-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EE2CjkWKDLhjl5tLnh+v+2awrJojbQRby/ZeCWIWCVV/7Px9JIdcjrDOnZsBogeq cgf0yVEayHc7wPOV150s1A== 0001012870-01-001460.txt : 20010409 0001012870-01-001460.hdr.sgml : 20010409 ACCESSION NUMBER: 0001012870-01-001460 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: P COM INC CENTRAL INDEX KEY: 0000935493 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 770289371 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-25356 FILM NUMBER: 1589210 BUSINESS ADDRESS: STREET 1: 3175 S WINCHESTER BLVD CITY: CAMPBELL STATE: CA ZIP: 95008 BUSINESS PHONE: 4088663666 MAIL ADDRESS: STREET 1: 3175 S WINCHESTER BLVD STREET 2: P-COM INC CITY: CAMPBELL STATE: CA ZIP: 95008 10-K405 1 0001.txt FORM 10-K (12-31-2000) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal period ended December 31, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 0-25356 P-COM, Inc. (Exact Name of Registrant as Specified in its Charter) Delaware 77-0289371 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization)
3175 S. Winchester Boulevard, Campbell, California 95008 (408) 866-3666 (Address and Telephone Number of Principal Executive Offices) Securities registered pursuant to Section 12(b) of the Act: Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $0.0001 par value Preferred Stock Purchase Rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. YES [X] NO [_] The aggregate market value of the voting stock held by non-affiliates of the Registrant, as of March 15, 2001, was approximately $114,762,710 (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 15, 2001, approximately 80,740,176 shares of the Registrant's Common Stock, $0.0001 par value, were outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I Item 1. Business The following Business section contains forward-looking statements, which involve risks and uncertainties. Forward-looking statements are characterized by words such as "plan," "expect," "believe," "intend," "would" and similar words. 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 Risk Factors Affecting the Company" and elsewhere in this Annual Report on Form 10-K. Overview P-Com develops, manufactures, and markets Point-to-Multipoint, Point-to-Point, and Spread Spectrum radio systems for the worldwide telecommunications market. Cellular and Personal Communications Services ("PCS") providers employ our Point-to-Point systems for backhaul between remote tower sites and switching centers in their growing global markets. Network service providers and Internet service providers are able, through the deployment of P-Com equipment and systems, to respond to the increasing global demands for high-speed wireless access services, such as Internet access associated with Business-to-Business and E-Commerce business processes. Through deployment of our systems, network providers can quickly and efficiently establish integrated Internet, data, voice, and video services for their customers, then expand and grow those services as demand increases. P-Com's market is a subset of the global telecom, cellular, PCS, Wireless Internet access, and private network markets. Because of the number of sub-markets for various products within the nations of the world, reliable market statistics are not readily available. Most of our revenue is currently derived from our Point-to-Point products. We believe that in the future our Point-to-Multipoint products will generate an increasing share of our revenue. P-Com's wholly owned subsidiary, P-Com Network Services, Inc. (PCNS), provides engineering, installation support, program management and maintenance support services to the telecommunications industry in the United States. Network service providers (wireless and traditional wireline) outsource these tasks to approved service suppliers on a project-by-project basis. Microwave service projects are typically short in duration--one to two weeks--and primarily involve logistical installation or maintenance of millimeter wave radio systems. Central office services projects involve ordering materials and substantial man-hour commitments and can last up to three months. Since January 1, 2000, we have acted to strengthen our core business by raising $61.2 million in private equity financings and raising additional capital by disposing of several previously acquired businesses (Technosystem, Cemetel, Control Resources, and RT Masts), which we determined no longer fit with our business plan and strategy. In the year ended December 31, 2000, we generated our highest revenues to date, but we continued to report operating losses. Industry background There is a growing demand for multimedia communications infrastructure globally. Over the past 3-4 years, Internet usage has exploded, and has become the key driver, along with demand for global telephone accessibility. Communication networks' expansion is required. Speed, reliability and economies of scale are the key elements inherent in commercially successful networked systems globally. Broadband Wireless Access ("BWA") is an efficient and particularly economical means to meet this growing demand for information transfer. P-Com's BWA products and services are targeted to add value to the integrated service providers and wireless telephone operators globally. The Company's products are designed to be frequency specific by country where required. 1 The BWA market has developed into two commercially viable architectures for voice and data transmission: Point-to-Point and Point-to-Multipoint. P-Com has developed and sold equipment in commercial quantities for both formats. BWA providers have just begun to utilize high frequency Point-to-Multipoint systems as produced by P-Com, as a significant alternative to existing Point-to-Point systems, particularly in the United States markets. Although P-Com believes the overall markets within which it competes are growing, P-Com cannot insure the proliferation of its products or guarantee a given market share of the global telecom equipment market in future years. Additionally, there are competing technologies which service the communication sector's hardware demands. P-Com does not provide products for wireline sub- sectors of the telecommunications market, including wireline systems and cable systems. Drivers of Broadband Wireless Access Growth Global deregulation of telecommunications markets and the related set-aside of radio frequencies for BWA transmission have spurred competition to supply wireless-based systems as a cost effective alternative to traditional wireline service delivery systems. New network service providers are operating in the United States and other high demand markets to create integrated digital network solutions to meet the growing demand for multi-purpose efficient telecommunications systems. Broadband wireless systems are competitive due to the relatively short set up and deployment time compared to wireline alternatives, high return on capital investment, ability to "turn on" customers quickly once the transmission hardware and software infrastructure are in place. There are less capacity restraints for transmission levels compared to T1/E1 lines and DSL alternatives with lower potential of "stranded capital costs" as ultimate user locales expand or change over time. Incumbent exchange carriers can also create more flexible systems via adjunct buildouts of BWA systems which integrate with their existing trunk lines. In the United States, incumbent Regional Bell Operating Companies ("RBOC") were traditionally the sole providers of the copper wire interconnection network that connected business and residential subscribers to the Public Switched Telephone Network ("PSTN"), commonly known as the "last mile" connection. The Telecommunications Act of 1996 required incumbent telephone companies to lease portions of their networks, including this last mile, to Competitive Local Exchange Carriers ("CLECs"), created a significantly competitive telecommunications industry domestically. Additional competition has risen between traditional telephone companies and cable television operators expanding services into the others' traditional markets. To provide services, CLECs can either lease infrastructure from incumbent wireline carriers to connect their customers, or they can build their own access services, termed "on network." Constructing landline access, whether copper or fiber optic, is costly and time-consuming; deployment of BWA is relatively quick, efficient, and economical, for the reasons noted above. The initial market deregulation in the United States has fostered similar deregulation actions globally. Newly allocated frequencies have been auctioned or apportioned for BWA usage. Service providers of the new systems are differentiating themselves from "commodity" status of existing private or state-owned wireline carriers through deploying and marketing integrated, digital, high-speed access services to business and residential customers. BWA alternatives are, as a result, in high demand, although many competitors vie for these markets globally. Based upon providers' choice to deploy BWA as the quickest, most economical and scalable means of providing reliable, cost effective telecommunications service, the demand for this technology portends significant growth globally. In most locales, P-Com's Point-to-Point and Point-to-Multipoint radio systems are marketed to spectrum license holders who hold rights to transmit via BWA. Such license holders have various options from competing technologies and competitive equipment providers are in direct competition with P-Com for the business. P-Com does market a line of unlicensed radios, which are used by off spectrum service providers, primarily in Asian, South American and African markets. 2 Global Privatization and Deregulation: Stimuli to Broadband Wireless Access Growth In many parts of the world, communication services are either inadequate or non-existent due to the lack of existing infrastructure. Additionally, many such countries have both privatized the once state-owned telecommunications monopoly and opened their markets to competitive network service providers. In these markets, we believe competitive service providers often find deployment of BWA the quickest, most economical and scalable means of provisioning reliable, modern telecommunications services. Thus, the demand for such wireless access systems is expected to continue to grow. For the communications service providers of the world to be able to utilize P- Com's BWA systems (which include P-Com's Point-to-Multipoint and Point-to-Point radio systems), they must own the licenses required to operate such systems. Once the service provider has obtained the license, they must then determine from a number of competing systems (including non-BWA systems), the one that appears best suited for their particular application. In some cases, competitive systems may be determined to be more appropriate than P-Com systems for the satisfaction of such applications. Network Architecture Bottlenecks Fiber optic networks have received much attention because of the speed and quality associated with such technology. Increasingly, network service providers are constructing fiber optic interoffice backbones to meet the significant demand created by Internet and data, video conferencing, and voice services. To satisfy the growing user demand for high-speed access, the fiber optic channels would (if not supplemented by other systems) have to extend all the way into the buildings in which the users reside. Such is the case today in only about five percent of the commercial buildings within the United States, and that number is not expected to grow much because of the extremely high cost to extend fiber optic channels to buildings. Instead, the fiber optic channel usually ends short of the building, at the beginning of the "last mile". Thus, users are often forced to use slower dial-up modem connections and ISDN (Integrated Services Digital Network) services, or ADSL (Asymmetrical Digital Subscriber Line) service, subject to its physical distance proximity limitations. This local access "bottleneck" denies users the real benefits afforded by fiber optic backbones because the highest speed which users can experience is that of the local access portion of their end-to-end connection. To overcome such limitations in a quick and efficient manner, we believe BWA is attractive to incumbent and competitive carriers alike because the local access speed restrictions are obviated, and because wireless systems can be installed and become operational in weeks as compared to months or years for wired infrastructure, and at a much reduced cost, since street cuts are not required for installation. Wireless Access Solutions Point-to-Multipoint BWA service is a wireless technology that provides the highest speed symmetrical access service other than Point-to- Point wireless and dedicated access fiber optic service. This service is drawing significant attention and growing interest because it can be rapidly deployed; it is highly efficient, reliable, and scalable; it is cost effective because it can serve many subscribers from one hub, and can be expanded as demand for service dictates. Nonetheless, the traditional system providers' buildout approach has resulted in P-Com's and its competitors' Point-to-Multipoint products only gradually gaining market share in the BWA market. Point-to-Point BWA is a dedicated link wireless technology enabling symmetrical voice and data services between a subscriber and the network. For each new subscriber using this service, the network service provider provides a separate set of dedicated access equipment. Even providers who offer Point-to-Multipoint services use Point-to-Point technology for those customers with very high capacity requirements. Backhauls between mobile wireless towers and the mobile switching office on cellular phone networks are a typical application for Point-to-Point equipment. As mobile service usage continues to grow, cellular service providers will have to continue to scale down existing cells into smaller ones to reuse precious spectrum. With each such division of cells comes opportunity for new wireless Point-to-Point applications because of the need for more 3 backhauls. Mobile wireless access to the numerous and growing Internet-based applications is fueling growth in this segment of the wireless market. Certain limitations are common to all BWA systems like those provided by P-Com. Among the more common of these limitations are the requirement for line-of- sight between the hubs and the remote sites; signal fade due to weather conditions including rain, fog, and snow; spacing between the hubs and the remote stations; signal transmit/receive power level interference; poor performance if there is improper antenna alignment; and adjacent cell interference due to improper power levels. Careful and professional execution encompassing engineering of path and site surveys and installation and testing procedures can mitigate most of the problems associated with such limiting factors. P-Com Network Services can provide the professional engineering and installation services required for wireless access system operation, which adds an element of competitive advantage for P-Com. The P-Com Solution The P-Com Strategy P-Com's goal is to be the leading worldwide supplier of high-performance Point- to-Multipoint, Point-to-Point, and Spread Spectrum wireless access equipment. P-Com's strategy to accomplish this objective is to: . Focus on Point-to-Multipoint, Point-to-Point, and Spread Spectrum Microwave Markets. P-Com is designing products specifically for the millimeter wave and spread spectrum microwave frequency bands. We have designed P-Com's core architecture to optimize the systems for operation at millimeter and microwave frequencies. . Continue domestic expansion of P-Com's service business, PCNS, by commencing full EF&I (Engineering, Furnishing and Installation) Central Office operations for DC power and transport at selectively targeted microwave services field offices. . Continue expansion of its identified global market opportunities. We have met the standards established by the European Telecommunications Standards Institute ("ETSI") and achieved regulatory approval for our systems in Argentina, Australia, Austria, Brazil, Canada, China, the Czech Republic, France, Germany, Greece, Hungary, Italy, Japan, Mexico, Spain, the United Kingdom, as well as the United States. We maintain sales and/or support offices in major international markets. . 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 turnkey contract manufacturers eliminates expensive in-house manufacturing assembly facility maintenance, provides ability to scale up or down as conditions dictate, and provides multiple manufacturing assembly sourcing through which customer requirements can be satisfied. . Leverage and Maintain Software Leadership. P-Com differentiates its systems through proprietary software embedded in the IDU ("InDoor Unit") and ODU ("OutDoor Unit"), and in the Windows and SNMP-based software tools. This software is designed to allow us to deliver to our customers a high level of functionality that can be easily reconfigured by the customer to meet changing needs. Software tools are also used to facilitate network management. Range of Product Choices P-Com offers access providers around the world a range of wireless systems that encompass Point-to-Multipoint BWA, Point-to-Point BWA, and Spread Spectrum systems. P-Com's systems utilize a common architecture in the millimeter wave and spread spectrum microwave frequencies, including 2.4 GHz, 5.7 GHz, 7 GHz, 13 GHz, 14 GHz, 15 GHz, 18 GHz, 23 GHz, 24 GHz, 26 GHz, 28 GHz, 31 GHz, 38 GHz, 4 and 50 GHz. Both FDMA (Frequency Division Multiple Access) and TDMA (Time Division Multiple Access) technologies are designed into our systems. Point-to-Multipoint and Point-to-Point BWA systems operate in specific radio frequency bands uniquely allocated by the telecommunications authorities of the nations of the world. To participate in the BWA markets of the world, BWA manufacturers must provide systems that conform to these national frequency specifications systems. The systems are subjected to stringent customs testing and must pass homologation procedures. The greater the number of frequencies provided for by the BWA manufacturer, the greater the potential market penetration. One of the main objectives of the access providers which buy BWA products from P-Com or its competitors is the establishment of an access system that enables them to derive from their allocated frequency bandwidth the maximum amount of revenue-producing traffic, also known as "throughput." The greater the "throughput" capability of a BWA system, the greater the access provider's revenue production potential from their finite licensed bandwidth. Point-to-Point systems provided by P-Com and its competitors are essentially equal in terms of revenue producing capacity within a common radio spectrum utilized by providers. Point-to-Multipoint systems, however, differ greatly in terms of revenue producing capacity within the same spectrum. Systems throughput may provide typically anywhere from 16mbps or higher. Also, the radius served may be divided into a range from 4 sectors to 24 sectors per hubsite. Access providers determine from studies of their market whether to provide a Point-to-Multipoint or Point-to-Point system, or a combination of both, to best meet their business plan objectives. Additionally, access providers determine if TDMA or FDMA, or a combination of both, best satisfies their engineering requirements. Although TDMA appears to offer the most cost effective use of bandwidth, FDMA has the advantage of being easier to deploy and allows providers to better guarantee service levels to their customers. It is not yet clear which will be the eventual dominant technology either throughout the world or in specific geographic regions. As a result, P-Com has elected to offer both FDMA and TDMA. P-Com provides greater versatility for the customer and higher levels of network flexibility by allowing both FDMA and TDMA to be simultaneously deployed within a section. CLECs, ISPs, and other carriers are currently identifying how Point-to- Multipoint technology might most effectively integrate into existing and newly built systems. As a result the products required are evolving as well. All equipment provider companies in this market must be aware and able to react to product developments to remain competitive. P-Com provides both Point-to-Multipoint and Point-to-Point systems in a broad range of frequencies and provide both TDMA and FDMA capability. P-Com's competitors' generally provide either Point-to-Multipoint or Point-to-Point, but seldom both. Through provision of such a broad range of design options, and through the application of a network management system that is common across all of our systems, P-Com gives BWA service providers broader design latitudes than those available from many competing systems and enables providers to tailor their purchases to help maximize their "throughput." In addition, P- Com's relatively broad range of product offerings tends to cushion P-Com against the risk that a particular frequency or standard might, for whatever reason, come to dominate all marketplace alternatives, or be mandatory for a particular country or project. Software embedded in P-Com's systems allows the user to easily configure and adjust system settings such as frequency, power, and capacity without manual tuning and mechanical adjustments. Software provided with our systems includes sophisticated diagnostics, maintenance, network management, and system configuration tools. P-Com first produced and marketed its Point-to-Point systems in 1993. P-Com's Point-to-Multipoint systems became commercially available in 1999, and P-Com's Spread Spectrum Systems became available through 5 P-Com's acquisition of Cylink assets in 1998. In fiscal 2000, the revenue mix reflects P-Com's introduction of the Point-to-Multipoint product line, with product revenues for the Point-to-Multipoint, Point-to-Point, and Spread Spectrum systems of 8%, 82%, and 10%, respectively. Services P-Com Network Services, Inc. ("PCNS") is an installation services company providing three distinct service lines in the United States: Central Office DC Power Services, Central Office Transport Services, and Microwave Services. In the Central Office Group, PCNS installs and services a wide variety of central office power and transmission equipment produced and distributed by several telecommunications manufacturers. Typically, Central Office Group projects involve full engineering, furnishing and installation (EF&I) services. In the Microwave Group, PCNS installs the millimeter wave radio equipment manufactured by P-Com, Inc. The Microwave Group primarily offers installation services in commercial buildings consisting of site preparation/construction, equipment installation and equipment commissioning into a customers' network. Both the Central Office Group and Microwave Group offer full program or project management that vary in complexity and length of time. Central Office projects are performed primarily in the Eastern region. Microwave projects are performed in areas surrounding PCNS field offices in Los Angeles and San Francisco, CA; Salt Lake City, UT; Denver, CO; Kansas City, KS; Milwaukee, WI; Tampa, FL; and Dulles, VA. Manufacturing and Testing P-Com's Campbell, California facility received its initial ISO 9001 registration in December 1993, and was subsequently recertified in December of 1999. The Company's ISO 9001 registration for its United Kingdom sales and customer support facility was received in 1996 and recertified in 1999; the Company's ISO 9001 registration for its Tortona facility in Italy was first received in 1996 and recertified in 2000. The Company's production facility in Melbourne, Florida and its Dietzenbach, Germany repair center were ISO 9001 certified in 1999. Once a system reaches commercial status, P-Com contracts with one or more of several certified turnkey fabricators to build radio system units in commercial quantities. Utilization of such fabricators relieves P-Com of expensive investments in manufacturing facilities, equipment, and parts inventories. This strategy enables P-Com to quickly scale to meet varying customer demands and changes in technology. Manufactured systems are tested by P-Com in its California and Florida locations prior to shipment to its customers. Testing includes the complete IDU-ODU assembly, 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 and services are sold internationally and domestically directly through its own sales force, as well as through strategic partners, systems providers and original equipment manufacturers ("OEMs"). P- Com's services are sold directly through its internal sales force. P-Com's customers include: . AT&T Local Services .Orange Personal Communications . Bosch Telecom .Siemens . Embratel .Tellabs . Lucent Technologies .Verizon . Mercury One-2-One .Winstar Communications . New Century Global Net .XO Communications
During 2000, sales to Winstar Communications and Lucent Technologies accounted for approximately 28% and 12% of our total sales, respectively. We expect that sales to relatively few customers will continue to account for a high percentage of our sales in the foreseeable future. Although the composition of the group comprising 6 our largest customers may vary from period to period, the loss of a significant customer or a major reduction in orders by any significant customer, including reductions due to market, economic or competitive conditions in the telecommunications industry, may have a material adverse effect on our business, financial condition and results of operations. While we generally enter into written agreements with our major customers, they do not provide for minimum purchase commitments. Our ability to maintain or increase our sales in the future will depend, in part upon our ability to obtain orders from new customers as well as the financial condition and success of our customers, the telecommunication industry and the economy in general. We operate in two segments: Product Sales and Service Sales. The Product Sales segment consists of organizations located primarily in the United States, the United Kingdom, Germany, and Italy, which develop, manufacture and/or market network access systems for use in the worldwide wireless telecommunications market. The Service Sales segment performs installation and program management services through its Central Office Group and Microwave Group. See Note 8 to the Consolidated Financial Statements for additional information regarding the operations of our operating segments, as well as the allocation of sales by geographic customer destination. The Company's backlog was approximately $41.9 million as of December 31, 2000, as compared to approximately $32.6 million as of December 31, 1999. The increase is due to the timing of purchase orders received from the Company's largest customers relating to ongoing contracts or significant purchase orders. 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, 2000 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. Technology P-Com's technological approach to Point-to-Multipoint, Point-to-Point, and Spread Spectrum radio systems is, we believe, meaningfully different from conventional approaches. Through use of proprietary digital signal processing, frequency converter, and antenna interface technology, and 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 distance replication, 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. P-Com's Point-to-Point technology uses four-level ("FSK") modulation which is spectrally efficient and very impervious to interference. This robust quality results in improved frequency reuse distances which is beneficial to operators of large-scale Point-to-Point radio network deployments. FSK modulation is generated with low-component-count circuitry, and it is therefore very cost-effective. It is also reasonably insensitive to circuit linearity and can therefore be multiplied to higher frequencies without degradation. This in turn enables a range of high frequency millimeter wave bands to be supported with inexpensive circuitry. This technology is also quite suitable for high-volume manufacturing. P-Com's Point-to-Point and Spread Spectrum microwave radios consist of three primary assemblies: the IDU, the ODU and the antenna. The IDU houses the digital signal processing and the 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. 7 We believe our millimeter wave technology is meaningfully different from that contained in most conventional systems. When transmitting, the Company's IDU sends an already modulated, intermediate frequency ("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 that was used when transmitting. The signal is passed through the 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 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. 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. P-Com's Point-to-Multipoint radios provide further software configurable options. The system is comprised of Base Station equipment transmitting to many Remote Terminals within a sector. This "downlink" carries Asynchronous Transfer Mode ("ATM") cells over the link. The return, or up-link from the Remote to the Base Station, can operate in either FDMA or TDMA mode. This gives the network service provider the option of selecting the most efficient transmission method for the type of traffic to be carried. FDMA is efficient for constant bit rate, high-capacity traffic, while TDMA is more suitable for fractional rate, or bursty type data. The system can operate concurrently in both modes within the sector thereby providing the network access operator the flexibility to design systems that uniquely match the specific traffic profiles within individual sectors. The transport of ATM cells over the link allows multimedia transmission to be supported, including voice, data, fax, IP, Frame Relay, 10 BaseT, and many other services. The modulation of each carrier can also be software configured from 4-level to 16- or 64-level QAM, as well as QPSK. This provides the network provider with the capability to best match the capacity demands of customers with the range trade-off of each modulation level. Such flexibility enables operators to optimally use the available spectrum. The modular design of this Point-to-Multipoint system allows the user to start with a low capacity installation, and then by plugging cards into the sector IDU, to increase the number of carriers, and hence capacity, within the sector. This is achieved without the duplication of any of the more expensive microwave ODU equipment. All of these innovations result in a highly flexible, yet cost-effective, Point-to-Multipoint system that enables network system providers to optimize spectrum utilization, and correspondingly, revenue generation. Research and Development 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 $20.2 million, $32.4 million, and $38.9 million in 2000, 1999, and 1998, respectively, in research and development efforts and expects to continue to invest significant resources in research and development. The Company's research and 8 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 would result in the loss of or delay in market acceptance. The inability of the Company to introduce in a timely manner new systems, enhancements, or related software tools that contribute to sales could have a material adverse effect on the Company's business, financial condition, and results of operations. Sales and Marketing P-Com's sales and marketing efforts are directed from 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 and in China and Singapore for the Asian Market. Internationally, the Company uses a variety of sales channels, including system providers, OEMs, dealers and local agents. In addition, the Company has established agent relationships in numerous other countries in the Asia/Pacific region, the mid-East, South America, and Europe. 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 The worldwide wireless communications market is very competitive. P-Com's wireless radio systems compete with other wireless telecommunications products and alternative telecommunications transmission media, including copper and fiber optic cable. 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, Floware, DMC Stratex Networks, Ericsson, Harris-Farinon Division, 9 Nokia, Nortel, SIAE, Hughes Network Systems, and Western Multiplex Corporation, many of which have substantially greater installed bases, financial resources and production, marketing, manufacturing, engineering and other capabilities than P-Com. 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 customers, which choose to rely on wireless strategies, elect to purchase from outside sources rather than develop and manufacture their own radio systems. There can be no assurance that such customers will rely on, or expand, their reliance on the Company as an external source of supply for their radio systems. Recently, certain of 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. 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 functionality, the ability to meet delivery requirements and customer service and support. Government Regulation Radio communications are subject to extensive regulation by the United States and foreign governmental agencies and international treaties. 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 prevent or delay the sale of systems by the Company to such customers. The failure to comply with current or future regulations or changes in the interpretation of existing regulations could result in suspension or cessation of 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. 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 10 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. 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 eleven 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. 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 March 16, 2001, P-Com and its subsidiaries had a total of 891 employees, including 484 in Operations, 124 in Research and Development, 93 in Sales and Marketing, 31 in Quality Assurance and 159 in Administration. P-Com believes that future results of operations will depend in large part on its ability to attract and retain highly skilled employees. None of the Company's employees are represented by a labor union, and we have not experienced any work stoppages to date. On February 7, 2001, the RT Masts group was sold, at which time this group employed 172 employees. 11 Item 2. Properties
Location of Square Date Lease Lease Facility (/1/) Functions Footage Expires -------------------- --------- ------- -------------- HEADQUARTERS Administration/ Customer Support/ 61,000 November 2005 Campbell, CA Sales/ Engineering/ Manufacturing Campbell, CA Manufacturing 25,000 September 2002 San Jose, CA Warehouse 34,000 September 2003 Redditch, England Sales/ Customer Support 5,500 June 2005 Watford, England Research/ Development 7,500 April 2008 Redditch, England Warehouse 6,800 September 2004 Dulles, VA Administration 8,750 October 2007 Sterling, VA Sales/ Customer Support/ Warehouse 15,000 July 2007 Orange, CA Warehouse 3,400 April 2001 Northants, England (/2/) Administration Sales/ Customer 5,290 August 2011 Support Essex, England (/2/) Administration Sales/ Customer 8,000 September 2007 Support Frankfurt, Germany Warehouse/ Sales and Customer 11,000 Month to Month Support Melbourne, Florida Research/ Development 36,250 June 2001 Beijing, China Sales/ Customer Support 4,200 July 2002
(/1/)All locations support product sales except Sterling, VA; Northants, England; and Essex, England which support services sales. (/2/)Leased properties located in Northants and Essex, England pertain to the operation of RT Masts, which was sold in February 2001. Leases related to these properties were assumed by the buyer at the time of the sale. P-Com Italia, S.p.A., owns and maintains its corporate headquarters in Tortona, Italy. This facility, approximately 36,000 square feet, contains design, test, manufacturing, mechanical and warehouse functions. Item 3. Legal Proceedings In September and October 1998, several punitive 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 un- quantified compensatory, punitive and other damages, attorneys' fees and injunctive and/or equitable relief. On December 3, 1998, the Superior Court of California, County of Santa Clara, entered an order consolidating all of the above complaints. On June 30, 2000 the Superior Court issued a notice of ruling certifying this matter as a class action. 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 Security Holders In August 2000, the Company solicited the written consent of stockholders for a proposal to amend the Certificate of Incorporation to increase the authorized number of shares of Common Stock of the Company from 95,000,000 to 145,000,000. The proposal was approved on October 17, 2000 with 45,321,49 votes FOR; 1,941,572 votes AGAINST; and 135,221 votes ABSTAINED. 12 On November 30, 2000, the Company held its 1999 Annual Meeting of Stockholders, where one matter was put to a vote of stockholders, the election of two directors to serve for "three-year" terms ending upon the 2002 annual meeting of stockholders or until their successors are duly elected. George P. Roberts and Brian T. Josling were elected. There were 48,512, 670 votes FOR and 1,105,126 votes WITHHELD from George P. Roberts; and 48,566,993 votes FOR and 1,050,903 votes WITHHELD from Brian T. Josling. The continuing directors were John A. Hawkins, James J. Sobczak, and M. Bernard Pucket. Also, on November 30, 2000, the Company held its 2000 Annual Meeting of Stockholders, where three matters were put to a vote of stockholders. The first matter was to elect 2 directors to serve for "three-year" terms ending upon the 2003 annual meeting of stockholders or until their successors are duly elected. John A. Hawkins and James J. Sobczak were elected. There were 44,292,908 votes FOR and 2,591,456 votes WITHHELD from John A. Hawkins; and 45,796,704 votes FOR and 1,087,660 votes WITHHELD from James J. Sobczak. The continuing directors were George P. Roberts, Brian T. Josling, and M. Bernard Pucket. The second proposal was to approve a series of amendments to the Company's 1995 Stock Option/Stock Issuance Plan (the "1995 Plan") which included: (i) elimination of the automatic share increase provisions of the 1995 Plan; (ii) elimination of the provisions of the 1995 Plan that would otherwise allow option grants to be made with exercise prices below the fair market value of the option shares on the grant date; (iii) modification of the option cancellation/re-grant provisions of the 1995 Plan to require stockholder approval of any repricing of outstanding options; (iv) to increase the maximum number of shares authorized for issuance under the 1995 Plan; (v) to increase the limitation on the maximum number of shares any one individual may be granted; and (vi) to change the vesting period for 4,000-share automatic option grants to non-employee Board members so they fully vest upon grant. The proposal was approved with 42,338,431 votes FOR, 4,291,534 votes AGAINST, and 254,399 votes ABSTAINED. The third proposal was to ratify the appointment of PricewaterhouseCoopers LLP as independent accountants of the Company for the fiscal year ending December 31, 2000. The proposal was approved with 46,757,275 votes FOR, 87,735 votes AGAINST, and 39,354 votes ABSTAINED. 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Our Common Stock is quoted in the Nasdaq National Market under the symbol PCOM. The following tables sets forth the range of high and low closing bid prices, as reported on the Nasdaq Market for each quarter in 1999 and 2000. These quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions. As of March 15, 2001, there were 495 stockholders of record of our Common Stock.
Price Range of Common Stock ------------ High Low ------ ----- 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 Year Ended December 31, 2000: First Quarter................................................. $23.72 $9.00 Second Quarter................................................ 15.00 5.56 Third Quarter................................................. 8.44 5.18 Fourth Quarter................................................ 6.13 1.53
Recent Sales of Unregistered Securities None. Dividends To date, we have not paid any cash dividends on shares of our Common Stock. We currently anticipate that we will retain any available funds for use in the operation of our business, and do not anticipate paying any cash dividends in the foreseeable future. In addition, the terms of our working capital credit agreements prohibit us from paying any dividends without the prior approval of the other parties named therein. 14 Item 6. Selected Financial Data The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations." The balance sheet data as of December 31, 2000 and 1999 and the Statement of Operations data for the years ended December 31, 2000, 1999, and 1998, have been derived from the audited financial statements included in Item 8 of this document. Statement of Operations Data
2000 (2)(3) 1999 (4) 1998 (5) 1997 1996 ----------- --------- -------- -------- -------- (in thousands, except per share data) Sales: Product................... $183,606 $ 116,409 $118,948 $169,453 $101,853 Service................... 50,795 40,470 43,597 30,157 19,100 -------- --------- -------- -------- -------- Total sales.............. 234,401 156,879 162,545 199,610 120,953 -------- --------- -------- -------- -------- Cost of sales: Product................... 160,965 107,378 93,829 96,948 60,362 Service................... 38,170 28,274 30,777 18,968 13,696 -------- --------- -------- -------- -------- Total cost of sales...... 199,135 135,652 124,606 115,916 74,058 -------- --------- -------- -------- -------- Gross profit............... 35,266 21,227 37,939 83,694 46,895 -------- --------- -------- -------- -------- Operating expenses: Research and development.. 20,241 32,431 38,882 27,854 20,163 Selling and marketing..... 11,972 17,135 19,224 12,795 7,525 General and administrative........... 26,893 25,179 24,260 11,029 10,178 Goodwill amortization..... 19,598 6,547 5,023 1,380 105 Restructuring charges..... -- 3,300 4,332 -- -- Acquired in-process research and development(7)........... -- -- 15,442 -- -- -------- --------- -------- -------- -------- Total operating expenses................ 78,704 84,592 107,163 53,058 37,971 -------- --------- -------- -------- -------- Income (loss) from operations................ (43,438) (63,365) (69,224) 30,636 8,924 Interest expense........... (4,750) (8,175) (8,652) (1,811) -- Other income (expense), net....................... (6,977) (2,537) 1,446 1,988 906 -------- --------- -------- -------- -------- Income (loss) from continuing operations before income taxes, extraordinary item and cumulative effect of accounting change......... (55,165) (74,077) (76,430) 30,813 9,830 Provision (benefit) for income taxes.............. 11,140 1,407 (11,501) 11,018 956 -------- --------- -------- -------- -------- Income (loss) from continuing operations before extraordinary item and cumulative effect of accounting change......... (66,305) (75,484) (64,929) 19,795 8,874 Discontinued operations(6): Loss from operations...... (4,000) (13,903) (2,869) (904) -- Loss on disposal.......... -- (26,901) -- -- -- -------- --------- -------- -------- -------- (4,000) (40,804) (2,869) (904) 8,874 -------- --------- -------- -------- -------- Extraordinary gain on retirement of notes....... 1,890 13,239 5,333 -- -- Cumulative effect of accounting change(2)...... (1,534) -- -- -- -- -------- --------- -------- -------- -------- Net income (loss).......... $(69,949) $(103,049) $(62,465) $ 18,891 $ 8,874 ======== ========= ======== ======== ======== Charge related to Preferred Stock discount............ -- -- (1,839) -- -- Loss on conversion of Preferred Stock Common Stock..................... -- (18,521) -- -- -- -------- --------- -------- -------- -------- Net income (loss) applicable to Common Stockholders.............. $(69,949) $(121,570) $(64,304) $ 18,891 $ 8,874 ======== ========= ======== ======== ======== Basic income (loss) from Continuing Operations(1).. $ (0.85) $ (1.32) $ (1.50) $ 0.47 $ 0.23 Diluted income (loss) from Continuing Operations(1).. (0.85) (1.32) (1.50) 0.44 0.22 Basic net income (loss) applicable to Common Stockholders(1)........... (0.90) (2.13) (1.49) 0.45 0.23 Diluted net income (loss) applicable to Common Stockholders(1)........... (0.90) (2.13) (1.49) 0.42 0.22
15 Balance Sheet Data (in thousands)
2000 1999 1998 1997 1996 --------- --------- -------- -------- -------- Cash and cash equivalents.. $ 27,541 $ 11,629 $ 29,241 $ 88,145 $ 42,226 Working capital............ 76,823 31,984 78,967 196,279 90,811 Total assets............... 216,219 218,746 315,217 305,521 155,452 Long-term debt............. 30,290 39,858 97,769 101,690 914 Mandatorily redeemable Preferred Stock........... -- -- 13,559 -- -- Mandatorily Redeemable Common Stock Warrants..... -- -- 1,839 -- -- Retained earnings (accumulated deficit)..... (218,922) (148,973) (45,924) 18,380 (511) Stockholders' equity....... 95,247 89,215 99,409 148,297 112,479
- -------- (/1/)See Note 9 of Notes to Consolidated Financial Statements for an explanation of the method used to determine share and per share amounts. (/2/)The Company recorded a non-cash charge of approximately $1.5 million on January 1, 2000 to account for the cumulative effect of the change in accounting method related to revenue recognition made to comply with SAB 101. See Note 2 of Notes to Consolidated Financial Statements. (/3/)In 2000, the Company recorded charges of approximately $21.7 million related to excess inventory and inventory purchase commitments, $15.0 million related to a write-down of goodwill, and a $9.9 million increase in the valuation allowance against the carrying value of deferred tax assets. (/4/)In 1999, the Company recorded restructuring and other charges of approximately $36.5 million. (/5/)In 1998, the Company recorded restructuring and other charges of approximately $26.6 million. (/6/)Losses from discontinued operations are attributable to Technosystem, which was reclassified to discontinued operations in the third quarter of 1999. (/7/)In connection with the acquisition of substantially all of the assets of the Cylink Wireless Group in 1998, $15.4 million of purchase price attributed to in-process research and development was expensed. 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 telecommunications and broadcast networks. The Company was founded in April 1991 to develop, manufacture, market and sell millimeter wave radio systems for wireless networks. Currently, we ship 2.4 GHz and 5.7 GHz spread spectrum radio systems, as well as 7 GHz, 13 GHz, 14 GHz, 15 GHz, 18 GHz, 23 GHz, 26 GHz, 38 GHz and 50 GHz Point-to-Point radio systems. Additionally, we offer central office and microwave installation services. Our Point-to-Multipoint radio system, first marketed in the fourth quarter of 1999, was sold primarily to one U.S. customer and one Chinese customer in 2000. We anticipate that our ability to generate future revenues and profits will depend in large part on our ability to attract a large customer base and increase market penetration for the Point-to- Multipoint systems, as well as our ability to continue to bring to market competitive new products in our Point-to-Point and Spread Spectrum product lines. 16 The net loss in 2000 was primarily attributable to charges to operations required to state inventories and deferred tax assets at realizable value, write down of goodwill carried from prior years' acquisitions to current estimated realizable value, losses recorded from discontinued operations and losses on the sale of subsidiaries. We experienced a sharp decrease in sales beginning in September 1998 due to the worldwide downturn in the telecommunications equipment market as a whole. This status continued into the third quarter of 1999. We instituted cost reduction programs through this period, and made decisions to divest certain non-core operations in 1999 and 2000, which resulted in significant losses related to the disposition of these businesses over the past two years. In February 2000, we completed the divestiture of two Italian subsidiaries, Technosystem, S.p.A. and Cemetel S.r.L., resulting in additional losses for the first quarter of approximately $4.0 million and $3.5 million, respectively. In April 2000, we sold Control Resources Corporation ("CRC") resulting in a gain of approximately $2.6 million. The Company revised its method for recognizing revenue for sales of radio systems as a result of the adoption of Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial Statements." The Company previously recognized revenue upon shipment of product, provided no significant obligations remained and collection was probable. This was changed to recognition upon transfer of title and risk of loss, which is generally upon shipment of the product provided no significant obligations remained and collection was probable. In accordance with SAB No. 101, the Company recorded a non-cash charge of approximately $1.5 million on January 1, 2000 to account for the cumulative effect of the accounting change. The cumulative effect of this accounting change primarily resulted from contracts where revenue had historically been recognized upon shipment, however, under the terms of the underlying contracts, title and risk of loss did not transfer until either delivery or subsequent receipt of payment. Under the Company's revised revenue recognition method, revenue relating to such sales is deferred until both title and risk of loss is assumed by the customer. As a result of this change, approximately $12.0 million in revenue and $10.5 million in related costs originally recognized in 1999 were deferred and re- recognized in the first quarter of 2000. During 2000, the Company renegotiated the terms of one of its significant contracts so that title and risk of loss transfers upon shipment. Years Ended 2000, 1999 and 1998 Sales Sales consist of revenues from radio systems sales and repairs and support services offered. In 2000, 1999 and 1998, sales were approximately $234.4 million, $156.9 million, and $162.5 million, respectively. The 49.4% increase in sales from 1999 to 2000 was primarily due to increased radio systems delivery levels under a large order from Winstar in the second half of the year and a 25% increase in the services business sales in the U.S. and UK combined. The 3.5% decrease in sales from 1998 to 1999 was primarily due to the downturn in the telecommunications equipment market. During 2000, the Tel-Link Point-to-Point product line contributed 61.0% of our total sales, compared to 59.0% of our total sales during 1999 and 58.2% during 1998. The Spread Spectrum product line contributed approximately 8% of our total sales in 2000, as compared to 11.3% during 1999 and 10.6% of our total sales during 1998. Our Point-to-Multipoint Tel-Link product line, which was introduced in late fourth quarter 1999, contributed 6% of our total sales in 2000 and only approximately $1.1 million of sales in 1999. Total sales for the Point-to-Multipoint line of approximately $13.9 million in 2000 did not meet our expectations. Customers, particularly in the U.S. CLEC markets, did not place orders equivalent to forecasted orders. However, these same customers increased their Point-to-Point radio orders to bring actual sales levels for this line higher than originally forecasted for 2000. 17 Sales to Orange Personal Communications Services accounted for approximately 7%, 20%, and 24% of total sales in 2000, 1999, and 1998, respectively. Sales to Winstar Communications accounted for approximately 28% and 11% of total sales in 2000 and 1999, respectively. Sales to Bosch Telecom accounted for approximately 13% of total sales in 1999. Sales to Lucent Technologies accounted for approximately 12% of total sales in 2000. Product sales for 2000 reached $183.6 million during the year, an increase of $67.2 million or 57.7%, when compared to 1999 levels, and as compared to a decrease of approximately $2.5 million or 2.1% during 1999 when compared to 1998. Product sales represented 78.3%, 74.2%, and 73.2% of sales in 2000, 1999, and 1998, respectively. The increase in 2000 product sales resulted from larger orders from U.S. CLEC customers and an order from a Chinese customer under a multi-year contract for Point-to-Multipoint products announced in mid-2000. The decrease in product sales in 1999 and 1998 was primarily due to the continued slowdown in the telecommunication equipment industry construction activity and declining prices as a result of the Pacific Rim currency crisis and surplus capacity in the industry. Service sales for 2000 increased approximately $10.3 million or 25.5% from the prior year as compared to a decrease of approximately $3.1 million or 7.2% during 1999. Service sales represented 21.7%, 25.8%, and 26.8% of total sales in 2000, 1999, and 1998, respectively. The increase in service sales in 2000 resulted from increased levels of installation services for the primary UK service group customers, and a significant increase in central office maintenance work performed by the U.S. service group for a major RBOC group. The decrease in service revenue sales in 1999 vs. 1998 was a result of the previously mentioned downturn. Historically, we have generated a majority of our sales outside of the United States. During 2000, we generated 55.9% of our sales in the United States, 24.3% in the United Kingdom, 7.8% in Continental Europe and Middle East markets, and 12% in other geographic regions, particularly in the Pacific Rim. During 1999, we generated 30.8% of our sales in the U.S., 34.5% in the United Kingdom, 18.0% in Europe excluding the UK, 6.1% in Asia, and 10.7% in other geographic regions. During 1998, we generated 25.6% of our sales in the U.S., 43.9% in the United Kingdom, 7.5% in Europe excluding the UK and 11.8% in Africa, 11.2% in Asia. In February 2001, we sold RT Masts, our U.K. services unit. RT Masts' revenues were approximately $20 million, $18 million and $22 million in 2000, 1999 and 1998, respectively. Operating income for RT Masts was approximately $1.2 million, $3.1 million and $5.8 million for 2000, 1999 and 1998, respectively. Many of our largest customers use our products and services to build telecommunication network infrastructures. These purchases are significant investments in capital equipment and are required for a phase of the rollout in a geographic area or a market. Consequently, the customer may have different requirements from year to year and may vary its purchases from us accordingly. We provide our customers with significant volume price discounts, which would lower the average selling price of any particular product line as more units are sold to a given customer up to a maximum discount level offered. In addition, we expect that the average selling price of any particular product line will also decline as a given product matures and as competition increases in the future. Accordingly, our ability to maintain or increase sales will depend upon many factors, including our ability to increase unit sales volumes of our systems and 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. As the first quarter of 2001 progresses, there is evidence of a significant slowing in economic growth and related capital spending in the U.S. economy and, to a lesser extent, in other global economies, especially in the telecommunications equipment industry. Such a slowdown can have an effect on our ability to continue recent quarter-on-quarter sales increases, and our most recent guidance to financial and investor markets have included lowered sales expectations as a result of this economic slowdown. Gross Profit Cost of sales consists primarily of costs related to materials, labor and overhead, freight and duty. And in the case of the services business, direct labor and applied materials. In 2000, 1999, and 1998, gross profits were 18 $35.3 million, $21.7 million, and $37.9 million, respectively, or 15.0%, 13.5%, and 23.3% of sales, respectively. In 2000, 1999, and 1998, product gross margins were affected by inventory and other related charges of $21.3 million, $21.4 million, and $16.9 million, respectively. (See Restructuring and Other Charges below.) Product gross profit as a percentage of product sales, not including the effect of the inventory charges described above, was approximately 23.9%, 26.1%, and 35.3% in 2000, 1999, and 1998, respectively. In 2000, the reduced gross profit margins related to high materials cost for the Point-to-Multipoint products due to industry wide part shortages, and higher overhead applied to sales due to lower than originally expected unit sales of the Point-to-Multipoint line in the second half of 2000. Additionally, the Point-to-Point Tel-Link products were subjected to margin pressure due to the existence of highly competitive alternative product lines in the marketplace in 2000. In 1999, the decrease in such product gross profit percentage was due to manufacturing variances and declining average selling prices that generated lower margins. Service gross profit as a percentage of service sales was approximately 25.0%, 30.1%, and 29.4% in 2000, 1999, and 1998, respectively. The decrease in service gross profit percentage in 2000 was due to fixed contract rates charged in the UK market for RT Masts' largest customer and shifts in service job type mix. Fourth quarter revenue in the U.S. service market was heavily weighted to lower margin radio installation work directly related to our higher sales volume of radios to Winstar. Research and Development Research and development expenses consist primarily of costs associated with new product development. Our research and development activities include the development of additional radio products, frequencies and upgrading operating features and related software tools. Software development costs incurred prior to the establishment of technological feasibility are expensed as incurred. Software development costs incurred after the establishment of technological feasibility and before general release to customers are capitalized, if material. To date, all software development costs incurred after the establishment of technological feasibility have been immaterial. In 2000, 1999, and 1998, research and development expenses were approximately $20.2 million, $32.4 million, and $38.9 million, respectively. As a percentage of sales, research and development expenses decreased from 20.7% in 1999 to 8.6% in 2000, 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 in 2000 as compared to 1999,and overall sales increases in 2000, including rollout of the Point-to-Multipoint radio product. The period from early 1998 through the third quarter of 1999 was a period of relatively high research and development activity, since the Point-to- Multipoint project involved entirely new technology, not just improving existing products. As a percentage of sales, research and development expenses decreased from 23.9% in 1998 to 20.7% in 1999. Selling and Marketing Selling and Marketing expenses consist of salaries, sales commissions, travel expenses, customer service and support expenses and costs related to business development and trade shows. In 2000, 1999, and 1998, selling and marketing expenses were $12.0 million, $17.1 million, and $19.2 million, respectively. As a percentage of sales, selling and marketing expense decreased from 10.9% in 1999 to 5.1% in 2000, primarily due to smaller sales and marketing staff levels as a result of the sales of Control Resources Corporation and Technosystem subsidiaries in early 2000. 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 decreased from 11.8% in 1998 to 10.9% in 1999, primarily due to a lower level of sales in 1998 and the 1998 expansion and start-up of our international sales and marketing organization, including opening sales offices in the United Arab Emirates, Singapore, China, and Mexico. 19 General and Administrative General and administrative expenses consist primarily of salaries and other expenses for management, finance, accounting, data processing, and legal and other professional services. In 2000, 1999, and 1998, general and administrative expenses were $26.9 million, $25.2 million, and $24.3 million, respectively. As a percentage of sales, general and administrative expenses decreased from 16.0% in 1999 to 11.5% in 2000. General and administrative expenses overall increased 6.8% in 2000 compared to 1999. The sale of Control Resources Corporation in April 2000 reduced the total 2000 expense levels. Control Resources Corporation general and administrative expenses in 2000 through the April 2000 sale date were approximately $850,000. However, the expansion of the services business, predominantly in the U.S. market, significantly increased the related administrative expenses in 2000. General and administrative expenses overall level for the manufacturing operations were reduced in 2000 as compared to 1999 due to better cost controls and due to significant write-offs of accounts receivable in 1999 which did not recur in 2000. The increase in 1999 compared to 1998 was 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. 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 5 to 20 years. In 2000, 1999, and 1998, goodwill amortization was approximately $19.6 million, $6.5 million, and $5.0 million, respectively. In the second quarter of 2000, management reviewed the carrying value of goodwill related to its 1998 acquisition of the Cylink Wireless Group. Based upon its assessment of future value of revenue flows estimated to be provided from this acquisition, a $15 million impairment charge was made. This amount is included in the total figure for 2000 noted above. Management also determined it appropriate to amortize the remaining goodwill related to the Cylink Wireless Group over a 4 1/2 year period beginning in July 2000. Other than the impairment charge of $15 million, the amortization of goodwill for 2000 totaled $4.6 million compared to $6.5 million in 1999. The increase in goodwill amortization for 1999 as compared to 1998 was due to recording a full year of amortization expense relating to the acquisition of the assets of the Cylink Wireless Group on March 28, 1998. Restructuring and Other Charges In the second quarter of 2000, the Company determined that there was a need to reevaluate its inventory levels and related accrued liabilities in light of recent changes in product and customer mix. The evaluation was prompted by a change in customer mix away from the UK and other European markets and toward the U.S. market, and the resulting anticipated decrease in demand for certain of its lower speed and lower frequency Tel-Link Point-to-Point product line, and resulted in total charges of approximately $21.7 million during the second quarter of 2000. These charges consisted of increases to inventory reserve of approximately $17.4 million and accrued liabilities of approximately $4.3 million, both relating to the Company's product segment. In addition, the Company performed a review of the carrying value and remaining life of long- lived assets associated with the Company's product segment and recorded write- downs of approximately $15.0 million of goodwill, and an approximately $9.9 million of deferred tax assets. The increase in inventory reserves and related purchases liabilities was charged to product cost of sales in the second quarter of 2000. Of the $17 million charge for additional reserves, $15.4 million related to the aforementioned Tel-Link Point-to-Point product line. An additional reserve of approximately $1.0 million was added in the second quarter to adjust carrying value of certain modules of the Point-to-Multipoint radio line. During 1999 and 1998, the Company's management approved restructuring plans, which included initiatives to integrate the operations of acquired companies, consolidate duplicate facilities, and reduce overhead. Total 20 accrued restructuring and other charges of approximately $36.5 million and approximately $26.6 million were recorded in 1999 and 1998, respectively, relating to these initiatives, all relating to the Company's product segment. As of December 31, 1999, the Company had utilized all restructuring reserves established to offset actual restructuring costs incurred by the Company. Operating expenses overall declined in fiscal 2000 due to cost reduction plans in place and due to sale of Control Resources Corporation in April 2000. In-Process Research and Development We had no expenses for acquired in-process research and development in 2000 or 1999. On March 28, 1998, we 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. Interest Expense In 2000, 1999, and 1998, interest expense was $4.8 million, $8.2 million and $8.7 million, respectively. For 2000 and 1999, interest expense consisted primarily of interest and fees incurred on borrowings under our bank lines of credit, interest on the principal amount of our subordinated 4 1/4% convertible promissory notes due 2002 (the "Notes"), equipment leases, and contractual penalties for late filing of the registration statement in connection with the issuance of the Series B Convertible Preferred Stock and the related warrants. Approximately $1.9 million was charged to interest expense during the year related to amortization of fair value of warrants issued to our lender group in January 2000. The reduction in interest expense in 2000 was primarily due to reduced debt levels outstanding. Other Income (Expense), net In 2000, other income and expense represents primarily a $3.5 million loss in the first quarter on the sale of our Cemetel unit, foreign exchange losses of approximately $5 million and the write-off of a 1998 investment in a Poland- based telecom venture of $1.3 million. This was partially offset by interest income from bank deposits, a gain of $2.6 million on the sale of Control Resources Corporation in April 2000. For 2000, 1999, and 1998, interest income consisted primarily of interest generated from cash maintained in interest bearing bank accounts. In 2000, 1999, and 1998, interest income was $0.4 million, $0.6 million, and $1.5 million, respectively. For 2000, 1999, and 1998, we incurred net other expenses of $7.4, $3.2 million, and $0.1 million. Sales contracts negotiated in foreign currencies have been primarily limited to British Pound Sterling contracts and Italian Lira contracts. The impact of translating balance sheet accounts due to currency fluctuations in British Pound Sterling or Italia Lira for 2000 was related to strengthening of the U.S. dollar versus these currencies through most of the year. We may in the future be exposed to the risk of foreign currency gains or losses depending upon the magnitude of a change in the value of a local currency in an international market. Provision (Benefit) for Income Taxes In 2000 and 1999, we recorded tax provisions of $11,140 and $1,407, respectively, representing effective tax rates of (20.2)% and (1.4)%, respectively. The tax provision for 2000 is comprised of a $9.9 million write- off of deferred tax assets taken in 2000 and income taxes attributable to foreign jurisdictions that had taxable income for 2000. The tax provision for 1999 is comprised of income taxes attributable to foreign jurisdictions that had taxable income for 1999. No benefit was recognized in 2000 or 1999 for net operating losses incurred. In 1998, we recorded a tax benefit of $(11,501) representing an effective tax rate of 15.9%. 21 Discontinued Operations In August 1999, we decided to divest our broadcast equipment business, Technosystem. Accordingly, beginning in the third quarter of 1999, this business was reported as a discontinued operation and the financial statement information related to this business was presented on one line in the 1999 Consolidated Balance Sheet, "net assets of discontinued operations", and in the "discontinued operations" line of the Consolidated Statements of Operations. The "net assets of discontinued operations" represented the assets intended to be sold, offset by the liabilities anticipated to be assumed by the buyers of the business. The disposition of Technosystem was completed by the end of the first quarter of 2000. In 1999 we recorded an estimated loss on disposal of $26.9 million, including the write-off of approximately $12.5 million of goodwill, related to the disposal of Technosystem. Losses from discontinued operations were $4.0 million, $13.9, million, and $2.9 million in 2000, 1999, and 1998, respectively. Extraordinary Item In January 2000, we repurchased an additional $7.0 million of our Notes for 677,000 shares of newly issued common stock with a fair market value of $5.1 million. The extraordinary gain resulting from this transaction amounted to $1.9 million. In January and February of 1999, we repurchased an aggregate of $25.5 million of our Notes for an aggregate of 2,792,000 shares of our Common Stock with a fair market value of $18.3 million and recorded an extraordinary gain of $7.2 million. In December 1999, we repurchased an aggregate of $23.8 million of our Notes for an aggregate of 2,359,000 shares of our Common Stock with a fair market value of $17.8 million. This transaction resulted in an extraordinary gain of $6.0 million. In December 1998, we repurchased 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 June 1999, we exchanged all 15,000 shares of Series B Convertible Preferred Stock for 5,135,000 shares of 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. In November 1999, we entered into agreements with the former Series B preferred shareholders to eliminate their redemption rights and their past and future late registration premiums and penalties in exchange for 220,000 shares of Common Stock, warrants to purchase 443,000 share of Common Stock, and a $400,000 promissory note convertible (with interest) into Common Stock at a conversion price of approximately $4.72 per share. As a result of these transactions, we recorded a charge in 1999 of approximately $6.3 million relating to these agreements. In December 1998, we completed a private placement of 15,000 shares of a newly designated Series B Convertible Preferred stock and warrants to purchase up to 1,242,000 shares of Common Stock for $15 million. During the period the Series B preferred stock as outstanding, 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, we recorded a charge of approximately $1.8 million to our accumulated deficit in 1998. Liquidity and Capital Resources Since our 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, three private placements of Common Stock yielding approximately $18.2 million in August 2000, $43.0 million in January 2000, $38.3 million in June 1999, 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. 22 In 2000, we used approximately $37.0 million of cash in operating activities, primarily due to the net loss of $69.9 million offset by non-cash charges for inventory related charges aggregating $21.7 million, the loss on disposal of discontinued operations of $4.0 million and an impairment charge related to goodwill of $15 million. In addition, we experienced increases in accounts receivable and inventories. These increases were offset by increases in accounts payable and other accrued liabilities. During 2000, we used approximately $2.5 million of cash in investing activities primarily for the acquisition of property and equipment of $8.0 million offset by proceeds on the sale of the Control Resources Corporation and Cemetel subsidiaries of $6.8 million. In 2000, we generated approximately $57.2 million from financing activities. We repaid approximately $14.0 million of borrowings under our bank line of credit and other credit arrangements, borrowed $12 million under a new bank line of credit, and received approximately $61.2 million in net proceeds from private placements of approximately 7.5 million shares of Common Stock in January and an additional private placement of 3.0 million shares in July. In addition proceeds from exercises of stock options and warrants aggregated $9.9 million. During 2000, we retired approximately $7 million of our 4 1/4% convertible subordinated notes ("Notes") through the issuance of approximately 677,000 shares of Common Stock. This non-cash exchange resulted in an extraordinary gain of approximately $1.9 million. At December 31, 2000, we had working capital of approximately $76.8 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. Sales terms to some larger customers have recently been at extended due dates, resulting in additional use of working capital. Our principal sources of liquidity as of December 31, 2000 consisted of approximately $27.5 million of cash and cash equivalents. At December 31, 1999, we had approximately $11.6 million in cash and cash equivalents. At December 31, 2000, we had outstanding borrowings of approximately $11.0 million under our line of credit, which expired and was paid off, with accrued interest, on January 31, 2001. In February 2001, we sold RT Masts our U.K. services unit for approximately $12 million in cash, an additional $750,000 retained by the purchaser for six months to cover any contingencies, and a seven year note receivable for $750,000, interest due annually at LIBOR. On March 29, 2001, we entered into a Loan and Security Agreement with a borrowing capacity of up to $25 million. The Loan and Security Agreement matures in March 2004. Borrowings under the Loan and Security Agreement bear interest at LIBOR plus 3.5% to 4.5% per annum and are secured by our cash deposits, receivables, inventories, equipment, and intangibles. Maximum borrowings under the Loan and Security Agreement are limited to 85% of eligible accounts receivable. Given the size and working capital needs of our business and our recent history of losses, we judge our current liquidity situation to be adequate. 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 outstanding debt (including $29 million of Notes maturing on November 1, 2002), our results of operations, the development of new radio systems and related software tools, expansion of our domestic services business, the extent and timing of acceptance of our radio systems in the market, requirements to maintain adequate manufacturing facilities, the progress of our research and development efforts, expansion of our marketing and sales efforts, and the status of competitive products, potential acquisitions, working capital requirements. We believe that cash and cash equivalents on hand, projected cash flow from operations and funds available from eligible receivable financing under our new loan agreement should be 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 our operations, particularly if economic conditions in our industry or in global economies in which we compete restrain our sales. 23 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 our research and development or manufacturing programs, cease any potential acquisition activities or obtain funds through arrangements with partners or others that may require the Company to relinquish some level of control of operations. Accordingly, the inability to obtain such financing could have a material adverse effect on our business, financial condition and results of operations. 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 cannot be applied retroactively. The Company adopted SFAS 133 effective January 1, 2001. The adoption of SFAS 133 did not have a material impact on our financial position or results of operations. CERTAIN RISK FACTORS AFFECTING THE COMPANY Small Player in Large Market We do not have the customer base or other resources of more established companies, which makes it more difficult for us to address the liquidity and other challenges we face. Although we have installed and have in operation over 100,000 radio units globally, we have not developed a large installed base of our equipment or the kind of close relationships with a broad base of customers of a type enjoyed by older, more developed companies, which would provide a base of financial performance from which to launch strategic initiatives and withstand business reversals. In addition, we have not built up the level of capital often enjoyed by more established companies, so from time to time we may face serious challenges in financing our continued operation. We may not be able to successfully address these risks. Additional Capital Requirements Our future capital requirements will depend upon many factors, including development costs of new products and related software tools, potential acquisitions opportunities, maintenance of adequate manufacturing facilities and contract manufacturing agreements, progress of research and development efforts, expansion of marketing and sales efforts, and status of competitive products. Additional financing may not be available in the future on acceptable terms or at all. The continued existence of a substantial amount of debt (including Notes which come due November 1, 2002) could also severely limit our ability to raise additional financing. In addition, given the recent price for our common stock, if we raise additional funds by issuing equity securities, significant dilution to our stockholders could result. If adequate funds are not available, we may be required to restructure or refinance our debt or delay, scale back or eliminate our research and development, acquisition or manufacturing programs. We may also need to obtain funds through arrangements with partners or others that may require us to relinquish rights to certain of our technologies or potential products or other assets. Our inability to obtain capital, or our ability to obtain additional capital only upon onerous terms, could very seriously damage our business, operating results and financial condition and further erode our stock price. 24 Rapid Technological Change Rapid technological change, frequency of new product introductions and enhancements, product obsolescence, changes in end-user requirements and period-to-period demand, and evolving industry standards characterize the communications market. 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 our new Point-to-Multipoint systems, upgraded Point-to-Point systems, and cost effective Spread Spectrum radios. Any success in developing new and enhanced systems and related software tools will depend upon a variety of factors. Such factors include: . new product development to meet market demand; . integration of various elements of complex technology; . timely and efficient implementation of manufacturing and assembly processes at turnkey suppliers and manufacturing cost reduction programs for existing product lines; . development and completion of related software tools, system performance, quality and reliability of systems; and . timely and efficient completion of system design. Moreover, the Company may not be successful in selecting, developing, manufacturing and marketing new systems or enhancements or related software tools. For example, to date, revenue generated through the sales of Point-to- Multipoint systems has not met original expectations. Also, errors could be found in the Company's systems after commencement of commercial quantity shipments. Such errors could result in the loss of or delay in market acceptance, as well as expenses associated with re-work of previously delivered equipment. History of Losses From inception to December 31, 2000, the Company generated an accumulated deficit of approximately $219.0 million. The decrease in retained earnings from $18.4 million at December 31, 1997 to an accumulated deficit of $219.0 million at December 31, 2000 was due primarily to net losses of $62.5 million in 1998, $103.0 million in 1999, and $70.0 million in 2000. The decline in product prices received has had a significant downward impact on the Company's gross margin over the past three years, particularly in its Point-to-Point radio systems line. Additionally, slow sales in the Point-to- Multipoint product line in the second half of 2000 resulted in lower margins on this line than had been forecasted for higher sales unit levels. The Company expects pricing pressures to continue for the next several quarters and also expects pricing pressures from the slowing U.S. economy in 2001 to affect gross margins. Our ability to drive down cost of producing radio units will be a key issue in the coming year. Customer Concentration For 2000, approximately 180 customers accounted for substantially all of the Company's sales. Sales to 4 customers accounted for 58% of sales. Our ability to maintain or increase our sales in the future will depend, in part upon our ability to obtain orders from new customers as well as the financial condition and success of our customers, the telecommunications industry and the economy in general. Many of the Company's major customers are located in foreign countries, primarily in the United Kingdom and the Pacific Rim. Some of these customers are implementing new networks and are themselves in the early stages of development. They may require additional capital to fully implement their planned networks, which may be unavailable to them on an as-needed basis, and which the Company cannot supply in terms of long-term financing. 25 If the Company's customers cannot finance their purchases of the Company's products or services, 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. Both current customers and potential future customers in the telecommunications industry have, from time to time, reportedly undergone financial difficulties and may therefore limit their future orders or find it difficult to pay our billings to them. Any cancellation, reduction or delay in orders or shipments, for example, as a result of manufacturing or supply difficulties or a customer's inability to finance its purchases of the Company's products or services, may materially adversely affect the Company's business. Some difficulties of this nature have occurred in the past and the Company believes they can 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, as well as their own buildout schedules; . 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; . price negotiations required to secure purchase orders; and . education of customers as to the potential applications of our products and services, as well as related product-life cost savings. Shipment delays Due to logistics of production and inventory, a delay in a shipment near the end of a particular quarter for any reason may cause sales in a particular quarter to fall significantly below the Company's and stock market analysts' expectations. A single customer's order scheduled for shipment in a quarter can represent a large portion of the Company's potential sales for the quarter. Such delays have occurred in the past due to, for example, unanticipated shipment rescheduling, cancellations or deferrals by customers, competitive and economic factors, unexpected manufacturing or other difficulties, delays in deliveries of components, subassemblies or services by suppliers and failure to receive anticipated orders. 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. 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 26 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. Ordering materials and building inventory based on customer forecasts or non-binding orders can also result in large inventory write-offs, such as occurred in 2000. Global economic conditions have had a depressing effect on sales levels in past years, particularly in 1998. The soft economy and reported slowdown in capital spending in early 2001 in the U.S. market may again have a significant depressing effect on the sales levels to be attained by our Company in 2001. 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 to fulfill customer needs, its results of operations could continue to be adversely affected. In particular, increases in inventory could materially adversely affect operations if such inventory is ultimately not used or becomes obsolete. This risk was realized in the large inventory write-downs in the second quarter of 1999 and 2000. Expenses Magnifying the effects of any sales shortfall, a material portion of the Company's operating expenses is 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 existing 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 hold on placing orders 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 expense levels incurred; . product sales discounts; . accounts receivable collection issues; . changes in its pricing or customers' or its 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; 27 . 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; . customisation 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. Acquisition Related Risks The Company may be unable to realize the full value of its past acquisitions. From April 1996 through 1998, the Company 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.r.l. were divested in February 2000, Control Resources Corporation was divested in April 2000, and RT Masts was divested in February 2001. 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 and/or accelerated write-offs associated with amortization of acquired intangible assets; . 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 operating cultures. Although we have now integrated the remaining acquired businesses, we may continue to encounter problems related to the management of these companies. Overcoming existing and potential problems may entail increased costs, additional investment and diversion of management attention and other resources, or require 28 divestment of one or more business units, which may adversely affect our business, financial condition and operating results. In addition, we have written off assets of several of our other acquired companies for which the acquisitions have not worked out as originally anticipated. The Company may not be successful in overcoming any or all of these risks or any other problems encountered in connection with our past or any future 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. Most of the Company's past acquisitions have been accounted for under the purchase method of accounting, and as a result, a significant amount of goodwill is being amortized relative to two of these acquisitions where the Company continues to operate. This amortization expense may have a significant effect on the Company's future financial results. Contract Manufacturers and Limited Sources of Supply The Company's internal manufacturing capacity is very limited. The Company uses contract manufacturers in large part 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. 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. Management of Growth To maintain a competitive market position, the Company is required to continue to invest resources for growth. Currently, the Company is devoting significant resources to the development of new products and technologies and is continuously 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 bringing these products to commercial production stage. 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. 29 Additional inventory on hand for new product development and customer service requirements also increases the risk of further inventory write-downs if such products do not gain reasonable market acceptance at normal gross profit margin. Although the Company, through monitoring its operating expense levels relative to business plan revenue levels, tries to maintain a given level of operating results, there are many market condition changes which have and may continue to challenge the Company's ability to maintain given levels of operating expenses to revenue ratios. 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 from time to time 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 or replacements to inventory and management systems designed to help control and monitor inventory levels and other operating decision criteria. 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, Florida, Virginia, and elsewhere. The Company has experienced difficulties due to the integration of acquired businesses utilizing differing business and accounting systems, currencies, and a variety of unique customs, cultures, and language barriers. 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 expenses and inherent risks, greater risk of billing delays, inventory write-downs and financial reporting difficulties. A significant ramp-up of production of products and services could require 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 such 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 relative from the point at which a product is initially marketed and priced. Reasons for such decline may include the maturation of such systems, the effect of volume price discounts in existing and future contracts and the intensification of competition. 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. 30 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 accounts receivable. The Company could be unable to enforce a policy of receiving payment within a limited number of days of issuing bills, especially for customers in the early phases of business development. Such risk is mitigated through the requirement that newer customers place irrevocable Letters of Credit at the Company's disposal. The Company's current credit policy on customers both domestically and internationally requires letters of credit and/or significant advance payments for those customers deemed to be a high risk and open credit levels 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 120 days depending upon the customer and the economic norms of the region. The Company could have difficulties 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 $11.3 million, for accounts receivable write-offs and reserves additions. While such charges amount to only $0.7 million in 2000, similar write-offs may occur 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. 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 expenditure levels. Communications providers may not make the necessary investment in such infrastructure, and the creation of this infrastructure may not occur in a timely manner. Moreover, one potential application of the Company's technology is the use of its systems in conjunction with the provision of alternative wireless access in competition with the existing wireline local exchange providers 31 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 other segments. Certain current and prospective customers are delivering services and features that use competing transmission media such as fiber optic and copper cable, particularly in the local loop access market. To successfully compete with existing products and technologies, the Company must offer systems with superior price/performance characteristics and extensive customer service and support. Additionally, the Company must supply such systems on a timely and cost-effective basis, in sufficient volume to satisfy such prospective customers' requirements and otherwise overcome any reluctance on the part of such customers to transition to new technologies. Any delay in the adoption of the Company's systems may result in prospective customers using alternative technologies in their next generation of systems and networks. Prospective customers may not design their systems or networks to include the Company's systems. Existing customers may not continue to include the Company's systems in their products, systems or networks in the future. The Company's technology may not replace existing technologies and achieve widespread acceptance in the wireless telecommunications market. Failure to achieve or sustain commercial acceptance of the Company's currently available radio systems or to develop other commercially acceptable radio systems would materially adversely affect it. Also, industry technical standards may change or, if emerging standards become established, the Company may not be able to conform to these new standards in a timely and cost-effective manner. Intensely Competitive Industry The wireless communications market is intensely competitive. The Company's wireless-based radio systems compete with other wireless telecommunications products and alternative telecommunications transmission media, including copper and fiber optic cable. The Company is experiencing intense competition worldwide from a number of leading telecommunications companies. Such companies offer a variety of competitive products and services and some offer broader telecommunications product lines, and include Alcatel Network Systems, Bosch Telekom, DMC Stratex Networks, Cerragon, Ericsson Limited, Harris Corporation- Farinon Division, Lucent T.R.T., NEC, Nokia Telecommunications, Nortel/BNI, SIAE, Siemens, and Western Multiplex Corporation. Many of these companies have greater installed bases, financial resources and production, marketing, manufacturing, engineering and other capabilities than the Company does. 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, and new technology featuring laser-based millimeter-wave delivery is now on the marketplace. 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 32 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. The majority 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.r.l., 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.r.l. at a significant loss. In February 2001, the Company sold RT Masts at an estimated gain. Historically, the Company's international sales have been denominated in British pounds sterling or United States dollars. Certain of the Company's international sales are denominated in other foreign currencies, including Italian lira (P-Com Italia). A decrease in the value of foreign currencies relative to the United States dollar could result in decreased margins from those transactions if such decreases are not hedged. For international sales that are United States dollar-denominated, such a decrease could make its systems less price-competitive if competitors choose to price in other currencies and could have a material adverse effect upon its financial condition. Additional risks are inherent in the Company's international business activities. Such risks include: . changes in regulatory requirements; . costs and risks of localizing systems (homologation) in foreign countries; . delays in receiving and processing components and materials; . availability of suitable export financing; . timing and availability of export licenses, tariffs and other trade barriers; . difficulties in staffing and managing foreign operations, branches and subsidiaries; . difficulties in managing distributors; . potentially adverse tax consequences; . foreign currency exchange fluctuations; . the burden of complying with a wide variety of complex foreign laws and treaties; . difficulty in accounts receivable collections, if applicable; and . political and economic instability. In addition, many of 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. 33 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 governments as well as by international treaties. The Company's systems must conform to a variety of domestic and international requirements established to, among other things, avoid interference among users of radio frequencies and to permit interconnection of equipment. Historically, in many developed countries, the limited availability of radio frequency spectrum has inhibited the growth of wireless telecommunications networks. Each country's regulatory process differs. To operate in a jurisdiction, the Company must obtain regulatory approval for its systems and comply with differing regulations. Regulatory bodies worldwide continue to adopt new standards for wireless communications products. The delays inherent in this governmental approval process may cause the cancellation, postponement or rescheduling of the installation of communications systems by the Company and its customers. The failure to comply with current or future regulations or changes in the interpretation of existing regulations could result in the suspension or cessation of operations. Such regulations or such changes in interpretation could require the Company to modify its products and services and incur substantial costs to comply with such regulations and changes. In addition, the Company is also affected by domestic and international authorities' regulation of the allocation and auction of the radio frequency spectrum. Equipment to support new systems and services can be marketed only if permitted by governmental regulations and if suitable frequency allocations are auctioned to service providers. Establishing new regulations and obtaining frequency allocation at auction is a complex and lengthy process. If PCS operators and others are delayed in deploying new systems and services, the Company could experience delays in orders. Similarly, failure by regulatory authorities to allocate suitable frequency spectrum could have a material adverse effect on the Company's results. In addition, delays in the radio frequency spectrum auction process in the United States could delay the Company's ability to develop and market equipment to support new services. 34 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. Class Action Litigation In September and October 1998, several class action complaints were filed in the Superior Court of California, County of Santa Clara, on behalf of P-Com stockholders who purchased or otherwise acquired its Common Stock between April 1997 and September 11, 1998. The plaintiffs allege various state securities laws violations by P-Com and certain of its officers and directors. The complaints seek un-quantified compensatory, punitive and other damages, attorneys' fees and injunctive and/or equitable relief. On December 3, 1998, the Superior Court of California, County of Santa Clara, entered an order consolidating all of the above complaints. On June 30, 2000 the Superior Court of California, County of Santa Clara, issued a notice of ruling certifying this matter as a class action. 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. 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. Protection of Proprietary Rights The Company relies on a combination of patents, trademarks, trade secrets, copyrights and other measures to protect its intellectual property rights. The Company generally enters into confidentiality and nondisclosure agreements with service providers, customers and others to limit access to and distribution of proprietary rights. The Company also enters into software license agreements with customers and others. However, such measures may not provide adequate protection for its trade secrets or other proprietary information for a number of reasons. Any of the Company's patents could be invalidated, circumvented or challenged, or the rights granted thereunder may not provide competitive advantages to the Company. Any of the Company's pending or future patent applications might not be issued within the scope of the claims sought, if at all. Furthermore, others may develop similar products or software or duplicate the Company's products or software. Similarly, others might design around the patents owned by the Company, or third parties may assert intellectual property infringement claims against the Company. In addition, foreign intellectual property laws may not adequately protect the Company's intellectual property rights abroad. A failure or inability to protect proprietary rights could have a material adverse effect on the Company's business, financial condition and results of operations. Even if the Company's intellectual property rights are adequately protected, litigation may be necessary to enforce patents, copyrights and other intellectual property rights, to protect the Company's trade secrets, to determine the validity of and scope of proprietary rights of others or to defend against claims of infringement or invalidity. 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. 35 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 who would be difficult to replace. Future operating results also depend upon the ability to attract and retain qualified management and technical personnel. Competition for such personnel is intense, and 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 has instituted 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, the Company's 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, technology stocks in particular, have experienced extreme price fluctuations. Such fluctuations have often been unrelated to the operating performance of individual 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, 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. Substantial Amount of Debt As of December 31, 2000, the Company's total indebtedness including current liabilities was approximately $121.0 million and its stockholders' equity was approximately $95.2 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. As of January 31, 2001, the Company paid off $11 million in maturing debt under an asset-based lending agreement, as the lender was withdrawing from the market. The Company's $29 million outstanding principal amount of Notes matures on November 1, 2002. 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. 36 Change of Control Inhibition The Company's 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 (20% or more in the case of the State of Wisconsin Investment Board and Firsthand Capital Management) of the Common Stock will be substantially diluted. Future issuance of stock or any additional preferred stock could have the effect of making it more difficult for a third party to acquire a majority of 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. 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, 2000, 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. The Company does not use derivative financial instruments for speculative or trading purposes. Interest Rate Risk The Company's Notes bear interest at a fixed rate, therefore, the Company's financial condition and results of operations would not be affected by interest rate changes in this regard. The working capital credit facility being negotiated at March 15, 2001 includes borrowing options based on either U.S. prime, or 30-90 LIBOR settings. Such rates in either case are subject to movements in underlying central bank offering rates. 37 Item 8. Financial Statements P-Com, Inc. Index to Consolidated Financial Statements and Financial Statement Schedule
Page ---- Financial Statements: Report of Independent Accountants....................................... 39 Consolidated Balance Sheets at December 31, 2000 and 1999............... 40 Consolidated Statements of Operations for the years ended December 31, 2000, 1999, and 1998................................................... 41 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999, and 1998...................................... 42 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998................................................... 44 Notes to Consolidated Financial Statements.............................. 45 Financial Statement Schedule: Schedule II--Valuation and Qualifying Accounts.......................... 66
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. 38 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting associated with revenue recognition effective January 1, 2000. PricewaterhouseCoopers LLP San Jose, California March 9, 2001, except for Note 15, which is as of March 29, 2001 39 P-Com, Inc. Consolidated Balance Sheets (in thousands, except per share data)
December 31, ------------------ 2000 1999 -------- -------- Assets Current assets: Cash and cash equivalents................................. $ 27,541 $ 11,629 Accounts receivable, net of allowances of $3,810 and $14,899, respectively.................................... 63,458 44,041 Inventory................................................. 62,838 46,849 Prepaid expenses and notes receivable..................... 13,668 15,987 Net assets of discontinued operations..................... -- 3,151 -------- -------- Total current assets.................................... 167,505 121,657 Property and equipment, net................................ 23,166 36,626 Deferred income taxes...................................... -- 9,858 Goodwill and other assets.................................. 25,548 50,605 -------- -------- Total assets............................................ $216,219 $218,746 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable.......................................... $ 36,093 $ 34,275 Accrued employee benefits................................. 2,440 2,894 Other accrued liabilities................................. 41,238 28,947 Notes payable............................................. 10,911 23,557 -------- -------- Total current liabilities............................... 90,682 89,673 Other long-term liabilities................................ 991 3,542 Convertible subordinated notes............................. 29,299 36,316 -------- -------- Total liabilities....................................... 120,972 129,531 -------- -------- Commitments and contingencies (notes 12 and 13) Stockholders' equity: Series A Preferred Stock.................................. -- -- Common Stock, $0.0001 par value; 145,000 shares and 95,000 shares authorized at December 31, 2000 and 1999, respectively; 80,631 and 67,400 shares issued and outstanding at December 31, 2000 and 1999, respectively.. 8 7 Additional paid-in capital................................ 316,515 238,721 Accumulated deficit....................................... (218,922) (148,973) Accumulated other comprehensive loss...................... (2,354) (540) -------- -------- Total stockholders' equity.............................. 95,247 89,215 -------- -------- Total liabilities and stockholders' equity.............. $216,219 $218,746 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 40 P-Com, Inc. Consolidated Statements of Operations (in thousands, except per share data)
2000 1999 1998 -------- --------- -------- Sales: Product........................................ $183,606 $ 116,409 $118,948 Service........................................ 50,795 40,470 43,597 -------- --------- -------- Total sales................................... 234,401 156,879 162,545 -------- --------- -------- Cost of sales: Product........................................ 160,965 107,378 93,829 Service........................................ 38,170 28,274 30,777 -------- --------- -------- Total cost of sales........................... 199,135 135,652 124,606 -------- --------- -------- Gross profit.................................... 35,266 21,227 37,939 -------- --------- -------- Operating expenses: Research and development....................... 20,241 32,431 38,882 Selling and marketing.......................... 11,972 17,135 19,224 General and administrative..................... 26,893 25,179 24,260 Goodwill amortization.......................... 19,598 6,547 5,023 Restructuring charges.......................... -- 3,300 4,332 Acquired in-process research and development... -- -- 15,442 -------- --------- -------- Total operating expenses...................... 78,704 84,592 107,163 -------- --------- -------- Loss from continuing operations................. (43,438) (63,365) (69,224) Interest expense................................ (4,750) (8,175) (8,652) Other income (expense), net..................... (6,977) (2,537) 1,446 -------- --------- -------- Loss from continuing operations before income taxes, extraordinary items and cumulative effect of change in method of accounting....... (55,165) (74,077) (76,430) Provision (benefit) for income taxes............ 11,140 1,407 (11,501) -------- --------- -------- Loss from continuing operations before extraordinary items and cumulative effect of accounting change.............................. (66,305) (75,484) (64,929) Discounted operations: Loss from operations........................... (4,000) (13,903) (2,869) Loss on disposal............................... -- (26,901) -- -------- --------- -------- (4,000) (40,804) (2,869) Extraordinary gain on retirement of Notes....... 1,890 13,239 5,333 Cumulative effect of change in method of accounting..................................... (1,534) -- -- -------- --------- -------- Net loss........................................ $(69,949) $(103,049) $(62,465) ======== ========= ======== Net loss applicable to Common Stockholders: Net loss....................................... (69,949) (103,049) (62,465) Charge related to Preferred Stock discount..... -- -- (1,839) Loss on conversion of Preferred Stock to Common Stock......................................... -- (18,521) -- -------- --------- -------- Net loss applicable to Common Stockholders..... $(69,949) $(121,570) $(64,304) ======== ========= ======== Basic and diluted loss per share: Loss from continuing operations................ $ (0.85) $ (1.32) $ (1.50) Loss from discontinued operations.............. (0.05) (0.72) (0.07) Extraordinary gain on retirement of Notes...... 0.02 0.23 0.12 Cumulative effect of change in method of accounting.................................... (0.02) -- -- Charges related to Preferred Stock discount and loss on conversion of Preferred Stock to Common Stock.................................. -- (0.32) (0.04) -------- --------- -------- Basic and diluted net loss per share applicable to Common Stockholders......................... $ (0.90) $ (2.13) $ (1.49) ======== ========= ======== Shares used in per share computations: Basic and diluted.............................. 78,000 56,995 43,254 ======== ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 41 P-Com, Inc. Consolidated Statement of Stockholders' Equity (in thousands)
Accumulated Other Retained Compre- Compre- Common Stock Additional Earnings hensive hensive ------------- Paid-In (Accumulated Income Income Shares Amount Capital Deficit) (Loss) (Loss) Total ------ ------ ---------- ------------ ----------- -------- -------- Balance at December 31, 1997................... 42,664 $ 4 $131,735 $ 18,380 $(1,822) $148,297 Issuance of Common Stock upon exercise of stock options and warrants... 499 -- 2,651 -- -- 2,651 Issuance of Common Stock under employee stock purchase plan.......... 240 -- 1,842 -- -- 1,842 Issuance of Common Stock upon retirement of Convertible Subordinated Notes due 2002................... 2,467 1 9,018 -- -- 9,019 Charge related to Preferred Stock discount............... -- -- -- (1,839) -- (1,839) Cumulative translation adjustment............. -- -- -- -- 1,904 $ 1,904 1,904 Net loss................ -- -- -- (62,465) -- (62,465) (62,465) -------- Comprehensive income.... (60,561) ------ --- -------- -------- ------- ======== -------- Balance at December 31, 1998................... 45,870 5 145,246 (45,924) 82 99,409 Issuance of Common Stock, net of issuance costs.................. 10,068 1 38,274 -- -- 38,275 Issuance of Common Stock in exchange for convertible notes...... 5,171 -- 36,095 -- -- 36,095 Charge to Common stockholders resulting from the conversion of redeemable Preferred Stock to redeemable Common Stock........... -- -- (10,190) -- -- (10,190) Charge to Common stockholders resulting from repricing of warrants............... -- -- (2,000) -- -- (2,000) Charge to Common stockholders resulting from penalties due to certain Common stockholders........... -- -- (6,331) -- -- (6,331) Issuance of Common Stock and Common Stock warrants in satisfaction of penalties due to certain Common stockholders........... 220 -- 4,886 -- -- 4,886 Reclassification of Mandatorily redeemable Common Stock and Common Stock warrants resulting from the cancellation of Redemption rights...... 5,135 1 29,007 -- -- 29,008 Issuance of Common Stock upon exercise of stock options................ 725 -- 3,016 -- -- 3,016 Issuance of Common Stock under employee stock purchase plan.......... 211 -- 718 -- -- 718 Cumulative translation adjustment............. -- -- -- -- (622) (622) (622) Net loss................ -- -- -- (103,049) -- (103,049) (103,049) -------- Comprehensive income.... (103,671) ------ --- -------- -------- ------- ======== -------- Balance at December 31, 1999................... 67,400 7 238,721 (148,973) (540) 89,215
The accompanying notes are an integral part of these consolidated financial statements. 42 P-Com, Inc. Consolidated Statement of Stockholders' Equity (Continued) (in thousands)
Accumulated Other Retained Compre- Compre- Common Stock Additional Earnings hensive hensive ------------- Paid-In (Accumulated Income Income Shares Amount Capital Deficit) (Loss) (Loss) Total ------ ------ ---------- ------------ ----------- -------- -------- Balance at December 31, 1999................... 67,400 7 238,721 (148,973) (540) 89,215 Issuance of Common Stock for cash, net of issuance costs of $125................... 10,531 1 61,206 -- -- 61,207 Issuance of warrants for Common Stock on conjunction with line of credit borrowings... -- -- 1,902 -- -- 1,902 Conversion of notes payable to Common Stock.................. 677 -- 4,382 -- -- 4,382 Issuance of Common Stock upon exercise of warrant................ 158 -- 600 600 Stock-based compensation expense from acceleration of option vesting................ -- -- 372 -- -- 372 Issuance of Common Stock upon exercise of stock options................ 1,473 -- 8,098 -- -- 8,098 Issuance of Common Stock under employee stock purchase plan.......... 392 -- 1,234 -- -- 1,234 Cumulative translation adjustment............. -- -- -- -- (1,814) (1,814) (1,814) Net loss................ -- -- -- (69,949) -- (69,949) (69,949) -------- Comprehensive income.... $(71,763) ------ --- -------- --------- ------- ======== -------- Balance at December 31, 2000................... 80,631 $ 8 $316,515 $(218,922) $(2,354) $ 95,247 ====== === ======== ========= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. 43 P-Com, Inc. Consolidated Statement of Cash Flows (in thousands)
2000 1999 1998 -------- --------- -------- Cash flows from operating activities: Net loss....................................... $(69,949) $(103,049) $(62,465) Adjustments to reconcile net loss to net cash used in operating activities, net of effect of acquisition: Depreciation................................... 10,948 11,783 11,544 Amortization of goodwill and other intangible assets........................................ 4,598 7,798 6,827 Write-off of goodwill.......................... 15,000 -- -- Loss on disposal of property and equipment..... 6,206 2,157 -- Compensation expense related to stock options....................................... 372 -- -- Change in minority interest.................... -- -- (604) Deferred income taxes.......................... 9,858 (180) (7,981) Acquired in-process research and development expenses...................................... -- -- 15,442 Inventory and other restructuring charges...... 21,679 15,100 -- Non cash effect of retirement of notes......... (1,890) (13,239) (5,333) Loss on sale of subsidiary..................... 855 -- -- Loss on disposal of discontinued operations.... 4,000 26,901 -- Cumulative effect of change in method of accounting.................................... 1,534 -- -- Amortization of stock warrants................. 1,745 -- -- Accounts receivable charge..................... -- 21,400 -- Writedown of long term investment.............. 1,320 -- -- Changes in assets and liabilities: Accounts receivable........................... (23,034) (18,501) 23,905 Inventory..................................... (36,940) 563 (15,016) Prepaid expenses and notes receivable......... 473 3,800 (9,109) Other assets.................................. 1,559 295 2,684 Accounts payable.............................. 6,409 1 (1,390) Accrued employee benefits..................... 587 362 (585) Other accrued liabilities..................... 7,695 17,584 2,709 Deferred contract obligation.................. -- -- 8,000 Income taxes payable.......................... -- (2,189) (6,409) -------- --------- -------- Net cash used in operating activities........ (36,975) (29,414) (37,781) -------- --------- -------- Cash flows from investing activities: Acquisition of property and equipment.......... (8,037) (6,054) (29,187) Cash paid on disposal of discontinued operations.................................... (2,000) -- -- Proceeds from sale of property and equipment... 700 1,373 -- Proceeds from sale of subsidiary............... 6,860 -- -- Acquisitions, net of cash received............. -- -- (61,398) -------- --------- -------- Net cash used in investing activities........ (2,477) (4,681) (90,585) -------- --------- -------- Cash flows from financing activities: Proceeds from (payment of) note payable........ (12,487) (21,525) 46,067 Proceeds from issuance of Common Stock, net of expenses...................................... 61,206 38,274 -- Proceeds from exercise of stock options and warrants...................................... 9,932 3,734 4,493 Borrowings (Repayments) of long-term obligations and capital leases................ (1,223) (3,378) 1,882 Proceeds from issuance of Preferred Stock and warrants, net................................. -- -- 13,559 Proceeds from sale-leaseback transaction....... -- -- 1,557 Issuance of note receivable to officers........ (250) -- -- -------- --------- -------- Net cash provided by financing activities.... 57,178 17,105 67,558 -------- --------- -------- Effect of exchange rate changes on cash......... (1,814) (622) 1,904 -------- --------- -------- Net increase (decrease) in cash and cash equivalents.................................... 15,912 (17,612) (58,904) -------- --------- -------- Cash and cash equivalents at beginning of year.. 11,629 29,241 88,145 -------- --------- -------- Cash and cash equivalents at end of year........ $ 27,541 $ 11,629 $ 29,241 ======== ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 44 P-Com, Inc. Notes to Consolidated Financial Statements 1.The Company and Summary of Significant Accounting Policies The Company P-Com, Inc. (the "Company") was incorporated in Delaware on August 23, 1991 to engage in the design, manufacture and marketing of millimeter network access wave radio systems for use in the worldwide wireless telecommunications market. The Company also provides network services including system and program planning and management, path design, and installation for the wireless communication market through its service sales segment. Through December 31, 2000, the Company has incurred substantial losses and negative cash flows from operations and, as of December 31, 2000, the Company had an accumulated deficit of $218.9 million. For the year ended December 31, 2000, the Company recorded losses from operations of $69.9 million and cash outflows from operating activities of $37.0 million. During 2000, the Company successfully consummated two separate sales of Common Stock in private placement offerings. The Company sold a total of 7,531,000 shares of Common Stock at a 15% discount to the trailing 60-day average closing market price for net proceeds of $43.0 million in January 2000. In August 2000, the Company sold 3,000,000 shares of Common Stock in a private placement at a 7.2% discount to the trailing 60-day average closing market price for net proceeds of $18.2 million. The Company operates in a highly competitive market characterized by rapidly changing technology, together with competitors and distributors that have significantly greater financial resources than the Company. The Company intends to incur significant expenses to develop and promote new products as well as to support existing product sales. Failure to generate sufficient revenues from new and existing products, raise additional capital or reduce discretionary expenditures would have a material adverse effect on the Company's ability to continue as a going concern and achieve its intended business objectives. Summary of Significant Accounting Policies Management's use of estimates and assumptions The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such differences could be material and affect the results of operations reported in future periods. Principles of consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Foreign currency translation The functional currencies of 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. 45 P-Com, Inc. Notes to Consolidated Financial Statements -- Continued Fair value of financial instruments The Company measures its financial assets and liabilities in accordance with accounting principles generally accepted in the United States of America. The estimated fair value of the Company's Convertible Subordinated Notes included in long-term debt was approximately 70% of par or $20.4 million at December 31, 2000, compared to 74% of par or $21.7 million at December 31, 1999. The estimated fair value of cash, accounts receivable and payable, and accrued liabilities at December 31, 2000 and 1999 approximated cost due to the short maturity of these assets and liabilities. Cash and cash equivalents The Company considers all highly liquid debt instruments with a maturity when acquired of three months or less to be cash equivalents. Revenue recognition Revenue from product sales is generally recognized upon transfer of title and risk of loss, which is generally upon shipment of the product provided persuasive evidence of an arrangement exists, the price is fixed or determinable, no significant obligations remain and collection is probable. Provisions for estimated warranty repairs, returns and other allowances are recorded at the time revenue is recognized. Revenue from service sales is recognized ratably over the contractual period or as the service is performed. Inventory Inventory is stated at the lower of cost or market, based on standard costs that are updated at least annually. Products and their associated costs are released from inventory based on first-in, first-out basis. Property and equipment Property and equipment are stated at cost and include tooling and test equipment, computer equipment, furniture, land and buildings, and construction- in-progress. Depreciation is computed using the straight-line method based upon the useful lives of the assets ranging from three to seven years. Leasehold improvements are amortized using the straight-line method based upon the shorter of the estimated useful lives or the lease term of the respective assets. Research and development and software development costs Research and development costs are expensed as incurred. The Company's software products are integrated into its hardware products. Software development costs incurred prior to the establishment of technological feasibility are expensed as incurred. Software development costs incurred subsequent to the establishment of technological feasibility and before general release to customers are capitalized, if material. To date, all software development costs incurred 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 5 to 20 years. 46 P-Com, Inc. Notes to Consolidated Financial Statements -- Continued 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 2000, 1999 and 1998 has been reflected in the Consolidated Statement of Stockholders' Equity. Accounting for stock-based compensation The Company accounts for stock-based employee compensation arrangements using the intrinsic value method as prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and Financial Accounting Standards Board Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation" ("FIN 44"). Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value of the Company's stock at the date of grant over the stock option exercise price. The Company accounts for stock issued to non-employees in accordance with the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") and Emerging Issues Task Force Consensus No. 96-18, "Accounting for Equity Instruments that are offered to other than employees for acquiring or in conjunction with selling goods or services" ("EITF 96-18"). Under SFAS No. 123 and EITF 96-18, stock option awards issued to non-employees are accounted for at their fair value, determined using the Black-Scholes option pricing method. The fair value of each non-employee stock option or award is remeasured at each period end until a commitment date is reached, which is generally the vesting date. Concentration of credit risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents, trade accounts receivable, and derivative financial instruments used in hedging activities. The Company places its cash equivalents in a variety of financial instruments such as market rate accounts and U.S. Government agency debt securities. The Company, by policy, limits the amount of credit exposure to any one financial institution or commercial issuer. 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, 2000 and 1999, amounts due from these customers represented 22% and 28%, respectively, of accounts receivable. Any gains and/or losses incurred on the settlement of these receivables are included in the financial statements as they occur. The Company extends credit terms to international customers of up to 120 days, which is consistent with local business practices. The Company performs on- going credit evaluations of its customers' financial condition to determine the customer's credit worthiness. Sales are then generally made either on 30 to 120 day payment terms, COD or letters of credit. 47 P-Com, Inc. Notes to Consolidated Financial Statements -- Continued At December 31, 2000 and 1999, approximately 66% and 43%, respectively, of trade accounts receivable represents amounts due from three and four customers, respectively. The following table summarizes the percentage of total company sales to Company's significant customers with sales of 10% or more:
Year Ended December 31, ---------------- 2000 1999 1998 ---- ---- ---- Company A................................................. -- 20% 25% Company B................................................. 28% 11% -- Company C................................................. -- 13% -- Company D................................................. 12% -- --
Reclassifications Certain amounts reported in prior years' consolidated financial statements have been reclassified to conform with the current year presentation. 2.Change in Method of Accounting Effective January 1, 2000, the Company has revised its method of accounting associated with revenue recognition for sales of equipment as a result of the adoption of Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial Statements." The Company previously recognized revenue upon shipment of product, provided no significant obligations remained and collection was probable. This method was changed to recognition upon transfer of title and risk of loss, which is generally upon shipment of the product provided no significant obligations remained and collection is probable. In accordance with SAB No. 101, the Company has recorded a non-cash charge of approximately $1.5 million ($1.5 million, after tax) on January 1, 2000 to account for the cumulative effect of this change in method of accounting. The cumulative effect of this change in method of accounting primarily resulted from one contract where revenue had historically been recognized upon shipment, however, under the terms of the underlying contract, title did not transfer until subsequent receipt of payment. Under the Company's revised revenue recognition method, revenue relating to such sales is deferred until title transfers. Primarily as a result of this, approximately $12.0 million in revenue and $10.5 million in related costs originally recognized in 1999 were deferred and re-recognized in the first quarter of 2000. The following table provides selected financial data for 1999 as reported and on a Pro Forma basis assuming SAB No. 101 had been in effect for that year (in thousands, except per share data):
1999 --------------------- As Reported Pro Forma ----------- --------- Loss from Continuing Operations Before Extraordinary Items and Cumulative Effect of Change in Method of Accounting.......................................... $ (75,484) $ (75,638) Net Loss............................................. (103,049) (103,203) Net Loss Applicable to Common Stockholders........... (121,570) (121,724) Basic and Diluted Net Loss Applicable to Common Stockholders........................................ $ (2.13) $ (2.14)
Pro Forma information for 1998 has not been presented as the underlying records necessary to prepare such information are no longer readily available. 48 P-Com, Inc. Notes to Consolidated Financial Statements -- Continued 3.Balance Sheet Components Inventory consists of the following (in thousands of dollars):
December 31, ------------------ 2000 1999 -------- -------- Raw materials............................................ $ 36,366 $ 22,484 Work-in-process.......................................... 20,757 16,019 Finished goods........................................... 25,155 21,837 Inventory at customer sites.............................. 6,550 2,689 -------- -------- 88,828 63,029 Less: Inventory reserves................................. (25,990) (16,180) -------- -------- $ 62,838 $ 46,849 ======== ========
Property and equipment consists of the following (in thousands of dollars):
December 31, ------------------------------- Useful Life 2000 1999 ------------ -------- -------- Tooling and test equipment.................. 5 to 7 years $ 41,839 $ 48,936 Computer equipment.......................... 3 to 5 years 11,809 10,716 Furniture and fixtures...................... 3 to 5 years 3,822 5,860 Land and buildings.......................... 5 to 7 years 2,923 2,837 Construction-in-process..................... -- 1,538 -------- -------- 60,393 69,887 Less: Accumulated deprecation and amortization........... (37,227) (33,261) -------- -------- $ 23,166 $ 36,626 ======== ========
The above amounts include items under capital leases and related accumulated amortization of $3,634 and $974 at December 31, 2000 and $1,557 and $441 at December 31, 1999, respectively. Goodwill and other assets consist of the following (in thousands):
December 31, ------------------ 2000 1999 -------- -------- Goodwill: CSM..................................................... $ 22,295 $ 22,295 Cylink.................................................. 34,261 34,261 Cemetel S.r.l........................................... -- 4,360 -------- -------- 56,556 60,916 Less: Accumulated amortization........................... (31,616) (12,474) -------- -------- Net goodwill........................................... 24,940 48,442 Other assets............................................. 608 2,163 -------- -------- $ 25,548 $ 50,605 ======== ========
In 2000, management reviewed the carrying value of the goodwill related to Cylink. Based upon its assessment of future cash flows estimated to be provided by Cylink, a $15 million impairment charge was recorded. 49 P-Com, Inc. Notes to Consolidated Financial Statements -- Continued Other accrued liabilities consist of the following (in thousands):
December 31, --------------- 2000 1999 ------- ------- Deferred revenue............................................ $11,920 $ 4,735 Deferred contract obligation (a)............................ 8,000 8,000 Purchase commitment......................................... 6,687 4,047 Accrued warranty............................................ 6,323 3,060 Other....................................................... 5,106 4,153 Income taxes payable........................................ 1,566 2,098 Lease obligations........................................... 1,428 1,364 Interest payable............................................ 208 1,490 ------- ------- $41,238 $28,947 ======= =======
(a) Under a joint license and development contract, the Company determined that a related Original Equipment Manufacturer ("OEM") agreement provided for subsequent payments of $8 million specifically earmarked for marketing the Company's products manufactured under this joint license and development contract. As of December 31, 2000 and 1999, payment obligations of $8 million under this contract remained outstanding. Other long-term liabilities consist of the following (in thousands):
December 31, ----------- 2000 1999 ---- ------ Capital lease obligations....................................... $703 $1,777 Other........................................................... 288 1,765 ---- ------ $991 $3,542 ==== ======
4.Borrowing Arrangements The Company entered into a revolving line-of-credit agreement on May 15, 1998, as amended, that provided for borrowings of up to $50.0 million. The maximum revolving commitment, as amended, had been reduced to $30.0 million until maturity on January 15, 2000. At December 31, 1999, the Company had been advanced approximately $23.6 million and had used the remaining $3.4 million to secure letters of credit under such line. In January 2000, the balance was paid in full and the line-of-credit agreement was terminated. Borrowings under the line were secured by the assets of the Company and bore interest at either a base interest rate or a variable interest rate. In January 2000 the Company entered into a line-of-credit agreement for $12 million. The line matured and was repaid in full on January 31, 2001 (see Note 15). Borrowings under the line bore interest at the greater of prime rate plus 2% (8% per annum at December 31, 2000) and were secured by cash deposits, receivables, inventory, equipment, investment property and intangibles of the Company in the United States. In connection with the loan agreement, the Company issued the lender warrants to purchase 200,000 shares of common stock at $5.71 per share. The warrants are fully exercisable, are subject to anti- dilution clauses and expire on January 31, 2005. The Company recorded a discount to amounts recorded under the loan agreement of approximately $2 million, which represented the estimated fair value of the warrants. Such discount was amortized to interest expense over the term of the loan resulting in $1,745,000 of interest expense in 2000. 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 $24.73 per share subsequent to October 2000. The Notes are redeemable by the Company, beginning on November 5, 2000, 50 P-Com, Inc. Notes to Consolidated Financial Statements -- Continued 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 2000, 1999 and 1998, the Company issued Common Stock in exchange for a portion of these Notes and recorded extraordinary gains as noted below. A summary of Convertible Subordinated Note activity is as follows:
Shares Gain on Amount Issued Conversion ---------- ----------- ---------- (millions) (thousands) (millions) Issuance of $100 million in Convertible Subordinated Notes in November 1997........ $100 -- $ -- ---- ----- ---- Balance at December 31, 1997................ 100 -- -- Conversion of Notes in December 1998........ (14) 2,467 5 ---- ----- ---- Balance at December 31, 1998................ 86 2,467 5 Conversion of Notes in January and February 1999....................................... (26) 2,812 7 Conversion of Notes in December 1999........ (24) 2,359 6 ---- ----- ---- Balance at December 31, 1999................ 36 7,638 18 Conversion of Notes in January 2000......... (7) 677 2 ---- ----- ---- Balance at December 31, 2000................ $ 29 8,315 $ 20 ==== ===== ====
5.Capital Stock The authorized capital stock of the Company consists of 145 million shares of Common Stock, $0.0001 par value (the "Common Stock"), and 2 million shares of preferred stock, $0.0001 par value (the "Preferred Stock"), including 500,000 shares of which have been designated Series A Junior Participating Preferred Stock (the "Series A") pursuant to the Stockholder Rights Agreement (see discussion below). Preferred Stock The Board of Directors has the authority to issue shares of Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the holders of Common Stock. Mandatorily Redeemable Convertible Preferred Stock and warrants In December 1998, the Company completed a private placement of 15,000 shares of the Series B Convertible Participating Preferred Stock (the "Series B") for $1,000 per share and issued mandatorily redeemable warrants to purchase up to 1,242,000 shares of Common Stock at $3.47 per share. A portion of the proceeds was allocated to the warrants based on their fair value and accounted for as a discount to the Series B. The remainder of the proceeds was allocated to the Series B. Because the Series B was immediately convertible into shares of Common Stock, the discount was amortized as a reduction of income available to holders of Common Stock in the amount of $1.8 million upon the issuance of the Series B. The Company did not record a beneficial conversion feature related to Series B because the conversion price, using the conversion terms that are most beneficial to the holder, was greater than the market price of the Common Stock on the date of issuance. Pursuant to the registration rights agreement the Company entered into in connection with the issuance of the Series B, as amended by the exchange agreements, the Company was required to register the Series B for resale on or before July 19, 1999. See additional discussion below regarding premiums and penalties related to this requirement. 51 P-Com, Inc. Notes to Consolidated Financial Statements -- Continued The mandatorily redeemable warrants issued in connection with Series B were valued at $1,839,000 using the Black-Scholes option-pricing model with the following assumptions used: expected volatility of 65%; a weighted-average risk-free interest rate of 4.5% and a weighted-average expected life of 5 years. The initial exercise price for the Common Stock underlying the warrants was $3.47. In June 1999, in connection with the conversion of the Series B to Common Stock, the mandatorily redeemable warrants were exchanged for 1,242,000 non- mandatorily redeemable warrants having an exercise price of $3.00. As a result of the exchange and repricing of warrants, the Company recorded a $2.0 million charge to loss attributable to Common Stockholders representing the difference in fair value of the warrants before and after the exchange and repricing. The warrants are immediately exercisable until the earlier of: (1) December 22, 2002, or (2) the date 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 January 2000, the Company sold approximately 7,531,000 shares of common stock at a per share price of $5.71, for an aggregate purchase price of $43.0 million. The unregistered shares were priced at a 15% discount to the average closing sale prices of the Company's common stock for the 60 consecutive trading days prior to the signing of the agreement. The shares were subsequently registered for resale in October 2000. As a result of the late registration of these shares, the Company was required to issue the holders warrants to purchase 1,358,000 shares of Common Stock at an exercise price of $3.80 per share. In August 2000, the Company sold 3,000,000 shares of common stock at a per share price of $6.11, for an aggregate purchase price of $18.2 million. The unregistered shares were priced at a 7.2% discount to the average closing sale price of the Company's Common Stock for the 60 consecutive trading days prior to the signing of the agreement. The shares have subsequently been registered for resale. In June 1999, the Company received net proceeds of $38.3 million from the sale 10,068,000 shares of Common Stock sold at a 7.5% discount from the market price. 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 52 P-Com, Inc. Notes to Consolidated Financial Statements -- Continued 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 16, 1999 at $4.72 per share, warrants to purchase 443,000 shares of Common Stock issued on January 20, 2000 at an exercise price of $8.50 per share, and a $400,000 promissory note convertible (with interest) into Common Stock at a conversion price of $4.72 per share. As a result of this transaction, the Company recorded a $6.3 million charge to loss attributable to Common Stockholders representing the difference between the value of the redemption rights and the market value of the common stock issued, the fair value of the warrants issued, and the convertible promissory note net of accrued interest eliminated as part of the transaction. This note was converted into approximately 95,000 shares of common stock in the fourth quarter of 2000. At December 31, 2000, the Company had 10,881 shares of Common Stock reserved for issuance of warrants and options. Common Stock warrants A summary of issued and outstanding warrants to purchase Common Stock is as follows:
Exercise Number Price ------ -------- (in thousands) June 1999 -- issuance..................................... 1,242 $3.00 August 1999 -- issuance................................... 180 $5.00 November 1999 -- issuance................................. 443 $8.50 January 2000 -- issuance.................................. 200 $5.71 October 2000 -- issuance.................................. 1,358 $3.80 October 2000 -- exercise.................................. (158) $3.80 ----- Balance at December 31, 2000............................ 3,265 =====
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. In the case of the State of Wisconsin Investment Board and Firsthand Capital Management, the threshold figure is 20% rather than 15%. 53 P-Com, Inc. Notes to Consolidated Financial Statements -- Continued 6.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 14,934,459 shares of Common Stock as of December 31, 2000. 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. 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 100% of the fair market value per share of common stock on the grant date with exercise periods not to exceed ten years. The plan administrator is authorized to issue tandem stock appreciation rights and limited stock appreciation rights in connection with the option grants. The Stock Issuance Program provides for the sale of common stock at a price not less than 100% of fair market value. Shares may also be issued solely for services. The administrator has discretion as to vesting provisions, including accelerations, and may institute a loan program to assist participants with financing stock purchases. The program also provides certain alternatives to satisfy tax liabilities incurred by participants in connection with the program. Under the Automatic Option Grant Program, as amended, participants will automatically receive an option to purchase 40,000 shares of common stock upon initially joining the Board of Directors and will receive an additional automatic grant each year at each annual stockholders' meeting for 4,000 shares. Each option will have an exercise price per share equal to 100% of the fair market value of the common stock on the grant date. The shares subject to the initial share option vest, and for options granted before November 2000 the shares subject to the annual 4,000 share option will vest, in eight successive equal quarterly installments upon the optionee's completion of each successive 3-month period of Board service over the 24-month period measured from the grant date. Effective November 2000, the annual 4,000 share options will vest fully on the grant date. 54 P-Com, Inc. Notes to Consolidated Financial Statements -- Continued The following table summarizes stock option activity under the Company's 1992 and 1995 Plans (in thousands, except per share amounts):
2000 1999 1998 ------------- ------------- -------------- Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ------ Outstanding at beginning of year... 6,635 $6.36 7,862 $6.77 6,006 $12.65 Granted........................... 4,439 6.71 1,453 4.52 6,481 6.20 Exercised......................... (1,473) 5.50 (725) 4.16 (499) 5.32 Canceled.......................... (1,985) 6.80 (1,955) 6.73 (4,126) 14.59 ------ ------ ------ Outstanding at end of year......... 7,616 6.62 6,635 6.36 7,862 6.77 ====== ====== ====== Options exercisable at year-end.... 2,611 7.49 3,909 7.03 2,483 8.57 ====== ====== ====== Weighted-average fair value of options granted during the year... $5.32 $4.52 $ 2.24
The following table summarizes information about stock options outstanding and exercisable at December 31, 2000 (in thousands, except per share amounts):
Options Exercisable Options Outstanding ------------------------- ---------------------------------------- Weighted- Average Weighted Weighted- Range of Remaining Life Average Exercise Life (in Exercise Exercise Prices Shares Years) Price Shares Price -------- ------ --------- -------- ------ --------- $ 0.10- 2.88 491 8.5 $ 1.80 115 $ 1.04 3.00- 3.00 827 7.7 3.00 444 3.00 3.09- 4.75 1,054 8.7 3.95 328 4.24 5.00- 5.81 2,002 8.5 5.66 515 5.78 6.31- 7.25 1,715 8.8 6.83 302 6.95 8.25-10.25 611 6.2 9.37 509 9.43 12.38-13.75 522 8.7 13.25 79 13.20 17.25-23.22 394 6.7 18.21 319 18.20 ----- ----- 7,616 8.2 $ 6.62 2,611 $ 7.49 ===== =====
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 392,000, 211,000, and 240,000 shares in 2000, 1999, and 1998, 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 55 P-Com, Inc. Notes to Consolidated Financial Statements -- Continued awards under those plans, consistent with the method of SFAS 123, the Company's net loss and net loss per share would have been reduced to the pro forma amounts indicated as follows:
2000 1999 1998 -------- --------- ---------- (restated) Net loss applicable to common stockholders As reported.............................. $(69,949) $(121,570) $(64,304) Pro forma................................ $(78,219) $(127,685) $(66,743) Net loss per share As reported -- Basic and Diluted......... $ (0.90) $ (2.13) $ (1.49) Pro forma -- Basic and Diluted........... $ (1.00) $ (2.24) $ (1.54)
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 2000, 1999, and 1998, respectively: expected volatility of 95%, 96%, and 72%; weighted-average risk-free interest rates of 6.2%, 5.4%, and 5.1%, weighted-average expected lives of 3.71, 3.28, and 2.76, respectively, and a zero dividend yield. The fair value of the employees' stock purchase rights was estimated using the Black-Scholes model with the following assumptions for 2000, 1999, and 1998, respectively: expected volatility of 95%, 96%, and 72% weighted-average risk- free interest rates of 6.2%, 4.6%, and 5.3%, weighted-average expected lives of 0.5, 0.5, and 0.5 years and a dividend yield of zero. The weighted-average fair value of those purchase rights granted in 2000, 1999, and 1998 was $6.03, $5.74, and $1.99, respectively. 401(k) Plan The Company sponsors a 401(k) Plan (the "401(k) Plan") which provides tax- deferred salary deductions for eligible employees. Employees may contribute up to 15% of their annual compensation to the 401(k) Plan, limited to a maximum annual amount as set periodically by the Internal Revenue Service. The 401(k) Plan permits, but does not require, the Company to make matching contributions. To date, no matching contributions have been made. 7.Restructuring and Other Charges In the second quarter of 2000, the Company determined that there was a need to reevaluate its inventory levels and related accrued liabilities in light of recent changes in product and customer mix. The evaluation was prompted by a change in customer mix away from the UK and other European markets and toward the U.S. market, and the resulting anticipated decrease in demand for certain of its lower speed and lower frequency Tel-Link Point-to-Point product line, and resulted in total charges of approximately $21.7 million during the second quarter of 2000. These charges consisted of increases to inventory reserve of approximately $17.4 million and accrued liabilities of approximately $4.3 million, both relating to the Company's product segment. In addition, the Company performed a review of the carrying value and remaining life of long- lived assets associated with the Company's product segment and recorded write- downs of approximately $15.0 million of goodwill, and an approximately $9.9 million write-off of deferred tax assets. The increase in inventory reserves and related purchases liabilities was charged to product cost of sales in the second quarter of 2000. Of the $17 million charge for additional reserves, $15.4 million related to the Tel-Link Point-to-Point product line. An additional reserve of approximately $1.0 million was added in the second quarter to adjust carrying value of certain modules of the Point-to-Multipoint radio line. 56 P-Com, Inc. Notes to Consolidated Financial Statements -- Continued During 1999 and 1998, the Company's management approved restructuring plans, which included initiatives to integrate the operations of acquired companies, consolidate duplicate facilities, and reduce overhead. Total accrued restructuring and other charges of approximately $36.5 million and approximately $26.6 million were recorded in 1999 and 1998, respectively, relating to these initiatives, all relating to the Company's product segment. As of December 31, 1999, the Company had utilized all restructuring reserves established to offset actual restructuring costs incurred by the Company. 8.Segment Reporting For purposes of segment reporting, the Company aggregates operating segments that have similar economic characteristics and meet the aggregation criteria specified in SFAS No. 131. The Company has determined that there are two reportable segments: Product Sales and Service Sales. The Product Sales segment consists of organizations located primarily in the United States, the United Kingdom, and Italy, which develop, manufacture, and/or market network access systems for use in the worldwide wireless telecommunications market. The Service Sales segment consists of organizations primarily located in the United States, 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 was reported as a discontinued operation and the amounts presented for prior periods have been reclassified for appropriate comparability. Technosystem was divested in the first quarter of 2000. As such, the segment information shown below does not include Technosystem's financial information. Capital expenditures for long-lived assets are not reported to management by segment and are excluded as presenting such information is not practical. The following tables show the operating results and identifiable assets of the Company's operating segments (in thousands):
Product Service Total For the Year Ended December 31, 2000 -------- ------- -------- Sales.......................................... $183,606 $50,795 $234,401 Income (loss) from operations.................. (46,701) 3,263 (43,438) Depreciation................................... 10,375 573 10,948 Identifiable assets............................ 194,351 21,868 216,219 Interest expense, net.......................... 4,629 121 4,750
Product Service Total For the Year Ended December 31, 1999 -------- ------- -------- Sales.......................................... $116,409 $40,470 $156,879 Income (loss) from operations.................. (67,856) 4,491 (63,365) Depreciation................................... 11,010 773 11,783 Identifiable assets............................ 196,712 22,034 218,746 Interest expense, net.......................... 8,086 89 8,175
Product Service Total 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 1,016 11,544 Identifiable assets............................. 290,662 24,555 315,217 Interest expense, net........................... 8,518 134 8,652
57 P-Com, Inc. Notes to Consolidated Financial Statements -- Continued The allocation of sales by geographic customer destination and property, plant and equipment, net are as follows (in thousands):
% of Total for 2000 2000 1999 1998 -------- -------- -------- -------- Sales: United States........................ 55.9% $130,942 $ 48,248 $ 41,597 United Kingdom....................... 24.3% 57,061 54,172 71,399 Continental Europe................... 7.8% 18,135 28,183 12,123 Africa............................... 1.1% 2,635 -- 19,104 Asia................................. 3.7% 8,637 9,489 18,322 Other geographic regions............. 7.2% 16,991 16,787 -- ----- -------- -------- -------- Total.............................. 100.0% $234,401 $156,879 $162,545 ===== ======== ======== ======== 2000 1999 -------- -------- Property, plant, and equipment, net United States.......................................... $ 20,462 $ 28,751 United Kingdom......................................... 1,234 2,878 Italy.................................................. 1,349 4,771 Other geographic regions............................... 121 226 -------- -------- Total................................................ $ 23,166 $ 36,626 ======== ========
9.Net Loss Per Share For purpose of computing diluted net loss per share, weighted average common share equivalents do not include stock options with an exercise price that exceeds the average fair market value of the Company's Common Stock for the period because the effect would be antidilutive. Because losses were incurred in the years 2000, 1999, and 1998, all options, warrants, and convertible notes are excluded from the computations of diluted net loss per share because they are antidilutive. 10.Income Taxes Loss before extraordinary items, income taxes and cumulative effect of accounting change consists of the following (in thousands):
Year Ended December 31, ---------------------------- 2000 1999 1998 -------- -------- -------- Domestic....................................... $(55,511) $(67,120) $(71,277) Foreign........................................ 346 (6,957) (5,153) -------- -------- -------- $(55,165) $(74,077) $(76,430) ======== ======== ========
58 P-Com, Inc. Notes to Consolidated Financial Statements -- Continued The provision (benefit) for income taxes consists of the following (in thousands):
Year Ended December 31, ------------------------ 2000 1999 1998 ------- ------ -------- Current: Federal.......................................... $ -- $ -- $ (4,727) State............................................ -- 55 (37) Foreign.......................................... 1,282 1,532 1,244 ------- ------ -------- 1,282 1,587 (3,520) ------- ------ -------- Deferred: Federal.......................................... 8,792 (135) (7,410) State............................................ 1,066 (45) (571) ------- ------ -------- 9,858 (180) (7,981) ------- ------ -------- Total.......................................... $11,140 $1,407 $(11,501) ======= ====== ========
Deferred tax assets consist of the following (in thousands):
December 31, ------------------ 2000 1999 -------- -------- Net operating loss carryforwards......................... $ 54,663 $ 31,776 Credit carryforwards..................................... 4,302 4,043 Intangible assets........................................ 12,177 6,177 Reserves and other....................................... 18,412 26,941 -------- -------- 89,554 68,937 (89,554) (59,079) -------- -------- Valuation allowance...................................... $ -- $ 9,858 ======== ========
The Company's net operating loss carryforwards included as a deferred tax asset above are approximately $148 million and $86 million for 2000 and 1999, respectively. These operating loss carryforwards will expire between 2005 and 2020 if not utilized beforehand. For federal and state tax purposes, a portion of the Company's net operating loss 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. During 2000, the Company reassessed its ability to realize future tax benefits, and concluded that as a result of the recent history of losses, it was more likely than not, that such benefits would not be realized. Accordingly, the Company recorded a charge of approximately $9.9 million in 2000 to establish a full valuation allowance against its deferred tax assets. 59 P-Com, Inc. Notes to Consolidated Financial Statements -- Continued Reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows:
Year Ended December 31, --------------------- 2000 1999 1998 ----- ----- ----- U.S. federal statutory rate......................... 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit............................................ 0.0 0.0 0.3 Change in valuation allowance....................... (52.9) (35.0) (11.9) Foreign income taxes at different rate.............. (2.3) (1.5) (0.8) Other, net.......................................... 0.0 0.1 (6.7) ----- ----- ----- (20.2)% (1.4)% 15.9% ===== ===== =====
11.Acquisitions and Divestitures On March 28, 1998, the Company acquired substantially all of the assets, and on April 1, 1998, the accounts receivable of the Wireless Communications Group of Cylink Corporation ("Cylink Wireless Group"), a Sunnyvale, California-based company, for $46.0 million in cash and $14.5 million in a short-term note, non- interest bearing unsecured subordinated promissory note due July 6, 1998. The Cylink Wireless Group designs, manufactures and markets spread spectrum radio products for voice and data applications in both domestic and international markets. The Company accounted for this acquisition as a purchase business combination. The results of the Cylink Wireless Group were included from the date of acquisition. During 1998, the Company acquired the remaining interest in Geritel and the assets of Cemetel S.r.l., a service company located in Carsoli, Italy. These acquisitions were not material to the consolidated financial statements or the results of operations of the Company. On February 24, 1997, the Company acquired 100% of the outstanding stock of Technosystem, for aggregate payments of $3.3 million and the assumption of long-term debt of approximately $12.7 million in addition to other liabilities. The Company initially paid $2.6 million in cash, and an additional payment of $0.7 million was made on March 31, 1998, 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 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. 60 P-Com, Inc. Notes to Consolidated Financial Statements -- Continued 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. In February 2000, the Company completed the divestiture of two Italian subsidiaries, Technosystem, S.p.A. and Cemetal S.r.L. resulting in additional losses for the first quarter of approximately $4.0 million and $3.5 million, respectively. In April 2000, the Company sold Control Resources Corporation ("CRC") resulting in a gain of approximately $2.6 million. 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 reported as a discontinued operation and the financial statement information related to this business has been presented on one line in the 1999 Consolidated Balance Sheet, "net assets of discontinued operations," and in the "discontinued operations" line of the Consolidated Statements of Operations for 2000 and 1999. The "net assets of discontinued operations" represents the assets intended to be sold offset by the liabilities anticipated to be assumed by the buyers of the business. The Statements of Operations amounts related to Technosystem in prior periods have been reclassified to discontinued operations. Summarized results of Technosystem are as follows (in thousands):
Year Ended December 31, ----------------- 1999 1998 -------- ------- Sales.................................................. $ 6,483 $25,258 ======== ======= Loss before income taxes............................... $(13,903) $(2,869) Provision for income taxes............................. -- -- -------- ------- Net loss............................................. $(13,903) $(2,869) ======== =======
Net assets of Technosystem, as reported in the Consolidated Balance Sheets, comprised the following (in thousands):
December 31, 1999 ------------ 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 =======
61 P-Com, Inc. Notes to Consolidated Financial Statements -- Continued 12.Commitments Obligations Under Capital and Operating Leases In August 1998, the Company entered into a capital lease for equipment in the amount of $1.6 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. In 2000, the Company entered into several capital leases for equipment in the amount of $1,869 with interest accruing at 11%. These leases expire in 2002. Future minimum lease payments required under these leases are as follows (in thousands):
Year Ended December 31, ----------------------- 2001............................................................. $1,483 2002............................................................. 750 2003............................................................. 33 ------ Total minimum lease payments..................................... 2,266 Less: Amount representing interest............................... (135) ------ Present value of net minimum lease payments...................... $2,131 ======
The present value of net minimum lease payments are reflected in the December 31, 2000 and 1999 balance sheets as a component of other accrued liabilities and other long-term liabilities of $2,131 and $3,141. The Company leases its facilities under non-cancelable operating leases which expire at various times through 2007. 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, 2000 are as follows (in thousands):
Year Ended December 31, ----------------------- 2001............................................................ $ 4,463 2002............................................................ 3,969 2003............................................................ 3,087 2004............................................................ 2,893 2005............................................................ 2,639 Thereafter...................................................... 351 ------- $17,402 =======
During 2000, 1999, and 1998, the amount of rent expense incurred by the Company under non-cancelable operating leases was $3,180, $3,258, and $3,218. 13.Contingencies In September and October 1998, several class action complaints were filed in the Superior Court of California, County of Santa Clara, on behalf of P-Com stockholders who purchased or otherwise acquired its Common Stock between April 1997 and September 11, 1998. The plaintiffs allege various state securities laws violations by P-Com and certain of its officers and directors. The complaints seek un-quantified compensatory, punitive and other damages, attorneys' fees and injunctive and/or equitable relief. On December 3, 1998, the Superior Court of California, County of Santa Clara, entered an order consolidating all of the above complaints. On June 30, 2000 the Superior Court of California, County of Santa Clara, issued a notice of ruling certifying this matter as a class action. 62 P-Com, Inc. Notes to Consolidated Financial Statements -- Continued 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. 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. 14.Supplemental Cash Flow Information The following provides additional information concerning supplemental disclosure of cash flow activities.
Year Ended December 31, -------------------- 2000 1999 1998 ------ ------ ------ Supplemental cash flow information: Cash paid for income taxes........................... $ 435 $3,900 $5,610 ====== ====== ====== Cash paid for interest............................... $2,725 $8,717 $ 656 ====== ====== ======
Non-cash transactions During 2000 and 1999, the Company issued shares of Common Stock in exchange for Convertible Subordinated Notes. In conjunction with these transactions, the Company recorded extraordinary gains of $1.9 million and $13.2 million for the years ended December 31, 2000 and 1999, respectively. The Company exchanged Mandatorily Redeemable Series B Convertible Preferred Stock for shares of Common Stock and repriced certain warrants held by the holders of the Series B Convertible Preferred Stock during June 1999. During November 1999, the Company issued shares of Common Stock, warrants to purchase additional shares of Common Stock, and a promissory note convertible into Common Stock in exchange for the elimination of certain redemption rights and late registration premiums and penalties. In connection with these transactions, the Company recorded charges of $18.5 million for the year ended December 31, 1999, respectively, as adjustments to arrive at the net loss applicable to Common Stockholders. During 1999 and 1998, 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. During 2000 $1,869 of fixed assets were acquired through the assumption of capital lease liabilities. 15.Subsequent Events The existing $12 million bank loan facility matured January 31, 2001 and was paid off, with accrued interest, at that date. On March 29, 2001, the Company entered into a Loan and Security Agreement with a borrowing capacity of up to $25 million. The Loan and Security Agreement matures in March 2004. Borrowings under the Loan and Security Agreement bear interest at LIBOR plus 3.5% to 4.5% per annum and are secured by cash deposits, receivables, inventories, equipment, and intangibles of the Company. Maximum borrowings under the Loan and Security Agreement are limited to 85% of eligible accounts receivable. 63 P-Com, Inc. Notes to Consolidated Financial Statements -- Continued On February 7, 2001, the Company sold RT Masts Limited its U.K. services subsidiary to SpectraSite Transco, a U.S. based company with operations in the UK and on the European continent, for approximately $12 million in cash, an additional $750,000 in a 6-month escrow, and a $750,000 Note receivable due in 2008 with interest due annually at LIBOR. RT Masts is primarily engaged in providing site preparation, installation, and maintenance of wireless broadband radio systems for cell phone services providers in the UK. RT Masts' revenues were approximately $20 million, $18 million, and $22 million in 2000, 1999 and 1998, respectively. Operating income for RT Masts was approximately $1.2 million, $3.1 million, and $5.8 million for 2000, 1999 and 1998, respectively. 64 P-Com, Inc. Selected Quarterly Financial Data -- Unaudited The data for first three quarters of 2000 is presented both as originally reported by the Company and as restated to reflect the retroactive application by the Company of new revenue recognition accounting policies in accordance with SAB 101. The data for 1999 is presented both as originally reported by the Company and on a pro forma basis to reflect the results of the Company as if the new revenue recognition accounting policies had been in effect during 1999. The following is in thousands, except per share data:
Three Months Ended ----------------------------------------------- March 31, June 30, September 30, December 31, --------- -------- ------------- ------------ 2000 - As Reported Sales (1)...................... $ 51,055 $ 48,833 $ 59,535 $ 74,978 Gross profit (loss) (1)........ $ 12,714 $ (9,343) $ 15,391 $ 16,504 Net income (loss).............. $(15,901) $(52,202) $ (2,071) $ 225 Net income (loss) per common share: Basic and diluted............. $ (0.21) $ (0.68) $ (0.03) $ 0.00 2000 - As Restated Sales (1)...................... $ 60,459 $ 49,930 $ 61,031 n/a Gross profit (loss) (1)........ $ 13,105 $ (9,382) $ 16,573 n/a Net income (loss).............. $(17,044) $(52,241) $ (889) n/a Net income (loss) per common share: Basic and diluted............. $ (0.22) $ (0.68) $ (0.01) n/a Three Months Ended ----------------------------------------------- March 31, June 30, September 30, December 31, --------- -------- ------------- ------------ 1999 - As Reported Sales (1)...................... $ 33,909 $ 35,443 $ 40,058 $ 47,469 Gross profit (loss) (1)........ $ 9,555 $(13,186) $ 10,817 $ 14,041 Net loss....................... $ (6,651) $(54,615) $(36,399) $ (5,384) Net loss attributable to common stockholders.................. $ (6,651) $(66,805) $(36,399) $(11,715) Net loss per common share: Basic and diluted............. $ (0.14) $ (1.29) $ (0.55) $ (0.21) 1999 - Pro Forma Sales (1)...................... $ 32,177 $ 38,455 $ 29,649 $ 49,847 Gross profit (loss) (1)........ $ 10,095 $(12,752) $ 8,980 $ 14,794 Net loss....................... $ (6,111) $(54,181) $(38,280) $ (4,631) Net loss attributable to common stockholders.................. $ (6,111) $(66,371) $(38,280) $(10,962) Net loss per common share: Basic and diluted............. $ (0.13) $ (1.28) $ (0.58) $ (0.20)
- -------- (/1/)Quarterly sales and gross profit amounts for each of the four quarters in 1999 and the first quarter of 2000 reflect a reduction for sales and gross profit attributable to Technosystem, which was reclassified to discontinued operations in the third quarter of 1999. 65 Schedule II Valuation and Qualifying Accounts Years ended December 31, 1998, 1999, and 2000 (in thousands)
Additions Balance at Charged to Deductions Balance Beginning Statement of from at End of Year Operations Reserves of Year ---------- ------------ ---------- ------- Allowance for doubtful accounts: Year ended December 31, 1998....... $ 2,521 $10,892 $ (3,822) $ 9,591 Year ended December 31, 1999....... 9,591 11,284 (5,976) 14,899 Year ended December 31, 2000....... 14,899 696 (11,785) 3,810 Inventory related reserves: Year ended December 31, 1998....... $ 915 $23,367 $ (7,360) $16,922 Year ended December 31, 1999....... 16,922 15,400 (16,142) 16,180 Year ended December 31, 2000....... 16,180 17,361 (7,551) 25,990
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures Not applicable 66 PART III Item 10. Directors and Officers of the Registrant The executive officers and directors of the Company, their ages as of March 31, 2001, and their positions and their backgrounds are as follows:
Name Age Position - ---- --- -------- George P. Roberts....... 68 Chairman of the Board and Chief Executive Officer James J. Sobczak........ 59 President and Chief Operating Officer Leighton J. Stephenson.. 52 Chief Financial Officer, Vice President Alan T. Wright.......... 52 Executive Vice President, Operations Ben L. Jarvis........... 63 Executive Vice President and General Manager, P-Com Network Services Caroline Baldwin Kahl... 43 Vice President and General Counsel John R. Wood............ 45 Senior Vice President Technology Strategies Brian T. Josling........ 58 Director John A. Hawkins......... 40 Director M. Bernard Puckett...... 55 Director
Background The principal occupations of each executive officer and director of the Company for at least the last five years are as follows: Mr. Roberts is a founder of the Company and has served as Chief Executive Officer and Director since October 1991. 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 since 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. Stephenson has served as Vice President and Chief Financial Officer since September 2000. From 1993 to 2000 he served as Chief Financial Officer, Treasurer, and Secretary of Vallen Corporation, a Texas company engaged in manufacturing and distribution of industrial safety products and services. Mr. Wright has served as Executive Vice President of Operations since March of 2000 and previously from 1997 to 1998 (from 1998 to 1999 he served as Senior Operations Advisor and was a private investor from 1996 to 1997 and 1999 to 2000.) From 1994 to 1996 he acted as Director of Quality and Product Integrity at Stratacom. Mr. Jarvis has served as Executive Vice President and General Manager of P-Com Network Services since May of 2000. From September of 1998 to November of 1999 he served as Senior Vice President of Operations for Alaska Communications Systems. From 1996 to August of 1998, he served as Chief Operating Officer of Amaritel S.A. DE C.V. and Vice President of Operations, CT Global, Inc. Ms. Kahl has served as Vice President and General Counsel of the Company since February 2000. From March 1997 to February 2000 she served as General Counsel to P-Com Network Services, and from August 1994 to March 1997 as General Counsel for Columbia Spectrum Management, the predecessor of PCNS. Mr. Wood was appointed Senior Vice President of Technology Strategies of the Company in January 1997. From April 1993 to January 1997, Mr. Wood served as Vice President, Engineering for the Company. 67 Mr. Josling has served as Director of the Company since September 1999. Since December 2000 he has served as the President of Fuel Cells, Canada. Mr. Josling is a former division President for Rogers ATT, Canada's national cellular telephone carrier, and was a senior executive with CSB and Capitol EMI in the music entertainment industry. Mr. Puckett has served as a Director of the Company since May 1994. From 1996 to present he has been a private investor. Mr. Hawkins has served as a Director of the Company since September 1991. Since August 1995, Mr. Hawkins has been a General Partner of Generation Capital Partners, L.P., a private equity firm. He also currently serves on the Board of Directors for PixTech, Inc. and Hotjobs, Inc. Board Committees and Meetings The Board of Directors held six (6) meetings and acted by unanimous written consent 15 times during the fiscal year ended December 31, 2000. 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 2000. 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 accountants and reviewing their reports regarding the Company's accounting practices and systems of internal accounting controls. The Audit Committee held four (4) meetings during 2000. 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 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) meeting and acted by unanimous written consent 14 times during 2000. Director Compensation Non-employee board members do not receive cash compensation for their services as directors. Under the Automatic Option Grant Program as now contained in the Company's 1995 Stock Option/Stock Issuance Plan (the "1995 Plan"), each individual who first joins the Board as a non-employee will receive, at the time of such initial election or appointment, an automatic option grant to purchase 40,000 shares of Common Stock, 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 100% of 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. Because the "1999" Annual Meeting of Stockholders was held so soon before the 2000 Annual Meeting of Stockholders and the non-employee directors would be receiving a 4,000-share automatic option grant upon the 1999 Annual Meeting, the technical terms of the 1995 Plan preclude the three non-employee directors (Messrs. Hawkins, Josling and Puckett) from receiving automatic 4,000-share options upon the 2000 Annual 68 Meeting. The Company believes it would be unfair if the three directors were deprived of this compensation and therefore granted the three directors 4,000- share options under the 1995 Plan's Discretionary Option Grant Program, with the same terms and conditions as the erstwhile automatic grants, immediately after the 2000 Annual Meeting. Item 11. Executive Compensation and Related Information The following table provides certain information summarizing the compensation earned for services rendered in all capacities to the Company and its subsidiaries for each of the last three fiscal years by (i) the Company's Chief Executive Officer, and (ii) each of the Company's four other most highly compensated executive officers, who were executive officers on December 31, 2000 and whose salary and bonus for the fiscal year ended December 31, 2000 (the "2000 Fiscal Year") was in excess of $100,000 (collectively, the "Named Executive Officers"). 2000 SUMMARY COMPENSATION TABLE
Long-Term Compensation Awards ------------ Annual Compensation Securities --------------- Underlying Salary Bonus Stock Name and Principal Position Year ($)(/1/) ($) Options (#) --------------------------- ---- -------- ------ ------------ George P. Roberts............................ 2000 376,000 -- 375,000 Chief Executive Officer and 1999 376,000 -- -- Chairman of the Board of Directors 1998 366,600 -- 450,000 James J. Sobczak............................. 2000 300,000 -- 100,000 President & Chief Operating Officer 1999 101,538 11,538 300,000 1998 -- -- 4,000 Alan T. Wright............................... 2000 164,307 25,000 190,000 Executive Vice President, Operations 1999 30,000 -- -- 1998 159,601 -- 100,000 Ben L. Jarvis................................ 2000 151,538 -- 100,000 Executive Vice President & 1999 -- -- -- General Manager, P-Com Network Services 1998 -- -- -- Caroline Baldwin Kahl........................ 2000 145,961 -- 25,000 Vice President & General Counsel 1999 115,000 46,000 -- 1998 112,615 50,000 65,000
- -------- (/1/)Includes amounts deferred under the Company's 401(k) Plan. 69 The following table contains information concerning the stock option grants made to each of the named Executive Officers for the 2000 Fiscal Year. No stock appreciation rights were granted to these individuals during such fiscal year. OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at Assumed Annual Rates of % of Total Stock Number of Options Price Appreciation Securities Granted to Individual Grant for Option Term (1) Underlying Employees ----------------------- ------------------- Options in Fiscal Exercise Expiration Granted (#) Year Price ($/Sh) Date 5% ($) 10% ($) ----------- ---------- ------------ ---------- -------- ---------- George P. Roberts....... 375,000 8.48 $ 2.03 12/20/10 $479,029 $1,213,954 James J. Sobczak........ 100,000 2.26 5.63 09/27/10 353,753 896,480 Alan T. Wright.......... 40,000 0.90 6.81 02/11/10 171,374 434,295 150,000 3.39 5.63 08/01/10 530,630 1,344,720 Ben L. Jarvis........... 100,000 2.26 6.81 05/11/10 428,434 1,085,737 Caroline Baldwin Kahl... 25,000 0.57 13.25 01/27/10 208,321 527,927
(/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. The table below sets forth certain information with respect to the named Executive Officers concerning the exercise of options during 2000 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. Aggregated Option Exercises in Last Fiscal Year Fiscal Year-End Option Values
Number of Securities Value of Unexercised Shares Underlying Unexercised in-the-Money Acquired On Value Options at FY-End (#) Options at FY-End (1) Exercise Realized ----------------------------- ------------------------- Name (#) ($)(2) Exercisable (3) Unexercisable Exercisable Unexercisable - ------------------------ ----------- -------- --------------- ------------- ----------- ------------- George P. Roberts....... -- $ -- 1,160,206 628,126 $199,650 $399,042 James J. Sobczak........ -- -- 144,000 300,000 -- -- Alan T. Wright.......... -- -- -- 190,000 -- -- Ben L. Jarvis........... 12,604 188,279 15,312 102,084 -- -- Caroline Baldwin Kahl... 12,923 117,929 34,439 42,638 527 410
70 (/1/)Based on the fair market value of the option shares at the 2000 Fiscal Year-end ($3.0625 per share based on the closing selling price on the NASDAQ Market as of December 31, 2000) less the exercise price. (/2/)Based on the fair market value of the shares on the exercise date less the exercise price paid for those shares. (/3/)The exercisable options are immediately exercisable for all the options shares. However, any shares purchased under the options are subject to repurchase by the Company, at the original exercise price paid per share, upon the optionee's cessation of service prior to vesting in such shares. As of December 31, 2000, the following number of shares were unvested: Mr. Roberts- 628,126 shares; Mr. Sobczak- 300,000 shares; Mr. Wright- 190,000 shares; Mr. Jarvis- 102,084 shares and Ms Kahl- 42,638 shares. Employment Contracts, Termination of Employment Arrangements and Change of Control Agreements The Compensation Committee of the Board of Directors, as Plan Administrator of the 1995 Stock Option/Stock Issuance Plan, has the authority to provide for accelerated vesting of the shares of Common Stock subject to any outstanding options held by the Chief Executive Officer and any other executive officer or any unvested share issuances actually held by such individual, in connection with certain changes in control of 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 Leighton Stephenson, Chief Financial Officer and Vice President, Finance and Administration (individually, the "Officer" and collectively the "Officers"), dated December 15, 1997, September 7, 1999, and September 6, 2000, respectively. Each of these Agreements provides for the following benefits should the Officer's employment terminate, either voluntarily or involuntarily, for any reason within twenty- four (24) months following a 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 any named Executive Officer 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. 71 Compensation Committee Interlocks and Insider Participation The Compensation Committee of the Company's Board of Directors currently consists of Mr. Puckett and Mr. Hawkins. Neither of these individuals was an officer or employee of the Company at any time during the 2000 Fiscal Year or at any other time, and neither had a business relationship with the Company. No executive officer of the Company has ever served as a member of the board of directors or compensation committee of any other entity that has or has had one or more executive officers serving as a member of the Company's Board of Directors or Compensation Committee. Report of the Compensation Committee of the Board of Directors on Executive Compensation "The Compensation Committee of the Board of Directors is responsible for establishing the base salary and incentive cash bonus programs for 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 2000 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 2000, the Committee reviewed and relied on technology industry compensation surveys in its assessment of appropriate compensation levels. 72 The fiscal year 2000 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 the 2000 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 2000 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 2000 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 2000 fiscal year, the base salary of Mr. Roberts was set at the 75th percentile of the base salary levels in effect for those other chief executive officers. 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 2000 fiscal year. The Committee granted Mr. Roberts 375,000 stock options with an exercise price of $2.03120 on December 20, 2000 (166,152 ISO; 208,848 NQ). 73 It is the Committee's view that the total compensation package provided Mr. Roberts for the 2000 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 2000 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 2001 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." M. Bernard Puckett Member, Compensation Committee John A. Hawkins Member, Compensation Committee Stock Performance Graph The graph depicted below shows a comparison of cumulative total stockholder returns for the Company, the Standard & Poor's 500 Index and the Standard & Poor's Communications Equipment Manufacturers Index. [STOCK PERFORMANCE GRAPH] - -------- (/1/)The graph covers the period from March 2, 1995, the date of the Company's initial public offering of shares of its Common Stock, to December 31, 2000. 74 (/2/)The graph assumes that $100 was invested 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. 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 March 15, 2001, by (i) all persons who are beneficial owners of five percent (5%) or more of the Company's Common Stock, (ii) each director, (iii) the named Executive Officers, and (iv) all current directors and executive officers as a group. Unless otherwise indicated, each of the stockholders has sole voting and investment power with respect to the shares beneficially owned, subject to community property laws, where applicable, and has the same address as the company.
Percentage Shares of Shares Beneficially Beneficially Beneficial Owner Owned (#) Owned (1) ---------------- ------------ ------------ State of Wisconsin Investment Board (/2/)........... 15,400,000 19.07 P.O. Box 7842 Madison, WI 53707 Firsthand Capital Management, Inc (/3/)............. 11,028,300 13.66 101 Park Center Plaza, Ste. 1300 San Jose, CA 95113 John A. Hawkins (/4/)............................... 38,000 * Brian T. Josling (/5/).............................. 38,000 * M. Bernard Puckett (/6/)............................ 89,332 * George P. Roberts (/7/)............................. 1,465,545 1.82 James J. Sobczak (/8/).............................. 197,319 * Alan T. Wright (/9/)................................ 25,236 * Ben L. Jarvis (/10/)................................ 41,146 * Caroline Baldwin Kahl (/11/)........................ 51,988 * All current directors and executive officersas a group (10 persons) (/12/).......................... 2,098,106 2.60
- -------- * Less than one percent of the outstanding Common Stock (/1/)Percentage of ownership is based on 80,740,176 shares of Common Stock outstanding on March 15, 2001. Shares of Common Stock subject to stock options that are currently exercisable or will become exercisable within 60 days after March 15, 2001 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 schedule 13G dated February 9, 2001, filed with the Securities and Exchange Commission, the State of Wisconsin Investment Board reported that as of December 31, 2000 it had sole voting power over all 15,400,000 shares and sole dispositive power over all shares. (/3/)Pursuant to schedule 13G dated February 14, 2001, filed with the Securities and Exchange Commission, Firsthand Capital Management reported that as of December 31, 2000 it had sole voting power over all 11,028,300 shares and sole dispositive power over all shares. 75 (/4/)Includes 38,000 shares issuable upon exercise of options that are currently exercisable or will become exercisable within 60 days after March 15, 2001. (/5/)Includes 38,000 shares issuable upon exercise of options that are currently exercisable or will become exercisable within 60 days after March 15, 2001. (/6/)Includes 69,332 shares issuable upon exercise of options that are currently exercisable or will become exercisable within 60 days after March 15, 2001. (/7/)Includes 1,235,205 shares issuable upon exercise of options that are currently exercisable or will become exercisable within 60 days after March 15, 2001. (/8/)Includes 194,000 shares issuable upon exercise of options that are currently exercisable or will become exercisable within 60 days after March 15, 2001. (/9/)Includes 20,000 shares issuable upon exercise of options that are currently exercisable or will become exercisable within 60 days after March 15, 2001. (/10/)Includes 41,146 shares issuable upon exercise of options that are currently exercisable or will become exercisable within 60 days after March 15, 2001. (/11/)Includes 48,383 shares issuable upon exercise of options that are currently exercisable or will become exercisable within 60 days after March 15, 2001. (/12/)Includes 1,790,211 shares issuable upon exercise of options that are currently exercisable or will become exercisable within 60 days after March 15, 2001. 13.Certain Relationships and Related Transactions In connection with certain relocation expenses a promissory note in the amount of $250,000 was issued to Mr. James Sobczak interest free and payable one year after Mr. Sobczak leaves the company. In addition, P-Com agreed to pay for certain fees and services in connection with the sale of Mr. Sobczack's home in Pennsylvania so that could complete his relocation to California. We anticipate these fees and services to amount to approximately $55,000. 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. 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 76 PART IV 14.Exhibits, Financial Statements Schedules, and Reports on Form 8-K (a) The following documents are filed as part of this Annual Report on form 10- K: 1. Financial Statements. The following Consolidated Financial Statements of P-Com, Inc. and its subsidiaries are included in Item 8 of this Annual Report on 10-K: Page Financial Statements: Report of Independent Accountants..................................... 39 Consolidated Balance Sheets at December 31, 2000 and 1999............. 40 Consolidated Statements of Operations for the years ended December 31, 2000, 1999, and 1998.................................................. 41 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999, and 1998..................................... 42 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998.................................................. 44 Notes to Consolidated Financial Statements............................ 45 Financial Statement Schedule: Schedule II--Valuation and Qualifying Accounts........................ 66
All other schedules have been omitted because they are not required, are not applicable, or the information is included in the consolidated financial statements or notes thereto. (b) No reports on Form 8-K were filed during the fourth quarter of 2000. (c) Exhibits -- See Exhibit list below.
Number Description ------ ----------- 3.2 (/1/) Restated Certificate of Incorporation filed with the Secretary of State on March 9, 1995. 3.2A (/11/) Certificate of Amendment of Restated Certificate of Incorporation filed with the Secretary of State on June 16, 1997. 3.2B (/12/) 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 (/13/) Amended and Restated Certificate of Designation of the Series A Junior Participating Preferred Stock, as filed with the Delaware Secretary of State on December 21, 1998. 3.2D (/13/) 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 (/13/) Certificate of Correction of Certificate of Designations for the Series B Convertible Participating Preferred Stock, as filed with the Delaware Secretary of State on December 23, 1998. 3.2F Certificate of Elimination of Series B Convertible Participating Preferred Stock as filed with the Secretary of State on June 15, 1999 3.3 (/2/) Bylaws of the Company. 4.1 (/2/) Form of Common Stock Certificates 4.2 (/3/) Indenture, dated as of November 1, 1997, between the Registrant and State Street Bank and Trust Company of California, N.A., as Trustee. 4.10 Amended and Restated Rights Agreement, dated as of January 24, 2001 between the Company and BankBoston, N.A.
77
Number Description ------ ----------- 10.16 (/10/) 1995 Stock Option/Stock Issuance Plan, as amended. 1995 Stock Option/Stock Issuance Plan, including forms of Notices of Grant of Automatic Stock Option for initial grant and annual grants and Automatic Stock Option Agreements, as amended. 10.17 (/4/) Employee Stock Purchase Plan, as amended. 10.18 (/2/) Form of Indemnification Agreement by and between the Company and each of its officers and directors and a list of signatories. 10.60 (/5/) Common Stock PIPES Purchase Agreement, dated January 6, 2000, by and among P-Com and several investors. 10.61 (/5/) Loan and Security Agreement, dated January 14, 2000, by and between P-Com and Greyrock Capital. 10.62 (/5/) Warrant to Purchase Stock, dated January 14, 2000, to Greyrock Capital. 10.63 (/5/) Registration Rights Agreement, dated January 14, 2000, by and between P-Com and Greyrock Capital. 10.64 (/5/) Antidilution Agreement, dated January 14, 2000, by and between P- Com and Greyrock Capital. 10.65 (/5/) Warrant to Purchase Stock, dated January 14, 2000 to Silicon Valley Bank. 10.66 (/5/) Registration Rights Agreements, dated January 14, 2000, by and between P-Com and Silicon Valley Bank. 10.67 (/5/) Antidilution Agreement, dated January 14, 2000, by and between P- Com and Silicon Valley Bank. 10.74 (/6/) Stock Purchase Warrant between P-Com, Inc. and Marshall Capital Management, Inc., dated January 20, 2000. 10.75 (/6/) Promissory Note between P-Com, Inc. and Castle Creek Technology Partners LLC, dated November 16, 1999. 10.76 (/6/) Asset Purchase Agreement between Paradyne Networks, Inc., P-Com, Inc. and Control Resources Corporation, dated April 5, 2000. 10.77 (/6/) Promissory note between James Sobczak and P-Com, Inc., dated May 3, 2000. 10.78 (/6/) Agreement between Reloaction, a California Corporation and P-Com, Inc., dated November 8, 1999. 10.79 (/7/) Letter of Cooperation between China PTIC and P-Com, Inc., dated July 12, 2000. 10.80 (/8/) Common Stock PIPES Purchase Agreement dated August 11, 2000, by and between the Company and State of Wisconsin Investment Board. 10.84 (/8/) General Release and Settlement Agreement, dated as of August 28, 2000, by and between the Company and Robert E. Collins. 10.85 (/9/) Letter of Offer, dated August 31, 2000, by and between the Company and Leighton J. Stephenson. 10.86 Severance Agreement dated December 7, 2000 by and between the Company and Leighton J. Stephenson 10.87 Loan and Security Agreement by and between P-Com, Inc., P-Com Network Services, Inc., and Foothill Capital Corporation, dated March 29, 2001. 21.1 List of subsidiaries of the Registrant. 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
- -------- (1) Incorporated by reference to the identically numbered exhibit included in the Company's Registration Statement on form S-1 (File No. 33-95392) declared effective with the Securities and Exchange Commission on August 17, 1995. 78 (2) Incorporated by reference to the identically numbered exhibit included in the Company's Registration Statement on form S-1 (File No. 33-88492) declared effective with the Securities and Exchange Commission on March 2, 1995. (3) Incorporated by reference to the identically numbered exhibit included in the Company's Registration Statement on form S-3 (File No. 333-45463) as filed with the Securities and Exchange Commission on February 2, 1998. (4) Incorporated by reference to the identically numbered exhibit of the Company's Quarterly Report on form 10-Q for the quarterly period ended June 30, 1997. (5) Incorporated by reference to the identically numbered exhibit of the Company's form 8-K as filed with the Securities and Exchange Commission on January 25, 2000. (6) Incorporated by reference to the identically numbered exhibit included in the Company's Registration Statement on form S-3/A (File No. 333-70937) as filed with the Securities and Exchange Commission on May 4, 2000. (7) Incorporated by reference to the identically numbered exhibit included in the Company's Registration Statement on form S-3/A (File No. 333-70937) as filed with the Securities and Exchange Commission on August 24, 2000. (8) Incorporated by reference to the identically numbered exhibit of the Company's form 8-K as filed with the Securities and Exchange Commission on August 11, 2000. (9) Incorporated by reference to the identically numbered exhibit of the Company's Quarterly Report on form 10-Q/A for the quarterly period ended September 30, 2000. (10) Incorporated by reference to exhibit 99.1 included in the Company's Registration Statement on form S-8 (File No. 333-55604) as filed with the Securities and Exchange Commission on February 14, 2001. (11) Incorporated by reference to exhibit 3.3 of the Company's Quarterly Report on form 10-Q for the quarterly period ended June 30, 1997. (12) Incorporated by reference to exhibit 3 of the Company's Quarterly Report on form 10-Q for the quarterly period ended September 30, 1997. (13) Incorporatedby reference to the identically numbered exhibit to the Company's Report on Form 8-K as filed with the Securities and Exchange on December 24, 1998. 79 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 30, 2001 By: /s/ George P. Roberts __________________________________ George P. Roberts Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ George P. Roberts Chairman of the Board and March 30, 2001 ____________________________________ Chief Executive Officer George P. Roberts (Principal Executive Officer) /s/ Leighton J. Stephenson Vice President and March 30, 2001 ____________________________________ Chief Financial Officer Leighton J. Stephenson (Principal Financial Officer and Principal Accounting Officer) /s/ James J. Sobczak President and March 30, 2001 ____________________________________ Chief Operating Officer, James J. Sobczak Director of the Company /s/ Brian T. Josling Director of the Company March 30, 2001 ____________________________________ Brian T. Josling /s/ John A. Hawkins Director of the Company March 30, 2001 ____________________________________ John A. Hawkins /s/ M. Bernard Puckett Director of the Company March 30, 2001 ____________________________________ M. Bernard Puckett
80 INDEX TO EXHIBITS
Number Description ------ ----------- 3.2 (/1/) Restated Certificate of Incorporation filed with the Secretary of State on March 9, 1995. 3.2A (/11/) Certificate of Amendment of Restated Certificate of Incorporation filed with the Secretary of State on June 16, 1997. 3.2B (/12/) 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 (/13/) Amended and Restated Certificate of Designation of the Series A Junior Participating Preferred Stock, as filed with the Delaware Secretary of State on December 21, 1998. 3.2D (/13/) 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 (/13/) Certificate of Correction of Certificate of Designations for the Series B Convertible Participating Preferred Stock, as filed with the Delaware Secretary of State on December 23, 1998. 3.2F Certificate of Elimination of Series B Convertible Participating Preferred Stock as filed with the Secretary of State on June 15, 1999 3.3 (/2/) Bylaws of the Company. 4.1 (/2/) Form of Common Stock Certificates 4.2 (/3/) Indenture, dated as of November 1, 1997, between the Registrant and State Street Bank and Trust Company of California, N.A., as Trustee. 4.10 Amended and Restated Rights Agreement, dated as of January 24, 2001 between the Company and BankBoston, N.A. 10.16 (/10/) 1995 Stock Option/Stock Issuance Plan, as amended. 1995 Stock Option/Stock Issuance Plan, including forms of Notices of Grant of Automatic Stock Option for initial grant and annual grants and Automatic Stock Option Agreements, as amended. 10.17 (/4/) Employee Stock Purchase Plan, as amended. 10.18 (/2/) Form of Indemnification Agreement by and between the Company and each of its officers and directors and a list of signatories. 10.60 (/5/) Common Stock PIPES Purchase Agreement, dated January 6, 2000, by and among P-Com and several investors. 10.61 (/5/) Loan and Security Agreement, dated January 14, 2000, by and between P-Com and Greyrock Capital. 10.62 (/5/) Warrant to Purchase Stock, dated January 14, 2000, to Greyrock Capital. 10.63 (/5/) Registration Rights Agreement, dated January 14, 2000, by and between P-Com and Greyrock Capital. 10.64 (/5/) Antidilution Agreement, dated January 14, 2000, by and between P- Com and Greyrock Capital. 10.65 (/5/) Warrant to Purchase Stock, dated January 14, 2000 to Silicon Valley Bank. 10.66 (/5/) Registration Rights Agreements, dated January 14, 2000, by and between P-Com and Silicon Valley Bank. 10.67 (/5/) Antidilution Agreement, dated January 14, 2000, by and between P- Com and Silicon Valley Bank. 10.74 (/6/) Stock Purchase Warrant between P-Com, Inc. and Marshall Capital Management, Inc., dated January 20, 2000.
81
Number Description ------ ----------- 10.75 (/6/) Promissory Note between P-Com, Inc. and Castle Creek Technology Partners LLC, dated November 16, 1999. 10.76 (/6/) Asset Purchase Agreement between Paradyne Networks, Inc., P-Com, Inc. and Control Resources Corporation, dated April 5, 2000. 10.77 (/6/) Promissory note between James Sobczak and P-Com, Inc., dated May 3, 2000. 10.78 (/6/) Agreement between Reloaction, a California Corporation and P-Com, Inc., dated November 8, 1999. 10.79 (/7/) Letter of Cooperation between China PTIC and P-Com, Inc., dated July 12, 2000. 10.80 (/8/) Common Stock PIPES Purchase Agreement dated August 11, 2000, by and between the Company and State of Wisconsin Investment Board. 10.84 (/8/) General Release and Settlement Agreement, dated as of August 28, 2000, by and between the Company and Robert E. Collins. 10.85 (/9/) Letter of Offer, dated August 31, 2000, by and between the Company and Leighton J. Stephenson. 10.86 Severance Agreement dated December 7, 2000 by and between the Company and Leighton J. Stephenson 10.87 Loan and Security Agreement by and between P-Com, Inc., P-Com Network Services, Inc., and Foothill Capital Corporation, dated March 29, 2001. 21.1 List of subsidiaries of the Registrant. 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
- -------- (1) Incorporated by reference to the identically numbered exhibit included in the Company's Registration Statement on form S-1 (File No. 33-95392) declared effective with the Securities and Exchange Commission on August 17, 1995. (2) Incorporated by reference to the identically numbered exhibit included in the Company's Registration Statement on form S-1 (File No. 33-88492) declared effective with the Securities and Exchange Commission on March 2, 1995. (3) Incorporated by reference to the identically numbered exhibit included in the Company's Registration Statement on form S-3 (File No. 333-45463) as filed with the Securities and Exchange Commission on February 2, 1998. (4) Incorporated by reference to the identically numbered exhibit of the Company's Quarterly Report on form 10-Q for the quarterly period ended June 30, 1997. (5) Incorporated by reference to the identically numbered exhibit of the Company's form 8-K as filed with the Securities and Exchange Commission on January 25, 2000. (6) Incorporated by reference to the identically numbered exhibit included in the Company's Registration Statement on form S-3/A (File No. 333-70937) as filed with the Securities and Exchange Commission on May 4, 2000. (7) Incorporated by reference to the identically numbered exhibit included in the Company's Registration Statement on form S-3/A (File No. 333-70937) as filed with the Securities and Exchange Commission on August 24, 2000. (8) Incorporated by reference to the identically numbered exhibit of the Company's form 8-K as filed with the Securities and Exchange Commission on August 11, 2000. (9) Incorporated by reference to the identically numbered exhibit of the Company's Quarterly Report on form 10-Q/A for the quarterly period ended September 30, 2000. (10) Incorporated by reference to exhibit 99.1 included in the Company's Registration Statement on form S-8 (File No. 333-55604) as filed with the Securities and Exchange Commission on February 14, 2001. 82 (11) Incorporated by reference to exhibit 3.3 of the Company's Quarterly Report on form 10-Q for the quarterly period ended June 30, 1997. (12) Incorporated by reference to exhibit 3 of the Company's Quarterly Report on form 10-Q for the quarterly period ended September 30, 1997. (13) Incorporatedby reference to the identically numbered exhibit to the Company's Report on Form 8-K as filed with the Securities and Exchange on December 24, 1998. 83 EX-3.2F 2 0002.txt CERTIFICATE OF ELIMINATION... PREFERRED STOCK Exhibit 3.2F CERTIFICATE OF ELIMINATION OF SERIES B CONVERTIBLE PARTICIPATING PREFERRED STOCK ----------------------------- Pursuant to Section 151(g) of the General Corporation Law of the State of Delaware ----------------------------- P-Com, Inc., a Delaware corporation ("P-Com"), desires to eliminate from its Certificate of Incorporation the Certificate of Designations, Preferences and Rights of Series B Convertible Participating Preferred Stock, which was filed with the Secretary of State of the State of Delaware on December 21, 1998. In this regard, the following resolutions were duly adopted by written consent of the Board of Directors of P-Com, June 10, 1999: WHEREAS, no shares of Series B Convertible Participating Preferred Stock are presently outstanding and no such shares will be issued pursuant to the Certificate of Designations, Preferences and Rights of Series B Convertible Participating Preferred Stock, which was filed with the Secretary of State of the State of Delaware on December 21, 1998, as amended (the "Certificate"); and WHEREAS, it is in the best interests of the Corporation to eliminate all matters set forth in the Certificate from the Corporation's Certificate of Incorporation; NOW, THEREFORE, be it: RESOLVED, that the Certificate be eliminated from the Corporation's Certificate of Incorporation; and FURTHER RESOLVED, that the officers of the Corporation be, and they hereby are authorized and directed to take all actions necessary or desirable to effectuate the foregoing resolutions, including without limitation executing and filing appropriate documents with the Secretary of State of the State of Delaware. IN WITNESS WHEREOF, the undersigned has executed this Certificate in his capacity as Secretary of P-Com on behalf of P-Com. P-COM, INC. By: /s/ Warren T. Lazarow ----------------------------- Warren T. Lazarow, Secretary EX-4.10 3 0003.txt AMENDED AND RESTATED RIGHTS AGREEMENT (01/24/01) Exhibit 4.10 P-COM, INC. and BANKBOSTON, N.A. (Rights Agent) AMENDED AND RESTATED RIGHTS AGREEMENT DATED AS OF JANUARY 24, 2001 TABLE OF CONTENTS
Page ---- Section 1. Certain Definitions.......................................................... 1 Section 2. Appointment of Rights Agent.................................................. 6 Section 3. Issue of Rights Certificates................................................. 6 Section 4. Form of Rights Certificates.................................................. 8 Section 5. Countersignature and Registration............................................ 9 Section 6. Transfer, Split-Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates..................... 9 Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights................ 10 Section 8. Cancellation and Destruction of Rights Certificates.......................... 12 Section 9. Reservation and Availability of Preferred Stock.............................. 12 Section 10. Preferred Stock Record Date.................................................. 13 Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights........... 14 Section 12. Certificate of Adjusted Purchase Price or Number of Shares................... 21 Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power......... 22 Section 14. Fractional Rights and Fractional Shares...................................... 24 Section 15. Rights of Action............................................................. 25 Section 16. Agreement of Rights Holders.................................................. 26 Section 17. Rights Certificate Holder Not Deemed a Stockholder........................... 26 Section 18. Concerning the Rights Agent.................................................. 27 Section 19. Merger or Consolidation or Change of Name of Rights Agent.................... 27 Section 20. Duties of Rights Agent....................................................... 28 Section 21. Change of Rights Agent....................................................... 30 Section 22. Issuance of New Rights Certificates.......................................... 31 Section 23. Redemption and Termination................................................... 31 Section 24. Exchange..................................................................... 32 Section 25. Notice of Certain Events..................................................... 33 Section 26. Notices...................................................................... 34 Section 27. Supplements and Amendments................................................... 34 Section 28. Successors................................................................... 35 Section 29. Determinations and Actions by the Board of Directors......................... 35
i Section 30. Benefits of This Agreement................................................... 36 Section 31. Severability................................................................. 36 Section 32. Governing Law................................................................ 36 Section 33. Counterparts................................................................. 36 Section 34. Descriptive Headings......................................................... 36
EXHIBITS Exhibit A Form of Amended and Restated Certificate of Designations of Series A Junior Participating Preferred Stock Exhibit B Form of Amended Rights Certificate Exhibit C Amended and Restated Summary of Rights to Purchase Shares of Series A Preferred Stock ii AMENDED AND RESTATED RIGHTS AGREEMENT ------------------------------------- THIS AMENDMENT AND RESTATEMENT (the "Agreement") OF THE RIGHTS AGREEMENT dated as of October 1, 1997 and subsequently amended, between P-COM, Inc., a Delaware corporation (the "Company") and BankBoston, N.A. (the "Rights Agent") is made between the Company and the Rights Agent on this 24th day of January, 2001 (the "Amendment Date"). W I T N E S S E T H: -------------------- WHEREAS, effective October 1, 1997 (the "Rights Dividend Declaration Date"), the Board of Directors authorized and declared a distribution of one Right (each, a "Right") for each share of Common Stock (as hereinafter defined) of the Company outstanding as of the Close of Business (as hereinafter defined) on November 3, 1997 (the "Record Date"), each Right then representing the right to purchase one one-hundredth (1/100) of a share of Preferred Stock (as hereinafter defined) upon the terms and subject to the conditions set forth in that certain Rights Agreement dated as of October 1, 1997 between the Company and BankBoston, N.A., as amended (the "Rights Agreement"), and further authorized and directed the issuance of one Right with respect to each share of Common Stock that shall become outstanding between the Record Date and the earliest of the Distribution Date, the Redemption Date or the Final Expiration Date (as such terms are hereinafter defined); and WHEREAS, on December 18, 1998, the Board of Directors of the Company and the Rights Agent amended and restated the Rights Agreement in its entirety in order to provide, among other things, that each Right shall now represent the right to purchase one ten-thousandth (1/10,000) of a share (a "Unit") of Preferred Stock; and WHEREAS, on December 21, 1998, the Board of Directors of the Company and the Rights Agent amended and restated the Rights Agreement in its entirety; and WHEREAS, on July 13, 1999, the Board of Directors of the Company and the Rights Agent further amended a portion of the Rights Agreement; and NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree to amend and restate that certain Amended and Restated Rights Agreement between the Company and BankBoston, N.A., such amendment and restatement to be effective as of October 1, 1997 as follows: Section 1. Certain Definitions. For purposes of this Agreement, the following ------------------- terms have the meanings indicated: "Acquiring Person" shall mean (a) any Person (as such term is hereinafter defined), other than the State of Wisconsin Investment Board (the "Wisconsin Board") or Firsthand Capital Management, Inc., a California corporation ("Firsthand") or the Affiliates or Associates (as such terms are hereinafter defined) of Firsthand or the Wisconsin Board, who or which Person, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner (as such term is hereinafter defined) of 15% or more of the shares of Common Stock of the Company 1 then outstanding, (b) the Wisconsin Board (a "Permitted Investor") if it, together with all its Affiliates and Associates, shall be the Beneficial Owner of more than 19.99% of the shares of Common Stock of the Company then outstanding, or (c) Firsthand (also a "Permitted Investor"), if it, together with all its Affiliates and Associates, shall be the Beneficial Owner of more than 19.99% of the shares of Common Stock of the Company then outstanding; but shall not include the Company, any Subsidiary (as such term is hereinafter defined) of the Company, any employee benefit plan of the Company or any Subsidiary of the Company, or any entity holding shares of Common Stock for or pursuant to the terms of any such plan. Notwithstanding the foregoing: (i) in determining whether a Person (or Affiliate or Associate of such Person) shall be deemed to be an Acquiring Person, the following shares of Common Stock shall not be counted: (A) shares of Common Stock that may be deemed to be Beneficially Owned by a Person (hereinafter a "Series B Purchaser") as a result of (1) entry into any of (x) that certain Securities Purchase Agreement for Series B Convertible Participating Preferred Stock (the "Series B Preferred") and Common Stock warrants by and among the Company and the purchasers listed therein, or (y) those certain respective Exchange Agreements dated June 4, 1999 between the Company and such respective purchasers ((x) and (y), each a "Securities Purchase Agreement"), or (2) any of the transactions contemplated by any Securities Purchase Agreement, or (3) the purchase from the Company of shares of Series B Preferred, Common Stock or warrants to purchase Common Stock issued, in each case, pursuant to any Securities Purchase Agreement ("Series B Warrants"); (B) shares of Common Stock that may be deemed to be Beneficially Owned by a transferee (to the extent contemplated by any Securities Purchase Agreement) of a Series B Purchaser as a result of such transferee's ownership of shares of Series B Preferred or Series B Warrants; and (C) shares of Common Stock that are Beneficially Owned by a Series B Purchaser (or such a transferee) upon conversion/exchange or exercise of, respectively, the Series B Preferred or the Series B Warrants. (ii) no Person shall become an "Acquiring Person" as the result of an acquisition of shares of Common Stock by the Company which, by reducing the number of shares outstanding, (a) increases the proportionate number of shares beneficially owned by such Person to 15% or more of the shares of Common Stock of the Company then outstanding, or (b) in the case of a Permitted Investor, increases the proportionate number of shares beneficially owned by the Permitted Investor to more than 19.99% of the shares of Common Stock of the Company then outstanding; provided, however, -------- ------- that if a Person shall become the Beneficial Owner of 15% or more (or, in the case of a Permitted Investor, more than 19.99%) of the shares of Common Stock of the Company then outstanding by reason of share purchases by the Company and shall, after such share purchases by the Company, become the Beneficial Owner of any additional shares of Common Stock of the Company, then such Person shall be deemed to be an "Acquiring Person" hereunder; and (iii) if the Board of Directors of the Company determines in good faith that a Person who would otherwise be an "Acquiring Person" as defined pursuant to the foregoing provisions of this paragraph (a), has become such inadvertently, and such 2 Person divests as promptly as practicable a sufficient number of shares of Common Stock so that such Person would no longer be an "Acquiring Person" (as defined pursuant to the foregoing provisions of this paragraph (a)), then such Person shall not be deemed to be an "Acquiring Person" for any purpose of this Agreement. "Adjustment Shares" has the meaning set forth in Section 11(a)(ii). "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act (as such term is hereinafter defined). "Amended and Restated Summary of Rights" shall have the meaning set forth in Section 3(b) hereof. "Amendment Date" shall have the meaning set forth in the recitals to this Agreement. A Person shall be deemed the "Beneficial Owner" of, and shall be deemed to "beneficially own," any securities: (i) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly, for purposes of Section 13(d) of the Exchange Act and Rule 13d-3 thereunder (or any comparable or successor law or regulation); or (ii) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing, other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights (other than the Rights), warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner -------- ------- of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (B) the right to vote pursuant to any agreement, arrangement or understanding; provided further, however, that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," any security under this subparagraph (ii) as a result of an agreement, arrangement or understanding to vote such security if such agreement, arrangement or understanding: (x) arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the Exchange Act and the Exchange Act Regulations, and (y) is not reportable by such Person on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person (or any of such Person's Affiliates or Associates) has any agreement, arrangement or understanding, 3 (whether or not in writing, other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso to subparagraph (ii) above) or disposing of any securities of the Company; provided, -------- however, that in no case shall an officer or director of the Company be ------- deemed (A) the Beneficial Owner of any securities beneficially owned by another officer or director of the Company solely by reason of actions undertaken by such persons in their capacity as officers or directors of the Company or (B) the Beneficial Owner of securities held of record by the trustee of any employee benefit plan of the Company or any Subsidiary of the Company for the benefit of any employee of the Company or any Subsidiary of the Company, other than the officer or director, by reason of any influence that such officer or director may have over the voting of the securities held in the plan; Notwithstanding anything in this definition of "Beneficial Owner" and "beneficially own" to the contrary, the phrase "then outstanding," when used with reference to a Person who is the Beneficial Owner of securities of the Company, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person would be deemed to beneficially own hereunder. "Business Day" shall mean any day other than a Saturday, a Sunday, or a day on which banking institutions in The Commonwealth of Massachusetts or the state in which the principal office of the Rights Agent is located are authorized or obligated by law or executive order to close. "Close of Business" on any given date shall mean 5:00 P.M., Eastern time, on such date; provided, however, that if such date is not a Business Day -------- ------- it shall mean 5:00 P.M., Eastern time, on the next succeeding Business Day. "Common Stock" when used with reference to the Company shall mean the shares of common stock, par value $.0001, of the Company. "Common Stock" when used with reference to any Person other than the Company shall mean the capital stock (or other equity interest) with the greatest voting power of such other Person or, if such other Person is a Subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person. "Company" shall have the meaning set forth in the recitals to this Agreement. "current per share market price" shall have the meaning set forth in Section 11(d)(i) hereof. "Current Value" shall have the meaning set forth in Section 11(a)(iii) hereof. "Distribution Date" shall have the meaning set forth in Section 3(a) hereof. "equivalent preferred shares" shall have the meaning set forth in Section 11(b) hereof. 4 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Exchange Act Regulations" shall mean the General Rules and Regulations under the Exchange Act. "Expiration Date" shall have the meaning set forth in Section 7(a) hereof. "Final Expiration Date" shall have the meaning set forth in Section 7(a) hereof. "NASDAQ" shall have the meaning set forth in Section 11(d) hereof. "Original Summary of Rights" shall have the meaning set forth in Section 3(b) hereof. "Person" shall mean any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. "Preferred Stock" shall mean shares of Series A Preferred Stock, par value $.0001, of the Company having the rights and preferences set forth in the form of amended and restated certificate of designations attached to this Agreement as Exhibit A. "preferred stock equivalents" shall have the meaning set forth in Section 11(a)(iii) hereof. "Purchase Price" shall have the meaning set forth in Section 7(b) hereof. "Record Date" shall have the meaning set forth in the recitals to this Agreement. "Redemption Date" shall have the meaning set forth in Section 7(a) hereof. "Redemption Price" shall have the meaning set forth in Section 23(a) hereof. "Right" shall have the meaning set forth in the recitals to this Agreement. "Rights Agent" shall have the meaning set forth in the recitals to this Agreement. "Rights Certificate" shall have the meaning set forth in Section 3(a) hereof. "Rights Dividend Declaration Date" shall have the meaning set forth in the recitals to this Agreement. "Section 11(a)(ii) Event" shall have the meaning set forth in Section 11(a)(ii) hereof. "Section 11(a)(ii) Trigger Date" shall have the meaning set forth in Section 11(a)(iii) hereof. "Section 13 Event" shall have the meaning set forth in Section 13(a) hereof. 5 "Section 24(a) Exchange Ratio" has the meaning set forth in Section 24(a) hereof. "Securities Act" shall mean the Securities Act of 1933, as amended. "Shares Acquisition Date" shall mean the first date of public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has become such. "Spread" shall have the meaning set forth in Section 11(a)(iii) hereof. "Subsidiary" of any Person shall mean any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by such Person. "Trading Day" shall have the meaning set forth in Section 11(d)(i) hereof. "Triggering Event" shall mean any Section 11(a)(ii) Event or any Section 13 Event. "Unit" shall have the meaning set forth in the recitals to this Agreement. Section 2. Appointment of Rights Agent. The Company hereby appoints the Rights --------------------------- Agent to act as agent for the Company in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such co-Rights Agents as it may deem necessary or desirable, upon ten days prior written notice to the Rights Agent. The Rights Agent shall have no duty to supervise, and in no event shall be liable for, the acts or omissions of any such co-Rights Agent. Section 3. Issue of Rights Certificates ---------------------------- (a) Until the earlier of (i) the Close of Business on the Shares Acquisition Date (or if the Board so authorizes, by majority vote during such 20-day period, the Close of Business on the twentieth day after the Shares Acquisition Date or at such earlier time as the Board designates) and (ii) the Close of Business on the tenth Business Day (or such later date as may be determined by action of the Company's Board of Directors prior to such time as any Person becomes an Acquiring Person and of which the Company will give the Rights Agent prompt written notice) after the date that a tender or exchange offer by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding shares of Common Stock for or pursuant to the terms of any such plan) is first published or sent or given within the meaning of Rule 14d-4(a) of the Exchange Act Regulations or any successor rule or of the first public announcement of the intention of any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding shares of Common Stock for or pursuant to the terms of any such plan) to commence, a tender or exchange offer, if upon consummation thereof such Person would be the Beneficial Owner of 15% or more of the shares of Company Common Stock then outstanding (the earlier of (i) and (ii) above being the "Distribution Date"), (x) the Rights will be evidenced (subject to the provisions of 6 Section 3(b) hereof) by the certificates for shares of Common Stock registered in the names of the holders thereof (which certificates shall also be deemed to be Rights Certificates) and not by separate Rights Certificates, and (y) the right to receive Rights Certificates will be transferable only in connection with the transfer of shares of Common Stock. As soon as practicable after the Distribution Date, the Company will notify the Rights Agent thereof and the Company will prepare and execute, the Rights Agent will countersign, and the Company will send or cause to be sent (and the Rights Agent will, if requested and provided with all necessary information, send) by first-class, insured, postage-prepaid mail, to each record holder of shares of Common Stock as of the Close of Business on the Distribution Date, at the address of such holder shown on the records of the Company, an Amended Rights Certificate, in substantially the form of Exhibit B hereto (a "Rights Certificate"), evidencing one Right for each share of Common Stock so held. As of the Distribution Date, the Rights will be evidenced solely by such Rights Certificates. (b) On, or shortly after the Record Date, the Company sent a copy of a summary of rights (the "Original Summary of Rights") to Purchase Preferred Stock, to each record holder of shares of Common Stock as of the Close of Business on the Record Date, at the address of such holder shown on the records of the Company. Promptly after the date hereof, the Company will send a copy of an amended and restated Summary of Rights in substantially the form of Exhibit C hereto (the "Amended and Restated Summary of Rights"), to each record holder of shares of Common Stock as of the Close of Business on a record date chosen by the Board of Directors. With respect to certificates for shares of Common Stock outstanding as of the Record Date, until the Distribution Date, the Rights will be evidenced by such certificates registered in the names of the holders thereof together with a copy of the Original Summary of Rights, or Amended and Restated Summary of Rights, as the case may be, attached thereto. Until the Distribution Date (or the Expiration Date), the surrender for transfer of any certificate for shares of Common Stock outstanding on or after the Record Date, with or without a copy of the Original Summary of Rights, or Amended and Restated Summary of Rights attached thereto, shall also constitute the transfer of the Rights associated with the shares of Common Stock represented thereby. (c) Certificates for shares of Common Stock which become outstanding (including, without limitation, reacquired shares of Common Stock referred to in the last sentence of this paragraph (c)) after the Amendment Date but prior to the earlier of the Distribution Date and the Expiration Date shall have impressed on, printed on, written on or otherwise affixed to them the following legend: This certificate also evidences and entitles the holder hereof to certain rights as set forth in an Amended and Restated Rights Agreement between P-COM, INC. and BANKBOSTON, N.A. (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of P-COM, INC. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. P- COM, INC. will mail to the holder of this certificate a copy of the Rights Agreement without charge after receipt of a 7 written request therefor. Under certain circumstances, as set forth in the Rights Agreement, Rights issued to any Person who becomes an Acquiring Person (as defined in the Rights Agreement), whether currently held by or on behalf of such person or by any subsequent holder, may become null and void. With respect to such certificates containing the foregoing legend, until the earlier of the Distribution Date and the Expiration Date, the Rights associated with the shares of Common Stock represented by such certificates shall be evidenced by such certificates alone, and the surrender for transfer of any such certificate shall also constitute the transfer of the Rights associated with the shares of Common Stock represented thereby. In the event that the Company purchases or acquires any shares of Common Stock after the Record Date but prior to the Distribution Date, any Rights associated with such shares of Common Stock shall be deemed cancelled and retired so that the Company shall not be entitled to exercise any Rights associated with the shares of Common Stock which are no longer outstanding. Section 4. Form of Rights Certificates. --------------------------- (a) The Rights Certificates (and the forms of election to purchase Units of Preferred Stock and of assignment to be printed on the reverse thereof) shall be substantially the same as Exhibit B hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate (but which do not affect the duties or responsibilities of the Rights Agent) and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange or transaction reporting system on which the Rights may from time to time be listed, or to conform to usage. Subject to the provisions of Section 11 and Section 22 hereof, the Rights Certificates shall entitle the holders thereof to purchase the number of Units of Preferred Stock as shall be set forth therein at the price per Unit of Preferred Stock set forth therein, but the number of such Units of Preferred Stock and the Purchase Price shall be subject to adjustment as provided herein. (b) Any Rights Certificate issued pursuant hereto that represents Rights beneficially owned by: (i) an Acquiring Person or any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such or (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom such Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect avoidance of Section 7(e) hereof shall contain (to the extent feasible) the following legend: The Rights represented by this Rights Certificate are or were beneficially owned by a Person who was or became an Acquiring 8 Person or an Affiliate or Associate of an Acquiring Person (as such terms are defined in the Amended and Restated Rights Agreement between P-COM, INC. and BANKBOSTON, N.A. as Rights Agent(the "Rights Agreement"). Accordingly, this Rights Certificate and the Rights represented hereby may become null and void in the circumstances specified in Section 7(e) of the Rights Agreement. Section 5. Countersignature and Registration. --------------------------------- (a) The Rights Certificates shall be executed on behalf of the Company by its Chairman of the Board, its President, any of its Vice Presidents, or its Treasurer or Chief Financial Officer, either manually or by facsimile signature, shall have affixed thereto the Company's seal or a facsimile thereof, and shall be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. The Rights Certificates shall be manually countersigned by the Rights Agent and shall not be valid for any purpose unless countersigned. In case any officer of the Company who shall have signed any of the Rights Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Rights Certificates, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as though the person who signed such Rights Certificates had not ceased to be such officer of the Company; and any Rights Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Rights Certificate, shall be a proper officer of the Company to sign such Rights Certificate, although at the date of the execution of this Agreement any such person was not such an officer. (b) Following the Distribution Date and receipt by the Rights Agent of all relevant information, the Rights Agent will keep or cause to be kept, at its office designated for such purpose, books for registration and transfer of the Rights Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Rights Certificates, the number of Rights evidenced on its face by each of the Rights Certificates and the date of each of the Rights Certificates. Section 6. Transfer, Split-Up, Combination and Exchange of Rights Certificates; -------------------------------------------------------------------- Mutilated, Destroyed, Lost or Stolen Rights Certificates. - -------------------------------------------------------- (a) Subject to the provisions of Sections 4(b), 7(e) and 14 hereof, at any time after the Close of Business on the Distribution Date, and at or prior to the Close of Business on the Expiration Date, any Rights Certificate or Rights Certificates may be transferred, split up, combined or exchanged for another Rights Certificate or Rights Certificates, entitling the registered holder to purchase a like number of Units of Preferred Stock (or, following a Triggering Event, other securities, cash or other assets, as the case may be) as the Rights Certificate or Rights Certificates surrendered then entitled such holder to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Rights Certificate or Rights Certificates shall make such request in writing delivered to the Rights Agent, and shall surrender the Rights Certificate or Rights Certificates to be transferred, split up, combined or exchanged at the office of the Rights Agent designated for such purpose. Neither the Rights 9 Agent nor the Company shall be obligated to take any action whatsoever with respect to the transfer of any such surrendered Rights Certificate until the registered holder shall have properly completed and signed the certificate contained in the form of assignment on the reverse side of such Rights Certificate and shall have provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company or the Rights Agent shall reasonably request. Thereupon the Rights Agent shall, subject to Sections 4(b), 7(e) and 14 hereof, countersign and deliver to the person entitled thereto a Rights Certificate or Rights Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Rights Certificates. (b) Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Rights Certificate, and, in case of loss, theft or destruction, of indemnity or security satisfactory to them, and, at the Company's request, reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Rights Certificate if mutilated, the Company will make and deliver a new Rights Certificate of like tenor to the Rights Agent for delivery to the registered holder in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated. Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights. ------------------------------------------------------------- (a) Except as provided in Sections 23(c) and 7(e), the registered holder of any Rights Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein) in whole or in part at any time after the Distribution Date upon surrender of the Rights Certificate, with the form of election to purchase and certification on the reverse side thereof duly executed, to the Rights Agent at the office of the Rights Agent designated for such purpose, together with payment of the Purchase Price for each Unit of Preferred Stock as to which the Rights are exercised, at or prior to the earliest of (i) the Close of Business on October 1, 2007 (the "Final Expiration Date"), (ii) the time at which the Rights are redeemed as provided in Section 23 hereof (the "Redemption Date"), or (iii) the time at which such Rights are exchanged as provided in Section 24 hereof (the earlier of (i), (ii) and (iii) being the "Expiration Date"). (b) The purchase price (the "Purchase Price") for each Unit of Preferred Stock pursuant to the exercise of a Right shall initially be $125, shall be subject to adjustment from time to time as provided in Sections 11 and 13 hereof and shall be payable in lawful money of the United States of America in accordance with paragraph (c) below. (c) Upon receipt of a Rights Certificate representing exercisable Rights, with the form of election to purchase duly executed, accompanied by payment of the Purchase Price for the number of Units of Preferred Stock (or other securities or property, as the case may be) to be purchased and an amount equal to any applicable transfer tax required to be paid by the holder of such Rights Certificate in accordance with Section 9 hereof in cash, or by certified check or cashier's check payable to the order of the Company, the Rights Agent shall, subject to Section 20(k) hereof, thereupon promptly (i) (A) requisition from any transfer agent of the Preferred Stock (or make available, if the Rights Agent is the transfer agent for the Preferred 10 Stock) a certificate or certificates for the number of Units of Preferred Stock to be purchased and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests or (B) if the Company shall have elected to deposit the total number of Units of Preferred Stock issuable upon exercise of the Rights hereunder with a depositary agent, requisition from the depositary agent of a depositary receipt or depositary receipts representing such number of Units of Preferred Stock as are to be purchased (in which case certificates for the Units of Preferred Stock represented by such receipt or receipts shall be deposited by the transfer agent with the depositary agent) and the Company hereby directs the depositary agent to comply with such request, (ii) when appropriate, requisition from the Company the amount of cash to be paid in lieu of issuance of fractional shares in accordance with Section 14 hereof, (iii) after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder and (iv) when appropriate, after receipt thereof, deliver such cash to or upon the order of the registered holder of such Rights Certificate. The payment of the Purchase Price (as such amount may be reduced (including to zero) pursuant to Section 11(a)(iii) hereof) may be made in cash or by certified bank check or bank draft payable to the order of the Company. In the event that the Company is obligated to issue other securities of the Company, pay cash and/or distribute other property pursuant to Section 11(a) hereof, the Company will make all arrangements necessary so that such other securities, cash and/or other property are available for distribution by the Rights Agent, if and when necessary to comply with this Agreement. (d) In case the registered holder of any Rights Certificate shall exercise less than all the Rights evidenced thereby, a new Rights Certificate evidencing a number of Rights equivalent to the number of Rights remaining unexercised shall be issued by the Rights Agent to the registered holder of such Rights Certificate or to such registered holder's duly authorized assigns, subject to the provisions of Section 14 hereof. (e) Notwithstanding anything in this Agreement to the contrary, from and after the first occurrence of a Triggering Event, any Rights beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such, (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom the Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the a majority of the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect the avoidance of this Section 7(e) or (iv) any subsequent transferee shall become null and void without any further action and no holder of such Rights shall have any rights whatsoever with respect to such Rights, whether under any provision of this Agreement or otherwise. The Company shall use all reasonable efforts to ensure that the provisions of this Section 7(e) and Section 4(b) hereof are complied with, but shall have no liability to any holder of Rights Certificates or to any other Person as a result of its failure to make any determinations with respect to an Acquiring Person or any of such Acquiring Person's Affiliates, Associates or transferees hereunder. 11 (f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder upon the occurrence of any purported exercise as set forth in this Section 7 unless such registered holder shall have (i) properly completed and signed the certificate contained in the form of election to purchase set forth on the reverse side of the Rights Certificate surrendered for such exercise and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company or Rights Agent shall reasonably request. Section 8. Cancellation and Destruction of Rights Certificates. All Rights --------------------------------------------------- Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Rights Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all cancelled Rights Certificates to the Company, or shall, at the written request of the Company, destroy such cancelled Rights Certificates, and in such case shall deliver a certificate of destruction thereof to the Company. Section 9. Reservation and Availability of Preferred Stock. ----------------------------------------------- (a) The Company covenants and agrees that it will use its best efforts to cause to be reserved and kept available out of and to the extent of its authorized and unissued Units of Preferred Stock not reserved for another purpose that will be sufficient to permit the exercise in full of all outstanding Rights. Upon the occurrence of any events resulting in an increase in the aggregate number of shares of Preferred Stock (or other equity securities of the Company) issuable upon exercise of all outstanding Rights above the number then reserved, the Company shall make appropriate increases in the number of shares so reserved. (b) If the Units of Preferred Stock to be issued and delivered upon the exercise of the Rights are at any time listed on a national securities exchange or included for quotation on any transaction reporting system, the Company shall during the period from the Distribution Date to the Expiration Date use its best efforts to cause all shares reserved for such issuance to be listed on such exchange or included for quotation on any such transaction reporting system upon official notice of issuance upon such exercise. (c) The Company shall use its best efforts to (i) file, as soon as practicable following the earliest date after the first occurrence of a Section 11(a)(ii) Event in which the consideration to be delivered by the Company upon exercise of the Rights has been determined in accordance with Section 11(a)(iii) hereof, or as soon as is required by law following the Distribution Date, as the case may be, a registration statement under the Securities Act, with respect to the securities purchasable upon exercise of the Rights on an appropriate form, (ii) cause such registration statement to become effective as soon as practicable after such filing and (iii) cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Securities Act) until the earlier of (A) the date as of which the 12 Rights are no longer exercisable for such securities and (B) the Expiration Date. The Company will also take such action as may be appropriate under, or to ensure compliance with, the securities or "blue sky" laws of the various states in connection with the exercisability of the Rights. Notwithstanding any provision of this Agreement to the contrary, the Rights shall not be exercisable in any jurisdiction, unless the requisite qualification in such jurisdiction shall have been obtained, or an exemption therefrom shall be available and until a registration statement has been declared effective. (d) The Company covenants and agrees that it will take all such action as may be necessary to ensure that all Units of Preferred Stock (and, following the occurrence of a Triggering Event, any other securities that may be delivered upon exercise of Rights) shall, at the time of delivery of the certificates for such Units of Preferred Stock (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and non-assessable. (e) The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the issuance or delivery of the Rights Certificates or of any Units of Preferred Stock upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Rights Certificates to a person other than, or the issuance or delivery of certificates or depositary receipts for Units of Preferred Stock in a name other than that of, the registered holder of the Rights Certificate evidencing Rights surrendered for exercise or to issue or to deliver any certificates or depositary receipts for Units of Preferred Stock upon the exercise of any Rights until any such tax shall have been paid (any such tax being payable by the holder of such Rights Certificate at the time of surrender) or until it has been established to the Company's reasonable satisfaction that no such tax is due. Section 10. Preferred Stock Record Date. Each Person in whose name any --------------------------- certificate for Units of Preferred Stock (or, following the occurrence of a Triggering Event, other securities) is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the Units of Preferred Stock (or, following the occurrence of a Triggering Event, other securities) represented thereby on, and such certificate shall be dated, the date upon which the Rights Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable transfer taxes) was made; provided, however, that if the date of such surrender and -------- ------- payment is a date upon which the Preferred Stock (or, following the occurrence of a Triggering Event, other securities) transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Stock transfer books of the Company are open; provided further, however, that if delivery of Units of Preferred Stock is delayed pursuant to Section 9(c), such Persons shall be deemed to have become the record holders of such Units of Preferred Stock only when such Units first become deliverable. Prior to the exercise of the Rights evidenced thereby, the holder of a Rights Certificate shall not be entitled to any rights of a stockholder of the Company with respect to securities for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein. Prior to the exercise of the Rights evidenced thereby, the holder of a Rights Certificate shall not be entitled to any rights of a holder of a Unit of Preferred Stock for which the Rights 13 shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein. Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights. ------------------------------------------------------------------ The Purchase Price, the number and kinds of securities covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11. (a)(i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Stock payable in shares of Preferred Stock, (B) subdivide the outstanding shares of Preferred Stock, (C) combine the outstanding Preferred Stock into a smaller number of shares Preferred Stock or (D) issue any shares of its capital stock in a reclassification of the Preferred Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a), the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of capital stock issuable on such date, shall be proportionately adjusted so that the holder of any Rights exercised after such time shall be entitled to receive the aggregate number and kind of shares of capital stock which, if such Rights had been exercised immediately prior to such date and at a time when the Preferred Stock transfer books of the Company were open, such holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification; provided, however, that in no event shall the -------- ------- consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right. If an event occurs which would require an adjustment under both this Section 11(a)(i) and Section 11(a)(ii), the adjustment provided for in this Section 11(a)(i) shall be in addition to, and shall be made prior, to any adjustment required pursuant to Section 11(a)(ii). (ii) Subject to Section 24 of this Agreement, in the event that (A) any Acquiring Person or any Associate or Affiliate of any Acquiring Person, at any time after the date of this Agreement, directly or indirectly, shall (1) merge into the Company or otherwise combine with the Company and the Company shall be the continuing or surviving corporation of such merger or combination and shares of Company Common Stock shall remain outstanding and unchanged, (2) in one transaction or a series of transactions, transfer any assets to the Company or any of its Subsidiaries in exchange (in whole or in part) for shares of Company Common Stock, for other equity securities of the Company or any such Subsidiary, or for securities exercisable for or convertible into shares of equity securities of the Company or any of its Subsidiaries (whether shares of Company Common Stock or otherwise) or otherwise obtain from the Company or any of its Subsidiaries, with or without consideration, any additional shares of such equity securities or securities exercisable for or convertible into such equity securities other than pursuant to a pro rata distribution to all holders of shares of Company Common Stock, (3) sell, purchase, lease, exchange, mortgage, pledge, transfer or otherwise acquire or dispose of, in one transaction or a series of transactions, to, from or with the Company or 14 any of its Subsidiaries or any employee benefit plan maintained by the Company or any of its Subsidiaries or any trustee or fiduciary with respect to such plan acting in such capacity, assets (including securities) on terms and conditions less favorable to the Company or such Subsidiary or plan than those that could have been obtained in arm's-length negotiations with an unaffiliated third party, other than pursuant to a transaction set forth in Section 13(a) hereof, (4) sell, purchase, lease, exchange, mortgage, pledge, transfer or otherwise acquire or dispose of, in one transaction or a series of transactions, to, from or with the Company or any of its Subsidiaries or any employee benefit plan maintained by the Company or any of its Subsidiaries or any trustee or fiduciary with respect to such plan acting in such capacity (other than transactions, if any, consistent with those engaged in, as of the date hereof, by the Company and such Acquiring Person or such Associate or Affiliate), assets (including securities or intangible assets) having an aggregate fair market value of more than $5,000,000, other than pursuant to a transaction set forth in Section 13(a) hereof, (5) receive, or any designee, agent or representative of such Acquiring Person or any Affiliate or Associate of such Acquiring Person shall receive, any compensation from the Company or any of its Subsidiaries other than compensation for full-time employment as a regular employee at rates in accordance with the Company's (or its Subsidiaries') past practices, or (6) receive the benefit, directly or indirectly (except proportionately as a holder of shares of Company Common Stock or as required by law or governmental regulation), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Company or any of its Subsidiaries or any employee benefit plan maintained by the Company or any of its Subsidiaries or any trustee or fiduciary with respect to such plan acting in such capacity; or (B) any Person shall become an Acquiring Person, unless the event causing the Person to become an Acquiring Person is a transaction set forth in Section 13(a); or (C) during such time as there is an Acquiring Person, there shall be any reclassification of securities (including any reverse stock split), or recapitalization of the Company, or any merger or consolidation of the Company with any of its Subsidiaries or any other transaction or series of transactions involving the Company or any of its Subsidiaries, other than a transaction or transactions to which the provisions of Section 13(a) apply (whether or not with or into or otherwise involving an Acquiring Person), which has the effect, directly or indirectly, of increasing by more than 1% the proportionate share of the outstanding shares of any class of equity securities of the Company or any of its Subsidiaries that is directly or indirectly beneficially owned by any Acquiring Person or any Person or any Associate or Affiliate of any Acquiring Person; then promptly following the occurrence of an event described in Section 11(a)(ii)(A), (B) or (C) (a "Section 11(a)(ii) Event"), proper provision shall be made so that each holder of a Right, except as provided in Section 7(e) hereof, shall thereafter have the right to receive for each Right, upon exercise thereof in accordance with the terms of this Agreement and payment of the then- current Purchase Price, in lieu of the number of Units of Preferred Stock for which a Right was exercisable immediately prior to the first occurrence of a Section 11(a)(ii) Event, such number of Units of Preferred Stock as shall equal the result obtained by multiplying the then-current Purchase Price by the then number of Units of Preferred Stock for which a Right was exercisable (or would have been exercisable if the Distribution Date had occurred) immediately prior to the first occurrence of a Triggering Event, and dividing that product by 50% of the 15 current per share market price (determined pursuant to Section 11(d) hereof) for shares of Common Stock on the date of occurrence of the Triggering Event (such number of Units of Preferred Stock being hereinafter referred to as the "Adjustment Shares"). (iii) In the event that the number of Units of Preferred Stock which are authorized by the Company's Certificate of Incorporation but not outstanding or reserved for issuance for purposes other than upon exercise of the Rights are not sufficient to permit the exercise in full of the Rights, or if any necessary regulatory approval for such issuance has not been obtained by the Company, the Company shall, in lieu of issuing Units of Preferred Stock in accordance with Section 11(a)(ii) hereof (A) determine the excess of (1) the value of the Units of Preferred Stock issuable upon the exercise of a Right (the "Current Value") over (2) the Purchase Price (such excess being referred to as the "Spread") and (B) with respect to each Right, make adequate provision to substitute for such Units of Preferred Stock, upon exercise of the Rights, (1) cash, (2) a reduction in the Purchase Price, (3) other equity securities of the Company (including, without limitation, Common Stock or shares or units of shares of any series of preferred stock which the Board of Directors of the Company has deemed to have the same value as the Units of Preferred Stock (such shares or units of preferred stock are herein called "preferred stock equivalents")), except to the extent that the Company has not obtained any necessary regulatory approval for such issuance, (4) debt securities of the Company, except to the extent that the Company has not obtained any necessary regulatory approval for such issuance, (5) other assets or (6) any combination of the foregoing, having an aggregate value equal to the Current Value, where such aggregate value has been determined by the Board of Directors of the Company based upon the advice of a nationally recognized investment banking firm selected by the Board of Directors of the Company; provided, however, if the Company shall not have made adequate -------- ------- provision to deliver value pursuant to clause (B) above within 30 days following the later of (x) occurrence of a Section 11(a)(ii) Event, and (y) the date on which the Company's right of redemption pursuant to Section 23(a) expires (the later of (x) and (y) being referred to herein as the "Section 11(a)(iii) Trigger Date"), then the Company shall be obligated to deliver, upon the surrender for exercise of a Right and without requiring payment of the Purchase Price, Units of Preferred Stock (to the extent available), except to the extent that the Company has not obtained any necessary regulatory approval for such issuance, and then, if necessary, cash, which Units and/or cash have an aggregate value equal to the Spread. (b) In the event that the Company shall fix a record date for the issuance of rights (other than the Rights), options or warrants to all holders of Units of Preferred Stock entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Units of Preferred Stock (or shares having the same rights, privileges and preferences as the Preferred Stock ("equivalent preferred stock")) or securities convertible into Units of Preferred Stock or equivalent preferred stock at a price per Unit of Preferred Stock or equivalent preferred share (or having a conversion price per share, if a security convertible into Units of Preferred Stock or equivalent preferred stock) less than the then current per share market price of a Unit of Preferred Stock (as determined pursuant to Section 11(d)) on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the 16 numerator of which shall be the number of Units of Preferred Stock outstanding on such record date plus the number of Units of Preferred Stock which the aggregate offering price of the total number of Units of Preferred Stock and/or equivalent preferred stock so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price and the denominator of which shall be the number of Units of Preferred Stock outstanding on such record date plus the number of additional Units of Preferred Stock and/or equivalent preferred stock to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible). In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights. Units of Preferred Stock owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such rights, options or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (c) In case the Company shall fix a record date for a distribution to all holders of Units of Preferred Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of evidences of indebtedness, cash (other than a regular quarterly cash dividend) assets (other than a dividend payable in Units of Preferred Stock but including any dividend payable in equity securities other than Preferred Stock) or subscription rights or warrants (excluding those referred to in Section 11(d) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the then current per share market price (as determined pursuant to Section 11(d)) of the Preferred Stock on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holder of rights) of the cash, assets or evidences of indebtedness to be distributed or of such subscription rights or warrants distributable in respect of a share of Preferred Stock and the denominator of which shall be such current per share market price (as determined pursuant to Section 11(d)) of a share of Preferred Stock. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (d) (i) For the purpose of any computation hereunder, the "current per share market price" of any security (a "Security" for the purpose of this Section 11(d)(i)) on any date shall be deemed to be the average of the daily closing prices per share of such Security for the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to but not including such date; provided, however, that in the event that the -------- ------- "current per share market price" of the Security is determined during a period following the announcement by the issuer of such Security of (A) a dividend or distribution on such Security payable in shares of such Security or securities convertible into such shares, or (B) any subdivision, combination or reclassification of such Security 17 and prior to the expiration of 30 Trading Days after but not including the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the "current per share market price" shall be appropriately adjusted to reflect the "current market price" per share equivalent of such Security. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the Nasdaq National Market ("NASDAQ") or, if the Security is not listed or admitted to trading on the NASDAQ, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Security is listed or admitted to trading or, if the Security is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the NASDAQ or such other system then in use, or, if on any such date the Security is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Security selected by the Board of Directors of the Company. If on any such date no market maker is making a market in the Security, the "current per share market price" of such Security on such date as determined in good faith by the Board of Directors of the Company as provided for above shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Security is listed or admitted to trading is open for the transaction of business or, if the Security is not listed or admitted to trading on any national securities exchange, a Business Day. (ii) For the purpose of any computation hereunder, the "current per share market price" of the Preferred Stock shall be determined in accordance with the method set forth in Section 11(d)(i). If the "current per share market price" of the Preferred Stock cannot be determined in the manner provided above or if the Preferred Stock is not publicly held or listed or traded in a manner described in clause (i) of this Section 11(d), the "current per share market price" of the Preferred Stock shall be conclusively deemed to be an amount equal to $10,000 (as such amount may be appropriately adjusted for such events as stock splits, stock dividends and recapitalizations with respect to shares of Company Common Stock occurring after the date of this Agreement) multiplied by the current market price per share of Company Common Stock. If shares of neither the Company Common Stock nor Preferred Stock is publicly held or so listed or traded, "current per share market price" of the Preferred Stock shall mean the fair value per share as determined in good faith by the Board of Directors of the Company whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights. (e) No adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; provided, however, that any adjustments which by reason of this Section -------- ------- 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest one ten-thousandth of a share of Preferred Stock or one ten-thousandth of any other share or security as the case may be. 18 Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three years from the date of the transaction which requires such adjustment or (ii) the Expiration Date. (f) If as a result of an adjustment made pursuant to Section 11(a)(ii) hereof, the holder of any Rights thereafter exercised shall become entitled to receive any shares of capital stock of the Company other than Units of Preferred Stock, thereafter the number of such other shares so receivable upon exercise of any Rights and the Purchase Price thereof shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Stock contained in Section 11(a), (b), (c), (d), (e), (g), (h), (i), (j), (k), (l) and (m), and the provisions of Sections 7, 9, 10, 13 and 14 with respect to the Preferred Stock shall apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of Units of Preferred Stock purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. (h) Unless the Company shall have exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of Units of Preferred Stock (calculated to the nearest one ten-thousandth of a share of Preferred Stock) obtained by dividing (i) the product obtained by multiplying (x) the number of Units of Preferred Stock covered by a Right immediately prior to this adjustment by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price by, (ii) the Purchase Price in effect immediately after such adjustment of the Purchase Price. (i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in substitution for any adjustment in the number of Units of Preferred Stock purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the number of Units of Preferred Stock for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest one ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement (with prompt notice thereof to the Rights Agent) of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Rights Certificates have been issued, shall be at least ten days later than the date of the public announcement. If Rights Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Rights Certificates on such record date Rights Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of 19 record in substitution and replacement for the Rights Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Rights Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Rights Certificates to be so distributed shall be issued, executed and countersigned in the manner provided for herein and shall be registered in the names of the holders of record of Rights Certificates on the record date specified in the public announcement. (j) Irrespective of any adjustment or change in the Purchase Price or the number of Units of Preferred Stock issuable upon the exercise of the Rights, the Rights Certificates theretofore and thereafter issued may continue to express the Purchase Price per Unit and the number of Units of Preferred Stock which were expressed in the initial Rights Certificates issued hereunder. (k) Before taking any action that would cause an adjustment reducing the Purchase Price below the then par value of the number of Units of Preferred Stock issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable number of Units of Preferred Stock at such adjusted Purchase Price. (l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer (with prompt notice thereof to the Rights Agent) until the occurrence of such event the issuing to the holder of any Rights exercised after such record date of that number of Units of Preferred Stock and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the Units of Preferred Stock and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; provided, however, that the Company shall deliver to such holder a due bill or - -------- ------- other appropriate instrument evidencing such holder's right to receive such additional shares (fractional or otherwise) upon the occurrence of the event requiring such adjustment. (m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that it in its sole discretion shall determine to be advisable in order that any (i) consolidation or subdivision of the Preferred Stock, (ii) issuance wholly for cash of any Unit of Preferred Stock at less than the current market price, (iii) issuance wholly for cash of Preferred Stock or securities which by their terms are convertible into or exchangeable for Preferred Stock, (iv) dividends on Preferred Stock payable in Preferred Stock or (v) issuance of rights, options or warrants referred to in this Section 11, hereafter made by the Company to holders of Units of its Preferred Stock shall not be taxable to such stockholders. (n) The Company shall not, at any time after the Distribution Date, (i) consolidate with any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o)), (ii) merge with or into any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o)), or (iii) sell or transfer (or permit any Subsidiary to sell or transfer), in one transaction, or a series of transactions, assets or earning power aggregating more than 50% of the assets or earning power 20 of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company and/or any of its Subsidiaries in one or more transactions each of which complies with Section 11(o)), if (x) at the time of or immediately after such consolidation, merger or sale there are any rights, warrants or other instruments or securities outstanding or agreements in effect which would substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights or (y) prior to, simultaneously with or immediately after such consolidation, merger or sale, the Person which constitutes, or would constitute the "Principal Party" for purposes of Section 13(a) shall have distributed or otherwise transferred to its stockholders or other persons holding an equity interest in such Person Rights previously owned by such Person or any of its Affiliates and Associates; provided, however, this Section 11(n) -------- ------- shall not affect the ability of any Subsidiary of the Company to consolidate with, merge with or into, or sell or transfer assets or earning power to, any other Subsidiary of the Company. (o) After the Distribution Date, the Company shall not, except as permitted by Section 23 or Section 27, take (or permit any Subsidiary to take) any action if at the time such action is taken it is reasonably foreseeable that such action will diminish substantially or otherwise eliminate the benefits intended to be afforded by the Rights. (p) In the event that, at any time after the date of this Agreement and prior to the Distribution Date, the Company shall (i) declare or pay any dividend on outstanding shares of Common Stock payable in shares of Common Stock or (ii) effect a subdivision, combination or consolidation of the Common Stock (by reclassification or otherwise than by payment of dividends in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in any such case the number of Units of Preferred Stock purchasable after such event upon proper exercise of each Right shall be determined by multiplying the number of Units of Preferred Stock so purchasable immediately prior to such event by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately before such event and the denominator of which is the number of shares of Common Stock outstanding immediately after such event. The adjustments provided for in this Section 11(p) shall be made successively whenever such a dividend is declared or paid or such a subdivision, combination or consolidation is effected. Section 12. Certificate of Adjusted Purchase Price or Number of Shares. ---------------------------------------------------------- Whenever an adjustment is made as provided in Sections 11 and 13 hereof, the Company shall promptly (a) prepare a certificate setting forth such adjustment, and a brief statement of the facts and computations accounting for such adjustment, (b) file with the Rights Agent and with each transfer agent for the shares of Common Stock or Units of Preferred Stock a copy of such certificate and (c) mail a brief summary thereof to each holder of a Rights Certificate in accordance with Section 25 hereof. Notwithstanding the foregoing sentence, the failure by the Company to make such certification or give such notice shall not affect the validity of or the force or effect of the requirement for such adjustment. The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment contained therein and shall not be deemed to have knowledge of such adjustment unless and until it shall have received such certificate. 21 Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning -------------------------------------------------------------- Power. - ----- (a) Except as provided in Section 13(b) hereof, in the event that, following a Shares Acquisition Date, directly or indirectly, (x) the Company shall consolidate with, or merge with and into, any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o)), and the Company shall not be the continuing or surviving corporation of such consolidation or merger, (y) any Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o)) shall consolidate with the Company, or merge with and into the Company and the Company shall be the continuing or surviving corporation of such consolidation or merger and, in connection with such consolidation or merger, all or part of the shares of Common Stock shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property, or (z) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer) to any Person or Persons (other than a Subsidiary of the Company in a transaction which complies with Section 11(o)), in one or more transactions, directly or indirectly, assets or earning power aggregating 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole), (any such event being a "Section 13 Event"), then, and in each such case, proper provision shall be made so that: (i) each holder of a Right, except as provided in Section 7(e), shall thereafter have the right to receive, upon the exercise thereof at the then current Purchase Price, such number of validly authorized and issued, fully paid and non-assessable shares of Common Stock of the Principal Party (as such term is hereinafter defined), which shares shall not be subject to any liens, encumbrances, rights of first refusal, transfer restrictions or other adverse claims, as shall be equal to the result obtained by (1) multiplying the then current Purchase Price by the number of Units of Preferred Stock for which a Right is exercisable immediately prior to the first occurrence of a Section 13 Event (or, if a Section 11(a)(ii) Event has occurred prior to the first occurrence of a Section 13 Event, multiplying the number of such Units of Preferred Stock for which a Right would be exercisable hereunder but for the occurrence of such Section 11(a)(ii) Event by the Purchase Price which would be in effect hereunder but for such first occurrence) and (2) dividing that product (which, following the direct occurrence of a Section 13 Event, shall be the "Purchase Price" for all purposes of this Agreement) by 50% of the current per share market price (determined pursuant to Section 11(d)) of the shares of Common Stock of such Principal Party on the date of consummation of such Section 13 Event; (ii) such Principal Party shall thereafter be liable for, and shall assume, by virtue of such Section 13 Event, all the obligations and duties of the Company pursuant to this Agreement; (iii) the term "Company" shall, for all purposes of this Agreement, thereafter be deemed to refer to such Principal Party, it being specifically intended that the provisions of Section 11 shall apply only to such Principal Party following the first occurrence of a Section 13 Event; (iv) such Principal Party shall take such steps (including, but not limited to, the reservation of a sufficient number of shares of its Common Stock) in connection with the consummation of any such transaction as may be necessary to ensure that the provisions of this Agreement shall thereafter be applicable to its shares of Common Stock thereafter deliverable upon the exercise of the Rights; and (v) the provisions of Section 11(a)(ii) shall be of no further effect following the first occurrence of any Section 13 Event. (b) "Principal Party" shall mean: 22 (i) in the case of any transaction described in clause (x) or (y) of the first sentence of Section 13(a), (A) the Person that is the issuer of any securities into which shares of Company Common Stock are converted in such merger or consolidation, or, if there is more than one such issuer, the issuer of shares of Common Stock that has the highest aggregate current market price (determined pursuant to Section 11(d)) and (B) if no securities are so issued, the Person that is the other party to such merger or consolidation, or, if there is more than one such Person, the Person the Common Stock of which has the highest aggregate current market price (determined pursuant to Section 11(d)); and (ii) in the case of any transaction described in clause (z) of the first sentence of Section 13(a), the Person that is the party receiving the largest portion of the assets or earning power transferred pursuant to such transaction or transactions, or, if each Person that is a party to such transaction or transactions receives the same portion of the assets or earning power transferred pursuant to such transaction or transactions or if the Person receiving the largest portion of the assets or earning power cannot be determined, whichever Person the Common Stock of which has the highest aggregate current market price (determined pursuant to Section 11(d)); provided, however, that in any such case, (1) if the Common Stock -------- ------- of such Person is not at such time and has not been continuously over the preceding twelve-month period registered under Section 12 of the Exchange Act ("Registered Common Stock"), or such Person is not a corporation, and such Person is a direct or indirect Subsidiary of another Person that has Registered Common Stock outstanding, "Principal Party" shall refer to such other Person; (2) if the Common Stock of such Person is not Registered Common Stock or such Person is not a corporation, and such Person is a direct or indirect Subsidiary of another Person but is not a direct or indirect Subsidiary of another Person which has Registered Common Stock outstanding, "Principal Party" shall refer to the ultimate parent entity of such first-mentioned Person; (3) if the Common Stock of such Person is not Registered Common Stock or such Person is not a corporation, and such Person is directly or indirectly controlled by more than one Person, and one or more of such other Persons has Registered Common Stock outstanding, "Principal Party" shall refer to whichever of such other Persons is the issuer of the Registered Common Stock having the highest aggregate current per share market price (determined pursuant to Section 11(d)); and (4) if the Common Stock of such Person is not Registered Common Stock or such Person is not a corporation, and such Person is directly or indirectly controlled by more than one Person, and none of such other Persons has Registered Common Stock outstanding, "Principal Party" shall refer to whichever ultimate parent entity is the corporation having the greatest stockholders' equity or, if no such ultimate parent entity is a corporation, shall refer to whichever ultimate parent entity is the entity having the greatest net assets. (c) The Company shall not consummate any such consolidation, merger, sale or transfer unless the Principal Party shall have a sufficient number of authorized shares of Common Stock which have not been issued or reserved for issuance to permit the exercise in full of the Rights in accordance with this Section 13, and unless prior thereto the Company and such Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement providing for the terms set forth in paragraphs (a) and (b) of this Section 13 and further providing that the Principal Party will: 23 (i) (A) file on an appropriate form, as soon as practicable following the execution of such agreement, a registration statement under the Securities Act with respect to the shares of Common Stock that may be acquired upon exercise of the Rights, (B) cause such registration statement to remain effective (and to include a prospectus complying with the requirements of the Securities Act) until the Expiration Date, and (C) as soon as practicable following the execution of such agreement take such action as may be required to ensure that any acquisition of such shares of Common Stock upon the exercise of the Rights complies with any applicable state securities or "blue sky" laws; and (ii) deliver to holders of the Rights historical financial statements for the Principal Party and each of its Affiliates which comply in all respects with the requirements for registration on Form 10 under the Exchange Act. (d) In case the Principal Party which is to be a party to a transaction referred to in this Section 13 has a provision in any of its authorized securities or in its Certificate of Incorporation or Bylaws or other instrument governing its corporate affairs, which provision would have the effect of (i) causing such Principal Party to issue, in connection with, or as a consequence of, the consummation of a transaction referred to in this Section 13, shares of Common Stock of such Principal Party at less than the then current market price per share (determined pursuant to Section 11(d)) or securities exercisable for, or convertible into, shares of Common Stock of such Principal Party at less than such then current marker price (other than to holders of Rights pursuant to this Section 13) or (ii) providing for any special payment, tax or similar provisions in connection with the issuance of the shares of Common Stock of such Principal Party pursuant to the provisions of this Section 13, then, in such event, the Company shall not consummate any such transaction unless prior thereto the Company and such Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement providing that the provision in question of such Principal Party shall have been cancelled, waived or amended, or that the authorized securities shall be redeemed, so that the applicable provision will have no effect in connection with, or as a consequence of, the consummation of the proposed transaction. (e) The provisions of this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers. In the event that a Section 13 Event shall occur at any time after the occurrence of a Section 11(a)(ii) Event, the Rights which have not theretofore been exercised shall thereafter become exercisable in the manner described in Section 13(a). Section 14. Fractional Rights and Fractional Shares. --------------------------------------- (a) The Company shall not be required to issue fractions of Rights or to distribute Rights Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Rights Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Right. For the purposes of this Section 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise 24 issuable. The closing price for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the NASDAQ or, if the Rights are not listed or admitted to trading on the NASDAQ, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Directors. If on any such date no such market maker is making a market in the Rights, the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Company shall be used. (b) The Company shall not be required to issue fractions of Preferred Stock (other than fractions which are integral multiples of one ten-thousandth of a share of Preferred Stock) upon exercise of the Rights or to distribute certificates which evidence fractional Preferred Stock (other than fractions which are integral multiples of one ten-thousandth of a share of Preferred Stock). Fractions of Preferred Stock in integral multiples of one ten-thousandth of a share of Preferred Stock may, at the election of the Company, be evidenced by depositary receipts, pursuant to an appropriate agreement between the Company and a depositary selected by it; provided, however, that such agreement shall -------- ------- provide that the holders of such depositary receipts shall have all the rights, privileges and preferences to which they are entitled as beneficial owners of the Preferred Stock represented by such depositary receipts. In lieu of fractional shares of Preferred Stock that are not integral multiples of one ten- thousandth of a share of Preferred Stock, the Company shall pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one a share of Preferred Stock as determined pursuant to Section 11(d). (c) The holder of a Right by the acceptance of the Right expressly waives such holder's right to receive any fractional Rights or any fractional shares upon exercise of a Right (except as provided above). Section 15. Rights of Action. All rights of action in respect of this ---------------- Agreement, excepting the rights of action given to the Rights Agent under Section 18 hereof, are vested in the respective registered holders of the Rights Certificates (and, prior to the Distribution Date, the registered holders of certificates representing shares of Common Stock); and any registered holder of any Rights Certificate (or, prior to the Distribution Date, a certificate representing shares of Common Stock), without the consent of the Rights Agent or of the holder of any other Rights Certificate (or, prior to the Distribution Date, of a certificate representing shares of Common Stock), may, in such holder's own behalf and for such holder's own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, such holder's right to exercise the Rights evidenced by such Rights Certificate in the manner provided in such Rights Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of 25 Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations hereunder, and injunctive relief against actual or threatened violations of the obligations of any Person subject to this Agreement. Section 16. Agreement of Rights Holders. Every holder of a Right, by accepting --------------------------- the same, consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of shares of the Company's Common Stock; (b) after the Distribution Date, the Rights Certificates are transferable only on the registry books of the Rights Agent if surrendered at the office of the Rights Agent designated for such purpose, duly endorsed or accompanied by a proper instrument of transfer; (c) subject to Sections 6(a) and 7(f) hereof, the Company and the Rights Agent may deem and treat the person in whose name the Rights Certificate (or, prior to the Distribution Date, the associated Common Stock certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Rights Certificates or the associated Common Stock certificate made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent shall be affected by any notice to the contrary; and (d) notwithstanding anything in this Agreement to the contrary, neither the Company nor the Rights Agent shall have any liability to any holder of a Right or other Person as a result of its inability to perform any of its obligations under this Agreement by reason of any preliminary or permanent injunction or other order, decree, judgment or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, or any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, prohibiting or otherwise restraining performance of such obligation; provided, however, the Company must use its best -------- ------- efforts to have any such order, decree, judgment or ruling lifted or otherwise overturned as soon as possible. Section 17. Rights Certificate Holder Not Deemed a Stockholder. No holder, -------------------------------------------------- as such, of any Rights Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the Units of Preferred Stock or any other securities of the Company which may at any time be issuable upon the exercise of the Rights represented thereby, nor shall anything contained herein or in any Rights Certificate be construed to confer upon the holder of any Rights Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 25 hereof), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Rights Certificate shall have been exercised in accordance with the provisions hereof. 26 Section 18. Concerning the Rights Agent. The Company agrees to pay to the --------------------------- Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the preparation, execution, delivery and amendment of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability, fine, damage, judgment, penalty, cost, claim, demand, settlement or expense, incurred without gross negligence, or willful misconduct on the part of the Rights Agent, for any action taken, suffered or omitted by the Rights Agent in connection with the execution, acceptance and administration of this Agreement and the exercise and performance hereunder of its duties, including the costs and expenses of defending against and appealing any claim of liability in the premises. The indemnity provided herein shall survive the termination of this Agreement and the expiration of the Rights. The costs and expenses incurred in enforcing this right of indemnification shall be paid by the Company. Anything to the contrary notwithstanding, in no event shall the Rights Agent be liable for special, punitive, indirect, consequential or incidental loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Rights Agent has been advised of the likelihood of such loss or damage. Any liability of the Rights Agent under this Agreement will be limited to the amount of fees paid by the Company to the Rights Agent. The Rights Agent may conclusively rely upon and shall be protected and shall incur no liability for, or in respect of any action taken, suffered or omitted by it in connection with, its acceptance and administration of this Agreement and the exercise and performance of its duties hereunder in reliance upon any Rights Certificate or certificate for Units of Preferred Stock or shares of Common Stock or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper person or persons, or otherwise upon the advice of counsel as set forth in Section 20 hereof. Section 19. Merger or Consolidation or Change of Name of Rights Agent. --------------------------------------------------------- (a) Any Person into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any Person resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any Person succeeding to the stock transfer of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such Person would be eligible for appointment as a successor Rights Agent under the provisions of Section 21 hereof. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement any of the Rights Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, any successor Rights Agent may countersign such Rights Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. 27 (b) In case at any time the name of the Rights Agent shall be changed and at such time any of the Rights Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, the Rights Agent may countersign such Rights Certificates either in its prior name or in its changed name; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. Section 20. Duties of Rights Agent. The Rights Agent undertakes only the ---------------------- duties and obligations expressly imposed by this Agreement upon the following terms and conditions and no implied duties or obligations shall be read into this Agreement against the Rights Agent, by all of which the Company and the holders of Rights Certificates, by their acceptance thereof, shall be bound: (a) Before the Rights Agent acts or refrains from acting, it may consult with legal counsel of its choice (who may be legal counsel for the Company), and the advice or opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken, suffered or omitted by it in good faith and in accordance with such advice or opinion. (b) Whenever in the administration, exercise and performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter (including, without limitation, the identity of any Acquiring Person and the determination of current per share market price) be proved or established by the Company prior to taking, suffering or omitting any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Treasurer or the Secretary of the Company and delivered to the Rights Agent; and such certificate shall be full authorization and protection to the Rights Agent for any action taken, suffered or omitted in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder to the Company and any other Person only for its own gross negligence or willful misconduct. (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Rights Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Rights Agent shall not be under any liability or responsibility in respect of the legality, validity or enforceability of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the legality, validity or enforceability or the execution of any Rights Certificate (except its countersignature thereof and has actual knowledge of such change or adjustment); nor shall it be liable or responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Rights Certificate; nor shall it be responsible for any change in the 28 exercisability of the Rights (including the Rights becoming null and void pursuant to Section 11(a)(ii) hereof) or any adjustment in the terms of the Rights (including the manner, method or amount thereof) provided for in Section 3, 11, 13, 23 or 24, or the ascertaining of the existence of facts that would require any such change or adjustment (except with respect to the exercise of Rights evidenced by Rights Certificates after receipt of the certificate described in Section 12 hereof or has actual knowledge of such change or adjustment); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Units of Preferred Stock to be issued pursuant to this Agreement or any Rights Certificate or as to whether any Preferred Stock will, when issued, be validly authorized and issued, fully paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the administration, exercise and performance of its duties hereunder from any one of the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Secretary or the Treasurer of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be responsible or liable for any action taken, suffered or omitted by it in good faith in accordance with instructions of any such officer or for any delay in acting while waiting for those instructions. Any application by the Rights Agent for written instructions from the Company may, at the option of the Rights Agent, set forth in writing any action proposed to be taken or omitted by the Rights Agent under this Agreement and the date on and/or after which such action shall be taken or such omission shall be effective. The Rights Agent shall not be liable for any action taken by, or omission of, the Rights Agent in accordance with a proposal included in any such application on or after the date specified in such application (which date shall not be less than five (5) Business Days after the date any officer of the Company actually received such application, unless any such officer shall have consented in writing to an earlier date) unless, prior to taking any such action (or the effective date in the case of an omission), the Rights Agent shall have received written instructions in response to such application specifying the action to be taken or omitted. (h) The Rights Agent and any stockholder, affiliate, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other Person. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. 29 (j) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if the Rights Agent in good faith believes that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. (k) If, with respect to any Rights Certificate surrendered to the Rights Agent for exercise, transfer, split up, combination or exchange, the certification on the form of assignment or form of election to purchase, as the case may be, that the Rights evidenced by the Rights Certificate are not owned by an Acquiring Person, or an Affiliate or Associate thereof, has either not been completed or in any manner indicates any other response thereto, the Rights Agent shall not take any further action with respect to such requested exercise, transfer, split up, combination or exchange, without first consulting with the Company. Section 21. Change of Rights Agent. The Rights Agent or any successor Rights ---------------------- Agent may resign and be discharged from its duties under this Agreement upon 30 days' notice in writing mailed to the Company and to each transfer agent of the Common Stock or Preferred Stock (as to which the Rights Agent has received prior written notice) by registered or certified mail, and the Company shall mail notice thereof to the holders of the Rights Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Stock or Preferred Stock (as to which the Rights Agent has received prior written notice) by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Rights Certificate (who shall, with such notice, submit such holder's Rights Certificate for inspection by the Company), then the registered holder of any Rights Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be (i) a Person organized and doing business under the laws of the United States or of any state of the United States, in good standing, authorized under such laws to exercise stock transfer powers, and subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50 million or (ii) an affiliate of such Person. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Stock or Preferred Stock, and mail a notice thereof in writing to the registered holders of the Rights Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. 30 Section 22. Issuance of New Rights Certificates. Notwithstanding any of the ----------------------------------- provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Rights Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Rights Certificates made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of shares of Common Stock following the Distribution Date and prior to the Expiration Date, the Company (a) shall, with respect to shares of Common Stock so issued or sold pursuant to the exercise of stock options or under any employee benefit plan or arrangement or upon the exercise, conversion or exchange of securities of the Company currently outstanding or issued at any time in the future by the Company and (b) may, in any other case, if deemed necessary or appropriate by the Board of Directors of the Company, issue Rights Certificates representing the appropriate number of Rights in connection with such issuance or sale; provided, however, that (i) no such Rights Certificate -------- ------- shall be issued and this sentence shall be null and void ab initio if, and to the extent that, such issuance or this sentence would create a significant risk of or result in material adverse tax consequences to the Company or the Person to whom such Rights Certificate would be issued or would create a significant risk of or result in such options' or employee plans' or arrangements' failing to qualify for otherwise available special tax treatment and (ii) no such Rights Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof. Section 23. Redemption and Termination. -------------------------- (a) The Company may, at its option, upon approval by the Board of Directors, at any time prior to the earlier of (i) if the Acquiring Person beneficially owns or has ever beneficially owned more than 50% of the Common Stock then outstanding, the Shares Acquisition Date, (ii) if the Acquiring Person does not beneficially own and has never beneficially owned more than 50% of the Common Stock then outstanding, ten Business Days after the Shares Acquisition Date (or any later time up to 20 days after such Shares Acquisition Date as and if, by majority vote during such 20-day period, the Board so authorizes), or (iii) the Final Expiration Date redeem all but not less than all the then outstanding Rights at a redemption price of $0.001 per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price"), and the Company may, at its option, pay the Redemption Price either in cash, shares of Common Stock (based on the current per share market price thereof (as determined pursuant to Section 11(d) hereof) at the time of redemption), or any other form of consideration deemed appropriate by the Board of Directors of the Company. The redemption of the Rights by the Board of Directors of the Company may be made effective at such time on such basis and with such conditions as the Board of Directors of the Company in its sole discretion may establish. (b) Immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights pursuant to paragraph (a) of this Section 23, and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price. The Company shall promptly give public notice of any such redemption; provided, however, that the failure -------- ------- to give, or any defect in, any such notice shall not affect the validity of such redemption. 31 Within 10 days after such action of the Board of Directors of the Company ordering the redemption of the Rights, the Company shall give notice of such redemption to the Rights Agent and shall mail a notice of redemption to all the holders of the then outstanding Rights at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the Common Stock. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this Section 23 or in Section 24 hereof, and other than in connection with the purchase of shares of Common Stock prior to the Distribution Date. (c) Notwithstanding anything contained in this Agreement to the contrary, the Rights shall not be exercisable pursuant to Section 7(a) at any time when the Rights are redeemable hereunder. Section 24. Exchange. -------- (a) The Company, at its option, upon approval by the Company's Board of Directors, at any time after any Person becomes an Acquiring Person, may exchange all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to the provisions of Section 7(e) hereof) for Units of Preferred Stock at an exchange ratio equal to, subject to adjustment to reflect stock splits, stock dividends and similar transactions occurring after the date hereof, that number obtained by dividing the Purchase Price by the then current per share market price per Unit of Preferred Stock on the earlier of (i) the date on which any Person becomes an Acquiring Person and (ii) the date on which a tender or exchange offer by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan maintained by the Company or any of its Subsidiaries or any trustee or fiduciary with respect to such plan acting in such capacity) is first published or sent or given within the meaning of Rule 14d-4(a) of the Exchange Act Regulations or any successor rule, if upon consummation thereof such Person would be the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding (such exchange ratio being hereinafter referred to as the "Section 24(a) Exchange Ratio"). Notwithstanding the foregoing, the Company may not effect such exchange at any time after any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan maintained by the Company or any of its Subsidiaries, or any trustee or fiduciary with respect to such plan acting in such capacity), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or more of the shares of Common Stock then outstanding. (b) Immediately upon the action of the Board of Directors of the Company ordering the exchange of any Rights pursuant to subsection (a) of this Section 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of holders of such Rights shall be to receive that number of Units of Preferred Stock equal to the number of such Rights held by such holder multiplied by the Section 24(a) Exchange Ratio. The Company shall promptly give public notice of any such exchange (with prompt notice thereof to the Rights Agent); provided, however, -------- ------- that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company 32 promptly shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of Units of Preferred Stock for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other than Rights which have become void pursuant to the provisions of Section 7(e) hereof) held by each holder of Rights. (c) In the event that the number of shares of Preferred Stock which are authorized by the Company's Certificate of Incorporation but not outstanding or reserved for issuance for purposes other than upon exercise of the Rights are not sufficient to permit any exchange of Rights as contemplated in accordance with this Section 24, the Company shall take all such action as may be necessary to authorize additional shares of Preferred Stock for issuance upon exchange of the Rights or make adequate provision to substitute (1) cash, (2) Company Common Stock or other equity securities of the Company, (3) debt securities of the Company, (4) other assets, or (5) any combination of the foregoing, having an aggregate value equal to the Adjustment Spread, where such aggregate value has been determined by the Company's Board of Directors. (d) The Company shall not be required to issue fractions smaller than or to distribute certificates which evidence fractions smaller than one ten- thousandth of a share of Preferred Stock. In lieu thereof, the Company shall pay to the registered holders of the Rights Certificates with regard to which such fractional Units would otherwise be issuable an amount in cash equal to the same fraction of the current per share market price (as determined pursuant to Section 11(d)(i) hereof) of one Unit of Preferred Stock. Section 25. Notice of Certain Events. ------------------------ (a) In case the Company shall propose (i) to pay any dividend payable in stock of any class to the holders of its Preferred Stock or to make any other distribution to the holders of its Preferred Stock (other than a regular quarterly cash dividend), (ii) to offer to the holders of its Preferred Stock rights or warrants to subscribe for or to purchase any additional Units of Preferred Stock or shares of stock of any class or any other securities, rights or options, (iii) to effect any reclassification of its Preferred Stock (other than a reclassification involving only the subdivision of outstanding Preferred Stock), (iv) to effect any consolidation or merger into or with any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o)), or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one or more transactions, of 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the liquidation, dissolution or winding up of the Company, or (vi) to declare or pay any dividend on the Common Stock payable in shares of Common Stock or to effect a subdivision, combination or consolidation of the shares of Common Stock (by reclassification or otherwise than by payment of dividends in shares of Common Stock), then, in each such case, the Company shall give to each holder of a Rights Certificate and the Rights Agent, in accordance with Section 26 hereof, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, or distribution of rights or 33 warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the shares of Common Stock and/or shares of Preferred Stock, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least ten days prior to the record date for determining holders of the shares of Preferred Stock for purposes of such action, and in the case of any such other action, at least ten days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the shares of Common Stock and/or shares of Preferred Stock, whichever shall be the earlier. (b) In case any of the events set forth in Section 11(a)(ii) hereof shall occur, then the Company shall as soon as practicable thereafter give to each holder of a Rights Certificate, in accordance with Section 26 hereof, a notice of the occurrence of such event, which notice shall describe such event and the consequences of such event to holders of Rights under Section 11(a)(ii) hereof. In the event any Person becomes an Acquiring Person, the Company will promptly notify the Rights Agent thereof. Section 26. Notices. Notices or demands authorized by this Agreement to be ------- given or made by the Rights Agent or by the holder of any Rights Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: P-Com, Inc. 3175 S. Winchester Boulevard Campbell, California 95008 Attention: George P. Roberts Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Rights Certificate to or on the Rights Agent shall be sent by registered or certified mail and shall be deemed given upon receipt and addressed (until another address is filed in writing with the Company) as follows: BankBoston, N.A. c/o EquiServe 150 Royall Street Canton, MA 02021 Attention: Client Administration Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Rights Certificate shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. Section 27. Supplements and Amendments. Prior to the Distribution Date, the -------------------------- Company may supplement or amend this Agreement in any respect, without the approval of any holders of Rights, by action of its Board of Directors, and the Rights Agent shall, if the 34 Company so directs, execute such supplement or amendment. From and after the Distribution Date, the Company may from time to time supplement or amend this Agreement without the approval of any holders of Rights, by action of its Board of Directors, in order (i) to cure any ambiguity, (ii) to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, (iii) to shorten or lengthen any time period hereunder or (iv) to change or supplement the provision s hereunder in any manner which the Company may deem necessary or desirable and which shall not adversely affect the interests of the holders of Rights Certificates (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person), including, without limitation, to change the Purchase Price, the Redemption Price, any time periods herein specified, and any other term hereof, any such supplement or amendment to be evidenced by a writing signed by the Company and the Rights Agent; provided, -------- however, that from and after such time as any Person becomes an Acquiring - ------- Person, this Agreement shall not be amended in any manner which would adversely affect the interests of the holders of Rights and further provided that such supplement or amendment does not change or increase the Rights Agent's duties, liabilities or obligations. Upon receipt of a certificate from an appropriate officer of the Company that the proposed supplement or amendment is consistent with this Section 27 and, after such time as any Person has become an Acquiring Person, that the proposed supplement or amendment does not adversely affect the interests of the holders of Rights, the Rights Agent shall execute such supplement or amendment. Notwithstanding the foregoing, no supplement or amendment that would adversely affect, in any material manner, a Series B Purchaser (or transferee thereof as contemplated by any Securities Purchase Agreement) shall be made without the prior consent of such Series B Purchaser (or transferee thereof as contemplated by any Securities Purchase Agreement). Section 28. Successors. All the covenants and provisions of this Agreement by ---------- or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 29. Determinations and Actions by the Board of Directors. For all ---------------------------------------------------- purposes of this Agreement, any calculation of the number of shares of Common Stock outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding shares of Common Stock of which any Person is the Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the Exchange Act. The Board of Directors of the Company shall have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board of Directors, or the Company, or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (i) interpret the provisions of this Agreement and (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including a determination to redeem or not redeem the Rights or to amend the Agreement). All such actions, calculations, interpretations and determinations (including, for purposes of clause (y) below, all omissions with respect to the foregoing), which are done or made by the Board of Directors in good faith, shall (x) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Rights Certificates and all other parties and (y) not subject the Board of Directors to any liability to the holders of the Rights. The Rights Agent is entitled to always assume the Company's Board of Directors acted in good faith and shall be fully protected and incur no liability in reliance thereon. 35 Section 30. Benefits of This Agreement. Nothing in this Agreement shall be -------------------------- construed to give to any person or corporation other than the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, shares of Common Stock) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, shares of Common Stock). Section 31. Severability. If any term, provision, covenant or restriction of ------------ this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; provided, however, that notwithstanding anything in this Agreement to the contrary, if any such term, provision, covenant or restriction is held by such court or authority to be invalid, void or unenforceable and the Board of Directors of the Company determines in its good faith judgment that severing the invalid language from this Agreement would adversely affect the purpose or effect of this Agreement, the right of redemption set forth in Section 23 hereof shall be reinstated and shall not expire until the tenth Business Day following the date of such determination by the Board of Directors of the Company. Section 32. Governing Law. This Agreement and each Rights Certificate issued ------------- hereunder shall be deemed to be a contract made under the laws of the State of California and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State; provided, however, that all provisions regarding the -------- ------- rights, duties and obligations of the Rights Agent shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made to be performed entirely within such State. Section 33. Counterparts. This Agreement may be executed in any number of ------------ counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 34. Descriptive Headings. Descriptive headings of the several sections -------------------- of this Agreement are inserted or convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. 36 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of January 24, 2001. P-COM, INC. By: /s/ George P. Roberts ------------------------------------- Name: George P. Roberts Title: Chairman of the Board and CEO BANKBOSTON, N.A. as Rights Agent By: /s/ -------------------------------------- Name: Title: 37 Exhibit A --------- FORM of AMENDED AND RESTATED CERTIFICATE OF DESIGNATIONS of SERIES A JUNIOR PARTICIPATING PREFERRED STOCK of P-COM, INC. (Pursuant to Section 151 of the Delaware General Corporation Law) __________________________________ P-COM, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (hereinafter called the "Corporation"), hereby certifies that the following resolution was adopted by the Board of Directors of the Corporation as required by Section 151 of the Delaware General Corporation Law ("DGCL") at a meeting duly called and held on November 28, 1998; WHEREAS, at a meeting duly called on September 26, 1997, the Board of Directors of the Corporation (the "Board of Directors" or the "Board") adopted a resolution creating a series of preferred stock, par value $0.0001 per share, designated "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock"), and stated the number of shares and fixed the relative rights, references and limitations thereof in a Certificate of Designations filed with the Delaware Secretary of State on October 8, 1997; and WHEREAS, as of the date hereof, no shares of the Series A Preferred Stock have been issued; and WHEREAS, the Board of Directors now deems it advisable and in the best interest of the stockholders of the Corporation at this time to amend and restate the Certificate of Designations for the Series A Preferred Stock; NOW THEREFORE, pursuant to the authority vested granted to and vested in the Board of Directors of the Corporation in accordance with the provisions of the Certificate of Incorporation and Section 151(g) of the DGCL, the Board of Directors hereby decreases the A-1 number of shares of Series A Preferred Stock, and amends and restates the relative rights, preferences, and limitations of the Series A Preferred Stock as follows: Series A Junior Participating Preferred Stock: Section 1. Designation and Amount. The shares of such series shall be ---------------------- designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be Five Hundred Thousand (500,000). Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that -------- no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. Section 2. Dividends and Distributions. --------------------------- (A) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, each holder of a share of Series A Preferred Stock, in preference to the holders of shares of Common Stock, par value $.0001 per share (the "Common Stock"), of the Corporation, and of any other junior stock, shall be entitled to receive, when declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to, subject to the provision for adjustment hereinafter set forth, Ten Thousand (10,000) times the aggregate per share amount of all cash dividends, and Ten Thousand (10,000) times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of a share or fraction of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. A-2 (B) The Corporation shall declare a dividend or distribution on the shares of Series A Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided, however, -------- ------- that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Distribution Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $10,000 per share of Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on each outstanding share of Series A Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such share of Series A Participating Preferred Stock, unless the date of issue of such share is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such share shall begin to accrue from the date of issue of such share, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A Preferred Stock ------------- shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to Ten Thousand (10,000) votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in any other Certificate of Designations creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock A-3 and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. -------------------- (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the shares of Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation A-4 unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased ----------------- or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Certificate of Incorporation, or in any other Certificate of Designations creating a series of Preferred Stock or any similar stock or as otherwise required by law. Section 6. Liquidation, Dissolution or Winding Up. -------------------------------------- (A) Upon any liquidation, dissolution or winding up of the Corporation, subject to the rights of holders of securities ranking senior to the Series A Preferred Stock, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received Ten Thousand Dollars ($10,000) per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series A Liquidation Preference"), provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 10,000 times the aggregate amount to be distributed per share to holders of shares of Common Stock (the "Common Adjustment"), or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event (the "Adjustment Number"). (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, which rank on a parity with the Series A Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit A-5 payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (C) In the event the Corporation shall at any time after the date hereof (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the Corporation shall enter -------------------------- into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to Ten Thousand (10,000) times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of Series A Preferred Stock shall not be ------------- redeemable. Section 9. Rank. The Series A Preferred Stock shall rank, with respect to the ---- payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation's Preferred Stock. Section 10. Amendment. The Certificate of Incorporation of the Corporation --------- shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least a majority of the outstanding shares of Series A Preferred Stock, voting together as a single class. A-6 IN WITNESS WHEREOF, this Amended and Restated Certificate of Designations is executed on behalf of the Corporation by its Chief Financial Officer and Vice President of Finance and Administration and attested by its Secretary this 18th day of December, 1998. /s/ Mike Sophie ------------------------------- Name: Mike Sophie Title: Chief Financial Officer Attest: /s/ Warren T. Lazarow - ----------------------- Name: Warren T. Lazarow Title: Secretary A-7 Exhibit B --------- Form of Amended Rights Certificate Certificate No. R- ________ Rights NOT EXERCISABLE AFTER OCTOBER 1, 2007 OR EARLIER IF REDEMPTION OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT THE OPTION OF THE COMPANY AT $.001 PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE AMENDED AND RESTATED RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE AMENDMENT AND RESTATED AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE AMENDED AND RESTATED RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SUCH AMENDED AND RESTATED RIGHTS AGREEMENT.] Rights Certificate P-COM, INC. This certifies that __________________________________, or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Amended and Restated Rights Agreement, dated as of January 24, 2001 (the "Amended and Restated Rights Agreement"), between P-COM, INC., a Delaware corporation (the "Company"), and BANKBOSTON, N.A. (the "Rights Agent"), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Amended and Restated Rights Agreement) and prior to 5:00 P.M., California time, on October 1, 2007 at the office of the Rights Agent designated for such purpose, or at the office of its successor as Rights Agent, one ten-thousandth (a "Unit") of a fully paid non-assessable share of Series A Junior Participating Preferred Stock, par value $.0001 per share (the "Series A Preferred Stock") of the Company, at a purchase price of $125 per Unit of Series A Preferred Stock (the "Purchase Price"), upon presentation and B-1 surrender of this Rights Certificate with the Form of Election to Purchase duly executed. The number of Rights evidenced by this Rights Certificate (and the number of Units of Series A Preferred Stock which may be purchased upon exercise hereof) set forth above, and the Purchase Price set forth above, are the number and Purchase Price as of January 24, 2001 based on the Series A Preferred Stock as constituted at such date. As provided in the Amended and Restated Rights Agreement, the Purchase Price and the number of Units of Series A Preferred Stock which may be purchased upon the exercise of the Rights evidenced by this Rights Certificate are subject to modification and adjustment upon the happening of certain events. This Rights Certificate is subject to all of the terms, provisions and conditions of the Amended and Restated Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Amended and Restated Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Rights Certificates. Copies of the Amended and Restated Rights Agreement are on file at the principal executive offices of the Company. This Rights Certificate, with or without other Rights Certificates, upon surrender at the office of the Rights Agent designated for such purpose, may be exchanged for another Rights Certificate or Rights Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of Series A Preferred Stock as the Rights evidenced by the Rights Certificate or Rights Certificates surrendered shall have entitled such holder to purchase. If this Rights Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Rights Certificate or Rights Certificates for the number of whole Rights not exercised. Subject to the provisions of the Amended and Restated Rights Agreement, the Rights evidenced by this Certificate may be redeemed by the Company at a redemption price of $.001 per Right. No fractional shares of Series A Preferred Stock will be issued upon the exercise of any Rights or Rights evidenced hereby (other than fractions which are integral multiples of one ten-thousandth of a share of Series A Preferred Stock, which may, at the election of the Company, be evidenced by depositary receipts), but in lieu thereof a cash payment will be made, as provided in the Amended and Restated Rights Agreement. No holder of this Rights Certificate, as such, shall be entitled to vote or receive dividends or be deemed for any purpose the holder of Units of Series A Preferred Stock or of any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Amended and Restated Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in the Amended and Restated Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Rights or Rights evidenced by this Rights Certificate shall have been exercised as provided in the Amended and Restated Rights Agreement. B-2 This Rights Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. WITNESS the signature of the proper officers of the Company and its corporate seal. Dated as of ________________________, 200_. ATTEST P-COM, INC. By By ------------------------------- ------------------------------------ Name: Name: Title: Title: Countersigned: BANKBOSTON, N.A. as Rights Agent By: ----------------------------- Authorized Signatory B-3 Form of Reverse Side of Rights Certificate FORM OF ASSIGNMENT ------------------ (To be executed by the registered holder if such holder desires to transfer the Rights Certificate.) FOR VALUE RECEIVED ____________________________________ hereby sells, assigns and transfers unto (Please print name and address of transferee) this Rights Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _________________________________ Attorney, to transfer the within Rights Certificate on the books of the within-named Company, with full power of substitution. Dated: ____________________, 200_ Signature Signature Guaranteed: Signatures must be guaranteed by a participant in a Securities Transfer Association Inc. recognized signature guarantee medallion program. B-4 CERTIFICATE ----------- The undersigned hereby certifies that the Rights evidenced by this Rights Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Amended and Restated Rights Agreement). Signature NOTICE ------ The signature in the foregoing Form of Assignment must conform to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever. In the event the certification set forth above in the Form of Assignment is not completed, the Company and the Rights Agent will deem the beneficial owner of the Rights evidenced by this Rights Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as defined in the Amended and Restated Rights Agreement) and such Assignment will not be honored. B-5 FORM OF ELECTION TO PURCHASE ---------------------------- (To be executed if holder desires to exercise the Rights Certificate.) To P-COM, INC. The undersigned hereby irrevocably elects to exercise ______________ Rights represented by this Rights Certificate to purchase the Units of Series A Preferred Stock issuable upon the exercise of such Rights and requests that certificates for such Series A Preferred Stock be issued in the name of: Please insert social security __________________________________________________ or other identifying number (Please print name and address) If such number of Rights shall not be all the Rights evidenced by this Rights Certificate, a new Rights Certificate for the balance remaining of such Rights shall be registered in the name of and delivered to: Please insert social security _________________________________________________ or other identifying number (Please print name and address) Dated: ________________, 200_ Signature Signature Guaranteed: Signatures must be guaranteed by a participant in a Securities Transfer Association Inc. recognized signature guarantee medallion program. B-6 CERTIFICATE ----------- The undersigned hereby certifies that the Rights evidenced by this Rights Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Amended and Restated Rights Agreement). Signature NOTICE ------ The signature in the foregoing Form of Election to Purchase must conform to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever. In the event the certification set forth above in the Form of Election to Purchase is not completed, the Company and the Rights Agent will deem the beneficial owner of the Rights evidenced by this Rights Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as defined in the Amended and Restated Rights Agreement) and such Assignment will not be honored. B-7 Exhibit C --------- P-COM, INC. AMENDED AND RESTATED SUMMARY OF RIGHTS TO PURCHASE SHARES OF SERIES A PREFERRED STOCK On October 1, 1997, the Board of Directors of P-COM, Inc. (the "Company") declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of Common Stock (the "Common Stock"), par value $.0001 per share, of the Company. The dividend was payable on December 3, 1997 (the "Record Date") to the stockholders of record on that date. On various dates through and including January 24, 2001 (the "Amendment Date") the terms and conditions of the Rights were amended. Each Right now entitles the registered holder to purchase from the Company one ten-thousandth (1/10,000) of a share (a "Unit") of Series A Junior Participating Preferred Stock, par value $.0001 per share (the "Series A Preferred Stock"), of the Company at a price of $125 per Unit (the "Purchase Price"), subject to adjustment. The amended description and terms of the Rights are set forth in an Amended and Restated Rights Agreement dated as of January 24, 2001 (the "Amended and Restated Rights Agreement") between the Company and BankBoston, N.A. as Rights Agent (the "Rights Agent"). Until the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") have acquired beneficial ownership of 15% or more of the outstanding Common Stock or (ii) 10 business days (or such later date as may be determined by action of the Board of Directors prior to such time as any Person becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of such outstanding Common Stock (the earlier of such dates being called the "Distribution Date"), the Rights will be evidenced, with respect to any of the Common Stock certificates outstanding as of the Record Date, by such Common Stock certificate with a copy of this Amended and Restated Summary of Rights attached thereto. For purposes of determining whether they have become Acquiring Persons and for other purposes for which such figure is used in this Summary of Rights, in the case of the State of Wisconsin Investment Board and Firsthand Capital Management, Inc. and their respective affiliates, the relevant percentage is 20% rather than 15%. The Amended and Restated Rights Agreement provides that, until the Distribution Date, the Rights will be transferred with and only with the Common Stock. Until the Distribution Date (or earlier redemption or expiration of the Rights), new Common Stock certificates issued after the Amendment Date, upon transfer or new issuance of Common Stock will contain, or shall be deemed to contain, a notation incorporating the Amended and Restated Rights Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights), the surrender for transfer of any certificates for Common Stock, outstanding as of the Record Date, even without such notation or a copy of this Summary of Rights being attached thereto, will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. As soon as practicable following the Distribution Date, separate C-1 certificates evidencing the Rights ("Rights Certificates") will be mailed to holders of record of the Common Stock as of the Close of Business on the Distribution Date and such separate Rights Certificates alone will evidence the Rights. The Rights are not exercisable until the Distribution Date. The Rights will expire at the close of business on October 1, 2007 (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by the Company, in each case as described below. The Purchase Price payable, and the number of Units of Preferred Stock or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Stock, (ii) upon the grant to holders of the Units of Preferred Stock of certain rights or warrants to subscribe for or purchase Units of Preferred Stock at a price, or securities convertible into Units of Preferred Stock with a conversion price, less than the then current market price of the Units of Preferred Stock or (iii) upon the distribution to holders of the Units of Preferred Stock of evidences of indebtedness or assets (excluding regular periodic cash dividends paid out of earnings or retained earnings or dividends payable in Units of Preferred Stock) or of subscription rights or warrants (other than those referred to above). The number of outstanding Rights and the number of Units of Preferred Stock issuable upon exercise of each Right are also subject to adjustment in the event of a stock split of the Common Stock or a stock dividend on the Common Stock payable in Common Stock or subdivisions, consolidations or combinations of the Common Stock occurring, in any such case, prior to the Distribution Date. Units of Preferred Stock purchasable upon exercise of the Rights will not be redeemable. Each Unit of Preferred Stock will be entitled to a dividend equal to any dividend declared per share of Common Stock. In the event of liquidation, each Unit of Preferred Stock will be entitled to a payment equal to any payment made per share of Common Stock. Each Unit of Preferred Stock will have one vote, voting together with the Common Stock. Finally, in the event of any merger, consolidation or other transaction in which shares of Common Stock are exchanged, each Unit of Preferred Stock will be entitled to receive an amount equal to the amount received per share of Common Stock. These rights are protected by customary antidilution provisions. Because of the nature of the dividend, liquidation and voting rights, the value of each Unit of Preferred Stock purchasable upon exercise of the Rights should approximate the value of one share of Common Stock. In the event that, after the Rights become exercisable, the Company is acquired in a merger or other business combination transaction with an Acquiring Person or an affiliate thereof, or 50% or more of its consolidated assets or earning power are sold to an Acquiring Person or an affiliate thereof, proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon exercise thereof at the then current exercise price of the Rights, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Rights. C-2 In the event that any person or group of affiliated or associated persons becomes the beneficial owner of 15% or more of the outstanding shares of Common Stock proper provision shall be made so that each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise that number of shares of Common Stock or Units of Preferred Stock (or cash, other securities or property) having a market value of two times the exercise price of the Rights. At any time after the acquisition by a person or group of affiliated or associated persons of beneficial ownership of 15% or more of the outstanding shares of Common Stock and prior to the acquisition by such person or group of 50% or more of the outstanding Common Stock, the Board of Directors of the Company may exchange all or part of the Rights (other than Rights owned by such person or group which have become void) for Units of Preferred Stock at an exchange ratio (subject to adjustment) which shall equal, subject to adjustment to reflect stock splits, stock dividends and similar transactions occurring after the date hereof, that number obtained by dividing the Purchase Price by the then current per share market price per Unit of Preferred Stock on the earlier of (i) the date on which any Person becomes an Acquiring Person and (ii) the date on which a tender or exchange offer is announced by any Person, if upon consummation thereof such Person would be the Beneficial Owner of 15% or more of the shares of Company Common Stock then outstanding. With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional shares of Preferred Stock will be issued (other than fractions which are integral multiples of one ten-thousandth of a share of Preferred Stock, which may, at the election of the Company, be evidenced by depositary receipts) and, in lieu thereof, an adjustment in cash will be made based on the market price of the Units of Preferred Stock on the last trading day prior to the date of exercise. At any time within ten business days after a person or group of affiliated or associated persons acquire beneficial ownership of 15% or more of the outstanding Common Stock (unless the Company's Board of Directors extends such ten-day period), the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $.001 per Right (the "Redemption Price"). The redemption of the rights may be made effective at such time on such basis and with such conditions as the Board of Directors of the Company in its sole discretion may establish. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. The Rights are also redeemable under other circumstances as specified in the Amended and Restated Rights Agreement. The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights except that from and after a Distribution Date no such amendment may adversely affect the interests of the holders of the Rights. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. C-3 The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Company's Board of Directors, except pursuant to an offer conditioned on a substantial number of rights being acquired. The Rights should not interfere with any merger or other business combination approved by the Board of Directors because the Rights may be redeemed by the Company at the Redemption Price prior to the occurrence of a Distribution Date. A copy of the Amended and Restated Rights Agreement has been filed with the Securities and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A, as amended. A copy of the Amended and Restated Rights Agreement is available free of charge from the Company. This amended and restated summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Amended and Restated Rights Agreement, which is hereby incorporated herein by reference. C-4 EX-10.86 4 0004.txt SEVERANCE AGREEMENT DATED 12/07/00 Exhibit 10.86 December 7, 2000 Leighton J. Stephenson Vice President & Chief Financial Officer P-COM, Inc. 3175 South Winchester Boulevard Campbell, CA 95008 Dear Leighton: We are pleased to inform you that the Board of Directors of P-Com, Inc. (the "Company") has recently authorized and approved a special benefit program for you and the other key executives. The purpose of this letter agreement is to set forth the terms and conditions of your benefit package and to explain the limitations which will govern the overall value of your benefits. Your benefits will become payable in the event your employment terminates, either voluntarily or involuntarily for any reason, within twenty-four (24) months following certain changes in ownership or control of the Company. To understand the full scope of your benefits, you should familiarize yourself with the definitional provisions of Section I of this letter agreement. The benefits comprising your package are detailed in Section II. Section III addresses the treatment of any excise tax imposed in the event that any of your benefits constitute excess parachute payments for purposes of the Federal tax laws and Section IV deals with ancillary matters affecting your arrangement. SECTION I - DEFINITIONS For purposes of this letter agreement the following definitions will be in effect: 1.1 Average Compensation means the average of your W-2 wages from the Company for the five (5) calendar years completed immediately prior to the calendar year in which the Change of Control is effected. Any W-2 wages for a partial year of employment will be annualized, in accordance with the frequency which such wages are paid during such partial year, before inclusion in your Average Compensation. If any of your compensation from the Company during such five (5)-year or shorter period was not included in your W-2 wages for U.S. income tax purposes, either because you were not a U.S. citizen or resident or because such compensation was excludible from income as foreign earned income under Code Section 911 or as pre-tax income under Code Section 125 or 402(g), then such compensation will nevertheless be included in your Average Compensation to the same extent as if it were part of your W-2 wages. 1.2 Base Salary means the annual rate of base salary in effect for you immediately prior to the Change in Control or (if greater) the annual rate of base salary in effect at the time of your Termination. 1.3 Board means the Company's Board of Directors. 1.4 Change in Control means any of the following transactions effecting a change in ownership or control of the Company: (i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the State in which the Company is incorporated, (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company in complete liquidation or dissolution of the Company, (iii) any reverse merger in which the Company is the surviving entity but in which securities possessing fifty percent (50%) or more of the total combined voting power of the Company's outstanding securities are transferred to person or persons different from the persons holding those securities immediately prior to such merger, (iv) a Hostile Take-Over, or (v) the acquisition, directly or indirectly by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than thirty percent (30%) of the total combined voting power of the Company's outstanding securities pursuant to a tender or exchange offer made directly to the Company's stockholders. 1.5 Code means the Internal Revenue Code of 1986, as amended. 1.6 Common Stock means the Company's common stock. 1.7 Disability shall mean your inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. 1.8 Fair Market Value means, with respect to any shares of Common Stock subject to any of your Options, the closing selling price per share of Common Stock on the date in question, as reported on the Nasdaq National Market. If there is no reported sale of Common Stock on such date, then the closing selling price on the Nasdaq National Market on the next preceding day for which there does exist such quotation shall be determinative of Fair Market Value. 1.9 Health Care Coverage means the continued health care coverage to which you and your eligible dependents may become entitled under Section II of this letter agreement upon the Termination of your employment. 1.10 Hostile Take-Over means either of the following transactions: (i) the successful acquisition by a person or a group of related persons, other than the Company or a person controlling, controlled by or under common control with the Company, of beneficial ownership (as determined pursuant to the provisions of Rule 13d-3 under the 1934 Act) of securities possessing more than twenty-five percent (25%) of the total combined voting power of the Company's outstanding securities pursuant to a transaction or series of related transactions which the Board does not at any time recommend the Company's stockholders to accept or approve, or (ii) a change in the composition of the Board over a period of twenty- four (24) consecutive months or less such that a majority of the Board ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (I) have been members of the Board continuously since the beginning of such period or (II) have been elected or nominated for election as Board members during such period by at least a two- thirds majority of the Board members described in clause (I) who were still in office at the time such election or nomination was approved by the Board. 1.11 Involuntary Termination means the termination of your employment with the Company (or successor): (i) involuntarily upon your discharge or dismissal, (ii) voluntarily upon your resignation following (I) a change in your position with the Company (or successor) which reduces your duties or level of responsibility or otherwise changes the level of management to which you report, (II) a reduction in your level of compensation (including base salary, fringe benefits and target bonus under any incentive performance plan) or (III) a change in your place of employment which is more than fifty (50) miles from your place of employment prior to the Change in Control, provided and only if such change or reduction is effected without your written concurrence, or (iii) by reason of your death or Disability. 1.12 1934 Act shall mean the Securities Exchange Act of 1934, as amended. 1.13 Option means any option granted to you under the Plans which is outstanding at the time of the Change in Control or your subsequent Termination. Your Options will be divided into two (2) separate categories as follows: Acquisition-Accelerated Options: any outstanding Option (or installment -------------------------------- thereof) which automatically accelerates, pursuant to the acceleration provisions of the agreement evidencing that Option, upon a change in control or ownership of the Company under certain specified circumstances. Severance-Accelerated Options: any outstanding Option (or installment ------------------------------ thereof) which accelerates upon your Termination pursuant to Section II of this letter agreement. 1.14 Option Parachute Payment means, with respect to any Acquisition- Accelerated Option or any Severance-Accelerated Option, the portion of that Option deemed to be a parachute payment under Code Section 280G and the Treasury Regulations issued thereunder. The portion of such Option which is categorized as an Option Parachute Payment will be calculated in accordance with the valuation provisions established under Code Section 280G and the applicable Treasury Regulations and will include an appropriate dollar adjustment to reflect the lapse of your obligation to remain in the Company's employ as a condition to the vesting of the accelerated installment. In no event, however, will the Option Parachute Payment attributable to any Acquisition-Accelerated Option or Severance-Accelerated Option (or accelerated installment) exceed the spread (the excess of the Fair Market Value of the accelerated option shares over the option exercise price payable for those shares) existing at the time of acceleration. 1.15 Other Parachute Payment means any payment in the nature of compensation (other than the benefits to which you become entitled under Section II of this letter agreement) which are made to you in connection with the Change in Control and which accordingly qualify as parachute payments within the meaning of Code Section 280G(b)(2) and the Treasury Regulations issued thereunder. Your Other Parachute Payments will include (without limitation) the Present Value, measured as of the Change in Control, of the aggregate Option Parachute Payment attributable to your Acquisition-Accelerated Options (if any). 1.16 Plans means (i) the Company's 1992 Stock Option Plan, (ii) the Company's 1995 Stock Option/Stock Issuance Plan, as amended or restated from time to time, and (iii) any successor stock incentive plan subsequently implemented by the Company. 1.17 Present Value means the value, determined as of the date of the Change in Control, of any payment in the nature of compensation to which you become entitled in connection with the Change in Control or the subsequent Termination of your employment, including (without limitation) the Option Parachute Payment attributable to your Severance-Acceleration Options, your Severance Payments under Section II of this letter agreement and the Option Parachute Payment attributable to your Acquisition-Accelerated Options. The Present Value of each such payment will be determined in accordance with the provisions of Code Section 280G(d)(4), utilizing a discount rate equal to one hundred twenty percent (120%) of the applicable Federal rate in effect at the time of such determination, compounded semi-annually to the effective date of the Change in Control. 1.18 Severance Payments means the severance payments to which you may become entitled under Section II in the event of a Termination following a Change in Control, subject, however, to the dollar limitations of Section III. 1.19 Termination means a Voluntary Resignation or an Involuntary Termination of your employment. 1.20 Voluntary Resignation means a resignation by you other than one which constitutes an Involuntary Termination. SECTION II - BENEFITS Upon the Termination of your employment within twenty-four (24) months following a Change in Control, you will become entitled to receive the special benefits provided in this Section II. 2.1 Payments (a) Base Salary You will be entitled to a Severance Payment in an amount equal to two (2) times your Base Salary. (b) Bonus You will be entitled to an additional Severance Payment in an amount equal to the greater of the following bonus amounts: (a) two (2) times the full amount of the target bonus payable to you with respect to the fiscal year in which the Termination occurs or (b) two (2) times the full amount of the target bonus payable to you with respect to the fiscal year in which the Change in Control occurs. (c) Payment of Severance Payments In the absence of a Hostile Take-Over, your Severance Payments will be made at bi-weekly intervals following your Termination. However, these payments will immediately terminate in the event you fail to abide by the restrictive covenants set forth in Paragraph 2.4. Should your Termination occur in connection with a Hostile Take-Over, the Severance Payments will be made to you in a lump sum payment within thirty (30) days after your Termination and the provisions of Paragraph 2.4 will not apply. All Severance Payments will be subject to the Company's collection of all applicable federal and state income and employment withholding taxes. 2.2 Option Acceleration Each of your outstanding Options will (to the extent not then otherwise fully exercisable) automatically accelerate so that each such Option will become fully vested and immediately exercisable for the total number of shares of Common Stock at the time subject to that Option. Each such accelerated Option, together with all your other vested Options, will remain exercisable for fully- vested shares until the earlier of (i) the expiration date of the ten (10)-year option term or (ii) the end of two (2) full years measured from the date of your Termination or greater if set forth in the Option. 2.3 Additional Benefits (a) Health Care Coverage The Company will, at its expense, provide you and your eligible dependents with continued health care coverage under the Company's medical/dental/vision plan until the earlier of (i) twenty-four (24) months after the date of your Termination or (ii) the first date that you are covered under another employer's health benefit program which provides substantially the same level of benefits without exclusion for pre-existing medical conditions. The coverage so provided you and your eligible dependents will be in full and complete satisfaction of the continued health care coverage to which you or your eligible dependents would otherwise, at your own expense, be entitled under Code Section 4980B by reason of your termination of employment. (b) Unpaid Benefits You will receive an immediate lump sum payment of all unpaid vacation days which you have accrued through the date of your Termination. 2.4 Restrictive Covenants For the twenty-four (24)-month period following your Termination, you will not: (i) directly or indirectly, whether for your own account or as an employee, director, consultant or advisor, provide services to any business enterprise which is at the time in competition with any of the Company's then- existing or formally planned product lines and which is located geographically in an area where the Company maintains substantial business activities; (ii) directly or indirectly encourage or solicit any individual to leave the Company's employ for any reason or interfere in any other manner with the employment relationships at the time existing between the Company and its current or prospective employees; or (iii) induce or attempt to induce any customer, supplier, distributor, licensee or other business affiliate of the Company to cease doing business with the Company or in any way interfere with the existing business relationship between any such customer, supplier, distributor, licensee or other business affiliate and the Company. You acknowledge that monetary damages may not be sufficient to compensate the Company for any economic loss which may be incurred by reason of your breach of the foregoing restrictive covenants. Accordingly, in the event of any such breach, the Company will, in addition to the cessation of the severance benefits provided under this agreement and any remedies available to the Company at law, be entitled to obtain equitable relief in the form of an injunction precluding you from continuing to engage in such breach. None of the foregoing restrictive covenants will be applicable in the event your Termination occurs in connection with a Hostile Take-Over. SECTION III - PARACHUTE PAYMENTS 3.1 Parachute Tax Gross-Up Should the aggregate Present Value (measured as of the Change in Control) of (i) the benefits to which you become entitled under Section II at the time of your Termination (namely the Severance Payments, the Option Parachute Payment attributable to your Severance-Accelerated Options and your Health Care Continuation) and (ii) all Other Parachute Payments to which you are entitled, exceed 2.99 times your Actual Average Compensation (the "Parachute Limit") and thereby result in an excise tax liability under Section 4999 of the Code, then the Company will provide you with a full tax gross-up with respect to such excise tax liability. The amount of such tax gross-up will be determined pursuant to the following formula: X = Y 1 - (A + B + C), where X is the total dollar payment (the "Tax Gross-Up") required to be paid under this letter agreement, Y is the total excise tax (the "Parachute Tax") imposed on you pursuant to Section 4999 of the Code (or any successor provision) with respect to the Severance Payments, the Option Parachute Payment attributable to your Severance-Accelerated Options, your Health Care Continuation and all Other Parachute Payments, A is the excise tax rate in effect under Section 4999 of the Code for excess parachute payments, B is the highest combined marginal federal income and applicable state income tax rate in effect for you, after taking into account the deductibility of state income taxes against federal income taxes to the extent allowable, for the calendar year in which the Tax Gross-Up is paid, and, C is the applicable Hospital Insurance (Medicare) Tax Rate in effect for you for the calendar year in which the Tax Gross-Up is paid. 3.2 Initial Payment Within ninety (90) days after each determination is made by the Internal Revenue Service or your tax advisor that you have received a parachute payment for which you are liable for a Parachute Tax, you will identify the nature of such parachute payment to the Company and submit to the Company the calculation of the Parachute Tax attributable to that payment and the Tax Gross-Up to which you are entitled with respect to such tax liability. The Company will pay such Tax Gross-Up to you (net of all applicable withholding taxes, including any taxes required to be withheld under Section 4999 of the Code) within ten (10) business days after your submission of the calculation of such Parachute Tax and the resulting Tax Gross-Up, provided such calculations represent a reasonable interpretation of the applicable law and regulations. 3.3 Final Determination In the event that your actual Parachute Tax liability is determined by a Final Determination to be greater than the Parachute Tax liability taken into account for purposes of the Tax-Gross-Up paid pursuant to this Section, then within ninety (90) days following the Final Determination, you will submit to the Company a new Parachute Tax calculation based upon the Final Determination. Within ten (10) business days after receipt of such calculation, the Company will pay you the additional Tax Gross-Up attributable to such excess Parachute Tax liability. 3.4 Refund In the event that your actual Parachute Tax liability is determined by a Final Determination to be less than the Parachute Tax liability taken into account for purposes of the Tax Gross-Up paid to you pursuant to this Section, then you will refund to the Company, promptly upon receipt, any federal or state tax refund attributable to the Parachute Tax overpayment. 3.5 Definition For purposes of this section, a Final Determination means an audit adjustment by the Internal Revenue Service that is either agreed to by you or your estate or an adjustment that is sustained by a court of competent jurisdiction in a decision with which you concur or with respect to which the period within which an appeal may be filed has lapsed without a notice of appeal being filed. SECTION IV - MISCELLANEOUS PROVISIONS 4.1 Death In the event of your death, the Severance Payments (including the Parachute Payments) to which you become entitled under this letter agreement will be made, on the due date hereunder, to the executors or administrators of your estate. Should you die before you exercise all your outstanding Options, then such Options may be exercised, within twelve (12) months after your death, by the executors or administrators of your estate or by persons to whom the Options are transferred pursuant to your will or in accordance with the laws of inheritance. In no event, however, may any such Option be exercised after the specified expiration date of the option term. 4.2 General Creditor Status The payments and benefits to which you become entitled hereunder will be paid, when due, from the general assets of the Company, and no trust fund, escrow arrangement or other segregated account will be established as a funding vehicle for such payment. Accordingly, your right (or the right of the personal representatives or beneficiaries of your estate) to receive any payments or benefits hereunder will at all times be that of a general creditor of the Company and will have no priority over the claims of other general creditors. 4.3 Indemnification The indemnification provisions for officers and directors under the Company certificate of incorporation, indemnification agreement, Bylaws and insurance policies will (to the maximum extent permitted by law) be extended to you with respect to any and all matters, events or transactions occurring or effected during your employment with the Company. 4.4 Miscellaneous This letter agreement will be binding upon the Company, its successors and assigns (including, without limitation, the surviving entity in any Change in Control) and is to be construed and interpreted under the laws of the State of California. Except as set forth herein, this letter agreement supersedes all prior agreements between you and the Company relating to the subject of severance benefits payable upon a change in control or ownership of the Company, including the Plans and the agreements evidencing the Options, and may only be amended by written instrument signed by you and an authorized officer of the Company. If any provision of this letter agreement as applied to any party or to any circumstance should be adjudged by a court of competent jurisdiction to be void or unenforceable for any reason, the invalidity of that provision will in no way affect (to the maximum extent permissible by law) the application of such provision under circumstances different from those adjudicated by the court, the application of any other provision of this letter agreement, or the enforceability or invalidity of this letter agreement as a whole. Should any provision of this letter agreement become or be deemed invalid, illegal or unenforceable in any jurisdiction by reason of the scope, extent or duration of its coverage, then such provision will be deemed amended to the extent necessary to conform to applicable law so as to be valid and enforceable or, if such provision cannot be so amended without materially altering the intention of the parties, then such provision will be stricken and the remainder of this letter agreement will continue in full force and effect. 4.5 Attorney Fees In the event legal proceeding should be initiated by you or by the Company with respect to any controversy, claim or dispute relating to the interpretation or application of the provisions of this letter agreement or any benefits payable hereunder, the prevailing party in such proceedings will be entitled to recover from the losing party reasonable attorney fees and costs incurred in connection with such proceedings or in the enforcement or collection of any judgment or award rendered in such proceedings. For purposes of this provision, the prevailing party means the party determined by the court to have most nearly prevailed in the proceedings, even if that party does not prevail in all matters, and does not necessarily mean the party in those favor the judgment is actually rendered. If the Company materially breaches any of its obligations under this letter agreement and fails to cure that breach within thirty (30) days after written notice from you, you will then be entitled to reimbursement from the Company for any reasonable expenses and attorney fees you incur in having the Company subsequently cure that breach, whether or not legal proceedings are actually commenced in connection with such breach. 4.6 Independent Legal Counsel By executing this letter agreement, you acknowledge that (i) this agreement has been prepared by Brobeck, Phleger & Harrison LLP ("Brobeck") acting it its capacity as legal counsel to the Company and (ii) you have had an opportunity to seek advice from your own legal counsel with respect to the matters contained herein and such individual counsel is not Brobeck. Please indicate your acceptance of the foregoing provisions of this letter agreement by signing the enclosed copy of this agreement and returning it to the Company. P-COM, INC.: ACCEPTANCE: Signature: /s/ George P. Roberts I hereby agree to all the terms and ---------------------- provisions of the foregoing letter By: George P. Roberts agreement governing the special Title: Chairman & CEO benefits to which I may become entitled in connection with certain changes in control or ownership of P-Com, Inc. Signature: /s/ Leighton J. Stephenson -------------------------- Date: December 7, 2000 EX-10.87 5 0005.txt LOAN AND SECURITY AGREEMENT EXHIBIT 10.87 =============================================================================== LOAN AND SECURITY AGREEMENT by and between P-COM, INC. and P-COM NETWORK SERVICES, INC. as Borrowers and FOOTHILL CAPITAL CORPORATION as Lender Dated as of March 29, 2001 ================================================================================ TABLE OF CONTENTS -----------------
Page(s) ------- 1. DEFINITIONS AND CONSTRUCTION.................................................... 1 1.1 Definitions............................................................... 1 1.2 Accounting Terms.......................................................... 17 1.3 Code...................................................................... 17 1.4 Construction.............................................................. 17 1.5 Schedules and Exhibits.................................................... 17 2. LOAN AND TERMS OF PAYMENT....................................................... 17 2.1 Revolving Advances........................................................ 17 2.2 Intentionally Omitted..................................................... 18 2.3 Borrowing Procedures and Settlements...................................... 18 2.4 Payments.................................................................. 19 2.5 Overadvances.............................................................. 20 2.6 Interest: Rates, Payments, and Calculations.............................. 20 2.7 Collection of Accounts.................................................... 21 2.8 Crediting Payments; Application of Collections............................ 21 2.9 Designated Account........................................................ 22 2.10 Maintenance of Loan Account; Statements of Obligations.................... 22 2.11 Fees...................................................................... 22 2.12 LIBOR Options............................................................. 23 2.13 Capital Requirements...................................................... 25 2.14 Joint and Several Liability of Borrowers.................................. 26 3. CONDITIONS; TERM OF AGREEMENT................................................... 28 3.1 Conditions Precedent to the Initial Advance............................... 28 3.2 Conditions Precedent to all Advances...................................... 30 3.3 Conditions Subsequent..................................................... 30 3.4 Term...................................................................... 31 3.5 Effect of Termination..................................................... 31 3.6 Early Termination by Borrowers............................................ 32 3.7 Termination Upon Event of Default......................................... 32 4. CREATION OF SECURITY INTEREST................................................... 32 4.1 Grant of Security Interest................................................ 32 4.2 Negotiable Collateral..................................................... 32 4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral.... 32 4.4 Delivery of Additional Documentation Required............................. 33 4.5 Power of Attorney......................................................... 33 4.6 Right to Inspect.......................................................... 34 4.7 Control Agreements........................................................ 34 5. REPRESENTATIONS AND WARRANTIES.................................................. 34 5.1 No Encumbrances.......................................................... 34
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5.2 Eligible Accounts........................................................ 34 5.3 Inventory................................................................ 35 5.4 Equipment................................................................ 35 5.5 Location of Inventory and Equipment...................................... 35 5.6 Inventory Records........................................................ 35 5.7 Location of Chief Executive Office; FEIN................................. 35 5.8 Due Organization and Qualification; Subsidiaries......................... 36 5.9 Due Authorization; No Conflict........................................... 36 5.10 Litigation............................................................... 37 5.11 No Material Adverse Change............................................... 37 5.12 Solvency................................................................. 37 5.13 Employee Benefits........................................................ 37 5.14 Environmental Condition.................................................. 37 5.15 Brokerage Fees........................................................... 38 5.16 Intellectual Property.................................................... 38 5.17 Leases................................................................... 38 5.18 DDAs..................................................................... 38 5.19 Complete Disclosure...................................................... 38 5.20 Indebtedness............................................................. 38 6. AFFIRMATIVE COVENANTS........................................................... 38 6.1 Accounting System........................................................ 39 6.2 Collateral Reporting..................................................... 39 6.3 Financial Statements, Reports, Certificates.............................. 40 6.4 Intentionally Omitted.................................................... 42 6.5 Returns.................................................................. 42 6.6 Title to Equipment....................................................... 42 6.7 Maintenance of Equipment................................................. 42 6.8 Taxes.................................................................... 42 6.9 Insurance................................................................ 43 6.10 No Setoffs or Counterclaims.............................................. 44 6.11 Location of Inventory and Equipment...................................... 44 6.12 Compliance with Laws..................................................... 44 6.13 Intentionally Omitted.................................................... 44 6.14 Leases................................................................... 44 6.15 Litigation............................................................... 44 7. NEGATIVE COVENANTS.............................................................. 44 7.1 Indebtedness............................................................. 44 7.2 Liens.................................................................... 45 7.3 Restrictions on Fundamental Changes...................................... 45 7.4 Disposal of Assets....................................................... 45 7.5 Change Name.............................................................. 45 7.6 Guarantee................................................................ 45 7.7 Nature of Business....................................................... 45 7.8 Prepayments and Amendments............................................... 45 7.9 Change of Control........................................................ 46
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7.10 Consignments............................................................. 46 7.11 Distributions............................................................ 46 7.12 Accounting Methods....................................................... 46 7.13 Investments.............................................................. 46 7.14 Transactions with Affiliates............................................. 46 7.15 Suspension............................................................... 46 7.16 Intentionally Omitted.................................................... 46 7.17 Use of Proceeds.......................................................... 47 7.18 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees............................................................. 47 7.19 Securities Accounts...................................................... 47 7.20 Financial Covenants...................................................... 47 7.21 Capital Expenditures..................................................... 48 8. EVENTS OF DEFAULT............................................................... 48 9. FOOTHILL'S RIGHTS AND REMEDIES.................................................. 50 9.1 Rights and Remedies...................................................... 50 9.2 Remedies Cumulative...................................................... 52 10. TAXES AND EXPENSES.............................................................. 52 11. WAIVERS; INDEMNIFICATION........................................................ 53 11.1 Demand; Protest; etc..................................................... 53 11.2 Foothill's Liability for Collateral...................................... 53 11.3 Indemnification.......................................................... 53 12. NOTICES......................................................................... 53 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER...................................... 54 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS...................................... 55 14.1 Assignments and Participations........................................... 55 14.2 Successors............................................................... 57 15. AMENDMENTS; WAIVERS............................................................. 57 15.1 Amendments and Waivers................................................... 57 15.2 No Waivers; Cumulative Remedies.......................................... 57 16. GENERAL PROVISIONS.............................................................. 57 16.1 Effectiveness............................................................ 57 16.2 Destruction of Borrowers' Documents...................................... 57 16.3 Section Headings......................................................... 58 16.4 Interpretation........................................................... 58 16.5 Severability of Provisions............................................... 58 16.6 Withholding Taxes........................................................ 58 16.7 Counterparts; Telefacsimile Execution.................................... 58 16.8 Revival and Reinstatement of Obligations................................. 59
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16.9 Integration.............................................................. 59 16.10 P-Com as Agent for Borrowers............................................. 59
iv SCHEDULES AND EXHIBITS ---------------------- Schedule C-1 Investment Property Schedule E-1 Places of Business/Inventory Schedule P-1 Permitted Liens Schedule 5.8 Subsidiaries Schedule 5.10 Litigation Schedule 5.16 Intellectual Property Schedule 5.18 Bank Accounts (DDAs) Schedule 5.20 Indebtedness Schedule 6.11 Location of Inventory and Equipment Exhibit C-1 Form of Compliance Certificate Exhibit P-1 Closing Date Business Plan v LOAN AND SECURITY AGREEMENT --------------------------- THIS LOAN AND SECURITY AGREEMENT (this "Agreement"), is entered into as of March 29, 2001, between and among FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"), P-COM NETWORK SERVICES, INC., a Delaware corporation ("Network") and P-COM, INC., a Delaware corporation ("P-Com;" P-Com and Network are referred to hereinafter each individually as a "Borrower" and collectively, jointly and severally as the "Borrowers"). The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Account Debtor" means any Person who is or who may become obligated -------------- under, with respect to, or on account of, an Account. "Accounts" means all of Borrowers' now owned or hereafter acquired -------- right, title, and interest with respect to "accounts" (as that term is defined in the Code), and any and all supporting obligations in respect thereof. "Administrative Borrower" has the meaning set forth in Section ----------------------- ------- 16.10. - ----- "Advances" has the meaning set forth in Section 2.1(a). -------- -------------- "Affiliate" means, as applied to any Person, any other Person who --------- directly or indirectly controls, is controlled by, is under common control with or is a director or officer of such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to vote 25% or more of the securities having ordinary voting power for the election of directors or the direct or indirect power to direct the management and policies of a Person; provided, however, that in any event (a) each director (or comparable manager) of a Person shall be deemed to be an Affiliate of such Person; and (c) each partnership or joint venture in which a Person is a partner or joint venturer shall be deemed to be an Affiliate of such Person. "Agreement" has the meaning set forth in the preamble hereto. --------- "Applicable LIBOR Rate Margin" means (i) three and one quarter (3.25) ---------------------------- percentage points for the period commencing upon the Closing Date until the date Foothill receives the Borrowers' financial statements for the quarter ending March 31, 2001, and (ii) from and after the date Foothill receives Borrowers' financial statements for the quarter ending March 31, 2001, the Applicable LIBOR Rate Margin shall be calculated based upon a comparison of (y) Borrowers' actual EBITDA for the four quarters of fiscal year 2001 on a cumulative basis, and as of the end of each fiscal quarter commencing with the quarter ending 1 March 31, 2001, the EBITDA for the prior twelve month period then ended, to the (z) the projected EBITDA set forth in the Business Plan for such period as follows: Percentage of EBITDA to Plan Applicable Margin ---------------------------- ----------------- If actual EBITDA is more than 125% of the Plan EBITDA..................... 3.00 If actual EBITDA is less than 125%, but more than 75%, of Plan EBITDA........... 3.25 If actual EBITDA is less than 75% of Plan EBITDA.......................... 3.50 If Administrative Borrower fails to timely deliver the Projections required pursuant to Section 6.3(g) or if Foothill does not find the Projections delivered pursuant to that section to be satisfactory, then until satisfactory Projections are delivered to Foothill and accepted by Foothill, the Applicable LIBOR Rate Margin shall equal three and one half (3.50) percentage points. "Applicable Reference Rate Margin" means (i) three quarters (.75) of a -------------------------------- percentage point for the period commencing upon the Closing Date until the date Foothill receives the Borrowers' financial statements for the quarter ending March 31, 2001, and (ii) from and after the date Foothill receives Borrowers' financial statements for the quarter ending March 31, 2001, the Applicable Reference Rate Margin shall be calculated based upon a comparison of (y) Borrowers' actual EBITDA for the four quarters of fiscal year 2001 on a cumulative basis, and as of the end of each fiscal quarter commencing with the quarter ending March 31, 2001, the EBITDA for the prior twelve month period then ended, to the (z) projected EBITDA set forth in the Business Plan for such period as follows: Percentage of EBITDA to Plan Applicable Margin ---------------------------- ---------------- If actual EBITDA is more than 125% of the Plan EBITDA..................... 0.50 If actual EBITDA is less than 125%, but more than 75%, of Plan EBITDA........... 0.75 If actual EBITDA is less than 75% of Plan EBITDA.......................... 1.00 If Administrative Borrower fails to timely deliver the Projections required pursuant to Section 6.3(g) or if Foothill does not find the Projections delivered pursuant to that section to be satisfactory, then until satisfactory Projections are delivered to Foothill and accepted by Foothill, the Applicable Reference Rate Margin shall equal one (1.00) percentage point. "Authorized Person" means any officer or other employee of ----------------- Administrative Borrower. 2 "Availability" means, as of the date of determination, the result (so ------------ long as such result is a positive number) of (a) the lesser of the Borrowing Base and the Maximum Amount, less (b) the amount of outstanding Advances. ---- "Average Unused Portion of the Maximum Amount" means, as of any date -------------------------------------------- of determination, (a) the Maximum Amount, less (b) the average Daily Balance of ---- Advances that were outstanding during the immediately preceding month. "Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C. --------------- (S) 101 et seq.), as amended, and any successor statute. -- --- "Base LIBOR Rate" means the rate per annum, calculated by Foothill --------------- based on the USD British Banker's Association's determination (as quoted in various Publications, including Bloomberg), or if such quotation becomes unavailable for Foothill to obtain, then the Base LIBOR Rate shall be determined by Foothill in accordance with its customary procedures, and utilizing such electronic or other quotation sources as it considers appropriate (rounded upwards, if necessary, to the next 1/16%), on the basis of the rates at which Dollar deposits are offered to major banks in the London interbank market on or about 11:00 a.m. (California time) 2 Business Days prior to the commencement of the applicable Interest Period, for a term and in amounts comparable to the Interest Period and amount of the LIBOR Rate Loan requested by Administrative Borrower in accordance with this Agreement, which determination shall be conclusive in the absence of manifest error. "Benefit Plan" means a "defined benefit plan" (as defined in Section ------------ 3(35) of ERISA) for which any Borrower, any Subsidiary of any Borrower, or any ERISA Affiliate has been an "employer" (as defined in Section 3(5) of ERISA) within the past six years. "Board of Directors" means, individually, the board of directors of ------------------ each Borrower or any committee thereof duly authorized to act on behalf thereof. "Borrower" and "Borrowers" have the meanings set forth in the -------- --------- preamble to this Agreement. "Borrowers' Books" means all of each Borrower's books and records ---------------- including: ledgers; records indicating, summarizing, or evidencing any Borrower's properties or assets (including the Collateral) or liabilities; all information relating to any Borrower's business operations or financial condition; and all computer programs, disk or tape files, printouts, runs, or other computer prepared information. "Borrowing Base" has the meaning set forth in Section 2.1(a). -------------- -------------- "Business Day" means any day that is not a Saturday, Sunday, or other ------------ day on which national banks are authorized or required to close, except that, if a determination of a Business Day shall relate to a LIBOR Rate Loan, the term "Business Day" also shall exclude any day on which banks are closed for dealings in Dollar deposits in the London interbank market. 3 "Business Plan" means (y) for the period commencing on the Closing Date and concluding on the last day of the Borrowers' 2002 fiscal year, the Closing Date Business Plan, and (z) for the period commencing on the first day of Borrowers' 2003 fiscal year through the Maturity Date, the Projections delivered to and accepted by Foothill pursuant to Section 6.3(g). "Capital Lease" means a lease that is required to be capitalized for ------------- financial reporting purposes in accordance with GAAP. "Capitalized Lease Obligation" means any Indebtedness represented ---------------------------- by obligations under a Capital Lease. "Cash Equivalents" means (a) marketable direct obligations issued or ---------------- unconditionally guaranteed by the United States or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within 1 year from the date of acquisition thereof, (b) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof maturing within 1 year from the date of acquisition thereof and, at the time of acquisition, having the highest rating obtainable from either S&P or Moody's, (c) commercial paper maturing no more than 1 year from the date of acquisition thereof and, at the time of acquisition, having a rating of A-1 or P-1, or better, from S&P or Moody's, (d) certificates of deposit or bankers' acceptances maturing within 1 year from the date of acquisition thereof either (i) issued by any bank organized under the laws of the United States or any state thereof which bank has a rating of A or A2, or better, from S&P or Moody's, or (ii) certificates of deposit less than or equal to $100,000 in the aggregate issued by any other bank insured by the Federal Deposit Insurance Corporation, and (e) any investment property listed on Schedule C-1. ------------ "Change of Control" shall be deemed to have occurred at such time as ----------------- (a) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of 25%, or more, of the Stock of either Borrower having the right to vote for the election of members of the Board of Directors of such Borrower, or (b) any Borrower ceases to directly own and control 100% of the outstanding capital Stock of each of its Subsidiaries extant as of the Closing Date. "Closing Date" means March 30, 2001. ------------ "Closing Date Business Plan" means the set of Projections of Borrowers -------------------------- for the period following the Closing Date and continuing through the close of Borrower's 2002 fiscal year (on a quarter by quarter basis), in form and substance (including as to scope and underlying assumptions) satisfactory to Foothill and attached hereto as Exhibit P-1. ----------- "Code" means the California Uniform Commercial Code. ---- "Collateral" means all of each Borrower's now owned or hereafter ---------- acquired right, title, and interest in and to each of the following: 4 (a) the Accounts, (b) Borrowers' Books, (c) the Equipment, (d) the General Intangibles, (e) the Inventory, (f) the Investment Property, (g) the Negotiable Collateral, (h) intentionally omitted, (i) any money, or other assets of each Borrower that now or hereafter come into the possession, custody, or control of Foothill, and (j) the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the foregoing, and any and all Accounts, each Borrowers' Books, Equipment, General Intangibles, Inventory, Investment Property, Negotiable Collateral, Real Property, money, deposit accounts, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof. "Collateral Access Agreement" means a landlord waiver, mortgagee --------------------------- waiver, bailee letter, or acknowledgment agreement of any warehouseman, processor, lessor, consignee, or other Person in possession of, having a Lien upon, or having rights or interests in the Equipment or Inventory, in each case, in form and substance satisfactory to Foothill. "Collections" means all cash, checks, notes, instruments, and other ----------- items of payment (including, insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds) of Borrowers. "Compliance Certificate" means a certificate substantially in the form ---------------------- of Exhibit C-1 and delivered by the chief financial officer of the Administrative Borrower to Foothill. "Control Agreements" means those certain control agreements between ------------------ Foothill and Wells Fargo, Union Bank of California, Barclays Bank PLC and such other institutions where any Borrower maintains its investments. "Daily Balance" means, with respect to each day during the term of ------------- this Agreement, the amount of an Obligation owed at the end of such day. "DDA" means any checking or other demand deposit account --- maintained by any Borrower. 5 "Default" means an event, condition, or default that, with the giving ------- of notice, the passage of time, or both, would be an Event of Default. "Designated Account" means account number 6450148294 of Administrative ------------------ Borrower maintained with the Designated Account Bank, or such other deposit account of Administrative Borrower (located within the United States) which has been designated, in writing and from time to time, by Administrative Borrower to Foothill. "Designated Account Bank" means Union Bank of California, whose office ----------------------- is located at 99 Almaden Boulevard, 2nd Floor, San Jose, California 95113-1687, and whose ABA number is 122000496. "Dilution" means, as of the date of determination, a percentage, based -------- upon the experience of the immediately prior twelve months, which is the result of dividing the Dollar amount of (a) write-offs against Borrowers' accounts receivable reserve, discounts, advertising allowances, returns, promotions, credits, or other dilutive items with respect to the Accounts during such period, by (b) Borrowers' Collections with respect to Accounts during such period (excluding extraordinary items) plus the Dollar amount of clause (a). "Dilution Reserve" means, as of any date of determination, an amount ---------------- sufficient to reduce Foothill's advance rate against Eligible Accounts by one percentage point for each percentage point by which Dilution is in excess of 5%. "Disbursement Letter" means an instructional letter executed and ------------------- delivered by Administrative Borrower to Foothill regarding the extensions of credit to be made on the Closing Date, the form and substance of which shall be satisfactory to Foothill. "Dollars or $" means United States dollars. ------------ "Due Diligence Letter" means the due diligence letter sent by -------------------- Foothill's counsel to Administrative Borrower, together with Administrative Borrower's completed responses to the inquiries set forth therein, the form and substance of such responses to be satisfactory to Foothill. "Early Termination Premium" has the meaning set forth in Section ------------------------- ------- 3.6. - --- "EBITDA" means P-Com's and its Subsidiaries consolidated net earnings ------ (or loss), minus extraordinary gains, plus interest expense, income taxes, and depreciation and amortization, as determined in accordance with GAAP, for the four quarters of fiscal year 2001 on a cumulative basis, and as of the end of each fiscal quarter commencing with the quarter ending March 31, 2002, for the prior twelve month period then ended. "Eligible Accounts" means those Accounts created by any of the ----------------- Borrowers in the ordinary course of business, that arise out of such Borrower's sale of goods or rendition of services, that strictly comply with each and all of the representations and warranties respecting Accounts made by such Borrower to Foothill in the Loan Documents, and that are not excluded as ineligible by virtue of one or more of the criteria set forth below; provided, however, that -------- ------- such criteria may be fixed and revised from time to time by Foothill in Foothill's Permitted 6 Discretion to address the results of any audit performed by Foothill from time to time after the Closing Date. In determining the amount to be so included, Accounts shall be valued net of customer deposits, reserves for unapplied cash, unissued credits and discounts. Eligible Accounts shall not include the following: (a) Accounts that the Account Debtor has failed to pay within 90 days of original invoice date or Accounts with selling terms of more than 75 days; provided, however, that Accounts with Winstar Equipment Corp. may have - -------- ------- selling terms of up to 90 days; (b) Accounts owed by an Account Debtor or its Affiliates where 50% or more of all Accounts owed by that Account Debtor (or its Affiliates) are deemed ineligible under clause (a) above; (c) Accounts with respect to which the Account Debtor is an employee, Affiliate, or agent of any Borrower; (d) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the Account Debtor may be conditional; (e) Accounts that are not payable in Dollars or pounds sterling with respect to foreign accounts which have been approved by Foothill, or with respect to which the Account Debtor: (i) does not maintain its chief executive office in the United States, or (ii) is not organized under the laws of the United States or any State thereof, or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof, unless (y) the Account is supported by an irrevocable letter of credit satisfactory to Foothill (as to form, substance, and issuer or domestic confirming bank) that has been delivered to Foothill and is directly drawable by Foothill, or (z) the Account is covered by credit insurance in form and amount, and by an insurer, satisfactory to Foothill; provided that the foregoing shall not exclude Accounts with respect to which the Account Debtor is either Siemens AG, Bosch Telekom Gmbh, Orange Personal Communications Services, Ltd., Marconi, Mercury One-2-One Personal Communications, or any other Account Debtor that Foothill, in its sole and absolute discretion, approves for the purposes of this subpart (e) (with the understanding that Foothill may withdraw its approval of any such additional Account Debtor at any time, in Foothill's sole and absolute discretion); (f) Accounts with respect to which the Account Debtor is either (i) the United States or any department, agency, or instrumentality of the United States (exclusive, however, of Accounts with respect to which the applicable Borrower has complied, to the satisfaction of Foothill, with the Assignment of Claims Act, 31 U.S.C. (S) 3727), or (ii) any State of the United States (exclusive, however, of Accounts owed by any State that does not have a statutory counterpart to the Assignment of Claims Act); (g) Accounts which are turnkey Accounts, buffer Accounts, trial Accounts or with respect to which the Account Debtor is a creditor of any Borrower, has or has asserted a right of setoff, has disputed its liability, or has made any claim with respect to the 7 Account unless Foothill has received a no-offset letter from the Account Debtor that is satisfactory to Foothill; (h) that portion of the Eligible Accounts of a single Account Debtor, as measured in Dollars, that exceed 10% of all Eligible Accounts; provided, however, (i) that an Eligible Account supported by an irrevocable letter of credit satisfactory to Foothill (as to form, substance, and issuer or domestic confirming bank) that has been delivered to Foothill and is directly drawable by Foothill shall not be subject to the foregoing 10% limitation; and (ii) that with respect to Winstar Equipment, Orange Personal Communications Services, Ltd., Lucent Technologies, Mercury One-2-One or Siemens AG (the "Qualified Account Debtors"), that portion of the Eligible Accounts of any of single Qualified Account Debtor that exceed 60% of all Eligible Accounts and that portion of the Eligible Accounts of the three Qualified Account Debtors with the most (as measured in Dollars) outstanding Accounts that exceed 85% of all Eligible Accounts; provided further, however, that Foothill may from time to time elect to add or exclude Account Debtors as Qualified Account Debtors based upon financial criteria selected by Foothill. (i) Accounts with respect to which the Account Debtor is subject to an Insolvency Proceeding, is not Solvent or has gone out of business or its about to go out of business; (j) Accounts the collection of which Foothill, in its Permitted Discretion, believes to be doubtful by reason of the Account Debtor's financial condition; (k) Accounts with respect to which the goods giving rise to such Account have not been shipped and billed to the Account Debtor, the services giving rise to such Account have not been performed and accepted by the Account Debtor, or the Account otherwise does not represent a final sale; (l) Accounts with respect to which the Account Debtor is located in the states of New Jersey, Minnesota, or West Virginia (or any other state that requires a creditor to file a Business Activity Report or similar document in order to bring suit or otherwise enforce its remedies against such Account Debtor in the courts or through any judicial process of such state), unless the applicable Borrower has qualified to do business in New Jersey, Minnesota, West Virginia, or such other states, or has filed a Notice of Business Activities Report with the applicable division of taxation, the department of revenue, or with such other state offices, as appropriate, for the then-current year, or is exempt from such filing requirement; (m) Accounts that are not subject to a valid and perfected first priority Lien in favor of Foothill; and (n) Accounts that represent progress payments or other advance billings that are due prior to the completion of performance by the applicable Borrower of the subject contract for goods or services unless such Accounts have been approved by Foothill in writing, which approval shall not be unreasonably withheld. "Equipment" means all of Borrowers' now owned and hereafter acquired --------- right, title and interest with respect to equipment, machinery, machine tools, motors, furniture, 8 furnishings, fixtures, vehicles (including motor vehicles and trailers), tools, parts, goods (other than consumer goods, farm products, or Inventory), wherever located, including, all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, 29 ----- U.S.C. (S)(S) 1000 et seq., amendments thereto, successor statutes, and regulations or guidance promulgated thereunder. "ERISA Affiliate" means (a) any Person subject to ERISA whose --------------- employees are treated as employed by the same employer as the employees of any Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of any Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which any Borrower is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any Person subject to ERISA that is a party to an arrangement with any Borrower and whose employees are aggregated with the employees of any Borrower under IRC Section 414(o). "Event of Default" has the meaning set forth in Section 8. ---------------- --------- "Excess Availability" means the amount, as of the date of ------------------- determination, equal to Borrowers' unrestricted cash and Cash Equivalents plus Borrowers' unused Availability minus the aggregate amount of Borrowers' accounts ----- payable aged in excess of Borrowers' historical levels with respect thereto and all book overdrafts in excess of their historical practices with respect thereto, in each case determined by Foothill in its Permitted Discretion. "FEIN" means Federal Employer Identification Number. ---- "Foothill" has the meaning set forth in the preamble to this -------- Agreement. "Foothill Account" has the meaning set forth in Section 2.7. ---------------- ----------- "Foothill Expenses" means all (a) costs or expenses (including taxes, ----------------- and insurance premiums) required to be paid by a Borrower under any of the Loan Documents that are paid or incurred by Foothill, (b) fees or charges paid or incurred by Foothill in connection with Foothill's transactions with Borrowers, including, fees or charges for photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien, litigation, and UCC searches and including searches with the patent and trademark office, the copyright office, or the department of motor vehicles), filing, recording, publication, appraisal (including periodic Collateral appraisals or business valuations to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement, real estate surveys, real estate title policies and endorsements, and environmental audits, (c) costs and expenses incurred by Foothill in the disbursement of funds to or for the account of Borrowers (by wire transfer or otherwise), (d) charges paid or incurred by Foothill resulting from the dishonor of checks, (e) reasonable costs and expenses paid or incurred by Foothill to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, 9 handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated, (f) audit fees and expenses of Lender related to audit examinations of the Borrowers' Books to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement, (g) reasonable costs and expenses of third party claims or any other suit paid or incurred by Foothill in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or Foothill's relationship with any Borrower or any guarantor of the Obligations, (h) Lender's reasonable fees and expenses (including attorneys fees) incurred in advising, structuring, drafting, reviewing, administering, or amending the Loan Documents, and (i) Foothill's reasonable fees and expenses (including attorneys fees) incurred in terminating, enforcing (including attorneys fees and expenses incurred in connection with a "workout," a "restructuring," or an Insolvency Proceeding concerning any Borrower or in exercising rights or remedies under the Loan Documents), or defending the Loan Documents, irrespective of whether suit is brought, or in taking any Remedial Action concerning the Collateral. "Funding Date" means the date on which an Advance is made. ------------ "Funding Losses" has the meaning set forth in Section -------------- ------- 2.12(b)(ii). "GAAP" means generally accepted accounting principles as in effect ---- from time to time in the United States, consistently applied. "General Intangibles" means all of Borrowers' present and future ------------------- general intangibles and other personal property (including payment intangibles, contract rights, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, computer programs, software information contained on computer disks or tapes, literature, reports, catalogs, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims), other than goods, Accounts, and Negotiable Collateral. "Governing Documents" means the certificate or articles of ------------------- incorporation, by-laws, or other organizational or governing documents of any Person. "Governmental Authority" means any nation or government, any state or ---------------------- other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Hazardous Materials" means (a) substances that are defined or listed ------------------- in, or otherwise classified pursuant to, any applicable laws or regulations as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, 10 or production of crude oil, natural gas, or geothermal resources, (c) any flammable substances or explosives or any radioactive materials, and (d) asbestos in any form or electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million. "Indebtedness" means: (a) all obligations of a Borrower for borrowed ------------ money, (b) all obligations of a Borrower evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations of a Borrower in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all obligations of a Borrower under Capital Leases, (d) all obligations or liabilities of others secured by a Lien on any property or asset of a Borrower, irrespective of whether such obligation or liability is assumed, (e) all obligations of a Borrower for the deferred purchase price of assets (other than trade debt incurred in the ordinary course of a Borrower's business and repayable in accordance with customary trade practices), and (f) any obligation of a Borrower guaranteeing or intended to guarantee (whether guaranteed, endorsed, co-made, discounted, or sold with recourse to a Borrower) any indebtedness, lease, dividend, letter of credit, or other obligation of any other Person. "Indemnified Liabilities" has the meaning set forth in Section ----------------------- 11.3. "Indemnified Person" has the meaning set forth in Section 11.3. ------------------ "Insolvency Proceeding" means any proceeding commenced by or against --------------------- any Person under any provision of the Bankruptcy Code or under any other state of federal bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief. "Intangible Assets" means, with respect to any Person, that portion of ----------------- the book value of all of such Person's assets that would be treated as intangibles under GAAP. "Intercompany Subordination Agreement" means a subordination agreement ------------------------------------ executed and delivered by Borrowers and Foothill, the form and substance of which is satisfactory to Foothill. "Intellectual Property Security Agreement" means an Intellectual ---------------------------------------- Property Security Agreement, of even date herewith, between a Borrower and Foothill. "Interest Period" means, with respect to each LIBOR Rate Loan, a --------------- period commencing on the date of the making of such LIBOR Rate Loan and ending 1, 2, or 3 months thereafter; provided, however, that (a) if any Interest Period -------- ------- would end on a day that is not a Business Day, such Interest Period shall be extended (subject to clauses (c)-(e) below) to the next succeeding Business Day, (b) interest shall accrue at the applicable rate based upon the LIBOR Rate from and including the first day of each Interest Period to, but excluding, the day on which any Interest Period expires, (c) any Interest Period that would end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day, (d) with respect to an Interest Period that begins on the last Business Day of a 11 calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period), the Interest Period shall end on the last Business Day of the calendar month that is 1, 2, or 3 months after the date on which the Interest Period began, as applicable, and (e) Borrowers (or Administrative Borrower on behalf thereof) may not elect an Interest Period which will end after the Maturity Date. "Inventory" means all present and future inventory in which any --------- Borrower has any interest, including goods held for sale or lease or to be furnished under a contract of service and all of such Borrower's present and future raw materials, work in process, finished goods, and packing and shipping materials, wherever located. "Investment Property" means all of Borrowers' now owned or hereafter ------------------- acquired right, title, and interest with respect to "investment property" as that term is defined in the Code, and any and all supporting obligations in respect thereof. "IRC" means the Internal Revenue Code of 1986, as amended, and --- the regulations thereunder. "LIBOR Deadline" has the meaning set forth in Section 2.12(b)(i). -------------- ------------------ "LIBOR Notice" means a written notice in the form of Exhibit L-1. ------------ ------------ "LIBOR Rate" means, for each Interest Period for each LIBOR Rate Loan, ---------- the rate per annum determined by Foothill (rounded upwards, if necessary, to the next 1/16%) by dividing (a) the Base LIBOR Rate for such Interest Period, by (b) 100% minus the Reserve Percentage. The LIBOR Rate shall be adjusted on and as of the effective day of any change in the Reserve Percentage. "LIBOR Rate Loan" means each portion of an Advance that bears interest --------------- at a rate determined by reference to the LIBOR Rate. "Lien" means any interest in property securing an obligation owed to, ---- or a claim by, any Person other than the owner of the property, whether such interest shall be based on the common law, statute, or contract, whether such interest shall be recorded or perfected, and whether such interest shall be contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances, including the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, adverse claim or charge, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes and also including reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting Real Property. "Loan Account" has the meaning set forth in Section 2.10. ------------ ------------ "Loan Documents" means this Agreement, the Disbursement Letter, the -------------- Lockbox Agreements, the Intellectual Property Security Agreement, the Stock Pledge, the Control Agreements, the Intercompany Subordination Agreement, any note or notes executed by 12 any Borrower and payable to Foothill, and any other agreement entered into, now or in the future, in connection with this Agreement. "Lockbox Account" shall mean a depositary account established --------------- pursuant to one of the Lockbox Agreements. "Lockbox Agreements" means those certain Lockbox Operating Procedural ------------------ Agreements and those certain Depository Account Agreements, in form and substance satisfactory to Foothill, each of which is among Borrower, Foothill, and one of the Lockbox Banks. "Lockbox Banks" means Union Bank of California or such other banks as ------------- may be agreed to by Foothill and Borrower from time to time. "Material Adverse Change" means (a) a material adverse change in the ----------------------- business, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise) of Borrowers, taken as a whole, (b) the material impairment of any Borrower's ability to perform its obligations under the Loan Documents to which it is a party or of Foothill to enforce the Obligations or realize upon the Collateral, (c) a material adverse effect on the value of the Collateral or the amount that Foothill would be likely to receive (after giving consideration to delays in payment and costs of enforcement) in the liquidation of such Collateral, or (d) a material impairment of enforceability or the priority of Foothill's Liens with respect to the Collateral. "Maturity Date" means March 30, 2004. ------------- "Maximum Amount" means $25,000,000. -------------- "Negotiable Collateral" means all of any Borrower's present and future --------------------- letters of credit, notes, drafts, instruments, Investment Property, securities (including the shares of stock of Subsidiaries of such Borrower), documents, personal property leases (wherein such Borrower is the lessor), chattel paper (including electronic chattel paper and tangible chattel paper) and any and all supporting obligations in respect thereof. "Obligations" means all loans, Advances, debts, principal, interest ----------- (including any interest that, but for the provisions of the Bankruptcy Code, would have accrued), premiums (including Early Termination Premiums), liabilities (including all amounts charged to Borrowers' Loan Account pursuant hereto), obligations, fees, charges, costs, or Foothill Expenses (including any fees or expenses that, but for the provisions of the Bankruptcy Code, would have accrued), lease payments, guaranties, covenants, and duties owing by any Borrower to Foothill of any kind and description (whether pursuant to or evidenced by the Loan Documents or pursuant to any other agreement between Foothill and such Borrower, and irrespective of whether for the payment of money), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including any debt, liability, or obligation owing from such Borrower to others that Foothill may have obtained by assignment or otherwise, and further including all interest not paid when due and all Foothill Expenses that such Borrower is required to pay or reimburse by the Loan Documents, by law, or otherwise. 13 "Overadvance" has the meaning set forth in Section 2.5. ----------- ----------- "Participant" means any Person that acquires a participation interest ----------- in Foothill's rights under the Loan Documents. "Permitted Discretion" means a determination made in good faith and in -------------------- the exercise of reasonable (from the perspective of a secured asset-based lender) business judgment. "Permitted Liens" means (a) Liens held by Foothill, (b) Liens for --------------- unpaid taxes that either (i) are not yet delinquent or (ii) do not constitute an Event of Default hereunder and are the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the interests of lessors under operating leases ------------ and purchase money security interests and Liens of lessors under Capital Leases to the extent that the acquisition or lease of the underlying asset is permitted under Section 7.21 and so long as the Lien only attaches to the asset purchased ------------ or acquired and only secures the purchase price of the asset, (e) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of Borrowers' business and not in connection with the borrowing of money, and which Liens either (i) are for sums not yet due and payable, or (ii) are the subject of Permitted Protests, (f) Liens arising from deposits made in connection with obtaining worker's compensation or other unemployment insurance, (g) Liens or deposits to secure performance of bids, tenders, or leases (to the extent permitted under this Agreement), incurred in the ordinary course of Borrowers' business and not in connection with the borrowing of money, (h) Liens arising by reason of security for surety or appeal bonds in the ordinary course of Borrowers' business, (i) Liens of or resulting from any judgment or award that is not an Event of Default hereunder, (j) with respect to any Real Property, easements, rights of way, zoning and similar covenants and restrictions, and similar encumbrances that customarily exist on properties of Persons engaged in similar activities and similarly situated and that in any event do not materially interfere with or impair the use or operation of the Collateral by Borrowers or the value of Foothill's Lien thereon or therein, or materially interfere with the ordinary conduct of Borrowers' business. "Permitted Protest" means the right of the applicable Borrower to ----------------- protest any Lien (other than any such Lien that secures the Obligations), tax (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on the books of such Borrower in an amount that is reasonably satisfactory to Foothill, (b) any such protest is instituted and diligently prosecuted by such Borrower in good faith, and (c) Foothill is satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity, or priority of any of the Liens of Foothill in and to the Collateral. "Person" means and includes natural persons, corporations, limited ------ liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. 14 "Plan" means any employee benefit plan, program, or arrangement ---- maintained or contributed to by any Borrower or with respect to which it may incur liability. "Projections" means Borrowers' forecasted (a) balance sheets, (b) ----------- profit and loss statements, and (c) cash flow statements, all prepared on a consistent basis with Borrowers' historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. "Real Property" means any estates or interests in real property ------------- now owned or hereafter acquired by any Borrower. "Record" means information that is inscribed on a tangible medium, or ------ which is stored in an electronic or other medium and is retrievable in perceivable form. "Reference Rate" means the rate of interest announced within Wells -------------- Fargo, at its principal office in San Francisco as its "prime rate", with the understanding that the "prime rate" is one of Wells Fargo's base rates (not necessarily the lowest of such rates) and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto and is evidenced by the recording thereof after its announcement in such internal publication or publications as Wells Fargo may designate. "Reference Rate Loan" means any Advance (or portion thereof) made or ------------------- outstanding hereunder during any period when interest on such Advance (or portion thereof) is payable based on the Reference Rate. "Remedial Action" means all actions taken to (a) clean up, remove, --------------- remediate, contain, treat, monitor, assess, evaluate, or in any way address Hazardous Materials in the indoor or outdoor environment, (b) prevent or minimize a release or threatened release of Hazardous Materials so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (c) perform any pre-remedial studies, investigations, or post-remedial operation and maintenance activities, or (d) conduct any other actions authorized by 42 USC (S) 9601. "Reportable Event" means any of the events described in Section ---------------- 4043(c) of ERISA or the regulations thereunder other than a Reportable Event as to which the provision of 30 days notice to the PBGC is waived under applicable regulations. "Requirement of Law" means, as to any Person: (a) (i) all statutes ------------------ and regulations and (ii) court orders and injunctions, arbitrators' decisions, and/or similar rulings, in each instance by any Governmental Authority or arbitrator applicable to or binding upon such Person or any of such Person's property or to which such Person or any of such Person's property is subject; and (b) that Person's organizational documents, by-laws and/or other instruments which deal with corporate or similar governance, as applicable. "Reserve Percentage" for any Interest Period means, as of the date of ------------------ determination thereof, the maximum percentage (rounded upward, if necessary to the nearest 1/100th of 1%), as determined by Foothill (or its Affiliates) in accordance with its (or their) usual procedures (which determination shall be conclusive in the absence of manifest error), that is in 15 effect on such date as prescribed by the Board of Governors of the Federal Reserve System for determining the reserve requirements (including supplemental, marginal, and emergency reserve requirements) with respect to eurocurrency funding (currently referred to as "eurocurrency liabilities") having a term equal to such Interest Period by Foothill or its Affiliates. "Retiree Health Plan" means an "employee welfare benefit plan" within ------------------- the meaning of Section 3(1) of ERISA that provides benefits to individuals after termination of their employment, other than as required by Section 601 of ERISA. "Securities Account" means a "securities account" as that term is ------------------ defined in the Code. "Senior Convertible Notes" means P-Com's 4-1/4% Convertible ------------------------ Subordinated Notes due November 1, 2002. "Solvent" means, with respect to any Person on a particular date, that ------- on such date (a) at fair valuations, all of the properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (b) the present fair salable value of the properties and assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its properties and assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts beyond such Person's ability to pay as such debts mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount that, in light of all the facts and circumstances existing at such time, represents the amount that reasonably can be expected to become an actual or matured liability. "Stock Pledge" means that certain Security Agreement - Stock Pledge, ------------ of even date herewith, between P-Com and Foothill. "Subsidiary" of a Person means a corporation, partnership, limited ---------- liability company, or other entity in which that Person directly or indirectly owns or controls the shares of stock or other ownership interests having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company, or other entity. "Subsidiary Security Agreements" means those certain security ------------------------------ agreements, of even date herewith, between various Subsidiaries of P-Com and Foothill. "Tangible Net Worth" means, as of any date of determination, the ------------------ difference of (a) P-Com's total stockholder's equity, minus (b) the sum of: (i) ----- all Intangible Assets of P-Com, (ii) all of P-Com's prepaid expenses (other than prepaid insurance premiums), and (iii) all amounts due to P-Com from its Affiliates. 16 "Taxes" has the meaning set forth in Section 16.6. ----- ------------ "Voidable Transfer" has the meaning set forth in Section 16.8. ----------------- ------------ "Wells Fargo" means Wells Fargo Bank, National Association, a ----------- national banking association. 1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. Whenever the term "Borrowers" or the term "P-Com" is used in respect of a financial covenant or a related definition, it shall be understood to mean Borrowers or P-Com on a consolidated basis unless the context clearly requires otherwise. 1.3 Code. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein. 1.4 Construction. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document, as the case may be. Section, subsection, clause, schedule, and exhibit references are to this Agreement unless otherwise specified. Any reference in this Agreement or in the Loan Documents to any agreement, instrument or document shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders and supplements, thereto and thereof, as applicable (subject to any restrictions on such alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements set forth herein). Any reference herein to any Person shall be construed to include such Person's successors and assigns. Any requirement of a writing contained herein or in the other Loan Documents shall be satisfied by the transmission of a Record and any Record transmitted shall constitute a representation and warranty as to the accuracy and completeness of the information contained therein. 1.5 Schedules and Exhibits. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference. 2. LOAN AND TERMS OF PAYMENT. 2.1 Revolving Advances. (a) Subject to the terms and conditions of this Agreement, Foothill agrees to make advances ("Advances") to Borrowers in an amount outstanding not to exceed at any one time the lesser of (i) the Maximum Amount, or (ii) the Borrowing Base. For purposes of this Agreement, "Borrowing Base", as of any date of determination, shall mean an amount equal to the lesser of the result of: 17 (1) the amount equal to (i) 85% of the value of the outstanding Eligible Accounts, less, (ii) the amount, if any, of the ---- Dilution Reserve, less (iii) the aggregate amount of reserves, if any, ---- established by Foothill under Sections 2.1 and 10. ------------ ------ (2) an amount equal to 50% of Borrowers' aggregate Collections with respect to Accounts for the immediately preceding 90 day period. (b) Anything to the contrary in this Section 2.1 notwithstanding, ----------- Foothill shall have the right to establish reserves in such amounts, and with respect to such matters, as Foothill in its Permitted Discretion shall deem necessary or appropriate, against the Borrowing Base, including reserves with respect to (i) the amount determined from time to time by Foothill to adjust the amount of the foreign Eligible Accounts as a result of Borrowers using an exchange rate for foreign currencies which is not accurate, and (ii) sums that Borrowers are required to pay (such as taxes, assessments, insurance premiums, or, in the case of leased assets, rents or other amounts payable under such leases) and has failed to pay under any Section of this Agreement or any other Loan Document, and (iii) amounts owing by Borrowers to any Person to the extent secured by a Lien on, or trust over, any of the Collateral (other than any existing Permitted Lien set forth on Schedule P-1 which is specifically ------------ identified thereon as entitled to have priority over the Foothill's Liens), which Lien or trust, in the Permitted Discretion of Foothill likely would have a priority superior to the Foothill's Liens (such as Liens or trusts in favor of landlords, warehousemen, carriers, mechanics, materialmen, laborers, or suppliers, or Liens or trusts for ad valorem, excise, sales, or other taxes where given priority under applicable law) in and to such item of the Collateral. In addition to the foregoing, in the event Foothill agrees at some future date to make advances against Borrower's Inventory, which agreement shall be in Foothill's sole and absolute discretion, Foothill shall have the right to have the Inventory reappraised by a qualified appraisal company selected by Foothill from time to time after the Closing Date. (c) Amounts borrowed pursuant to this Section 2.1 may be repaid ----------- and, subject to the terms and conditions of this Agreement, reborrowed at any time during the term of this Agreement. 2.2 Intentionally Omitted 2.3 Borrowing Procedures and Settlements. (a) Procedures for Borrowing. Each request for an Advance shall be made by a written request by an Authorized Person delivered to Foothill (which notice must be received by Foothill no later than 10:00 a.m. (California time) on the Business Day that is the requested Funding Date specifying (i) the amount of such Advance, and (ii) the requested Funding Date, which shall be a Business Day. At Foothill's election, in lieu of delivering the above-described request in writing, any Authorized Person may give Foothill telephonic notice of such request by the required time, with such telephonic notice to be confirmed in writing within 24 hours of the giving of such notice. 18 (b) Making of Advances. If Foothill has received a timely request for an Advance in accordance with the provisions hereof, and subject to the satisfaction of the applicable terms and conditions set forth herein, Foothill shall make the proceeds of such Advance available to Borrowers on the applicable Funding Date by transferring available funds equal to such proceeds to the Designated Account. 2.4 Payments. (a) Payments by Borrowers. Except as otherwise expressly provided herein, all payments by Borrowers shall be made to Foothill's Account and shall be made in immediately available funds, no later than 11:00 a.m. (California time) on the date specified herein. Any payment received by Foothill later than 11:00 a.m. (California time), shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue until such following Business Day. (b) Application, and Reversal of Payments. (i) All payments shall be remitted to Lender and all such payments (other than continuing and which relate to the payment of principal or interest of specific Obligations or which relate to the payment of specific fees), and all proceeds of Accounts or other Collateral received by Lender, shall be applied as follows: A. first, to pay any Foothill Expenses then due to Foothill ----- under the Loan Documents, until paid in full, B. second, to pay any fees then due to Foothill under the ------ Loan Documents until paid in full, C. third, ratably to pay interest due in respect of ----- Advances until paid in full, D. fourth, to pay the principal of all Advances until paid ------ in full, E. fifth, to pay any other Obligations until paid in full, ----- and F. sixth, to Borrowers (to be wired to the Designated ----- Account) or such other Person entitled thereto under applicable law. (ii) In each instance, so long as no Default or Event of Default has occurred and is continuing, Section 2.4(b) shall not be deemed to apply to -------------- any payment by Borrowers specified by Borrowers to be for the payment of specific Obligations then due and payable (or prepayable) under any provision of this Agreement. (iii) For purposes of the foregoing, "paid in full" means payment of all amounts owing under the Loan Documents according to the terms thereof, 19 including loan fees, service fees, professional fees, interest (and specifically including interest accrued after the commencement of any Insolvency Proceeding), default interest, interest on interest, and expense reimbursements, whether or not the same would be or is allowed or disallowed in whole or in part in any Insolvency Proceeding. (iv) In the event of a direct conflict between the priority provisions of this Section 2.4 and other provisions contained in any other Loan ----------- Document, it is the intention of the parties hereto that such priority provisions in such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of this Section 2.4 shall control and govern. ----------- 2.5 Overadvances. If, at any time or for any reason, the amount of Obligations owed by Borrowers to Foothill pursuant to Section 2.1 is greater ----------- than either the Dollar or percentage limitations set forth in Section 2.1 (an ----------- "Overadvance"), Borrowers immediately shall pay to Foothill, in cash, the amount of such excess, which amount shall be used by Lender to reduce the Obligations in accordance with the priorities set forth in Section 2.4(b). In addition, ------------- Borrowers hereby promise to pay the Obligations (including principal, interest, fees, costs, and expenses) in Dollars in full to Lender as and when due and payable under the terms of this Agreement and the other Loan Documents. 2.6 Interest: Rates, Payments, and Calculations. (a) Interest Rate. Except as provided in Section 2.6(c), below, all -------------- Advances shall bear interest on the Daily Balance as follows: (i) each LIBOR Rate Loan shall bear interest at a per annum rate equal to the LIBOR Rate plus the Applicable LIBOR Rate Margin; and (ii) all other Obligations shall bear interest at a per annum rate equal to the Reference Rate plus the Applicable Reference Rate Margin. (b) Intentionally Omitted. (c) Default Rate. Upon the occurrence and during the continuation of an Event of Default, all Obligations shall bear interest on the Daily Balance at a per annum rate equal to three percentage points above the rate set forth in Section 2.6(a)(ii). - ------------------ (d) Intentionally Omitted. (e) Payments. Interest in respect of Reference Rate Loans payable hereunder shall be due and payable, in arrears, on the first day of each month during the term hereof. Interest in respect of each LIBOR Rate Loan shall be due and payable, in arrears, on the last day of the applicable Interest Period. Borrowers hereby authorize Foothill, at its option, without prior notice to Borrowers, to charge such interest, all Foothill Expenses (as and when incurred), the fees and charges provided for in Section 2.11 (as and when ------------ accrued or incurred), and all other payments as and when due and payable under any Loan Document to Borrowers' Loan Account, which amounts shall thereafter constitute Advances hereunder and shall accrue 20 interest at the rate then applicable to Advances that are Reference Rate Loans hereunder. Any interest not paid when due shall be compounded by being charged to Borrowers' Loan Account and shall thereafter constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances that are Reference Rate Loans hereunder. (f) Computation. The Reference Rate as of the date of this Agreement is 8.00% per annum. In the event the Reference Rate is changed from time to time hereafter, the applicable rate of interest hereunder automatically and immediately shall be increased or decreased by an amount equal to such change in the Reference Rate. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a 360 day year for the actual number of days elapsed. (g) Intent to Limit Charges to Maximum Lawful Rate. In no event shall the interest rate or rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction shall, in a final determination, deem applicable. Borrowers and Foothill, in executing and delivering this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; provided, however, that, anything contained herein to the -------- ------- contrary notwithstanding, if said rate or rates of interest or manner of payment exceeds the maximum allowable under applicable law, then, ipso facto as of the ---- ----- date of this Agreement, Borrowers are and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrowers in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess. 2.7 Collection of Accounts. Borrowers shall at all times maintain Lockbox Agreements and, immediately after the Closing Date, shall instruct all Account Debtors with respect to the Accounts, General Intangibles, and Negotiable Collateral of Borrower to remit all Collections in respect thereof in accordance --- with such Lockbox Agreements. Borrowers, Foothill, and the Lockbox Banks shall enter into the Lockbox Agreements, which among other things shall provide for the opening of a Lockbox Account for the deposit of Collections at a Lockbox Bank. Borrowers agree that all Collections and other amounts received by any Borrower from any Account Debtor or any other source immediately upon receipt shall be deposited into a Lockbox Account. No Lockbox Agreement or arrangement contemplated thereby shall be modified by Borrowers without the prior written consent of Foothill. Upon the terms and subject to the conditions set forth in the Lockbox Agreements, Foothill shall the right at any time to require that all amounts received in a Lockbox Account be wired each Business Day into an account (the "Foothill Account") maintained by Foothill at a depositary selected by Foothill. In the absence of such a requirement, amounts received in a Lockbox Account may be transferred to an account of either Borrower. 2.8 Crediting Payments; Application of Collections. The receipt of any Collections by Foothill (whether from transfers to Foothill by the Lockbox Banks pursuant to the Lockbox Agreements or otherwise) immediately shall be applied provisionally to reduce the Obligations outstanding under Section 2.1, but shall ----------- not be considered a payment on account unless such Collection item is a wire transfer of immediately available federal funds and is made to the Foothill Account or unless and until such Collection item is honored when presented for payment. From and after the Closing Date, Foothill shall be entitled to charge Borrowers for one 21 Business Day of "clearance" or "float" at the rate set forth in Section ------- 2.6(a)(ii) or Section 2.6(c), as applicable, on all Collections (regardless of - ---------- -------------- whether forwarded by the Lockbox Banks to Foothill, whether provisionally applied to reduce the Obligations under Section 2.1, or otherwise). This across- ----------- the-board one Business Day clearance or float charge on all Collections is acknowledged by the parties to constitute an integral aspect of the pricing of Foothill's financing of Borrowers, and shall apply irrespective of the characterization of whether receipts are owned by any Borrower or Foothill, and whether or not there are any outstanding Advances, the effect of such clearance or float charge being the equivalent of charging one Business Day of interest on such Collections. Should any Collection item not be honored when presented for payment, then Borrowers shall be deemed not to have made such payment, and interest shall be recalculated accordingly. Anything to the contrary contained herein notwithstanding, any Collection item shall be deemed received by Foothill only if it is received into the Foothill Account on a Business Day on or before 11:00 a.m. California time. If any Collection item is received into the Foothill Account on a non-Business Day or after 11:00 a.m. California time on a Business Day, it shall be deemed to have been received by Foothill as of the opening of business on the immediately following Business Day. 2.9 Designated Account. Foothill is authorized to make the Advances under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Person, or without instructions if pursuant to Section 2.6(e). Administrative Borrower agrees to establish and maintain the - -------------- Designated Account with the Designated Account Bank for the purpose of receiving the proceeds of the Advances requested by Borrowers and made by Foothill hereunder. Unless otherwise agreed by Foothill and Administrative Borrower, any Advance requested by Borrowers and made by Foothill hereunder shall be made to the Designated Account. 2.10 Maintenance of Loan Account; Statements of Obligations. Foothill shall maintain an account on its books in the name of Borrowers (the "Loan Account") on which Borrowers will be charged with all Advances made by Foothill to Borrowers or for Borrowers' account, and with all other payment Obligations hereunder or under the other Loan Documents, including, accrued interest and Foothill Expenses. In accordance with Section 2.8, the Loan Account will be ----------- credited with all payments received by Foothill from Borrowers or for Borrowers' account, including all amounts received in the Foothill Account from any Lockbox Bank. Foothill shall render statements regarding the Loan Account to Administrative Borrower, including principal, interest, fees, and including an itemization of all charges and expenses constituting Foothill Expenses owing, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrowers and Foothill unless, within 30 days after receipt thereof by Administrative Borrower, Administrative Borrower shall deliver to Foothill written objection thereto describing the error or errors contained in any such statements. 2.11 Fees. Borrowers shall pay to Foothill the following fees: (a) Closing Fee. On the Closing Date, a closing fee of $225,000; 22 (b) Unused Line Fee. On the first day of each month during the term of this Agreement, an unused line fee in an amount equal to 0.375% per annum times the Average Unused Portion of the Maximum Amount; (c) Intentionally Omitted; (d) Financial Examination, Documentation, and Appraisal Fees. Foothill's customary fee of $750 per day per examiner, plus out-of-pocket expenses for each financial analysis and examination (i.e., audits) of Borrowers performed by personnel employed by Foothill; provided, however, that so long as no Event of Default has occurred and is continuing, Borrower shall only be obligated to pay for the first four audits conducted by or on behalf of Foothill during each calendar year (any audit conducted while an Event of Default exists shall not be counted when calculating the number of audits conducted during a calendar year); Foothill's out-of-pocket expenses for each appraisal of the Collateral; and, the actual charges paid or incurred by Foothill if it elects to employ the services of one or more third Persons to perform such financial analyses and examinations (i.e., audits) of Borrowers or to appraise the Collateral; and, a one time fee of $5,000, plus out of pocket expenses, for setting up electronic reporting by Borrowers; and (e) Servicing Fee. For each month, a monthly servicing fee in the amount of $3,000 payable in arrears. 2.12 LIBOR Options (a) Interest and Interest Payment Dates. In lieu of having interest charged at the rate based upon the Reference Rate, Borrowers shall have the option (the "LIBOR Option") to have interest on all or a portion of the Advances ------------ be charged at the LIBOR Rate plus the Applicable LIBOR Rate Margin. Interest on LIBOR Rate Loans shall be payable on the earliest of (i) the last day of the Interest Period applicable thereto, (ii) the occurrence of an Event of Default in consequence of which Foothill has elected to accelerate the maturity of the Obligations, or (iii) termination of this Agreement pursuant to the terms hereof. On the last day of each applicable Interest Period, unless Administrative Borrower properly has exercised the LIBOR Option with respect thereto, the interest rate applicable to such LIBOR Rate Loan automatically shall convert to the rate of interest then applicable to Reference Rate Loans of the same type hereunder. At any time that an Event of Default has occurred and is continuing, Borrowers no longer shall have the option to request that Advances bear interest at the LIBOR Rate and Foothill shall have the right to convert the interest rate on all outstanding LIBOR Rate Loans to the rate then applicable to Reference Rate Loans hereunder. (b) LIBOR Election. (i) Administrative Borrower may, at any time and from time to time, so long as no Event of Default has occurred and is continuing, elect to exercise the LIBOR Option by notifying Foothill prior to 11:00 a.m. (California time) at least 3 Business Days prior to the commencement of the proposed Interest Period (the "LIBOR Deadline"). Notice of Administrative Borrower's -------------- election of the LIBOR Option for a permitted portion of the Advances and an Interest Period pursuant to this Section shall be made by delivery to Foothill of 23 a LIBOR Notice received by Foothill before the LIBOR Deadline, or by telephonic notice received by Foothill before the LIBOR Deadline (to be confirmed by delivery to Foothill of a LIBOR Notice received by Foothill prior to 5:00 p.m. (California time) on the same day. (ii) Each LIBOR Notice shall be irrevocable and binding on Borrowers. In connection with each LIBOR Rate Loan, each Borrower shall indemnify, defend, and hold Foothill harmless against any loss, cost, or expense incurred by Foothill as a result of (a) the payment of any principal of any LIBOR Rate Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any LIBOR Rate Loan other than on the last day of the Interest Period applicable thereto, or (c) the failure to borrow, convert, continue or prepay any LIBOR Rate Loan on the date specified in any LIBOR Notice delivered pursuant hereto (such losses, costs, and expenses, collectively, "Funding Losses"). Funding -------------- Losses shall, with respect to Foothill, be deemed to equal the amount determined by Foothill to be the excess, if any, of (i) the amount of interest that would have accrued on the principal amount of such LIBOR Rate Loan had such event not occurred, at the LIBOR Rate that would have been applicable thereto, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period therefor), minus (ii) the amount of interest that would accrue on such principal amount for such period at the interest rate which Foothill would be offered were it to be offered, at the commencement of such period, Dollar deposits of a comparable amount and period in the London interbank market. A certificate of Foothill delivered to Administrative Borrower setting forth any amount or amounts that Foothill is entitled to receive pursuant to this Section shall be conclusive absent manifest error. (iii) Borrowers shall have not more than 5 LIBOR Rate Loans in effect at any given time. Borrowers only may exercise the LIBOR Option for LIBOR Rate Loans of at least $1,000,000 and integral multiples of $500,000 in excess thereof. (c) Prepayments. Borrowers may prepay LIBOR Rate Loans at any time; provided, however, that in the event that LIBOR Rate Loans are prepaid on any - -------- ------- date that is not the last day of the Interest Period applicable thereto, including as a result of any automatic prepayment through the required application by Foothill of proceeds of Collections in accordance with Section ------- 2.4(b) or for any other reason, including early termination of the term of this - ------ Agreement or acceleration of the Obligations pursuant to the terms hereof, each Borrower shall indemnify, defend, and hold Foothill and their Participants harmless against any and all Funding Losses in accordance with clause (b) above. (d) Special Provisions Applicable to LIBOR Rate. (i) The LIBOR Rate may be adjusted by Foothill on a prospective basis to take into account any additional or increased costs to Foothill of maintaining or obtaining any eurodollar deposits or increased costs due to changes in applicable law occurring subsequent to the commencement of the then applicable Interest Period, including changes in tax laws (except changes of general applicability in corporate income tax laws) and changes in the reserve requirements imposed by the Board of Governors of the Federal Reserve System (or any successor), excluding the Reserve Percentage, which additional or increased 24 costs would increase the cost of funding loans bearing interest at the LIBOR Rate. In any such event, Foothill shall give Administrative Borrower notice of such a determination and adjustment and, upon its receipt of the notice from Foothill, Administrative Borrower may, by notice to Foothill (y) require Foothill to furnish to Administrative Borrower a statement setting forth the basis for adjusting such LIBOR Rate and the method for determining the amount of such adjustment, or (z) repay the LIBOR Rate Loans with respect to which such adjustment is made (together with any amounts due under clause (b)(ii) above). (ii) In the event that any change in market conditions or any law, regulation, treaty, or directive, or any change therein or in the interpretation of application thereof, shall at any time after the date hereof, in the reasonable opinion of Foothill, make it unlawful or impractical for Foothill to fund or maintain LIBOR Advances or to continue such funding or maintaining, or to determine or charge interest rates at the LIBOR Rate, Foothill shall give notice of such changed circumstances to Administrative Borrower and (y) in the case of any LIBOR Rate Loans that are outstanding, the date specified in Foothill's notice shall be deemed to be the last day of the Interest Period of such LIBOR Rate Loans, and interest upon the LIBOR Rate Loans of Foothill thereafter shall accrue interest at the rate then applicable to Reference Rate Loans, and (z) Borrowers shall not be entitled to elect the LIBOR Option until Foothill determines that it would no longer be unlawful or impractical to do so. (e) No Requirement of Matched Funding. Anything to the contrary contained herein notwithstanding, neither Foothill, nor any of its Participants, is required actually to acquire eurodollar deposits to fund or otherwise match fund any Obligation as to which interest accrues at the LIBOR Rate. The provisions of this Section shall apply as if Foothill or its Participants had match funded any Obligation as to which interest is accruing at the LIBOR Rate by acquiring eurodollar deposits for each Interest Period in the amount of the LIBOR Rate Loans. 2.13 Capital Requirements. If, after the date hereof, Foothill determines that (i) the adoption of or change in any law, rule, regulation or guideline regarding capital requirements for banks or bank holding companies, or any change in the interpretation or application thereof by any Governmental Authority charged with the administration thereof, or (ii) compliance by Foothill or its parent bank holding company with any guideline, request or directive of any such entity regarding capital adequacy (whether or not having the force of law), the effect of reducing the return on Foothill's or such holding company's capital as a consequence of Foothill's obligations hereunder to a level below that which Foothill or such holding company could have achieved but for such adoption, change, or compliance (taking into consideration Foothill's or such holding company's then existing policies with respect to capital adequacy and assuming the full utilization of such entity's capital) by any amount deemed by Foothill to be material, then Foothill may notify Administrative Borrower thereof. Following receipt of such notice, Borrowers agree to pay Foothill on demand the amount of such reduction of return of capital as and when such reduction is determined, payable within 90 days after presentation by Foothill of a statement in the amount and setting forth in reasonable detail Foothill's calculation thereof and the assumptions upon which such calculation was based (which statement shall be deemed true and correct absent manifest error). In determining such amount, Foothill may use any reasonable averaging and attribution methods. 25 2.14 Joint and Several Liability of Borrowers. (a) Each of Borrowers is accepting joint and several liability hereunder and under the other Loan Documents in consideration of the financial accommodations to be provided by Foothill under this Agreement, for the mutual benefit, directly and indirectly, of each of Borrowers and in consideration of the undertakings of the other Borrowers to accept joint and several liability for the Obligations. (b) Each of Borrowers, jointly and severally, hereby irrevocably and unconditionally accepts, not merely as a surety but also as a co-debtor, joint and several liability with the other Borrowers, with respect to the payment and performance of all of the Obligations (including, without limitation, any Obligations arising under this Section 2.14), it being the ------------ intention of the parties hereto that all the Obligations shall be the joint and several obligations of each Person composing Borrowers without preferences or distinction among them. (c) If and to the extent that any of Borrowers shall fail to make any payment with respect to any of the Obligations as and when due or to perform any of the Obligations in accordance with the terms thereof, then in each such event the other Persons composing Borrowers will make such payment with respect to, or perform, such Obligation. (d) The Obligations of each Person composing Borrowers under the provisions of this Section 2.14 constitute the absolute and unconditional, full recourse Obligations of each Person composing Borrowers enforceable against each such Borrower to the full extent of its properties and assets, irrespective of the validity, regularity or enforceability of this Agreement or any other circumstances whatsoever. (e) Except as otherwise expressly provided in this Agreement, each Person composing Borrowers hereby waives notice of acceptance of its joint and several liability, notice of any Advances under or pursuant to this Agreement, notice of the occurrence of any Default, Event of Default, or of any demand for any payment under this Agreement, notice of any action at any time taken or omitted by Foothill under or in respect of any of the Obligations, any requirement of diligence or to mitigate damages and, generally, to the extent permitted by applicable law, all demands, notices and other formalities of every kind in connection with this Agreement (except as otherwise provided in this Agreement). Each Person composing Borrowers hereby assents to, and waives notice of, any extension or postponement of the time for the payment of any of the Obligations, the acceptance of any payment of any of the Obligations, the acceptance of any partial payment thereon, any waiver, consent or other action or acquiescence by Foothill at any time or times in respect of any default by any Person composing Borrowers in the performance or satisfaction of any term, covenant, condition or provision of this Agreement, any and all other indulgences whatsoever by Foothill in respect of any of the Obligations, and the taking, addition, substitution or release, in whole or in part, at any time or times, of any security for any of the Obligations or the addition, substitution or release, in whole or in part, of any Person composing Borrowers. Without limiting the generality of the foregoing, each of Borrowers assents to any other action or delay in acting or failure to act on the part of Foothill with respect to the failure by any Person composing Borrowers to comply with any of its respective Obligations, including, without limitation, any failure strictly or diligently to assert any right or to pursue any remedy or to comply fully with applicable laws or regulations 26 thereunder, which might, but for the provisions of this Section 2.14 afford ------------ grounds for terminating, discharging or relieving any Person composing Borrowers, in whole or in part, from any of its Obligations under this Section ------- 2.14, it being the intention of each Person composing Borrowers that, so long as - ---- any of the Obligations hereunder remain unsatisfied, the Obligations of such Person composing Borrowers under this Section 2.14 shall not be discharged ------------ except by performance and then only to the extent of such performance. The Obligations of each Person composing Borrowers under this Section 2.14 shall not be diminished or rendered unenforceable by any winding up, reorganization, arrangement, liquidation, reconstruction or similar proceeding with respect to any Person composing Borrowers or Foothill. The joint and several liability of the Persons composing Borrowers hereunder shall continue in full force and effect notwithstanding any absorption, merger, amalgamation or any other change whatsoever in the name, constitution or place of formation of any of the Persons composing Borrowers or Foothill. (f) Each Person composing Borrowers represents and warrants to Foothill that such Borrower is currently informed of the financial condition of Borrowers and of all other circumstances which a diligent inquiry would reveal and which bear upon the risk of nonpayment of the Obligations. Each Person composing Borrowers further represents and warrants to Foothill that such Borrower has read and understands the terms and conditions of the Loan Documents. Each Person composing Borrowers hereby covenants that such Borrower will continue to keep informed of Borrowers' financial condition, the financial condition of other guarantors, if any, and of all other circumstances which bear upon the risk of nonpayment or nonperformance of the Obligations. (g) The provisions of this Section 2.14 are made for the benefit ------------ of Foothill and respective successors and assigns, and may be enforced by it or them from time to time against any or all of the Persons composing Borrowers as often as occasion therefor may arise and without requirement on the part of Foothill, successor, or assign first to marshal any of its or their claims or to exercise any of its or their rights against any of the other Persons composing Borrowers or to exhaust any remedies available to it or them against any of the other Persons composing Borrowers or to resort to any other source or means of obtaining payment of any of the Obligations hereunder or to elect any other remedy. The provisions of this Section 2.14 shall remain in effect until all of ------------ the Obligations shall have been paid in full or otherwise fully satisfied. If at any time, any payment, or any part thereof, made in respect of any of the Obligations, is rescinded or must otherwise be restored or returned by Foothill upon the insolvency, bankruptcy or reorganization of any of the Persons composing Borrowers, or otherwise, the provisions of this Section 2.14 will ------------ forthwith be reinstated in effect, as though such payment had not been made. (h) Each of the Persons composing Borrowers hereby agrees that it will not enforce any of its rights of contribution or subrogation against the other Persons composing Borrowers with respect to any liability incurred by it hereunder or under any of the other Loan Documents, any payments made by it to Foothill with respect to any of the Obligations or any collateral security therefor until such time as all of the Obligations have been paid in full in cash. Any claim which any Borrower may have against any other Borrower with respect to any payments to Foothill hereunder or under any other Loan Documents are hereby expressly made subordinate and junior in right of payment, without limitation as to any increases in the Obligations arising hereunder or thereunder, to the prior payment in full in cash of the 27 Obligations and, in the event of any insolvency, bankruptcy, receivership, liquidation, reorganization or other similar proceeding under the laws of any jurisdiction relating to any Borrower, its debts or its assets, whether voluntary or involuntary, all such Obligations shall be paid in full in cash before any payment or distribution of any character, whether in cash, securities or other property, shall be made to any other Borrower therefor. (i) Each of the Persons composing Borrowers hereby agrees that, after the occurrence and during the continuance of any Default or Event of Default, the payment of any amounts due with respect to the indebtedness owing by any Borrower to any other Borrower is hereby subordinated to the prior payment in full in cash of the Obligations. Each Borrower hereby agrees that after the occurrence and during the continuance of any Default or Event of Default, such Borrower will not demand, sue for or otherwise attempt to collect any indebtedness of any other Borrower owing to such Borrower until the Obligations shall have been paid in full in cash. If, notwithstanding the foregoing sentence, such Borrower shall collect, enforce or receive any amounts in respect of such indebtedness, such amounts shall be collected, enforced and received by such Borrower as trustee for Foothill, and such Borrower shall deliver any such amounts to Foothill for application to the Obligations. 3. CONDITIONS; TERM OF AGREEMENT. 3.1 Conditions Precedent to the Initial Advance. The obligation of Foothill to make the initial Advance is subject to the fulfillment, to the satisfaction of Foothill and its counsel, of each of the following conditions on or before the Closing Date: (a) the Closing Date shall occur on or before March 30, 2001; (b) Foothill shall have received searches reflecting the filing of its financing statements and fixture filings; (c) Foothill shall have received each of the following documents, duly executed, and each such document shall be in full force and effect: (i) the Lockbox Agreement in connection with Union Bank of California, N.A.; (ii) the Disbursement Letter; (iii) the Intellectual Property Security Agreement; (iv) the Stock Pledge, together with all certificates representing the shares of Stock pledged thereunder, other than shares of P-Com Gmbh, as well as stock powers endorsed in blank with medallion signature guaranties; (v) the Intercompany Subordination Agreement; and (vi) the Due Diligence Letter; 28 (d) Foothill shall have received a certificate from the Secretary of Borrower attesting to the resolutions of each Borrower's Board of Directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which Borrower is a party and authorizing specific officers of such Borrower to execute the same; (e) Foothill shall have received copies of each Borrower's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of such Borrower; (f) Foothill shall have received a certificate of status with respect to each Borrower, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of such Borrower, which certificate shall indicate that such Borrower is in good standing in such jurisdiction; (g) Foothill shall have received certificates of status with respect to each Borrower, each dated within 15 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that such Borrower is in good standing in such jurisdictions; (h) Foothill shall have received a certificate of insurance and certified copies of the policies of insurance, together with the endorsements thereto, as are required by Section 6.9, the form and substance of which shall ----------- be satisfactory to Foothill and its counsel; (i) Foothill shall have received an opinion of each Borrower's counsel in form and substance satisfactory to Foothill in its sole discretion; (j) Foothill shall have received and approved P-Com's draft 10K for the fiscal year ending December 31, 2000; (k) Foothill shall have a certification from the Chief Financial Officer of the Administrative Borrower confirming that all tax returns required to be filed by Borrowers have been timely filed or that Borrowers have timely filed appropriate extensions and that the extension period has not yet lapsed, and all taxes upon any Borrower or its properties, assets, income, and franchises (including real property taxes and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of a Permitted Protest; (l) Borrowers must have not less than $10,000,000 of Excess Availability on the Closing Date; (m) Foothill shall have reviewed Borrowers' contracts with Siemens AG, Winstar Equipm Orange CPCS, Lucent Technologies, Mercury One-2-One and other of Borrowers' contracts requested by Foothill, and Foothill shall have found them to be satisfactory; (n) Foothill shall have received copies of the Senior Convertible Notes, as well as any other debt instruments issued by any Borrower, and Foothill shall have found them to be satisfactory; 29 (o) Foothill shall have received the Closing Date Business Plan, in form and substance acceptable to Foothill; and (p) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed, or recorded and shall be in form and substance satisfactory to Foothill and its counsel. 3.2 Conditions Precedent to all Advances. The following shall be conditions precedent to all Advances: (a) the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all respects on and as of the date of such extension of credit, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date); (b) no Default or Event of Default shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof; and (c) no injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any governmental authority against Borrowers, Foothill, or any of their Affiliates. 3.3 Conditions Subsequent. As conditions subsequent to initial closing hereunder, Borrowers shall perform or cause to be performed the following (the failure by Borrowers to so perform or cause to be performed constituting an Event of Default): (a) within 30 days of the Closing Date, deliver to Foothill all certificates representing the shares of P-Com Gmbh Stock pledged to Foothill under the Stock Pledge, as well as stock powers endorsed in blank with medallion signature guaranties. (b) within 30 days of the Closing Date, using its best efforts, deliver to Foothill no offset letters, in form and substance satisfactory to Foothill and its counsel, from Siemens AG, Winstar Equipment, and any and other Person designated by Foothill prior to the Closing Date, and each such no offset letter shall be in full force and effect; (c) Within 30 days of the Closing Date, deliver to Foothill the duly executed Lockbox Agreements in connection with Borrowers' Barclays Accounts, and each such Lockbox Agreement shall be in full force and effect; (d) within 30 days of the Closing Date, deliver to Foothill the duly executed Control Agreements in connection with Union Bank of California, N.A. and Barclays Bank PLC, and each such Control Agreement shall be in full force and effect; (e) within 30 days of the Closing Date, deliver to Foothill the duly executed Subsidiary Security Agreements, and each such Subsidiary Security Agreement shall be in full force and effect; 30 (f) within 30 days of the Closing Date, deliver to Foothill the duly executed Subsidiary Subordination Agreements, and each such Subsidiary Subordination Agreement shall be in full force and effect; (g) within 30 days of the Closing Date, deliver to Foothill such Collateral Access Agreements from lessors, warehousemen, bailees, and other third persons as Foothill may require; (h) within 30 days of the Closing Date, deliver to Foothill certificates from the Secretary of each Subsidiary attesting to the resolutions of each Subsidiary's Board of Directors authorizing its execution, delivery, and performance of the agreements required of such Subsidiary pursuant to this Agreement and authorizing specific officers of such Subsidiary to execute the same; (i) within 30 days of the Closing Date, deliver to Foothill certified copies of the policies of insurance, together with the endorsements thereto, as are required by Section 6.9, the form and substance of which shall be satisfactory to Foothill and its counsel; (j) within 30 days of the Closing Date, each Borrower shall register with the United States Copyright Office its copyrights for current versions of its software, and Borrower shall execute an amendment to the appropriate Intellectual Property Security Agreement adding such registered copyrights; (k) within 45 days of the Closing Date, Network shall become qualified as a foreign corporation in the State of California; and (l) within 90 days of the Closing Date, Network shall either cause Bank of America, N.A. ("BofA") to enter into a Lockbox Agreement containing terms and conditions acceptable to Foothill, in its Permitted Discretion, or discontinue its banking relationship with BofA and establish a new banking relationship with a financial institution satisfactory to Foothill. 3.4 Term. This Agreement shall become effective upon the execution and delivery hereof by Borrowers and Foothill and shall continue in full force and effect for a term ending on the date (the "Maturity Date") that is three years from the Closing Date. The foregoing notwithstanding, Foothill shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default. 3.5 Effect of Termination. On the date of termination of this Agreement, all Obligations immediately shall become due and payable without notice or demand. No termination of this Agreement, however, shall relieve or discharge Borrowers of Borrowers' duties, Obligations, or covenants hereunder, and Foothill's continuing security interests in the Collateral shall remain in effect until all Obligations have been fully and finally discharged and Foothill's obligation to provide additional credit hereunder is terminated. When this Agreement has been terminated and all of the Obligations have been fully and finally discharged and Foothill's obligations to provide additional credit under the Loan Documents have been terminated irrevocably, Foothill will, at Borrowers' sole expense, execute and deliver any UCC 31 termination statements, lien releases, mortgage releases, re-assignments of trademarks, discharges of security interests, and other similar discharge or release documents (and, if applicable, in recordable form) as are reasonably necessary to release, as of record, the Foothill's Liens and all notices of security interests and liens previously filed by Foothill with respect to the Obligations. 3.6 Early Termination by Borrowers. Borrower has the option, at any time upon 90 days prior written notice to Foothill, to terminate this Agreement by paying to Foothill, in cash, the Obligations, in full, together with a premium (the "Early Termination Premium") equal to 1% of the Maximum Amount for each year or partial year of the unexpired term of this Agreement if such termination occurs at any time thereafter other than on the Maturity Date; provided that any such Early Termination Premium shall be eliminated if the prepayment is made from the proceeds of a credit facility provided by a commercial banking unit of Wells Fargo. 3.7 Termination Upon Event of Default. If Foothill terminates this Agreement upon the occurrence of an Event of Default, in view of the impracticability and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Foothill's lost profits as a result thereof, Borrower shall pay to Foothill upon the effective date of such termination, a premium in an amount equal to the Early Termination Premium. The Early Termination Premium shall be presumed to be the amount of damages sustained by Foothill as the result of the early termination and Borrower agrees that it is reasonable under the circumstances currently existing. The Early Termination Premium provided for in this Section 3.7 shall be deemed included in the Obligations. 4. CREATION OF SECURITY INTEREST. 4.1 Grant of Security Interest. Each Borrower hereby grants to Foothill a continuing security interest in all currently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrowers of each of their covenants and duties under the Loan Documents. Foothill's security interests in the Collateral shall attach to all Collateral without further act on the part of Foothill or Borrowers. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for the sale of Inventory to buyers in the ordinary course of business, Borrowers have no authority, express or implied, to dispose of any item or portion of the Collateral. 4.2 Negotiable Collateral. In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, the applicable Borrower, immediately upon the request of Foothill, shall endorse and deliver physical possession of such Negotiable Collateral to Foothill. 4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral. At any time that an Event of Default has occurred and is continuing, Foothill or Foothill's designee may (a) notify customers or Account Debtors of Borrowers that the Accounts, General Intangibles, or Negotiable Collateral have been assigned to Foothill or that Foothill has a security interest therein, and (b) collect the Accounts, General Intangibles, and Negotiable 32 Collateral directly and charge the collection costs and expenses to the Loan Account. Each Borrower agrees that it will hold in trust for Foothill, as Foothill's trustee, any Collections that it receives and immediately will deliver said Collections to a Lockbox Bank or, if requested by Foothill, to Foothill in their original form as received by the applicable Borrower. 4.4 Delivery of Additional Documentation Required. At any time upon the request of Foothill, Borrowers shall execute and deliver to Foothill all financing statements, continuation financing statements, fixture filings, security agreements, pledges, assignments, control agreements, endorsements of certificates of title, applications for title, affidavits, reports, notices, schedules of accounts, letters of authority, and all other documents that Foothill in its Permitted Discretion may request, in form satisfactory to Foothill, to perfect and continue perfected Foothill's security interests in the Collateral, and in order to fully consummate all of the transactions contemplated hereby and under the other the Loan Documents. To the maximum extent permitted by applicable law, each Borrower authorizes Foothill to execute any such Additional Documents in the applicable Borrower's name and authorize Foothill to file such executed Additional Documents in any appropriate filing office. In addition, on such periodic basis as Foothill shall require, Borrowers shall (a) provide Foothill with a report of all new patentable, copyrightable, or trademarkable materials acquired or generated by Borrowers during the prior period, (b) cause all patents, copyrights, and trademarks acquired or generated by Borrowers that are not already the subject of a registration with the appropriate filing office (or an application therefor diligently prosecuted) to be registered with such appropriate filing office in a manner sufficient to impart constructive notice of Borrowers' ownership thereof, and (c) cause to be prepared, executed, and delivered to Foothill supplemental schedules to the applicable Loan Documents to identify such patents, copyrights, and trademarks as being subject to the security interests created thereunder. 4.5 Power of Attorney. Each Borrower hereby irrevocably makes, constitutes, and appoints Foothill (and any of Foothill's officers, employees, or agents designated by Foothill) as such Borrower's true and lawful attorney, with power to (a) if such Borrower refuses to, or fails timely to execute and deliver any of the documents described in Section 4.4, sign the name of such ----------- Borrower on any of the documents described in Section 4.4, (b) at any time that ----------- an Event of Default has occurred and is continuing, sign such Borrower's name on any invoice or bill of lading relating to any Account, drafts against Account Debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to Account Debtors, (c) send requests for verification of Accounts, (d) endorse such Borrower's name on any Collection item that may come into Foothill's possession, (e) at any time that an Event of Default has occurred and is continuing, notify the post office authorities to change the address for delivery of such Borrower's mail to an address designated by Foothill, to receive and open all mail addressed to such Borrower, and to retain all mail relating to the Collateral and forward all other mail to such Borrower, (f) at any time that an Event of Default has occurred and is continuing, make, settle, and adjust all claims under such Borrower's policies of insurance and make all determinations and decisions with respect to such policies of insurance, and (g) at any time that an Event of Default has occurred and is continuing, settle and adjust disputes and claims respecting the Accounts, General Intangibles and Negotiable Collateral directly with Account Debtors, for amounts and upon terms that Foothill determines to be reasonable, and Foothill may cause to be executed and delivered any documents and releases that Foothill determines to be necessary. The appointment of Foothill as each Borrower's attorney, and each and every one of Foothill's 33 rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and Foothill's obligation to extend credit hereunder is terminated. 4.6 Right to Inspect. Foothill (through any of its officers, employees, or agents) shall have the right, from time to time hereafter to inspect Borrowers' Books and to check, test, and appraise the Collateral in order to verify each Borrower's financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral. 4.7 Control Agreements. Each Borrower agrees that it will not transfer assets out of any Securities Accounts other than as permitted under Section 7.19 ------------ and, if to another securities intermediary, unless each of the applicable Borrower, Lender, and the substitute securities intermediary have entered into a Control Agreement. No arrangement contemplated hereby or by any Control Agreement in respect of any Securities Accounts or other Investment Property shall be modified by Borrowers without the prior written consent of Lender. Upon the occurrence and during the continuance of a Default or Event of Default, Lender may notify any securities intermediary to liquidate the applicable Securities Account or any related Investment Property maintained or held thereby and remit the proceeds thereof to the Lender's Account. 5. REPRESENTATIONS AND WARRANTIES. In order to induce Foothill to enter into this Agreement, each Borrower makes the following representations and warranties which shall be true, correct, and complete in all respects as of the date hereof, and shall be true, correct, and complete in all respects as of the Closing Date, and at and as of the date of the making of each Advance, thereafter, as though made on and as of the date of such Advance (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement: 5.1 No Encumbrances. Each Borrower has good and indefeasible title to its Collateral, free and clear of Liens except for Permitted Liens. 5.2 Eligible Accounts. The Eligible Accounts are bona fide existing payment obligations of Account Debtors created by the sale and delivery of Inventory or the rendition of services to such Account Debtors in the ordinary course of Borrowers' business, owed to Borrowers without defenses, disputes, offsets, counterclaims, or rights of return or cancellation. As to each Eligible Account, such Account is not: (a) owed by an employee, Affiliate, or agent of a Borrower, (b) on account of a transaction wherein goods were placed on consignment or were sold pursuant to a guaranteed sale, a sale or return, a sale on approval, a bill and hold, or on any other terms by reason of which the payment by the Account Debtor may be conditional, (c) other than permitted foreign Eligible Accounts, payable in a currency other than Dollars, 34 (d) owed by an Account Debtor that has or has asserted a right of setoff, has disputed its liability, or has made any claim with respect to its obligation to pay the Account, (e) owed by an Account Debtor that is subject to any Insolvency Proceeding or is not Solvent or as to which a Borrower has received notice of an imminent Insolvency Proceeding or a material impairment of the financial condition of such Account Debtor, (f) on account of a transaction as to which the goods giving rise to such Account have not been shipped and billed to the Account Debtor or the services giving rise to such Account have not been performed and accepted by the Account Debtor, (g) a right to receive progress payments or other advance billings that are due prior to the completion of performance by the applicable Borrower of the subject contract for goods or services, and (h) an Account that has not been billed to the customer. 5.3 Inventory. All Inventory is of good and merchantable quality, free from defects. As to each item of Inventory, such Inventory is (a) owned by a Borrower free and clear of all Liens other than Liens in favor of Foothill, (b) either located at one of the locations set forth on Schedule E-1 or in transit from one such location to another such location, and (c) not located on real property leased by a Borrower or in a contract warehouse, in each case, unless subject to a Collateral Access Agreement executed by the lessor, the warehouseman, or other third party, as the case may be, and unless segregated or otherwise separately identifiable from goods of others, if any, stored on the premises. 5.4 Equipment. All of the Equipment is used or held for use in Borrowers' business and is fit for such purposes. 5.5 Location of Inventory and Equipment. The Inventory and Equipment are not stored with a bailee, warehouseman, or similar party (without Foothill's prior written consent) and are located only at the locations identified on Schedule 6.11 or otherwise permitted by Section 6.11. - ------------- ------------ 5.6 Inventory Records. Each Borrower keeps correct and accurate records itemizing and describing the kind, type, and quantity of the Inventory, and Borrower's cost therefor. 5.7 Location of Chief Executive Office; FEIN. The chief executive office of each Borrower and each Borrower's FEIN is as follows: 35 P-COM: FEIN: 77-0289371, chief executive office: 3175 S. Winchester Boulevard, Campbell, California 9508; Network: FEIN: 77-0450522, chief executive office: 45472 Holiday Drive, Dulles, Virginia 20160; 5.8 Due Organization and Qualification; Subsidiaries. (a) Each Borrower is duly organized and existing and in good standing under the laws of the jurisdiction of its incorporation and qualified and licensed to do business in, and in good standing in, any state where the failure to be so licensed or qualified reasonably could be expected to cause a Material Adverse Change . (b) Set forth on Schedule 5.8, is a complete and accurate list of ------------ each Borrower's direct and indirect Subsidiaries, showing: (i) the jurisdiction of their incorporation; (ii) the number of shares of each class of common and preferred stock authorized for each of such Subsidiaries; and (iii) the number and the percentage of the outstanding shares of each such class owned directly or indirectly by each Borrower. All of the outstanding capital stock of each such Subsidiary has been validly issued and is fully paid and non-assessable. (c) Except as set forth on Schedule 5.8, no capital stock (or any securities, instruments, warrants, options, purchase rights, conversion or exchange rights, calls, commitments or claims of any character convertible into or exercisable for capital stock) of any direct or indirect Subsidiary of any Borrower is subject to the issuance of any security, instrument, warrant, option, purchase right, conversion or exchange right, call, commitment or claim of any right, title, or interest therein or thereto. 5.9 Due Authorization; No Conflict. (a) The execution, delivery, and performance by each Borrower of this Agreement and the Loan Documents to which it is a party have been duly authorized by all necessary corporate action. (b) The execution, delivery, and performance by each Borrower of this Agreement and the Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation (including Regulations T, U, and X of the Federal Reserve Board) applicable to such Borrower, the Governing Documents of such Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on such Borrower, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation or material Capital Lease of such Borrower, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of such Borrower, other than Permitted Liens, or (iv) require any approval of stockholders or any approval or consent of any Person under any material contractual obligation of such Borrower. (c) Other than the filing of appropriate financing statements, fixture filings, and the execution, delivery, and performance by each Borrower of this Agreement and the Loan Documents to which such Borrower is a party do not and will not require any 36 registration with, consent, or approval of, or notice to, or other action with or by, any federal, state, foreign, or other Governmental Authority or other Person. (d) As to each Borrower, this Agreement and the Loan Documents to which such Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by such Borrower will be the legally valid and binding obligations of such Borrower, enforceable against such Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. (e) The Liens granted by Borrowers to Foothill in and to their properties and assets pursuant to this Agreement and the other Loan Documents are validly created, perfected, and first priority Liens, subject only to Permitted Liens. 5.10 Litigation. There are no actions or proceedings pending by or against Borrowers before any court or administrative agency and Borrowers do not have knowledge or belief of any pending, threatened, or imminent litigation, governmental investigations, or claims, complaints, actions, or prosecutions involving Borrowers or any guarantor of the Obligations, except for: (a) ongoing collection matters in which a Borrower is the plaintiff; (b) matters disclosed on Schedule 5.10; and (c) matters arising after the date hereof that, if decided ------------- adversely to Borrowers, would not cause a Material Adverse Change. 5.11 No Material Adverse Change. All financial statements relating to Borrowers or any guarantor of the Obligations that have been delivered by Borrowers to Foothill have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and fairly present Borrowers' (or such guarantor's, as applicable) financial condition as of the date thereof and Borrower's results of operations for the period then ended. There has not been a Material Adverse Change with respect to Borrowers (or such guarantor, as applicable) since the date of the latest financial statements submitted to Foothill on or before the Closing Date. 5.12 Solvency. Each Borrower is Solvent. No transfer of property is being made by any Borrower and no obligation is being incurred by any Borrower in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of Borrowers. 5.13 Employee Benefits. None of Borrowers, any of their Subsidiaries, or any of their ERISA Affiliates maintains or contributes to any Benefit Plan. 5.14 Environmental Condition. None of Borrowers' properties or assets has ever been used by Borrowers or, to the best of Borrower's knowledge, by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any Hazardous Materials. None of Borrowers' properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a Hazardous Materials disposal site, or a candidate for closure pursuant to any environmental protection statute. No Lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned or operated by Borrowers. No Borrower has received 37 a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission by Borrower resulting in the releasing or disposing of Hazardous Materials into the environment. 5.15 Brokerage Fees. Borrowers have not utilized the services of any broker or finder in connection with Borrowers' obtaining financing from Foothill under this Agreement and no brokerage commission or finders fee is payable by Borrowers in connection herewith. 5.16 Intellectual Property. Each Borrower owns, or holds licenses in, all trademarks, trade names, copyrights, patents, patent rights, and licenses that are necessary to the conduct of its business as currently conducted.. Attached hereto as Schedule 5.16 is a true, correct, and complete listing of all ------------- material patents, patent applications, trademarks, trademark applications, copyrights, and copyright registrations as to which each Borrower is the owner or is an exclusive licensee. 5.17 Leases. Borrowers enjoy peaceful and undisturbed possession under all leases material to the business of Borrowers and to which Borrowers are a party or under which Borrowers are operating. All of such leases are valid and subsisting and no material default by Borrowers exists under any of them. 5.18 DDAs. Set forth on Schedule 5.18 are all of the DDAs of each ------------- Borrower, including, with respect to each depository (i) the name and address of such depository, and (ii) the account numbers of the accounts maintained with such depository. 5.19 Complete Disclosure. All factual information (taken as a whole) furnished by or on behalf of Borrowers in writing to Foothill (including all information contained in the Schedules hereto or in the other Loan Documents) for purposes of or in connection with this Agreement, the other Loan Documents or any transaction contemplated herein or therein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of Borrowers in writing to Foothill will be, true and accurate, in all material respects, on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was provided. On the Closing Date, the Closing Date Projections represent, and as of the date on which any other Projections are delivered to Foothill, such additional Projections represent Borrowers' good faith best estimate of their future performance for the periods covered thereby. 5.20 Indebtedness. Set forth on Schedule 5.20 is a true and complete ------------- list of all Indebtedness of each Borrower outstanding immediately prior to the Closing Date that is to remain outstanding after the Closing Date and such Schedule accurately reflects the aggregate principal amount of such Indebtedness and the principal terms thereof. 6. AFFIRMATIVE COVENANTS. Each Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrowers shall and shall cause each of their respective Subsidiaries to do all of the following: 38 6.1 Accounting System. Maintain a standard and modern system of accounting that enables Borrowers to produce financial statements in accordance with GAAP, and maintain records pertaining to the Collateral that contain information as from time to time may be requested by Foothill. Borrowers also shall keep a modern inventory reporting system that shows all additions, sales, claims, returns, and allowances with respect to the Inventory. 6.2 Collateral Reporting. Provide Foothill with the following documents at the following times in form satisfactory to Foothill: Weekly (a) a sales journal, collection journal, and credit register since the last such schedule and a calculation of the Borrowing Base as of such date, and (b) notice of all returns, disputes, or claims. - -------------------------------------------------------------------------------------------- Monthly (not (c) the balances maintained by each Borrower in their DDAs and later than the Securities Accounts as reflected in the monthly statements issued by 10th day of each the financial institutions or securities intermediaries where such month) accounts are maintained, (d) a detailed calculation of the Borrowing Base (including detail regarding those Accounts that are not Eligible Accounts), (e) a detailed aging, by total, of the Accounts, a manual aging of the Accounts owing by Orange Personal Communications Services Ltd., and by Mercury One-2-One Personal Communications, together with a reconciliation to the detailed calculation of the Borrowing Base previously provided to Foothill, (f) a summary aging, by vendor, of Borrowers' accounts payable (including non-cancelable minimum guaranteed contracts); and any book overdraft, and (g) a calculation of Dilution for the prior month and prior 12 months. - -------------------------------------------------------------------------------------------- Quarterly (h) a detailed list of each Borrower's customers. - -------------------------------------------------------------------------------------------- Upon request by (i) copies of invoices in connection with the Accounts, credit memos, Lender remittance advices, deposit slips, shipping and delivery documents in connection with the Accounts and, for Inventory and Equipment acquired by Borrowers, purchase orders and invoices, and (k) such other reports as to the Collateral, or the financial condition of Borrowers as Foothill may request. - --------------------------------------------------------------------------------------------
39 6.3 Financial Statements, Reports, Certificates(a) . Deliver to Foothill: (a) as soon as available, but in any event within 30 days (45 days in the case of a month that is the end of one of the first 3 fiscal quarters in a fiscal year) after the end of each month during each of P-Com's fiscal years, (i) a company prepared consolidated balance sheet, income statement, and statement of cash flow covering P-Com's and its Subsidiaries' operations during such period, (ii) a certificate signed by the chief financial officer of P-Com to the effect that: A. the financial statements delivered hereunder have been prepared in accordance with GAAP (except for the lack of footnotes and being subject to year-end audit adjustments) and fairly present in all material respects the financial condition of P-Com and its Subsidiaries, B. the representations and warranties of Borrowers contained in this Agreement and the other Loan Documents are true and correct in all material respects on and as of the date of such certificate, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date), and C. there does not exist any condition or event that constitutes a Default or Event of Default (or, to the extent of any non- compliance, describing such non-compliance as to which he or she may have knowledge and what action Borrowers have taken, are taking, or propose to take with respect thereto), and (iii) for each month that is the date on which a financial covenant in Section 7.20 is to be tested, a Compliance Certificate demonstrating, in reasonable detail, compliance at the end of such period with the applicable financial covenants contained in Section 7.20, and (b) as soon as available, but in any event within 90 days after the end of each of P-Com's fiscal years, (i) financial statements of P-Com and its Subsidiaries for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Foothill and certified, without any qualifications, by such accountants to have been prepared in accordance with GAAP (such audited financial statements to include a balance sheet, income statement, and statement of cash flow and, if prepared, such accountants' letter to management), (ii) a certificate of such accountants addressed to Foothill stating that such accountants do not have knowledge of the existence of any Default or Event of Default under Section 7.20; provided, however, that an Event of Default ------------ -------- ------- shall not be deemed to have occurred if such accountants refuse to issue such a certificate following Administrative Borrower's request that such a certificate be issued to Foothill. 40 (c) as soon as available, but in any event within 30 days prior to the start of each of P-Com's fiscal years, (i) copies of Borrowers' Projections, in form and substance (including as to scope and underlying assumptions) satisfactory to Foothill, in its sole discretion, for the forthcoming 3 years, year by year, and for the forthcoming fiscal year, month by month, certified by the chief financial officer of P-Com as being such officer's good faith best estimate of the financial performance of P-Com and its Subsidiaries during the period covered thereby, (d) if and when filed by any Borrower, (i) 10-Q quarterly reports, Form 10-K annual reports, and Form 8-K current reports, (ii) any other filings made by any Borrower with the SEC, (iii) copies of Borrowers' federal income tax returns, and any amendments thereto, filed with the Internal Revenue Service, and (iv) any other information that is provided by P-Com to its shareholders generally, (e) if and when filed by any Borrower and as requested by Foothill, satisfactory evidence of payment of applicable excise taxes in each jurisdiction in which (i) any Borrower conducts business or is required to pay any such excise tax, (ii) where any Borrower's failure to pay any such applicable excise tax would result in a Lien on the properties or assets of any Borrower, or (iii) where any Borrower's failure to pay any such applicable excise tax reasonably could be expected to result in a Material Adverse Change, (f) as soon as a Borrower has knowledge of any event or condition that constitutes a Default or an Event of Default, notice thereof and a statement of the curative action that Borrowers propose to take with respect thereto, (g) not less than 30 days prior to the end of Borrowers' 2002 fiscal year, Administrative Borrower shall deliver a set of Projections of Borrowers for the period commencing on the first day of Borrowers' 2003 fiscal year and concluding on or after the Maturity Date (on a quarter by quarter basis), in form and substance (including as to scope, underlying assumptions and projected results of operations) reasonably satisfactory to Foothill, and (h) upon the request of Foothill, any other report reasonably requested relating to the financial condition of Borrowers. In addition to the financial statements referred to above, Borrowers agree to deliver financial statements prepared on both a consolidated and consolidating basis and that no Borrower, or any Subsidiary of a Borrower, will have a fiscal year different from that of P-Com. Borrowers agree that their independent certified public accountants are authorized to communicate with Foothill and to release to Foothill whatever financial information concerning 41 Borrowers that Foothill reasonably may request. Each Borrower waives the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Foothill pursuant to or in accordance with this Agreement, and agree that Foothill may contact directly any such accounting firm or service bureau in order to obtain such information. 6.4 Intentionally Omitted. 6.5 Returns. Cause returns and allowances, if any, as between Borrowers and their Account Debtors to be on the same basis and in accordance with the usual customary practices of Borrowers, as they exist at the time of the execution and delivery of this Agreement. If, at a time when no Event of Default has occurred and is continuing, any Account Debtor returns any Inventory to any Borrower, the applicable Borrower promptly shall determine the reason for such return and, if the applicable Borrower accepts such return, issue a credit memorandum (with a copy to be sent to Foothill) in the appropriate amount to such Account Debtor. If, at a time when an Event of Default has occurred and is continuing, any Account Debtor returns any Inventory to any Borrower, the applicable Borrower promptly shall determine the reason for such return and, if Foothill consents (which consent shall not be unreasonably withheld), issue a credit memorandum (with a copy to be sent to Foothill) in the appropriate amount to such Account Debtor. 6.6 Title to Equipment. Upon Foothill's request, Borrowers immediately shall deliver to Foothill, properly endorsed, any and all evidences of ownership of, certificates of title, or applications for title to any items of Equipment. 6.7 Maintenance of Equipment. Maintain the Equipment in good operating condition and repair (ordinary wear and tear excepted), and make all necessary replacements thereto so that the value and operating efficiency thereof shall at all times be maintained and preserved. Other than those items of Equipment that constitute fixtures on the Closing Date, Borrowers shall not permit any item of Equipment to become a fixture to real estate or an accession to other property, and such Equipment shall at all times remain personal property. 6.8 Taxes. Cause all assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against Borrowers or any of their property to be paid in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such assessment or tax shall be the subject of a Permitted Protest. Borrowers shall make due and timely payment or deposit of all such federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Foothill, on demand, appropriate certificates attesting to the payment thereof or deposit with respect thereto. Borrowers will make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Foothill with proof satisfactory to Foothill indicating that Borrowers have made such payments or deposits. 42 6.9 Insurance. (a) At Borrowers' expense, keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as are ordinarily insured against by other owners in similar businesses. Borrowers also shall maintain business interruption, public liability, product liability, and property damage insurance relating to Borrowers' ownership and use of the Collateral, as well as insurance against larceny, embezzlement, and criminal misappropriation. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as may be reasonably satisfactory to Foothill. All insurance required herein shall be written by companies which are authorized to do insurance business in the State of California. All hazard insurance and such other insurance as Foothill shall specify, shall contain a California Form 438BFU (NS) mortgagee endorsement, or an equivalent endorsement satisfactory to Foothill, showing Foothill as sole loss payee thereof, and shall contain a waiver of warranties. Every policy of insurance referred to in this Section 6.9 shall contain an agreement by the insurer that it will not cancel - ----------- such policy except after 30 days prior written notice to Foothill and that any loss payable thereunder shall be payable notwithstanding any act or negligence of Borrowers or Foothill which might, absent such agreement, result in a forfeiture of all or a part of such insurance payment and notwithstanding occupancy or use of the Real Property for purposes more hazardous than permitted by the terms of such policy. Borrowers shall deliver to Foothill certified copies of such policies of insurance and evidence of the payment of all premiums therefor. (c) Original policies or certificates thereof satisfactory to Foothill evidencing such insurance shall be delivered to Foothill at least 30 days prior to the expiration of the existing or preceding policies. Administrative Borrower shall give Foothill prompt notice of any loss covered by such insurance, and Foothill shall have the right to adjust any loss. Foothill shall have the exclusive right to adjust all losses payable under any such insurance policies without any liability to Borrowers whatsoever in respect of such adjustments. Any monies received as payment for any loss under any insurance policy including the insurance policies mentioned above, shall be paid over to Foothill to be applied at the option of Foothill either to the prepayment of the Obligations without premium, in such order or manner as Foothill may elect, or shall be disbursed to Administrative Borrower under stage payment terms satisfactory to Foothill for application to the cost of repairs, replacements, or restorations. All repairs, replacements, or restorations shall be effected with reasonable promptness and shall be of a value at least equal to the value of the items or property destroyed prior to such damage or destruction. Upon the occurrence of an Event of Default, Foothill shall have the right to apply all prepaid premiums to the payment of the Obligations in such order or form as Foothill shall determine. (d) Borrower shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section 6.9, unless Foothill is included thereon as named insured ----------- with the loss payable to Foothill under a standard California 438BFU (NS) Mortgagee endorsement, or its local equivalent. Administrative Borrower immediately shall notify Foothill whenever such separate insurance is taken out, specifying the insurer thereunder and full particulars as to the policies evidencing the same, and originals of such policies immediately shall be provided to Foothill. 43 6.10 No Setoffs or Counterclaims. Make payments hereunder and under the other Loan Documents by or on behalf of Borrowers without setoff or counterclaim and free and clear of, and without deduction or withholding for or on account of, any federal, state, or local taxes. 6.11 Location of Inventory and Equipment. Keep the Inventory and Equipment only at the locations identified on Schedule 6.11; provided, however, ------------- -------- ------- that Administrative Borrower may amend Schedule 6.11 so long as such amendment ------------- occurs by written notice to Foothill not less than 30 days prior to the date on which the Inventory or Equipment is moved to such new location, so long as such new location is within the continental United States, and so long as, at the time of such written notification, the applicable Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected Foothill's security interests in such assets and also provides to Foothill a Collateral Access Agreement. 6.12 Compliance with Laws. Comply with the requirements of all applicable laws, rules, regulations, and orders of any governmental authority, including the Fair Labor Standards Act and the Americans With Disabilities Act, other than laws, rules, regulations, and orders the non-compliance with which, individually or in the aggregate, would not have and could not reasonably be expected to cause a Material Adverse Change. 6.13 Intentionally Omitted. 6.14 Leases. Pay within 30 days when due all rents and other amounts payable under any leases to which any Borrower is a party or by which any Borrower's properties and assets are bound, unless such payments are the subject of a Permitted Protest. 6.15 Litigation. Promptly notify Foothill, in writing, of any material litigation, governmental investigations or complaints filed against Borrowers. 7. NEGATIVE COVENANTS. Each Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrowers will not do and shall cause each of their Subsidiaries to not do any of the following: 7.1 Indebtedness. Create, incur, assume, permit, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except: (a) Indebtedness evidenced by this Agreement; (b) Indebtedness set forth on Schedule 5.20; ------------- (c) Indebtedness secured by Permitted Liens; and (d) refinancings, renewals, or extensions of Indebtedness permitted under clauses (b) and (c) of this Section 7.1 (and continuance or ----------- renewal of any Permitted Liens associated therewith) so long as: (i) the terms and conditions of such refinancings, renewals, or 44 extensions do not materially impair the prospects of repayment of the Obligations by Borrowers, (ii) the net cash proceeds of such refinancings, renewals, or extensions do not result in an increase in the aggregate principal amount of the Indebtedness so refinanced, renewed, or extended, (iii) such refinancings, renewals, refundings, or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended, and (iv) to the extent that Indebtedness that is refinanced was subordinated in right of payment to the Obligations, then the subordination terms and conditions of the refinancing Indebtedness must be at least as favorable to Foothill as those applicable to the refinanced Indebtedness. 7.2 Liens. Create, incur, assume, or permit to exist, directly or indirectly, any Lien on or with respect to any of their property or assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that the original Indebtedness is refinanced under Section 7.1(d) and so long as the replacement Liens only encumber those assets - ------------- or property that secured the original Indebtedness). 7.3 Restrictions on Fundamental Changes. Without Foothill's prior written consent, enter into any merger, consolidation, reorganization, or recapitalization, or reclassify its capital stock, or liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, assign, lease, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its property or assets. 7.4 Disposal of Assets. Sell, lease, assign, transfer, or otherwise dispose of the properties or assets of any Borrower other than sales of Inventory to buyers in the ordinary course of such Borrower's business as currently conducted. 7.5 Change Name. Change any Borrower's name, FEIN, corporate structure (within the meaning of Division 9 of the Code), jurisdiction of organization or identity, or add any new fictitious name. 7.6 Guarantee. Guarantee or otherwise become in any way liable with respect to the obligations of any third Person except by endorsement of instruments or items of payment for deposit to the account of Borrowers or which are transmitted or turned over to Foothill. 7.7 Nature of Business. Make any change in the principal nature of Borrowers' business. 7.8 Prepayments and Amendments. (a) Except in connection with a refinancing permitted by Section ------- 7.1(d), prepay, redeem, retire, defease, purchase, or otherwise acquire any - ----- Indebtedness owing to any third Person, other than the Obligations in accordance with this Agreement; provided, however, that Borrowers may pay $8,000,000 to Siemens AG and/or redeem the Senior Convertible Notes so long as immediately after such payment or redemption is made Borrowers' shall have not less than $10,000,000 of Excess Availability, and 45 (b) Directly or indirectly, amend, modify, alter, increase, or change any of the terms or conditions of any agreement, instrument, document, indenture, or other writing evidencing or concerning Indebtedness permitted under Sections 7.1(b), (c), or (d). ---------------------------- 7.9 Change of Control. Cause, permit, or suffer, directly or indirectly, any Change of Control. 7.10 Consignments. Consign any Inventory or sell any Inventory on bill and hold, sale or return, sale on approval, or other conditional terms of sale. 7.11 Distributions. Other than distributions, or the declaration and payment of dividends, by a Borrower to another Borrower, make any distribution or declare or pay any dividends (in cash or other property, other than capital stock) on, or purchase, acquire, redeem, or retire any of any Borrower's capital stock, of any class, whether now or hereafter outstanding. 7.12 Accounting Methods. Modify or change its method of accounting or enter into, modify, or terminate any agreement currently existing, or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of Borrowers' accounting records without said accounting firm or service bureau agreeing to provide Foothill information regarding the Collateral or Borrowers' financial condition. Borrowers waive the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Foothill pursuant to or in accordance with this Agreement, and agrees that Foothill may contact directly any such accounting firm or service bureau in order to obtain such information. 7.13 Investments. Directly or indirectly make, acquire, or incur any liabilities (including contingent obligations) for or in connection with (a) the acquisition of the securities (whether debt or equity) of, or other interests in, a Person, (b) loans, advances, capital contributions, or transfers of property to a Person, or (c) the acquisition of all or substantially all of the properties or assets of a Person; provided, however, that so long as no Event of -------- ------- Default has occurred and is continuing, Borrowers shall be entitled to acquire the equity instruments or assets of another Person so long as (x) the amount expended by Borrowers, either individually or in the aggregate with other acquisitions made during the same calendar year, does not exceed $1,000,000), (y) immediately after the consummation of such acquisition Borrowers have Excess Availability of not less than $7,500,000, and (z) no Account acquired by Borrowers or of the Person whose equity instruments were acquired by Borrowers shall be an Eligible Account. 7.14 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of any Borrowers except for transactions that are in the ordinary course of Borrowers' business, upon fair and reasonable terms, that are fully disclosed to Foothill, and that are no less favorable to Borrowers than would be obtained in an arm's length transaction with a non-Affiliate. 7.15 Suspension. Suspend or go out of a substantial portion of their business. 7.16 Intentionally Omitted. 7.17 Use of Proceeds. Use the proceeds of the Advances made hereunder for any purpose other than (i) on the Closing Date, (y) to repay in full the outstanding principal, accrued interest, and accrued fees and expenses owing to Existing Lender, and (z) to pay transactional costs and expenses incurred in connection with this Agreement, and (ii) thereafter, consistent with the terms and conditions hereof, for its lawful and permitted corporate purposes. 7.18 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees. Relocate their chief executive office to a new location without providing 30 days prior written notification thereof to Foothill and so long as, at the time of such written notification, the applicable Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected Foothill's security interests and also provides to Foothill a Collateral Access Agreement with respect to such new location. The Inventory and Equipment shall not at any time now or hereafter be stored with a bailee, warehouseman, or similar party without Foothill's prior written consent. 7.19 Securities Accounts. Establish or maintain any Securities Account unless Foothill shall have received a Control Agreement in respect of such Securities Account. Borrowers agree to not transfer assets out of any Securities Account; provided, however, that, so long as no Event of Default has occurred -------- ------- and is continuing or would result therefrom, Borrowers may use such assets (and the proceeds thereof) to the extent not prohibited by this Agreement. 7.20 Financial Covenants. Fail to maintain: (a) Tangible Net Worth of at least the following amounts as of the dates specified below:
Quarter Ending Minimum Tangible Net Worth -------------- -------------------------- March 31, 2001 $ 57,944.000 June 30, 2001 $ 58,031,000 September 30, 2001 $ 61,066,000 December 31, 2001 $ 66,563,000 March 31, 2002 $ 69,580,000 June 30, 2002 $ 73,067,000 September 30, 2002 $ 77,604,000 December 31, 2002 $ 83,546,000 March 31, 2003 $ 87,913,000
47 June 30, 2003 $ 92,635,000 September 30, 2003 $ 97,211,000 December 31, 2003 $102,714,000
(b) EBITDA of at least the following amounts as of the dates specified below:
Quarter Ending Minimum EBITDA -------------- -------------- March 31, 2001 $ 3,121,000 June 30, 2001 $ 5,613,000 September 30, 2001 $10,540,000 December 31, 2001 $16,830,000 March 31, 2002 $18,831,000 June 30, 2002 $21,965,000 September 30, 2002 $23,083,000 December 31, 2002 $23,248,000 March 31, 2003 $24,516,000 June 30, 2003 $25,671,000 September 30, 2003 $26,699,000 December 31, 2003 $27,827,000
7.21 Capital Expenditures. Make capital expenditures in any fiscal year in excess of $13,000,000. 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an event of default (each, an "Event of Default") under this Agreement: 8.1 If Borrowers fail to pay when due and payable or when declared due and payable, any portion of the Obligations (whether of principal, interest (including any interest which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts), fees and charges due Foothill, reimbursement of Foothill Expenses, or other amounts constituting Obligations); 48 8.2 If Borrowers fail to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrowers and Foothill; 8.3 If there is a Material Adverse Change; 8.4 If any material portion of any Borrower's properties or assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any third Person; 8.5 If an Insolvency Proceeding is commenced by any Borrower; 8.6 If an Insolvency Proceeding is commenced against any Borrower and any of the following events occur: (a) such Borrower consents to the institution of the Insolvency Proceeding against it; (b) the petition commencing the Insolvency Proceeding is not timely controverted; (c) the petition commencing the Insolvency Proceeding is not dismissed within 45 calendar days of the date of the filing thereof; provided, however, that, during the pendency of such -------- ------- period, Foothill shall be relieved of its obligation to extend credit hereunder; (d) an interim trustee is appointed to take possession of all or a substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, such Borrower; or (e) an order for relief shall have been issued or entered therein; 8.7 If any Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; 8.8 If a notice of Lien, levy, or assessment is filed of record with respect to any of any Borrower's properties or assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a Lien, whether choate or otherwise, upon any of such Borrower's properties or assets and the same is not paid before such payment is delinquent; 8.9 If a judgment or other claim becomes a Lien or encumbrance upon any material portion of any Borrower's properties or assets; 8.10 If there is a default in any material agreement, including without limitation the Senior Convertible Notes, to which any Borrower is a party with one or more third Persons and such default (a) occurs at the final maturity of the obligations thereunder, or (b) results in a right by such third Person(s), irrespective of whether exercised, to accelerate the maturity of such Borrower's obligations thereunder; 8.11 If any Borrower makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness; 8.12 If any misstatement or misrepresentation exists now or hereafter in any warranty, representation, statement, or report made to Foothill by any Borrower or any officer, 49 employee, agent, or director of any Borrower, or if any such warranty or representation is withdrawn; 8.13 If the obligation of any guarantor under its guaranty or other third Person under any Loan Document is limited or terminated by operation of law or by the guarantor or other third Person thereunder, or any such guarantor or other third Person becomes the subject of an Insolvency Proceeding; 8.14 If this Agreement or any other Loan Document that purports to create a Lien in favor of Foothill, shall, for any reason, fail or cease to create a valid and perfected and, except to the extent permitted by the terms hereof or thereof, first priority Lien on or security interest in the Collateral covered hereby or thereby; or 8.15 Any provision of any Loan Document shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by any Borrower, or a proceeding shall be commenced by any Borrower, or by any Governmental Authority having jurisdiction over any Borrower, seeking to establish the invalidity or unenforceability thereof, or any Borrower shall deny that any Borrower has any liability or obligation purported to be created under any Loan Document. 9. FOOTHILL'S RIGHTS AND REMEDIES. 9.1 Rights and Remedies. Upon the occurrence, and during the continuation, of an Event of Default Foothill may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrowers: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable; (b) Cease advancing money or extending credit to or for the benefit of Borrowers under this Agreement, under any of the Loan Documents, or under any other agreement between Borrowers and Foothill; (c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of Foothill, but without affecting any of Foothill's Liens in the Collateral and without affecting the Obligations; (d) Settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms which Foothill considers advisable, and in such cases, Foothill will credit Loan Account with only the net amounts received by Foothill in payment of such disputed Accounts after deducting all Foothill Expenses incurred or expended in connection therewith; (e) Cause Borrowers to hold all returned Inventory in trust for Foothill, segregate all returned Inventory from all other property of Borrowers or in Borrowers' possession and conspicuously label said returned Inventory as the property of Foothill; (f) Without notice to or demand upon any Borrower or any guarantor, make such payments and do such acts as Foothill considers necessary or reasonable to protect its 50 security interests in the Collateral. Each Borrower agrees to assemble the Collateral if Foothill so requires, and to make the Collateral available to Foothill as Foothill may designate. Each Borrower authorizes Foothill to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or Lien that in Foothill's determination appears to conflict with Foothill's Lien and to pay all expenses incurred in connection therewith and to charge Borrowers' Loan Account therefor. With respect to any of any Borrower's owned or leased premises, each Borrower hereby grants Foothill a license to enter into possession of such premises and to occupy the same, without charge, for up to 120 days in order to exercise any of Foothill's rights or remedies provided herein, at law, in equity, or otherwise; (g) Without notice to any Borrower (such notice being expressly waived), and without constituting a retention of any collateral in satisfaction of an obligation (within the meaning of Division 9 of the Code), set off and apply to the Obligations any and all (i) balances and deposits of Borrowers held by Foothill (including any amounts received in the Lockbox Accounts), or (ii) indebtedness at any time owing to or for the credit or the account of any Borrower held by Foothill; (h) Hold, as cash collateral, any and all balances and deposits of any Borrower held by Foothill, and any amounts received in the Lockbox Accounts, to secure the full and final repayment of all of the Obligations; (i) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Foothill is hereby granted a license or other right to use, without charge, each Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and each Borrower's rights under all licenses and all franchise agreements shall inure to Foothill's benefit; (j) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrowers' premises) as Foothill determines is commercially reasonable. It is not necessary that the Collateral be present at any such sale; (k) Foothill shall give notice of the disposition of the Collateral as follows: (1) Foothill shall give Administrative Borrower (for the benefit of the applicable Borrower) a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Collateral, then the time on or after which the private sale or other disposition is to be made; (2) The notice shall be personally delivered or mailed, postage prepaid, to Administrative Borrower as provided in Section 12, at least ---------- five days before the date fixed for the sale, or at least five days before the date on or after which the private sale or other disposition is to be made; no notice needs to be given prior to the disposition of any portion of 51 the Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market. (3) If the sale is to be a public sale, Foothill also shall give notice of the time and place by publishing a notice one time at least five days before the date of the sale in a newspaper of general circulation in the county in which the sale is to be held; (l) Foothill may credit bid and purchase at any public sale; (m) Foothill may seek the appointment of a receiver or keeper to take possession of all or any portion of the Collateral or to operate same and, to the maximum extent permitted by law, may seek the appointment of such a receiver without the requirement of prior notice or a hearing (n) Foothill shall have all other rights and remedies available to it at law or in equity pursuant to any other Loan Documents; and (o) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrowers. Any excess will be returned, without interest and subject to the rights of third Persons, by Foothill to Administrative Borrower (for the benefit of the applicable Borrower). 9.2 Remedies Cumulative. Foothill's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Foothill shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Foothill of one right or remedy shall be deemed an election, and no waiver by Foothill of any Event of Default shall be deemed a continuing waiver. No delay by Foothill shall constitute a waiver, election, or acquiescence by it. 10. TAXES AND EXPENSES. If any Borrower fails to pay any monies (whether taxes, assessments, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, to the extent that Foothill determines, in its Permitted Discretion, that such failure by any Borrower could result in a Material Adverse Change, Foothill may do any or all of the following without prior notice to any Borrower: (a) make payment of the same or any part thereof; (b) set up such reserves in Borrowers' Loan Account as Foothill deems necessary to protect Foothill from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type described in Section 6.10, ------------ and take any action with respect to such policies as Foothill deems prudent. Any such amounts paid by Foothill shall constitute Foothill Expenses. Any such payments made by Foothill shall not constitute an agreement by Foothill to make similar payments in the future or a waiver by Foothill of any Event of Default under this Agreement. Foothill need not inquire as to, or contest the validity of, any such expense, tax, or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 52 11. WAIVERS; INDEMNIFICATION. 11.1 Demand; Protest; etc. Each Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Foothill on which any Borrower may in any way be liable. 11.2 Foothill's Liability for Collateral. So long as Foothill complies with its obligations, if any, under the Code, Foothill shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person. All risk of loss, damage, or destruction of the Collateral shall be borne by Borrowers. 11.3 Indemnification. Borrower shall pay, indemnify, defend, and hold Foothill, each Participant, and each of their respective officers, directors, employees, counsel, agents, and attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all reasonable attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them in connection with or as a result of or related to the execution, delivery, enforcement, performance, and administration of this Agreement and any other Loan Documents or the transactions contemplated herein or therein, and with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). The foregoing to the contrary notwithstanding, Borrowers shall have no obligation to any Indemnified Person under this Section 11.3 with respect to any Indemnified Liability that ------------ a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. If any Indemnified Person makes any payment to any other Indemnified Person with respect to an Indemnified Liability as to which Borrowers were required to indemnify the Indemnified Person receiving such payment, the Indemnified Person making such payment is entitled to be indemnified and reimbursed by Borrowers with respect thereto. 12. NOTICES. Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail (postage prepaid, return receipt requested), overnight courier, electronic mail, or telefacsimile to the 53 Administrative Borrower (for the benefit of all Borrowers) or to Foothill, as the case may be, at its address set forth below: If to Administrative Borrower: P-COM, INC. 3175 Winchester Boulevard Campbell, California 95008 Attn: Leighton Stephenson, Chief Financial Officer Fax No. 408.874.4324 with copies to: BROBECK, PHLEGER & HARRISON LLP 12390 El Camino Road San Diego, California 92130 Attn: Maria K. Pum Fax No. 858.720.2555 If to Foothill: FOOTHILL CAPITAL CORPORATION 2450 Colorado Avenue Suite 3000 W Santa Monica, California 90404 Attn: Business Finance Division Manager Fax No. 310.453.7300 with copies to: BUCHALTER, NEMER, FIELDS & YOUNGER 601 South Figueroa Street, Suite 2400 Los Angeles, California 90017-5704 Attn: Robert C. Colton, Esq. Fax No.: 213.896.0400 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. All notices or demands sent in accordance with this Section 12, other ---------- than notices by Foothill in connection with enforcement rights against the Collateral under the provisions of the Code, shall be deemed received on the earlier of the date of actual receipt or three days after the deposit thereof in the mail. Each Borrower acknowledges and agrees that notices sent by Foothill in connection with enforcement rights against the Collateral under the provisions of the Code shall be deemed sent when deposited in the mail or personally delivered, or, where permitted by law, transmitted by electronic mail, telefacsimile or other similar method set forth above. 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. 13.1 THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING 54 HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. 13.2 THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA OR, AT THE SOLE OPTION OF FOOTHILL, IN ANOTHER COUNTY IN CALIFORNIA PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT -------- ------- AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT FOOTHILL'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE FOOTHILL ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. 13.3 BORROWERS AND FOOTHILL WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13. BORROWERS AND FOOTHILL HEREBY WAIVE THEIR ---------- RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWERS AND FOOTHILL REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS 14.1 Assignments and Participations (a) Foothill may assign and delegate to one or more assignees (each an "Assignee") all, or any ratable part of all, of the Obligations and the --------- other rights and obligations of Foothill hereunder and under the other Loan Documents; provided, however, that Borrowers may continue to deal solely and -------- ------- directly with Foothill in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses, and related information with respect to the Assignee, have been given to Administrative Borrower by Foothill and the Assignee an appropriate assignment and acceptance agreement. (b) From and after the date that Foothill provides Administrative Borrower with such written notice and executed assignment and acceptance agreement, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations 55 hereunder have been assigned to it pursuant to such assignment and acceptance agreement, shall have the assigned and delegated rights and obligations of Foothill under the Loan Documents, and (ii) Foothill shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned and delegated by it pursuant to such assignment and acceptance agreement, relinquish its rights (except with respect to Section 11.3 hereof) ------------ and be released from its obligations under this Agreement (and in the case of an assignment and acceptance agreement covering all or the remaining portion of Foothill's rights and obligations under this Agreement and the other Loan Documents, Foothill shall cease to be a party hereto and thereto), and such assignment shall affect a novation between Borrowers and the Assignee. (c) Immediately upon Borrower's receipt of such fully executed assignment and acceptance agreement, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the rights and duties of Foothill arising therefrom. (d) Foothill may at any time sell to one or more commercial banks, financial institutions, or other Persons not Affiliates of Foothill (a "Participant") participating interests in Obligations and the other rights and ----------- interests of Foothill hereunder and under the other Loan Documents; provided, -------- however, that (i) Foothill shall remain the "Foothill" for all purposes of this - ------- Agreement and the other Loan Documents and the Participant receiving the participating interest in the Obligations and the other rights and interests of Foothill hereunder shall not constitute a "Foothill" hereunder or under the other Loan Documents and Foothill's obligations under this Agreement shall remain unchanged, (ii) Foothill shall remain solely responsible for the performance of such obligations, (iii) Borrowers and Foothill shall continue to deal solely and directly with each other in connection with Foothill's rights and obligations under this Agreement and the other Loan Documents, (iv) Foothill shall not transfer or grant any participating interest under which the Participant has the right to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment to, or consent or waiver with respect to this Agreement or of any other Loan Document would (A) extend the final maturity date of the Obligations hereunder in which such Participant is participating, (B) reduce the interest rate applicable to the Obligations hereunder in which such Participant is participating, (C) release all or a material portion of the Collateral or guaranties (except to the extent expressly provided herein or in any of the Loan Documents) supporting the Obligations hereunder in which such Participant is participating, (D) postpone the payment of, or reduce the amount of, the interest or fees payable to such Participant through Foothill, or (E) change the amount or due dates of scheduled principal repayments or prepayments or premiums, and (v) all amounts payable by Borrowers hereunder shall be determined as if Foothill had not sold such participation, except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Foothill under this Agreement. The rights of any Participant only shall be derivative through Foothill and no Participant shall have any rights under this Agreement or the other Loan Documents or any direct rights as to Borrowers, the Collections, the Collateral, or otherwise in respect of the Obligations. No Participant shall have the right to participate directly in the making of decisions by Foothill. 56 (e) In connection with any such assignment or participation or proposed assignment or participation, a Foothill may disclose all documents and information which it now or hereafter may have relating to Borrowers or Borrowers' business. (f) Any other provision in this Agreement notwithstanding, Foothill may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement in favor of any Federal Reserve Bank in accordance with Regulation A of the Federal Reserve Bank or U.S. Treasury Regulation 31 CFR (S)203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. 14.2 Successors. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided, -------- however, that Borrowers may not assign this Agreement or any rights or duties - ------- hereunder without Foothill's prior written consent and any prohibited assignment shall be absolutely void ab initio. No consent to assignment by Foothill shall release any Borrower from its Obligations. Foothill may assign this Agreement and the other Loan Documents and its rights and duties hereunder and thereunder pursuant to Section 14.1 hereof and, except as expressly required pursuant to ------------ Section 14.1 hereof, no consent or approval by any Borrower is required in - ------------ connection with any such assignment. 15. AMENDMENTS; WAIVERS. 15.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by Borrowers therefrom, shall be effective unless the same shall be in writing and signed by Foothill and Administrative Borrower (on behalf of all Borrowers) and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given 15.2 No Waivers; Cumulative Remedies. No failure by Foothill to exercise any right, remedy, or option under this Agreement or, any other Loan Document, or delay by Foothill in exercising the same, will operate as a waiver thereof. No waiver by Foothill will be effective unless it is in writing, and then only to the extent specifically stated. No waiver by Foothill on any occasion shall affect or diminish Foothill's rights thereafter to require strict performance by Borrowers of any provision of this Agreement. Foothill's rights under this Agreement and the other Loan Documents will be cumulative and not exclusive of any other right or remedy that Foothill may have. 16. GENERAL PROVISIONS. 16.1 Effectiveness. This Agreement shall be binding and deemed effective when executed by Borrowers and Foothill. 16.2 Destruction of Borrowers' Documents. All documents, schedules, invoices, agings, or other papers delivered to Foothill may be destroyed or otherwise disposed of by Foothill four months after they are delivered to or received by Foothill, unless Administrative Borrower requests, in writing, the return of said documents, schedules, or other papers and makes arrangements, at Borrowers' expense, for their return. 57 16.3 Section Headings. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each section applies equally to this entire Agreement. 16.4 Interpretation. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Foothill or Borrowers, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. 16.5 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 16.6 Withholding Taxes. All payments made by Borrowers hereunder or under any note will be made without setoff, counterclaim, or other defense, except as required by applicable law other than for Taxes (as defined below). All such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction (other than the United States) or by any political subdivision or taxing authority thereof or therein (other than of the United States) with respect to such payments (but excluding, any tax imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein (i) measured by or based on the net income or net profits of Foothill, or (ii) to the extent that such tax results from a change in the circumstances of Foothill, including a change in the residence, place of organization, or principal place of business of Foothill, or a change in the branch or lending office of Foothill participating in the transactions set forth herein) and all interest, penalties or similar liabilities with respect thereto (all such non-excluded taxes, levies, imposts, duties, fees, assessments or other charges being referred to collectively as "Taxes"). If any Taxes are so levied or imposed, each Borrower ----- agrees to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every payment of all amounts due under this Agreement or under any note, including any amount paid pursuant to this Section 16.6 after ------------ withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein; provided, however, that Borrowers shall not be -------- ------- required to increase any such amounts payable to Foothill if the increase in such amount payable results from Foothill's own willful misconduct or gross negligence. Borrowers will furnish to Foothill as promptly as possible after the date the payment of any Taxes is due pursuant to applicable law certified copies of tax receipts evidencing such payment by Borrowers. 16.7 Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. 58 16.8 Revival and Reinstatement of Obligations. If the incurrence or payment of the Obligations by any Borrower or any guarantor of the Obligations or the transfer by either or both of such parties to Foothill of any property of either or both of such parties should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, and other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if Foothill is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that Foothill is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of Foothill related thereto, the liability of Borrowers or such guarantor automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 16.9 Integration. This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. 16.10 P-Com as Agent for Borrowers. Each Borrower hereby irrevocably appoints P-Com as the borrowing agent and attorney-in-fact for all Borrowers (the "Administrative Borrower") which appointment shall remain in full force and ----------------------- effect unless and until Foothill shall have received prior written notice signed by each Borrower that such appointment has been revoked and that another Borrower has been appointed Administrative Borrower. Each Borrower hereby irrevocably appoints and authorizes the Administrative Borrower (i) to provide Foothill with all notices with respect to Advances obtained for the benefit of any Borrower and all other notices and instructions under this Agreement and (ii) to take such action as the Administrative Borrower deems appropriate on its behalf to obtain Advances and to exercise such other powers as are reasonably incidental thereto to carry out the purposes of this Agreement. It is understood that the handling of the Loan Account and Collateral of Borrowers in a combined fashion, as more fully set forth herein, is done solely as an accommodation to Borrowers in order to utilize the collective borrowing powers of Borrowers in the most efficient and economical manner and at their request, and that Foothill shall not incur liability to any Borrower as a result hereof. Each Borrower expects to derive benefit, directly or indirectly, from the handling of the Loan Account and the Collateral in a combined fashion since the successful operation of each Borrower is dependent on the continued successful performance of the integrated group. To induce Foothill to do so, and in consideration thereof, each Borrower hereby jointly and severally agrees to indemnify Foothill and hold Foothill harmless against any and all liability, expense, loss or claim of damage or injury, made against Foothill by any Borrower or by any third party whosoever, arising from or incurred by reason of (a) the handling of the Loan Account and Collateral of Borrowers as herein provided, (b) Foothill's relying on any instructions of the Administrative Borrower, or (c) any other action taken by Foothill hereunder or under the other Loan Documents, except that Borrowers will have no liability to 59 Foothill under this Section 16.10 with respect to any liability that has been ------------- finally determined by a court of competent jurisdiction to have resulted solely from the gross negligence or willful misconduct of Foothill. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in Los Angeles, California. P-COM, INC., a Delaware corporation By /s/ Leighton J. Stephenson ------------------------------------- Title: Chief Financial Officer --------------------------------- P-COM NETWORK SERVICES, INC., a Delaware corporation By /s/ Leighton J. Stephenson ------------------------------------- Title: Chief Financial Officer --------------------------------- FOOTHILL CAPITAL CORPORATION, a California corporation By /s/ Katy Brooks ------------------------------------- Title: Vice President, Underwriter --------------------------------- 60 COMPLIANCE CERTIFICATE SAMPLE COPY (Loan and Security Agreement Section 6.3) Date _______________ FOOTHILL CAPITAL CORPORATION 2450 Colorado Avenue, Suite 3000W Santa Monica, California 90404 Attention: ________________________ RE: Loan and Security Agreement, dated as of March 29, 2001 (the "Agreement") by and among FOOTHILL CAPITAL CORPORATION ("Foothill"), P-COM, INC. ("P- Com") and P-COM NETWORK SERVICES, INC. ("Network" and together with P-Com, "Borrowers") Dear _______________: In accordance with Section 6.3 of the Agreement, this letter shall serve as certification to Foothill that to the best of my knowledge: (i) all financial statements have been prepared in accordance with GAAP and fairly represent the financial condition of Borrowers, (ii) the representations and warranties of Borrowers set forth in the Agreement and other Loan Documents are true and correct in all material respects on and as of the date of this certification, (iii) as demonstrated on Exhibit 1 attached hereto, each Borrower is in compliance with each of its financial covenants set forth in Sections 7.20 and 7.21 of the Agreement as of the date of this certification, and (iv) there does not exist any condition or event that constitutes a Default or Event of Default. Such certification is made as of the fiscal month ending ______________. Sincerely, Chief Financial Officer Exhibit C-1 EX-21.1 6 0006.txt LIST OF SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 LIST OF SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of Incorporation Subsidiary or Organization ---------- ---------------- 1. P-Com United Kingdom, Inc. Delaware 2. P-Com (BARBADOS) FSC Limited Barbados 3. P-Com Finance Corporation Delaware 4. P-Com, Italia S.p.A. Italy 5. P-Com Network Services, Inc. Delaware 6. P-Com GmbH Germany 7. Telematics, Inc. Virginia 8 P-Com Services (UK) Limited England 9. P-Com Corp., Int'l (Cayman) Ltd. Cayman Islands 10. P-Com Finance Corp. Delaware
EX-23.1 7 0007.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 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. 333-45463) and on Form S-3 (No. 333-47190, No. 333-47034, No. 333-47184, and No. 333-70937) of P-Com, Inc. of our report dated March 9, 2001, except for Note 15 which is as of March 29, 2001, relating to the financial statements and financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP San Jose, California March 30, 2001 -----END PRIVACY-ENHANCED MESSAGE-----