertible Securities, the
maximum total number of shares of Common Stock issuable upon the exercise,
conversion or exchange of the Convertible Securities for which the adjustment
is required, as of the date of issuance of such Convertible Securities, if
any.
(ii) "Market Price," as of any date, (i) means the Closing Bid
------------
Price for the shares of Common Stock as reported to Nasdaq National Market
System for the trading day
10
<PAGE>
immediately preceding such date, or (ii) if the Nasdaq National Market System
is not the principal trading market for the Common Stock, the last reported
bid price on the principal trading market for the Common Stock during the same
period, or, if there is no bid price for such period, the last reported sales
price for such period, or (iii) if market value cannot be calculated as of
such date on any of the foregoing bases, the Market Price shall be the fair
market value as reasonably determined by an investment banking firm selected
by the Company and reasonably acceptable to each initial holder and the
Holders of a majority in interest of the Warrants, with the costs of the
appraisal to be borne by the Company. The manner of determining the Market
Price of the Common Stock set forth in the foregoing definition shall apply
with respect to any other security in respect of which a determination as to
market value must be made hereunder.
(iii) "Common Stock," for purposes of this Section 4, includes
------------
the Common Stock and any additional class of stock of the Company having no
preference as to dividends or distributions on liquidation, provided that the
shares purchasable pursuant to this Warrant shall include only Common Stock in
respect of which this Warrant is exercisable, or shares resulting from any
subdivision or combination of such Common Stock, or in the case of any
reorganization, reclassification, consolidation, merger, or sale of the
character referred to in Section 4(e) hereof, the stock or other securities or
property provided for in such Section.
5. Issue Tax. The issuance of certificates for Warrant Shares upon the
---------
exercise of this Warrant shall be made without charge to the Holder or such
shares for any issuance tax or other costs in respect thereof, provided that the
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance and delivery of any certificate in a name
other than the Holder.
6. No Rights or Liabilities as a Stockholder. This Warrant shall not
-----------------------------------------
entitle the Holder to any voting rights or other rights as a stockholder of
the Company. No provision of this Warrant, in the absence of affirmative
action by the Holder to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the Holder, shall give rise to any
liability of the Holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
7. Transfer, Exchange, Redemption and Replacement of Warrant.
---------------------------------------------------------
(a) Restriction on Transfer. This Warrant and the rights granted to
-----------------------
the Holder are transferable, in whole or in part, upon surrender of this
Warrant, together with a properly executed assignment in the Form of
Assignment attached hereto as Exhibit 2, at the office or agency of the
Company referred to in Section 7(e) below, provided, however, that any
transfer or assignment shall be subject to the provisions of Sections 5.1 and
5.2 of the Securities Purchase Agreement dated December 21, 1999 by and among
the Company and the signatorer thereto (the "Securities Purchase Agreement").
-----------------------------
Until due presentment for registration of transfer on the books of the
Company, the Company may treat the registered holder hereof as the owner and
holder hereof for all purposes, and the Company shall not be affected by any
notice to the contrary.
(b) Warrant Exchangeable for Different Denominations. This Warrant
------------------------------------------------
is exchangeable, upon the surrender hereof by the Holder at the office or agency
of the Company
11
<PAGE>
referred to in Section 7(e) below, for new Warrants, in the form hereof, of
different denominations representing in the aggregate the right to purchase
the number of shares of Common Stock which may be purchased hereunder, each of
such new Warrants to represent the right to purchase such number of shares as
shall be designated by the Holder of at the time of such surrender.
(c) Replacement of Warrant. Upon receipt of evidence reasonably
----------------------
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant or, in the case of any such loss, theft, or destruction, upon
delivery, of an indemnity agreement reasonably satisfactory in form and amount
to the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrants, in the form hereof, in such
denominations as Holder may request.
(d) Cancellation; Payment of Expenses. Upon the surrender of this
---------------------------------
Warrant in connection with any transfer, exchange, or replacement as provided
in this Section 7, this Warrant shall be promptly canceled by the Company. The
Company shall pay all issuance taxes (other than securities transfer taxes)
and charges payable in connection with the preparation, execution, and
delivery of Warrants pursuant to this Section 7.
(e) Warrant Register. The Company shall maintain, at its principal
----------------
executive offices (or such other office or agency of the Company as it may
designate by notice to the Holder), a register for this Warrant, in which the
Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee
and each prior owner of this Warrant.
(f) Additional Restriction on Exercise or Transfer. Notwithstanding
----------------------------------------------
anything to the contrary contained herein, the Warrants shall not be
exercisable by the Holder to the extent (but only to the extent) that, if
exercisable by Holder, Holder would beneficially own in excess of 4.9% (the
"Applicable Percentage") of the shares of Common Stock. To the extent the above
---------------------
limitation applies, the determination of whether the Warrants shall be
exercisable (vis-a-vis other securities owned by Holder) and of which Warrants
shall be exercisable (as among Warrants) shall be made by Holder and
submission of the Warrants for exercise shall be deemed to be the Holder's
determination of whether such Warrants are exercisable (vis-a-vis other
securities owned by Holder) and of which Warrants are exercisable (among
Warrants), in each case subject to such aggregate percentage limitation. No
prior inability to exercise Warrants pursuant to this paragraph shall have any
effect on the applicability of the provisions of this paragraph with respect
to any subsequent determination of exercisability. For the purposes of this
paragraph, beneficial ownership and all determinations and calculations,
including without limitation, with respect to calculations of percentage
ownership, shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulations 13D and G
thereunder. The provisions of this paragraph may be implemented in a manner
otherwise than in strict conformity with the terms this Section (f) with the
approval of the Board of Directors of the Company and the Holder: (i) with
respect to any matter to cure any ambiguity herein, to correct this paragraph
(or any portion hereof) which may be defective or inconsistent with the
intended Applicable Percentage beneficial ownership limitation herein
contained or to make changes or supplements necessary or desirable to properly
give effect to
12
<PAGE>
such Applicable Percentage limitation; and (ii) with respect to any other
matter only with the further consent of the holders of a majority of the then
outstanding shares of Common Stock. For clarification, it is expressly a term
of this security that the limitations contained in this paragraph shall apply
to each successor holder of Warrants.
8. Notices. Any notice herein required or permitted to be given shall
-------
be in writing and may be personally served or delivered by courier or by
confirmed telecopy, and shall be deemed delivered at the time and date of
receipt (which shall include telephone line facsimile transmission). The
addresses for such communications shall be:
If to the Company:
P-Com, Inc.
3175 S. Winchester Blvd.
Campbell, California 95008
Telecopy: (408) 866-3678
Attention: Chief Financial Officer and
Chief Executive Officer
with a copy to:
Brobeck, Phleger & Harrison LLP
550 West C Street, Suite 1300
San Diego, California 92101
Telecopy: (619) 236-1403
Attention: Hayden Trubitt
and if to the Holder, at such address as Holder shall have provided in writing
to the Company, or at such other address as each such party furnishes by notice
given in accordance with this Section 10.
9. Governing Law; Jurisdiction. This Warrant shall be governed by and
---------------------------
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in the State of Delaware. The Company
irrevocably consents to the jurisdiction of the United States federal courts
located in the County of New Castle in the State of Delaware in any suit or
proceeding based on or arising under this Warrant and irrevocably agrees that
all claims in respect of such suit or proceeding may be determined in such
courts. The Company irrevocably waives the defense of an inconvenient forum to
the maintenance of such suit or proceeding. The Company agrees that a final
nonappealable judgment in any such suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.
10. Miscellaneous.
-------------
(a) Amendments. This Warrant and any provision hereof may only be
----------
amended by an instrument in writing signed by the Company and each initial
Holder and the Holders of a majority of the Warrant Shares remaining subject
to the Warrants.
13
<PAGE>
(b) Descriptive Headings. The descriptive headings of the several
--------------------
Sections of this Warrant are inserted for purposes of reference only, and
shall not affect the meaning or construction of any of the provisions hereof.
(c) Cashless Exercise. Notwithstanding anything to the contrary
-----------------
contained in this Warrant, this Warrant may be exercised by presentation and
surrender of this Warrant to the Company at its principal executive offices
with a written notice of the Holder's intention to effect a cashless exercise,
including a calculation of the number of shares of Common Stock to be issued
upon such exercise in accordance with the terms hereof (a "Cashless Exercise").
-----------------
In the event of a Cashless Exercise, in lieu of paying the Exercise Price in
cash, the Holder shall surrender this Warrant for the number of shares of
Common Stock determined by multiplying the number of Warrant Shares to which
it would otherwise be entitled by a fraction, the numerator of which shall be
the difference between the then current Market Price per share of the Common
Stock and the Exercise Price, and the denominator of which shall be such then
current Market Price per share of Common Stock.
(d) Assignability. This Warrant shall be binding upon the Company
-------------
and its successors and assigns and shall inure to the benefit of Holder and
its successors and assigns. The Holder shall notify the Company upon the
assignment of this Warrant.
(e) Loss, Theft, Destruction or Mutilation of Warrant. Upon
-------------------------------------------------
receipt by the Company of evidence of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or destruction) of
indemnity or security reasonably satisfactory to the Company, and upon
surrender of this Warrant, if mutilated, the Company shall execute and deliver
a new Warrant of like tenor and date.
* * *
14
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
their duly authorized officers.
P-Com, Inc.
By: /s/ Robert E. Collins
---------------------
Name: Robert E. Collins
Title: Chief Financial Officer
15
<PAGE>
FORM OF EXERCISE AGREEMENT
(To be Executed by the Holder in order to Exercise the Warrant)
The undersigned hereby irrevocably exercises the right to purchase
____________ of the shares of common stock of P-Com, Inc., a Delaware
corporation (the "Company"), evidenced by the attached Warrant, and [herewith
makes payment of the Exercise Price with respect to such shares in full/ elects
to effect a Cashless Exercise pursuant to the terms of the Warrant], all in
accordance with the conditions and provisions of said Warrant.
(i) [If a cash exercise -- The undersigned makes the representations and
warranties contained in Sections 2.1 through 2.7 of the Securities Purchase
Agreement as of the date of the exercise.] The undersigned agrees not to
offer, sell, transfer or otherwise dispose of any Common Stock obtained on
exercise of the Warrant, except under circumstances that will not result in a
violation of the Securities Act of 1933, as amended, or any state securities
laws.
(ii) The undersigned requests that stock certificates for such shares be
issued, and a Warrant representing any unexercised portion hereof be issued,
pursuant to the Warrant in the name of the Holder (or such other person or
persons indicated below) and delivered to the undersigned (or designee(s) at
the address (or addresses) set forth below:
Date:________________ ____________________________________
Signature of Holder
____________________________________
Name of Holder (Print)
Address:
____________________________________
____________________________________
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers all rights of the undersigned under the within Warrant, with respect
to the number of shares of Common Stock covered thereby set forth hereinbelow,
to:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
and hereby irrevocably constitutes and appoints ______________________________
as agent and attorney-in-fact to transfer said Warrant on the books of the
within-named corporation, with full power of substitution in the premises.
Date:____________, _____,
In the presence of
Name: ___________________________________________
Signature: ___________________________________________
Title of Signing Officer or Agent (if any):
___________________________________________
Address: ___________________________________________
___________________________________________
Note: The above signature should
correspond exactly with the name
on the face of the within Warrant.
<PAGE>
Exhibit 10.58
VOID AFTER 5:00 P.M. Eastern Standard
TIME ON August 11, 2004
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS
OF ANY STATE OF THE UNITED STATES. THE SECURITIES REPRESENTED HEREBY MAY NOT BE
OFFERED OR SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS, OR
UNLESS OFFERED, SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THOSE LAWS.
Right to Purchase Shares of
Common Stock, par value $0.0001 per share
Date: August 11, 1999
P-COM, INC.
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received Capital Ventures International
or its registered assigns, is entitled to purchase from P-Com, Inc., a Delaware
corporation (the "Company"), at any time or from time to time during the period
specified in Section 2 hereof, 40,000 fully paid and nonassessable shares of the
Company's common stock, par value $0.0001 per share (the "Common Stock").
The Warrant exercise price per share of Common Stock (the "Exercise
Price") shall be equal to $5.00. The number of shares of Common Stock
purchasable hereunder (the "Warrant Shares") and the Exercise Price are subject
to adjustment as provided in Section 4 hereof.
The term "Closing Bid Price" and "Closing Trade Price" mean, for any
----------------- -------------------
security as of any date, the closing bid price and the closing trade price,
respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg
Financial Markets or a comparable reporting service of national reputation
selected by the Company and reasonably acceptable to the holder hereof (the
"Holder") if Bloomberg Financial Markets is not then reporting closing bid
------
prices or closing sale prices, as applicable, of such security (collectively,
"Bloomberg"), or if the foregoing does not apply, the last reported sale price
---------
of such security in the over-the-counter market on the electronic bulletin board
of such security as reported by Bloomberg, or, if no sale price is reported for
such security by Bloomberg, the average of the bid prices of any market makers
for such security as reported in the "pink sheets" by the National Quotation
Bureau, Inc. If the Closing Bid Price or Closing Trade Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Closing Bid Price or Closing Trade Price, as applicable, of such security on
such date shall be the fair market value as reasonably determined by an
investment banking firm selected by the
<PAGE>
Company and reasonably acceptable to the Holder with the costs of such appraisal
to be borne by the Company.
This Warrant is subject to the following terms, provisions, and
conditions:
1. Mechanics of Exercise. Subject to the provisions hereof, including,
---------------------
without limitation, the limitations contained in Section 7(f) hereof, this
Warrant may be exercised as follows:
(a) Manner of Exercise. This Warrant may be exercised by the Holder,
------------------
in whole or in part, by the surrender of this Warrant (or evidence of loss,
theft, destruction or mutilation thereof in accordance with Section 10(e)
hereof), together with a completed exercise agreement in the form of Exercise
Agreement attached hereto as Exhibit 1 (the "Exercise Agreement"), to the
Company at the Company's principal executive offices (or such other office or
agency of the Company as it may designate by notice to the Holder), and upon (i)
payment to the Company in cash, by certified or official bank check or by wire
transfer for the account of the Company, of the Exercise Price for the Warrant
Shares specified in the Exercise Agreement or (ii) if the Holder elects to
effect a Cashless Exercise (as defined in Section 10(c) below), delivery to the
principal executive office of the Company ("Attention: Corporate Secretary") of
a written notice of an election to effect a Cashless Exercise for the Warrant
Shares specified in the Exercise Agreement. The Warrant Shares so purchased
shall be deemed to be issued to the Holder or Holder's designees, as the record
owner of such shares, as of the date on which this Warrant shall have been
surrendered, the completed Exercise Agreement shall have been delivered, and
payment (or notice of an election to effect a Cashless Exercise) shall have been
made for such shares as set forth above.
(b) Issuance of Certificates. Subject to Section 1(c), certificates
------------------------
for the Warrant Shares so purchased, representing the aggregate number of shares
specified in the Exercise Agreement, shall be delivered to the Holder within a
reasonable time, not exceeding three (3) business days, after this Warrant shall
have been so exercised (the "Delivery Period"). The certificates so delivered
---------------
shall be in such denominations as may be requested by the Holder upon exercise
and shall be registered in the name of Holder or such other name as shall be
designated by such Holder upon exercise. If this Warrant shall have been
exercised only in part, then, unless this Warrant has expired, the Company
shall, at its expense, at the time of delivery of such certificates, deliver to
the Holder a new Warrant representing the number of shares with respect to which
this Warrant shall not then have been exercised.
(c) Exercise Disputes. In the case of any dispute with respect to an
-----------------
exercise, the Company shall promptly issue such number of shares of Common Stock
as are not disputed in accordance with this Section. If such dispute involves
the calculation of the Exercise Price, the Company shall submit the disputed
calculations to a nationally recognized independent accounting firm (selected by
the Company) via facsimile within three (3) business days of receipt of the
Exercise Agreement. The accounting firm shall audit the calculations and notify
the Company and the converting Holder of the results no later than ten (10)
business days from the date it receives the disputed calculations. The
accounting firm's calculation shall be deemed conclusive, absent manifest error.
The Company shall then issue the appropriate number of shares of Common Stock in
accordance with this Section.
2
<PAGE>
(d) Fractional Shares. No fractional shares of Common Stock are to be
-----------------
issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Exercise Price of a share of
Common Stock (as determined for exercise of this Warrant into whole shares of
Common Stock); provided that in the event that sufficient funds are not legally
available for the payment of such cash adjustment any fractional shares of
Common Stock shall be rounded up to the next whole number.
2. Period of Exercise. This Warrant is exercisable at any time or from
------------------
time to time on or after the date hereof and before 5:00 P.M., Eastern Standard
time on August 11, 2004 (the "Exercise Period").
---------------
3. Certain Agreements of the Company. The Company hereby covenants and
---------------------------------
agrees as follows:
(a) Shares to be Fully Paid. All Warrant Shares will, upon issuance
-----------------------
in accordance with the terms of this Warrant, be validly issued, fully paid, and
non-assessable and free from all taxes, liens, claims and encumbrances, except
such as are caused by the Holder.
(b) Reservation of Shares. During the Exercise Period, the Company
---------------------
shall at all times have authorized, and reserved for the purpose of issuance
upon exercise of this Warrant, a sufficient number of shares of Common Stock to
provide for the exercise of this Warrant.
(c) Certain Actions Prohibited. The Company will not, by amendment of
--------------------------
its charter or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such actions as may reasonably be requested by the Holder of this
Warrant in order to protect the exercise privilege of the Holder of this
Warrant, consistent with the tenor and purpose of this Warrant. Without limiting
the generality of the foregoing, the Company (i) will not increase the par value
of any shares of Common Stock receivable upon the exercise of this Warrant above
the Exercise Price then in effect, and (ii) will take all such actions as may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of Common Stock upon the exercise of this
Warrant.
4. Antidilution Provisions. During the Exercise Period, the Exercise
-----------------------
Price and the number of Warrant Shares shall be subject to adjustment from time
to time as provided in this Section 4. In the event that any adjustment of the
Exercise Price or number of Warrant Shares as required herein results in a
fraction of a cent or fraction of a share, as applicable, such Exercise Price or
number of Warrant Shares shall be rounded up or down to the nearest cent or
share, as applicable.
3
<PAGE>
(a) Adjustment of Exercise Price and Number of Shares upon Issuance
---------------------------------------------------------------
of Common Stock. Except as otherwise provided in Section 4(c) and 4(e) hereof,
- ---------------
if and whenever after the initial issuance of this Warrant, the Company issues
or sells, or in accordance with Section 4(b) hereof is deemed to have issued or
sold, any shares of Common Stock for no consideration or for a consideration per
share less than the Exercise Price (as then in effect) (a "Dilutive Issuance"),
then effective immediately upon the Dilutive Issuance, the Exercise Price will
be adjusted in accordance with the following formula:
E' = (E) (O + P/M) / (CSDO)
where:
E' = the adjusted Exercise Price;
E = the then current Exercise Price;
M = the greater of the then current Market Price and the
then Current Exercise Price;
O = the number of shares of Common Stock outstanding
immediately prior to the Dilutive Issuance;
P = the aggregate consideration, calculated as set forth
in Section 4(b) hereof, received by the
Company upon such Dilutive Issuance; and
CSDO = the total number of shares of Common Stock Deemed
Outstanding (as herein defined) immediately
after the Dilutive Issuance.
(b) Effect on Exercise Price of Certain Events. For purposes of
------------------------------------------
determining the adjusted Exercise Price under Section 4(a) hereof, the following
will be applicable:
(i) Issuance of Rights or Options. If, after the date hereof,
-----------------------------
the Company in any manner issues or grants any warrants, rights or options,
whether or not immediately exercisable, to subscribe for or to purchase Common
Stock or other securities exercisable, convertible into or exchangeable for
Common Stock ("Convertible Securities"), but not to include the issuance, grant
----------------------
or exercise of any stock or options which may hereafter be issued, granted or
exercised under any service provider benefit plan of the Company now existing or
to be implemented in the future, so long as the issuance of such stock or
options is approved by a majority of the non-employee members of the Board of
Directors of the Company or a majority of the members of a committee of non-
employee directors established for such purpose (such warrants, rights and
options to purchase Common Stock or Convertible Securities are hereinafter
referred to as "Options"), and the price per share for which Common Stock is
-------
purchasable or issuable upon the exercise of such Options is less than the
Exercise Price (as then in effect) on the date of issuance of such Option or
direct stock grant ("Below Market Options"), then the maximum total number of
--------------------
shares of Common Stock issuable upon the exercise of all such Below Market
Options (assuming full exercise, conversion or exchange of Convertible
Securities, if applicable) will, as of the date of the issuance or grant of such
Below Market Options, be deemed to be outstanding and to have been issued and
sold by the Company for such price per share. For purposes of the preceding
sentence, the price per share for which Common Stock is issuable upon the
exercise of such Below Market Options is determined by dividing (i)
4
<PAGE>
the total amount, if any, received or receivable by the Company as consideration
for the issuance or granting of such Below Market Options, plus the minimum
aggregate amount of additional consideration, if any, payable to the Company
upon the exercise of all such Below Market Options, plus, in the case of
Convertible Securities issuable upon the exercise of such Below Market Options,
the minimum aggregate amount of additional consideration payable upon the
exercise, conversion or exchange thereof at the time such Convertible Securities
first become exercisable, convertible or exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable upon the exercise of all such Below
Market Options (assuming full conversion of Convertible Securities, if
applicable). No further adjustment to the Exercise Price will be made upon the
actual issuance of such Common Stock upon the exercise of such Below Market
Options or upon the exercise, conversion or exchange of Convertible Securities
issuable upon exercise of such Below Market Options.
(ii) Issuance of Convertible Securities.
----------------------------------
(A) If the Company in any manner issues or sells any
Convertible Securities, whether or not immediately convertible (other than where
the same are issuable upon the exercise of Options) and the price per share for
which Common Stock is issuable upon such exercise, conversion or exchange (as
determined pursuant to Section 4(b)(ii)(B) if applicable) is less than the
Exercise Price (as then in effect) on the date of issuance of such Convertible
Security, then the maximum total number of shares of Common Stock issuable upon
the exercise, conversion or exchange of all such Convertible Securities will, as
of the date of the issuance of such Convertible Securities, be deemed to be
outstanding and to have been issued and sold by the Company for such price per
share. For the purposes of the preceding sentence, the price per share for which
Common Stock is issuable upon such exercise, conversion or exchange is
determined by dividing (i) the total amount, if any, received or receivable by
the Company as consideration for the issuance or sale of all such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the exercise, conversion or exchange thereof at
the time such Convertible Securities first become exercisable, convertible or
exchangeable, by (ii) the maximum total number of shares of Common Stock
issuable upon the exercise, conversion or exchange of all such Convertible
Securities. No further adjustment to the Exercise Price will be made upon the
actual issuances of such Common Stock upon exercise, conversion or exchange of
such Convertible Securities.
(B) If the Company in any manner issues or sells any
Convertible Securities with a fluctuating or re-setting conversion or exercise
price or exchange ratio (a "Variable Rate Convertible Security"), then the price
----------------------------------
per share for which Common Stock is issuable upon such exercise, conversion or
exchange for purposes of the calculation contemplated by Section 4(b)(ii)(A)
shall be deemed to be the lowest price per share which would be applicable
assuming that (1) all holding period and other conditions to any discounts
contained in such Convertible Security have been satisfied, and (2) the Market
Price on the date of exercise, conversion or exchange of such Convertible
Security was 80% of the Market Price on the date of issuance of such Convertible
Security (the "Assumed Variable Market Price").
-----------------------------
5
<PAGE>
(iii) Change in Option Price or Conversion Rate. Except for the
-----------------------------------------
issuance, grant or exercise of any stock or options which may hereafter be
granted or exercised under any service provider benefit plan of the Company now
existing or to be implemented in the future, so long as the issuance of such
stock or options is approved by a majority of the non-employee members of the
Board of Directors of the Company or a majority of the members of a committee of
non-employee directors established for such purpose, if there is a change at any
time in (i) the amount of additional consideration payable to the Company upon
the exercise of any Options; (ii) the amount of additional consideration, if
any, payable to the Company upon the exercise, conversion or exchange or any
Convertible Securities; or (iii) the rate at which any Convertible Securities
are convertible into or exchangeable for Common Stock (other than under or by
reason of provisions designed to protect against dilution), the Exercise Price
in effect at the time of such change will be readjusted to the Exercise Price
which would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed additional consideration
or changed conversion rate, as the case may be, at the time initially granted,
issued or sold.
(iv) Treatment of Expired Options and Unexercised Convertible
--------------------------------------------------------
Securities. If, in any case, the total number of shares of Common Stock issuable
- ----------
upon exercise of any Options or upon exercise, conversion or exchange of any
Convertible Securities is not, in fact, issued and the rights to exercise such
Option or to exercise, convert or exchange such Convertible Securities shall
have expired or terminated, the Exercise Price then in effect will be readjusted
to the Exercise Price which would have been in effect at the time of such
expiration or termination had such Options or Convertible Securities, to the
extent outstanding immediately prior to such expiration or termination (other
than in respect of the actual number of shares of Common Stock issued upon
exercise or conversion thereof), never been issued.
(v) Calculation of Consideration Received. If any Common Stock,
-------------------------------------
Options or Convertible Securities are issued, granted or sold for cash, the
consideration received therefor for purposes of this Warrant will be the amount
received by the Company therefor, before deduction of reasonable commissions,
underwriting discounts or allowances or other reasonable expenses paid or
incurred by the Company in connection with such issuance, grant or sale. In case
any Common Stock, Options or Convertible Securities are issued or sold for a
consideration part or all of which shall be other than cash, the amount of the
consideration other than cash received by the Company will be the fair market
value of such consideration except where such consideration consists of freely-
tradeable securities, in which case the amount of consideration received by the
Company will be the Market Price thereof as of the date of receipt. In case any
Common Stock, Options or Convertible Securities are issued in connection with
any merger or consolidation in which the Company is the surviving corporation,
the amount of consideration therefor will be deemed to be the fair market value
of such portion of the net assets and business of the non-surviving corporation
as is attributable to such Common Stock, Options or Convertible Securities, as
the case may be. The fair market value of any consideration other than cash or
securities will be determined in the good faith reasonable business judgment of
the Board of Directors.
6
<PAGE>
(vi) Exceptions to Adjustment of Exercise Price. No adjustment to
------------------------------------------
the Exercise Price will be made (i) upon the exercise of any warrants, options
or convertible securities issued and outstanding on the date hereof in
accordance with the terms of such securities as of such date; (ii) upon the
grant or exercise of any stock or options which may hereafter be granted or
exercised under any employee, consultant or director benefit plan of the Company
now existing or to be implemented in the future, so long as the issuance of such
stock or options is approved by a majority of the non-employee members of the
Board of Directors of the Company or a majority of the members of a committee of
non-employee directors established for such purpose; or (iii) issuances of any
equity securities pursuant to the Stockholders Rights Plan and the Series A
Preferred Stock, as amended.
(c) Subdivision or Combination of Common Stock. If the Company, at
------------------------------------------
any time after the initial issuance of this Warrant, subdivides (by any stock
split, stock dividend, recapitalization, reorganization, reclassification or
otherwise) its shares of Common Stock into a greater number of shares, then,
after the date of record for effecting such subdivision, the Exercise Price in
effect immediately prior to such subdivision will be proportionately reduced. If
the Company, at any time after the initial issuance of this Warrant, combines
(by reverse stock split, recapitalization, reorganization, reclassification or
otherwise) its shares of Common Stock into a smaller number of shares, then,
after the date of record for effecting such combination, the Exercise Price in
effect immediately prior to such combination will be proportionately increased.
(d) Adjustment in Number of Shares. Upon each adjustment of the
------------------------------
Exercise Price pursuant to the provisions of this Section 4, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
by multiplying a number equal to the Exercise Price in effect immediately prior
to such adjustment by the number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
(e) Major Transactions. Except in the case of a Common Stock Major
------------------
Transaction (as defined below), if the Company shall consolidate or merge with
any other corporation or entity (other than a merger in which the Company is the
surviving or continuing entity and its capital stock is unchanged and unissued
in such transaction (except for Common Stock constituting less than twenty
percent (20%) of the Company's Common Stock then outstanding)) or there shall
occur any share exchange pursuant to which all of the outstanding shares of
Common Stock are converted into other securities or property or any
reclassification or change of the outstanding shares of Common Stock (each of
the foregoing being a "Major Transaction"), then each holder of a Warrant shall
thereafter be entitled to (a) in the event that the Common Stock remains
outstanding or holders of Common Stock receive any common stock or substantially
similar equity interest, in each of the foregoing cases which is publicly
traded, retain its Warrant and such Warrant shall continue to apply to such
Common Stock or shall apply, as nearly as practicable, to such other common
stock or equity interest, as the case may be, or (b) regardless or whether (a)
applies, receive consideration, in exchange for such Warrant, equal to the
greater of, as determined in the sole discretion of such holder, (i) the number
of shares of stock or securities or property of the Company, or of the entity
resulting from such Major Transaction (the "Major Transaction Consideration"),
-------------------------------
to which a holder of the number of shares of Common Stock delivered upon the
exercise of such Warrant would have been entitled upon such Major Transaction
had such holder exercised the Warrant (without regard to any
7
<PAGE>
limitations on conversion or elsewhere contained) on the trading date
immediately preceding the public announcement of the transaction resulting in
such Major Transaction and had such Common Stock been issued and outstanding and
had such Holder been the holder of record of such Common Stock at the time of
the consummation of such Major Transaction, and (ii) cash paid by the Company in
immediately available funds, in an amount equal to one hundred and twenty five
percent (125%) of the Black-Scholes Amount (as defined herein) times the number
of shares of Common Stock for which this Warrant was exercisable (without regard
to any limitations on exercise herein contained); and the Company shall make
lawful provision for the foregoing as a part of such Major Transaction. In the
event that the Company shall consolidate or merge with any corporation in a
transaction in which common stock of the surviving corporation or the parent
thereof (the "Exchange Securities") is issued to the holders of Common Stock in
such transaction in exchange for all such Common Stock, and (a) the Exchange
Securities are publicly traded, (b) the average daily trading volume of the
Exchange Securities reported by Bloomberg during the ninety (90) day period
ending on the date on which such transaction is publicly disclosed is greater
than two million dollars ($2,000,000) per day, (c) the historical one hundred
(100) day volatility of the Exchange Securities reported by Bloomberg during the
period ending on the date on which such transaction is publicly disclosed is
greater than fifty percent (50%) and (d) the last sale price of the Exchange
Securities on the date immediately before the date on which such transaction is
publicly disclosed is not less than sixty five percent (65%) of the last sale
price of the Exchange Securities on any day during the twenty (20) trading day
period ending on such date (in each case as reported by Bloomberg) (a "Common
Stock Major Transaction"), then each holder of a Warrant shall following
consummation of such transaction have the right to receive solely, in exchange
for such Warrant, consideration equal to the number of shares of stock or
securities or property issued or paid in such Common Stock Major Transaction to
which a holder of the number of shares of Common Stock which would have been
delivered upon exercise of such Warrant would have been entitled upon such
Common Stock Major Transaction had the holder of such Warrant exercised (without
regard to any limitations on conversion herein or elsewhere contained) the
Warrant on the trading date immediately preceding the public announcement of the
transaction resulting in such Common Stock Major Transaction and had such Common
Stock been issued and outstanding and had such holder been the holder of record
of such Common Stock at the time of the consummation of such Common Stock Major
Transaction; and the Company shall make lawful provision for the foregoing as a
part of such Common Stock Major Transaction. No sooner than ten (10) business
days nor later than five (5) business days prior to the consummation of the
Major Transaction or Common Stock Major Transaction, as the case may be, (each,
a "Transaction") but not prior to the public announcement of such Transaction,
the Company shall deliver written notice ("Notice of Transaction") to each
---------------------
holder of a Warrant, which Notice of Transaction shall be deemed to have been
delivered one (1) business day after the Company's sending such notice by
telecopy (provided that the Company sends a confirming copy of such notice on
the same day by overnight courier) of such Notice of Transaction. Such Notice of
Transaction shall indicate the amount and type of the Transaction consideration
which such holder of a Warrant would receive under this Section. If the Major
Transaction Consideration does not consist entirely of United States currency,
such holder may elect to receive United States currency in an amount equal to
the value of the Major Transaction Consideration in lieu of the Major
Transaction Consideration by delivering notice of such election to the Company
within five (5) business days of such holder's receipt of the Notice of
Transaction.
8
<PAGE>
The "Black-Scholes Amount" shall be an amount determined by
--------------------
calculating the "Black-Scholes" value of an option to purchase one share of
Common Stock on the applicable page on the Bloomberg online page, using the
following variable values: (i) the current market price of the Common Stock
equal to the closing trade price on the last trading day before the date of the
Notice of the Major Transaction; (ii) volatility of the Common Stock equal to
the volatility of the common Stock during the 100 trading day period preceding
the date of the Notice of the Major Transaction; (iii) a risk free rate equal to
the interest rate on the United States treasury bill or treasury note with a
maturity corresponding to the remaining term of this Warrant on the date of the
Notice of the Major Transaction; and (iv) an exercise price equal to the
Exercise Price on the date of the Notice of the Major Transaction. In the event
such calculation function is no longer available utilizing the Bloomberg online
page, the Holder shall calculate such amount in its sole discretion using the
closest available alternative mechanism and variable values to those available
utilizing the Bloomberg online page for such calculation function.
(f) Distribution of Assets. In case the Company shall declare or make
----------------------
any distribution of its assets (or rights to acquire its assets) to holders of
Common Stock as a partial liquidating dividend, by way of return of capital or
like events (including any dividend or distribution to the Company's
shareholders of cash or shares (or rights to acquire shares) of capital stock of
a subsidiary) (a "Distribution"), at any time after the initial issuance of this
------------
Warrant, then the Holder shall be entitled upon exercise of this Warrant for the
purchase of any or all of the shares of Common Stock subject hereto, to receive
the amount of such assets (or rights) which would have been payable to the
Holder had such Holder been the holder of such shares of Common Stock on the
record date for the determination of shareholders entitled to such Distribution.
(g) Notices of Adjustment. Upon the occurrence of any event which
---------------------
requires any adjustment of the Exercise Price, then, and in each such case, the
Company shall give notice thereof to the Holder, which notice shall state the
Exercise Price resulting from such adjustment and the increase or decrease in
the number of Warrant Shares purchasable at such price upon exercise, setting
forth in reasonable detail the method of calculation and the facts upon which
such calculation is based. Such calculation shall be certified by the chief
financial officer of the Company.
(h) Minimum Adjustment of Exercise Price. No adjustment of the
------------------------------------
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
(i) No Fractional Shares. No fractional shares of Common Stock are to
--------------------
be issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Market Price of a share of Common
Stock; provided that in the event that sufficient funds are not legally
available for the payment of such cash adjustment any fractional shares of
Common Stock shall be rounded up to the next whole number.
9
<PAGE>
(j) Other Notices. In case at any time:
-------------
(i) the Company shall declare any dividend upon the Common Stock
payable in shares of stock of any class or make any other distribution to
all (or substantially all) of the holders of the Common Stock;
(ii) the Company shall offer for subscription pro rata to the
holders of the Common Stock any additional shares of stock of any class or
other rights;
(iii) there shall be any capital reorganization of the Company,
or reclassification of the Common Stock, or consolidation or merger of the
Company with or into, or sale of all or substantially all of its assets to,
another corporation or entity; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company; then, in each such case, the Company
shall give to the Holder (a) notice of the date on which the books of the
Company shall close or a record shall be taken for determining the holders of
Common Stock entitled to receive any such dividend, distribution, or
subscription rights or for determining the holders of Common Stock entitled to
vote in respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding-up and (b) in the case of any
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up, notice of the date (or, if not then known, a
reasonable approximation thereof by the Company) when the same shall take place.
Such notice shall also specify the date on which the holders of Common Stock
shall be entitled to receive such dividend, distribution, or subscription rights
or to exchange their Common Stock for stock or other securities or property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation, or winding-up, as the case may be. Such notice
shall be given at least 30 days prior to the record date or the date on which
the Company's books are closed in respect thereto, but in no event earlier than
public announcement of such proposed transaction or event. Failure to give any
such notice or any defect therein shall not affect the validity of the
proceedings referred to in clauses (i), (ii), (iii) and (iv) above.
(k) Certain Definitions.
-------------------
(i) "Common Stock Deemed Outstanding" shall mean the number of
-------------------------------
shares of Common Stock actually outstanding (not including shares of Common
Stock held in the treasury of the Company), plus (x) in case of any adjustment
required by Section 4(a) resulting from the issuance of any Options, the maximum
total number of shares of Common Stock issuable upon the exercise of the Options
for which the adjustment is required (including any Common Stock issuable upon
the conversion of Convertible Securities issuable upon the exercise of such
Options), and (y) in the case of any adjustment required by Section 4(a)
resulting from the issuance of any Convertible Securities, the maximum total
number of shares of Common Stock issuable upon the exercise, conversion or
exchange of the Convertible Securities for which the adjustment is required, as
of the date of issuance of such Convertible Securities, if any.
(ii) "Market Price," as of any date, (i) means the Closing Bid
------------
Price for the shares of Common Stock as reported to Nasdaq National Market
System for the trading day
10
<PAGE>
immediately preceding such date, or (ii) if the Nasdaq National Market System is
not the principal trading market for the Common Stock, the last reported bid
price on the principal trading market for the Common Stock during the same
period, or, if there is no bid price for such period, the last reported sales
price for such period, or (iii) if market value cannot be calculated as of such
date on any of the foregoing bases, the Market Price shall be the fair market
value as reasonably determined by an investment banking firm selected by the
Company and reasonably acceptable to each initial holder and the Holders of a
majority in interest of the Warrants, with the costs of the appraisal to be
borne by the Company. The manner of determining the Market Price of the Common
Stock set forth in the foregoing definition shall apply with respect to any
other security in respect of which a determination as to market value must be
made hereunder.
(iii) "Common Stock," for purposes of this Section 4, includes
------------
the Common Stock and any additional class of stock of the Company having no
preference as to dividends or distributions on liquidation, provided that the
shares purchasable pursuant to this Warrant shall include only Common Stock in
respect of which this Warrant is exercisable, or shares resulting from any
subdivision or combination of such Common Stock, or in the case of any
reorganization, reclassification, consolidation, merger, or sale of the
character referred to in Section 4(e) hereof, the stock or other securities or
property provided for in such Section.
5. Issue Tax. The issuance of certificates for Warrant Shares upon the
---------
exercise of this Warrant shall be made without charge to the Holder or such
shares for any issuance tax or other costs in respect thereof, provided that the
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance and delivery of any certificate in a name
other than the Holder.
6. No Rights or Liabilities as a Stockholder. This Warrant shall not
-----------------------------------------
entitle the Holder to any voting rights or other rights as a stockholder of the
Company. No provision of this Warrant, in the absence of affirmative action by
the Holder to purchase Warrant Shares, and no mere enumeration herein of the
rights or privileges of the Holder, shall give rise to any liability of the
Holder for the Exercise Price or as a shareholder of the Company, whether such
liability is asserted by the Company or by creditors of the Company.
7. Transfer, Exchange, Redemption and Replacement of Warrant.
---------------------------------------------------------
(a) Restriction on Transfer. This Warrant and the rights granted to
-----------------------
the Holder are transferable, in whole or in part, upon surrender of this
Warrant, together with a properly executed assignment in the Form of Assignment
attached hereto as Exhibit 2, at the office or agency of the Company referred to
in Section 7(e) below, provided, however, that any transfer or assignment shall
be subject to the provisions of Sections 5.1 and 5.2 of the Securities Purchase
Agreement dated December 21, 1999 by and among the Company and the signatorer
thereto (the "Securities Purchase Agreement"). Until due presentment for
-----------------------------
registration of transfer on the books of the Company, the Company may treat the
registered holder hereof as the owner and holder hereof for all purposes, and
the Company shall not be affected by any notice to the contrary.
(b) Warrant Exchangeable for Different Denominations. This Warrant is
------------------------------------------------
exchangeable, upon the surrender hereof by the Holder at the office or agency of
the Company
11
<PAGE>
referred to in Section 7(e) below, for new Warrants, in the form hereof, of
different denominations representing in the aggregate the right to purchase the
number of shares of Common Stock which may be purchased hereunder, each of such
new Warrants to represent the right to purchase such number of shares as shall
be designated by the Holder of at the time of such surrender.
(c) Replacement of Warrant. Upon receipt of evidence reasonably
----------------------
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant or, in the case of any such loss, theft, or destruction, upon
delivery, of an indemnity agreement reasonably satisfactory in form and amount
to the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrants, in the form hereof, in such
denominations as Holder may request.
(d) Cancellation; Payment of Expenses. Upon the surrender of this
---------------------------------
Warrant in connection with any transfer, exchange, or replacement as provided in
this Section 7, this Warrant shall be promptly canceled by the Company. The
Company shall pay all issuance taxes (other than securities transfer taxes) and
charges payable in connection with the preparation, execution, and delivery of
Warrants pursuant to this Section 7.
(e) Warrant Register. The Company shall maintain, at its principal
----------------
executive offices (or such other office or agency of the Company as it may
designate by notice to the Holder), a register for this Warrant, in which the
Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee and
each prior owner of this Warrant.
(f) Additional Restriction on Exercise or Transfer. Notwithstanding
----------------------------------------------
anything to the contrary contained herein, the Warrants shall not be exercisable
by the Holder to the extent (but only to the extent) that, if exercisable by
Holder, Holder would beneficially own in excess of 4.9% (the "Applicable
----------
Percentage") of the shares of Common Stock. To the extent the above limitation
- ----------
applies, the determination of whether the Warrants shall be exercisable (vis-a-
vis other securities owned by Holder) and of which Warrants shall be exercisable
(as among Warrants) shall be made by Holder and submission of the Warrants for
exercise shall be deemed to be the Holder's determination of whether such
Warrants are exercisable (vis-a-vis other securities owned by Holder) and of
which Warrants are exercisable (among Warrants), in each case subject to such
aggregate percentage limitation. No prior inability to exercise Warrants
pursuant to this paragraph shall have any effect on the applicability of the
provisions of this paragraph with respect to any subsequent determination of
exercisability. For the purposes of this paragraph, beneficial ownership and all
determinations and calculations, including without limitation, with respect to
calculations of percentage ownership, shall be determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended, and
Regulations 13D and G thereunder. The provisions of this paragraph may be
implemented in a manner otherwise than in strict conformity with the terms this
Section (f) with the approval of the Board of Directors of the Company and the
Holder: (i) with respect to any matter to cure any ambiguity herein, to correct
this paragraph (or any portion hereof) which may be defective or inconsistent
with the intended Applicable Percentage beneficial ownership limitation herein
contained or to make changes or supplements necessary or desirable to properly
give effect to
12
<PAGE>
such Applicable Percentage limitation; and (ii) with respect to any other matter
only with the further consent of the holders of a majority of the then
outstanding shares of Common Stock. For clarification, it is expressly a term of
this security that the limitations contained in this paragraph shall apply to
each successor holder of Warrants.
8. Notices. Any notice herein required or permitted to be given shall be
-------
in writing and may be personally served or delivered by courier or by confirmed
telecopy, and shall be deemed delivered at the time and date of receipt (which
shall include telephone line facsimile transmission). The addresses for such
communications shall be:
If to the Company:
P-Com, Inc.
3175 S. Winchester Blvd.
Campbell, California 95008
Telecopy: (408) 866-3678
Attention: Chief Financial Officer and
Chief Executive Officer
with a copy to:
Brobeck, Phleger & Harrison LLP
550 West C Street, Suite 1300
San Diego, California 92101
Telecopy: (619) 236-1403
Attention: Hayden Trubitt
and if to the Holder, at such address as Holder shall have provided in writing
to the Company, or at such other address as each such party furnishes by notice
given in accordance with this Section 10.
9. Governing Law; Jurisdiction. This Warrant shall be governed by and
---------------------------
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in the State of Delaware. The Company
irrevocably consents to the jurisdiction of the United States federal courts
located in the County of New Castle in the State of Delaware in any suit or
proceeding based on or arising under this Warrant and irrevocably agrees that
all claims in respect of such suit or proceeding may be determined in such
courts. The Company irrevocably waives the defense of an inconvenient forum to
the maintenance of such suit or proceeding. The Company agrees that a final
nonappealable judgment in any such suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.
10. Miscellaneous.
-------------
(a) Amendments. This Warrant and any provision hereof may only be
----------
amended by an instrument in writing signed by the Company and each initial
Holder and the Holders of a majority of the Warrant Shares remaining subject to
the Warrants.
13
<PAGE>
(b) Descriptive Headings. The descriptive headings of the several
--------------------
Sections of this Warrant are inserted for purposes of reference only, and shall
not affect the meaning or construction of any of the provisions hereof.
(c) Cashless Exercise. Notwithstanding anything to the contrary
-----------------
contained in this Warrant, this Warrant may be exercised by presentation and
surrender of this Warrant to the Company at its principal executive offices with
a written notice of the Holder's intention to effect a cashless exercise,
including a calculation of the number of shares of Common Stock to be issued
upon such exercise in accordance with the terms hereof (a "Cashless Exercise").
-----------------
In the event of a Cashless Exercise, in lieu of paying the Exercise Price in
cash, the Holder shall surrender this Warrant for the number of shares of Common
Stock determined by multiplying the number of Warrant Shares to which it would
otherwise be entitled by a fraction, the numerator of which shall be the
difference between the then current Market Price per share of the Common Stock
and the Exercise Price, and the denominator of which shall be such then current
Market Price per share of Common Stock.
(d) Assignability. This Warrant shall be binding upon the Company and
-------------
its successors and assigns and shall inure to the benefit of Holder and its
successors and assigns. The Holder shall notify the Company upon the assignment
of this Warrant.
(e) Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt
-------------------------------------------------
by the Company of evidence of the loss, theft, destruction or mutilation of this
Warrant, and (in the case of loss, theft or destruction) of indemnity or
security reasonably satisfactory to the Company, and upon surrender of this
Warrant, if mutilated, the Company shall execute and deliver a new Warrant of
like tenor and date.
* * *
14
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
their duly authorized officers.
P-Com, Inc.
By: /s/ Robert E. Collins
---------------------------
Name: Robert E. Collins
Title: Chief Financial Officer
15
<PAGE>
FORM OF EXERCISE AGREEMENT
(To be Executed by the Holder in order to Exercise the Warrant)
The undersigned hereby irrevocably exercises the right to purchase
____________ of the shares of common stock of P-Com, Inc., a Delaware
corporation (the "Company"), evidenced by the attached Warrant, and [herewith
makes payment of the Exercise Price with respect to such shares in full/ elects
to effect a Cashless Exercise pursuant to the terms of the Warrant], all in
accordance with the conditions and provisions of said Warrant.
(i) [If a cash exercise -- The undersigned makes the representations and
warranties contained in Sections 2.1 through 2.7 of the Securities Purchase
Agreement as of the date of the exercise.] The undersigned agrees not to offer,
sell, transfer or otherwise dispose of any Common Stock obtained on exercise of
the Warrant, except under circumstances that will not result in a violation of
the Securities Act of 1933, as amended, or any state securities laws.
(ii) The undersigned requests that stock certificates for such shares be
issued, and a Warrant representing any unexercised portion hereof be issued,
pursuant to the Warrant in the name of the Holder (or such other person or
persons indicated below) and delivered to the undersigned (or designee(s) at the
address (or addresses) set forth below:
Date:_________________ ________________________________________
Signature of Holder
________________________________________
Name of Holder (Print)
Address:
________________________________________
________________________________________
16
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers all rights of the undersigned under the within Warrant, with respect
to the number of shares of Common Stock covered thereby set forth hereinbelow,
to:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
and hereby irrevocably constitutes and appoints ______________________________
as agent and attorney-in-fact to transfer said Warrant on the books of the
within-named corporation, with full power of substitution in the premises.
Date:____________, _____,
In the presence of
Name: __________________________________________
Signature:__________________________________________
Title of Signing Officer or Agent (if any):
__________________________________________
Address: __________________________________________
__________________________________________
Note: The above signature should correspond
exactly with the name on the face of
the within Warrant.
17
<PAGE>
EXHIBIT 10.59
VOID AFTER 5:00 P.M. Eastern Standard
TIME ON August 11, 2004
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS
OF ANY STATE OF THE UNITED STATES. THE SECURITIES REPRESENTED HEREBY MAY NOT BE
OFFERED OR SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS, OR
UNLESS OFFERED, SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THOSE LAWS.
Right to Purchase Shares of
Common Stock, par value $0.0001 per share
Date: August 11, 1999
P-COM, INC.
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received Marshall Capital Management,
Inc. or its registered assigns, is entitled to purchase from P-Com, Inc., a
Delaware corporation (the "Company"), at any time or from time to time during
the period specified in Section 2 hereof, 40,000 fully paid and nonassessable
shares of the Company's common stock, par value $0.0001 per share (the "Common
Stock").
The Warrant exercise price per share of Common Stock (the "Exercise
Price") shall be equal to $5.00. The number of shares of Common Stock
purchasable hereunder (the "Warrant Shares") and the Exercise Price are subject
to adjustment as provided in Section 4 hereof.
The term "Closing Bid Price" and "Closing Trade Price" mean, for any
----------------- -------------------
security as of any date, the closing bid price and the closing trade price,
respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg
Financial Markets or a comparable reporting service of national reputation
selected by the Company and reasonably acceptable to the holder hereof (the
"Holder") if Bloomberg Financial Markets is not then reporting closing bid
- -------
prices or closing sale prices, as applicable, of such security (collectively,
"Bloomberg"), or if the foregoing does not apply, the last reported sale price
- ----------
of such security in the over-the-counter market on the electronic bulletin board
of such security as reported by Bloomberg, or, if no sale price is reported for
such security by Bloomberg, the average of the bid prices of any market makers
for such security as reported in the "pink sheets" by the National Quotation
Bureau, Inc. If the Closing Bid Price or Closing Trade Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Closing Bid Price or Closing Trade Price, as applicable, of such security on
such date shall be the fair market value as reasonably determined by an
investment banking firm selected by the
<PAGE>
Company and reasonably acceptable to the Holder with the costs of such appraisal
to be borne by the Company.
This Warrant is subject to the following terms, provisions, and
conditions:
1. Mechanics of Exercise. Subject to the provisions hereof, including,
---------------------
without limitation, the limitations contained in Section 7(f) hereof, this
Warrant may be exercised as follows:
(a) Manner of Exercise. This Warrant may be exercised by the Holder,
------------------
in whole or in part, by the surrender of this Warrant (or evidence of loss,
theft, destruction or mutilation thereof in accordance with Section 10(e)
hereof), together with a completed exercise agreement in the form of Exercise
Agreement attached hereto as Exhibit 1 (the "Exercise Agreement"), to the
Company at the Company's principal executive offices (or such other office or
agency of the Company as it may designate by notice to the Holder), and upon (i)
payment to the Company in cash, by certified or official bank check or by wire
transfer for the account of the Company, of the Exercise Price for the Warrant
Shares specified in the Exercise Agreement or (ii) if the Holder elects to
effect a Cashless Exercise (as defined in Section 10(c) below), delivery to the
principal executive office of the Company ("Attention: Corporate Secretary") of
a written notice of an election to effect a Cashless Exercise for the Warrant
Shares specified in the Exercise Agreement. The Warrant Shares so purchased
shall be deemed to be issued to the Holder or Holder's designees, as the record
owner of such shares, as of the date on which this Warrant shall have been
surrendered, the completed Exercise Agreement shall have been delivered, and
payment (or notice of an election to effect a Cashless Exercise) shall have been
made for such shares as set forth above.
(b) Issuance of Certificates. Subject to Section 1(c), certificates
------------------------
for the Warrant Shares so purchased, representing the aggregate number of shares
specified in the Exercise Agreement, shall be delivered to the Holder within a
reasonable time, not exceeding three (3) business days, after this Warrant shall
have been so exercised (the "Delivery Period"). The certificates so delivered
---------------
shall be in such denominations as may be requested by the Holder upon exercise
and shall be registered in the name of Holder or such other name as shall be
designated by such Holder upon exercise. If this Warrant shall have been
exercised only in part, then, unless this Warrant has expired, the Company
shall, at its expense, at the time of delivery of such certificates, deliver to
the Holder a new Warrant representing the number of shares with respect to which
this Warrant shall not then have been exercised.
(c) Exercise Disputes. In the case of any dispute with respect to
-----------------
an exercise, the Company shall promptly issue such number of shares of Common
Stock as are not disputed in accordance with this Section. If such dispute
involves the calculation of the Exercise Price, the Company shall submit the
disputed calculations to a nationally recognized independent accounting firm
(selected by the Company) via facsimile within three (3) business days of
receipt of the Exercise Agreement. The accounting firm shall audit the
calculations and notify the Company and the converting Holder of the results no
later than ten (10) business days from the date it receives the disputed
calculations. The accounting firm's calculation shall be deemed conclusive,
absent manifest error. The Company shall then issue the appropriate number of
shares of Common Stock in accordance with this Section.
2
<PAGE>
(d) Fractional Shares. No fractional shares of Common Stock are to
-----------------
be issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Exercise Price of a share of
Common Stock (as determined for exercise of this Warrant into whole shares of
Common Stock); provided that in the event that sufficient funds are not legally
available for the payment of such cash adjustment any fractional shares of
Common Stock shall be rounded up to the next whole number.
2. Period of Exercise. This Warrant is exercisable at any time or from
------------------
time to time on or after the date hereof and before 5:00 P.M., Eastern Standard
time on August 11, 2004 (the "Exercise Period").
---------------
3. Certain Agreements of the Company. The Company hereby covenants and
---------------------------------
agrees as follows:
(a) Shares to be Fully Paid. All Warrant Shares will, upon issuance
-----------------------
in accordance with the terms of this Warrant, be validly issued, fully paid, and
non-assessable and free from all taxes, liens, claims and encumbrances, except
such as are caused by the Holder.
(b) Reservation of Shares. During the Exercise Period, the Company
---------------------
shall at all times have authorized, and reserved for the purpose of issuance
upon exercise of this Warrant, a sufficient number of shares of Common Stock to
provide for the exercise of this Warrant.
(c) Certain Actions Prohibited. The Company will not, by amendment
--------------------------
of its charter or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such actions as may reasonably be requested by the Holder of this
Warrant in order to protect the exercise privilege of the Holder of this
Warrant, consistent with the tenor and purpose of this Warrant. Without limiting
the generality of the foregoing, the Company (i) will not increase the par value
of any shares of Common Stock receivable upon the exercise of this Warrant above
the Exercise Price then in effect, and (ii) will take all such actions as may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of Common Stock upon the exercise of this
Warrant.
4. Antidilution Provisions. During the Exercise Period, the Exercise
-----------------------
Price and the number of Warrant Shares shall be subject to adjustment from time
to time as provided in this Section 4. In the event that any adjustment of the
Exercise Price or number of Warrant Shares as required herein results in a
fraction of a cent or fraction of a share, as applicable, such Exercise Price or
number of Warrant Shares shall be rounded up or down to the nearest cent or
share, as applicable.
3
<PAGE>
(a) Adjustment of Exercise Price and Number of Shares upon Issuance
---------------------------------------------------------------
of Common Stock. Except as otherwise provided in Section 4(c) and 4(e) hereof,
- ---------------
if and whenever after the initial issuance of this Warrant, the Company issues
or sells, or in accordance with Section 4(b) hereof is deemed to have issued or
sold, any shares of Common Stock for no consideration or for a consideration per
share less than the Exercise Price (as then in effect) (a "Dilutive Issuance"),
then effective immediately upon the Dilutive Issuance, the Exercise Price will
be adjusted in accordance with the following formula:
E' = (E) (O + P/M) / (CSDO)
where:
E' = the adjusted Exercise Price;
E = the then current Exercise Price;
M = the greater of the then current Market Price and the
then Current Exercise Price;
O = the number of shares of Common Stock outstanding
immediately prior to the Dilutive Issuance;
P = the aggregate consideration, calculated as set forth
in Section 4(b) hereof, received by the Company upon
such Dilutive Issuance; and
CSDO = the total number of shares of Common Stock Deemed
Outstanding (as herein defined) immediately after the
Dilutive Issuance.
(b) Effect on Exercise Price of Certain Events. For purposes of
------------------------------------------
determining the adjusted Exercise Price under Section 4(a) hereof, the following
will be applicable:
(i) Issuance of Rights or Options. If, after the date hereof,
-----------------------------
the Company in any manner issues or grants any warrants, rights or options,
whether or not immediately exercisable, to subscribe for or to purchase Common
Stock or other securities exercisable, convertible into or exchangeable for
Common Stock ("Convertible Securities"), but not to include the issuance, grant
----------------------
or exercise of any stock or options which may hereafter be issued, granted or
exercised under any service provider benefit plan of the Company now existing or
to be implemented in the future, so long as the issuance of such stock or
options is approved by a majority of the non-employee members of the Board of
Directors of the Company or a majority of the members of a committee of non-
employee directors established for such purpose (such warrants, rights and
options to purchase Common Stock or Convertible Securities are hereinafter
referred to as "Options"), and the price per share for which Common Stock is
-------
purchasable or issuable upon the exercise of such Options is less than the
Exercise Price (as then in effect) on the date of issuance of such Option or
direct stock grant ("Below Market Options"), then the maximum total number of
--------------------
shares of Common Stock issuable upon the exercise of all such Below Market
Options (assuming full exercise, conversion or exchange of Convertible
Securities, if applicable) will, as of the date of the issuance or grant of such
Below Market Options, be deemed to be outstanding and to have been issued and
sold by the Company for such price per share. For purposes of the preceding
sentence, the price per share for which Common Stock is issuable upon the
exercise of such Below Market Options is determined by dividing (i)
4
<PAGE>
the total amount, if any, received or receivable by the Company as consideration
for the issuance or granting of such Below Market Options, plus the minimum
aggregate amount of additional consideration, if any, payable to the Company
upon the exercise of all such Below Market Options, plus, in the case of
Convertible Securities issuable upon the exercise of such Below Market Options,
the minimum aggregate amount of additional consideration payable upon the
exercise, conversion or exchange thereof at the time such Convertible Securities
first become exercisable, convertible or exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable upon the exercise of all such Below
Market Options (assuming full conversion of Convertible Securities, if
applicable). No further adjustment to the Exercise Price will be made upon the
actual issuance of such Common Stock upon the exercise of such Below Market
Options or upon the exercise, conversion or exchange of Convertible Securities
issuable upon exercise of such Below Market Options.
(ii) Issuance of Convertible Securities.
----------------------------------
(A) If the Company in any manner issues or sells any
Convertible Securities, whether or not immediately convertible (other than where
the same are issuable upon the exercise of Options) and the price per share for
which Common Stock is issuable upon such exercise, conversion or exchange (as
determined pursuant to Section 4(b)(ii)(B) if applicable) is less than the
Exercise Price (as then in effect) on the date of issuance of such Convertible
Security, then the maximum total number of shares of Common Stock issuable upon
the exercise, conversion or exchange of all such Convertible Securities will, as
of the date of the issuance of such Convertible Securities, be deemed to be
outstanding and to have been issued and sold by the Company for such price per
share. For the purposes of the preceding sentence, the price per share for which
Common Stock is issuable upon such exercise, conversion or exchange is
determined by dividing (i) the total amount, if any, received or receivable by
the Company as consideration for the issuance or sale of all such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the exercise, conversion or exchange thereof at
the time such Convertible Securities first become exercisable, convertible or
exchangeable, by (ii) the maximum total number of shares of Common Stock
issuable upon the exercise, conversion or exchange of all such Convertible
Securities. No further adjustment to the Exercise Price will be made upon the
actual issuances of such Common Stock upon exercise, conversion or exchange of
such Convertible Securities.
(B) If the Company in any manner issues or sells any
Convertible Securities with a fluctuating or re-setting conversion or exercise
price or exchange ratio (a "Variable Rate Convertible Security"), then the price
----------------------------------
per share for which Common Stock is issuable upon such exercise, conversion or
exchange for purposes of the calculation contemplated by Section 4(b)(ii)(A)
shall be deemed to be the lowest price per share which would be applicable
assuming that (1) all holding period and other conditions to any discounts
contained in such Convertible Security have been satisfied, and (2) the Market
Price on the date of exercise, conversion or exchange of such Convertible
Security was 80% of the Market Price on the date of issuance of such Convertible
Security (the "Assumed Variable Market Price").
-----------------------------
5
<PAGE>
(iii) Change in Option Price or Conversion Rate. Except for the
-----------------------------------------
issuance, grant or exercise of any stock or options which may hereafter be
granted or exercised under any service provider benefit plan of the Company now
existing or to be implemented in the future, so long as the issuance of such
stock or options is approved by a majority of the non-employee members of the
Board of Directors of the Company or a majority of the members of a committee of
non-employee directors established for such purpose, if there is a change at any
time in (i) the amount of additional consideration payable to the Company upon
the exercise of any Options; (ii) the amount of additional consideration, if
any, payable to the Company upon the exercise, conversion or exchange or any
Convertible Securities; or (iii) the rate at which any Convertible Securities
are convertible into or exchangeable for Common Stock (other than under or by
reason of provisions designed to protect against dilution), the Exercise Price
in effect at the time of such change will be readjusted to the Exercise Price
which would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed additional consideration
or changed conversion rate, as the case may be, at the time initially granted,
issued or sold.
(iv) Treatment of Expired Options and Unexercised Convertible
--------------------------------------------------------
Securities. If, in any case, the total number of shares of Common Stock issuable
- ----------
upon exercise of any Options or upon exercise, conversion or exchange of any
Convertible Securities is not, in fact, issued and the rights to exercise such
Option or to exercise, convert or exchange such Convertible Securities shall
have expired or terminated, the Exercise Price then in effect will be readjusted
to the Exercise Price which would have been in effect at the time of such
expiration or termination had such Options or Convertible Securities, to the
extent outstanding immediately prior to such expiration or termination (other
than in respect of the actual number of shares of Common Stock issued upon
exercise or conversion thereof), never been issued.
(v) Calculation of Consideration Received. If any Common
-------------------------------------
Stock, Options or Convertible Securities are issued, granted or sold for cash,
the consideration received therefor for purposes of this Warrant will be the
amount received by the Company therefor, before deduction of reasonable
commissions, underwriting discounts or allowances or other reasonable expenses
paid or incurred by the Company in connection with such issuance, grant or
sale. In case any Common Stock, Options or Convertible Securities are issued
or sold for a consideration part or all of which shall be other than cash, the
amount of the consideration other than cash received by the Company will be
the fair market value of such consideration except where such consideration
consists of freely-tradeable securities, in which case the amount of
consideration received by the Company will be the Market Price thereof as of
the date of receipt. In case any Common Stock, Options or Convertible
Securities are issued in connection with any merger or consolidation in which
the Company is the surviving corporation, the amount of consideration therefor
will be deemed to be the fair market value of such portion of the net assets
and business of the non-surviving corporation as is attributable to such
Common Stock, Options or Convertible Securities, as the case may be. The fair
market value of any consideration other than cash or securities will be
determined in the good faith reasonable business judgment of the Board of
Directors.
6
<PAGE>
(vi) Exceptions to Adjustment of Exercise Price. No adjustment
------------------------------------------
to the Exercise Price will be made (i) upon the exercise of any warrants,
options or convertible securities issued and outstanding on the date hereof in
accordance with the terms of such securities as of such date; (ii) upon the
grant or exercise of any stock or options which may hereafter be granted or
exercised under any employee, consultant or director benefit plan of the
Company now existing or to be implemented in the future, so long as the
issuance of such stock or options is approved by a majority of the non-
employee members of the Board of Directors of the Company or a majority of the
members of a committee of non-employee directors established for such purpose;
or (iii) issuances of any equity securities pursuant to the Stockholders
Rights Plan and the Series A Preferred Stock, as amended.
(c) Subdivision or Combination of Common Stock. If the
------------------------------------------
Company, at any time after the initial issuance of this Warrant, subdivides
(by any stock split, stock dividend, recapitalization, reorganization,
reclassification or otherwise) its shares of Common Stock into a greater
number of shares, then, after the date of record for effecting such
subdivision, the Exercise Price in effect immediately prior to such
subdivision will be proportionately reduced. If the Company, at any time after
the initial issuance of this Warrant, combines (by reverse stock split,
recapitalization, reorganization, reclassification or otherwise) its shares of
Common Stock into a smaller number of shares, then, after the date of record
for effecting such combination, the Exercise Price in effect immediately prior
to such combination will be proportionately increased.
(d) Adjustment in Number of Shares. Upon each adjustment of
------------------------------
the Exercise Price pursuant to the provisions of this Section 4, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be
adjusted by multiplying a number equal to the Exercise Price in effect
immediately prior to such adjustment by the number of shares of Common Stock
issuable upon exercise of this Warrant immediately prior to such adjustment
and dividing the product so obtained by the adjusted Exercise Price.
(e) Major Transactions. Except in the case of a Common Stock
------------------
Major Transaction (as defined below), if the Company shall consolidate or
merge with any other corporation or entity (other than a merger in which the
Company is the surviving or continuing entity and its capital stock is
unchanged and unissued in such transaction (except for Common Stock
constituting less than twenty percent (20%) of the Company's Common Stock then
outstanding)) or there shall occur any share exchange pursuant to which all of
the outstanding shares of Common Stock are converted into other securities or
property or any reclassification or change of the outstanding shares of Common
Stock (each of the foregoing being a "Major Transaction"), then each holder of
a Warrant shall thereafter be entitled to (a) in the event that the Common
Stock remains outstanding or holders of Common Stock receive any common stock
or substantially similar equity interest, in each of the foregoing cases which
is publicly traded, retain its Warrant and such Warrant shall continue to
apply to such Common Stock or shall apply, as nearly as practicable, to such
other common stock or equity interest, as the case may be, or (b) regardless
or whether (a) applies, receive consideration, in exchange for such Warrant,
equal to the greater of, as determined in the sole discretion of such holder,
(i) the number of shares of stock or securities or property of the Company, or
of the entity resulting from such Major Transaction (the "Major Transaction
-----------------
Consideration"), to which a holder of the number of shares of Common Stock
- -------------
delivered upon the exercise of such Warrant would have been entitled upon such
Major Transaction had such holder exercised the Warrant (without regard to any
7
<PAGE>
limitations on conversion or elsewhere contained) on the trading date
immediately preceding the public announcement of the transaction resulting in
such Major Transaction and had such Common Stock been issued and outstanding
and had such Holder been the holder of record of such Common Stock at the time
of the consummation of such Major Transaction, and (ii) cash paid by the
Company in immediately available funds, in an amount equal to one hundred and
twenty five percent (125%) of the Black-Scholes Amount (as defined herein)
times the number of shares of Common Stock for which this Warrant was
exercisable (without regard to any limitations on exercise herein contained);
and the Company shall make lawful provision for the foregoing as a part of
such Major Transaction. In the event that the Company shall consolidate or
merge with any corporation in a transaction in which common stock of the
surviving corporation or the parent thereof (the "Exchange Securities") is
issued to the holders of Common Stock in such transaction in exchange for all
such Common Stock, and (a) the Exchange Securities are publicly traded, (b)
the average daily trading volume of the Exchange Securities reported by
Bloomberg during the ninety (90) day period ending on the date on which such
transaction is publicly disclosed is greater than two million dollars
($2,000,000) per day, (c) the historical one hundred (100) day volatility of
the Exchange Securities reported by Bloomberg during the period ending on the
date on which such transaction is publicly disclosed is greater than fifty
percent (50%) and (d) the last sale price of the Exchange Securities on the
date immediately before the date on which such transaction is publicly
disclosed is not less than sixty five percent (65%) of the last sale price of
the Exchange Securities on any day during the twenty (20) trading day period
ending on such date (in each case as reported by Bloomberg) (a "Common Stock
Major Transaction"), then each holder of a Warrant shall following
consummation of such transaction have the right to receive solely, in exchange
for such Warrant, consideration equal to the number of shares of stock or
securities or property issued or paid in such Common Stock Major Transaction
to which a holder of the number of shares of Common Stock which would have
been delivered upon exercise of such Warrant would have been entitled upon
such Common Stock Major Transaction had the holder of such Warrant exercised
(without regard to any limitations on conversion herein or elsewhere
contained) the Warrant on the trading date immediately preceding the public
announcement of the transaction resulting in such Common Stock Major
Transaction and had such Common Stock been issued and outstanding and had such
holder been the holder of record of such Common Stock at the time of the
consummation of such Common Stock Major Transaction; and the Company shall
make lawful provision for the foregoing as a part of such Common Stock Major
Transaction. No sooner than ten (10) business days nor later than five (5)
business days prior to the consummation of the Major Transaction or Common
Stock Major Transaction, as the case may be, (each, a "Transaction") but not
prior to the public announcement of such Transaction, the Company shall
deliver written notice ("Notice of Transaction") to each holder of a Warrant,
---------------------
which Notice of Transaction shall be deemed to have been delivered one (1)
business day after the Company's sending such notice by telecopy (provided
that the Company sends a confirming copy of such notice on the same day by
overnight courier) of such Notice of Transaction. Such Notice of Transaction
shall indicate the amount and type of the Transaction consideration which such
holder of a Warrant would receive under this Section. If the Major Transaction
Consideration does not consist entirely of United States currency, such holder
may elect to receive United States currency in an amount equal to the value of
the Major Transaction Consideration in lieu of the Major Transaction
Consideration by delivering notice of such election to the Company within five
(5) business days of such holder's receipt of the Notice of Transaction.
8
<PAGE>
The "Black-Scholes Amount" shall be an amount determined by
--------------------
calculating the "Black-Scholes" value of an option to purchase one share of
Common Stock on the applicable page on the Bloomberg online page, using the
following variable values: (i) the current market price of the Common Stock
equal to the closing trade price on the last trading day before the date of the
Notice of the Major Transaction; (ii) volatility of the Common Stock equal to
the volatility of the common Stock during the 100 trading day period preceding
the date of the Notice of the Major Transaction; (iii) a risk free rate equal to
the interest rate on the United States treasury bill or treasury note with a
maturity corresponding to the remaining term of this Warrant on the date of the
Notice of the Major Transaction; and (iv) an exercise price equal to the
Exercise Price on the date of the Notice of the Major Transaction. In the event
such calculation function is no longer available utilizing the Bloomberg online
page, the Holder shall calculate such amount in its sole discretion using the
closest available alternative mechanism and variable values to those available
utilizing the Bloomberg online page for such calculation function.
(f) Distribution of Assets. In case the Company shall declare or
----------------------
make any distribution of its assets (or rights to acquire its assets) to
holders of Common Stock as a partial liquidating dividend, by way of return of
capital or like events (including any dividend or distribution to the
Company's shareholders of cash or shares (or rights to acquire shares) of
capital stock of a subsidiary) (a "Distribution"), at any time after the
------------
initial issuance of this Warrant, then the Holder shall be entitled upon
exercise of this Warrant for the purchase of any or all of the shares of
Common Stock subject hereto, to receive the amount of such assets (or rights)
which would have been payable to the Holder had such Holder been the holder of
such shares of Common Stock on the record date for the determination of
shareholders entitled to such Distribution.
(g) Notices of Adjustment. Upon the occurrence of any event which
---------------------
requires any adjustment of the Exercise Price, then, and in each such case,
the Company shall give notice thereof to the Holder, which notice shall state
the Exercise Price resulting from such adjustment and the increase or decrease
in the number of Warrant Shares purchasable at such price upon exercise,
setting forth in reasonable detail the method of calculation and the facts
upon which such calculation is based. Such calculation shall be certified by
the chief financial officer of the Company.
(h) Minimum Adjustment of Exercise Price. No adjustment of the
------------------------------------
Exercise Price shall be made in an amount of less than 1% of the Exercise
Price in effect at the time such adjustment is otherwise required to be made,
but any such lesser adjustment shall be carried forward and shall be made at
the time and together with the next subsequent adjustment which, together with
any adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
(i) No Fractional Shares. No fractional shares of Common Stock are
--------------------
to be issued upon the exercise of this Warrant, but the Company shall pay a
cash adjustment in respect of any fractional share which would otherwise be
issuable in an amount equal to the same fraction of the Market Price of a
share of Common Stock; provided that in the event that sufficient funds are
not legally available for the payment of such cash adjustment any fractional
shares of Common Stock shall be rounded up to the next whole number.
9
<PAGE>
(j) Other Notices. In case at any time:
-------------
(i) the Company shall declare any dividend upon the Common
Stock payable in shares of stock of any class or make any other distribution
to all (or substantially all) of the holders of the Common Stock;
(ii) the Company shall offer for subscription pro rata to the
holders of the Common Stock any additional shares of stock of any class or
other rights;
(iii) there shall be any capital reorganization of the
Company, or reclassification of the Common Stock, or consolidation or merger
of the Company with or into, or sale of all or substantially all of its assets
to, another corporation or entity; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company; then, in each such case, the Company
shall give to the Holder (a) notice of the date on which the books of the
Company shall close or a record shall be taken for determining the holders of
Common Stock entitled to receive any such dividend, distribution, or
subscription rights or for determining the holders of Common Stock entitled to
vote in respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding-up and (b) in the case of
any such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding-up, notice of the date (or, if not then
known, a reasonable approximation thereof by the Company) when the same shall
take place. Such notice shall also specify the date on which the holders of
Common Stock shall be entitled to receive such dividend, distribution, or
subscription rights or to exchange their Common Stock for stock or other
securities or property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation, or winding-up, as the
case may be. Such notice shall be given at least 30 days prior to the record
date or the date on which the Company's books are closed in respect thereto,
but in no event earlier than public announcement of such proposed transaction
or event. Failure to give any such notice or any defect therein shall not
affect the validity of the proceedings referred to in clauses (i), (ii), (iii)
and (iv) above.
(k) Certain Definitions.
-------------------
(i) "Common Stock Deemed Outstanding" shall mean the number of
-------------------------------
shares of Common Stock actually outstanding (not including shares of Common
Stock held in the treasury of the Company), plus (x) in case of any adjustment
required by Section 4(a) resulting from the issuance of any Options, the
maximum total number of shares of Common Stock issuable upon the exercise of
the Options for which the adjustment is required (including any Common Stock
issuable upon the conversion of Convertible Securities issuable upon the
exercise of such Options), and (y) in the case of any adjustment required by
Section 4(a) resulting from the issuance of any Convertible Securities, the
maximum total number of shares of Common Stock issuable upon the exercise,
conversion or exchange of the Convertible Securities for which the adjustment
is required, as of the date of issuance of such Convertible Securities, if
any.
(ii) "Market Price," as of any date, (i) means the Closing Bid
------------
Price for the shares of Common Stock as reported to Nasdaq National Market
System for the trading day
10
<PAGE>
immediately preceding such date, or (ii) if the Nasdaq National Market System
is not the principal trading market for the Common Stock, the last reported
bid price on the principal trading market for the Common Stock during the same
period, or, if there is no bid price for such period, the last reported sales
price for such period, or (iii) if market value cannot be calculated as of
such date on any of the foregoing bases, the Market Price shall be the fair
market value as reasonably determined by an investment banking firm selected
by the Company and reasonably acceptable to each initial holder and the
Holders of a majority in interest of the Warrants, with the costs of the
appraisal to be borne by the Company. The manner of determining the Market
Price of the Common Stock set forth in the foregoing definition shall apply
with respect to any other security in respect of which a determination as to
market value must be made hereunder.
(iii) "Common Stock," for purposes of this Section 4, includes
------------
the Common Stock and any additional class of stock of the Company having no
preference as to dividends or distributions on liquidation, provided that the
shares purchasable pursuant to this Warrant shall include only Common Stock in
respect of which this Warrant is exercisable, or shares resulting from any
subdivision or combination of such Common Stock, or in the case of any
reorganization, reclassification, consolidation, merger, or sale of the
character referred to in Section 4(e) hereof, the stock or other securities or
property provided for in such Section.
5. Issue Tax. The issuance of certificates for Warrant Shares upon
---------
the exercise of this Warrant shall be made without charge to the Holder or such
shares for any issuance tax or other costs in respect thereof, provided that the
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance and delivery of any certificate in a name
other than the Holder.
6. No Rights or Liabilities as a Stockholder. This Warrant shall
-----------------------------------------
not entitle the Holder to any voting rights or other rights as a stockholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the Holder to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the Holder, shall give rise to any
liability of the Holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
7. Transfer, Exchange, Redemption and Replacement of Warrant.
---------------------------------------------------------
(a) Restriction on Transfer. This Warrant and the rights
-----------------------
granted to the Holder are transferable, in whole or in part, upon surrender of
this Warrant, together with a properly executed assignment in the Form of
Assignment attached hereto as Exhibit 2, at the office or agency of the
Company referred to in Section 7(e) below, provided, however, that any
transfer or assignment shall be subject to the provisions of Sections 5.1 and
5.2 of the Securities Purchase Agreement dated December 21, 1999 by and among
the Company and the signatorer thereto (the "Securities Purchase Agreement").
-----------------------------
Until due presentment for registration of transfer on the books of the
Company, the Company may treat the registered holder hereof as the owner and
holder hereof for all purposes, and the Company shall not be affected by any
notice to the contrary.
(b) Warrant Exchangeable for Different Denominations. This
------------------------------------------------
Warrant is exchangeable, upon the surrender hereof by the Holder at the office
or agency of the Company
11
<PAGE>
referred to in Section 7(e) below, for new Warrants, in the form hereof, of
different denominations representing in the aggregate the right to purchase
the number of shares of Common Stock which may be purchased hereunder, each of
such new Warrants to represent the right to purchase such number of shares as
shall be designated by the Holder of at the time of such surrender.
(c) Replacement of Warrant. Upon receipt of evidence reasonably
----------------------
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant or, in the case of any such loss, theft, or destruction, upon
delivery, of an indemnity agreement reasonably satisfactory in form and amount
to the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrants, in the form hereof, in such
denominations as Holder may request.
(d) Cancellation; Payment of Expenses. Upon the surrender of this
---------------------------------
Warrant in connection with any transfer, exchange, or replacement as provided
in this Section 7, this Warrant shall be promptly canceled by the Company. The
Company shall pay all issuance taxes (other than securities transfer taxes)
and charges payable in connection with the preparation, execution, and
delivery of Warrants pursuant to this Section 7.
(e) Warrant Register. The Company shall maintain, at its principal
----------------
executive offices (or such other office or agency of the Company as it may
designate by notice to the Holder), a register for this Warrant, in which the
Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee
and each prior owner of this Warrant.
(f) Additional Restriction on Exercise or Transfer.
----------------------------------------------
Notwithstanding anything to the contrary contained herein, the Warrants shall
not be exercisable by the Holder to the extent (but only to the extent) that,
if exercisable by Holder, Holder would beneficially own in excess of 4.9% (the
"Applicable Percentage") of the shares of Common Stock. To the extent the
---------------------
above limitation applies, the determination of whether the Warrants shall be
exercisable (vis-a-vis other securities owned by Holder) and of which Warrants
shall be exercisable (as among Warrants) shall be made by Holder and
submission of the Warrants for exercise shall be deemed to be the Holder's
determination of whether such Warrants are exercisable (vis-a-vis other
securities owned by Holder) and of which Warrants are exercisable (among
Warrants), in each case subject to such aggregate percentage limitation. No
prior inability to exercise Warrants pursuant to this paragraph shall have any
effect on the applicability of the provisions of this paragraph with respect
to any subsequent determination of exercisability. For the purposes of this
paragraph, beneficial ownership and all determinations and calculations,
including without limitation, with respect to calculations of percentage
ownership, shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulations 13D and G
thereunder. The provisions of this paragraph may be implemented in a manner
otherwise than in strict conformity with the terms this Section (f) with the
approval of the Board of Directors of the Company and the Holder: (i) with
respect to any matter to cure any ambiguity herein, to correct this paragraph
(or any portion hereof) which may be defective or inconsistent with the
intended Applicable Percentage beneficial ownership limitation herein
contained or to make changes or supplements necessary or desirable to properly
give effect to
12
<PAGE>
such Applicable Percentage limitation; and (ii) with respect to any other
matter only with the further consent of the holders of a majority of the then
outstanding shares of Common Stock. For clarification, it is expressly a term
of this security that the limitations contained in this paragraph shall apply
to each successor holder of Warrants.
8. Notices. Any notice herein required or permitted to be given
-------
shall be in writing and may be personally served or delivered by courier or by
confirmed telecopy, and shall be deemed delivered at the time and date of
receipt (which shall include telephone line facsimile transmission). The
addresses for such communications shall be:
If to the Company:
P-Com, Inc.
3175 S. Winchester Blvd.
Campbell, California 95008
Telecopy: (408) 866-3678
Attention: Chief Financial Officer and
Chief Executive Officer
with a copy to:
Brobeck, Phleger & Harrison LLP
550 West C Street, Suite 1300
San Diego, California 92101
Telecopy: (619) 236-1403
Attention: Hayden Trubitt
and if to the Holder, at such address as Holder shall have provided in writing
to the Company, or at such other address as each such party furnishes by notice
given in accordance with this Section 10.
9. Governing Law; Jurisdiction. This Warrant shall be governed by
---------------------------
and construed in accordance with the laws of the State of Delaware applicable
to contracts made and to be performed in the State of Delaware. The Company
irrevocably consents to the jurisdiction of the United States federal courts
located in the County of New Castle in the State of Delaware in any suit or
proceeding based on or arising under this Warrant and irrevocably agrees that
all claims in respect of such suit or proceeding may be determined in such
courts. The Company irrevocably waives the defense of an inconvenient forum to
the maintenance of such suit or proceeding. The Company agrees that a final
nonappealable judgment in any such suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on such judgment or in any
other lawful manner.
10. Miscellaneous.
-------------
(a) Amendments. This Warrant and any provision hereof may
----------
only be amended by an instrument in writing signed by the Company and each
initial Holder and the Holders of a majority of the Warrant Shares remaining
subject to the Warrants.
13
<PAGE>
(b) Descriptive Headings. The descriptive headings of the
--------------------
several Sections of this Warrant are inserted for purposes of reference only,
and shall not affect the meaning or construction of any of the provisions
hereof.
(c) Cashless Exercise. Notwithstanding anything to the
-----------------
contrary contained in this Warrant, this Warrant may be exercised by
presentation and surrender of this Warrant to the Company at its principal
executive offices with a written notice of the Holder's intention to effect a
cashless exercise, including a calculation of the number of shares of Common
Stock to be issued upon such exercise in accordance with the terms hereof (a
"Cashless Exercise"). In the event of a Cashless Exercise, in lieu of paying
-----------------
the Exercise Price in cash, the Holder shall surrender this Warrant for the
number of shares of Common Stock determined by multiplying the number of
Warrant Shares to which it would otherwise be entitled by a fraction, the
numerator of which shall be the difference between the then current Market
Price per share of the Common Stock and the Exercise Price, and the
denominator of which shall be such then current Market Price per share of
Common Stock.
(d) Assignability. This Warrant shall be binding upon the
-------------
Company and its successors and assigns and shall inure to the benefit of
Holder and its successors and assigns. The Holder shall notify the Company
upon the assignment of this Warrant.
(e) Loss, Theft, Destruction or Mutilation of Warrant. Upon
-------------------------------------------------
receipt by the Company of evidence of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or destruction) of
indemnity or security reasonably satisfactory to the Company, and upon
surrender of this Warrant, if mutilated, the Company shall execute and deliver
a new Warrant of like tenor and date.
* * *
14
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
their duly authorized officers.
P-Com, Inc.
By: /s/ Robert E. Collins
---------------------
Name: Robert E. Collins
Title: Chief Financial Officer
15
<PAGE>
FORM OF EXERCISE AGREEMENT
(To be Executed by the Holder in order to Exercise the Warrant)
The undersigned hereby irrevocably exercises the right to purchase
____________ of the shares of common stock of P-Com, Inc., a Delaware
corporation (the "Company"), evidenced by the attached Warrant, and [herewith
makes payment of the Exercise Price with respect to such shares in full/ elects
to effect a Cashless Exercise pursuant to the terms of the Warrant], all in
accordance with the conditions and provisions of said Warrant.
(i) [If a cash exercise -- The undersigned makes the representations
and warranties contained in Sections 2.1 through 2.7 of the Securities
Purchase Agreement as of the date of the exercise.] The undersigned agrees not
to offer, sell, transfer or otherwise dispose of any Common Stock obtained on
exercise of the Warrant, except under circumstances that will not result in a
violation of the Securities Act of 1933, as amended, or any state securities
laws.
(ii) The undersigned requests that stock certificates for such
shares be issued, and a Warrant representing any unexercised portion hereof be
issued, pursuant to the Warrant in the name of the Holder (or such other
person or persons indicated below) and delivered to the undersigned (or
designee(s) at the address (or addresses) set forth below:
Date:
_____________________ ______________________________________
Signature of Holder
______________________________________
Name of Holder (Print)
Address:
______________________________________
______________________________________
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers all rights of the undersigned under the within Warrant, with respect
to the number of shares of Common Stock covered thereby set forth hereinbelow,
to:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
and hereby irrevocably constitutes and appoints ______________________________
as agent and attorney-in-fact to transfer said Warrant on the books of the
within-named corporation, with full power of substitution in the premises.
Date:____________, _____,
In the presence of
Name:
______________________________________
Signature:
___________________________________
Title of Signing Officer or Agent
(if any):
______________________________________
Address:
______________________________________
______________________________________
Note: The above signature should correspond
exactly with the name on the face of
the within Warrant.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE P-COM
INC. FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 14,034 14,034
<SECURITIES> 0 0
<RECEIVABLES> 42,932 42,932
<ALLOWANCES> (4,622) (4,622)
<INVENTORY> 42,784 42,784
<CURRENT-ASSETS> 122,479 122,479
<PP&E> 68,852 68,852
<DEPRECIATION> 31,774 31,774
<TOTAL-ASSETS> 221,419 221,419
<CURRENT-LIABILITIES> 84,339 84,339
<BONDS> 0 0
0 0
0 0
<COMMON> 6 6
<OTHER-SE> 54,196 54,196
<TOTAL-LIABILITY-AND-EQUITY> 221,419 221,419
<SALES> 30,012 79,996
<TOTAL-REVENUES> 40,058 109,410
<CGS> 22,536 82,121
<TOTAL-COSTS> 29,241 102,224
<OTHER-EXPENSES> 18,525 75,321
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (2,717) (6,849)
<INCOME-PRETAX> (13,713) (78,326)
<INCOME-TAX> 228 479
<INCOME-CONTINUING> (13,941) (78,805)
<DISCONTINUED> (22,458) (26,144)
<EXTRAORDINARY> 0 7,284
<CHANGES> 0 0
<NET-INCOME> (36,399) (97,665)
<EPS-BASIC> (0.55) (1.99)
<EPS-DILUTED> (0.55) (1.99)
</TABLE>
