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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File Number: 0-25356
__________________________
P-Com, Inc.
(Exact name of Registrant as specified in its charter)
__________________________
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<S> <C>
Delaware 77-0289371
(State of Incorporation) (IRS Employer Identification No. )
3175 S. Winchester Boulevard, Campbell, California 95008
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (408) 866-3666
Securities Registered Pursuant To Section 12 Of The Act:
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Title of each class Name of each exchange on which registered
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None None
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Securities Registered Pursuant To Section 12 Of The Act: Common Stock,
$0.0001 par value. Preferred stock purchase rights.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ________
--
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, as of March 13, 2000, was approximately $1,739,347,465 (based
upon the closing price for shares of the Registrant's Common Stock as reported
by the Nasdaq National Market for the last trading date prior to that date).
Shares of Common Stock held by each executive officer, director and holder of 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On March 13, 2000, approximately 76,877,000 shares of the Registrant's
Common Stock, $0.0001 par value, were outstanding.
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PART I
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ITEM 1. BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. 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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Certain Factors Affecting the Company" and elsewhere in this Annual Report on
Form 10-K.
Overview
P-Com develops, manufactures, and markets Point-to-Multipoint and Point-to-
Point Broadband Wireless Access (BWA) systems, and Spread Spectrum radio
systems, for the worldwide telecommunications market. Network service providers
and Internet service providers are able, through the deployment of P-Com
systems, to respond to the increasing global demands for high-speed access
services, such as Internet access associated with the Business-to-Business
and E-Commerce business phenomenon. Through deployment of our systems, networks
providers can quickly and efficiently establish integrated Internet, data,
voice, and video services for their customers, and then expand and grow
those services as demand increases. Additionally, cellular and Personal
Communications Services (PCS) service providers employ our Point-to-Point
systems for backhaul between remote tower sites and switching centers in their
growing global markets.
Industry Background
The Growing Demand for Communications Services
The continuing rapid growth of Internet services for progressively numerous
applications is creating demands for greatly expanded and enhanced network
services. Network service providers are under ever-increasing pressure to expand
and enhance both their physical networks, and the capabilities embodied in those
networks. Businesses regularly employ the Internet to expand and enhance their
reach to customers, to suppliers, and to peer businesses with which they have
relationships ("B2B" applications). Applications such as E-Commerce, supply
chain management, global sales and marketing, and customer support are typical
examples of why the Internet is experiencing continuing growth. Additionally,
Intranet applications are being deployed by businesses to create data networks
among corporate sites, remote offices and telecommuters. Such Intranet
capabilities facilitate employee communications, e-mail, file sharing, record
creation/management, and research and analysis applications. Consumers also
increasingly use the Internet for shopping, research, collection and publication
of information, communications with others of similar interests, and accessing
on-line entertainment. For these and other reasons, increasingly large amounts
of data must be quickly, economically, and reliably handled by networks. BWA
is an efficient and economical means of meeting these growing demands, and it is
therefore becoming increasingly important.
Global Privatization and Deregulation: Stimuli to Broadband Wireless Access
Growth
Privatization of former governmental telecommunications monopolies, and
deregulation of telecommunications markets, on a global basis, are creating
unprecedented competition in telecommunications markets. New network services
providers are rushing to create integrated, digital networks to meet the growing
demands for efficient, economical telecommunications services. Deployment of
broadband access technologies is a fast, scalable, reliable, and economical
means of enabling these new competitors to create their new infrastructures. It
is also an effective means whereby incumbent network service providers can
supplement their existing networks as demands dictate. In the United States,
incumbent RBOC telephone companies were, until recently, the exclusive providers
of the copper wire interconnection network that connected subscribers to the
Public Switched Telephone Network ("PSTN"), commonly known as the "last mile."
The Telecommunications Act of 1996, which required incumbent telephone companies
to lease portions of their networks, including the last mile, to Competitive
Local Exchange Carriers ("CLECs"), served to create a significantly competitive
telecommunications industry within the United States. Adding to this competitive
environment is the struggle between telephone companies and cable operators to
expand their service offerings into each other's markets. To provide services,
CLECs can either lease from incumbent telecommunication companies the access
services to connect their customers, or they can build their own access
services. Constructing landline access is very costly and time-consuming;
deployment of BWA is relatively quick, efficient, and economical. Additionally,
BWA is scalable, and can be re-deployed in other areas if conditions so dictate,
thereby protecting investment.
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Deregulation and competition similar to that experienced in the United
States is occurring in most regions of the world. Network service providers are
seeking to differentiate their services from the "commodity" status of
telecommunications by deploying integrated, digital, high-speed access services.
Broadband Wireless Access is therefore very much in current demand, and the
demand is growing as more competitors vie for an expanding number of markets
around the world.
In many parts of the world, communication services are either inadequate or
non-existent due to the lack of existing infrastructure. Additionally, many such
countries have both privatized the once state-owned telecommunications monopoly
and opened their markets to competitive network service providers. In these
markets competitive service providers find deployment of BWA the quickest, most
economical and scalable means of provisioning reliable, modern
telecommunications services. Thus, the demand for such wireless access systems
continues to grow.
Network Architecture Bottlenecks
Fiber optic networks have received much attention because of the speed and
quality associated with such technology. Increasingly, network service
providers are constructing fiber optic interoffice backbones to meet the
significant demand created by Internet and other telecommunications services,
such as video conferencing. Data transfer rates of billions of bits per second
are common on fiber optic backbones. To satisfy the growing user demand for
high-speed access, the fiber optic channels would have to extend all the way
to the buildings in which the users reside. Such is the case in only about
three percent of the commercial buildings within the United States, and that
number is not expected to grow much because of the extremely high cost to extend
fiber optic channels to buildings. Instead, the fiber optic channel usually ends
short of the building, at the beginning of the "last mile". Thus, users are
forced to use slower dial-up modem connections and ISDN ("Integrated Services
Digital Network") services, or ADSL ("Asymmetrical Digital Subscriber Line")
service, if they are fortunate enough to reside within the physical limitations
of ADSL service. This local access "bottleneck" denies users the real benefits
afforded by fiber optic backbones because the highest speed which users can
experience is that of the local access portion of their end-to-end connection.
To overcome such limitations in a quick and efficient manner, BWA is attractive
to incumbent and competitive carriers alike because the local access speed
restrictions are obviated.
Wireless Access Solutions
Point-to-Multipoint Broadband Wireless Access Service is high-speed
wireless technology that provides the highest speed symmetrical access service
among alternative solutions other than Point-to-Point wireless and dedicated
access fiber optic service. This service is experiencing much attention and
growing demand because it can be rapidly deployed; it is highly efficient,
reliable, and scalable; it is cost effective because it can serve many
subscribers from one hub, and can be expanded as demand for service dictates.
Point-to-Point Wireless is dedicated link wireless technology enabling
symmetrical data services between a subscriber and the network. For each new
subscriber using this service, the network service provider provides a separate,
new set of dedicated equipment. Even providers who offer Point-to-Multipoint
services intend to use Point-to-Point technology for those customers with very
high capacity requirements. Back-hauls between mobile wireless towers and the
mobile switching office is a typical application for this service. As mobile
services continue to grow, mobile service providers will have to continue to
scale down existing cells into smaller ones to reuse precious spectrum. With
each such scale-back comes opportunity for new wireless Point-to-Point
applications because of the need for more backhauls. Mobile wireless access
to the numerous and growing Internet-based applications is fueling growth in
this segment of the wireless market.
Broadband satellite solutions enable asymmetrical, two-way
access services for high-speed transmissions from the network service provider
to the subscriber. In these applications the "bottleneck" limitation is the
slower wire-based connections to transmit data from the subscriber to the
network connecting users to the PSTN. Additionally, data rates to users decrease
as overall usage increases, much as experienced in cable data services.
The P-COM Solution
Range of Products Choices
P-Com offers access providers around the world a range of wireless systems
that encompass Point-to-Multipoint BWA, Point-to-Point high-speed access, and
Spread Spectrum systems. Our systems utilize a common architecture in the
millimeter wave and spread spectrum microwave frequencies, including 2.4 GHz,
5.7 GHz, 7 GHz, 13 GHz, 14 GHz, 15 GHz, 18 GHz, 23 GHz, 24 GHz, 26 GHz, 28 GHz,
31 GHz, 38 GHz, and 50 GHz. Both FDMA (Frequency Division Multiple Access)
and TDMA (Time Division Multiple Access) technologies are designed into our
systems. Our broad range of products, frequencies, and technologies allow our
customers to customize the systems they acquire from us to best satisfy the
unique environment in which the systems will be installed and operated.
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P-Com's systems are designed to be highly reliable, scalable, cost-
effective, and simple to install and maintain. Software embedded in our systems
allows the user to easily configure and adjust system settings such as
frequency, power, and capacity without manual tuning and mechanical adjustments.
We also provide a full line of Windows and SNMP-based software products that are
complementary to our systems as sophisticated diagnostic, maintenance, network
management, and system configuration tools.
The diagram below illustrates the use of P-Com systems in a Point-to-
Multipoint application to establish short-haul, high-speed BWA:
[GRAPH APPEARS HERE]
The following diagram illustrates the use of P-Com systems in a short-haul
Point-to-Point telecom access application:
[GRAPH APPEARS HERE]
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The diagram below illustrates the use of P-Com systems in the connection of
base stations in a cellular or PCN/PCS application:
[GRAPH APPEARS HERE]
(logo)
Services
Through our network services group, P-Com Network Services (Network
Services), we provide either turn-key or individual telecommunications services.
Network Services performs and manages every aspect of wired or wireless system
build-outs, from initial system and path planning through network optimization
and maintenance. Also provided are tower design, fabrication, and construction
services. For the switching environment, Network Services offers all the
resources needed for the installation of central office equipment.
The Network Services professional staff has managed the design and
construction of both wired and wireless telecommunications systems of all sizes
and complexity in the United States, the United Kingdom, Italy, and some twenty-
five countries around the world.
Manufacturing and Testing
P-Com received its initial ISO 9001 registration for Campbell, California
in December, 1993, and was subsequently recertified. Our ISO 9001 registration
for our United Kingdom sales and customer support facility was received in 1996;
our ISO 9001 registration for our Geritel facility in Italy was received in
1996.
In-house design, manufacturing, and testing expertise are employed to
develop systems that meet the demands common to commercial deployment.
Once a system reaches P-Com in-house commercial status, we contract with
one or more of several certified turn-key fabricators to build systems in
commercial quantities. Utilization of such fabricators relieves P-Com of
expensive investments in manufacturing facilities, enables us to quickly scale
to meet varying demands and changes in technology, and thereby enables us to
satisfy customer requirements.
Manufactured systems are tested by P-Com prior to shipment to our
customers. Testing includes the complete IDU-ODU assembly (InDoor Unit --
OutDoor Unit), thereby providing customers completely tested end-to-end systems
as opposed to independent testing of IDUs and ODUs.
Sales Channels and P-Com Customers
P-Com's wireless access systems are sold internationally and domestically
through strategic partners, systems providers, original equipment manufacturers
(OEMs), and distributors as well as directly. In 1999 we entered into a
strategic partnership with HeliOs. HeliOs manufactures a 155 Mbps (OC-3) radio
that is complementary to the P-Com product line.
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Customers include Advanced Radio Telecom, Bosch Telecom, China Unicom,
Comtel, Embratel, Ericsson, Fujitsu, Italtel S.p.A, Kokusai, Lucent
Technologies, Mercury Communications, Mercury One-2-One Personal Communications,
Motorola, Northern Telecom, Orange Personal Communications Services, Siemens,
Telecom GmbH, and WinStar Communications. Customers for service include AT&T
Wireless, Bell Atlantic, BellSouth, Mercury One-2-One Personal Communication,
Omnipoint, Orange Personal Communications Services, PrimeCo Personal
Communications, Sprint Spectrum, Tellabs Operations, and WinStar Communications.
The Company's backlog was approximately $32.6 million as of December 31,
1999, as compared to approximately $75.0 million as of December 31, 1998. The
decrease is due to the timing of purchase orders received from the Company's
largest customers relating to ongoing contracts. The Company includes in backlog
only those firm customer commitments to be shipped within the following twelve
months. A significant portion of the Company's backlog scheduled for shipment in
the twelve months subsequent to December 31, 1999 can be cancelled since orders
are often made substantially in advance of shipment, and most of the Company's
contracts provide that orders may be cancelled with limited or no penalties up
to a specified period (generally 60 to 90 days) before shipment, and in some
cases at any time. Therefore, backlog is not necessarily indicative of future
sales for any particular period. In addition, the Company's customers have
increasingly been requiring shipment of products at the time of ordering rather
than submitting purchase orders far in advance of expected dates of product
shipment.
The P-Com Strategy
Our goal is to be the leading worldwide supplier of high-performance Point-
to-Multipoint, Point-to-Point, and Spread Spectrum wireless access equipment.
Our strategy to accomplish this objective is to:
Focus on Point-to-Multipoint, Point-to-Point, and Spread Spectrum Microwave
Markets. P-Com is designing our products specifically for the millimeter wave
and spread spectrum microwave frequency bands. We have designed P-Com's core
architecture to optimize our systems for operation at millimeter and microwave
frequencies.
Provide Ancillary Services in RF Engineering and System Construction. P-Com
offers engineering, path design, program management, installation, and
maintenance services. We believe such services provide us with many strategic
advantages, including allowing development of strong relationships with
decision-makers at an early stage, and continuation of such relationships
throughout the system build-out.
Continue to Expand Worldwide. P-Com conducts a majority of its business
abroad. We have met the standards established by the European
Telecommunications Standards Institute (ETSI) and achieved regulatory approval
for our systems in Argentina, Australia, Austria, Brazil, Canada, China, the
Czech Republic, France, Germany, Greece, Hungary, Italy, Japan, Mexico, Spain,
the United Kingdom, as well as those required by the United States. We
maintain offices throughout the world.
Build and Sustain Manufacturing Cost Advantage. P-Com has designed its
system architecture to reduce the number of components incorporated into each
system, and to permit the use of common components across the range of our
products. Such an approach assists in manufacturing cost reduction through
volume component purchases and through enablement of a standardized
manufacturing process. Utilization of turn-key contract manufacturers
eliminates expensive manufacturing lines, provides ability to scale up or down
as conditions dictate, and provides multiple manufacturing lines through which
customer requirements can be satisfied.
Leverage and Maintain Software Leadership. P-Com differentiates its systems
through proprietary software embedded in the IDU and ODU, and in the Windows and
SNMP-based software tools. This software is designed to allow us to deliver to
our customers a high level of functionality that can be easily reconfigured by
the customer to meet changing needs. Software tools are also used to facilitate
network management.
TECHNOLOGY
P-Com's approach to Point-to-Multipoint, Point-to-Point, and Spread
Spectrum radio systems is, we believe, significantly different from conventional
approaches. Through use of our proprietary digital signal processing, frequency
converter, and antenna interface technology, and our proprietary software and
custom application-specific integrated circuits, P-Com produces highly-
integrated, feature-rich systems. The results of this integrated design are
reliability and cost advantages. The microprocessor and embedded software in
both the IDU and ODU enclosures enable flexible customization to the user's
specific telecommunications requirements.
Wireless transmission of voice, data and video traffic has become a
desirable alternative to wired solutions due to its advantages in the ease and
cost of implementation and maintenance. Because high frequency transmissions are
best suited for shorter distances, microwave radio frequencies are typically
used for communications links of 15 to 50 miles and millimeter wave radio
frequencies for transmissions of up to 15 miles. In addition, the cost of
millimeter wave radio systems and spread spectrum ISM band systems are generally
less than that of microwave radio systems.
P-Com's Point-to-Point technology uses four-level (FSK) modulation which is
spectrally efficient and very impervious to interference. This robust quality
results in improved frequency reuse distances which is beneficial to operators
of large-scale Point-to-Point radio network deployments.
FSK modulation is generated with low-component-count circuitry, and it is
therefore very cost-effective. It is also reasonably insensitive to circuit
linearity and can therefore be multiplied to higher frequencies without
degradation. This in turn
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enables a range of high frequency millimeter wave bands to be supported with
inexpensive circuitry. This technology is also quite suitable for high-volume
manufacturing.
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P-Com's Point-to-Point and Spread Spectrum microwave radios comprise three
primary assemblies: the IDU, the ODU and the antenna. The IDU houses the digital
signal processing and the modem functions, and interfaces to the ODU via a
single coaxial cable. The ODU, a radio frequency (RF) enclosure, establishes the
specific transmit and receive frequencies and houses the proprietary P-Com
frequency converter. The antenna interfaces directly to the ODU via a
proprietary P-Com wave guide transition technology. The following diagram
illustrates a typical P-Com Tel-Link(R) point-to-point radio system:
[GRAPH APPEARS HERE]
We believe our millimeter wave technology is significantly different from
that contained in most conventional systems. When transmitting, the Company's
IDU sends an already-modulated, IF transmit signal to the ODU where it is
received by the IF processor, routed to the transmit converter and mixed with a
synthesized frequency source. This signal is then amplified and passed through
to the Company's proprietary frequency converter to establish the appropriate
millimeter wave frequency. The signal is then routed to the antenna for
transmission to the millimeter wave radio system at the receiving end. At the
receiving end, the incoming signal is routed to the frequency converter and
mixed in the down converter with the same frequency source that was used when
transmitting. The signal is passed through the same IF processor to the IDU
where it is demodulated and sent to the end-user's equipment.
Our spread spectrum products use biphase shift keying (BPSK), minimal shift
keying (MSK), quadrature phase shift keying (QPSK) or quadrature amplitude
modulation (QAM) in the IDU. This signal is up converted into a microwave
frequency in the ODU, or in the case of some products, a single, stand- alone
terminal can be installed indoors or outdoors. This signal is then routed to the
antenna to be transmitted. The receiving antenna captures the signal power and
routes it to the ODU. The ODU down-converts the signal to be demodulated in the
IDU.
P-Com's architecture is designed to achieve reliability, cost, installation
and maintenance benefits over conventional approaches. The Company employs a
common architecture in the ODU for all stages of the system other than the
frequency converter used to establish the millimeter wave frequency at which the
system operates. In contrast, conventional millimeter wave systems often use
different designs for several components of the ODU for each different frequency
band. Third, the final transmit and receive frequencies are electronically
tunable either from the IDU or from a remote location using a network management
system. In contrast, many conventional approaches employ a Gunn oscillator to
generate the transmit millimeter wave frequency source and a second Gunn
oscillator to receive the millimeter wave transmission from the remote end.
These devices must be manually tuned and adjusted to achieve proper operation.
The Company believes that the Gunn oscillator technology that is typically used
in conventional approaches is inherently less reliable than P-Com's proprietary
frequency converter technology. Finally, in P-Com's systems, the IDU and ODU are
connected with a single coaxial cable, in contrast to many conventional systems
that require multiple cable connections.
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P-Com's Point-to-Multipoint radios take advantage of all the existing
technologies, and provide further software configurable options. The system is
comprised of Base Station equipment transmitting to many Remote Terminals within
a sector. This "downlink" carries ATM cells over the air. The return, or up-link
from the Remote to the Base Station, can operate in either FDMA or TDMA mode.
This gives the network service provider the option of selecting the most
efficient transmission method for the type of traffic to be carried. FDMA is
efficient for constant bit rate, high-capacity traffic, while TDMA is more
suitable for fractional rate, or bursty type data. The system can uniquely
operate concurrently in both modes within the sector thereby providing the
network access operator the flexibility to design systems that uniquely match
the specific traffic profiles within individual sectors.
The transport of ATM cells over the air allows multimedia transmission to
be supported, including voice, data, fax, IP, Frame Relay, 10 BaseT, and many
other services.
The modulation of each carrier can also be software configured from 4-level
to 16- or 64-level QAM, as well as QPSK. This provides the network provider with
the capability to best match the capacity demands of customers with the range
trade-off of each modulation level. Such flexibility enables operators to
optimally use the available spectrum..
The modular design of this Point-to-Multipoint system allows the user to
start with a low capacity installation, and then by plugging cards into the
sector IDU, to increase the number of carriers, and hence capacity, within the
sector. This is achieved without the duplication of any of the more expensive
microwave ODU equipment.
All of these innovations result in a highly flexible, yet cost-effective,
Point-to-Multipoint system that enables network system providers to optimize
spectrum utilization, and correspondingly, revenue generation.
Research And Development
The Company has a continuing research and development program in order to
enhance its existing systems and related software tools and to introduce new
systems. The Company invested approximately $32.4 million, $38.9 million and
$27.9 million in 1999, 1998 and 1997, respectively, in research and development
efforts and expects to continue to invest significant resources in research and
development, including new product development and acquisitions.
The Company's research and development efforts can be classified into two
distinct efforts: (1) increasing the functionality of its point-to-point and
point-to-multipoint radio systems under development by adding additional
frequencies and capacities to its product portfolio, modifying its network
management system software offering, and developing other advancements to its
radio systems under development, and (2) integrating new functionality to extend
the reach of its products into the customers' networks, such as access
technology which allows the customer to manage telecommunications services at
its site and integrate voice, data, video and facsimile in one offering. There
can be no assurance that current efforts will result in new product
introductions or modifications to existing products. The wireless
communications market is subject to rapid technological change, frequent new
product introductions and enhancements, product obsolescence, changes in end-
user requirements and evolving industry standards. The Company's ability to be
competitive in this market will depend in significant part upon its ability to
develop successfully, introduce, and sell new systems and enhancements and
related software tools on a timely and cost effective basis that respond to
changing customer requirements. The Company has experienced and may continue to
experience delays from time to time in completing development and introduction
of new systems, and enhancements or related software tools. There can be no
assurance that errors will not be found in the Company's systems after
commencement of commercial shipments, which could result in the loss of or delay
in market acceptance. The inability of the Company to introduce in a timely
manner new systems, enhancements or related software tools that contribute to
sales could have a material adverse effect on the Company's business, financial
condition and results of operations.
Sales And Marketing
P-Com's sales and marketing efforts are headquartered in the Company's
executive offices in Campbell, California. The Company has sales and customer
support facilities in the United Kingdom and Germany that serve as bases for the
European market. Internationally, the Company uses a variety of sales channels,
including system providers, OEMs, dealers and local agents, as well as selling
directly to its customers. The Company also has sales offices or personnel
located in China, Singapore, France and Poland. In addition, the Company has
established agent relationships in numerous other countries in the Asia/Pacific
region, the mid-East, South America, and Europe. In the United States, the
Company utilizes both direct sales and OEM channels.
Typically, our sales process commences with the solicitation of bids by
prospective customers. If selected to proceed further, the Company may provide
systems for incorporation into system trials, or may proceed directly to
contract negotiations. When system trials are required and successfully
completed, the Company then negotiates a contract with the customer to set
technical and commercial terms of sale. These terms of sale govern the purchase
orders issued by the customer as the network is deployed.
The Company believes that due to the complexity of its radio systems, a
high level of technical sophistication is required on the part of the Company's
sales and marketing personnel. In addition, the Company believes that customer
service is fundamental to its success and potential for follow-on business. New
customers are provided engineering assistance for installation of the first
units as well as varying degrees of field training depending upon the customer's
technical aptitude. All customers are provided telephone support via a 24-hour
customer service help desk. The Company's customer service efforts are
supplemented by its system providers.
The Company believes that it must continue to expand its sales and
marketing organization worldwide. Any significant sales growth will be dependent
in part upon the Company's expansion of its marketing, sales and customer
support capabilities which will require significant expenditures to build the
necessary infrastructure.
Competition
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The worldwide wireless communications market is very competitive. P-Com's
wireless-based radio systems compete with other wireless telecommunications
products and alternative telecommunications transmission media, including copper
and fiber optic cable. The Company has experienced increasing competition
worldwide from a number of leading telecommunications companies that offer a
variety of competitive products and services, including Alcatel Network Systems,
Spectra Point, Floware, Digital Microwave, Ericsson, Harris-Farinon Division,
Nokia, Nortel/BNI, SIAE, Hughes Network Systems, and Western Multiplex
Corporation, many of which have substantially greater installed bases, financial
resources and production, marketing, manufacturing, engineering and other
capabilities than P-Com. 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, such as DSL. The
Company may also face competition in the future from new market entrants
offering competing technologies. The Company's results of operations may depend
in part upon the extent to which these customers which choose to rely on
wireless strategies elect to purchase from outside sources rather than develop
and manufacture their own radio systems. There can be no assurance that such
customers will rely on or expand their reliance on the Company as an external
source of supply for their radio systems. The principal elements of competition
in the Company's market, and the basis upon which customers may select the
Company's systems, include price, performance, software funtionality, and
ability to meet delivery requirements and customer service and support.
Recently, certain of the Company's competitors have announced the introduction
of competitive products, including related software tools, and the acquisition
of other competitors and competitive technologies. The Company expects its
competitors to continue to improve the performance and lower the price of their
current products, and to introduce new products or new technologies that provide
added functionality and other features. New product introductions and
enhancements by the Company's competitors could cause a significant decline in
sales or loss of market acceptance of the Company's systems or intense price
competition, or make the Company's systems or technologies obsolete or
noncompetitive. The Company has experienced significant price competition and
expects such price competition to intensify, which may materially adversely
affect its gross margins and its business, financial condition and results of
operations. The Company believes that to be competitive, it will continue to be
required to expend significant resources on, among other items, new product
development and enhancements. In marketing its systems, the Company will face
competition from vendors employing other technologies that may extend the
capabilities of their competitive products beyond their current limits, increase
their productivity or add other features. There can be no assurance that the
Company will be able to compete successfully in the future.
Because network services provided by the Company are provided primarily to
the same companies who are customers of the Company's wireless-based radio
systems, competitors in this market segment include some of the same companies
already discussed above. Competition for network services also is provided by a
number of smaller companies that specialize in providing such services.
Government Regulation
Radio communications are subject to extensive regulation by the United
States and foreign laws and 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. Each country has a different regulatory
process. Historically, in many developed countries, the limited availability of
frequency spectrum has inhibited growth of wireless telecommunications networks.
In order for the Company to operate in a foreign jurisdiction, it must obtain
regulatory approval for its systems and comply with different regulations in
each jurisdiction. Regulatory bodies worldwide are continuing the process of
adopting new standards for wireless communication products. The delays inherent
in this governmental approval process may cause the cancellation, postponement
or rescheduling of the installation of communications systems by the Company and
its customers, which in turn may have a material adverse effect on the sale of
systems by the Company to such customers.
The failure to comply with current or future regulations or changes in the
interpretation of existing regulations could result in suspension or cessation
of operations. Such regulations or such changes could require the Company to
modify its products and incur substantial costs to comply with such time-
consuming regulations and changes. In addition, the Company is also affected to
the extent that domestic and international authorities regulate the allocation
and auction of the radio frequency spectrum. Equipment to support new services
can be marketed only if permitted by suitable frequency allocations, auctions
and regulations, and the process of establishing new regulations is complex and
lengthy. To the extent PCS operators and others are delayed in deploying these
systems, the Company could experience delays in orders. Failure by the
regulatory authorities to allocate suitable frequency spectrum could have a
material adverse effect on the Company's business, financial condition and
results of operations. 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. These delays could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
The regulatory environment in which the Company operates is subject to
significant change. Regulatory changes, which are affected by political,
economic and technical factors, could significantly impact the Company's
operations by restricting development efforts by the Company's customers, making
current systems obsolete or increasing the opportunity for additional
competition. Any such regulatory changes, including changes in the allocation of
available spectrum, could have a material adverse effect on the Company's
business and results of operations. The Company might deem it necessary or
advisable to modify its systems to operate in compliance with such regulations.
Such modifications could be extremely expensive and time consuming.
9
<PAGE>
Intellectual Property
The Company relies on a combination of patents, trademarks, trade secrets,
copyrights and a variety of other measures to protect its intellectual property
rights. The Company currently holds eight U.S. patents. The Company generally
enters into confidentiality and nondisclosure agreements with its service
providers, customers and others, and attempts to limit access to and
distribution of its proprietary rights. The Company also enters into software
license agreements with its customers and others. However, there can be no
assurance that such measures will provide adequate protection for the Company's
trade secrets or other proprietary information, that disputes with respect to
the ownership of its intellectual property rights will not arise, that the
Company's trade secrets or proprietary technology will not otherwise become
known or be independently developed by competitors or that the Company can
otherwise meaningfully protect its intellectual property rights. There can be
no assurance that any patent owned by the Company will not be invalidated,
circumvented or challenged, that the rights granted thereunder will provide
competitive advantages to the Company or that any of the Company's pending or
future patent applications will be issued with the scope of the claims sought by
the Company, if at all. Furthermore, there can be no assurance that others will
not develop similar products or software, duplicate the Company's products or
software or design around the patents owned by the Company or that third parties
will not assert intellectual property infringement claims against the Company.
A variety of third parties have alleged that the Cylink Wireless Group's
products may be infringing their intellectual property rights. In addition,
there can be no assurance that foreign intellectual property laws will
adequately protect the company's intellectual property rights abroad. The
failure of the Company to protect its proprietary rights could have a material
adverse effect on its business, financial condition and results of operations.
Litigation may be necessary to enforce the Company's patents, copyrights
and other intellectual property rights, to protect the Company's trade secrets,
to determine the validity of and scope of the proprietary rights of others or to
defend against claims of infringement or invalidity. Such 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. There can be no assurance that infringement, invalidity, right to
use or ownership claims by third parties or claims for indemnification resulting
from infringement claims will not be asserted in the future or that such
assertions will not materially adversely affect the Company's business,
financial condition and results of operations. If any claims or actions are
asserted against the Company, the Company may seek to obtain a license under a
third party's intellectual property rights. There can be no assurance, however,
that a license will be available under reasonable terms or at all. In addition,
should the Company decide to litigate such claims, such litigation could be
extremely expensive and time consuming and could materially adversely affect the
Company's business, financial condition and results of operations, regardless of
the outcome of the litigation.
Employees
As of December 31, 1999, P-Com had a total of 901 employees, including 489
in Operations, 133 in Research and Development, 87 in Sales and Marketing, 23 in
Quality Assurance, and 169 in Administration. P-Com believes our future results
of operations will depend in large part on our ability to attract and retain
highly skilled employees. None of the Company's employees are represented by a
labor union, and we have not experienced any work stoppages.
10
<PAGE>
ITEM 2. PROPERTIES.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Location of Leased Functions Square Footage Date
Facility (1) Lease Expires
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HEADQUARTERS Administration
Sales/Customer Support 61,000 September 2005
Campbell, CA Engineering
USA Manufacturing
- ----------------------------------------------------------------------------------------------
Campbell, CA Manufacturing 25,000 September 2002
- ----------------------------------------------------------------------------------------------
San Jose, CA Warehouse 34,000 September 2000
- ----------------------------------------------------------------------------------------------
Redditch, England Sales/Customer Support 5,500 June 2005
- ----------------------------------------------------------------------------------------------
Watford, England Research/Development 7,500 April 2008
- ----------------------------------------------------------------------------------------------
Redditch, England Warehouse 6,800 September 2004
- ----------------------------------------------------------------------------------------------
Administration
Vienna, VA Sales/Customer Support 15,000 April 2002
- ----------------------------------------------------------------------------------------------
Sterling, VA Administration 15,000 September 2000
- ----------------------------------------------------------------------------------------------
Orange, CA Warehouse 3,400 April 2000
- ----------------------------------------------------------------------------------------------
Administration
Northants, England Sales/Customer Support 5,290 August 2011
- ----------------------------------------------------------------------------------------------
Administration
Essex, England Sales/Customer Support 8,000 September 2007
- ----------------------------------------------------------------------------------------------
Administration
Sales/Customer Support
Engineering
Fair Lawn, NJ Manufacturing 43,700 June 2005
- ----------------------------------------------------------------------------------------------
Frankfurt, Germany Warehouse/Sales 11,000 September 2000
and Customer Support
- ----------------------------------------------------------------------------------------------
Melbourne, Florida Research/Development 36,250 June 2001
- ----------------------------------------------------------------------------------------------
Beijing, China Sales/Customer Support 3,500 March 2000
- ----------------------------------------------------------------------------------------------
Mexico City, Mexico Sales/Customer Support 4,050 Month to Month
Administration
- ----------------------------------------------------------------------------------------------
Rome, Italy (2) Sales/Customer Support 27,000 October 2001
Engineering
Manufacturing
- ----------------------------------------------------------------------------------------------
Rome, Italy (2) Warehouse 2,000 June 2001
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) All locations support product sales except Vienna, VA; Sterling, VA;
Northants, England; and Essex, England which support service sales.
(2) Leased properties located in Rome, Italy pertain to the operations of
Technosystem, which was sold in February 2000. Leases related to these
properties were assumed by the buyer at the time of the sale.
P-Com Italia owns and maintains its corporate headquarters in Tortona,
Italy. This facility, approximately 36,000 square feet, conducts design, test,
manufacturing, mechanical and warehouse functions. P-Com Italia also maintains a
sales and sales support facility in France. The French sales and sales support
facility is approximately 950 square feet.
Cemetel S.p.A. owns and maintains its corporate headquarters in Carsoli,
Italy. This facility, approximately 28,800 square feet, contains corporate,
administration, sales, customer support, engineering and warehousing facilities.
The Company divested Cemetel S.p.A. in February 2000.
The Company's facilities are fully utilized. The Company believes that
these facilities are adequate to meet its current and foreseeable requirements
or that suitable additional or substitute space will be available as needed.
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
State Actions
In September and October 1998, several putative class action complaints
were filed in the Superior Court of California, County of Santa Clara, on
behalf of P-Com stockholders who purchased or otherwise acquired its Common
Stock between April 1997 and September 11, 1998. The plaintiffs allege various
state securities laws violations by P-Com and certain of its officers and
directors. The complaints seek unquantified compensatory, punitive and other
damages, attorneys' fees and injunctive and/or equitable relief.
On December 3, 1998, the Superior Court of California, County of Santa
Clara, entered an order consolidating all of the above complaints. On January
15, 1999, the plaintiffs filed a consolidated amended class action complaint.
Although the litigation is being conducted actively, it is still at an
early stage and the Company is unable to speculate as to ultimate outcomes.
However, the Company believes the claims are without merit and intends to defend
against them vigorously. An unfavorable outcome could have a material adverse
effect on our business, prospects, financial condition and results of
operations. Even if all of the litigation is resolved in our 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 our
business, prospects, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The executive officers and directors of the Company, their ages as of March
29, 2000, and their positions and their backgrounds are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
George P. Roberts......................................... 67 Chairman of the Board and Chief Executive Officer
James J. Sobcazk.......................................... 58 President and Chief Operating Officer, Director
Robert E. Collins......................................... 53 Chief Financial Officer, Vice President
John R. Wood.............................................. 44 Senior Vice President, Advanced Technologies
Brian Josling............................................. 57 Director
John A. Hawkins........................................... 39 Director
M. Bernard Puckett........................................ 54 Director
</TABLE>
12
<PAGE>
Background
The principal occupations of each executive officer and director of the
Company for at least the last five years are as follows:
Mr. Roberts is a founder of the Company and has served as Chief Executive
Officer and Director since October 1991. From October 1991 through December
1996, Mr. Roberts served as President of the Company. Since September 1993, he
has also served as Chairman of the Board of Directors.
Mr. Sobczak has served as President and Chief Operating Officer as of
September 1999 and as a Director of the Company since April 1997. From 1991 to
September of 1999 served as the President of Telecommunications Education and
Research Network, Inc. ("TERN"), a non-profit company that manages a broadband
network providing research and education support to over 35 universities.
Mr. Collins has served as Vice President and Chief Financial Officer as of
April 1999. From 1998-1999 he served as Vice President and Chief Financial
Officer of Bell Sports, a major manufacturer of bicycle and auto racing helmets.
From 1995 to 1998 Mr. Collins was Vice President and Chief Financial Officer of
Zilog, Inc. a semiconductor company.
Mr. Wood was appointed Senior Vice President of Advanced Technologies of
the Company in January 1997. From April 1993 to January 1997, Mr. Wood served as
Vice President, Engineering for the Company.
Mr. Josling has served as Director of the Company since September 1999.
From 1994 to present, he serves as Chairman of the Board and Chief Technology
Officer of Aval Communiations, a telecommunications corporation, and also serves
as Corporate Director for BC Rail Properties, Ltd, The Angus Reid Group, MK
Telecom Network, Inc.
Mr. Puckett has served as a Director of the Company since May 1994. From
June 1995 to January 1996, he was President and Chief Executive Officer of
Mobile Telecommunication Technologies Corp. ("Mtel"), a telecommunications
corporation. From January 1994 to May 1995, Mr. Puckett was President and Chief
Operating Officer of Mtel.
Mr. Hawkins has served as a Director of the Company since September 1991.
Since August 1995, Mr. Hawkins has been a General Partner of Generation Capital
Partners, L.P., a private equity firm. From May 1992 to July 1995, he was a
general partner of certain venture capital funds associated with Burr, Egan,
Deleage & Co., a venture capital company.
Board Committees and Meetings
The Board of Directors held ten (10) meetings and acted by unanimous
written consent 18 times during the fiscal year ended December 31, 1999 (the
"1999 Fiscal Year"). The Board of Directors has an Audit Committee and a
Compensation Committee. Each director attended or participated in 75% or more of
the aggregate of (i) the total number of meetings of the Board of Directors and
(ii) the total number of meetings held by all committees of the Board on which
such director served during the portion of 1999.
The Audit Committee currently consists of two directors, Mr. Josling and
Mr. Puckett, and is primarily responsible for approving the services performed
by the Company's independent auditors and reviewing their reports regarding the
Company's accounting practices and systems of internal accounting controls. The
Audit Committee held four (4) meetings during 1999.
The Compensation Committee currently consists of two directors, Mr. Hawkins
and Mr. Puckett, and is primarily responsible for reviewing and approving the
Company's general compensation policies and setting compensation levels for the
Company's executive officers. The Compensation Committee also has the exclusive
authority to administer the Company's Employee Stock Purchase Plan and the
Company's 1995 Stock Option/Stock Issuance Plan and to make option grants
thereunder. The Compensation Committee held one (1) meetings and acted by
unanimous written consent 8 times during 1999.
Director Compensation
Non-employee board members do not receive cash compensation for their
services as directors.
Under the Automatic Option Grant Program contained in the Company's 1995
Stock Option/Stock Issuance Plan (the "1995 Plan"), each individual who first
joins the Board as a non-employee director any time after February 1, 1996 will
receive, at the time of such initial election or appointment, an automatic
option grant to purchase 40,000 shares of Common Stock,
13
<PAGE>
provided such person has not previously been in the Company's employ. In
addition, on the date of each annual stockholders meeting, each individual who
continues to serve as a non-employee Board member, whether or not such
individual is standing for re-election at that particular Annual Meeting, will
be granted an option to purchase 4,000 shares of Common Stock, provided such
individual has not received an option grant under the Automatic Option Grant
Program within the preceding six months. Each grant under the Automatic Option
Grant Program will have an exercise price per share equal to the fair market
value per share of the Company's Common Stock on the grant date, and will have a
maximum term of ten (10) years, subject to earlier termination should the
optionee cease to serve as a Board of Directors member.
PART II
- -------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is quoted in the Nasdaq National Market under
the symbol PCMS. The following table sets forth the range of high and low
closing sale prices, as reported on the Nasdaq National Market for each quarter
in 1998 and 1999.
At March 13, 2000, the Company had approximately 460 holders of record
of its Common Stock.
<TABLE>
<CAPTION>
Price Range of
Common Stock
High Low
---- ---
<S> <C> <C>
Year Ended December 31, 1998
First Quarter $21.13 $15.56
Second Quarter 20.50 8.88
Third Quarter 8.81 2.38
Fourth Quarter 4.38 2.50
Year Ended December 31, 1999
First Quarter $10.38 $ 3.31
Second Quarter 7.72 3.75
Third Quarter 8.00 3.69
Fourth Quarter 10.00 4.56
</TABLE>
Recent Sales of Unregistered Securities
On December 22, 1998, the Company issued to Castle Creek Technology
Partners LLC, Capital Ventures International and Marshall Capital Management,
Inc., 5,500, 5,000, and 4,500 shares, respectively, of its Series B Preferred
Stock and warrants to purchase 455,494, 414,086, and 372,677 shares,
respectively, of Common Stock for an aggregate purchase price of $15,000,000.
The conversion price of the Series B Preferred Stock is equal to the lower of
$5.46 per share or 101% of the lowest three-day average closing bid prices for
the Common Stock during the fifteen consecutive day trading period immediately
prior to such conversion. The sale was arranged by Paine Webber Incorporated
which received a placement fee. The Series B Prefered Stock was issued in a
non-public offering pursuant to transactions exempt under section 4(2) of the
Securities Act.
On June 22, 1999, the State of Wisconsin Investment Board purchased
5,034,000 shares of our Common Stock for $3.97 per share as part of a private
placement in which other, unaffiliated investors purchased an additional
$20,000,000 of Common Stock at the same price and on the same terms. The price
was calculated as 92.5% of the mean averaged of the closing sale prices of our
Common Stock for the 15 consecutive trading days ended on and including June 17,
1999.
To date, the Company has not paid any cash dividends on shares of its
Common Stock. The Company currently anticipates that it will retain any
available funds for use in the operation of its business, and does not
anticipate paying any cash dividends in the foreseeable future. In addition, the
terms of several of the Company's agreements prohibit the Company from paying
any dividends without the prior approval of the other parties named therein.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995
(restated)(2)
---------- ---------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales:
Product $ 116,409 $118,948 $169,453 $101,853 $52,856
Service 40,470 43,597 30,157 19,100 11,607
--------- -------- -------- -------- -------
Total sales 156,879 162,545 199,610 120,953 64,463
--------- -------- -------- -------- -------
Cost of sales:
Product 107,378 93,829 96,948 60,362 29,949
Service 28,274 30,777 18,968 13,696 7,507
--------- -------- -------- -------- -------
Total cost of sales 135,652 124,606 115,916 74,058 37,456
--------- -------- -------- -------- -------
Gross profit 21,227 37,939 83,694 46,895 27,007
--------- -------- -------- -------- -------
Operating expenses:
Research and development 32,431 38,882 27,854 20,163 12,284
Selling and marketing 17,135 19,224 12,795 7,525 4,837
General and administrative 25,179 24,260 11,029 10,178 5,573
Goodwill amortization 6,547 5,023 1,380 105 --
Restructuring charges 3,300 4,332 -- -- --
Acquired in-process research and development (2) -- 15,442 -- -- --
--------- -------- -------- -------- -------
Total operating expenses 84,592 107,163 53,058 37,971 22,694
--------- -------- -------- -------- -------
Income (loss) from operations (63,365) (69,224) 30,636 8,924 4,313
Interest expense (8,175) (8,652) (1,811) -- --
Other income (expense), net (2,537) 1,446 1,988 906 167
--------- -------- -------- -------- -------
Income (loss) from continuing operations before income taxes and
extraordinary item (74,077) (76,430) 30,813 9,830 4,480
Provision (benefit) for income taxes 1,407 (11,501) 11,018 956 761
--------- -------- -------- -------- -------
Income (loss) from continuing operations before extraordinary item (75,484) (64,929) 19,795 8,874 3,719
--------- -------- -------- -------- -------
Discontinued Operations (2):
Loss from operations (13,903) (2,869) (904) -- --
Loss on disposal (26,901) -- -- -- --
--------- -------- -------- -------- -------
(40,804) (2,869) (904) -- --
--------- -------- -------- -------- -------
Extraordinary gain on retirement of notes 13,239 5,333 -- -- --
--------- -------- -------- -------- -------
Net income (loss) $(103,049) $(62,465) $ 18,891 $ 8,874 $ 3,719
--------- -------- -------- -------- -------
Net income (loss) applicable to Common Stockholders:
Net income (loss) $(103,049) $(62,465) $ 18,891 $ 8,874 $ 3,719
Charge related to Preferred Stock discount (1,839) -- -- --
Loss on conversion of Preferred Stock to Common Stock (18,521) -- -- -- --
--------- -------- -------- -------- -------
Net income (loss) applicable to Common Stockholders $(121,570) $(64,304) $ 18,891 $ 8,874 $ 3,719
========= ======== ======== ======== =======
Basic income (loss) per share (1):
Income (loss) from continuing operations $ (1.32) $ (1.50) $ 0.47 $ 0.23 $ 0.11
Loss from discontinued operations (0.72) (0.07) (0.02) -- --
Extraordinary gain on retirement of notes 0.23 0.12 -- -- --
Charges related to Preferred Stock discount and Loss on
Conversion of Preferred Stock (0.32) (0.04) -- -- --
--------- -------- -------- -------- -------
Net income (loss) per share applicable to Common Stockholders $ (2.13) $ (1.49) $ 0.45 $ 0.23 $ 0.11
========= ======== ======== ======== =======
Diluted income (loss) per share (1):
Income (loss) from continuing operations $ (1.32) $ (1.50) $ 0.44 $ 0.22 $ 0.11
Loss from discontinued operations (0.72) (0.07) (0.02) -- --
Extraordinary gain on retirement of Notes 0.23 0.12 -- -- --
Charges related to Preferred Stock discount and Loss on
Conversion of Preferred Stock (0.32) (0.04) -- -- --
--------- -------- -------- -------- -------
Diluted net income (loss) per share applicable to common
stockholders $ (2.13) $ (1.49) $ 0.42 $ 0.22 $ 0.11
========= ======== ======== ======== =======
Shares used in per share computations:
Basic 56,995 43,254 42,175 38,762 32,645
========= ======== ======== ======== =======
Diluted 56,995 43,254 44,570 40,607 34,853
========= ======== ======== ======== =======
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 11,629 $ 29,241 $ 88,145 $ 42,226 $ 8,871
Working capital 31,984 78,967 196,279 90,811 38,473
Total assets 213,640 315,217 305,521 155,452 62,964
Long-term debt 39,858 97,769 101,690 914 491
Mandatorily Redeemable Preferred Stock -- 13,559 -- -- --
Mandatorily Redeemable Common Stock Warrants -- 1,839 -- -- --
Retained earnings (accumulated deficit) (148,973) (45,924) 18,380 (511) (9,360)
Stockholders' equity 89,215 99,409 148,297 112,479 47,258
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine share and per share amounts.
(2) The financial information presented in this Annual Report on Form 10-K has
been restated to include (a) the operating results of Control Resources
Corporation (CRC), which was acquired in a pooling-of-interests transaction
on May 29, 1997; (b) RT Masts Limited (RT Masts) and Telematics, Inc.
(Telematics), which were acquired in pooling-of-interests transactions on
November 27, 1997, (c) to revise the accounting treatment of certain
contracts with a major customer, the net effect of which was to reduce 1998
revenue and pretax income by $7.1 million and to reduce the first quarter
of 1999 revenue and pretax income by $0.9 million; and (d) the decision to
report the divestiture of its wholly owned Italian subsidiary Technosystem
as a discontinued operation resulting in this business segment no longer
being included in the Company's financial statements on a line item basis,
but instead shown separately as a discontinued operation. See Notes 2, 3
and 8 to the Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which involve risks and
uncertainties. 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 Factors Affecting the Company"
contained in this Item 7 and elsewhere in this Annual Report on Form 10-K.
Overview
We supply equipment and services for access to worldwide telecommnications
and broadcast networks. We founded the Company in April 1991 to develop,
manufacture, market and sell millimiter wave radio systems for wireless
networks. Currently, we ship 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. The Company also provides software and related services for
these products. Additionally, we offer turnkey microwave relocation services,
engineering, path design, program management, installation and maintenance of
communication systems to network service providers. Our point-to-multipoint
radio system for use in the telecommunications industry has reached the
production stage and shipments resulted in production revenues beginning in the
fourth quarter of 1999. We anticipate that our ability to generate future
revenues and profits will depend in large part on the success of the point-to-
multipoint product line.
The net loss for 1999 included unusual charges of $36.5 million which were
related to our Product segment. The net loss in 1998 included restructuring and
other charges of $26.6 million and acquired in-process research and development
charges of approximately $15.4 million related to the acquisition of the assets
of the Cylink Wireless Group from Cylink Corporation. The net losses in 1999 and
1998 were 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 in Asia. We experienced a sharp decrease in sales
beginning in September 1998, and began a cost reduction program shortly
thereafter.
The Company amended, and pursuant to those amendments has revised, its 1998
and first quarter of 1999 financial statements 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. As previously disclosed, the Company determined
that a related Original Equipment Manufacturer ("OEM") agreement which provided
for subsequent payments of $8 million to this customer, 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 of this
restatement was to reduce 1998 revenue and increase pretax loss by $7.1 million
and to reduce 1999 revenue and increase 1999 pretax loss by $0.9 million.
In March 1998, the Company recorded a charge for purchased in-process
research and development (IPR&D) in a manner consistent with widely recognized
appraisal practices at the date of acquisition. In the fourth quarter 1998 the
Company became aware of new information which brought into question the
traditional appraisal methodology and revised its purchase price allocation
based upon a more current and preferred methodology. As a result, the 1998
first quarter charge for acquired IPR&D was decreased from $33.9 to $15.4
million. The result of this restatement is a decrease of $18.5 million in IPR&D
charge with a corresponding increase in goodwill and other intangible assets.
16
<PAGE>
Years Ended 1999, 1998 and 1997
Sales. Sales consist of revenues from radio systems and service offerings.
In 1999, 1998 and 1997, sales were approximately $156.9 million, $162.5
million, and $199.6 million, respectively. The 3.5% decrease in sales from 1998
to 1999 was primarily due to the continued downturn in the telecommunications
equipment market.
The 18.6% decrease in sales from 1997 to 1998 was primarily due to the
market slowdown for our Tel-Link product line and a downturn and slowdown in the
telecommunication equipment industry segment, due in particular to the economic
turmoil in Asia and surplus capacity in the industry. During 1998, the Tel-Link
product line contributed approximately 58.2% of our total sales, compared to
approximately 77.6% of our total sales in 1997.
Sales to Orange Personal Communications Services accounted for
approximately 20%, 24% and 15% of total sales in 1999, 1998 and 1997,
respectively. Sales to WinStar Communications accounted for approximately 11%
and 11% of total sales in 1999 and 1997. Sales to Bosch Telecom accounted for
approximately 13% of total sales in 1999.
Product sales for 1999 decreased approximately $2.5 million or 2.1% during
the year as compared to a decrease of approximately $50.5 million or 29.8%
during 1998. Product sales represented approximately 74.2%, 73.2% and 84.9% of
sales in 1999, 1998 and 1997, respectively. The decrease in product sales in
1998 was primarily due to the continued slowdown in the telecommunication
equipment industry and declining prices as a result of the Pacific Rim currency
crisis and surplus capacity in the industry.
Service sales for 1999 decreased approximately $3.1 million or 7.2% from
the prior year as compared to an increase of approximately $13.4 million or
44.6% during 1998. Service sales represented 25.8%, 26.8% and 15.1% of total
sales in 1999, 1998 and 1997, respectively. The increase in service sales as a
percentage of total sales in 1998 was primarily due to increased presence in
international markets through acquisitions in the United Kingdom and Italy.
Historically, we have generated a majority of our sales outside of the
United States. During 1999, we generated approximately 30.8% of our sales in the
US and approximately 69.2% internationally. During 1998, we generated 25.6% of
our sales in the US and 74.4% internationally. We expect to continue to generate
a majority of our sales in international markets in the future.
Many of our largest customers use our product and services to build
telecommunication network infrastructures. These purchases are significant
investments in capital equipment and are required for a phase of the rollout in
a geographic area or a market. Consequently, the customer may have different
requirements from year to year and may vary its purchases from us accordingly.
We provide our customers with significant volume price discounts, which
would lower the average selling price of any particular product line as more
units are sold to a given customer. In addition, we expect 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, our ability to
maintain or increase sales will depend upon many factors, including our ability
to increase unit sales volumes of our 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 our more mature products.
Gross Profit. Cost of sales consists primarily of costs related to
materials, labor and overhead, and freight and duty. In 1999, 1998 and 1997,
gross profits were $21.2 million, $37.9 million and $83.7 million, respectively,
or 13.5%, 23.3% and 41.9% of sales, respectively.
In 1999 and 1998, product gross margins were affected by inventory and
other related charges of $21.4 million and $16.9 million, respectively. (See
Restructuring and Other Charges below.) Normalized product gross profit
as a percentage of product sales, not including the effect of the inventory
charges described above, was approximately 27.2%, 33.7% and 41.9% in 1999, 1998
and 1997, respectively. In 1999, the decrease in such normalized product gross
profit percentage was due to manufacturing variances and declining average
selling prices which generated lower margins. In 1998, the decrease in product
gross profit percentage was due to several factors, including a declining
average selling price, changes in the product mix, excess capacity due to the
market slow down, product conversion costs and other manufacturing variances.
Service gross profit as a percentage of service sales was approximately
30.1%, 29.4% and 37.1% in 1999, 1998, and 1997, respectively. The decrease in
service gross profit percentage in 1998 was due to increased price competition
and changes in the service offering mix.
17
<PAGE>
Research and Development. Research and development expenses consist
primarily of costs associated with personnel and equipment. Our research and
development activities include the development of additional frequencies and
varying operating features and related software tools. Our software products
are integrated into our 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.
In 1999, 1998 and 1997, research and development expenses were
approximately $32.4 million, $38.9 million and $27.9 million, respectively. As a
percentage of sales, research and development expenses decreased from 23.9% in
1998 to 20.7% in 1999, primarily due to our point-to-multipoint development
project, which was completed in the fourth quarter of 1999, resulting in reduced
spending for this project as compared to the prior year. The increase in
research and development expenses as a percentage of sales from 14.0% in 1997 to
23.9% in 1998 was primarily due to our sales decline and the significant
investment in research and development to support product development and
services, including the costs associated with new product development due to the
acquisition of the Cylink Wireless Group in March of 1998 and our engineering
efforts to develop a point-to-multipoint product.
Selling and Marketing. Selling and Marketing expenses consist of salaries,
sales commissions, travel expenses, customer service and support expenses and
costs related to advertising and trade shows. In 1999, 1998 and 1997, sales and
marketing expenses were $17.1 million, $19.2 million and $12.8 million,
respectively. As a percentage of sales, selling and marketing expense decreased
from 11.8% in 1998 to 10.9% in 1999, primarily due to a reduction in spending
during 1999. The decrease in actual spending in 1999 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. As a
percentage of sales, selling and marketing expense increased from 6.4% in 1997
to 11.8% in 1998, primarily due to a lower level of sales in 1998 and the
expansion and start-up of our international sales and marketing organization,
including opening sales offices in the United Arab Emirates, Singapore, China,
and Mexico.
General and Administrative. General and administrative expenses consist
primarily of salaries and other expenses for management, finance, accounting,
and legal and other professional services. In 1999, 1998 and 1997, general and
administrative expenses were $25.2 million, $24.3 million and $11.0 million,
respectively. As a percentage of sales, general and administrative expense
increased from 14.9% in 1998 to 16.0% in 1999, primarily due to a charge for
accounts receivable write-offs and reserves of $11.8 million and charges of $3.3
million for the abandonment of one of our leased facilities in Campbell,
California. Additionally, this increase in general and administrative expenses
as a percentage of sales was due in part to a lower level of sales in 1999 as
compared to 1998. As a percentage of sales, general and administrative expense
increased from 5.5% in 1997 to 14.9% in 1998, primarily due to a lower level of
sales in 1998, increased staffing and other costs resulting from our
international expansion and acquisitions, and a $5.4 million increase in
accounts receivable reserves that were charged to general and administrative
expenses as a result of our recording restructuring and other charges in 1998.
Goodwill Amortization. Goodwill represents the excess of the purchase price
over the fair value of the net identifiable assets of acquired companies
accounted for as purchase business combinations. Goodwill is amortized based on
a straight-line basis over the period of expected benefit, ranging from 3 to 20
years. In 1999, 1998 and 1997, goodwill amortization was approximately $6.5
million, $5.0 million, and $1.4 million, respectively. The increase in goodwill
amortization for 1999 as compared to 1998 was due to the Company recording a
full year of amortization expense relating to the acquisition of the assets of
the Cylink Wireless Group on March 28, 1998. The increase in goodwill
amortization from 1997 to 1998 was due to the Company recording a full year of
amortization expense for the acquisitions of and the assets of CSM, a Vienna,
Virginia-based partnership, which was acquired in February 1997 and March 1997,
respectively, and recording nine months of amortization for the acquisition of
the Cylink Wireless Group which took place in March 1998.
The Company is currently evaluating and revising its business plan for the
Cylink Wireless Group, and based on 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 2000.
Restructuring and other Charges. In 1999, we determined that there was a
need to reevaluate our sales forecasts, and to size the business to meet a
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 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.
In 1998, we 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 1998 relating to these initiatives, including 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, we recorded accounts receivable reserves of $5.4 million
and inventory reserves of $16.9 million (including $14.5 million in inventory
write downs related to our existing core business and $2.4 million in other
charges to inventory relating to the elimination of product lines).
The accrued restructuring and other charges and amounts charged against the
accrual as of December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Accrual Additions Expenditures Accrual
At December 31, and Write-offs At December 31,
1998 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Severance and benefits $ 569 $ 300 $ (869) $ -
Facility and fixed asset write-offs 879 3,000 (3,879) -
Goodwill impairment 2,884 - (2,884) -
--------------- --------------- --------------- ---------------
Total restructuring charges 4,332 3,300 (7,632) -
--------------- --------------- --------------- ---------------
Inventory reserve 16,922 15,400 (16,142) 16,180
Non-cancellable purchase commitments reserve - 6,000 (3,053) 2,947
--------------- --------------- --------------- ---------------
Total inventory and other related charges 16,922 21,400 (19,195) 19,127
--------------- --------------- --------------- ---------------
Accounts receivable reserve 5,386 11,800 (7,517) 9,669
--------------- --------------- --------------- ---------------
Total accrued restructuring and other unusual charges $ 26,640 $ 36,500 $ (34,344) $ 28,796
=============== =============== =============== ===============
</TABLE>
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 $58.2 million including acquisition
expenses of $2.5 million. Of the purchase price, $15.4 million was ultimately
assigned to in-process research and development ("IPR&D") and expensed upon the
consummation of the acquisition. In-process research and development had no
alternative use at the date of acquisition and technological feasibility had not
been established.
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<PAGE>
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.
During 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 is not expected to be completed prior to the end of year 2000. The
point-to-point project, discussed above, which was acquired from the Cylink
Wireless Group, was completed during 1998 at an estimated total cost of $2.0
million. The enhanced Airlink projects were completed during 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.
Interest Expense. In 1999, 1998, and 1997, interest expense was $8.2
million, $8.7 million and $1.8 million, respectively. For 1999 and 1998,
interest expense consisted primarily of interest and fees incurred on borrowings
under our bank line of credit, interest on the principal amount of our
subordinated 4 1/4% convertible promissory notes due 2002 (the Notes), equipment
leases, 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, and finance charges related to our receivables purchase
19
<PAGE>
agreements. For 1997, interest expense consisted primarily of interest accrued
on our bank line of credit and equipment lease lines. Given our current lower
debt levels, we expect interest expense to decrease in 2000.
Other income (expense), net. In 1999, other income and expense consists
primarily of the final Cylink Wireless purchase price dispute settlement of
$3.3 million. For 1999, 1998 and 1997, interest income consisted primarily of
interest generated from cash maintained in its interest bearing bank accounts.
In 1999, 1998 and 1997, interest income was $0.6 million, $1.5 million and
$1.5 million, respectively. For 1999, 1998 and 1997, we incurred net other
expenses of $3.2 million, $(0.1) million, and $0.5 million.
Sales contracts negotiated in foreign currencies have been primarily
limited to British Pound Sterling contracts and Italian Lira contracts, and any
balance sheet impact to date due to currency fluctuations in British Pound
Sterling or Italia Lira has been insignificant. We may in the future be exposed
to the risk of foreign currency gains or losses depending upon the magnitude of
a change in the value of a local currency in an international market. We have
entered into foreign currency hedging transactions to reduce exposure to foreign
exchange risks. As of December 31, 1999, we had forward exchange contracts
valued at approximately $3.5 million. The forward contracts generally have
maturities of six months or less.
Discontinued operations. In August 1999, the Company's Board of Directors
decided to divest its broadcast equipment business, Technosystem. 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 1999 Consolidated Balance Sheet,
"net assets of discontinued operations", and in the "discontinued operations"
line of the Consolidated Statements of Operations. The "net assets of
discontinued operations" represents the assets intended to be sold offset by the
liabilities anticipated to be assumed by the buyers of the business.
Extraordinary Item. In December 1999, we exchanged an aggregate of $23.8
million of our Notes for an aggregate of 2,359,000 shares of our Common Stock
with a fair market value of $17.8 million. This transaction resulted in an
extraordinary gain of $6.0 million. In January and February of 1999, we
exchanged an aggregate of $25.5 million of our Notes for an aggregate of
2,792,000 shares of our Common Stock with a fair market value of $18.3 million
and recorded an extraordinary gain of $7.2 million. In December 1998, we
exchanged an aggregate of $14.3 million of our Notes for an aggregate of
2,467,000 shares of our Common Stock with a fair market value of $9.0 million,
which resulted in an extraordinary gain of $5.3 million.
Charge related to preferred stock discount. In 1999 and 1998 we recorded
charges of $18.5 million and $1.8 million, respectively, related to preferred
stock discount increasing the loss attributable to Common Stockholders. In
November 1999, we entered into agreements with the Series B preferred
shareholders to eliminate their redemption rights and their past and future late
registration premiums and penalties in exchange for 220,000 shares of Common
Stock, warrants to purchase 443,000 share of Common Stock, and a $400,000
promissory note convertible (with interest) into Common Stock at a conversion
price of approximately $4.72 per share. As a result of these transactions, we
recorded a charge in 1999 of approximately $6.3 million relating to these
agreements.
In December 1998, we completed a private placement of 15,000 shares of a
newly designated Series B Convertible Participating Preferred stock and warrants
to purchase up to 1,242,000 shares of Common Stock for $15 million. During the
period of conversion of the Series B preferred stock, we recorded a charge for
the accretion of the Series B preferred stock to its redemption value as a
dividend to the holders of the Series B preferred stock. Consequently, the
Company recorded a charge of approximately $1.8 million to its accumulated
deficit in 1998.
In June 1999, we exchanged all 15,000 shares of Series B Convertible
Preferred Stock for 5,135,000 shares of mandatorily redeemable Common Stock. We
also exchanged outstanding mandatorily redeemable warrants to purchase 1,242,000
shares of Common Stock, which were held by the Series B Convertible Preferred
Stockholders, for new warrants with an exercise price of $3.00 per share rather
than $3.47 per share. We recorded a charge in 1999 of approximately $12.2
million resulting from this exchange.
Provision (Benefit) for Income Taxes. The Company's effective tax rates for
1999, 1998 and 1997 were 1.4%, 16.9% and 36.9% respectively. The Company's
effective tax rate is less than the combined federal and state statutory rate
due principally to net operating losses and loss credit carry forwards available
to offset taxable income. 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 originate in the United States.
20
<PAGE>
Liquidity And Capital Resources
Since its inception in August 1991, we have financed our operations and met
our capital requirements through net proceeds of approximately $89.5 million
from our initial and two follow-on public offerings of our Common Stock, two
private placements of Common Stock yielding approximately $43.0 million in
January 2000 and $38.3 million in June 1999, four preferred stock financings
aggregating approximately $32.2 million, including a $13.6 million preferred
stock financing in 1998, Notes with net proceeds of approximately $97.5
million in 1997 and borrowings under bank lines of credit and equipment lease
arrangements.
In 1999, we used approximately $29.4 million of cash in operating
activities, primarily due to the net loss of $103.0 million and the non-cash
gain on exchange of Convertible Notes of $13.2 million offset by non-cash
charges for restructuring and other charges aggregating $36.5 million and the
loss on disposal of discontinued operations of $26.9 million. In addition, the
Company experienced increases in operating cash flow from non-cash depreciation
and amortization, and an increase related to accrued liabilities offset by a
decrease related to accounts receivable.
During 1999, we used approximately $4.7 million in investing activities
primarily for the acquisition of property and equipment offset by proceeds on
sales of property and equipment of $1.4 million.
During 1999, we retired approximately $49.3 million of our 4 1/4%
Convertible Subordinated Notes ("Notes") through the issuance of approximately
5.2 million shares of Common Stock. These non-cash exchanges resulted in an
extraordinary gain of approximately $13.2 million.
In 1999, we generated approximately $17.1 million from financing
activities. We repaid approximately $21.5 million of borrowings under our bank
line of credit and other banking relationships, and received approximately $38.3
million in net proceeds from a private placement of approximately 10.1 million
shares of Common Stock in June.
At December 31, 1999, we had working capital of approximately $32.0
million. In recent years, we have realized most of our sales near the end of
each quarter, resulting in a significant investment in accounts receivable at
the end of the quarter. We expect that our investments in accounts receivable
and inventories will continue to represent a significant portion of working
capital.
Our principal sources of liquidity as of December 31, 1999 consisted of
approximately $11.6 million of cash and cash equivalents. At December 31, 1998,
we had approximately $29.2 million in cash and cash equivalents. At December
31, 1999, we had borrowed or had used as security for letters of credit
approximately $27.0 million under our line of credit, which expired on January
15, 2000. In January 2000, we received approximately $43 million in net
proceeds from a private placement of Common Stock. Approximately $27 million of
the proceeds were used to repay our entire borrowings under the line of credit.
In addition, we entered into a new loan agreement for $12 million. The loan
matures on January 31, 2001, subject to annual renewals. Borrowings under the
line are secured by our cash deposits, receivables, inventory, equipment,
investment property and intangibles. The maximum borrowings under the
agreement will be limited to 85% of eligible accounts receivable, not to
exceed $12 million. We issued the lender warrants to purchase 200,000 shares
of common stock at $5.71 per share. The warrants, which are immediately
exercisable and are subject to anti-dilution clauses, expire on January 31,
2005.
21
<PAGE>
In addition to the revolving line of credit, our foreign subsidiaries have
lines of credit available from various financial institutions with interest
rates ranging from 8% to 12%. At December 31, 1999, $1.1 million had been drawn
down under these facilities. Subsequent to our year-end these liabilities
were assumed by the purchasers of Technosystems upon the consummation of its
disposition.
At present, we do not have any material commitments for capital equipment
purchases. However, our future capital requirements will depend upon many
factors, including the repayment of our debt, the development of new radio
systems and related software tools, potential acquisitions, the extent and
timing of acceptance of our radio systems in the market, requirements to
maintain adequate manufacturing facilities, working capital requirements for our
acquired entities, the progress of our research and development efforts,
expansion of our marketing and sales efforts, our results of operations and the
status of competitive products. We believe that cash and cash equivalents on
hand, cash flow from operations and funds available, if any, from our loan
agreement are adequate to fund our operations in the ordinary course of business
for at least the next twelve months. There can be no assurance, however, that
we will not require additional financing prior to such date to fund its
operations.
We have in the past and may from time to time in the future sell its
receivables, as part of an overall customer financing program, with immaterial
recourse to the Company. There can be no assurance that we will be able to
locate parties to purchase such receivables on acceptable terms, or at all. To
the extent that our financial resources are insufficient to fund our activities
and to repay our debts, additional funds will be required. There can be no
assurance that any additional financing will be available to us on acceptable
terms, or at all, when required by us. If additional funds are raised by issuing
equity securities, further dilution to the existing stockholders will result. If
adequate funds are not available, we may be required to delay, scale back or
eliminate one or more of its research and development or manufacturing programs,
cease our acquisition activities or obtain funds through arrangements with
partners or others that may require the Company to relinquish. Accordingly, the
inability to obtain such financing could have a material adverse effect on our
business, financial condition and results of operations. For risk factors
associated with our future capital requirements, please see "Rapid Technological
Change - Additional Capital Requirements."
22
<PAGE>
Acquisitions
On March 28, 1998, we acquired substantially all of the assets, and on
April 1, 1998, the accounts receivable, of the Wireless Communications Group of
Cylink Corporation (the Cylink Wireless Group). The acquisition was accounted
for as a purchase business combination in accordance with Accounting Principles
Board ("APB") Opinion No. 16. Under the purchase method of accounting, the
purchase price was allocated to the net tangible and identifiable intangible
assets acquired and liabilities assumed based on their estimated fair values at
the date of the acquisition with any excess recorded as goodwill. Results of
operations for the Cylink Wireless Group have been included with those of the
Company for periods subsequent to the date of acquisition.
The total purchase price of the acquisition was $58.2 million including
acquisition expenses of $2.5 million. Of the purchase price, $15.4 million was
ultimately assigned to in-process research and development and expensed in
1998. Developed technology is being amortized over the period of the expected
revenue stream of the developed products of approximately four years. The
value of the acquired workforce is being amortized on a straight-line basis
over three years, and the remaining intangibles, including goodwill and core
technology are being amortized on a straight-line basis over ten years.
Amortization expense related to the acquisition of the Cylink Wireless Group
was $5.2 million for 1999 and $3.7 in 1998.
Among the factors considered in determining the amount of the allocation of
the purchase price to in-process research and development were various factors
such as estimating the stage of development of each in-process research and
development 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, such as research projects in areas
supporting products which address the growing third world markets by offering a
new point-to-multi-point product, a faster, less expensive more flexible point-
to-point product, and the development of enhanced Airlink products, consists of
a Voice Extender, Data Metro II, and RLL encoding products.
If none of these projects are successfully developed, the Company's sales
and profitability may be materially adversely affected in future periods.
Additionally, the failure of any particular individual project in process could
impair the value of other intangible assets acquired.
Year 2000 Readiness Disclosure and Euro Compliance
To date, we have not experienced year 2000 problems related to our products or
our external relationships. Accordingly, we do not anticipate incurring
material expenses or experiencing any material operational disruptions as a
result of any year 2000 problems.
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing currencies and the
Euro and adopted the Euro as their common legal currency (the "Euro
Conversion"). The impact of the Euro Conversion was not material to the Company
in 1999. The Company is currently unsure of the future impact that the Euro
Conversion will have, particularly as it relates to its European operations.
However, the Company does not anticipate that the Euro Conversion will have a
material adverse effect on its future business, financial condition, results of
operations, or cash flows.
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:
. new product selection;
. integration of various elements of complex technology;
. timely and efficient implementation of manufacturing and assembly
processes and cost reduction programs;
23
<PAGE>
. development and completion of related software tools, system
performance, quality and reliability of systems;
. development and introduction of competitive systems; and
. 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.
History of Losses
From inception to December 31, 1999, the Company had generated an
accumulated deficit of approximately $149.0 million. The decrease in retained
earnings from $18.4 million at December 31, 1997 to an accumulated deficit of
$149.0 million at December 31, 1999 was due primarily to the net loss of $62.5
million in 1998, as well as a net loss of $103.0 million in 1999.
The net loss in 1999 included a loss on the discontinuation of
Technosystem, S.p.A of $40.8 million and unusual charges of $36.5 million which
were related to the Company's Product Business Segment. The net loss in 1998
included restructuring and other charges of $26.6 million and 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 $805.9 million
(including Technosystem S.p.A and Cemetel S.p. A.) since inception. From
inception in October 1993 through December 31, 1996, sales were $234.1 million
or 29.0% 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 41.8% of total sales to date. Sales of
$235.1 million or 29.2% of total sales were generated in the 18 month period
from July 1, 1998 through December 31, 1999. The decrease in sales during the
18 months ended December 31, 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.
In recent periods, operating expenses increased more rapidly than the
Company had anticipated, and these increases also contributed to net losses.
Customer Concentration
For 1999 and 1998, approximately two hundred customers accounted for
substantially all of the Company's sales. Sales to Orange Personal
Communications Services accounted for approximately 20%, 24% and 15% of total
sales in 1999, 1998 and 1997, respectively. Sales to WinStar Communications
accounted for approximately 11% and 11% of total sales in 1999 and 1997. Sales
to Bosch Telecom accounted for approximately 13% of total sales in 1999. 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
24
<PAGE>
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
involves a significant commitment of senior management, as well as its sales
force and other resources. The sales cycle for its products and services
typically involve technical evaluation and commitment of cash and other
resources and delays often occur. Delays are frequently associated with, among
other things:
. customers' seasonal purchasing and budgetary cycles;
. education of customers as to the potential applications of its
products and services, as well as related product-life cost savings;
. compliance with customers' internal procedures for approving large
expenditures and evaluating and accepting new technologies;
. compliance with governmental or other regulatory standards;
. difficulties associated with customers' ability to secure financing;
. negotiation of purchase and service terms for each sale; and
. 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 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
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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 sales shortfall, a material portion of the
Company's expenses are fixed and difficult to reduce should sales 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:
. new product introductions and enhancements and related costs;
. weakness in emerging-country markets, resulting in overcapacity;
. ability to manufacture and produce sufficient volumes of systems and
meet customer requirements;
. manufacturing efficiencies and costs;
. customer confusion due to the impact of actions of competitors;
. variations in the mix of sales through direct efforts or through
distributors or other third parties;
. 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;
. operating and new product development expenses;
. product discounts;
. accounts receivable collection;
. changes in its pricing or customers' or suppliers' pricing;
. inventory write-downs and obsolescence;
. market acceptance by customers and timing of availability of new
products and services provided by the Company or its competitors;
. acquisitions, including costs and expenses thereof;
. use of different distribution and sales channels;
. fluctuations in foreign currency exchange rates;
. delays or changes in regulatory approval of systems and services;
. warranty and customer support expenses;
. severance costs;
. consolidation and other restructuring costs;
. the pending stockholder class action lawsuit;
. the need for additional financing;
. customization of systems;
. general economic and political conditions; and
. natural disasters.
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 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.
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The Company incurred a net loss for each of the quarters in 1998 and 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
From April 1996 through 1998, 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 and two of these companies, Technosystem
S.p.A. and Cemetel S.p.A. were divested in February, 2000 and the Company is
exploring the possibility of disposing of Control Resources Corporation. The
Company has encountered or expects to encounter the following problems relating
to such transactions:
. difficulty of assimilating operations and personnel of combined
companies;
. potential disruption of ongoing business;
. inability to retain key technical and managerial personnel;
. inability of management to maximize financial and strategic position
through integration of acquired businesses;
. additional expenses associated with amortization of acquired
intangible assets;
. difficulty in maintaining uniform standards, controls, procedures and
policies;
. impairment of relationships with employees and customers as a result
of integration of new personnel;
. risks of entering markets in which it has no or limited direct prior
experience; and
. 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
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.
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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 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 Italy, the
United Kingdom, California, New Jersey, Florida, Virginia, and elsewhere. For a
number of reasons, the Company has in the past experienced and
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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:
. successfully introducing and selling new systems on a timely basis;
. developing new products that incorporate advanced software and other
features that can be sold at higher average selling prices; and
. 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 or fails to
achieve increase sales of new products at a higher average selling price, 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. In 1999, the Company
recorded charges of $11.8 million for accounts receivable write-offs and
reserves. Such difficulties may continue in the future, which could have a
further material adverse effect on its business, financial condition and results
of operations.
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.
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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 and its Geritel facility in Italy in 1996. 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
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.
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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 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 P-Com Italia 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. In February 2000, the Company sold Technosystem S.p.A. and Cemetel
S.p.A. at a significant loss. 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:
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. changes in regulatory requirements;
. costs and risks of localizing systems in foreign countries;
. delays in receiving components and materials;
. availability of suitable export financing;
. timing and availability of export licenses, tariffs and other trade
barriers;
. difficulties in staffing and managing foreign operations, branches and
subsidiaries;
. difficulties in managing distributors;
. potentially adverse tax consequences;
. foreign currency exchange fluctuations;
. the burden of complying with a wide variety of complex foreign laws
and treaties;
. difficulty in accounts receivable collections; and
. 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
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.
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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.
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 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
33
<PAGE>
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.
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
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.
34
<PAGE>
Substantial Amount of Debt
As of December 31, 1999, its total indebtedness including current
liabilities was approximately $124.4 million and its stockholders' equity was
approximately $89.2 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 its debt in the future.
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 3% 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.
ITEM 7A. 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.
35
<PAGE>
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 December 31, 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 December 31, 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. Borrowings under the Company's loan agreement
entered into in January 2000 are subject to interest at the greater of 8% or
prime rate plus 2%. An increase in prime rate would not be material to the
Company's financial condition or results of operations. If the Company were not
able to renew its existing loan agreement, which matures on January 31, 2001, it
is possible that any replacement lending facility obtained by the Company might
be more subject to interest rate changes.
36
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
P-COM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Accountants................................................................................... 38
Consolidated Balance Sheets at December 31, 1999 and 1998........................................................... 39
Consolidated Statements of Operations for the years ended December 31, 1999, 1998, and 1997......................... 40
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998, and 1997............... 42
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.......................... 43
Notes to Consolidated Financial Statements.......................................................................... 44
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts..................................................................... 62
</TABLE>
All other schedules have been omitted because they are not required, are
not applicable, or the information is included in the consolidated financial
statements or notes thereto.
37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To The Board Of Directors And Stockholders Of P-Com, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of P-Com,
Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
March 30, 2000
38
<PAGE>
P-COM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
---- ----
ASSETS (restated)
(See Note 2)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,629 $ 29,241
Accounts receivable, net of allowances of $14,899 and $9,591 respectively 38,935 51,392
Inventory 46,849 79,026
Prepaid expenses and notes receivable 15,987 21,949
Net assets of discontinued operations 3,151 --
--------- --------
Total current assets 116,551 181,608
Property and equipment, net 36,626 52,086
Deferred income taxes 9,858 9,678
Goodwill and other assets 50,605 71,845
--------- --------
$ 213,640 $315,217
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 34,275 $ 39,618
Accrued employee benefits 2,894 3,345
Other accrued liabilities 15,841 10,318
Deferred contract obligation 8,000 3,000
Notes payable 23,557 46,360
--------- --------
Total current liabilities 84,567 102,641
--------- --------
Other long term liabilities 3,542 12,119
--------- --------
Convertible Subordinated Notes 36,316 85,650
--------- --------
Series B Mandatorily Redeemable Convertible Preferred Stock -- 13,559
--------- --------
Mandatorily Redeemable Common Stock Warrants -- 1,839
--------- --------
Commitments and contingent liabilities (Notes 12 and 16)
Stockholders' equity:
Series A Preferred Stock -- --
Common Stock, $0.0001 par value; 95,000 shares authorized; 67,400 and 45,870
shares issued and outstanding at December 31, 1999 and 1998, respectively 7 5
Additional paid-in capital 238,721 145,246
Accumulated deficit (148,973) (45,924)
Accumulated other comprehensive income (loss) (540) 82
--------- --------
Total stockholders' equity 89,215 99,409
--------- --------
$ 213,640 $315,217
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
39
<PAGE>
P-COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
(restated)
(See Note 2)
<S> <C> <C> <C>
Sales:
Product $ 116,409 $118,948 $169,453
Service 40,470 43,597 30,157
--------- -------- --------
Total sales 156,879 162,545 199,610
--------- -------- --------
Cost of sales:
Product 107,378 93,829 96,948
Service 28,274 30,777 18,968
--------- -------- --------
Total cost of sales 135,652 124,606 115,916
--------- -------- --------
Gross profit 21,227 37,939 83,694
--------- -------- --------
Operating expenses:
Research and development 32,431 38,882 27,854
Selling and marketing 17,135 19,224 12,795
General and administrative 25,179 24,260 11,029
Goodwill amortization 6,547 5,023 1,380
Restructuring charge 3,300 4,332 --
Acquired in-process research and development -- 15,442 --
--------- -------- --------
Total operating expenses 84,592 107,163 53,058
--------- -------- --------
Income (loss) from continuing operations (63,365) (69,224) 30,636
Interest expense (8,175) (8,652) (1,811)
Other income (expense), net (2,537) 1,446 1,988
--------- -------- --------
Income (loss) from continuing operations before income taxes and
extraordinary item (74,077) (76,430) 30,813
Provision (benefit) for income taxes 1,407 (11,501) 11,018
--------- -------- --------
Income (loss) from continuing operations before extraordinary item (75,484) (64,929) 19,795
--------- -------- --------
Discontinued operations:
Loss from operations (13,903) (2,869) (904)
Loss on disposal (26,901) -- --
--------- -------- --------
(40,804) (2,869) (904)
--------- -------- --------
Extraordinary gain on retirement of Notes 13,239 5,333 --
--------- -------- --------
Net income (loss) $(103,049) $(62,465) $ 18,891
========= ======== ========
Net income (loss) applicable to Common Stockholders:
Net income (loss) $(103,049) $(62,465) $ 18,891
Charge related to Preferred Stock discount -- (1,839) --
Loss on conversion of Preferred Stock to Common Stock (18,521) -- --
--------- -------- --------
Net income (loss) applicable to Common Stockholders $(121,570) $(64,304) $ 18,891
========= ======== ========
Basic income (loss) per share:
Income (loss) from continuing operations $ (1.32) $ (1.50) $ 0.47
Loss from discontinued operations (0.72) (0.07) (0.02)
Extraordinary gain on retirement of Notes 0.23 0.12 --
Charges related to Preferred Stock discount and loss on
Conversion of Preferred Stock to Common Stock (0.32) (0.04) --
--------- -------- --------
Basic net income (loss) per share applicable to common stockholders $ (2.13) $ (1.49) $ 0.45
========= ======== ========
Diluted income (loss) per share:
Income (loss) from continuing operations $ (1.32) $ (1.50) $ 0.44
Loss from disposal of discontinued operations (0.72) (0.07) (0.02)
Extraordinary gain on retirement of Notes 0.23 0.12 --
</TABLE>
40
<PAGE>
<TABLE>
<S> <C> <C> <C>
Charges related to Preferred Stock discount and loss on
Conversion of Preferred Stock to Common Stock (0.32) (0.04) --
--------- -------- --------
Diluted net income (loss) per share applicable to Common Stockholders $ (2.13) $ (1.49) $ 0.42
========= ======== ========
Shares used in per share computations:
Basic 56,995 43,254 42,175
========= ======== ========
Diluted 56,995 43,254 44,570
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE>
P-COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Accum.
Other
Retained Compre- Compre-
Common Stock Additional Earnings hensive hensive
-------------- Paid-In (Accumulated) Income Income
Shares Amount Capital Deficit) (Loss) (Loss)
------ ------ ----------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 40,837 $4 $112,913 $ (511) $ 73
Conversion of shareholder's loan to equity by Geritel - - 368 -
Issuance of Common Stock for the purchase of CSM 797 - 14,500 -
Issuance of Common Stock upon exercise of stock
options and warrants 878 - 2,912 -
Cumulative translation adjustment - - - - (1,895) $ (1,895)
Issuance of Common Stock under employee stock purchase plan 152 - 1,042 -
Net income - - - 18,891 18,891
----------
Comprehensive income $ 16,996
------ ------ ---------- ---------- ------- ==========
Balance at December 31, 1997 42,664 4 131,735 18,380 (1,822)
Issuance of Common Stock upon exercise of stock
options and warrants 499 - 2,651 -
Issuance of Common Stock under employee stock
purchase plan 240 - 1,842 -
Issuance of Common Stock upon retirement of
Covertible subordinated Notes due 2002 2,467 1 9,018 -
Charge related to Preferred Stock discount - - (1,839)
Cumulative translation adjustment - - - - 1,904 1,904
Net loss (restated)(See Note 2) - - - (62,465) (62,465)
----------
Comprehensive loss (restated) $ (60,561)
------ ------ ---------- ---------- ------- ==========
Balance at December 31, 1998 (restated)(See Note 2) 45,870 5 145,246 (45,924) 82
Issuance of Common Stock, net of issuance costs 10,068 1 38,274
Issuance of Common Stock in exchange for
convertible notes 5,171 - 36,095
Charge to Common stockholders resulting from the
conversion of redeemable Preferred Stock to
redeemable Common Stock (10,190)
Charge to Common stockholders resulting from
repricing of warrants (2,000)
Charge to Common stockholders resulting from
penalties due to certain Common stockholders (6,331)
Issuance of Common Stock and Common Stock
warrants in satisfaction of penalties due to certain
Common stockholders 220 - 4,886
Reclassification of Mandatorily redeemable Common
Stock and Common Stock Warrants resulting from
the cancellation of redemption rights 5,135 1 29,007
Issuance of Common Stock upon exercise of stock
options 725 - 3,016
Issuance of Common Stock under employee stock
purchase plan 211 - 718
Cumulative translation adjustment (622) (622)
Net loss (103,049) (103,049)
----------
Comprehensive loss $(103,671)
------ ------ ---------- ---------- ------- ==========
Balance at December 31, 1999 67,400 $7 $238,721 $(148,973) $ (540)
====== ====== ========== ========== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
42
<PAGE>
P-COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
---------- ---------- ---------
(restated)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (103,049) $ (62,465) $ 18,891
Adjustments to reconcile net income (loss) to net cash used in
operating activities, net of effect of acquisitions:
Loss on disposal of discontinued operations 26,901 - -
Depreciation 11,783 11,544 6,013
Amortization of goodwill and other intangible assets 7,798 6,827 2,207
Loss on sale of property and equipment 2,157 - -
Change in minority interest - (604) (15)
Deferred income taxes (180) (7,981) 14
Acquired in-process research and development expenses - 15,442 -
Restructuring charges 3,300 - -
Inventory charge 11,800 - -
Accounts receivable charge 21,400 - -
Gain on exchange of convertible notes (13,239) (5,333) -
Change in assets and liabilities:
Accounts receivable (13,395) 23,905 (19,375)
Inventory 563 (15,016) (20,807)
Prepaid expenses and notes receivable 3,800 (9,109) 110
Other assets 295 2,684 (5,111)
Accounts payable 1 (1,390) 4,443
Accrued employee benefits 362 (585) 1,967
Other accrued liabilities 12,478 2,709 (4,746)
Deferred contract obligation - 8,000 -
Income taxes payable (2,189) (6,409) 3,915
--------- --------- ---------
Net cash used in operating activities (29,414) (37,781) (12,494)
--------- --------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (6,054) (29,187) (16,922)
Proceeds from sale of property and equipment 1,373 - -
Acquisitions, net of cash received - (61,398) (10,855)
--------- --------- ---------
Net cash used in investing activities (4,681) (90,585) (27,777)
--------- --------- ---------
Cash flows from financing activities:
Proceeds (repayments) of notes payable (21,525) 46,067 (12,651)
Proceeds from issuance of common stock, net of expenses 38,274 - -
Proceeds from exercise of stock options and warrants 3,734 4,493 3,955
Proceeds (repayments) from long-term obligations (3,378) 1,882 (719)
Proceeds from convertible debt offering, net of expenses - - 97,500
Proceeds from issuance of preferred stock and warrants, net - 13,559 -
Proceeds from sale-leaseback transaction - 1,557 -
--------- --------- ---------
Net cash provided by financing activities 17,105 67,558 88,085
--------- --------- ---------
Effect of exchange rate changes on cash (622) 1,904 (1,895)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (17,612) (58,904) 45,919
Cash and cash equivalents at the beginning of the year 29,241 88,145 42,226
--------- --------- ---------
Cash and cash equivalents at the end of the year $ 11,629 $ 29,241 $ 88,145
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
P-Com, Inc. (the "Company") was incorporated in Delaware on August 23, 1991
to engage in the design, manufacture and marketing of millimeter wave radio
systems for use in the worldwide wireless telecommunications market.
Summary of Significant Accounting Policies
The following is a summary of the Company's significant accounting
policies:
Management's use of estimates and assumptions
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Foreign currency translation
The functional currencies of the Company's 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 as a component of
comprehensive income (loss) in stockholders' equity. Foreign exchange
transaction gains and losses are included in the results of operations in the
periods incurred, and were not material in all periods presented.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. The estimated fair value of the
Company's Convertible Subordinated Notes included in long-term debt was
approximately 74% of par or $21.7 million at December 31, 1999. The estimated
fair value of all other financial instruments at December 31, 1999 and 1998
approximated cost.
Cash and cash equivalents
The Company considers all highly liquid debt instruments with a maturity
when acquired of three months or less to be cash equivalents.
Revenue recognition
Revenue from product sales is recognized upon shipment of the product
provided no significant obligations remain and collectibility is probable.
Provisions for estimated warranty repairs, returns and allowances are recorded
at the time products are shipped. Revenue from service sales is recognized
ratably over the contractual period or as the service is performed.
Inventory
Inventory is stated at the lower of cost or market, cost being determined
on a first-in, first-out basis.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon the useful lives of the assets ranging from
three to seven years. Leasehold improvements are amortized using the straight-
line method based upon the shorter of the estimated useful lives or the lease
term of the respective assets.
44
<PAGE>
Research and development and software development costs
Research and development costs are expensed as incurred. The Company's
software products are integrated into its hardware products. Software
development costs incurred prior to the establishment of technological
feasibility are expensed as incurred. Software development costs incurred
subsequent to the establishment of technological feasibility and before general
release to customers are capitalized, if material. To date, all software
development costs incurred subsequent to the establishment of technological
feasibility have been immaterial.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
the net assets of acquired companies accounted for as purchase business
combinations. Goodwill is amortized on a straight-line basis over the period of
expected benefit ranging from three to twenty years.
Impairment of long-lived assets
In the event that facts and circumstances indicate that the cost of assets
may be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the asset's carrying amount to determine if
a write-down is required.
Comprehensive income (loss)
The Company has adopted SFAS 130, "Reporting Comprehensive Income". Under
SFAS 130, the Company is required to display comprehensive income and its
components as part of the Company's full set of financial statements. The
measurement and presentation of net income did not change. Comprehensive income
comprises net income and other comprehensive income. Other comprehensive income
includes certain changes in equity of the Company that are excluded from net
income. Specifically, SFAS 130 requires unrealized gains and losses on the
Company's foreign currency translation, which were reported separately in
stockholders' equity, to be included in accumulated other comprehensive income.
Comprehensive income (loss) in 1999, 1998 and 1997 has been reflected in the
Consolidated Statements of Stockholders' Equity.
Income taxes
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.
Stock-based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and complies with the disclosure
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123).
Concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
trade accounts receivable, and derivative financial instruments used in hedging
activities. The Company places its cash and cash equivalents in a variety of
financial instruments such as market rate accounts and U.S. Government agency
debt securities. The Company, by policy, limits the amount of credit exposure to
any one financial institution or commercial issuer.
To date, the Company has sold most of its products in international
markets. Sales to several customers have been denominated in British pounds, and
at December 31, 1999 and 1998 amounts due from these customers represented 28%
and 49%, respectively, of accounts receivable. Any gains and/or losses incurred
on the settlement of these receivables are included in the financial statements
as they occur.
The Company extends credit terms to international customers of up to 120
days, which is consistent with local business practices. The Company performs
on-going credit evaluations of its customers' financial condition to determine
the customer's credit worthiness. Sales are then generally made either on 30 to
90 day payment terms, COD or letters of credit.
45
<PAGE>
At December 31, 1999 and 1998, approximately 43% and 75%, respectively, of
trade accounts receivable represents amounts due from three and four customers,
respectively. The Company has an agreement with certain banks to sell, without
recourse, certain of its trade accounts receivable. During 1999 and 1998, the
Company sold approximately $12 million and $57 million, respectively, of its
trade accounts receivable. For this service, the banks received a fee of between
0.5% and 1.0% plus interest of between 6% and 10% per annum. In 1999, 1998, and
1997, there were no material gains or losses on accounts receivable sold without
recourse.
The following table summarizes the percentage of sales to Company's
significant customers with sales of 10% or more:
Year ended December 31,
1999 1998 1997
------ ------ ------
(restated)
Customer A 24% 25% 15%
Customer B 11 -- 11
Customer C 13 -- --
Off-balance sheet risk
The Company enters into foreign forward exchange contracts to reduce the
impact of currency fluctuations on 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 foreign forward exchange
contracts 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 six months or less.
The Company considers purchase orders from customers to be firm commitments
for purposes of designating foreign forward exchange contracts as hedges. As
such, gains or losses on a contract are deferred and included in other income
(expense) when the underlying contract is recognized. Losses are not deferred,
however, if it is estimated that deferral would lead to recognizing losses in
later periods. The Company does not enter into speculative forward exchange
contracts.
At December 31, 1999 and 1998, the Company had forward exchange contracts
to sell approximately $3.5 million and $26.1 million in British pounds,
respectively. The fair value of forward exchange contracts, which is determined
based on a comparison of the exchange rate per the contract and the market
exchange rate on December 31, 1999, approximates cost. The Company does not
anticipate any material adverse effect on its financial position resulting from
the use of these instruments.
Reclassifications
Certain amounts reported in prior years' financial statements have been
reclassified to conform with the current year presentation.
NOTE 2 -- RESTATEMENT OF FINANCIAL STATEMENTS
The Company has revised its 1998 and first quarter of 1999 financial
statements 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. As previously
disclosed, the Company determined that a related Original Equipment Manufacturer
("OEM") agreement which provided for subsequent payments of $8 million to this
customer specifically earmarked for marketing the Company's products
manufactured for this customer, should have offset a portion of the revenue
recognized previously. As of December 31, 1999, payment obligations of $8
million under this contract remained outstanding. The net effect of this
restatement was to reduce 1998 revenue and increase pretax loss by $7.1 million
and to reduce the first quarter of 1999 revenue and increase 1999 pretax loss by
$0.9 million.
In March 1998, the Company recorded a charge for purchased in-process
research and development (IPR&D) in a manner consistent with widely recognized
appraisal practices at the date of acquisition. In the fourth quarter 1998 the
Company became aware of new information which brought into question the
traditional appraisal methodology and revised its purchase price allocation
based upon a more current and preferred methodology. As a result, the 1998
first quarter charge for acquired IPR&D was decreased from $33.9 to $15.4
million. The result of this restatement was a decrease of $18.5 million in
IPR&D charge with a corresponding increase in goodwill and other intangible
assets.
NOTE 3 -- DISCONTINUED OPERATION
In August 1999, the Company's Board of Directors decided to divest its
broadcast equipment business, Technosystem. Accordingly, beginning in the third
quarter of 1999, this business is being
46
<PAGE>
reported as a discontinued operation and the financial statement information
related to this business has been presented on one line in the 1999 Consolidated
Balance Sheet, "net assets of discontinued operations", and in the
"discontinued operations" line of the Consolidated Statements of Operations.
The "net assets of discontinued operations" represents the assets intended to
be sold offset by the liabilities anticipated to be assumed by the buyers of
the business. The Statements of Operations amounts related to Technosystems in
prior periods have been reclassified to discontinued operations.
Summarized results of Technosystem are as follows (in thousands):
<TABLE>
<CAPTION> Year Ended
December 31,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Sales $ 6,483 $ 25,258 $ 21,092
========== ========= =========
Loss before income taxes $ (13,903) $ (2,869) $ (870)
Provision for income taxes - - 34
---------- --------- ---------
Net loss $ (13,903) $ (2,869) $ (904)
========== ========= =========
</TABLE>
Net assets of Technosystem, as reported in the Consolidated Balance Sheets
comprised the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1999
-----------------
<S> <C>
Current assets $17,962
Land, buildings and equipment, net 3,832
Other assets 453
-----------------
Total assets 22,247
-----------------
Current liabilities 12,369
Long-term borrowings 982
-----------------
Total liabilities 13,351
-----------------
Accrual for loss on disposal of discontinued
operations 3,151
-----------------
Net assets of discontinued operations $ 5,745
=================
</TABLE>
NOTE 4 -- 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 year ended December 31,
1999, options to purchase approximately 1,715,000 shares of Common Stock were
excluded from the computation. For the year ended December 31, 1999, the assumed
conversion of the 41/4% Convertible Subordinated Notes ("Notes") into 5,949,000
shares of Common Stock was not included in the computation of diluted net loss
per share because the effect would be antidilutive.
47
<PAGE>
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted net income (loss) per share computations for the periods
presented (in thousands of shares):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
------ -------- ------
<S> <C> <C> <C>
Denominator for basic net income (loss) per common share 56,995 43,254 42,175
Effect of dilutive securities:
Stock options and warrants -- -- 1,826
Convertible Subordinated Notes -- -- 569
------ ------ ------
Denominator for diluted net income (loss) per common share 56,995 43,254 44,570
====== ====== ======
</TABLE>
5 -- BALANCE SHEET COMPONENTS:
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
----------- ----------
Raw materials $22,484 $16,395
Work-in-process 16,019 42,995
Finished goods 8,346 19,636
----------- ----------
$46,849 $79,026
=========== ==========
Property and equipment consist of the following (in thousands):
December 31,
1999 1998
----------- ----------
Tooling and test equipment $ 44,910 $ 52,718
Computer equipment 10,432 9,210
Furniture and fixtures 5,860 7,220
Land and buildings 2,837 3,506
Construction-in-process 5,848 4,878
----------- ----------
69,887 77,532
Less - accumulated depreciation and amortization (33,261) (25,446)
----------- ----------
$ 36,626 $ 52,086
=========== ==========
Goodwill and other assets consist of the following (in thousands):
December 31,
1999 1998
----------- ----------
<S> <C> <C>
Goodwill:
Technosystems - 15,850
ASM 22,295 22,295
Cylink 34,261 34,261
Cemetel 4,360 4,360
----------- ----------
60,916 76,766
Less- accumulated amortization (12,474) (7,698)
----------- ----------
Net goodwill 48,442 69,068
Other assets 2,163 2,777
----------- ----------
$ 50,605 $71,845
=========== ==========
</TABLE>
During 1999, the Company announced its intent to dispose of Technosystem,
resulting in a goodwill write-down of $12.5 million.
48
<PAGE>
Other accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
------- -------
<S> <C> <C>
Accrued warranty $ 3,060 $ 383
Purchase commitment 4,047 413
Interest Payable 1,490 708
Lease obligations 1,364 315
Income taxes payable 2,098 2,843
Other 3,782 5,656
------- -------
$15,841 $10,318
======= =======
</TABLE>
Other long term liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
------- -------
<S> <C> <C>
Deferred contract obligation,
long term portion $ - $ 5,000
Other 3,542 7,119
------- -------
$ 3,542 $12,119
======= =======
</TABLE>
NOTE 6 -- BORROWING ARRANGEMENTS:
On November 5, 1997, the Company issued $100 million in 4 1/4% Convertible
Subordinated Notes (the "Notes") due November 1, 2002. The Notes are convertible
at the option of the holder into shares of the Company's Common Stock at an
initial conversion price of $27.46 per share and at $24.97 per share subsequent
to March 1999. The Notes are redeemable by the Company, beginning on November 5,
2000, upon 30 days notice, subject to a declining redemption price. Interest on
the Notes is paid semi-annually on May 1 and November 1 of each year. In 1999
and 1998, the Company issued Common Stock in exchange for a portion of these
Notes and recorded extraordinary gains as follows:
A summary of Convertible Subordinated Note activity is as follows:
<TABLE>
<CAPTION>
Gain on
Amount Shares Issued Conversion
-------- ------------- ----------
(millions) (thousands) (millions)
<S> <C> <C> <C>
Issuance of $100 million in Convertible $100.0 -- $ --
Subordinated Notes in November 1997
----------- ----------- ---------
Balance at December 31, 1997 100.0 -- --
Conversion of Notes in December 1998 (14.4) 2,467 5.3
----------- ----------- ---------
Balance at December 31, 1998 85.6 2,467 5.3
Conversion of Notes in January and February 1999 (25.5) 2,812 7.3
Conversion of Notes in December 1999 (23.8) 2,359 6.0
----------- ----------- ---------
Balance at December 31, 1999 $ 36.3 7,638 $18.6
=========== =========== =========
</TABLE>
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, had been reduced to $30.0 million
until maturity on January 15, 2000. At December 31, 1999, the Company had been
advanced approximately $23.6 million and had used the remaining $3.4 million to
secure letters of credit under such line. In January 2000, the balance was paid
in full and the line-of-credit agreement was terminated (See note 17).
Borrowings under the line were secured by the assets of the Company and bore
interest at either a base interest rate or a variable interest rate.
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.
NOTE 7 -- CAPITAL STOCK
The authorized capital stock of the Company consists of 95 million shares
of Common Stock, $0.0001 par value (the "Common Stock"), and 2 million shares of
preferred stock, $0.0001 par value (the "Preferred Stock"), including 500,000
shares of which have been designated Series A Junior Participating Preferred
Stock (the "Series A") pursuant to the Stockholder Rights Agreement (see
discussion below) and 20,000 shares of which have been designated Series B
Convertible Participating Preferred Stock (the "Series B").
Preferred Stock.
The Board of Directors has the authority to issue shares of preferred
stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the holders of Common Stock.
Mandatorily Redeemable Convertible Preferred Stock and Warrants.
49
<PAGE>
In December 1998, the Company completed a private placement of 15,000
shares of the Series B for $1,000 per share and issued manditorily redeemable
warrants to purchase up to 1,242,000 shares of Common Stock at $3.47 per share.
A portion of the proceeds were allocated to the warrants based on their fair
value and accounted for as a discount to the Series B. The remainder of the
proceeds were allocated to the Series B. Because the Series B was immediately
convertible into shares of Common Stock, the discount was amortized as a
reduction of income available to holders of Common Stock in the amount of $1.8
million upon the issuance of the Series B. The Company did not record a
beneficial conversion feature related to Series B because the conversion price,
using the conversion terms that are most beneficial to the holder, was greater
than the market price of the Common Stock on the date of issuance.
Pursuant to the registration rights agreement the Company entered into in
connection with the issuance of the Series B, as amended by the exchange
agreements, the Company was required to register the Series B for resale on or
before July 19, 1999. See additional discussion below regarding premiums and
penalties related to this requirement.
The manditorily redeemable warrants issued in connection with Series B were
valued at $1,839,000 using the Black-Scholes option-pricing model with the
following assumptions used: expected volatility of 65%; a weighted-average risk-
free interest rate of 4.5% and a weighted-average expected life of 5 years. The
initial exercise price for the Common Stock underlying the warrants was $3.47.
In June 1999, in connection with the conversion of the Series B to Common Stock,
the manditorily redeemable warrants were exchanged for 1,242,000 non-mandatorily
redeemable warrants having an exercise price of $3.00. As a result of the
exchange and repricing of warrants, the Company recorded a $2.0 million charge
to loss attributable to Common Stockholders representing the difference in fair
value of the warrants before and after the exchange and repricing. The warrants
are immediately exercisable until the earlier of: (1) December 22, 2002, or (2)
the date on which the closing of a consolidation, merger of other business
combination with or into another entity pursuant to which the Company does not
survive. In the event the Company merges or consolidates with any other company,
the warrant holders are entitled to similar choices as to the consideration they
will receive in such merger or consolidation as are provided to the holders of
the Series B. In addition, the number of shares issuable upon exercise of the
warrants is subject to an anti-dilution adjustment if the Company sells Common
Stock or securities convertible into or exercisable for Common Stock (excluding
certain issuances such as Common Stock issued under employee, director or
consultant benefit plans) at a price per share less than $3.47 (subject to
adjustment). These warrants were subsequently exchanged for Common Warrants as
discussed below.
Common Stock
In June 1999, the Company received net proceeds of $38.3 million from the
sale 10,068,000 shares of Common Stock sold at a 7.5% discount from the market
price.
In 1998, the Company retired approximately $14.4 million of its Convertible
Subordinated Notes through the issuance of approximately 2,467,000 shares of
Common Stock. In 1999, the Company retired approximately $49.3 million of its
Convertible Subordinated Notes through the issuance of approximately 5,171,000
shares of Common Stock.
In June 1999, the Company exchanged all 15,000 shares of the Series B for
5,135,000 shares of mandatorily redeemable Common Stock. As a result of this
exchange, the Company recorded a $10.2 million charge to loss attributable to
Common Stockholders representing the difference between the book value of the
Series B and the market value of the mandatorily redeemable common stock net of
incurred premiums and penalties relating to the non-registration of the Series
B. Upon the occurrence of certain events outside 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 agreed to waive all premiums which had been accrued and penalties which had
been incurred in connection with the Series B as of the date of exchange. As
discussed above, the Company also exchanged outstanding mandatorily redeemable
warrants to purchase 1,243,000 shares of Common Stock, which were held by the
holders of the Series B for new warrants to purchase 1,243,000 shares of Common
Stock with an exercise price of $3.00 per share rather than $3.47 per share.
In November 1999, the Company entered into agreements with the holders of
the mandatorily redeemable Common Stock to eliminate their redemption rights and
their past and future late registration premiums and penalties in exchange for
212,000 shares of Common Stock issued on November 10, 1999 at $4.72 per share,
warrants to purchase 443,000 shares of Common Stock issued on January 20, 2000
at an exercise price of $8.50 per share, and a $400,000 promissory note
convertible (with interest) into Common Stock at a conversion price of $4.72 per
share. As a result of this transaction, the Company recorded a $6.3 million
charge to loss attributable to Common Stockholders representing the difference
between the value of the redemption rights and the market value of the common
stock issued, the fair value of the warrants issued, and the convertible
promissory note net of accrued interest eliminated as part of the transaction.
Common Stock Warrants
A summary of issued and outstanding warrants to purchase Common Stock is as
follows:
Number Exercise
------
(in thousands) Price
-----
December 1998 - issuance 1,242 $3.47
June 1999 - cancellation of 1998 warrants (1,242) $3.47
June 1999 - issuance 1,242 $3.00
August 1999 - issuance 180 $5.00
November 1999 - issuance 443 $8.50
--------
50
<PAGE>
--------
1,865
========
Stockholder Rights Agreement
On September 26, 1997, the Board of Directors of the Company adopted a
Stockholder Rights Agreement (the "Agreement"). Pursuant to the Agreement,
rights (the "Rights") were distributed as a dividend on each outstanding share
of its Common Stock held by stockholders of record as of the close of business
on November 3, 1997. Each Right will entitle stockholders to buy Series A
Preferred at an exercise price of $125.00 upon certain events. The Rights will
expire ten years from the date of the Agreement.
In general, the Rights will be exercisable only if a person or group
acquires 15% or more of the Company's Common Stock or announces a tender offer,
the consummation of which would result in ownership by a person or group of 15%
or more of the Company's Common Stock. If, after the Rights become exercisable,
the Company is acquired in a merger or other business combination transaction,
or sells 50% or more of its assets or earning power, each unexercised Right will
entitle its holder to purchase, at the Right's then-current exercise price, a
number of the acquiring company's common shares having a market value at the
time of twice the Right's exercise price. At any time within ten days after the
public announcement that a person or group has acquired beneficial ownership of
15% or more of the Company's Common Stock, the Board, in its sole discretion,
may redeem the Rights for $0.0001 per Right.
NOTE 8 -- ACQUISITIONS:
On March 28, 1998, the Company acquired substantially all of the assets,
and on April 1, 1998, the accounts receivable of the Wireless Communications
Group of Cylink Corporation ("Cylink Wireless Group"), a Sunnyvale, California-
based company, for $46.0 million in cash and $14.5 million in a short-term, non-
interest bearing unsecured subordinated promissory note due July 6, 1998. The
Company withheld approximately $4.8 million of the short-term promissory note
due to the Company's belief that Cylink Corporation breached various provisions
of the acquisition agreement. The remaining amount due on the note of $9.7
million was paid in July 1998. The promissory note holdback was disputed by
Cylink Corporation and the dispute was settled during the third quarter of 1999
for $3.3 million, and recorded as a charge to other expenses.
The Cylink Wireless Group designs, manufactures and markets spread spectrum
radio products for voice and data applications in both domestic and
international markets.
The Company accounted for this acquisition as a purchase business
combination. The results of the Cylink Wireless Group have been included since
the date of acquisition.
The total purchase price of the acquisition was as follows (in thousands):
Cash payment $46,000
Short-term promissory note 9,682
Expenses 2,483
-------
Total $58,165
=======
The allocation of the purchase price, restated for the revision of the
amount allocated to in-process research and development as discussed below, and
as previously reported, was as follows (dollars in thousands):
Amount Life
------ ----
(In years)
----------
Accounts receivable, net $ 4,247
Inventory 5,109
Property and equipment, net 461
In-process research and development expense 15,442
Current liabilities assumed (1,355)
Intangible Assets:
Goodwill 23,482 10
Developed technology 6,291 4
Acquired workforce 1,781 3
51
<PAGE>
Core technology 2,707 10
-------
Total $58,165
=======
In-process research and development had no future use at the date of
acquisition and technological feasibility had not been established.
Among the factors considered in determining the amount of the allocation of
the purchase price to in-process research and development were various factors
such as estimating the stage of development of each in-process research and
development 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 period of the expected revenue stream of the developed
products of approximately four years. The value of the acquired workforce is
being amortized on a straight-line basis over three years, and the remaining
identified intangible assets, including core technology and goodwill is being
amortized on a straight-line basis over ten years. Amortization expense related
to the acquisition of Cylink was $5.2 million and $3.7 million for 1999 and
1998, respectively.
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.
If none of these projects are 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 2000.
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 is not expected
to be completed prior to the end of 2000. Currently, the narrowband point-to-
multipoint project is approximately 60% complete. The point-to-point project,
discussed above, 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.
The following table represents unaudited pro forma information assuming the
acquisition had occurred at the beginning of the earliest period presented, as
restated for the revision of the amount of purchase price allocated to in-
process research and development as discussed in Note 2 (in thousands, except
per share data):
Year Ended Year Ended
December 31, December 31,
1998 1997
---- ----
Sales $167,053 $227,567
Net income (loss) (69,010) 15,448
Net Income (loss) per share:
Basic $ (1.60) $ 0.37
Diluted (1.60) 0.35
During 1998, the Company acquired the remaining interest in Geritel and the
assets of Cemetel S.p.A., a service company located in Carsoli, Italy. These
acquisitions were not material to the consolidated financial statements or the
results of operations of the Company.
On February 24, 1997, the Company acquired 100% of the outstanding stock of
Technosystem, for aggregate payments of $3.3 million and the assumption of long-
term debt of approximately $12.7 million in addition to other liabilities. The
Company initially paid $2.6 million in cash, and an additional payment of $0.7
million was made on March 31, 1998, which was subject to certain indemnification
obligations of the former Technosystem security holders, as set forth in the
securities purchase agreement. Technosystem designs, manufactures and markets
equipment for transmitters and transponders for television and radio
broadcasting. In 1999 the Company announced its intention to dispose of
Technosystem.
On March 7, 1997, the Company acquired substantially all of the assets of
Columbia Spectrum Management, L.P. ("CSM"), a Vienna, Virginia-based company,
for $7.8 million in cash and 797,000 shares of Common Stock valued at
52
<PAGE>
approximately $14.5 million. CSM provides turnkey relocation services for
microwave paths over spectrum allocated by the Federal Communications Commission
for Personal Communications Services and other emerging technologies.
The Company accounted for its acquisitions of Technosystem and CSM based on
the purchase method of accounting. The results of these acquired entities are
included from the date of acquisition. Goodwill and other intangible assets
recorded as a result of the purchase of CSM and Technosystem are being amortized
over twenty and ten years, respectively, using the straight-line method.
On May 29, 1997, the Company acquired all of the outstanding shares of
capital stock of CRC, a provider of integrated network access devices to network
service providers, in exchange for 1,503,000 shares of the Company's Common
Stock that were issued or are issuable to former CRC security holders in a
stock-for-stock merger.
On November 27, 1997, the Company acquired all of the outstanding shares of
capital stock of RT Masts and Telematics in exchange for 766,000 and 248,000
shares of the Company's Common Stock, respectively. RT Masts, located in
Wellingborough, Northhamptonshire, U.K. and Telematics, located in Herndon,
Virginia, supply, install and maintain telecommunications systems and structure
including antennas covering high frequency, medium frequency and microwave
systems.
The Company accounted for its acquisitions of CRC, RT Masts and Telematics
as poolings-of-interests and, therefore, all prior period financial statements
presented include the results of these acquired companies as if they had been
combined since inception. The following table represents historical information
of P-Com, CRC, RT Masts and Telematics, prior to their combination, for the year
ended December 31, 1997 (in thousands):
Sales:
P-Com $181,665
CRC 713
RT Masts 12,035
Telematics 5,197
--------
$199,610
========
Net income:
P-Com $ 20,375
CRC (1,254)
RT Masts (537)
Telematics 307
--------
$ 18,891
========
NOTE 9 -- EMPLOYEE BENEFIT PLANS:
Stock Option Plans. On January 11, 1995, the Company's Board of Directors
adopted the 1995 Stock Option/Stock Issuance Plan (the "1995 Plan") as a
successor to its 1992 Stock Option Plan (the "1992 Plan"). As of January 11,
1995, no further option grants or stock issuances were made under the 1992 Plan,
and all option grants and stock issuances made during the remainder of 1995 were
made under the 1995 Plan. All outstanding options under the 1992 Plan were
incorporated into the 1995 Plan. The 1995 Plan authorizes the issuance of up to
13,434,000 shares of Common Stock as of December 31, 1999.
Options granted under the 1992 Plan are generally exercisable for a period
not to exceed ten years, and generally must be issued with exercise prices not
less than 100% and 85%, for incentive and non-qualified stock options,
respectively, of the estimated fair market value of the Common Stock on the date
of grant as determined by the Board of Directors. Options granted under the 1992
Plan are exercisable immediately upon grant and generally vest 25% on the first
anniversary from the date of grant, and ratably each month over the remaining
thirty-six month period. Unvested shares purchased through the exercise of stock
options are subject to repurchase by the Company.
53
<PAGE>
The 1995 Plan contains three equity incentive programs: a Discretionary
Option Grant Program, a Stock Issuance Program for officers and employees of the
Company and independent consultants and advisors to the Company and an Automatic
Option Grant Program for non-employee members of the Company's Board of
Directors.
Options under the Discretionary Option Grant Program may be granted at not
less than 85% of the fair market value per share of common stock on the grant
date with exercise periods not to exceed ten years. The plan administrator is
authorized to issue tandem stock appreciation rights and limited stock
appreciation rights in connection with the option grants.
The Stock Issuance Program provides for the sale of common stock at a price
not less than 85% of fair market value. Shares may also be issued solely for
services. The administrator has discretion as to vesting provisions, including
accelerations, and may institute a loan program to assist participants with
financing stock purchases. The program also provides certain alternatives to
satisfy tax liabilities incurred by participants in connection with the program.
Under the Automatic Option Grant Program, as amended at the May 1997 Annual
Meeting of Stockholders, participants will automatically receive an option to
purchase 40,000 shares of common stock upon initially joining the Board of
Directors and will receive an additional automatic grant each year at each
annual stockholders' meeting for 4,000 shares. Each option will have an exercise
price per share equal to 100% of the fair market value of the common stock on
the grant date. The shares subject to the initial share option and the annual
4,000 share option will vest in eight successive equal quarterly installments
upon the optionee's completion of each successive 3-month period of Board
service over the 24-month period measured from the grant date.
The following table summarizes stock option activity under the Company's
1992 and 1995 Plans (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 7,862 $6.77 6,006 $12.65 3,778 $ 7.14
Granted 1,453 4.52 6,481 6.20 3,318 16.73
Exercised (725) 4.16 (499) 5.32 (878) 3.31
Canceled (1,955) 6.73 (4,126) 14.59 (212) 11.41
----- ----- ------ ------
Outstanding at end of year 6,635 6.26 7,862 6,006
===== ===== ====== ======
Options exercisable at year-end 3,909 7.03 2,483 2,970
Weighted-average fair value of
options granted during the year $4.52 $ 2.24 $ 7.54
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1999 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------- ----------------------------------
Weighted- Weighted- Weighted
Range of Average Life Average
Exercise Prices Shares Remaining Exercise Shares Exercise
Life Price Price
<S> <C> <C> <C> <C> <C>
$ 0.45 - 0.56 90 4.5 0.56 90 0.56
0.94 - 0.94 1 4.8 0.94 1 0.94
1.80 - 2.10 76 5.5 1.89 72 1.87
2.88 - 3.06 1,439 8.7 3.00 892 3.00
3.97 - 4.75 1,252 9.0 4.21 329 4.50
5.00 - 5.81 2,061 7.6 5.75 1,112 5.72
6.31 - 7.25 403 6.4 6.86 315 6.99
8.00 - 9.94 699 6.0 9.37 555 9.36
10.25 - 12.38 32 6.7 12.36 27 12.36
13.31 - 16.25 86 7.4 13.72 70 13.72
17.06 - 21.09 494 6.6 18.16 445 18.12
23.22 - 23.22 2 7.7 23.22 1 23.22
--------- --- ----- ----- -----
6,635 7.7 6.26 3,909 7.03
========= === ===== ===== =====
</TABLE>
54
<PAGE>
Repricing. On July 15, 1998, the plan administrator implemented an option
cancellation/regrant program for all employees of the Company, excluding the
Company's executive officers and directors. Pursuant to that program, each
participant was given the opportunity to surrender his or her outstanding
options under the 1995 Plan, with exercise prices in excess of $5.813 per share,
in return for a new option grant for the same number of shares but with an
exercise price of $5.813 per share, the closing selling price per share of
common stock as reported on the Nasdaq National Market on July 31, 1998, the
grant date of the new option. Options for a total of 2,746,000 shares with a
weighted average exercise price of $16.45 per share were surrendered for
cancellation, and new options for the same number of shares were granted with an
exercise price of $5.813 per share. The new options granted to employees did not
vest or become exercisable unless the participant continued in the Company's
employ through January 31, 1999. On that date, the option became exercisable for
(i) the number of shares for which the cancelled higher-priced option was
exercisable on July 31, 1998 plus (ii) the number of shares for which the
higher-priced option would have become exercisable over the period from August
1, 1998 to January 31, 1999 had that option not been cancelled. The new option
will become exercisable for the balance of the option shares in a series of
installments, with each such installment to become exercisable on the same date
that installment would have become exercisable under the cancelled higher-priced
option. In addition, each new option will vest and become exercisable on an
accelerated basis in the event the Company were to be acquired by a merger or
asset sale in which those options were not assumed by the successor entity.
On July 31, 1998, each of the option grants made under the Automatic Option
Grant Program on May 18, 1998 with an exercise price of $19.25 per share was
cancelled, and a new option for 4,000 shares was granted to each of the four
non-employee Board members with an exercise price of $5.81 per share, the fair
market value per share of common stock on the grant date of the new option. Each
of the new options is immediately exercisable for all the option shares, but any
shares purchased under the option will be subject to repurchase by the Company,
at the exercise price paid per share, upon the optionee's cessation of Board
service prior to vesting in those shares. The shares subject to each new option
will vest in a series of eight (8) successive equal quarterly installments upon
the optionee's completion of each successive three (3)-month period of Board
service over the twenty-four (24)-month period measured from the July 31, 1998
grant date.
Employee Stock Purchase Plan. On January 11, 1995, the Company's Board of
Directors adopted the Employee Stock Purchase Plan (the "Purchase Plan"), which
was approved by stockholders in February 1995. The Purchase Plan permits
eligible employees to purchase Common Stock at a discount through payroll
deductions during successive offering periods with a maximum duration of 24
months. Each offering period shall be divided into consecutive semi-annual
purchase periods. The price at which the Common Stock is purchased under the
Purchase Plan is equal to 85% of the fair market value of the Common Stock on
the first day of the offering period or the last day of the purchase period,
whichever is lower. A total of 1,150,000 shares of Common Stock have been
reserved for issuance under the Purchase Plan, as amended at the May 1997 and
1998 Annual Meetings of Stockholders. Awards and terms are established by the
Company's Board of Directors. The Purchase Plan may be canceled at any time at
the discretion of the Company's Board of Directors prior to its expiration in
December 2004. Under the Plan, the Company sold approximately 211,000, 240,000
and 152,000 shares in 1999, 1998 and 1997, respectively.
Because the Company has adopted the disclosure-only provision of SFAS No.
123, no compensation expense has been recognized for its stock option plan or
for its stock purchase plan. Had compensation costs for the Company's two stock-
based compensation plans been determined based on the fair value at the grant
dates for awards under those plans, consistent with the method of SFAS 123, the
Company's net income (loss) and net income (loss) per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(restated)
<S> <C> <C> <C>
Net income (loss) applicable to
Common stockholders As reported $(121,570) $(64,304) $18,891
Pro forma (127,685) (66,473) 11,221
Net income (loss) per share As reported - Basic $ (2.13) $ (1.49) $ 0.45
As reported - Diluted (2.13) (1.49) 0.42
Pro forma - Basic $ (2.24) $ (1.54) $ 0.27
Pro forma - Diluted (2.24) (1.54) 0.25
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions used
for grants in 1999, 1998, and 1997, respectively: expected volatility of 96%,
72% and 57%; weighted-average risk-free interest rates of 5.4%, 5.1%, and 6.1%
and weighted-average expected lives of 3.28, 2.76, and 3.16 years, respectively.
The fair value of the employees' stock purchase rights was estimated using
the Black-Scholes model with the following assumptions for 1999, 1998, and 1997,
respectively: expected volatility of 96%, 72% and 57% weighted-average risk-free
interest rates of 4.6%, 5.3%, and 5.3% and weighted-average expected lives of
0.5, 0.7, and 0.7 years. The weighted-average fair value of those purchase
rights granted in 1999, 1998, and 1997 was $5.74, $1.99, and $3.65,
respectively.
55
<PAGE>
NOTE 10 -- INCOME TAXES:
Income (loss) before extraordinary item and income taxes consists of the
following (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
---- ---- ----
(Restated)
<S> <C> <C> <C>
Domestic $(67,120) $(71,277) $27,260
Foreign ( 6,957) (5,153) 3,553
-------- -------- -------
$(74,077) $(76,430) $30,813
======== ======== =======
</TABLE>
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ -- $ (4,727) $ 7,850
State 55 (37) 268
Foreign 1,532 1,244 2,886
------ -------- -------
1,587 (3,520) 11,004
------ -------- -------
Deferred:
Federal (135) (7,410) (217)
State ( 45) (571) 231
------ -------- -------
(180) (7,981) 14
------ -------- -------
Total $1,407 $(11,501) $11,018
====== ======== =======
</TABLE>
Deferred tax assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
Net operating loss carryforwards $24,734 $ 7,030
Credit carryforwards 2,844 1,833
In-process research and development 5,127 5,527
Start-up costs -- 99
Reserves and other 26,941 5,988
------- --------
59,646 20,477
Valuation allowance (49,788) (10,799)
------- --------
$ 9,858 $ 9,678
======= ========
</TABLE>
The Company's net operating loss carryforwards included as a deferred tax
asset above are approximately $67 million and $19 million for 1999 and 1998,
respectively. These operating loss carry forwards will expire between 2005 and
2019 if not utilized beforehand. These amounts do not include stock option
deductions of $2.1 million and $5.1 million for 1999 and 1998, respectively,
which will be credited to paid in capital when realized.
For federal and state tax purposes, a portion of the Company's net
operating loss carryforwards may be subject to certain limitations on
utilization in case of change in ownership, as defined by federal and state tax
law.
Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their bases for
financial reporting purposes. In addition, future tax benefits, such as net
operating loss carryforwards, are recognized to the extent that realization of
such benefits is more likely than not. A valuation allowance has been
established for those benefits that management has determined do not meet the
more likely than not criteria.
Reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory rate (35.0)% (35.0)% 35.0%
State income taxes, net of federal tax benefit -- (0.3) 1.1
Change in valuation allowance 35.0 11.9 --
Benefit from foreign sales corporation -- -- (2.3)
Research and development tax credit -- -- (7.3)
Foreign income taxed at different rate 1.5 0.8 4.8
Other, net (0.1) 6.7 5.6
-------- ------- ------
1.4% (15.9)% 36.9%
======== ======= ======
</TABLE>
56
<PAGE>
NOTE 12 -- COMMITMENTS:
Obligations Under Capital And Operating Leases
In August 1998, the Company entered into a capital lease for equipment in
the amount of $1.6 million with interest accruing at the rate of 6.3%. The lease
is accounted for as a sale-leaseback transaction, which expires in January 2003.
Future minimum lease payments required under the lease are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending December 31,
2000...................................................................... $1,472
2001...................................................................... 1,432
2002...................................................................... 396
2003...................................................................... 33
------
Total minimum lease payments.............................................. 3,333
Less: amount representing interest........................................ 192
------
Present value of net minimum lease payments............................... $3,141
======
</TABLE>
The present value of net minimum lease payments are reflected in the
December 31, 1999 and 1998 balance sheets as a component of other accrued
liabilities and other long term liabilities of $1,364,000 and $1,770,000
respectively.
The Company leases its facilities under non-cancelable operating leases.
The leases require the Company to pay taxes, maintenance and repair costs.
Future minimum lease payments under the Company's non-cancelable operating
leases at December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31,
2000.................................................. $2,418
2001.................................................. 1,274
2002.................................................. 859
2003.................................................. 192
2004.................................................. 464
------
$5,207
======
</TABLE>
Rent expense for all operating leases was approximately $3,258,000,
$3,218,000, and $2,205,000 in 1999, 1998, and 1997, respectively.
NOTE 12 -- SUPPLEMENTAL CASH FLOW INFORMATION:
The following provides additional information concerning supplemental
disclosure of cash flow activities:
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Supplemental cash flow disclosures:
Cash paid for income taxes $ 3,900 $ 5,610 $ 217
======= ======= ======
Cash paid for interest $ 8,717 $ 656 $ 133
======= ======= ======
</TABLE>
Non-cash transactions
During 1999 and 1998, the Company exchanged shares of Common Stock for
Convertible Subordinated Notes. In conjunction with these transactions, the
Company recorded extraordinary gains of $13.2 million and $5.3 million for the
years ended December 31, 1999 and 1998, respectively. See Note 6 for additional
information.
As described more fully in Note 7, the Company exchanged Series B
Convertible Preferred Stock for shares of Mandatorily Redeemable Common Stock
and repriced certain warrants held by the holders of the Series B Convertible
Preferred Stock during June 1999. During November 1999, the Company issued
shares of Common Stock, warrants to purchase additional shares of Common Stock,
and a promissory note convertible into Common Stock in exchange for the
elimination of certain redemption rights and late registration premiums and
penalties. In connection with these transactions, the Company recorded charges
of $18.5 million and $1.8 million for the years ended December 31, 1999 and
1998, respectively, as adjustments to arrive at the net loss applicable to
Common Stockholders. See Note 7 for additional information.
During 1998 and 1997, the Company issued shares of Common Stock and a
promissory note in conjunction with various acquisitions. The Company also
exchanged a loan payable to stockholder for shares of Common Stock during 1998.
See Note 8 for additional information.
NOTE 13 -- RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," SFAS 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. SFAS 133 is effective for fiscal years beginning
after June 15, 2000 and can not be applied retroactively. The Company is
currently evaluating the impact of SFAS 133 on its financial position and
results of operations.
57
<PAGE>
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the Securities and Exchange Commission. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. SAB 101 is effective
for the fiscal quarter beginning April 1, 2000, however earlier adoption is
permitted. The Company has not yet determined the impact, if any, that adoption
will have on the consolidated financial statements.
NOTE 14 -- SEGMENT REPORTING:
For purposes of segment reporting, the Company aggregates operating
segments that have similar economic characteristics and meet the aggregation
criteria specified in SFAS No. 131. The Company has determined that there are
two reportable segments: Product Sales and Service Sales. The Product Sales
segment consists of organizations located primarily in the United States, the
United Kingdom, and Italy which develop, manufacture, and/or market network
access systems for use in the worldwide wireless telecommunications market. The
Service Sales segment consists of organizations primarily located in the United
States, the United Kingdom, and Italy which provide comprehensive network
services including system and program planning and management, path design, and
installation for the wireless communications market.
In August 1999, the Company announced its intent to divest its broadcast
equipment business, Technosystem, and concluded that a measurement date had
occurred. Accordingly, beginning in the third quarter of 1999, this business is
being reported as a discontinued operation and the amounts presented for prior
periods have been reclassified for appropriate comparability. As such, the
segment information shown below does not include Technosystem's financial
information. See Note 3 to the Consolidated Financial Statements. 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):
<TABLE>
<CAPTION>
For the year ended Product Service
December 31, 1999 Sales Sales Total
- ----------------- ----- ----- -----
<S> <C> <C> <C>
Sales $116,409 $40,470 $156,879
Income (loss) from operations (67,856) 4,491 (63,365)
Depreciation 11,010 773 11,783
Identifiable assets 191,606 22,034 213,640
Interest expense, net (8,086) (89) (8,175)
For the year ended
December 31, 1998
- -----------------
Sales $118,948 $43,597 $162,545
Income (loss) from operations (73,000) 3,776 (69,224)
Depreciation 10,528 382 10,910
Identifiable assets 290,662 24,555 315,217
Interest expense (8,518) (134) (8,652)
For the year ended
December 31, 1997
- -----------------
Sales $169,453 $30,157 $199,610
Income from operations 25,436 5,200 30,636
Depreciation 5,447 278 5,725
Identifiable assets 289,884 15,637 305,521
Interest expense (1,664) (147) (1,811)
</TABLE>
58
<PAGE>
The allocation of sales by geographic customer destination and property,
plant and equipment, net are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Sales:
United States $ 48,248 $ 41,597 $ 70,312
United Kingdom 54,172 71,399 69,201
Europe 28,183 12,123 23,969
Africa - 19,104 6,323
Asia 9,489 18,322 15,548
Other geographic regions 16,787 0 14,257
-------- -------- --------
Totals $156,879 $162,545 $199,610
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Property, plant, and equipment, net:
United States $ 28,751 $ 30,726
United Kingdom 2,878 9,845
Italy 4,771 11,317
Other geographic regions 226 198
-------- --------
Totals $ 36,626 $ 52,086
======== ========
</TABLE>
NOTE 15 -- RESTRUCTURING AND OTHER CHARGES:
During 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 1998 relating to these initiatives
including 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, we recorded accounts receivable
reserves of $5.4 million and inventory reserves of $16.9 million (including
$14.5 million in inventory write downs related to our existing core business and
$2.4 million in other charges to inventory relating to the elimination of
product lines.)
In 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 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 stated payment terms. This charge is
included 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 markets of Africa and Asia,
which experienced significant economic turmoil beginning in the third quarter of
1998. The write-off of a single customer receivable in South Africa accounted
for more than half of the charge in 1999. 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 in 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
workforce.
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. Also,
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-
59
<PAGE>
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.
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 has 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 charges and amounts charged against the
accrual as of December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Beginning Expenditures Remaining
Accrual Additions and Write-offs Accrual
------------- ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Severance and benefits $ 569 $ 300 $ (869) $ -
Facility and fixed asset write-offs 879 3,000 (3,879) -
Goodwill impairment 2,884 - (2,884) -
------------- ------------- ------------------ -------------
Total restructuring charges 4,332 3,300 (7,632) -
------------- ------------- ------------------ -------------
Inventory reserve 16,922 15,400 (16,142) 16,180
Non-cancellable purchase commitments reserve - 6,000 (3,053) 2,947
------------- ------------- ------------------ -------------
Total inventory and related charges 16,922 21,400 (19,195) 19,127
------------- ------------- ------------------ -------------
Accounts receivable reserve 5,386 11,800 (7,517) 9,669
------------- ------------- ------------------ -------------
Total accrued restructuring and other charges $ 26,640 $ 36,500 $ (34,344) $ 28,796
============= ============= ================== =============
</TABLE>
NOTE 16 -- CONTINGENCIES
The Company is a defendant in several class action lawsuits in which the
plaintiffs are alleging various state 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. While management believes the actions are without
merit and intends to defend them vigorously, all of these proceedings are at
the very early stage and the Company is unable to speculate on their ultimate
outcomes. However, the ultimate results could have a material adverse effect
on the Company's results of operations or financial position either through
the defense or results of such litigation.
NOTE 17 -- SUBSEQUENT EVENTS
In January 2000, the Company closed the sale of approximately 7,531,000
shares of common stock at a per share price of $5.71, for an aggregate purchase
price of $43 million. The unregistered shares were priced at a 15% discount to
the average closing sale prices of common stock for the 60 consecutive trading
days prior to the signing of the agreement. Until such shares are registered
for resale, the Company is subject to certain restrictions regarding future
sales of common stock, convertible stock and warrants.
In addition, in January 2000 the Company entered into a new loan agreement
for $12 million. A portion of the proceeds of the new equity and debt financings
has been used to repay the Company's outstanding indebtedness of approximately
$27 million under its revolving line-of-credit agreement. The loan matures on
January 31, 2001, subject to automatic one-year renewals at the option of both
parties. Borrowings under the line bear interest at the greater of prime rate
plus 2% or 8% per annum. Borrowings under the new agreement are secured by the
United States cash deposits, receivables, inventory, equipment, investment
property and intangibles of the Company. The maximum borrowings under the
agreement will be limited to 85% of eligible accounts receivable, not to exceed
$12 million. In connection with the loan agreement, the Company issued the
lender warrants to purchase 200,000 shares of common stock at $5.71 per share.
The warrants, which are immediately exercisable and are subject to anti-dilution
clauses, expire on January 31, 2005.
60
<PAGE>
NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA (Unaudited):
As a result of the Company's decision to restate its second, third and
fourth quarter 1998 and first quarter 1999 consolidated financial statements,
quarterly financial data is presented as originally reported and as restated
below (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
1999 (As Restated) March 31 June 30 September 30 December 31
------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales (1) $34,768 $ 35,443 $ 40,058 $ 47,469
Gross profit (1) 10,414 (13,186) 10,817 14,041
Net loss (6,651) (54,615) (36,399) (5,384)
Net loss attributable to common (6,651) (66,805) (36,399) (11,715)
stockholders
Per common share
----------------
Basic and diluted $ (0.14) $ (1.29) $ (0.55) $ (0.21)
1999 (As Reported)
Sales (1) $34,768 $ 35,443 $ 40,058 $ 47,469
Gross profit (1) 10,414 (13,186) 10,817 14,041
Net loss (5,792) (54,615) (36,399) (5,384)
Net loss attributable to common (5,792) (66,805) (36,399) (11,715)
stockholders
Per common share
----------------
Basic and diluted $ (0.12) $ (1.29) $ (0.55) $ (0.21)
1998 (As Restated)
Sales(1) $53,355 $ 50,413 $ 23,079 $ 35,698
Gross profit (deficit)(1) 22,728 12,447 (6,354) 9,118
Net loss (5,097) (6,263) (41,197) (9,908)
Net loss attributable to common (5,097) (6,263) (41,197) (11,747)
stockholders
Per common share
----------------
Basic and diluted $ (0.12) $ (0.14) $ (0.95) $ (0.27)
1998 (As Reported)
Sales(1) $53,355 $ 56,466 $ 23,580 $ 36,285
Gross profit (deficit)(1)(2) 22,728 18,500 (5,853) 9,705
Net loss(2) (5,097) (210) (40,696) (9,321)
Net loss attributable to common (5,097) (210) (40,696) (11,160)
stockholders(2)
Per common share(2)
----------------
Basic and diluted $ (0.12) $ 0.00 $ (0.94) $ (0.26)
</TABLE>
(1) Quarterly sales and gross profit amounts for each of the four quarters in
1998 and 1999 reflect a reduction for sales and gross profit attributable
to Technosystem, which was reclassified to discontinued operations in the
third quarter of 1999.
(2) The March 31, 1998 (as reported) amounts include the impact of the
restatement relating to purchased in-process research and development. See
Note 2 for additional information.
61
<PAGE>
SCHEDULE II
P-COM, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1997, 1998, and 1999
(in thousands)
<TABLE>
<CAPTION>
Additions
Charged to
Balance at Statement Deductions Balance at
Beginning of from end of
of Year Operations Reserves Year
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1997 $1,915 $ 810 $ (204) $ 2,521
Year ended December 31, 1998 2,521 10,892 (3,822) 9,591
Year ended December 31, 1999 9,951 11,284 (5,976) 14,899
Sales returns reserves:
Year ended December 31, 1997 $1,042 $ 3,743 $ -- $ 4,785
Year ended December 31, 1998 4,785 13,298 (8,583) 9,500
Year ended December 31, 1999 9,500 7,900 12,900 4,500
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
62
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
The information required by this item relating to the Company's executive
officers and directors is included under the caption "Executive Officers and
Directors" in Part I of this Form 10-K Annual Report.
ITEM 11. EXECUTIVE COMPENSATION AND RELATED INFORMATION.
The following table provides certain information summarizing the
compensation earned, by (i) the Company's Chief Executive Officer and (ii) each
of the Company's other four executive officers whose salary and bonus for the
fiscal year ended December 31, 1999 (the "1999 Fiscal Year") was in excess of
$100,000 (collectively, the "Named Executive Officers"), for services rendered
in all capacities to the Company and its subsidiaries for each of the last three
fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Number of
Compensation Securities
------------ ----------
Long-Term
Compensation
Name and Principal Position Year Salary($)/(1/ Bonus($) Awards
--------------------------- ---- ------------- -------- ------
<S> <C> <C> <C> <C>
George P. Roberts.............................. 1999 376,000 0 0
Chief Executive Officer and 1998 366,600 0 450,000
Chairman of the Board of Directors 1997 330,069 358,000 300,000
Pier Antoniucci................................ 1999 270,000 0 0
President and Chief Operating Officer 1998 270,855 0 200,000
1997 244,962 165,000 200,000
Michael Sophie................................. 1999 143,077 0 0
Former Chief Financial Officer, 1998 195,000 0 200,000
Vice President, Finance and 1997 175,673 109,000 150,000
Administration
Robert E. Collins.............................. 1999 142,308 0 175,000
Chief Financial Officer,
Vice President, Finance and Administration
John Wood...................................... 1999 144,900 0 20,000
Senior Vice President, Technology 1998 141,278 0 45,000
1997 147,421 28,980 10,000
</TABLE>
________________________
/(1)/ Includes amounts deferred under the Company's 401(k) Plan.
63
<PAGE>
Option Grants In 1999 Fiscal Year
The following table contains information concerning the stock option grants
made to each of the executive officers named in the Summary Compensation Table
for the 1999 Fiscal Year. No stock appreciation rights were granted to these
individuals during such fiscal year.
<TABLE>
<CAPTION>
Individual Grant
----------------
Number of % of Total Potential Realizable
Securities Options Value at Assumed Annual Rates
Underlying Granted to of Stock Price Appreciation for
Options Employees Exercise Option Term /(1)/
Granted in Fiscal Price Expiration -----------------
Name (#) Year ($/Sh) Date 5% ($) 10%($)
---- --- ---- ------ ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
John R. Wood...................... 20,000/(2)/ 1.32 3.97 08/17/09 48,914 126,498
Robert E. Collins................ 19,161/(2)/ 1.32 5.22 04/19/09 62,887 159,369
155,839/(2)/ 10.72 5.22 04/19/09 511,470 1,296,166
</TABLE>
____________________
/(1)/ There can be no assurance provided to any executive officer or any other
holder of the Company's securities that the actual stock price
appreciation over the ten-year option term will be at the assumed 5% and
10% levels or at any other defined level. Unless the market price of the
Common Stock appreciates over the option term, no value will be realized
from the option grants made to the executive officers.
/(2)/ Each option is immediately exercisable for all the option shares, but any
shares purchased under the option will be subject to repurchase by the
Company, at the option exercise price paid per share, should the
individual cease service with the Company prior to vesting in those
shares. Twenty-five percent (25%) of the option shares will vest upon the
optionee's continuation in service through one year following the grant
date and the balance of the shares will vest in thirty-six (36)
successive equal monthly installments upon the optionee?s completion of
each of the next thirty-six (36) months of service thereafter. The shares
subject to the option will immediately vest in full should (i) the
Company be acquired by merger or asset sale in which the option is not
assumed or replaced by the acquiring entity or (ii) the optionee?s
employment be involuntarily terminated within eighteen (18) months after
certain changes in control or ownership of the Company.
Aggregated Option Exercises And Fiscal Year-End Values
The table below sets forth certain information with respect to the
Company's Chief Executive Officer and the other executive officers named in the
Summary Compensation Table concerning the exercise of options during 1999
and unexercised options held by such individuals as of the end of
such fiscal year. No SARs were exercised during 1999 nor were
any SARs outstanding at the end of such fiscal year.
<TABLE>
<CAPTION>
Aggregate Number of Securities Value of Unexercised
Shares Value Underlying Unexercised in-the-Money Options at
Acquired on Realized Options at FY-End(#) FY-End(1)
-------------------- ---------
Name Exercise(#) ($)(2) Exercisable(3) Unexercisable Exercisable($) Unexercisable($)
---- ----------- ------ -------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
George P. Roberts 0 0 1,313,957 99,375 3,611,218 0
Pier Antoniucci 84,744 261,853 0 0 0 0
Michael Sophie 54,639 162,015 314,380 0 941,101 0
John R. Wood 0 0 101,041 23,959 426,719 97,495
Robert E. Collins 0 0 175,000 0 634,375 0
</TABLE>
__________________
(1) Based on the fair market value of the option shares at the 1999 Fiscal Year-
end ($8.844 per share based on the closing selling price on the Nasdaq
National Market as of December 31, 1999) less the exercise price.
64
<PAGE>
(2) Based on the fair market value of the shares on the exercise date less the
exercise price paid for those shares.
(3) The exercisable options are immediately exercisable for all the option
shares. However, any shares purchased under the options are subject to
repurchase by the Company, at the original exercise price paid per share,
upon the optionee?s cessation of service prior to vesting in such shares. As
of December 31, 1999, the following number of shares were unvested: Mr.
Roberts--544,167 shares; and Mr. Wood--1,225,313 shares; Mr. Collins--
175,000:
Employment Contracts, Termination Of Employment Arrangements And Change Of
Control Agreements
The Compensation Committee of the Board of Directors, as Plan Administrator
of the 1995 Stock Option/Stock Issuance Plan, has the authority to provide for
accelerated vesting of the shares of Common Stock subject to any outstanding
options held by the Chief Executive Officer and any other executive officer or
any unvested share issuances actually held by such individual, in connection
with certain changes in control of the Company or the subsequent termination of
the officer's employment following the change in control event.
The Company has entered into severance agreements (the "Agreements") with
George Roberts, Chairman of the Board of Directors and Chief Executive
Officer, James Sobczak, President and Chief Operating Officer, and Robert
Collins, Chief Financial Officer and Vice President, Finance and
Administration (individually, the "Officer" and collectively the "Officers"),
each dated December 15, 1997, September 7, 1999 and April 21, 1999,
respectively. Each of these Agreements provides for the following benefits
should the Officer's employment terminate, either voluntarily or
involuntarily, for any reason within twenty-four (24) months following a
Change in Control: (a) a severance payment in an amount equal to two (2) times
his annual rate of base salary; (b) a bonus in an amount equal to the greater
of either (i) two (2) times the full amount of the Officer's target bonus for
the fiscal year in which the termination occurs or (ii) two (2) times the full
amount of his target bonus for the fiscal year in which a Change in Control
occurs; (c) the shares subject to each outstanding option held by the Officer
(to the extent not then otherwise fully vested) will automatically vest so
that each such option will become immediately exercisable for all the option
shares as fully-vested shares (notwithstanding anything in this Form 10-K to
the contrary); and (d) the Company will, at its own expense, provide Mr.
Roberts and his dependents continued health care coverage for life. A Change
in Control will be deemed to occur under the Agreements upon: (a) a merger or
consolidation in which securities possessing fifty percent (50%) or more of
the total combined voting power of the Company's outstanding securities are
transferred to person or persons different from the persons holding those
securities immediately prior to such transaction, (b) the sale, transfer or
other disposition of all or substantially all of the assets of the Company in
complete liquidation or dissolution of the Company; (c) a hostile take-over of
the Company, whether effected through a tender offer for more than twenty-five
percent (25%) of the Company's outstanding voting securities or a change in
the majority of the Board by one or more contested elections for Board
membership; or (d) the acquisition, directly or indirectly by any person or
related group of persons (other than the Company or a person that directly or
indirectly controls, is controlled by, or is under common control with, the
Company), of beneficial ownership (within the meaning of Rule 13d-3 of the
Securities Exchange Act of 1934) of securities possessing more than thirty
percent (30%) of the total combined voting power of the Company's outstanding
securities pursuant to a tender or exchange offer made directly to the
Company's stockholders. In addition, each Officer will be entitled to a full
tax gross-up to the extent one or more of the severance benefits provided
under his Agreement are deemed to constitute excess parachute payments under
the federal income tax laws.
The Company does not have any existing agreements with the Chief Executive
Officer or any other executive officer named in the Summary Compensation Table
that establish a specific term of employment for them, and their employment may
accordingly be terminated at any time at the discretion of the Board of
Directors. The Compensation Committee of the Board of Directors has the
authority as Plan Administrator of the 1995 Plan to provide for the accelerated
vesting of the shares of Common Stock subject to outstanding options held by the
Company's executive officers, whether granted under that plan or any predecessor
plan, in the event their employment were to be terminated (whether involuntarily
or through a forced resignation) following certain changes in control or
ownership of the Company.
Compensation Committee Interlocks And Insider Participation
The Compensation Committee of the Company's Board of Directors currently
consists of Mr. Josling and Mr. Hawkins. Neither of these individuals was an
officer or employee of the Company at any time during the 1999 Fiscal Year or at
any other time.
No current executive officer of the Company has ever served as a member of
the board of directors or compensation committee of any other entity that has or
has had one or more executive officers serving as a member of the Company's
Board of Directors or Compensation Committee.
65
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE OF
THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is responsible for
establishing the base salary and incentive cash bonus programs for the
Company's executive officers. The Committee also has the exclusive
responsibility for the administration of the Company's 1995 Stock Option/Stock
Issuance Plan, under which grants may be made to executive officers and other
key employees of the Company.
Compensation Philosophy
Since the initial public offering of the Company's Common Stock in March
1995, it has been the Committee's policy and objective to provide the
Company's executive officers and other key employees with competitive
compensation opportunities based upon their contribution to the financial
success of the Company, the enhancement of corporate and stockholder values,
the market levels of compensation in effect at companies with which the
Company competes for executive talent and the personal performance of such
individuals. The primary factors that the Committee considered in establishing
the compensation levels of the executive officers for the 1999 fiscal year are
summarized below. The Committee may, however, in its discretion, apply
different factors in setting executive compensation for future fiscal years.
It is the Committee's current objective to have a significant portion of
each officer's compensation contingent upon the Company's performance as well
as upon the officer's own level of performance. Accordingly, the compensation
package for each executive officer and key employee is comprised of three
elements: (i) base salary that reflects individual performance and is designed
primarily to be competitive with salary levels in effect at a select group of
companies with which the Company competes for executive talent, (ii) annual
performance awards payable in cash and based upon the Company's financial
performance and the market performance of the Company's common stock and (iii)
long-term equity incentive awards with overlapping vesting schedules that
strengthen the mutuality of interests between the executive officers and the
Company's stockholders while fostering retention of existing personnel.
The Committee recognizes that the highly-specialized industry sector in
which the Company operates is both extremely competitive and
globally-challenging, with the result that there is substantial demand for
high-caliber, seasoned executives with a high level of industry-specific
knowledge and industry contacts, especially overseas contacts. It is crucial
that the Company reward and be assured of retaining the executive personnel
essential to the attainment of the Company's performance goals. For these
reasons, the Committee believes the Company's executive compensation
arrangements must remain competitive with those offered by other companies of
similar magnitude, complexity and performance records (the "peer group") in
order to provide adequate incentive to the Company's executive officers to
continue to provide services to the Company.
Cash Compensation
A key objective of the Company's current executive compensation program is
to position its key executives to earn annual cash compensation (base salary
plus bonus) equaling or exceeding that which the executive would earn at other
peer group companies. During 1999, the Committee reviewed and relied on
technology industry compensation surveys in its assessment of appropriate
compensation levels.
The fiscal year 1999 base salaries for the named executive officers are
based upon a number of factors, including, without limitation, each
executive's performance and contribution to overall Company performance and
the levels of base salary in effect for comparable positions with the peer
group companies. Base salary decisions are made as part of a formal review
process. Generally, the base salaries of the Company's executive officers for
66
<PAGE>
the 1999 fiscal year ranged from the 10th percentile to the 75th percentile of
the salaries surveyed for comparable positions at the peer group companies. In
defining "peer group companies," the Company considered companies with revenues
between $100 million and $200 million. In comparison to other companies in the
$200 million to $500 million range, the base salaries for the Company's
executive officers ranged from the 10th percentile to the 50th percentile.
The annual incentive compensation provided to the Company's executive
officers is in the form of cash bonuses based on the Committee's assessment of
the Company's financial performance for the year and the individual officer's
contribution to that performance. For the 1999 fiscal year, the Committee
determined not to award any cash bonus to the executive officers.
Stock Options
Equity incentives are provided primarily through stock option grants under
the 1995 Plan. The grants are designed to align the interests of each
executive officer with those of the stockholders and provide each individual
with a significant incentive to manage the Company from the perspective of an
owner with an equity stake in the business. Each grant allows the individual
to acquire shares of the Company's Common Stock at a fixed price per share
(the market price on the grant date) over a specified period of time (up to 10
years). The shares subject to each option generally vest in installments over
a two-to-four-year period, contingent upon the executive officer's continued
employment with the Company. Accordingly, the option will provide a return to
the executive officer only if the executive officer remains employed by the
Company during the applicable vesting period, and then only if the market
price of the underlying shares appreciates over the option term.
The number of shares subject to each option grant is set at a level
intended to create a meaningful opportunity for stock ownership based on the
officer's current position with the Company, the base salary associated with
that position, the size of comparable awards made to individuals in similar
positions within the industry, the individual's potential for increased
responsibility and promotion over the option term, and the individual's personal
performance in recent periods. The Committee will also take into account the
executive officer's existing holdings of the Company's Common Stock and the
number of vested and unvested options held by that individual in order to
maintain an appropriate level of equity incentive. However, the Committee does
not intend to adhere to any specific guidelines as to the relative option
holdings of the Company's executive officers.
Chief Executive Officer Performance and Compensation
In setting the base salary for Mr. Roberts for the 1999 fiscal year, the
Committee sought to achieve two objectives: (i) make his base salary
competitive with the base salaries paid to the chief executive officers of the
same peer group of companies which the Committee surveyed for comparative
compensation purposes for all other executive officers of the Company and (ii)
make a significant percentage of his total compensation package contingent
upon Company performance. For the 1999 fiscal year, the base salary of Mr.
Roberts was set at the 75th percentile of the base salary levels in effect for
67
<PAGE>
those other chief executive officers. In comparison to companies in the range
from $200 million to $500 million in revenues, Mr. Roberts' base salary was
set at the 50th percentile of the base salary levels for those chief executive
officers. As indicated above, the Committee decided not to award any cash
bonus to Mr. Roberts or any other executive officer for the 1999 fiscal year.
The Committee did not grant Mr. Roberts options to purchase any
additional shares of the Company's Common Stock during the 1999 fiscal
year.
It is the Committee's view that the total compensation package provided Mr.
Roberts for the 1999 fiscal year is competitive with the typical compensation
packages awarded to chief executive officers in the Company's peer group, in
light of the Company's performance.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code, enacted in 1993, generally
disallows a tax deduction to publicly held companies for compensation
exceeding $1 million paid to certain of the corporation's executive officers.
The limitation applies only to compensation that is not considered to be
performance-based. The non-performance based compensation to be paid to the
Company's executive officers for the 1999 fiscal year did not exceed the $1
million limit per officer, nor is it expected that the non-performance based
compensation to be paid to the Company's executive officers for fiscal 2000
will exceed that limit. Options granted under the Company's 1995 Plan are
structured so that any compensation deemed paid to an executive officer in
connection with the exercise of those options will qualify as
performance-based compensation that will not be subject to the $1 million
limitation. Because it is very unlikely that the cash compensation payable to
any of the Company's executive officers in the foreseeable future will approach
the $1 million limit, the Compensation Committee has decided at this time not to
take any other action to limit or restructure the elements of cash compensation
payable to the Company's executive officers. The Compensation Committee will
reconsider this decision should the individual compensation of any executive
officer ever approach the $1 million level.
It is the opinion of the Compensation Committee that the executive
compensation policies and programs in effect for the Company's executive
officers provide an appropriate level of total remuneration which properly
aligns the Company's performance and the interests of the Company's
stockholders with competitive and equitable executive compensation in a
balanced and reasonable manner, for both the short and long-term.
Brian T. Josling
Member, Compensation Committee
John A. Hawkins
Member, Compensation Committee
Stock Performance Graph
The graph depicted below shows a comparison of cumulative total shareholder
returns for the Company, the Dow Jones industrial average and the Standard and
Poors 500 Index.
1999 COMPARISON OF CUMULATIVE TOTAL RETURN
ASSUMES INITIAL INVESTMENT OF $100 AND REINVESTMENT OF DIVIDENDS
<TABLE>
<CAPTION>
3/2/95 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
<S> <C> <C> <C> <C> <C> <C>
PCOM, INC. 100.00 169.32 250.79 292.06 67.47 150.00
DJIA 100.00 128.26 164.15 198.21 230.14 288.17
SP 500 100.00 126.88 152.63 200.00 253.23 302.67
</TABLE>
- -------------------
(1) The graph covers the period from March 2, 1995, the commencement date of
the Company's initial public offering of shares of its Common Stock to
December 31, 1999.
(2) The graph assumes that $100 was invested in the Company on March 2, 1995,
in the Company's Common Stock and in each index, and that all dividends
were reinvested. No cash dividends have been declared on the Company's
Common Stock.
(3) Stockholder returns over the indicated period should not be considered
indicative of future stockholder returns.
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings made under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate future
filings made by the Company under those statutes, neither the preceding Stock
Performance Graph nor the Compensation Committee Report is to be incorporated by
reference into any such prior filings, nor shall such graph or report be
incorporated by reference into any future filings made by the Company under
those statutes.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information known to the Company
with respect to the beneficial ownership of the Company's Common Stock as of
February 29, 2000, by (i) all persons who are beneficial owners of five percent
(5%) or more of the Company's Common Stock, (ii) each director and nominee for
director, (iii) the executive officers named in the Summary Compensation Table
of the Executive Compensation and Related Information section of this Annual
Report on Form 10-K and (iv) all current directors and executive officers as a
group. Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares beneficially owned, subject to
community property laws, where applicable.
<TABLE>
<CAPTION>
Percentage
Shares of Shares
Beneficially Beneficially
Beneficial Owner Owned (#) Owned (1)
---------------- ---------- -----------------
<S> <C> <C>
State of Wisconsin Investment Board /2/............................................. 9,784,800 12.74
P.O. Box 7842
Madison, WI 53707
George P. Roberts /3/............................................................... 1,579,364 2.06
John R. Wood /4/.................................................................... 147,269 *
Kenneth E. Bean, II /5/............................................................. 6,673 *
M. Bernard Puckett /6/ ............................................................. 81,332 *
John A. Hawkins /7/................................................................. 30,000 *
James J. Sobczak /8/................................................................ 44,000 *
Brian Josling /9/................................................................... 40,000 *
Robert Collins /10/................................................................. 175,000 *
All current directors and executive officers as a group (8 persons)................. 2,103,638 2.74
</TABLE>
_____________________
* Less than one percent of the outstanding Common Stock
(1) Percentage of ownership is based on 76,829,914 shares of Common Stock
outstanding on February 29, 2000. Shares of Common Stock subject to stock
options that are currently exercisable or will become exercisable within 60
days after February 29, 2000 are deemed outstanding for computing the
percentage of the person or group holding such options, but are not deemed
outstanding for computing the percentage of any other person or group.
(2) Pursuant to a Schedule 13G dated February 2, 2000, filed with the
Securities and Exchange Commission, the State of Wisconsin Investment Board
reported that as of February 2, 2000 it had sole voting power over all
9,784,800 shares and sole dispositive power over all shares.
(3) Includes 1,348,957 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after
February 29, 2000.
(4) Includes 101,874 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after
February 29, 2000.
(5) Includes 2,083 shares issuable upon exercise of options that are currently
exercisable or will become exercisable within 60 days after February 29,
2000.
(6) Includes 61,332 shares issuable upon exercise of options that are currently
exercisable or will become exercisable within 60 days after February 29,
2000.
(7) Includes 30,000 shares issuable upon exercise of options that are currently
exercisable or will become exercisable within 60 days after February 29,
2000.
(8) Includes 44,000 shares issuable upon exercise of options that are currently
exercisable or will become exercisable within 60 days after February 29,
2000.
(9) Includes 40,000 shares issuable upon exercise of options that are currently
exercisable or will become exercisable within 60 days after February 29,
2000.
69
<PAGE>
(10) Includes 175,000 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after
February 29, 2000.
(11) Includes 1,803,246.00 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after
February 29, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In addition to the indemnification provisions contained in the Company's
Restated Certificate of Incorporation and Bylaws, the Company has entered into
separate indemnification agreements with each of its directors and officers.
These agreements require the Company, among other things, to indemnify such
director or officer against expenses (including attorneys' fees), judgments,
fines and settlements (collectively, "Liabilities") paid by such individual in
connection with any action, suit or proceeding arising out of such individual's
status or service as a director or officer of the Company) other than
Liabilities arising from the willful misconduct or conduct that is knowingly
fraudulent or deliberately dishonest) and to advance expenses incurred by such
individual in connection with any proceeding against such individual with
respect to which such individual may be entitled to indemnification by the
Company.
Mr. Roberts' adult son and Mr. Antoniucci's adult daughter each holds a
minority interest in a private company that supplies synthesizers to the Company
for use in its products. To date, the Company has purchased approximately $10.2
million of synthesizers from such supplier, including none in 1999 and
approximately $965,000 in 1998 and $2.3 million in 1997. Sales of synthesizers
to the Company, for fiscal year 1998, accounted for 62% of the sales of such
supplier, the terms of the Company's purchase agreement with such supplier are
no less favorable to the Company than could be obtained from an unaffiliated
third party supplier. The supplier ceased operations in 1999. The Company also
purchases synthesizers from Geritel, S.p.A., Communication Techniques, Inc. and
SPC Electronics Corp. at competitive prices approximately equal to those of such
suppler. Each such adult is financially independent of his or her parent and
resides at a different address from his or her parent.
All future transactions between the Company and its officers, directors,
principal stockholders and affiliates will be approved by a majority of the
independent and disinterested members of the Board of Directors, and will be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties.
70
<PAGE>
PART IV
- -------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
71
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
(b) See Exhibit list below
<S> <C>
2.1(4) Agreement dated April 15, 1996, by and among the Company, Mr. Giovanni Marciano and certain
other parties named thereunder.
2.8(12) Asset Purchase Agreement dated March 13, 1998, by and between P-Com, Inc. and Cylink
Corporation
2.8A(12) Amendment to the Asset Purchase Agreement dated March 13, 1998 by and between P-Com, Inc.
and Cylink Corporation.
2.8B(12) Amendment No. 2 to the Asset Purchase Agreement dated March 27, 1998 by and between P-Com,
Inc. and Cylink Corporation.
2.8C(12) Unsecured Subordinated Promissory Note
3.2(2) Restated Certificate of Incorporation filed on March 9, 1995.
3.2A(7) Certificate of Amendment of Restated Certificate of Incorporation filed on June 16, 1997.
3.2B(8) Certificate of Designation for the Series A Junior Participating Preferred Stock, as filed
with the Delaware Secretary of State on October 8, 1997.
3.2C(15) Certificate of Designation of the Series A Junior Participating Preferred Stock, as filed
with the Delaware Secretary of State on December 21, 1998.
3.2D(15) Certificate of Designation for the Series B Convertible Participating Preferred Stock, as
filed with the Delaware Secretary of State on December 21, 1998.
3.2E(15) Certificate of Correction of Certificate of Designations for the Series B Convertible
Participating Preferred Stock, as filed with the Delaware Secretary of State on December
23, 1998.
3.3(1) Bylaws of the Company.
4.1(1) Form of Common Stock Certificate.
4.2(11) Indenture, dated as of November 1, 1997, between the Registrant and State Street Bank and
Trust Company of California, N.A., as Trustee.
4.4(11) Registration Rights Agreement, dated as of November 1, 1997 by and among the Registrant and
PaineWebber Incorporated, BancAmerica Robertson Stephens, NationsBanc Montgomery
Securities, Inc. and Pacific Growth Equities, Inc.
4.5(9) Rights Agreement, dated as of October 1, 1997, between the Company and BankBoston, N.A.,
which includes the form of Certificate of Designation for the Series A Junior Participating
Preferred Stock as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of
Rights to Purchase Preferred Shares as Exhibit C.
4.6(14) First Amendment to the Rights Agreement, dated as of October 5, 1998, between the Company
and BankBoston, N.A.
4.7(15) Amended and Restated Rights Agreement, dated as of December 18, 1998 between the Company
and BankBoston, N.A.
4.8(15) Amended and Restated Rights Agreement, dated as of December 21, 1998 between the Company
and BankBoston, N.A.
4.9 (30 ) Amendment to Amended and Restated Rights Agreement
*10.3(1) Master OEM Agreement dated January 1, 1995, by and between the Company and AT&T Corp.
*10.9(1) Manufacturing Agreement dated July 13, 1994, by and between the Company and SPC.
*10.10(1) Manufacturing Agreement dated April 20, 1994, by and between the Company and Comptronix
Corporation (assigned to Sanmina Corporation).
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.12(1) Master Lease Agreement dated November 9, 1992, by and between the Company and Dominion;
First Amendment to Master Lease Agreement dated June 23, 1993, by and between the Company
and Dominion.
10.13(1) Master Equipment Lease entered into by and between the Company and Phoenix Leasing
Incorporated on August 10, 1994.
10.14(1) Commitment Letter dated January 10, 1995, by and between the Company and Applied
Telecommunications Technologies, Inc. ("ATTI"), including form of Master Lease to be
entered into between the Company and ATTI.
10.16(13) 1995 Stock Option/Stock Issuance Plan, as amended.
1995 Stock Option/Stock Issuance Plan, including forms of Notices of Grant of Automatic
Stock Option for initial grant and annual grants and Automatic Stock Option Agreement, as
amended.
10.17(13) Employee Stock Purchase Plan, as amended.
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.18(1) Form of Indemnification Agreement by and between the Company and each of its officers and
directors and a list of signatories.
10.19A(10) Service Agreement dated December 15, 1997 by and between the Company and Mr. George P.
Roberts.
10.19B(10) Service Agreement dated December 15, 1997 by and between the Company and Mr. Michael J.
Sophie.
10.19C(10) Service Agreement dated December 15, 1997 by and between the Company and Mr. Pier
Antoniucci.
10.21(1) Real Property Lease dated December 10, 1993, by and between the Company and Bryan T.D.
Trust, pertaining to 3175 S. Winchester Boulevard, Campbell, California 95008.
10.23(2) Sublease dated May 1, 1995 by and between the Company and Medallion Mortgage Company.
10.24(3) Lease dated August 4, 1995 by and between P-COM United Kingdom, Inc. and Capital Counties
plc; Rent Deposit Deed dated August 4, 1995, by and between P-Com United Kingdom, Inc.
and Capital Counties plc.
10.27(5) Lease dated November 11, 1995 by and between the Company, Inc. and Johann Birkart,
Internationale Spedition GmbH & Co.
10.31(13) Credit Agreement among P-Com, Inc. as the Borrower, Union Bank of California N.A., as
Administrative Agent, Bank of America National Trust and Savings Association as
Syndication Agent and the Lenders party hereto dated as of May 15, 1998.
10.32(13) Revolving Promissory Note in the principal amount of $25,000,000 dated May 15, 1998.
10.33(13) Revolving Promissory Note in the principal amount of $25,000,000 dated May 15, 1998.
10.34(13) Subsidiary Guarantee dated as of May 15, 1998.
*10.35(13) Joint Development and License Agreement between Siemens Aktiengesellschaft and P-Com,
Inc. dated June 30, 1998.
10.36(13) International Employee Stock Purchase Plan
10.37(14) First Amendment to Credit Agreement by and among P-Com, Inc., as the Borrower, Union
Bank of California N.A., as Administrative Agent, Bank of America National Trust and
Savings Association, as Syndication Agent, and the Lenders party thereto, dated as of
July 31, 1998.
10.38(15) Securities Purchase Agreement dated as of December 21, 1998 by and among the Company and
the purchasers listed therein.
10.39(15) Registration Rights Agreement dated as of December 21, 1998 by and among the Company and
the purchasers listed therein.
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.40A(16) Warrant to purchase shares of Common Stock, dated as of December 21, 1998, issued by the
Company to Castle Creek Technology Partners LLC
10.40B(16) Warrant to purchase shares of Common Stock, dated as of December 21, 1998, issued by the
Company to Capital Ventures International.
10.40C(16) Warrant to purchase shares of Common Stock, dated as of December 21, 1998, issued by the
Company to Marshall Capital Management, Inc
10.41(15) Second Amendment to Credit Agreement and First Amendment to Security Agreement by and
among the Registrant, as the Borrower, Union Bank of California, N.A., as Administrative
Agent, Bank of America National Trust and Savings Association, as Syndication Agent, and
the lenders party thereto dated as of October 21, 1998.
10.42(15) Third Amendment to Credit Agreement by and among the Registrant, as the Borrower, Union
Bank of California, N.A., as Administrative Agent, Bank of America National Trust and
Savings Association, as Syndication Agent, and the lenders party thereto dated as of
December 17, 1998.
10.43(17) Fourth Amendment to Credit Agreement and First Amendment to Security Agreement by and
among the Registrant, as the Borrower, Union Bank of California, N.A., as Administrative
Agent, Bank of America National Trust and Savings Association, as Syndication Agent, and
the lenders party thereto dated as of December 28, 1998.
10.44(17) Fifth Amendment to Credit Agreement by and among the Registrant, as the Borrower, Union
Bank of California, N.A., as Administrative Agent, Bank of America National Trust and
Savings Association, as Syndication Agent, and the lenders party thereto dated as of
January 29, 1999.
10.45(18) Sixth Amendment to Credit Agreement by and among the Registrant, as the Borrower, Union
Bank of California, N.A., as Administrative Agent, Bank of America National Trust and
Savings Association, as Syndication Agent, and the lenders party thereto dated as of
March 31, 1999.
10.46(18) Common Stock PIPES Purchase Agreement, dated June 21, 1999,by and between P-Com and the
Kaufmann Fund.
10.47 (18) Common Stock PIPES Purchase Agreement, dated June 21, 1999,by and between P-Com and
Baystar Capital, L.P.
10.48 (18) Common Stock PIPES Purchase Agreement, dated June 21, 1999,by and between P-Com and the
Lagunitas Partners,L.P.
10.49 (18) Common Stock PIPES Purchase Agreement, dated June 21, 1999,by and between P-Com and
Gruber McBain International.
10.50 (18) Common Stock PIPES Purchase Agreement, dated June 21, 1999, by and between P-Com and
Lockheed Martin Corp. Master Retirement Trust.
10.51 (18) Common Stock PIPES Purchase Agreement, dated June 21, 1999, by and between P-Com and
Trustees of Hamilton College.
10.52 (18) Common Stock PIPES Purchase Agreement, dated June 21, 1999, by and between P-Com and
State of Wisconsin Investment Board.
10.53 (19) Seventh Amendment to Credit Agreement by and among the Registrant, as the Borrower, Union
Bank of California, N.A., as Administrative Agent, Bank of America National Trust and
Savings Association, as Syndication Agent, and the lenders party thereto dated as of June
29, 1999.
</TABLE>
75
<PAGE>
10.54 (20) Agreement between P-Com and Marshall Capital
Management, Inc., dated as of June 4, 1999.
10.55 (21) Agreement between P-com and Castle Creek Technology
Partners, LLC, dated as of June 4, 1999.
10.56 (22) Agreement between P-Com and Capital Ventures
International, dated as of June 4, 1999.
10.57 (23) Warrant to purchase shares of Common Stock, dated as
of June 4, 1999, issued by P-Com,
Inc. to Marshall Capital Management, Inc.
10.58 (24) Warrant to purchase shares of Common Stock, dated as
of June 4, 1999, issued by P-Com,
Inc. to Castle Creek Technology Partners LLC.
10.59 (25) Warrant to purchase shares of Common Stock, dated as
of June 4, 1999, issued by P-Com,
Inc. to Capital Ventures International.
10.60 (26) Severance Agreement dated April 21, 1999 by and
between the Company and Robert E. Collins.
10.61 (27) Offer letter dated April 1., 1999 by and between the
Company and Robert E. Collins.
10.62 (28) Employment Letter Agreement between P-Com, Inc. and
James Sobczak, dated August 18, 1999.
10.63 (29) Severance Agreement between P-Com, Inc. and James
Sobczak, dated September 10, 1999.
10.64 (30) Eighth Amendment to Credit Agreement dated August 3,
1999.
10.65 (31) Stock Purchase Warrant agreement between P-Com, Inc.
and Castle Creek Technology Partners
LLC, dated August 11, 1999.
10.66 (32) Stock Purchase Warrant agreement between P-Com, Inc.
and Capital Ventures International,
dated August 11, 1999.
10.67 (33) Stock Purchase Warrant agreement between P-Com, Inc.
and Marshall Capital Management, Inc., dated August 11,
1999.
10.68 Penalty Settlement agreement between P-Com Inc. and
Castle Creek Technology Partners, LLC, dated November
16, 1999.
10.69 Penalty Settlement agreement between P-Com Inc. and
Marshall Capital Management, Inc. dated November 16,
1999.
10.70 Penalty Settlement agreement between P-Com Inc. and
Capital Ventures International dated November 16, 1999.
10.71 Eighth Amendment to Credit Agreement by and among P-
Com, Inc., as the Borrower, Union Bank of California,
N.A., as Administrative Agent, Bank of America National
Trust and Savings Association, as Syndication Agent,
and the lenders party thereto, dated as of August 3,
1999.
10.72 Ninth Amendment to Credit Agreement by and among P-Com,
Inc., as the Borrower, Union Bank of California, N.A.,
as Administrative Agent, Bank of America National Trust
and Savings Association, as Syndication Agent, and the
lenders party thereto, dated as of November 12, 1999.
10.73 Tenth Amendment to Credit Agreement by and among P-Com,
Inc., as the Borrower, Union Bank of California, N.A.,
as Administrative Agent, Bank of America National Trust
and Savings Association, as Syndication Agent, and the
lenders party thereto, dated as of December 16, 1999.
11.1(26) Computation of Pro Forma Net Income (Loss) Per Share.
21.1(26) List of subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
76
<PAGE>
24.1 Power of Attorney. (See page 80.)
27.1 Financial Data Schedule
(1) Incorporated by reference to identically numbered exhibits included in the
Company's Registration Statement on FormS-1 (File No. 33-88492) declared
effective with the Securities and Exchange Commission on March 2, 1995.
(2) Incorporated by reference to identically numbered exhibits included in the
Company's Registration Statement on Form S-1 (File No. 33-95392) declared
effective with the Securities and Exchange Commission on August 17, 1995.
(3) Incorporated by reference to identically numbered exhibits included in the
Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on November 1, 1996.
(6) Incorporated by reference to identically numbered exhibits included in the
Company's Registration Statement on Form S-3 declared effective with the
Securities and Exchange Commission on May 16, 1996 (File No. 333-3558).
(9) Incorporated by reference to identically numbered exhibits to the Company's
Annual Report on Form 10-K for the annual period ended December 31, 1995.
(13) Incorporated by reference to identically numbered exhibits to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1997.
(14) Incorporated by reference to Exhibit 3.3 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1996.
(16) Incorporated by reference to Exhibit 3 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1997.
(17) Incorporated by reference to Exhibit 4 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1997.
(18) Incorporated by reference to identically numbered exhibits to the
Company's Annual Report on Form 10-K for the annual period ended December
31, 1997.
(19) Incorporated by reference to identically numbered exhibits included in the
Company's Registration Statement on Form S-3 (File No. 333-45463) filed
with the Securities and Exchange Commission on February 2, 1998.
(21) Incorporated by reference to identically numbered exhibits included in the
Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on May 15, 1998.
(22) Incorporated by reference to identically numbered exhibits included in the
Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on August 14, 1998
(23) Incorporated by reference to identically numbered exhibits included in the
Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on November 13, 1997.
(24) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated December 22, 1998 as filed with the Securities and Exchange
Commission on December 24, 1998 (File No. 000-25356).
(25) Incorporated by reference to identically numbered exhibits included in the
Company's Registration Statement on Form S-3 (File No. 333-70937) filed
with the Securities and Exchange Commission on January 21, 1999.
(26) Incorporated by reference to identically numbered exhibits included in the
Company's Annual Report on Form 10-K for the annual period ended December
31, 1998
77
<PAGE>
(27) Incorporated by reference to identically numbered exhibits included in the
Company's Annual Report on Form 10-K for the annual period ended December
31, 1998 as amended on from 10-K/A filed with the Securities and Exchange
Commission on May 3, 1999.
(28) Incorporated by reference to identically numbered exhibit to the Company's
Current Report on Form 8-K dated June 21, 1999, as filed with the
Securities and Exchange Commission on June 22, 1999.
(29) Incorporated by reference to Exhibit 48A to the Company's Report on Form 8-
K dated June 4, 1999, as filed with the Securities and Exchange Commission
on June 8, 1999.
(30) Incorporated by reference to Exhibit 48B to the Company's report Form 8-K
dated June 4, 1999, as filed with the Securities and Exchange Commission on
June 8, 1999.
(31) Incorporated by reference to Exhibit 48C to the Company's report on Form 8-
K dated June 4, 1999, as filed with the Securities and Exchange Commission
on June 8, 1999.
(32) Incorporated by reference to Exhibit 49.A to the Company's report on Form
8-K dated June 4, 1999, as filed with the Securities and Exchange
Commission on June 8, 1999.
(33) Incorporated by reference to Exhibit 49.B to the Company's report on Form
8-K dated June 4, 1999, as filed with the Securities and Exchange
Commission on June 8, 1999.
(34) Incorporated by reference to Exhibit 49.C to the Company's report on Form
8-K dated June 4, 1999, as filed with the Securities and Exchange
Commission on June 8, 1999.
(35) Incorporated by reference to Exhibit 10.46 to the Company's Quarterly
Report of Form 10-Q for the quarterly period ended March 31, 1999.
(36) Incorporated by reference to Exhibit 10.47 to the Company's Quarterly
Report of Form 10-Q for the quarterly period ended March 31, 1999.
(37) Incorporated by reference to Exhibit 10.54 to the Company's Quarterly
Report of Form 10-Q for the quarterly period ended September 30, 1999.
(38) Incorporated by reference to Exhibit 10.55 to the Company's Quarterly
Report of Form 10-Q for the quarterly period ended September 30, 1999.
(39) Incorporated by reference to Exhibit 10.56 to the Company's Quarterly
Report of Form 10-Q for the quarterly period ended September 30, 1999.
(40) Incorporated by reference to Exhibit 10.57 to the Company's Quarterly
Report of Form 10-Q for the quarterly period ended September 30, 1999.
(41) Incorporated by reference to Exhibit 10.58 to the Company's Quarterly
Report of Form 10-Q for the quarterly period ended September 30, 1999.
(42) Incorporated by reference to Exhibit 10.59 to the Company's Quarterly
Report of Form 10-Q for the quarterly period ended September 30, 1999.
(43) 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.
* Confidential treatment granted as to certain portions of these exhibits.
78
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on.
P-COM, INC.
Date: March 31, 2000 By /s/ George P. Roberts
-----------------------------
George P. Roberts
Chairman of the Board and
Chief Executive Officer
Date: March 31, 2000 By /s/ Robert E. Collins
-----------------------------
Robert E. Collins
Chief Financial Officer, Vice
President,
Finance and Administration
79
<PAGE>
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Date: March 31, 2000 By /s/ George P. Roberts
---------------------------------------------------------
George P. Roberts
Chairman of the Board and
Chief Executive Officer (Principal Executive Officer)
Date: March 31, 2000 By /s/ Robert E. Collins
---------------------------------------------------------
Robert E. Collins
Chief Financial Officer, Vice President,
Finance and Administration (Principal Financial Officer)
Date: March 31, 2000 By /s/ James J. Sobczak
---------------------------------------------------------
James J. Sobczak
President and Chief Operating Officer, Director of the Company
Date: March 31, 2000 By /s/ Brian Josling
---------------------------------------------------------
Brian Josling
Director of the Company
Date: March 31, 2000 By /s/ John A. Hawkins
---------------------------------------------------------
John A. Hawkins
Director of the Company
Date: March 31, 2000 By /s/ M. Bernard Puckett
---------------------------------------------------------
M. Bernard Puckett
Director of the Company
</TABLE>
80
<PAGE>
EXHIBIT 10.68
PENALTY SETTLEMENT AGREEMENT
This Penalty Settlement Agreement (the "Agreement") is made between P-Com,
Inc., a Delaware corporation ("P-Com"), and Castle Creek Technology Partners
LLC, a Delaware limited liability company (the "Investor"), with respect to an
Agreement between P-Com and the Investor dated as of June 4, 1999 (the "Original
Agreement"). Capitalized terms not defined in this Agreement shall have the
meanings given them in the Original Agreement.
1. The Investor has, under the Original Agreement, a Put Right and/or a
right to receive Late Registration Penalties, under certain circumstances. Upon
the receipt of the consideration described in sections 2 and 3 below the
Investor hereby waives all past, present and future Put Rights and Late
Registration Penalties, for all past, present and future circumstances.
2. P-Com hereby agrees to forthwith issue to the Investor 70,050 shares of
unregistered P-Com common stock, which is equal to $330,330 divided by the
Price. The "Price" is the product of (a) 90% times (b) the average of the
closing bid prices of P-Com common stock as reported by the Nasdaq National
Market for the 15 trading days ending on November 10, 1999 (inclusive). The
parties agree that the Price is $4.715625.
3. Simultaneous with the delivery of this Agreement P-Com shall issue to
Investor the duly executed 12% Convertible Promissory Note, in the form attached
hereto as Exhibit A (the "Note").
4. The parties acknowledge that the sum of the quantities in Sections 2
and 3 of this Agreement are intended to reflect the Late Registration Penalties
which would accrue by December 20, 1999, and the Investor's potential ability
after that to use SEC Rule 144 for resales (subject to the requirements of Rule
144). This reference to Rule 144 is not intended to diminish in any way the
Original Agreement obligations of P-Com referred to in the first two sentences
of Section 11 of this Agreement.
5. P-Com hereby represents and warrants to Investor as follows as of the
date hereof:
<PAGE>
(a) Authorization and Enforcement. (i) P-Com has the requisite power and
-----------------------------
authority to enter into and perform its obligations under this Agreement and the
Note; (ii) the execution, delivery and performance of this Agreement and the
Note by P-Com and the consummation by it of the transactions contemplated hereby
and thereby have been duly authorized by P-Com's Board of Directors and no
further consent or authorization of P-Com, its Board of Directors or its
stockholders is required; and (iii) this Agreement and the Note constitute valid
and binding obligations of P-Com enforceable against P-Com in accordance with
their respective terms.
(b) No Conflicts. The execution, delivery and performance of this
------------
Agreement and the Note by P-Com and the consummation by P-Com of the
transactions contemplated hereby and thereby and the conversion of the Note into
Common Stock in accordance with the terms of the Note will not (i) result in a
violation of the Certificate of Incorporation (including without limitation the
Certificate) or the bylaws of P-Com; (ii) cause Investor to be deemed an
"Acquiring Person" under the Amended and Restated Rights Agreement between P-Com
and BankBoston, N.A.; or (iii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights under, or result in termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
P-Com or any of its subsidiaries is a party or result in a violation of any law,
rule, regulation, order, judgment or decree applicable to P-Com or any of its
subsidiaries or by which any property or assets of P-Com or any of its
subsidiaries is bound or affected.
(c) Issuance of Shares. The shares issuable hereunder and upon conversion
------------------
of the Note (the "Shares") are duly authorized and reserved for issuance, and,
are (or upon conversion of the Note, will be) validly issued, fully paid and
non-assessable, and free from all taxes, liens, claims and encumbrances (except
as created by Investor) and will not be subject to preemptive rights (except as
granted by Investor) or to P-Com's knowledge after reasonable investigation
other similar rights of stockholders of P-Com (other than as granted by
Investor). The Board of Directors of P-Com has unanimously approved the issuance
of Shares.
(d) SEC Documents. As of their respective dates, the SEC Documents (as
-------------
defined in the Purchase Agreement) complied in all material respects with the
requirements of the Exchange Act (as defined in the Purchase Agreement) and the
rules and regulations of the SEC promulgated thereunder applicable to the SEC
Documents, except for the Exceptions, and none of the SEC Documents, at the time
they were filed with the SEC, contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except for the Exceptions. None of the
statements made in any such SEC Documents is currently required to be updated or
amended under applicable law, except for the Exceptions. Since December 31,
1998, there has been no material adverse change and no material adverse
development in the business, properties, operations, financial condition or
results of operations or publicly-announced prospects of P-Com, except as
clearly disclosed as such in the SEC Documents filed with the SEC since December
31, 1998 and except for the Exceptions. The "Exceptions" are the necessity to
restate P-Com's financial statements for the matters and to the extent disclosed
in P-Com's January 28, 1999 and October 28, 1999 press releases, and the various
writedowns, writeoffs and charges described in P-Com's Form 10-Q for the quarter
ended June 30, 1999.
2
<PAGE>
(e) Disclosure. No information (written or oral) relating to or
----------
concerning P-Com and set forth in this Agreement or provided to Investor in
connection with the transactions contemplated hereby contains an untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements made herein or therein, in light of the
circumstances under which they were made, not misleading. No material adverse
fact (within the meaning of the federal securities laws of the United States)
exists with respect to P-Com or any of its subsidiaries which has not been
publicly disclosed. P-Com has not provided Investor with any material non-public
information.
(f) Exemption. The transactions contemplated hereby are exempt from
---------
the registration requirements of the Securities Act.
6. The Investor hereby waives any rights and remedies under the Original
Agreement arising from inaccuracies in the SEC Documents to the extent such
inaccuracies were caused by the Exceptions.
7. With a view to making available the benefits of certain rules and
regulations of the Securities and Exchange Commission (the "Commission") which
may permit the sale of the Shares to the public without registration, P-Com
agrees to:
A. Make and keep public information available as those terms are
understood and defined in Rule 144 under the Securities Act;
B. File with the Commission in a timely manner all reports and other
documents required of P-Com under the Securities Act and the Exchange Act;
C. So long as Investor owns any Shares, furnish to Investor forthwith
upon request a written statement by P-Com as to its compliance with the
reporting requirements of Rule 144, and of the Securities Act and the Exchange
Act, a copy of the most recent annual or quarterly report of P-Com, and such
other reports and documents so filed as Investor may reasonably request in
availing itself of any rule or regulation of the Commission allowing Investor to
sell any such securities without registration.
8. If P-Com proposes to register shares of common stock under the
Securities Act in connection with the public offering of such shares (other than
the resale registration statement for the Registrable Securities contemplated by
the Original Agreement or a registration relating solely to the sale of
securities issued by P-Com on June 22, 1999 to certain investors in the amount
of $40,000,000 or to participants in a Company stock plan or employee stock
award or a registration on Form S-4 under the Securities Act or any successor or
similar form registering stock issuable upon a reclassification, a business
combination involving an exchange of
3
<PAGE>
securities or an exchange offer for securities of the issuer or another entity)
(a "Proposed Registration"), P-Com shall, at such time, promptly give Investor
written notice of such Proposed Registration. Investor shall have thirty (30)
days from its receipt of such notice to deliver to P-Com a written request
specifying the amount of Shares that it intends to sell and Investor's intended
method of distribution. Upon receipt of such request, P-Com shall use its best
efforts to cause all Shares which P-Com has been requested to register to be
registered under the Securities Act to the extent necessary to permit their sale
or other disposition in accordance with the intended methods of distribution
specified in the request of Investor; provided, however, that P-Com shall have
the right to postpone or withdraw any registration effected pursuant to this
section without obligation to Investor. If, in connection with any underwritten
public offering for the account of P-Com, the managing underwriter(s) thereof
shall impose a limitation on the number of shares of common stock which may be
included in the registration statement because, in such underwriter(s)'
judgment, marketing or other factors dictate such limitation is necessary to
facilitate public distributions, then P-Com shall be obligated to include in
such registration statement only such limited portion of the Shares with respect
to which Investor has requested inclusion hereunder as such underwriter(s) shall
permit. P-Com shall not exclude any Shares unless P-Com has first excluded all
outstanding securities, the holders of which are not entitled to inclusion of
such securities in such registration statement; and provided, further, however,
that, after giving effect to the immediately preceding proviso, any exclusion of
Shares shall be made pro rata with holders of other securities having the right
to include such securities in the registration statement. The Investor shall
provide all requested information needed for the registration statement.
9. P-Com will use all reasonable efforts to cause all Shares held by
Investor to be listed on each securities exchange on which similar securities
issued by P-Com are then listed.
10. This Agreement constitutes the entire agreement of the parties with
respect to the subject matter hereof. Any negotiations, understandings or
agreements, prior or
4
<PAGE>
contemporaneous, written or oral, with respect to such subject matter are
superseded hereby and merged herein. This Agreement may not be amended except in
writing.
11. Except as expressly amended hereby, the Original Agreement, as amended
in writing from time to time through the date hereof, remains unchanged and in
full force and effect. Without limitation, the provisions of the Original
Agreement requiring P-Com to use its best efforts to register for resale the
Registrable Securities remain effective; however, the particular remedies of the
Put Right and the Late Registration Penalties are eliminated. Also, the Investor
hereby agrees not to, until the earlier of January 31, 2000 and such time as P-
Com has fully repaid the Union Bank of California debt due in January 2000, seek
any remedy whatever for failure to have the resale registration statement
declared effective, and further agrees not to before or after such time ever
seek any remedy whatever for failure to have the resale registration statement
declared, before November 16, 1999, effective.
DATED: November 16, 1999 P-COM, INC.
By: /s/ Robert E. Collins
---------------------------------
CASTLE CREEK TECHNOLOGY PARTNERS LLC
By: Castle Creek Partners, LLC
By: /s/ Richard S. Marks
---------------------------
Richard S. Marks, Vice President
5
<PAGE>
EXHIBIT A
---------
P-COM, INC.
PROMISSORY NOTE
---------------
November 16, 1999 $400,000
P-Com, Inc., a Delaware corporation (the "Company"), hereby promises
to pay to the order of Castle Creek Technology Partners LLC the principal
amount of $400,000 together with interest thereon calculated from the date
hereof in accordance with the provisions of this Note.
This Note was issued pursuant to a Penalty Settlement Agreement,
entered into as of November 16, 1999 (as amended and modified from time to time,
the "Agreement"), between the Company and the original holder of this Note.
1. Payment of Interest. Except as otherwise expressly provided in
-------------------
paragraph 3(b) hereof, interest shall accrue at the rate of twelve percent (12%)
per annum on the unpaid principal amount of this Note outstanding from time to
time, or (if less) at the highest rate then permitted under applicable law. The
Company shall pay to the holder of this Note all accrued interest on the date
the principal amount of this Note is due (whether at maturity or otherwise).
Unless prohibited under applicable law, any accrued interest which is not paid
on the date on which it is due and payable shall bear interest at the same rate
at which interest is then accruing on the principal amount of this Note until
such interest is paid. Interest shall accrue on any principal payment due under
this Note and, to the extent permitted by applicable law, on any interest which
has not been paid on the date on which it is due and payable until such time as
payment therefor is actually delivered to the holder of this Note.
2. Payment of Principal on Note.
----------------------------
(a) Scheduled Payments. The Company shall pay the principal
------------------
amount of $400,000 (or such lesser principal amount then outstanding) to the
holder of this Note on November 15, 2000, together with all accrued and unpaid
interest on the principal amount being repaid.
(b) Prepayments. The Company may not prepay this Note without
-----------
the prior written consent of the Holder which may be withheld for any or no
reason. In connection with each prepayment of principal hereunder, the Company
shall also pay all accrued and unpaid interest to the date of prepayment on the
principal amount of this Note being repaid.
3. Events of Default.
-----------------
(a) Definition. For purposes of this Note, an Event of Default
----------
shall be deemed to have occurred if:
Exhibit A-1
<PAGE>
(i) the Company fails to pay when due and payable (whether
at maturity or otherwise) the full amount of interest then accrued on this Note
or the full amount of any principal payment on this Note;
(ii) the Company fails to perform or observe any other
material provision contained in this Note or in the Agreement, and such failure
is not cured within 5 days after the occurrence hereof;
(iii) any representation, warranty or information contained
in the Agreement is false or misleading in any material respect on the date
made;
(iv) the Company or any subsidiary makes an assignment for
the benefit of creditors or admits in writing its inability to pay its debts
generally as they become due; or an order, judgment or decree is entered
adjudicating the Company or any subsidiary bankrupt or insolvent; or any order
for relief with respect to the Company or any subsidiary is entered under the
Federal Bankruptcy Code; or the Company or any subsidiary petitions or applies
to any tribunal for the appointment of a custodian, trustee, receiver or
liquidator of the Company or any subsidiary, or of any substantial part of the
assets of the Company or any subsidiary, or commences any proceeding (other than
a proceeding for the voluntary liquidation and dissolution of any subsidiary)
relating to the Company or any subsidiary under any bankruptcy reorganization,
arrangement, insolvency, readjustment of debt, dissolution or liquidation law of
any jurisdiction; or any such petition or application is filed, or any such
proceeding is commenced, against the Company or any subsidiary and either (A)
the Company or any such subsidiary by any act indicates its approval thereof,
consent thereto or acquiescence therein or (B) such petition, application or
proceeding is not dismissed within 60 days;
(v) a judgment in excess of $250,000 is rendered against the
Company or any subsidiary and, within 60 days after entry thereof, such judgment
is not discharged in full or execution thereof stayed pending appeal, or within
60 days after the expiration of any such stay, such judgment is not discharged
in full; or
(vi) the Company or any subsidiary defaults in the
performance of any obligation if the effect of such default is to cause an
amount exceeding $250,000 to become due prior to its stated maturity or to
permit the holder or holders of such obligation to cause an amount exceeding
$250,000 to become due prior to its stated maturity.
The foregoing shall constitute Events of Default whatever the reason
or cause for any such Event of Default and whether it is voluntary or
involuntary or is effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body.
(b) Consequences of Events of Default.
---------------------------------
(i) If any Event of Default has occurred the interest rate
on this Note shall increase immediately to the lesser of 18% or the highest
interest rate permitted by law.
(ii) If an Event of Default of the type described in
subparagraph 3(a)(iv) has occurred, the aggregate principal amount of this Note
(together with
Exhibit A-2
<PAGE>
all accrued interest thereon and all other amounts due and payable with respect
thereto) shall become immediately due and payable without any action on the part
of the holders of this Note, and the Company shall immediately pay to the
holders of this Note all amounts due and payable with respect to this Note.
(iii) If any Event of Default has occurred (other than under
subparagraph 3(a)(iv)), the holder of this Note may declare all or any portion
of the outstanding principal amount of this Note (together with all accrued
interest thereon and all other amounts due and payable with respect thereto) to
be immediately due and payable and may demand immediate payment of all or any
portion of the outstanding principal amount of this Note (together with all such
other amounts then due and payable).
(iv) The holder of this Note shall also have any other
rights which such holder may have been afforded under any contract or agreement
at any time and any other rights which such holder may have pursuant to
applicable law.
(v) The Company hereby waives diligence, presentment,
protest and demand and notice of protest and demand, dishonor and nonpayment of
this Note, and expressly agrees that this Note, or any payment hereunder, may be
extended from time to time and that the holder hereof may accept security for
this Note or release security for this Note, all without in any way affecting
the liability of the Company hereunder.
4. Amendment and Waiver. Except as otherwise expressly provided
--------------------
herein, the provisions of this Note may be amended and the Company may take any
action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
holder of this Note.
5. Payments. All payments to be made to the holder of this Note
--------
shall be made in the lawful money of the United States of America in immediately
available funds.
6. Place of Payment. Payments of principal and interest shall be
----------------
paid by wire transfer of immediately available funds to an account designated by
the holder of this Note.
7. Business Days. If any payment is due, or any time period for
-------------
giving notice or taking action expires, on a day which is a Saturday, Sunday or
legal holiday in the State of New York, the payment shall be due and payable on,
and the time period shall automatically be extended to, the next business day
immediately following such Saturday, Sunday or legal holiday, and interest shall
continue to accrue at the required rate hereunder until any such payment is
made.
8. Conversion.
----------
(a) The Holder may, at any time and from time to time, convert
all or any part of this Note into fully paid and non-assessable shares of common
stock of the Company by delivery of a conversion notice to the Company. The
effective date of any conversion shall be the date of the conversion notice.
Upon any conversion the Company will within three business days of receipt of
this Note and the conversion notice, issue to the Holder such number of shares
of common stock equal to (i) the principal amount of this Note being converted
plus all accrued
Exhibit A-3
<PAGE>
and unpaid interest thereon divided by (ii) $4.715625 (the "Conversion Price").
If the Note is converted for less than the full amount of principal, the Company
shall cancel the original Note and issue to the Holder a new Note, of like
tenor, for the remaining principal balance.
(b) The Company shall pay any and all taxes (other than transfer
taxes) which may be imposed with respect to the issuance and delivery of the
shares of common stock upon the conversion of this Note.
(c) No fractional shares of common stock are to be issued upon
the conversion of this Note, but the Company shall instead round up to the next
whole number the number of shares of common stock to be issued upon such
conversion.
(d) Notwithstanding anything to the contrary contained herein,
this Note shall not be convertible by a Holder to the extent (but only to the
extent) that, if convertible by such Holder, such 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 this
Note shall be exercisable (vis-a-vis other securities owned by Holder which
contain similar limitations on conversion) shall be made on the basis of the
earliest submission of this Note (vis-a-vis other securities owned by the Holder
which contain similar limitations on conversion), in each case subject to such
aggregate percentage limitation. No prior inability to convert this Note
pursuant to this paragraph shall have any effect on the applicability of the
provisions of this paragraph with respect to any subsequent determination of
convertibility. 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 Regulation
13D and G thereunder. The provisions of this paragraph may be implemented in a
manner otherwise than in strict conformity with the terms of this Section 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
such Applicable Percentage limitation; and (ii) with respect to any other
matter, 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 Section shall apply to each
successor Holder.
9. Stock Splits, Stock Dividends, Etc. If at any time on or after
----------------------------------
the date of issuance of this Note, the number of outstanding shares of Common
Stock is increased by a stock split, stock dividend, combination,
reclassification or other similar event, Conversion Price shall be
proportionately reduced, or if the number of outstanding shares of common stock
is decreased by a reverse stock split, combination or reclassification of
shares, or other similar event, the Conversion Price shall be proportionately
increased. In such event, the Company shall notify the Company's transfer agent
of such change on or before the effective date thereof.
10. Adjustment Due to Distribution. If 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 otherwise (including any dividend or
Exhibit A-4
<PAGE>
distribution to the Company's shareholders in cash or shares (or rights to
acquire shares) of capital stock of a subsidiary) (a "Distribution") at any
------------
time, then the Holder shall be entitled, upon any conversion of this Note after
the date of record for determining shareholders entitled to such Distribution,
to receive the amount of such assets (or rights) which would have been payable
to the Holder had the Holder with respect to the shares of common stock issuable
upon such conversion (without regard to any limitations on conversion or
exercise herein or elsewhere contained) been the holder of such shares of common
stock on the record date for the determination of shareholders entitled to such
Distribution.
11. Purchase Rights. If the Company issues any securities or rights
---------------
to purchase stock, warrants, securities or other property (the "Purchase
--------
Rights") pro rata to the record holders of any class of common stock, then the
- ------
Holders will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which each Holder could have acquired if
such Holder had held the number of shares of common stock acquirable upon
complete conversion of this Note (without regard to any limitations on
conversion or exercise herein or elsewhere contained) immediately before the
date on which a record is taken for the grant, issuance or sale of such Purchase
Rights, or, if no such record is taken, the date as of which the record holders
of common stock are to be determined for the grants, issue or sale of such
Purchase Rights.
12. Governing Law. All issues and questions concerning the
-------------
construction, validity, enforcement and interpretation of this Note shall be
governed by, and construed in accordance with, the laws of the State of New
York, without giving effect to any choice of law or conflict of law rules or
provisions (whether of the State of New York or any other jurisdiction) that
would cause the application of the laws of any jurisdiction other than the State
of New York.
13. Application of Payments. All payments shall be applied first, to
----------------------- -----
accrued and unpaid interest on the unpaid principal balance of this Note and
then to the unpaid principal balance of this Note.
- ----
14. Late Charge. If a payment of principal or interest to be made
-----------
pursuant to this Note becomes past due for a period in excess of 5 days, The
Company shall pay on demand to the Holder a late charge of 2% of the amount of
such overdue payment.
15. Costs of Collection. If any suit or action is instituted or
-------------------
attorneys are employed to collect this Note or any part hereof, the Company
promises and agrees to pay all costs of collection, including all court costs
and reasonable attorneys' fees based upon customary hourly rates and not a
percentage of the indebtedness outstanding.
16. WAIVER OF JURY TRIAL. THE COMPANY ACKNOWLEDGES AND AGREES THAT
--------------------
ANY CONTROVERSY WHICH MAY ARISE UNDER THIS NOTE WOULD BE BASED UPON DIFFICULT
AND COMPLEX ISSUES AND THEREFORE, THE COMPANY AGREES THAT ANY COURT PROCEEDING
ARISING OUT OF ANY SUCH CONTROVERSY WILL BE TRIED IN A COURT OF COMPETENT
JURISDICTION BY A JUDGE SITTING WITHOUT A JURY.
Exhibit A-5
<PAGE>
IN WITNESS WHEREOF, the Company has executed and delivered this Note
on November 16, 1999.
P-COM, INC.
By:
---------------------------
Its:
---------------------------
Exhibit A-6
<PAGE>
EXHIBIT 10.69
PENALTY SETTLEMENT AGREEMENT
This Penalty Settlement Agreement (the "Agreement") is made between P-Com,
Inc., a Delaware corporation ("P-Com"), and Marshall Capital Management, Inc.
(the "Investor"), with respect to an Agreement between P-Com and the Investor
dated as of June 4, 1999 (the "Original Agreement"). Capitalized terms not
defined in this Agreement shall have the meanings given them in the Original
Agreement.
1. The Investor has, under the Original Agreement, a Put Right and/or a
right to receive Late Registration Penalties, under certain circumstances. The
Investor hereby waives all past, present and future Put Rights and Late
Registration Penalties, for all past, present and future circumstances. P-Com
agrees to establish a mechanism, satisfactory to the Investor, to ensure that
transfers of Common Stock properly sold under the resale registration statement
contemplated by the Original Agreement (once such resale registration statement
becomes effective) will be handled expeditiously by the transfer agent and that
the transferee will receive unlegended stock.
2. P-Com hereby agrees to forthwith issue to the Investor 58,263 shares of
unregistered P-Com common stock, which is equal to $275,000 divided by the
Price. The "Price" is the product of (a) 90% times (b) the mean average of the
closing sale prices of P-Com common stock as reported by the Nasdaq National
Market for the 15 trading days ending on November 10, 1999 (inclusive). The
parties agree that the Price is $4.72.
3. P-Com hereby agrees to issue to the Investor on January 20, 2000 a
Warrant to purchase 443,000 shares of unregistered P-Com common stock. The per-
share exercise price of such Warrant shall be equal to the mean average of the
closing sale prices of P-Com common stock as reported by the Nasdaq National
Market for the 15 trading days ending on January 19,
<PAGE>
2000 (inclusive); provided, that in no event shall the exercise price be lower
than $4.50 per share nor higher than $8.50 per share. Such Warrant shall expire
on January 19, 2003 (or earlier in the event of an acquisition), shall have a
net issuance feature, shall not have any price-based antidilution or reset
provisions, and shall otherwise have terms and conditions which are standard and
customary for warrants issued in similar situations.
4. The parties acknowledge that the consideration in Sections 2 and 3 of
this Agreement is intended to reflect past and future Late Registration
Penalties, and the Investor's ability after December 20, 1999 to use SEC Rule
144 for resales (subject to the requirements of Rule 144). P-Com agrees that if
the Investor properly sells any Common Stock under and in accordance with SEC
Rule 144, P-Com will use its best efforts to cause the transfer to be handled
expeditiously by the transfer agent and to ensure that the transferee will
receive unlegended stock.
5. The Investor hereby waives any rights and remedies under the Original
Agreement arising from inaccuracies in the SEC Documents to the extent such
inaccuracies were caused by the necessity to restate P-Com's financial
statements for the matters and to the extent disclosed in P-Com's January 28,
1999 and October 28, 1999 press releases, and the various writedowns, writeoffs
and charges described in P-Com's Form 10-Q for the quarter ended June 30, 1999.
6. P-Com hereby grants to the Investor piggyback registration rights
(subject to customary terms and conditions of standard piggyback registration
rights agreements), for the shares of common stock issued pursuant to this
Agreement or upon exercise of the Warrant, on any registration statement
hereafter filed by the Company; provided, that there shall be no right to
piggyback on any Form S-8 or Form S-4, nor on the resale registration statement
for the
2
<PAGE>
Registrable Securities contemplated by the Original Agreement, nor on the resale
registration statement which P-Com is obliged to file for the investors in P-
Com's June 22, 1999 $40,000,000 common stock PIPES offering.
7. This Agreement constitutes the entire agreement of the parties with
respect to the subject matter hereof. Any negotiations, understandings or
agreements, prior or contemporaneous, written or oral, with respect to such
subject matter are superseded hereby and merged herein. This Agreement may not
be amended except in writing.
8. Except as expressly amended hereby, the Original Agreement, as amended
in writing from time to time through the date hereof, remains unchanged and in
full force and effect. Without limitation, the provisions of the Original
Agreement requiring P-Com to strive to register for resale the Registrable
Securities remain effective; however, the particular remedies of the Put Right
and the Late Registration Penalties are eliminated. Also, the Investor hereby
agrees not to, until the earlier of January 31, 2000 or such time as P-Com has
fully repaid the Union Bank of California debt due in January 2000, seek any
remedy whatever for failure to have the resale registration statement declared
effective, and further agrees never to seek any remedy whatever for failure to
have the resale registration statement declared, before December 21, 1999,
effective.
DATED: November 16, 1999
P-COM, INC.
By: /s/ Robert E. Collins
------------------------------------------
Vice President and Chief Financial Officer
MARSHALL CAPITAL MANAGEMENT, INC.
By: /s/ Allan Weine
------------------------------------------
Allan Weine
Title: President
----------------------------------------
3
<PAGE>
By: _________________________________________
4
<PAGE>
EXHIBIT 10.70
PENALTY SETTLEMENT AGREEMENT
This Penalty Settlement Agreement (the "Agreement") is made between P-Com,
Inc., a Delaware corporation ("P-Com"), and Capital Ventures International, a
Cayman Islands company (the "Investor"), with respect to an Exchange Agreement
between P-Com and the Investor dated as of June 4, 1999 (the "Exchange
Agreement"). Capitalized terms not defined in this Agreement shall have the
meanings given them in the Exchange Agreement.
1. The Investor has, under Paragraphs 3 and 5 of the Exchange Agreement, a
Put Right and/or a right to receive Late Registration Penalties, under certain
circumstances. The Investor hereby waives all past, present and future Put
Rights and Late Registration Penalties, that would otherwise be available under
the Exchange Agreement, for all past, present and future circumstances.
2. P-Com hereby agrees to forthwith issue to the Investor a number of
shares of unregistered P-Com common stock equal to $430,900 divided by the
Price. The "Price" is the product of (a) 90% times (b) the mean average of the
closing sale prices of P-Com common stock as reported by the Nasdaq National
Market for the 15 trading days ending on November 10, 1999 (inclusive) (the
"Average"). The parties agree that the Average is $5.25, and thus the Price is
$4.72. The number of shares to be issued under this Agreement is 91,292.
3. The parties acknowledge that the quantity in Section 2 of this
Agreement is intended to reflect the Late Registration Penalties which have
accrued and would accrue, and the Investor's ability after December 21, 1999 to
use SEC Rule 144 for resales (subject to the requirements of Rule 144).
<PAGE>
4. The Investor hereby waives any rights and remedies with respect to
inaccuracies in the SEC Documents when filed, to the extent of items for which
P-Com has publicly announced before November 10, 1999 that it has restated or
will restate its previous financial statements.
5. P-Com hereby grants to the Investor piggyback registration rights
(subject to customary terms and conditions of standard piggyback registration
rights agreements), for the shares of common stock issued pursuant to this
Agreement, on any registration statement hereafter filed by the Company;
provided, that there shall be no right to piggyback on any Form S-8 or Form S-4,
nor on the resale registration statement for the Registrable Securities
contemplated by the Exchange Agreement, nor on the resale registration statement
which P-Com is obliged to file for the investors in P-Com's June 22, 1999
$40,000,000 common stock PIPES offering.
6. This Agreement constitutes the entire agreement of the parties with
respect to the subject matter hereof. Any negotiations, understandings or
agreements, prior or contemporaneous, written or oral, with respect to such
subject matter are superseded hereby and merged herein. This Agreement may not
be amended except in writing.
7. Except as expressly amended hereby, the Exchange Agreement, as amended
in writing from time to time through the date hereof, remains unchanged and in
full force and effect. Without limitation, the provisions of the Exchange
Agreement requiring P-Com to use its best efforts to register for resale the
Registrable Securities remain effective; however, the particular remedies of the
Put Right and the Late Registration Penalties set forth in Paragraphs 3 and 5
are eliminated. Also, the Investor hereby agrees not to, until the earlier of
January 31,
2
<PAGE>
2000 or such time as P-Com has fully repaid the Union Bank of California debt
due in January 2000, seek any remedy whatever for failure to have the resale
registration statement declared effective, and never to seek any remedy whatever
for failure to have the resale registration statement declared, before December
21, 1999, effective.
DATED: November 16, 1999
P-COM, INC.
By: /s/ Robert E. Collins
-----------------------------------------
CAPITAL VENTURES INTERNATIONAL
By: Heights Capital Management, Inc. as agent
By: /s/ Michael Spolon
----------------------------------
General Counsel and Secretary
3
<PAGE>
EXHIBIT 10.71
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 & CFO
----------------------------------
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 McAuliffe
-------------------------------------
Name: M. Duncan McAuliffe
-----------------------------------
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/ W.J
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Effective as of August 3, 1999 P-COM NETWORK SERVICES, INC.
By: /s/ W.J
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Effective as of August 3, 1999 P-COM FINANCE CORPORATION
By: /s/ W.J
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Effective as of August 3, 1999 P-COM UNITED KINGDOM, INC.
By: /s/ W.J
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Effective as of August 3, 1999 TELEMATICS, INC.
By: /s/ W.J
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
9
<PAGE>
Exhibit 10.72
NINTH AMENDMENT TO CREDIT AGREEMENT
THIS NINTH AMENDMENT TO CREDIT AGREEMENT ("Ninth Amendment") is
---------------
effective as of November 12, 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(a), 6.2(c), 6.2(d) and 6.2(w) of the Credit Agreement for the period ending
- ------ ------ ------ ------
and as of September 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 Ninth 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 Ninth 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 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 November 12, 1999, the sum of (i) the aggregate outstanding
principal amount of all Loans, plus (ii) the aggregate outstanding Letter of
----
Credit Usage was $29,981,880.43. Each of Borrower and
1
<PAGE>
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 following new definition is hereby added to the Credit
Agreement in appropriate alphabetical order:
"Budget": the weekly cash flow projections of Borrower dated as
------
of November 9, 1999, for the period from the week ending November 5, 1999,
through and including the week ending January 28, 2000, delivered by
Borrower to Agent and Lenders in connection with the Ninth Amendment to
Credit Agreement, which projections may be (a) modified from time to time,
at the request of Agent or any Lender, to provide additional detail or
information or (b) otherwise modified with the consent of Agent and
Lenders.
(b) Section 6.1(a) shall be amended to add the word "and" at the
--------------
end of clause (vi) and add the following new clause (vii):
(vii) as soon as available, but in any event on or before
the second Business Day of each week, a written report setting forth in
comparative form Borrower's actual results on a cash basis as of the end of
the immediately preceding week versus the amount identified as the "Ending
Cash Balance" in the Budget for such immediately preceding week.
(c) Each of Section 6.2(a) and Section 6.2(c) is hereby deleted
-------------- --------------
in its entirety.
(d) Section 6.2(d) is hereby deleted in its entirety and the
--------------
following is substituted therefor:
(d) Profitability. Permit Consolidated Pre-Tax Income of
-------------
Borrower and its consolidated Subsidiaries to reflect a loss exceeding the
correlative amount listed below for any fiscal quarter of Borrower
commencing with the fiscal quarter ended December 31, 1999; provided, that
---------
any profit recognized from any exchange from time to time by Borrower of
certain shares of its Common Stock for certain of the Notes issued pursuant
to the Indenture shall be excluded from Consolidated Pre-Tax Income for
purposes of this Section 6.2(d):
December 31, 1999 $(8,200,000).
(e) Clause (ii) of Section 6.2(l) is hereby deleted in its
--------------
entirety and the following is substituted therefor:
2
<PAGE>
(ii) at any time after the Revolving Commitment has been
permanently reduced to $22,000,000, 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 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.
(f) Section 6.2(w) is hereby deleted in its entirety and the
--------------
following is substituted therefor:
(w) Minimum Consolidated EBITDA. Permit Consolidated
---------------------------
EBITDA to be less than the correlative amount listed below for any fiscal
quarter of Borrower commencing with the fiscal quarter ended December 31,
1999:
December 31, 1999 $ (1,000,000).
(g) Section 7.1(n) is hereby deleted in its entirety and the
--------------
following is substituted therefor:
(n) 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, and as the same may be amended, supplemented, or
otherwise modified from time to time, (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, and as the
same may be amended, supplemented, or otherwise modified from time to time,
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, and as the same may be amended,
supplemented, or otherwise modified from time to time, including, without
limitation, Borrower's obligations under Section 5(d)(ii) of each such
Exchange Agreement;
(h) The following new Section 7.1(o) is hereby added to the
--------------
Credit Agreement:
(o) the actual amounts expended or incurred by Borrower
during any week shall exceed the amount identified as the "Ending Cash
Balance" in the Budget by more than 15% for such week;
3. Consent. Notwithstanding any contrary term or provision set forth
-------
in the Credit Agreement, Agent and Lenders hereby consent, subject to the terms
and conditions set forth herein, to the following:
3
<PAGE>
a. Borrower's issuance of warrants for the purchase of 443,000
shares of its Common Stock to the holders ("Series B Holders") of the Common
----------------
Stock that was issued in exchange for Borrower's Series B Convertible
Participating Preferred Stock ("Series B Stock");
--------------
b. Borrower's issuance of up to 220,000 shares of its Common
Stock to the Series B Holders; and
c. Borrower's issuance to the Series B Holders of a convertible
promissory note in the original principal amount of $400,000 bearing interest at
a rate of 12%, and having no scheduled payments of interest or principal until
November 15, 2000.
4. Waivers by Agent and Lenders. Subject to satisfaction of each of
----------------------------
the conditions set forth in Section 5 of this Ninth 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(d), Consolidated Pre-Tax
--------------
Income of Borrower and its consolidated Subsidiaries for the fiscal quarter
ending September 30, 1999, reflects a loss in excess of $(15,000,000); or (b)
with respect to the Applicable Default under Section 6.2(w), Consolidated EBITDA
--------------
for the fiscal quarter ending September 30, 1999, is less than $(6,000,000).
5. Conditions to Effectiveness. This Ninth Amendment shall become
---------------------------
effective on November 12, 1999 (the "Effective Date"), only upon satisfaction of
--------------
each of the following conditions:
(a) receipt by Agent of this Ninth 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) with respect to each of the Series B Holders of Series B
Stock, receipt by Agent of either (i) a fully-executed agreement, in form and
substance satisfactory to Agent, by and between Borrower and such Series B
Holder relating to, among other things, such Series B Holder's waiver of rights
to redeem shares of Borrower's Common Stock pursuant to Section 5 of the
Exchange Agreements or (ii) a waiver letter from such Series B Holder extending
the deadlines established in Section 5(d)(ii) of each of the Exchange Agreements
referred to in Section 2(g) of this Ninth Amendment to a date not earlier than
November 22, 1999, in form and substance reasonably satisfactory to Agent;
(d) receipt by Agent of the Budget attached hereto as Exhibit A;
---------
4
<PAGE>
(e) 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 Ninth Amendment; and
(f) the absence of any Potential Events of Default or Events of
Default, after giving effect to Section 4 hereof.
---------
6. Additional Covenants.
--------------------
(a) On or before November 22, 1999, with respect to each of the
Series B Holders that on the Effective Date delivered a waiver letter referenced
in clause (ii) of Section 5(c) of this Ninth Amendment, Borrower shall deliver a
----------- ------------
fully-executed agreement, in form and substance satisfactory to Agent, by and
between Borrower and such Series B Holder relating to, among other things, such
Series B Holder's waiver of its rights to redeem shares of Borrower's Common
Stock pursuant to Section 5 of the Exchange Agreements.
(b) On or before November 30, 1999, Borrower shall deliver the
following items to Agent: (i) executed signature pages of P-Com Network
Services (UK) Ltd. and RT Masts Ltd. to the Subsidiary Pledge Agreement and
final schedules thereto; (ii) original stock certificates of RT Masts Ltd., RT
Ltd., and Sky Masts, Ltd. and original stock powers relating thereto; and (iii)
Secretary's Certificate of Borrower attaching board resolutions referred to in
Section 5(d) of the Eighth Amendment to Credit Agreement.
- ------------
(c) Borrower acknowledges that it has granted a lien to Agent,
for the benefit of Agent and Lenders, on all of its tangible and intangible
assets and that Agent has requested that Borrower provide Agent and Lenders with
updated information relating to the status of the registration of its assets
consisting of its rights and licenses to use trademarks, trade names,
copyrights, patents or technical processes (collectively "Intellectual
------------
Property"). Borrower shall (i) on or before November 30, 1999, deliver to Agent
- ---------
and Lenders a schedule listing all of Borrower's and Subsidiaries' rights and
licenses to use Intellectual Property and the status of the registration of
same, and (ii) without limiting its obligations under Section 6.1(i) of the
--------------
Credit Agreement, use its commercially reasonable best efforts to apply (or
cause its Subsidiaries to apply) for registration with the United States Patent
and Trademark Office or United States Copyright Office, as applicable, each of
Borrower's or Borrower's Subsidiaries' rights or licenses to use Intellectual
Property existing in any Material Product (including Intellectual Property
existing in the Borrower's product known as the point to multipoint wireless
transmission system) that is not currently registered or in the process of being
registered. If Borrower fails to use commercially reasonable efforts to apply
for the registrations described in clause (ii) of this subparagraph (c), then
----------- ----------------
such failure shall constitute an Event of Default.
(d) If Borrower is unable to deliver or cause the delivery of the
items described in subparagraphs (a), (b) or (c)(i) of this Section 6 by the
----------------- --- ---------
applicable date of delivery therefor, then such failure shall constitute an
Event of Default.
5
<PAGE>
(e) On or after the Effective Date, Borrower shall not transfer,
or permit any of its Subsidiaries to transfer, any of its assets (including cash
or cash equivalents) to P-Com (Barbados) FSC Limited and P-Com Corpl, Int'l
(Cayman) Ltd. The failure of Borrower to comply with this Section 6(e) shall
------------
constitute an Event of Default.
7. Representations and Warranties. In order to induce Lenders to
------------------------------
enter into this Ninth 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 Ninth Amendment:
(a) Corporate Power and Authority. Borrower has all requisite
-----------------------------
corporate power and authority to enter into this Ninth Amendment and to carry
out the transactions contemplated by, and perform its obligations under, the
Credit Agreement as amended by this Ninth 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 Ninth 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
-----------
Ninth 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.
(d) Governmental Consents. The execution and delivery by
---------------------
Borrower of this Ninth 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 Ninth 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
6
<PAGE>
are correct in all material respects on and as of the Effective Date of this
Ninth 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 Ninth Amendment, no event has occurred and is continuing or will
- -
result from the consummation of the transactions contemplated by this Ninth
Amendment that would constitute an Event of Default or a Potential Event of
Default.
8. Release.
-------
(a) Each Loan Party acknowledges that Agent, Syndication Agent,
and Lenders would not enter into this Ninth 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 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 Ninth Agreement
and the Loan Documents,
7
<PAGE>
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.
9. Entire Agreement. This Ninth 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 Ninth Amendment
supersedes all prior and contemporaneous oral and written agreements and
discussions with respect to the subject matter hereof.
10. Miscellaneous.
-------------
(a) Counterparts. This Ninth 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 Ninth
Amendment by facsimile transmission shall be effective as delivery of a manually
executed counterpart thereof.
(b) Headings. Section headings used herein are for convenience
--------
of reference only, are not part of this Ninth Amendment, and are not to be taken
into consideration in interpreting this Ninth Amendment.
(c) Recitals. The recitals set forth at the beginning of this
--------
Ninth Amendment are true and correct, and such recitals are incorporated into
and are a part of this Ninth Amendment.
(d) Governing Law. THIS NINTH 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 Ninth 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
8
<PAGE>
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 Ninth
-----------
Amendment, the execution, delivery, and effectiveness of this Ninth 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 Ninth Amendment and any provision of the Credit
Agreement, the terms and provisions of this Ninth Amendment shall govern and
control.
9
<PAGE>
IN WITNESS WHEREOF, this Ninth 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: VP & CFO
__________________________
UNION BANK OF CALIFORNIA, N.A.,
as Agent and a Lender
By: /s/ Allan B. Miner
_____________________________
Name: Allan B. Miner
___________________________
Title: Vice President
__________________________
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Syndication Agent and a Lender
By: /s/ M. Duncan McDuffle
_____________________________
Name: M. Duncan McDuffle
___________________________
Title: Managing Director
__________________________
10
<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 Ninth Amendment to Credit Agreement effective as of November12,
1999 (the "Ninth Amendment"), (iii) consents to all of the provisions of the
---------------
Ninth Amendment, and (iv) acknowledges and agrees that nothing contained in the
Ninth Amendment in any way affects the validity and enforceability of the
Guaranty.
Effective as of November 12, 1999 CONTROL RESOURCES CORPORATION
By: /s/ George Roberts
_____________________________
Name: George Roberts
___________________________
Title: Chairman
__________________________
Effective as of November 12, 1999 P-COM NETWORK SERVICES, INC.
By: /s/ George Roberts
_____________________________
Name: George Roberts
___________________________
Title: Chairman
__________________________
Effective as of November 12, 1999 P-COM FINANCE CORPORATION
By: /s/ George Roberts
_____________________________
Name: George Roberts
___________________________
Title: Chairman
__________________________
Effective as of November 12, 1999 P-COM UNITED KINGDOM, INC.
By: /s/ George Roberts
_____________________________
Name: George Roberts
___________________________
Title: Chairman
__________________________
Effective as of November 12, 1999 TELEMATICS, INC.
By: /s/ George Roberts
_____________________________
Name: George Roberts
___________________________
Title: Chairman
__________________________
11
<PAGE>
EXHIBIT A
---------
(See Attached)
12
<PAGE>
EXHIBIT 10.73
TENTH AMENDMENT TO CREDIT AGREEMENT
THIS TENTH AMENDMENT TO CREDIT AGREEMENT ("Tenth Amendment") is
---------------
effective as of December 16, 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, as issuing bank (in such capacity,
"Issuing Bank"), 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, Issuing Bank, 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, Issuing Bank, 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. Issuing Bank has issued a Letter of Credit in the amount of
$3,000,000 for the account of Borrower in favor of Banca Di Roma (the "Banca Di
--------
Roma L/C"), which Letter of Credit is set to expire on December 17, 1999.
- --------
C. Borrower has requested that Agent, Syndication Agent, Issuing
Bank, and Lenders consent to an extension to the expiration date of the Banca Di
Roma L/C, and that the Issuing Bank issue such an extension, and Agent,
Syndication Agent, Issuing Bank, and Lenders are willing to do so subject to the
terms and conditions of this Tenth 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 Tenth 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 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 December 16, 1999, the sum of (i) the aggregate outstanding
principal amount of all Loans, plus (ii) the aggregate outstanding Letter of
----
Credit Usage was $29,981,880.43. Each of Borrower and
1
<PAGE>
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.
------------------------------
The definition of "Revolving Commitment" is hereby deleted in its
--------------------
entirety and the following is substituted in lieu thereof:
"Revolving Commitment": (a) $50,000,000, at all times prior
--------------------
to August 15, 1999; (b) $40,000,000, at all times on and after August
15, 1999, and prior to October 15, 1999; (c) $30,000,000, at all times
on and after October 15, 1999, and prior to December 16, 1999; and (d)
$27,000,000, at all times on and after December 16, 1999, and prior to
the Maturity Date, in each case as such amount may be further reduced
(i) pursuant to Section 2.1(e) and (ii) by the amount of any Letters
--------------
of Credit that expire and are not renewed during the period from April
21, 1999, through the Maturity Date.
3. Consent. Notwithstanding any contrary term or provision set forth
-------
in the Credit Agreement, (i) Agent and Lenders hereby consent, subject to the
terms and conditions set forth herein, to the extension of the expiration date
of the Banca Di Roma L/C from December 17, 1999, to January 15, 2000, and (ii)
prior to the expiration of the Banca Di Roma L/C the Issuing Bank shall execute
and deliver a letter of credit amendment or such other documentation necessary
to effect such an extension.
4. Conditions to Effectiveness. This Tenth Amendment shall become
---------------------------
effective on December 16, 1999 (the "Effective Date"), only upon satisfaction of
--------------
each of the following conditions:
(a) receipt by Agent of this Tenth 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) the absence of any Potential Events of Default or Events of
Default.
5. Representations and Warranties. In order to induce Lenders to
------------------------------
enter into this Tenth 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 Tenth Amendment:
(a) Corporate Power and Authority. Borrower has all requisite
-----------------------------
corporate power and authority to enter into this Tenth Amendment and to carry
out the
2
<PAGE>
transactions contemplated by, and perform its obligations under, the Credit
Agreement as amended by this Tenth 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 Tenth 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
-----------
Tenth 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.
(d) Governmental Consents. The execution and delivery by Borrower
---------------------
of this Tenth 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 Tenth 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 the Credit Agreement
- ---------
are correct in all material respects on and as of the Effective Date of this
Tenth 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. No event has occurred and is continuing
------------------
or will result from the consummation of the transactions contemplated by this
Tenth Amendment that would constitute an Event of Default or a Potential Event
of Default.
6. Release.
-------
3
<PAGE>
(a) Each Loan Party acknowledges that Agent, Syndication Agent, and
Lenders would not enter into this Tenth 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 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 Tenth Amendment 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.
7. Entire Agreement. This Tenth 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 Tenth Amendment
supersedes all prior and
4
<PAGE>
contemporaneous oral and written agreements and discussions with respect to the
subject matter hereof.
8. Miscellaneous.
-------------
(a) Counterparts. This Tenth 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 Tenth Amendment by facsimile
transmission shall be effective as delivery of a manually executed counterpart
thereof.
(b) Headings. Section headings used herein are for convenience of
--------
reference only, are not part of this Tenth Amendment, and are not to be taken
into consideration in interpreting this Tenth Amendment.
(c) Recitals. The recitals set forth at the beginning of this Tenth
--------
Amendment are true and correct, and such recitals are incorporated into and are
a part of this Tenth Amendment.
(d) Governing Law. THIS TENTH 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 Tenth 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 Tenth
-----------
Amendment, the execution, delivery, and effectiveness of this Tenth 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 Tenth Amendment and any provision of the Credit Agreement,
the terms and provisions of this Tenth Amendment shall govern and control.
5
<PAGE>
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
6
<PAGE>
IN WITNESS WHEREOF, this Tenth Amendment to Credit Agreement has been
duly executed as of the date first written above.
P-COM, INC., as Borrower
By: /s/ Robert E. Collins
-------------------------------------
Name: Robert E. Collins
-----------------------------------
Title: VP & CFO
----------------------------------
UNION BANK OF CALIFORNIA, N.A.,
as Agent, Issuing Bank and a Lender
By: /s/ David Jackson
-------------------------------------
Name: David Jackson
-----------------------------------
Title: Vice President
----------------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Syndication Agent and a Lender
By: /s/ M. Duncan McDuffle
-------------------------------------
Name: M. Duncan McDuffle
-----------------------------------
Title: Managing Director
----------------------------------
7
<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 Tenth Amendment to Credit Agreement effective as of December 16,
1999 (the "Tenth Amendment"), (iii) consents to all of the provisions of the
---------------
Tenth Amendment, and (iv) acknowledges and agrees that nothing contained in the
Tenth Amendment in any way affects the validity and enforceability of the
Guaranty.
Effective as of December 16, 1999 CONTROL RESOURCES CORPORATION
By: /s/ George Roberts
-------------------------------------
Name: George Roberts
-----------------------------------
Title:
----------------------------------
Effective as of December 16, 1999 P-COM NETWORK SERVICES, INC.
By: /s/ George Roberts
-------------------------------------
Name: George Roberts
-----------------------------------
Title:
----------------------------------
Effective as of December 16, 1999 P-COM FINANCE CORPORATION
By: /s/ George Roberts
-------------------------------------
Name: George Roberts
-----------------------------------
Title:
----------------------------------
Effective as of December 16, 1999 P-COM UNITED KINGDOM, INC.
By: /s/ George Roberts
-------------------------------------
Name: George Roberts
-----------------------------------
Title:
----------------------------------
Effective as of December 16, 1999 TELEMATICS, INC.
By: /s/ George Roberts
-------------------------------------
Name: George Roberts
-----------------------------------
Title:
----------------------------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-495549, No. 333-30473, No. 333-89908 and No.33-
64477) and Form S-3 (No. 333-44559, No. 333-30473, No. 333-70937 and No. 333-
45463) of our report dated March 31, 2000 appearing in P-Com, Inc.'s Annual
Report on Form 10-K, for the Fiscal year ended December 31, 1999.
PricewaterhouseCoopers LLP
San Jose, California
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,629
<SECURITIES> 0
<RECEIVABLES> 53,834
<ALLOWANCES> 14,899
<INVENTORY> 46,849
<CURRENT-ASSETS> 116,551
<PP&E> 69,887
<DEPRECIATION> 36,626
<TOTAL-ASSETS> 213,640
<CURRENT-LIABILITIES> 84,567
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 89,208
<TOTAL-LIABILITY-AND-EQUITY> 213,640
<SALES> 156,879
<TOTAL-REVENUES> 156,879
<CGS> 135,652
<TOTAL-COSTS> 84,592
<OTHER-EXPENSES> 2,537
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (8,175)
<INCOME-PRETAX> (74,077)
<INCOME-TAX> 1,407
<INCOME-CONTINUING> (75,484)
<DISCONTINUED> (40,804)
<EXTRAORDINARY> 13,239
<CHANGES> 0
<NET-INCOME> (103,049)
<EPS-BASIC> (2.13)
<EPS-DILUTED> (2.13)
</TABLE>
