SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
| | Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to ss. 14a-11 or ss. 240.14a-12.
P-COM, INC. / SPEEDCOM WIRELESS CORPORATION
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(Name of Registrant as Specified in Charter)
Payment of Filing Fee (Check the appropriate box)
|_| No fee required.
|X| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
Common stock, par value $0.0001 per share, of P-Com, Inc.
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(2) Aggregate number of securities to which transaction applies:
67,500,000 shares of common stock of P-Com, Inc. See Footnote (1) below.
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$0.22 per share of common stock of P-Com, Inc. See Footnote (1)
below.
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(4) Proposed maximum aggregate value of transaction:
See Footnote (2) below.
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(5) Total fee paid: $__________
|X| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date filed:
(1) Estimated solely for the purpose of calculating the filing fee pursuant to
Rule 0-11(a)(4) under the Securities Exchange Act of 1934, as amended,
based on the average of the bid and asked prices per share of the common
stock of P-Com, Inc., on September 5, 2003, as reported on the OTC Bulletin
Board.
(2) The proposed maximum aggregate value of the transaction is $19,950,000,
consisting of (i) 67,500,000 shares of common stock of P-Com, Inc., valued
at $14,850,000 (based on a per share value of $0.22, as described in
Footnote (1) above), and (ii) $5,100,000 of liabilities of SPEEDCOM
Wireless Corporation to be assumed by P-Com, Inc.
PCOM LOGO SPEEDCOM LOGO
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October 31, 2003
Dear Stockholder:
You are cordially invited to attend the annual meeting of the
stockholders of P-Com, Inc. or a special meeting of the stockholders of SPEEDCOM
Wireless Corporation. At the meetings, you will be asked to consider proposals
related to P-Com's acquisition of substantially all of SPEEDCOM's assets, among
other important matters listed below.
At the SPEEDCOM special meeting, SPEEDCOM stockholders will be asked to
consider the following proposals:
o to adopt and approve the Asset Purchase Agreement, dated as of
June 16, 2003, as amended on September 2, 2003, pursuant to
which SPEEDCOM has agreed to sell substantially all of its
assets to P-Com (the "Acquisition") and
o to approve an amendment to SPEEDCOM's certificate of
incorporation to increase the authorized common stock of
SPEEDCOM from 250,000,000 shares to 500,000,000 shares.
At the P-Com annual meeting, P-Com stockholders will be asked to:
o approve an amendment to P-Com's certificate of incorporation
to increase the authorized common stock of P-Com from
69,000,000 shares to 700,000,000 shares;
o approve an amendment to P-Com's certificate of incorporation
to implement a reverse split of P-Com's common stock at a
ratio between 1-for-10 and 1-for-30;
o approve an amendment to P-Com's bylaws;
o approve the price-based antidilution feature of some of
P-Com's outstanding convertible preferred stock and warrants,
which were issued in connection with previous private
financing transactions;
o approve amendments to P-Com's 1995 Stock Option/Stock Issuance
Plan (the "Plan");
o elect two directors to the board of directors of P-Com; and
o ratify the appointment of Aidman Piser & Company as
independent auditors of P-Com.
At their respective meetings, stockholders of SPEEDCOM and P-Com will
also be asked to give management of their respective companies the discretionary
authority to adjourn the meeting to a later date or dates, but not later than
December 31, 2003, in order to solicit additional proxies in favor of any of the
proposals listed above.
In order to complete the Acquisition, P-Com's stockholders must approve
the amendment to P-Com's certificate of incorporation to increase the number of
shares of common stock that P-Com is authorized to issue so that P-Com may issue
the 67,500,000 shares of its common stock to SPEEDCOM. In addition, P-Com's
stockholders must approve the amendment to allow for the issuance of common
stock upon conversion or exercise of P-Com's outstanding Series B Preferred
Stock, Series C Preferred Stock, and warrants and options. If the proposal to
approve the amendment is not approved, a default under the provisions of certain
of those securities will be triggered, as discussed under "P-Com's Proposal to
Amend Its Certificate of Incorporation" and "Effect of Proposed Amendment"
beginning on pages 103 and 104, respectively of the attached materials.
The dates, times, and places of the annual meeting of the stockholders
of P-Com and the special meeting of the stockholders of SPEEDCOM are as follows:
For SPEEDCOM stockholders: For P-Com stockholders:
December 2, 2003 December 2, 2003
at 10:00 a.m. local time at 10:00 a.m. local time
at the corporate officers of SPEEDCOM at the corporate offices of P-Com, Inc.
Wireless Corporation 3175 S. Winchester Boulevard
7020 Professional Parkway East Campbell, California 95008
Sarasota, FL 34240
Under the terms of the Asset Purchase Agreement, P-Com will acquire
substantially all of the assets of SPEEDCOM in exchange for (i) 67,500,000
shares of P-Com's common stock, and (ii) the assumption by P-Com of certain of
SPEEDCOM's liabilities, totaling up to approximately $5.1 million. The number of
shares of P-Com common stock to be issued to SPEEDCOM represents 11.5% of
P-Com's common stock issued and outstanding on October 10, 2003, assuming
conversion of the Series B Preferred Stock and Series C Preferred Stock, as
discussed on page 29 of the attached materials, and the exercise or conversion
of all outstanding convertible securities of P-Com. The number of shares of
P-Com common stock to be issued will not be adjusted based upon changes in its
market price. As a result, the market value of the shares of P-Com common stock
to be received by SPEEDCOM will depend on the market price of P-Com common stock
at the time of the closing of the Acquisition.
P-Com's common stock is currently traded on the OTC Bulletin Board
under the symbol "PCOM" and on October 10, 2003, the closing price of P-Com's
common stock was $0.21 per share. Based on the market price of P-Com common
stock on that date, the value of the P-Com shares to be issued to SPEEDCOM is
$14,175,000.
ASSUMING P-COM SHAREHOLDERS APPROVE ALL PROPOSALS, THE TOTAL NUMBER OF
SHARES OF COMMON STOCK THAT WILL BE OUTSTANDING AND RESERVED FOR ISSUANCE UNDER
ALL PLANS AND COMMITMENTS OF P-COM IS 584,964,229. THE CURRENT NUMBER OF SHARES
OF COMMON STOCK ISSUED AND OUTSTANDING WILL REPRESENT 7.4% OF ALL OUTSTANDING
SHARES OF P-COM COMMON STOCK IF ALL OF THE PROPOSALS ARE APPROVED, ASSUMING THE
ISSUANCE OF ALL SHARES RESERVED FOR ISSUANCE UNDER THE PLAN, AS PROPOSED TO BE
AMENDED.
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF SPEEDCOM HAS
APPROVED THE ASSET PURCHASE AGREEMENT AND THE ACQUISITION AND RECOMMENDS THAT
THE STOCKHOLDERS OF SPEEDCOM VOTE (I) FOR THE APPROVAL OF THE ASSET PURCHASE
AGREEMENT AND THE ACQUISITION DESCRIBED IN THE ATTACHED MATERIALS, (II) FOR THE
AMENDMENT TO SPEEDCOM'S CERTIFICATE OF INCORPORATION, AND (III) FOR GRANTING
SPEEDCOM'S MANAGEMENT THE DISCRETIONARY AUTHORITY TO ADJOURN THE SPECIAL
MEETING.
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF P-COM HAS
APPROVED THE ASSET PURCHASE AGREEMENT AND THE ACQUISITION. IN ORDER TO COMPLETE
THE ACQUISITION, P-COM'S STOCKHOLDERS MUST APPROVE THE PROPOSAL TO AMEND P-COM'S
CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK
THAT P-COM IS AUTHORIZED TO ISSUE. THE BOARD OF DIRECTORS OF P-COM RECOMMENDS
THAT THE STOCKHOLDERS OF P-COM VOTE (I) FOR THE AMENDMENTS TO P-COM'S
CERTIFICATE OF INCORPORATION, (II) FOR THE AMENDMENT OF P-COM'S BYLAWS, (III)
FOR THE APPROVAL OF THE PRICE-BASED ANTIDILUTION FEATURE OF SOME OF P-COM'S
CONVERTIBLE SECURITIES, WHICH WERE ISSUED IN CONNECTION WITH PREVIOUS PRIVATE
FINANCING TRANSACTIONS, (IV) FOR THE AMENDMENT TO P-COM'S 1995 STOCK
OPTION/STOCK ISSUANCE PLAN, (V) FOR THE ELECTION OF P-COM'S DIRECTOR NOMINEES TO
THE BOARD OF DIRECTORS OF P-COM, (VI) FOR THE RATIFICATION OF THE APPOINTMENT OF
AIDMAN PISER & COMPANY AS INDEPENDENT AUDITORS OF P-COM, ALL AS FURTHER
DESCRIBED IN THE ATTACHED MATERIALS, AND (VII) FOR GRANTING P-COM'S MANAGEMENT
THE DISCRETIONARY AUTHORITY TO ADJOURN THE ANNUAL MEETING.
The accompanying notice of the annual meeting of the stockholders of
P-Com, notice of the special meeting of the stockholders of SPEEDCOM, and joint
proxy statement explain the proposed Acquisition and the other proposals being
presented for your approval, and they provide specific information about the
annual and special meetings. Please read these materials carefully. IN
PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE DISCUSSION IN THE SECTIONS
ENTITLED "RISK FACTORS" BEGINNING ON PAGE 7 AND "THE ACQUISITION" BEGINNING ON
PAGE 29.
Whether or not you expect to attend the meetings, please complete,
date, sign and promptly return the accompanying proxy in the enclosed postage
paid envelope so that your shares may be represented at the meeting, regardless
of the number of shares you own. If you sign, date and return your proxy card
without indicating how you want to vote, your proxy will be voted in accordance
with the recommendations of the respective boards of directors.
We join our boards of directors in strongly supporting the Acquisition
and recommend that you vote in favor of the proposals presented to you for
approval.
Sincerely, Sincerely,
/s/ Sam Smookler /s/ Mark Schaftlein
Sam Smookler Mark Schaftlein
President and Chief Executive Officer Chief Financial Officer
of P-Com, Inc. of SPEEDCOM Wireless Corporation
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE ACQUISITION DESCRIBED IN THIS JOINT
PROXY STATEMENT OR THE P-COM COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE
ACQUISITION OR DETERMINED IF THIS JOINT PROXY STATEMENT IS ACCURATE OR ADEQUATE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This joint proxy statement is dated October 31, 2003, and was first
mailed to stockholders of P-Com and SPEEDCOM on or about November 3, 2003.
PCOM LOGO
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 2, 2003
TO THE STOCKHOLDERS OF P-COM, INC.:
NOTICE IS HEREBY GIVEN that the 2003 Annual Meeting of Stockholders of
P-Com, Inc., a Delaware corporation, will be held on December 2, 2003 at 10:00
a.m., local time at the corporate offices of P-Com, Inc. located at 3175 S.
Winchester Boulevard, Campbell, California 95008. At the meeting, you will be
asked to vote on the following matters:
1. To approve an amendment to P-Com's certificate of
incorporation to increase the number of shares of common stock
authorized for issuance from 69,000,000 shares to 700,000,000
shares.
2. To approve an amendment to P-Com's certificate of
incorporation to implement a reverse split of P-Com's common
stock at a ratio between 1-for-10 and 1-for-30. The ratio at
which the reverse stock split will be implemented will be
selected by P-Com's board of directors in its discretion, and
the reverse stock split will be effected by the filing of a
certificate of amendment in one of the forms attached to this
joint proxy statement as Annex B.
3. To approve an amendment to P-Com's bylaws to permit the
issuance of securities that are convertible, exercisable or
exchangeable into shares of P-Com common stock at a
conversion, exercise or exchange price per share that is
subject to downward adjustment without having to obtain the
approval of the holders of a majority of P-Com's outstanding
common stock.
4. To approve the price-based antidilution feature of some of
P-Com's outstanding preferred stock and warrants, which will
enable the conversion and exercise prices of these securities
to be adjusted downward in the event that P-Com subsequently
issues additional shares of its common stock or other
securities convertible into or exercisable for shares of its
common stock at a price per share that is less than the price
per share paid by the purchasers of these securities.
5. To approve an amendment to P-Com's 1995 Stock Option/Stock
Issuance Plan (which is referred to in this notice as the
"Stock Option Plan") to (i) increase the number of shares of
P-Com common stock reserved for issuance under the Stock
Option Plan from 5,786,000 shares to 77,786,000 shares, and
(ii) extend the term of the Stock Option Plan from 10 years to
15 years.
6. To elect two directors to P-Com's board of directors to serve
for three-year terms ending upon the 2006 annual meeting of
stockholders or until a successor is duly elected and
qualified.
7. To ratify the appointment of Aidman Piser & Company as
independent auditors of P-Com for the fiscal year ending
December 31, 2003.
8. To grant P-Com's management the discretionary authority to
adjourn the annual meeting to a date or dates not later than
December 31, 2003, if necessary to enable P-Com's board of
directors to solicit additional proxies in favor of any of the
proposals listed above.
9. To consider such other matters as may properly come before the
annual meeting or any adjournment of the annual meeting.
P-Com's board of directors has approved each of the proposals and
recommends that you vote FOR each of the proposals as described in the attached
materials. Before voting, you should carefully review all the information
contained in the attached joint proxy statement and in particular you should
consider the matters discussed under "Risk Factors" beginning on page 7.
All P-Com stockholders are cordially invited to attend the P-Com annual
meeting in person. Whether or not you expect to attend the annual meeting,
please complete, date, sign and promptly return the accompanying proxy in the
enclosed postage paid envelope so that your shares may be represented at the
annual meeting, regardless of the number of shares you own. If you receive more
than one proxy card because your shares are registered in different names and
addresses, each proxy card should be signed and returned to assure that all your
shares will be represented at the annual meeting. You may revoke your proxy at
any time prior to the annual meeting. If you attend the annual meeting and vote
by ballot, your proxy will be revoked automatically and only your vote at the
annual meeting will be counted.
Only P-Com stockholders of record at the close of business on October
15, 2003, the record date for the P-Com annual meeting, are entitled to receive
notice of and to vote at the annual meeting or any adjournment of the annual
meeting. The stock transfer books of P-Com will remain open between the record
date and the date of the annual meeting. A list of stockholders entitled to vote
at the annual meeting will be available for inspection at the executive offices
of P-Com.
Sincerely,
/s/ Sam Smookler
Sam Smookler
President and Chief Executive Officer
October 31, 2003
Campbell, California
YOUR VOTE IS IMPORTANT.
PLEASE EITHER (1) MARK, SIGN, DATE AND
RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE ENCLOSED
POSTAGE-PAID ENVELOPE; (2) USE THE TELEPHONE NUMBER INDICATED BELOW OR SHOWN ON
THE PROXY CARD TO SUBMIT YOUR PROXY BY TELEPHONE OR (3) VISIT THE WEBSITE
INDICATED BELOW OR NOTED ON YOUR PROXY CARD TO SUBMIT YOUR PROXY ON THE
INTERNET. IN THIS WAY, IF YOU ARE UNABLE TO ATTEND IN PERSON, YOUR SHARES CAN
STILL BE VOTED AT THE P-COM ANNUAL MEETING.
VOTING ELECTRONICALLY OR BY TELEPHONE
In addition to submitting your proxy by mail, you may also submit your
proxy:
o through the Internet, by visiting a website established for
that purpose at http://www.eproxyvote.com/pcom and following
the instructions; or
o by telephone, by calling the toll-free number 1-877-PRX-VOTE
(1-877-799-8683) in the United States, Canada or Puerto Rico
on a touch-tone phone and following the recorded instructions.
If you are a beneficial owner, please refer to your proxy card or the
information forwarded by your bank, broker or other holder of record to see
which options are available to you.
SPEEDCOM LOGO
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 2, 2003
TO THE STOCKHOLDERS OF SPEEDCOM WIRELESS CORPORATION:
NOTICE IS HEREBY GIVEN that a special meeting of the stockholders of
SPEEDCOM Wireless Corporation will be held on December 2, 2003, at 10:00 a.m.
local time at the corporate offices of SPEEDCOM located at 7020 Professional
Parkway East, Sarasota, Florida 34240. At the special meeting, you will be asked
to vote on the following matters:
1. To adopt and approve the Asset Purchase Agreement, dated June
16, 2003, between SPEEDCOM and P-Com, and to approve the
Acquisition whereby P-Com will acquire substantially all of
the assets of SPEEDCOM and assume certain liabilities of
SPEEDCOM.
2. To adopt an amendment to SPEEDCOM's certificate of
incorporation to increase the number of authorized shares of
common stock from 250,000,000 to 500,000,000 shares.
3. To grant SPEEDCOM's management the discretionary authority to
adjourn the special meeting to a date or dates not later than
December 31, 2003, if necessary to enable SPEEDCOM's board of
directors to solicit additional proxies in favor of any of the
proposals listed above.
4. To consider such other matters as may properly come before the
special meeting or any adjournment of the special meeting.
SPEEDCOM's board of directors has approved each of the proposals and
recommends that you vote FOR each of the proposals as described in the attached
materials. Before voting, you should carefully review all the information
contained in the attached joint proxy statement and in particular you should
consider the matters discussed under "Risk Factors" beginning on page 7.
All SPEEDCOM stockholders are cordially invited to attend the SPEEDCOM
special meeting in person. Whether or not you expect to attend the annual
meeting, please complete, date, sign and promptly return the accompanying proxy
in the enclosed postage paid envelope so that your shares may be represented at
the special meeting, regardless of the number of shares you own. If you receive
more than one proxy card because your shares are registered in different names
and addresses, each proxy card should be signed and returned to assure that all
your shares will be represented at the special meeting. You may revoke your
proxy at any time prior to the special meeting. If you attend the special
meeting and vote by ballot, your proxy will be revoked automatically and only
your vote at the special meeting will be counted.
Only SPEEDCOM stockholders of record at the close of business on
October 23, 2003, the record date for the SPEEDCOM special meeting, are entitled
to receive notice of and to vote at the special meeting or any adjournment of
the special meeting. The stock transfer books of SPEEDCOM will remain open
between the record date and the date of the special meeting. A list of
stockholders entitled to vote at the special meeting will be available for
inspection at the executive offices of SPEEDCOM.
Sincerely,
/s/ Mark Schaftlein
Mark Schaftlein
Chief Financial Officer
October 31, 2003
Sarasota, Florida
YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN. PLEASE
READ THE ATTACHED PROXY STATEMENT CAREFULLY, COMPLETE, SIGN AND DATE THE
ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE AND RETURN IT IN THE ENCLOSED
ENVELOPE.
WHERE YOU CAN FIND MORE INFORMATION
P-Com and SPEEDCOM each file, and after the Acquisition will continue
to file, reports, proxy statements and other information with the Securities and
Exchange Commission ("SEC"). Copies of these reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the SEC at:
Judiciary Plaza
Room 1024
450 Fifth Street, N.W.
Washington, D.C. 20549
Copies of these materials can also be obtained by mail at prescribed
rates from the Public Reference Room of the SEC at the address set forth above
or by calling the SEC at l-800-SEC-0330. The SEC maintains a website that
contains reports, proxy statements and other information about issuers,
including P-Com and SPEEDCOM, that file electronically with the SEC. The address
of the SEC's website is http://www.sec.gov.
INFORMATION ON P-COM'S WEBSITE
Information on any P-Com website is not part of this joint proxy
statement and P-Com stockholders should not rely on that information in deciding
whether to approve the proposals described in this joint proxy statement, unless
that information is also in this joint proxy statement.
INFORMATION ON SPEEDCOM'S WEBSITES
Information on any SPEEDCOM website is not part of this joint proxy
statement and SPEEDCOM stockholders should not rely on that information in
deciding whether to approve the Acquisition, unless that information is also in
this joint proxy statement.
i
TABLE OF CONTENTS
PAGE
WHERE YOU CAN FIND MORE INFORMATION............................................................................ i
QUESTIONS AND ANSWERS ABOUT THE ACQUISITION.................................................................... iv
SUMMARY........................................................................................................ 1
COMPARATIVE PER SHARE DATA..................................................................................... 5
MARKET PRICE AND DIVIDEND DATA................................................................................. 6
RISK FACTORS................................................................................................... 7
STATEMENT REGARDING FORWARD-LOOKING INFORMATION................................................................ 20
ANNUAL MEETING OF P-COM STOCKHOLDERS........................................................................... 21
General...................................................................................................... 21
Purpose of the Annual Meeting................................................................................ 21
Recommendation of P-Com's Board of Directors................................................................. 22
Record Date and Outstanding Shares........................................................................... 23
Quorum and Vote Required..................................................................................... 23
Proxies...................................................................................................... 24
Revocation of Proxies........................................................................................ 25
Appraisal Rights Under Delaware Law.......................................................................... 25
Expenses; Solicitation....................................................................................... 25
Shares held by P-Com Directors and Executive Officers........................................................ 25
SPECIAL MEETING OF THE SPEEDCOM STOCKHOLDERS................................................................... 26
General...................................................................................................... 26
Purpose of the Special Meeting............................................................................... 26
Recommendation of SPEEDCOM's Board of Directors.............................................................. 26
Record Date and Outstanding Shares........................................................................... 27
Quorum and Vote Required..................................................................................... 27
Proxies...................................................................................................... 27
Revocation of Proxies........................................................................................ 28
Appraisal Rights Under Delaware Law.......................................................................... 28
Expenses; Solicitation....................................................................................... 28
Shares held by SPEEDCOM Directors and Executive Officers..................................................... 29
THE ACQUISITION................................................................................................ 29
General...................................................................................................... 29
Completion and Effectiveness of the Acquisition.............................................................. 29
Shares Issued by P-Com to SPEEDCOM........................................................................... 29
Liabilities to be Assumed by P-Com........................................................................... 30
Assets and Liabilities to be Retained by SPEEDCOM............................................................ 30
Required Stockholder Approvals............................................................................... 31
Appraisal or Dissenters' Rights.............................................................................. 31
Material United States Income Tax Consequences of the Acquisition............................................ 31
No Financial Advisors........................................................................................ 31
Background of the Acquisition................................................................................ 31
SPEEDCOM's Reasons for the Acquisition....................................................................... 33
Interests of SPEEDCOM's Directors and Executive Officers in the Acquisition.................................. 36
Recommendation of SPEEDCOM's Board of Directors............................................................... 36
P-Com's Reasons for the Acquisition.......................................................................... 36
Recommendation of P-Com's Board of Directors................................................................. 38
THE ASSET PURCHASE AGREEMENT................................................................................... 38
Representations and Warranties............................................................................... 38
Conditions to the Completion of the Acquisition.............................................................. 39
No Solicitation.............................................................................................. 40
Additional Agreements........................................................................................ 41
Termination of the Asset Purchase Agreement.................................................................. 42
Fees and Expenses............................................................................................ 43
P-COM'S BUSINESS............................................................................................... 43
P-COM'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................. 57
SPEEDCOM'S BUSINESS............................................................................................ 72
SPEEDCOM'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 78
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION........................................................ 90
P-Com Selected Historical and Pro Forma Consolidated Financial Data.......................................... 90
SPEEDCOM Selected Historical Financial Data.................................................................. 92
P-COM'S UNAUDITED PRO FORMA FINANCIAL INFORMATION.............................................................. 93
ii
SPEEDCOM'S PROPOSAL TO AMEND ITS AMENDED AND RESTATED CERTIFICATE OF INCORPORATION............................. 99
P-COM'S AND SPEEDCOM'S ADJOURNMENT PROPOSALS................................................................... 101
P-COM'S PROPOSAL TO AMEND ITS CERTIFICATE OF INCORPORATION..................................................... 103
Purpose of and Rationale for Proposed Amendment.............................................................. 103
Effect of Proposed Amendment................................................................................. 104
Anti-Takeover Effects........................................................................................ 105
Approvals Required........................................................................................... 106
Recommendation of P-Com's Board of Directors................................................................. 106
P-COM'S PROPOSAL TO AMEND ITS CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT..................... 106
General...................................................................................................... 106
Purpose and Background of the Reverse Stock Split............................................................ 107
Effect of Reverse Stock Split................................................................................ 107
Effect on Outstanding Securities............................................................................. 108
No Effect on Legal Ability to Pay Dividends.................................................................. 109
Payment for Fractional Shares; Exchange of Stock Certificates................................................ 109
Dissenters' Rights of Appraisal.............................................................................. 109
Approvals Required........................................................................................... 110
Recommendation of P-Com's Board of Directors................................................................. 110
P-COM'S PROPOSAL TO AMEND ITS BYLAWS........................................................................... 110
P-COM'S PROPOSAL TO APPROVE THE ISSUANCE OF CERTAIN CONVERTIBLE SECURITIES..................................... 112
P-COM'S PROPOSAL TO AMEND ITS 1995 STOCK OPTION/STOCK ISSUANCE PLAN............................................ 114
P-COM'S PROPOSAL TO ELECT ITS DIRECTOR NOMINEES TO THE P-COM BOARD OF DIRECTORS................................ 125
General...................................................................................................... 125
Nominees for Term Ending Upon the 2006 Annual Meeting of Stockholders........................................ 125
Continuing Director for Term Ending Upon the 2005 Annual Meeting of Stockholders............................. 126
Continuing Director for Term Ending Upon the 2004 Annual Meeting of Stockholders............................. 126
Board Committees and Meetings................................................................................ 126
Director Compensation........................................................................................ 126
Recommendation of the Board of Directors..................................................................... 127
P-COM'S PROPOSAL TO RATIFY THE SELECTION OF ITS INDEPENDENT AUDITORS........................................... 127
P-COM'S EXECUTIVE COMPENSATION AND RELATED INFORMATION......................................................... 128
OWNERSHIP OF P-COM'S SECURITIES................................................................................ 136
STOCK PERFORMANCE GRAPH FOR 1996 - 2002........................................................................ 138
CERTAIN TRANSACTIONS........................................................................................... 139
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934........................................... 139
DESCRIPTION OF P-COM'S SECURITIES.............................................................................. 139
SUBMISSION OF STOCKHOLDER PROPOSALS............................................................................ 143
INCORPORATION OF OTHER DOCUMENTS BY REFERENCE.................................................................. 144
OTHER MATTERS.................................................................................................. 144
INDEX TO FINANCIAL STATEMENTS.................................................................................. F-1
ANNEX A ASSET PURCHASE AGREEMENT
ANNEX B FORMS OF CERTIFICATE OF AMENDMENT
iii
QUESTIONS AND ANSWERS ABOUT THE ACQUISITION
Q: WHY IS P-COM PURCHASING SUBSTANTIALLY ALL OF THE ASSETS OF SPEEDCOM?
A: P-Com and SPEEDCOM are proposing to combine their business operations
by having P-Com purchase substantially all of the assets of SPEEDCOM.
We believe P-Com's acquisition of SPEEDCOM's business will provide
P-Com with complimentary unlicensed point-to-point and spread spectrum
wireless access systems, at lower price points, and, therefore, provide
additional opportunities for growth. Following the Acquisition, P-Com
will also have greater access to enterprise and government markets
through sales channels established by SPEEDCOM. Together with the
increased scale and reduced administrative expenses, we believe the
broader range of wireless radio products and additional markets will
provide P-Com with a better opportunity to achieve profitability.
Q: WHY IS SPEEDCOM SELLING ITS ASSETS?
A: Given the recent operating performance of SPEEDCOM, the current
industry and financial market conditions, and the cost of remaining an
independent public company, it became necessary to either engage in a
combination transaction or to sell substantially all of its assets.
SPEEDCOM believes the opportunities to derive value for its operating
and other assets are greatly enhanced as a result of the sale of its
business to P-Com, which, because of its size, has a greater ability to
leverage the combined assets to increase sales and revenues. As a
result of the sale to P-Com, SPEEDCOM will be able to realize the
expected benefits from the combined business, while still developing
additional revenue-generating opportunities.
Q. WHAT ASSETS ARE BEING SOLD TO P-COM IN THE ACQUISITION?
A: In the Acquisition, P-Com will acquire substantially all of the assets
used by SPEEDCOM in the operation of its business.
Q: WHAT WILL SPEEDCOM RECEIVE IN THE ACQUISITION?
A: In the Acquisition, SPEEDCOM will receive 67,500,000 shares of P-Com
common stock and have up to approximately $5.1 million of its
liabilities assumed by P-Com. The number of shares of P-Com common
stock to be issued to SPEEDCOM will not be adjusted based upon changes
in the market price of P-Com common stock. As a result, the market
value of the P-Com common stock to be received by SPEEDCOM in the
Acquisition will fluctuate as the market price of P-Com common stock
fluctuates. Neither P-Com nor SPEEDCOM has the right to terminate the
Asset Purchase Agreement due to changes in the market price of P-Com
common stock.
Q: HOW WILL P-COM STOCKHOLDERS BE AFFECTED BY THE ACQUISITION?
A: P-Com stockholders will continue to own the same number of shares of
P-Com common stock that they owned immediately prior to the
Acquisition. Each share of P-Com common stock, however, will represent
a smaller ownership percentage of a significantly larger company.
Q: WHAT WILL SPEEDCOM DO AFTER THE ACQUISITION IS COMPLETED?
A: Following the completion of the Acquisition, SPEEDCOM plans to
significantly reduce its monthly overhead in order to preserve its
remaining cash and begin developing revenue-generating opportunities.
If the Acquisition had been completed on September 2, 2003, SPEEDCOM
would have (i) approximately $200,000 in cash and accounts receivable,
after paying transaction related costs and some of SPEEDCOM's other
outstanding obligations, (ii) 67,500,000 shares of P-Com common stock
having a market value of approximately $12,825,000, (iii) approximately
$2.0 million in debt, and (iv) no revenue producing business
operations.
iv
Q: HOW WILL SPEEDCOM STOCKHOLDERS BE AFFECTED BY THE ACQUISITION?
A: SPEEDCOM stockholders will continue to own the same number of shares of
SPEEDCOM common stock that they owned immediately prior to the
Acquisition. Each share of SPEEDCOM common stock will represent the
same ownership percentage of a company with substantially less debt and
whose principal asset consists of 67,500,000 shares of P-Com common
stock.
Q: WHAT ARE THE MATERIAL UNITED STATES TAX CONSEQUENCES OF THE ACQUISITION
TO SPEEDCOM?
A: SPEEDCOM will recognize gain from the Acquisition in an amount equal to
the difference between the fair market value of the consideration
received from the sale of its assets and liabilities and SPEEDCOM's
adjusted tax basis in those same assets and liabilities. However,
SPEEDCOM currently has sufficient net operating losses to offset the
taxable gain based on the current terms of the Acquisition.
Q: WHAT ARE THE MATERIAL UNITED STATES TAX CONSEQUENCES OF THE ACQUISITION
TO P-COM STOCKHOLDERS AND SPEEDCOM STOCKHOLDERS?
A: The Acquisition will not materially affect P-Com stockholders and
SPEEDCOM stockholders for United States income tax purposes.
We encourage P-Com and SPEEDCOM stockholders to consult their own tax
advisors for a full understanding of the tax consequences of the
Acquisition.
Q: WHAT STOCKHOLDER VOTES ARE NEEDED TO APPROVE THE ACQUISITION?
A: In order to issue the 67,500,000 shares of P-Com common stock as part
of the Acquisition, P-Com's certificate of incorporation must be
amended to increase the number of shares of common stock that P-Com is
authorized to issue. The affirmative vote of (i) the holders of a
majority of the shares of P-Com common stock outstanding on the record
date, voting as a separate class, and (ii) the holders of a majority of
the shares of P-Com common stock and Series C Preferred Stock
outstanding on the record date, voting together as a single class, is
required to approve the proposed amendment to P-Com's certificate of
incorporation to increase the number of authorized shares.
For SPEEDCOM, the affirmative vote of the holders of a majority of the
outstanding SPEEDCOM common stock, as of the record date, is required
to approve and adopt the Asset Purchase Agreement and the Acquisition.
Q: WHY IS P-COM PROPOSING TO AMEND ITS CHARTER TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK?
A: P-Com intends to pay for the assets of SPEEDCOM by issuing 67,500,000
shares of P-Com common stock. P-Com is currently authorized to issue up
to 69,000,000 shares of its common stock, and as of the record date,
P-Com had approximately 43,517,644 shares of common stock outstanding
and approximately 19,899,251 shares of common stock reserved for
issuance upon conversion, exercise or exchange of some of its
convertible securities. As a result, P-Com will not have enough shares
of authorized common stock available for issuance to SPEEDCOM in
connection with the Acquisition unless the proposed amendment to
P-Com's certificate of incorporation is approved.
P-Com is also obligated to issue shares of its common stock upon the
conversion or exercise of some of its outstanding convertible
securities for which it has not reserved a sufficient number of
authorized and unissued shares of common stock. In order to provide
P-Com's board of directors with sufficient shares to meet its existing
obligations and the flexibility to issue additional securities in
connection with general corporate purposes, P-Com is asking its
v
stockholders to approve the proposed amendment to P-Com's certificate
of incorporation to increase the number of authorized shares of common
stock from 69,000,000 to 700,000,000.
Q: WHAT HAPPENS IF P-COM STOCKHOLDERS DO NOT APPROVE THE AMENDMENT TO ITS
CHARTER TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK?
A: In the event that P-Com does not receive stockholder approval of the
amendment to its charter to increase the number of authorized shares of
common stock, then P-Com will be unable to (i) consummate the
Acquisition, (ii) satisfy its obligations to issue shares of common
stock upon the conversion or exercise of its outstanding Series B
Preferred Stock, Series C Preferred Stock and some of its warrants,
thereby triggering a default under the provisions of those securities
that allows the holders of the preferred stock to redeem their shares
of preferred stock, (iii) issue any additional options or shares of
common stock under its 1995 Stock Option/Stock Issuance Plan, and (iv)
raise additional funds through equity financings to meet its working
capital needs. Under the default provisions of P-Com's Series B
Preferred Stock and Series C Preferred Stock, the holders of the
preferred stock may elect to redeem all of their outstanding shares for
cash. If P-Com is unable to redeem the holders' outstanding shares,
then the shares shall accrue interest per annum at the lower of 24% or
the highest interest rate permitted by applicable law until fully
redeemed.
Q: WHY IS P-COM PROPOSING TO AMEND ITS CHARTER TO EFFECT A REVERSE STOCK
SPLIT?
A: P-Com common stock currently trades on the OTC Bulletin Board. P-Com is
proposing to effect a reverse stock split primarily for the purpose of
increasing the bid price per share of its common stock above the $4.00
per share minimum bid price that is required for initial inclusion in
The Nasdaq Stock Market. Furthermore, P-Com's board of directors
believes that the low market price of P-Com common stock impairs its
marketability and creates a negative impression of P-Com. P-Com hopes
that the decrease in the number of shares of its outstanding common
stock resulting from the reverse stock split and the anticipated
increase in the per share trading price will encourage greater interest
in its common stock among members of the financial community and the
investing public.
Q: WHAT VOTE IS REQUIRED TO APPROVE THE PROPOSED AMENDMENTS TO P-COM'S
CERTIFICATE OF INCORPORATION?
A: The proposals to amend P-Com's certificate of incorporation will
require the affirmative vote of (i) the holders of a majority of the
shares of P-Com common stock outstanding on the record date, voting as
a separate class, and (ii) the holders of a majority of the shares of
P-Com common stock and Series C Preferred Stock outstanding on the
record date, voting together as a single class.
Q: WHY IS P-COM PROPOSING TO AMEND ITS BYLAWS?
A: P-Com's bylaws currently require P-Com to obtain the approval of the
holders of a majority of the outstanding shares of P-Com common stock
when issuing any securities that are convertible, exercisable or
exchangeable for shares of common stock at a conversion, exercise or
exchange price that is subject to downward adjustment. P-Com's board of
directors believes it would be in the best interests of P-Com and its
stockholders to amend P-Com's bylaws to permit the issuance of these
convertible securities without stockholder approval.
Q: WHAT VOTE IS REQUIRED TO APPROVE THE PROPOSED AMENDMENT TO P-COM'S
BYLAWS?
A: The proposal to amend P-Com's bylaws will require the affirmative vote
of (i) the holders of a majority of the shares of P-Com common stock
outstanding on the record date, voting as a separate class, and (ii)
the holders of a majority of the shares of P-Com common stock and
Series C Preferred Stock outstanding on the record date, voting
together as a single class.
vi
Q: WHAT IS THE PROPOSAL TO APPROVE THE PRICE-BASED ANTIDILUTION FEATURE OF
SOME OF P-COM'S OUTSTANDING CONVERTIBLE SECURITIES?
A: On March 26, 2003, May 28, 2003, July 18, 2003, and October 3, 2003,
P-Com consummated private financing transactions in which it issued
preferred stock and warrants that are convertible into or exercisable
for shares of P-Com common stock. Subject to approval by P-Com's
stockholders, the conversion price of the preferred stock and the
exercise price of the warrants are subject to downward adjustment in
the event that P-Com subsequently issues additional shares of its
common stock or other securities convertible into or exercisable for
shares of its common stock at a price per share that is less than the
price per share paid by the purchasers of these securities. Currently,
the downward adjustment feature of these securities is ineffective. In
order for this downward adjustment feature to take effect, it must be
approved by P-Com's stockholders in accordance with Article VII,
Section 8(iii) of P-Com's bylaws.
Q: WHAT VOTE IS REQUIRED TO APPROVE P-COM'S PRICE-BASED ANTIDILUTION
FEATURE OF CONVERTIBLE SECURITIES?
A: The proposal to approve the price-based antidilution feature of P-Com's
convertible securities will require the affirmative vote of (i) the
holders of a majority of the shares of P-Com common stock outstanding
on the record date, voting as a separate class, and (ii) the holders of
a majority of the shares of P-Com common stock and Series C Preferred
Stock outstanding on the record date, voting together as a single
class.
Q: WHAT ARE THE SPEEDCOM AND P-COM ADJOURNMENT PROPOSALS?
A: In the two adjournment proposals, SPEEDCOM and P-Com are each asking
their stockholders to grant management the discretionary authority to
adjourn their respective meetings, to a date or dates not later than
December 31, 2003, if the number of P-Com shares voting in favor of any
P-Com proposal or the number of SPEEDCOM shares voting in favor of any
SPEEDCOM proposal is insufficient to approve those proposals at the
annual or special meeting. Adjourning the annual or special meeting to
a later date will provide additional time to solicit proxies in favor
of those proposals.
Q: WHAT VOTE IS REQUIRED TO APPROVE THE ADJOURNMENT PROPOSALS?
A: The P-Com adjournment proposal will require the affirmative vote of the
holders of a majority of the shares of P-Com common stock and Series C
Preferred Stock present in person or represented by proxy and entitled
to vote at the P-Com annual meeting.
The SPEEDCOM adjournment proposal will require the affirmative vote of
the holders of a majority of the shares of SPEEDCOM common stock
present in person or represented by proxy and voting at the SPEEDCOM
special meeting.
Q: WHEN DO YOU EXPECT TO COMPLETE THE ACQUISITION?
A: We are working to complete the Acquisition as quickly as possible. We
expect to complete the Acquisition one week after the requisite
stockholder votes have been obtained.
Q: ARE SPEEDCOM OR P-COM STOCKHOLDERS ENTITLED TO APPRAISAL OR DISSENTERS'
RIGHTS?
A: Under Delaware law, SPEEDCOM and P-Com stockholders are not entitled to
appraisal or dissenters' rights.
Q: WHAT DO I NEED TO DO NOW?
A: After carefully reading and considering the information contained in
this joint proxy statement, please complete, sign and date your proxy
and return it in the enclosed return envelope as soon as possible, so
that your shares may be represented at the annual meeting of P-Com
stockholders or the special meeting of SPEEDCOM stockholders. If you
sign, date and return your proxy card but do not include instructions
vii
on how to vote your proxy, we will vote your shares FOR the proposals
described in this joint proxy statement.
P-Com stockholders may also submit their proxies electronically by
calling the toll-free telephone number or visiting the Internet website
shown on their proxy cards.
You may attend your annual meeting, if you are a P-Com stockholder, or
your special meeting, if you are a SPEEDCOM stockholder, and vote your
shares in person rather than voting by proxy.
Q: IF MY BROKER HOLDS MY SHARES IN "STREET NAME", WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on
how to vote in accordance with the information and procedures provided
to you by your broker.
If you hold P-Com common stock and do not instruct your broker how to vote
your shares, it will be equivalent to voting against Proposals 1, 2 and
3, but will have no effect on the outcome of the other proposals.
If you hold SPEEDCOM common stock and do not instruct your broker how to
vote your shares, it will be equivalent to voting against approval and
adoption of the Asset Purchase Agreement.
Q: WHAT HAPPENS IF I DO NOT VOTE?
A: If you are a SPEEDCOM stockholder and you do not submit a proxy or vote
at your special meeting, your shares will not be counted for the
purpose of determining the presence of a quorum and your inaction will
have the same effect as a vote against approval and adoption of the
Asset Purchase Agreement. If you submit a proxy and affirmatively elect
to abstain from voting, your shares will be counted for the purpose of
determining the presence of a quorum, but will not be voted at the
special meeting. As a result, your abstention will have the same effect
as a vote against approval and adoption of the Asset Purchase
Agreement.
If you are a P-Com stockholder and you do not submit a proxy or vote at
your annual meeting, your shares will not be counted for the purpose of
determining the presence of a quorum and your inaction will have the
same effect as a vote against Proposals 1, 2 and 3, but will have no
effect on the outcome of the other proposals. If you submit a proxy and
affirmatively elect to abstain from voting, your shares will be counted
for the purpose of determining the presence of a quorum but will not be
voted at the annual meeting. As a result, your abstention will have the
same effect as a vote against Proposals 1, 2 and 3, but will have no
effect on the outcome of the other proposals.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY?
A: Yes. You can change your vote at any time before your proxy is voted at
your company's annual or special meeting. You can do this in one of
three ways:
o timely delivery of a valid, later-dated proxy by mail, or,
with respect to P-Com, by telephone or Internet;
o revoking your proxy by written notice to the corporate
secretary of P-Com or SPEEDCOM, as applicable; or
o voting in person by written ballot at the P-Com annual meeting
or the SPEEDCOM special meeting.
If you have instructed a broker to vote your shares, you must follow
the directions from your broker on how to change that vote.
Q: ARE THERE ANY RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR
THE PROPOSALS DESCRIBED IN THIS JOINT PROXY STATEMENT?
A: We have listed in the section entitled "Risk Factors," beginning on
page 7, the risks that you should consider in deciding whether to vote
for the proposals described in this joint proxy statement.
Q: WHOM SHOULD I CALL WITH QUESTIONS?
A: If you have any questions about the Acquisition or, if you are a P-Com
stockholder, about any of the other proposals described in this joint
viii
proxy statement or if you need additional copies of this joint proxy
statement or the enclosed proxy, you should contact:
P-COM STOCKHOLDERS:
P-Com, Inc.
3175 S. Winchester Boulevard
Campbell, CA 95008
(408) 866-3666
Attention: Daniel W. Rumsey
SPEEDCOM STOCKHOLDERS:
SPEEDCOM Wireless Corporation
7020 Professional Parkway East
Sarasota, Fl 34240
(941) 907-2361
Attention: Gil Sharell
You may also obtain additional information about P-Com and SPEEDCOM from
documents filed with the SEC by following the instructions in the section
entitled "Where You Can Find More Information" on the page immediately preceding
the Table of Contents of this joint proxy statement.
ix
SUMMARY
We are sending this joint proxy statement to P-Com and SPEEDCOM
stockholders. This summary highlights selected information from this joint proxy
statement and may not contain all the information that is important to you. To
better understand the Acquisition and the other matters discussed in this joint
proxy statement, you should read this entire document carefully, including the
Asset Purchase Agreement, attached as Annex A, and the other documents to which
we refer. We have included page references parenthetically to direct you to a
more complete description of the topics presented in this summary.
THE COMPANIES (SEE PAGES 43 AND 72)
P-COM, INC.
3175 South Winchester Boulevard
Campbell, California 95008
(408) 866-3666
P-Com develops, manufactures and markets microwave radios for
point-to-point, spread spectrum and point-to-multipoint applications for
telecommunications networks worldwide. Cellular and personal communications
service providers employ P-Com's point-to-point systems to transmit data between
remote tower sites and switching centers. Network service providers and Internet
service providers are able, through the deployment of P-Com's equipment and
systems, to respond to the demands for high-speed wireless access services, such
as Internet access associated with business-to-business and e-commerce business
processes. Through deployment of P-Com's systems, network providers can quickly
and efficiently establish integrated Internet, data, voice and video
communications for their customers, then expand and grow those services as
demand increases.
SPEEDCOM WIRELESS CORPORATION
7020 Professional Parkway East
Sarasota, Florida, 34240
(941) 907-2300
SPEEDCOM manufactures, configures and delivers a variety of broadband
fixed-wireless products, including its SPEEDLAN family of wireless ethernet
bridges and routers. Internet service providers, telecommunications carriers and
other service providers and private organizations in the United States of
America and more than 80 foreign countries worldwide use SPEEDCOM's products to
provide broadband "last-mile" wireless connectivity in various point-to-point
and point-to-multipoint configurations at speeds up to 155 megabits per second
and distances up to 25 miles. SPEEDCOM's products provide high-performance
broadband fixed wireless solutions specifically designed for
building-to-building local area network connectivity and wireless Internet
distribution.
SUMMARY OF THE ACQUISITION (SEE PAGE 29)
The Asset Purchase Agreement is the main legal document that governs
the transaction and is attached to this joint proxy statement as Annex A. This
agreement provides the terms and conditions that govern P-Com's acquisition of
SPEEDCOM's assets. We encourage you to read the Asset Purchase Agreement
carefully.
In the Asset Purchase Agreement, P-Com agreed to issue to SPEEDCOM
67,500,000 shares of P-Com common stock and to assume up to a maximum of $5.1
million worth of SPEEDCOM's outstanding liabilities in exchange for
substantially all of the assets of SPEEDCOM.
P-Com will assume a maximum of $1,200,000 of SPEEDCOM's accounts
payable and SPEEDCOM may retain a maximum of $200,000 in cash and accounts
receivable. For every dollar of SPEEDCOM's accounts payable that SPEEDCOM
reduces through negotiations with its creditors, SPEEDCOM shall receive credit
for $0.50 for each such dollar reduction, which credit shall be retained by
SPEEDCOM.
P-COM'S PROPOSAL TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
(SEE PAGE 103)
P-Com intends to pay for the assets of SPEEDCOM, in part, by issuing
67,500,000 shares of P-Com common stock. Before P-Com can issue these shares,
P-Com must first amend its certificate of incorporation to increase the number
of shares of common stock that P-Com is authorized to issue. In order to permit
P-Com to issue the 67,500,000 shares of its common stock in connection with the
Acquisition, P-Com is asking its stockholders to approve the proposed amendment
to P-Com's certificate of incorporation to increase the number of authorized
shares of common stock from 69,000,000 to 700,000,000.
RECOMMENDATION OF P-COM'S BOARD OF DIRECTORS (SEE PAGES 38 AND 106)
After careful consideration, P-Com's board of directors has determined
that the Acquisition is in the best interests of P-Com and its stockholders and
has declared the Acquisition advisable. In order to issue the 67,500,000 shares
of P-Com common stock to SPEEDCOM, P-Com's certificate of incorporation must
first be amended to increase the number of shares of common stock that P-Com is
authorized to issue. P-Com's board of directors recommends that the P-Com
stockholders vote FOR the proposal to amend P-Com's certificate of
incorporation.
RECOMMENDATION OF SPEEDCOM'S BOARD OF DIRECTORS (SEE PAGE 36)
After careful consideration, SPEEDCOM's board of directors has
determined that the Acquisition is in the best interests of SPEEDCOM and its
stockholders and has declared the Acquisition advisable. SPEEDCOM's board of
directors recommends that SPEEDCOM stockholders vote FOR the proposal to approve
and adopt the Asset Purchase Agreement and the Acquisition.
ANNUAL MEETING OF P-COM STOCKHOLDERS (SEE PAGE 21)
The annual meeting of P-Com stockholders will be held at the corporate
offices of P-Com at 3175 S. Winchester Boulevard, Campbell, California 95008 on
December 2, beginning at 10:00 a.m., local time. If you owned shares of P-Com
common stock or Series C Preferred Stock on October 15, 2003, the record date
for the P-Com annual meeting, you are entitled to receive this document and to
vote at the meeting. On that date, there were 43,517,644 shares of P-Com common
stock and 8,369 shares of P-Com Series C Preferred Stock outstanding. Holders of
P-Com common stock can cast one vote for each share of P-Com common stock held
on the record date. Holders of P-Com Series C Preferred Stock can cast seventeen
thousand five hundred votes for each share of Series C Preferred Stock held on
the record date.
The affirmative vote of (i) the holders of a majority of the shares of
P-Com common stock outstanding on the record date, voting as a separate class,
and (ii) the holders of a majority of the shares of P-Com common stock and
Series C Preferred Stock outstanding on the record date, voting together as a
single class, is required to approve the proposal to amend P-Com's certificate
of incorporation.
SPECIAL MEETING OF SPEEDCOM STOCKHOLDERS (SEE PAGE 26)
The special meeting of SPEEDCOM stockholders will be held at 7020
Professional Parkway East, Sarasota, Florida 34240, on December 2, 2003,
beginning at 10:00 a.m., local time. If you owned shares of SPEEDCOM common
stock on October 23, 2003, the record date for the SPEEDCOM special meeting, you
are entitled to receive this document and to vote at the meeting. On that date,
20,092,022 shares of SPEEDCOM common stock were outstanding. Holders of SPEEDCOM
common stock can cast one vote for each share of SPEEDCOM common stock held on
the record date.
The affirmative vote of a majority of the shares of SPEEDCOM common
stock outstanding on the record date is required to approve and adopt the Asset
Purchase Agreement and the Acquisition, and to approve the proposal to amend
SPEEDCOM's certificate of incorporation.
CONDITIONS TO COMPLETION OF THE ACQUISITION (SEE PAGE 39)
The obligations of P-Com and SPEEDCOM to complete the Acquisition are
subject to the satisfaction or waiver of several closing conditions, including,
in addition to other customary closing conditions, the following:
2
o SPEEDCOM stockholders must have approved and adopted the Asset
Purchase Agreement and the related Acquisition and P-Com
stockholders must have approved the amendment to P-Com's
certificate of incorporation to increase the number of
authorized shares of common stock.
o P-Com must have consummated an equity financing transaction
generating at least $5,000,000 in gross proceeds.
o All of P-Com's outstanding 7% Convertible Subordinated Notes
due 2005 must have been converted into equity securities of
P-Com common stock.
o All of the convertible promissory notes issued by P-Com on
March 26, 2003 in the aggregate face amount of $1,500,000 and
any other convertible promissory notes issued thereafter must
have been converted into shares of P-Com equity securities.
TERMINATION OF THE ASSET PURCHASE AGREEMENT (SEE PAGE 42)
The Asset Purchase Agreement may be terminated before the Acquisition
is completed:
o by mutual written consent;
o by either party, if the Acquisition has not been completed by
December 31, 2003 through no fault of the terminating party;
o by either party, if the stockholders of P-Com have not
approved the amendment to P-Com's certificate of incorporation
to increase the number of authorized shares of common stock,
or if the stockholders of SPEEDCOM have not approved and
adopted the Asset Purchase Agreement and the Acquisition, at
their respective stockholders' meetings;
o by either party, if the board of directors of the other party
accepts or approves an alternate proposal or withdraws its
recommendation of the Acquisition; and
o by either party, if there has been a material breach by the
other party of any representation, warranty, covenant or
agreement in the Acquisition, and
o the breach has not been cured within thirty days after written
notice (except that no cure period shall be required for a
breach, which by its nature cannot be cured); and
o the breach would result in the failure to satisfy one or more
conditions to the Acquisition.
TERMINATION FEES (SEE PAGE 43)
P-Com or SPEEDCOM may be required to pay a termination fee to the other
party as follows:
o If P-Com terminates the Asset Purchase Agreement because
o of a material breach of the Asset Purchase Agreement
by SPEEDCOM;
o SPEEDCOM's board of directors approves an alternate
proposal and withdraws its recommendation of the
Acquisition;
3
o an alternate acquisition proposal remains in effect
60 days prior to December 31, 2003 and SPEEDCOM's
stockholders have not approved and adopted the Asset
Purchase Agreement and the Acquisition,
then SPEEDCOM must pay a termination fee of $500,000 to P-Com.
o If SPEEDCOM terminates the Asset Purchase Agreement because
o of a material breach of the Asset Purchase Agreement
by P-Com;
o P-Com's board of directors approves an alternate
proposal and withdraws its recommendation of the
Acquisition;
o an alternate acquisition proposal remains in effect
60 days prior to December 31, 2003 and P-Com's
stockholders have not approved the amendment to
P-Com's certificate of incorporation to increase the
number of authorized shares of common stock,
then P-Com must pay a termination fee of $500,000 to SPEEDCOM.
NO SOLICITATION PROVISIONS (SEE PAGE 40)
The Asset Purchase Agreement contains provisions prohibiting P-Com and
SPEEDCOM from initiating or engaging in any discussion regarding a competing
acquisition transaction. P-Com and SPEEDCOM have agreed that they and their
respective subsidiaries will not, and will cause their respective directors,
officers, employees, representatives, investment bankers, agents and affiliates
not to, take any action to solicit a competing acquisition proposal. There are
limited exceptions to these prohibitions that enable the boards of directors of
P-Com and SPEEDCOM to fulfill their fiduciary duties to the P-Com stockholders
and SPEEDCOM stockholders, respectively.
APPRAISAL OR DISSENTERS' RIGHTS (SEE PAGE 31)
Under Delaware law, P-Com and SPEEDCOM stockholders are not entitled to
appraisal rights in connection with the Acquisition.
TAX CONSEQUENCES (SEE PAGE 31)
SPEEDCOM will recognize gain from the Acquisition in an amount equal to
the difference between the fair market value of the consideration received from
the sale of its assets and liabilities and SPEEDCOM's adjusted tax basis in
those same assets and liabilities. However, SPEEDCOM currently has sufficient
net operating losses to offset the taxable gain based on the current terms of
the Acquisition.
RISK FACTORS (SEE PAGE 7)
By voting for or against the Acquisition, SPEEDCOM stockholders are
effectively deciding whether or not to invest indirectly in P-Com common stock,
which will become the sole principal asset of SPEEDCOM following the completion
of the Acquisition. By voting for or against the proposal to amend P-Com's
certificate of incorporation to increase the number of authorized shares of
P-Com common stock, P-Com stockholders are effectively deciding whether or not
to approve the Acquisition. SPEEDCOM and P-Com stockholders should carefully
consider the factors discussed in the section entitled "Risk Factors" before
deciding how to vote on these proposals.
COMPLETION AND EFFECTIVENESS OF THE ACQUISITION (SEE PAGE 29)
The Acquisition will be completed when all of the conditions to
completion of the Acquisition are satisfied or waived in accordance with the
Asset Purchase Agreement. P-Com and SPEEDCOM hope to complete the Acquisition in
the fourth quarter of 2003.
4
COMPARATIVE PER SHARE DATA
The following table provides historical and pro forma per share data of
P-Com and SPEEDCOM. Pro forma book value per share and earnings per share have
been calculated assuming that 67,500,000 shares of P-Com common stock were
issued in the Acquisition to SPEEDCOM on the respective dates presented. This
information should be read in conjunction with P-Com's and SPEEDCOM's Selected
Historical Financial Data, beginning on pages 90 and 92 of this joint proxy
statement, the Unaudited Pro Forma Financial Information, beginning on page 93,
of this joint proxy statement, P-Com's and SPEEDCOM's Management's Discussion
and Analysis of Financial Condition and Results of Operations, beginning on
pages 57 and 78 of this joint proxy statement, the financial statements and
related notes of P-Com, beginning on page F-1 of this joint proxy statement, and
the financial statements and related notes of SPEEDCOM incorporated herein by
reference.
P-COM PRO FORMA SPEEDCOM
HISTORICAL COMBINED HISTORICAL
BOOK VALUE PER SHARE:
December 31, 2002........................................... $(0.45) $(0.07) $(0.43)
June 30, 2003............................................... $(0.75) $(0.21) $(0.61)
LOSS PER SHARE:
Basic and diluted loss from continuing operations per common share:
Year ended December 31, 2002................................ $(1.74) $(0.53) $(0.47)
Six months ended June 30, 2003.............................. $(0.33) $(0.14) $(0.18)
DIVIDENDS PER SHARE:
Year ended December 31, 2002................................ - - -
Six months ended June 30, 2003.............................. - - -
-----------
(1) Historical loss from continuing operations per common share for P-Com
represent basic and diluted loss per share before discontinued
operations.
(2) Historical book value per share for P-Com and SPEEDCOM is computed by
dividing stockholders' deficit, less preferred equity, by the number of
shares outstanding at the end of each period presented, and excludes
common stock equivalents, if any (e.g., warrants, options and other
convertible securities).
5
MARKET PRICE AND DIVIDEND DATA
P-Com common stock is quoted on the OTC Bulletin Board under the symbol
"PCOM." SPEEDCOM common stock is quoted on OTC Bulletin Board under the symbol
"SPWC."
The table below shows, for the calendar year quarters indicated, the
reported high and low sale prices of P-Com common stock, as reported on the
NASDAQ National Market until August 28, 2002, on the NASDAQ Small Cap Market
until March 10, 2003 and on the OTC Bulletin Board thereafter, and SPEEDCOM
common stock, as reported on the OTC Bulletin Board until February 5, 2001, the
NASDAQ Small Cap Market until August 22, 2002 and on the OTC Bulletin Board
thereafter, in each case based on published financial sources. The P-Com common
stock prices have been adjusted to reflect the 1 for 5 reverse stock split
implemented on June 27, 2002. Information before September 26, 2000, the date of
the merger between SPEEDCOM and LTI Holdings, Inc., ("LTI") is for LTI's common
stock. The quotations represent stock prices between dealers and do not include
retail mark-up, mark-down or commission and may not represent actual
transactions.
P-COM COMMON STOCK SPEEDCOM COMMON STOCK
HIGH LOW HIGH LOW
----- ----- ----- -----
2000
First Quarter....................................................................... $4.74 $1.80 $3.59 $2.13
Second Quarter...................................................................... $3.00 $1.11 $11.72 $3.20
Third Quarter....................................................................... $1.69 $1.04 $22.90 $9.32
Fourth Quarter...................................................................... $1.23 $0.31 $10.25 $3.81
2001
First Quarter....................................................................... $1.10 $0.25 $9.13 $3.44
Second Quarter...................................................................... $0.30 $0.11 $5.25 $2.00
Third Quarter....................................................................... $0.14 $0.05 $2.70 $0.92
Fourth Quarter...................................................................... $0.08 $0.03 $1.35 $0.43
2002
First Quarter....................................................................... $0.37 $0.13 $0.94 $0.42
Second Quarter...................................................................... $0.36 $0.09 $0.69 $0.11
Third Quarter....................................................................... $0.82 $0.19 $0.19 $0.02
Fourth Quarter...................................................................... $0.38 $0.15 $0.07 $0.04
2003
First Quarter....................................................................... $0.31 $0.09 $0.06 $0.02
Second Quarter...................................................................... $0.13 $0.06 $0.09 $0.04
Third Quarter....................................................................... $0.34 $0.09 $0.13 $0.05
----- ----- ----- -----
The following table presents trading information for P-Com common stock
and SPEEDCOM common stock on June 16, 2003, the last full trading day before the
announcement of the signing of the Asset Purchase Agreement, and October 29,
2003, the last practicable trading day for which information was available
before the date of this joint proxy statement. P-Com and SPEEDCOM cannot assure
you what the market prices of P-Com or SPEEDCOM common stock will be on the date
of completion of the Acquisition. You should obtain current market quotations.
P-COM COMMON STOCK SPEEDCOM COMMON STOCK
------------------ ---------------------
Closing price on June 16, 2003.......................................... $0.12 $0.06
Closing price on October 29, 2003....................................... $0.20 $0.06
Neither P-Com nor SPEEDCOM has ever declared or paid cash dividends on
its capital stocks. The combined company does not anticipate paying cash
dividends on its common stock in the foreseeable future.
6
RISK FACTORS
An investment in P-Com and SPEEDCOM common stock is subject to many
risks. You should carefully consider the risks described below, together with
all of the other information included in this joint proxy statement, including
the financial statements and the related notes, before you decide whether to
approve the Acquisition. P-Com's and SPEEDCOM's business, operating results and
financial condition could be harmed by any of the following risks. The trading
price of P-Com and SPEEDCOM common stock could decline due to any of these
risks, and you could lose all or part of your investment.
RISKS ASSOCIATED WITH THE ACQUISITION
P-COM AND SPEEDCOM MAY NOT REALIZE THE INTENDED BENEFITS OF THE ACQUISITION IF
P-COM IS UNABLE TO INTEGRATE BOTH COMPANIES' OPERATIONS, PRODUCTS AND PERSONNEL
IN A TIMELY AND EFFICIENT MANNER.
Achieving the benefits of the Acquisition will depend in part on the
integration of P-Com's and SPEEDCOM's operations, products and personnel in a
timely and efficient manner. In order for P-Com to provide enhanced and more
valuable products to its customers after the Acquisition, P-Com will need to
integrate both companies' development operations and product lines. This
integration may be difficult and unpredictable because P-Com's and SPEEDCOM's
products are highly complex, have been developed independently and were designed
without regard to integration. Successful integration of P-Com's and SPEEDCOM's
product development operations and product lines also requires coordination of
different development and engineering teams, as well as sales and marketing
efforts and personnel. This, too, may be difficult and unpredictable because of
possible cultural conflicts between the companies and different opinions on
product and technology decisions. If P-Com cannot successfully integrate
SPEEDCOM's operations, products and personnel with its own, P-Com may not
realize the expected benefits of the Acquisition, which could adversely affect
P-Com's business.
INTEGRATING P-COM'S AND SPEEDCOM'S OPERATIONS MAY DIVERT MANAGEMENT'S ATTENTION
AWAY FROM ITS DAY-TO-DAY OPERATIONS.
Integration of P-Com's and SPEEDCOM's operations, products and
personnel may place a significant burden on P-Com's management and its internal
resources. The diversion of P-Com's management's attention and any difficulties
encountered in the transition and integration process could harm P-Com's
business.
THE ACQUISITION WILL RESULT IN SIGNIFICANT COSTS TO P-COM AND SPEEDCOM, WHETHER
OR NOT THE ACQUISITION IS COMPLETED.
The Acquisition will result in significant costs to P-Com and SPEEDCOM.
Transaction costs are estimated to be approximately $250,000. These costs are
expected to consist primarily of fees for attorneys, accountants, filing fees
and financial printers. All of these costs will be incurred whether or not the
Acquisition is completed. In addition, if the Asset Purchase Agreement is
terminated under specified circumstances, the terminating party may be obligated
to pay a $500,000 termination fee.
FAILURE TO COMPLETE THE ACQUISITION COULD CAUSE P-COM'S OR SPEEDCOM'S STOCK
PRICE TO DECLINE.
If the Acquisition is not completed for any reason, P-Com's or
SPEEDCOM's stock price may decline because costs related to the Acquisition,
such as legal and accounting, must be paid even if the Acquisition is not
completed. In addition, if the Acquisition is not completed, P-Com's or
SPEEDCOM's stock price may decline to the extent that the current market price
reflects a market assumption that the Acquisition will be completed.
7
A DIRECTOR OF SPEEDCOM MAY HAVE POTENTIAL CONFLICTS OF INTEREST IN RECOMMENDING
THAT YOU VOTE IN FAVOR OF APPROVAL OF THE ACQUISITION.
One of the directors of SPEEDCOM who recommends that you vote in favor
of the Asset Purchase Agreement and the related Acquisition is expected to join
the board of directors of P-Com immediately upon consummation of the
Acquisition. As a result, he may have interests in the Acquisition that differ
from yours. The receipt of any compensation as a result of his election to the
board of directors of P-Com may influence this director in making his
recommendation that you vote in favor of the Asset Purchase Agreement and the
Acquisition.
IF THE CONDITIONS TO THE ACQUISITION ARE NOT MET, THE ACQUISITION WILL NOT
OCCUR.
Specified conditions must be satisfied or waived to complete the
Acquisition. These conditions are summarized in the section captioned
"Conditions to Completion of the Acquisition" and are described in detail in the
Asset Purchase Agreement. P-Com and SPEEDCOM cannot assure you that each of the
conditions will be satisfied. If the conditions are not satisfied or waived, the
Acquisition will not occur or will be delayed and P-Com and SPEEDCOM each may
lose some or all of the intended benefits of the Acquisition.
IF P-COM'S STOCKHOLDERS DO NOT APPROVE AN INCREASE IN THE NUMBER OF AUTHORIZED
SHARES OF P-COM COMMON STOCK, P-COM WILL BE UNABLE TO CONSUMMATE THE
ACQUISITION.
In connection with the Acquisition, P-Com is asking its stockholders to
approve an amendment to its certificate of incorporation to increase the number
of shares of common stock that P-Com is authorized to issue. P-Com is currently
authorized to issue up to 69,000,000 shares of common stock, and as of August
21, 2003, P-Com had 43,517,644 shares of its common stock outstanding and
19,899,251 shares reserved for issuance upon conversion or exercise of
outstanding options, warrants and other convertible securities. Pursuant to the
Acquisition, P-Com expects to issue 67,500,000 shares of P-Com common stock to
SPEEDCOM. In addition, conditioned upon receipt of stockholder approval, P-Com
is expected to issue approximately 106,000,000 shares of common stock upon
conversion of P-Com's Series B Preferred Stock, and approximately 146,000,000
shares of common stock upon conversion of P-Com's Series C Preferred Stock. If
P-Com's stockholders do not approve the proposal to increase the number of
authorized shares of P-Com common stock from 69,000,000 to 700,000,000, then
P-Com will be unable to provide the consideration for the Acquisition, nor will
it be able to issue the common stock upon conversion of the Series B or Series C
Preferred Stock.
P-COM AND SPEEDCOM MAY WAIVE ONE OR MORE OF THE CONDITIONS TO THE ACQUISITION
WITHOUT RESOLICITING STOCKHOLDER APPROVAL FOR THE ACQUISITION.
Each of the conditions to P-Com's and SPEEDCOM's obligations to
complete the Acquisition may be waived, in whole or in part, to the extent
permitted by applicable laws, by agreement of P-Com and SPEEDCOM. The boards of
directors of P-Com and SPEEDCOM will evaluate the materiality of any such waiver
to determine whether amendment of this joint proxy statement and resolicitation
of proxies is warranted. However, P-Com and SPEEDCOM generally do not expect any
such waiver to be sufficiently material to warrant resolicitation of their
stockholders. In the event that the board of directors of P-Com or SPEEDCOM
determines any such waiver is not sufficiently material to warrant
resolicitation of stockholders, the applicable company will have the discretion
to complete the Acquisition without seeking further stockholder approval.
SALES OF P-COM'S AND SPEEDCOM'S PRODUCTS COULD DECLINE OR BE INHIBITED IF
CUSTOMER RELATIONSHIPS ARE DISRUPTED BY THE ACQUISITION.
The Acquisition may have the effect of disrupting customer
relationships. P-Com's and SPEEDCOM's customers or potential customers may delay
or alter buying patterns during the pendency of and following the Acquisition.
Customers may defer purchasing decisions as they evaluate the likelihood of
8
successful integration of P-Com's and SPEEDCOM's products and P-Com's future
product strategy following the Acquisition. P-Com's or SPEEDCOM's customers or
potential customers may instead purchase products of competitors. In addition,
by increasing the breadth of P-Com's business, the Acquisition may make it more
difficult for P-Com to enter into relationships with customers and strategic
partners, some of whom may view P-Com, following the Acquisition, as a more
direct competitor than P-Com prior to the Acquisition. Any significant delay or
reduction in orders for P-Com's or SPEEDCOM's products could cause P-Com's
sales, following the Acquisition, to decline.
RISKS RELATING TO THE OPERATIONS OF P-COM FOLLOWING THE ACQUISITION
CONTINUING WEAKNESS IN THE TELECOMMUNICATIONS EQUIPMENT AND SERVICES SECTOR HAS
ADVERSELY AFFECTED THE OPERATING RESULTS, FUTURE GROWTH AND STABILITY OF P-COM'S
BUSINESS.
There is an ongoing severe worldwide slowdown in the telecommunications
equipment and services sector that P-Com expects will continue to adversely
affect P-Com following the completion of the Acquisition. Customers,
particularly systems operators and integrated system providers, are deferring
capital spending and orders to suppliers, such as P-Com, and in general are not
building out any significant additional infrastructure at this time. In the
United States, most competitive local exchange carriers have declared bankruptcy
and, internationally, 3G network rollout and commercialization continue to
experience delays. In addition, P-Com's accounts receivable, inventory turnover,
and operating stability can be jeopardized if its customers experience financial
distress. P-Com does not believe that its products sales levels can recover
while an industry-wide slowdown in demand persists.
Global economic conditions have had a depressing effect on sales levels
in past years, including a significant slowdown for P-Com in 1998 and 2001, and
continuing through 2003. The soft economy and slowdown in capital spending
encountered in the United States, the United Kingdom, continental Europe, parts
of Asia, and other geographic markets have had a significant depressing effect
on the sales levels of telecommunications products, such as P-Com's. These
factors may continue to adversely affect P-Com's business, financial condition
and results of operations. P-Com cannot sustain itself at the currently
depressed sales levels, unless it is able to substantially reduce costs or
obtain additional debt or equity financing.
P-COM'S BUSINESS AND FINANCIAL POSITIONS HAVE DETERIORATED SIGNIFICANTLY.
P-Com's business and financial positions have deteriorated
significantly. P-Com's core business product sales were reduced sharply
beginning with the second half of 2001. From inception to June 30, 2003, P-Com's
aggregate net loss is approximately $365.2 million. At June 30, 2003, P-Com's
cash, working capital, accounts receivable, inventory, total assets, employee
headcount, backlog and total stockholders' equity are all substantially below
levels of one year ago. P-Com has negative working capital of $33.3 million as
of June 30, 2003. P-Com's short-term liquidity deficiency could disrupt its
supply chain, and result in its inability to manufacture and deliver its
products, which would adversely affect its results of operations.
P-Com's independent accountants' opinion on its 2002 consolidated
financial statements includes an explanatory paragraph indicating substantial
doubt about P-Com's ability to continue as a going concern. To continue long
term as a going concern, P-Com will have to increase its sales, decrease its
costs, and possibly induce other creditors to forebear or to convert to equity,
raise additional equity financing, and/or raise new debt financing. P-Com may
not accomplish these tasks.
P-COM MAY ENTER INTO SUBSEQUENT AGREEMENTS TO MERGE OR CONSOLIDATE WITH OTHER
COMPANIES, AND IT MAY INCUR SIGNIFICANT COSTS IN THE PROCESS, WHETHER OR NOT THE
TRANSACTIONS ARE COMPLETED.
P-Com signed an Agreement and Plan of Merger with Telaxis
Communications Corporation, dated September 9, 2002. The merger agreement was
terminated by mutual agreement on January 7, 2003. On January 27, 2003, P-Com
signed a letter of intent to acquire privately held Procera Networks Inc., of
9
Sunnyvale, California, in a stock-for-stock transaction. The acquisition effort
was terminated in April 2003. P-Com may enter into other acquisition agreements,
in addition to the Asset Purchase Agreement with SPEEDCOM, in furtherance of
P-Com's strategy to consolidate with other companies in the fixed wireless
market. P-Com may not be able to close any acquisitions on the timetable it
anticipates, if at all. P-Com has and may further incur significant
non-recoverable expenses in these efforts.
P-COM DOES NOT HAVE THE CUSTOMER BASE OR OTHER RESOURCES OF MORE ESTABLISHED
COMPANIES, WHICH MAKES IT DIFFICULT FOR IT TO ADDRESS THE LIQUIDITY AND OTHER
CHALLENGES IT FACES.
Although P-Com has installed and has in operation over 150,000 radio
units globally, it has not developed a large installed base of its equipment or
the kind of close relationships with a broad base of customers of a type enjoyed
by larger, more developed companies, which would provide a base of financial
performance from which to launch strategic initiatives and withstand business
reversals. In addition, P-Com has not built up the level of capital often
enjoyed by more established companies, so from time to time it faces serious
challenges in financing its continued operations. P-Com may not be able to
successfully address these risks.
P-COM RELIES ON A LIMITED NUMBER OF CUSTOMERS FOR A MATERIAL PORTION OF ITS
SALES AND THE LOSS OF OR REDUCTION IN SALES TO ANY OF THOSE CUSTOMERS COULD HARM
ITS BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATION.
For the six-month period ended June 30, 2003, sales to four customers
accounted for 53% of sales. P-Com's ability to maintain or increase its sales in
the future will depend, in part upon its ability to obtain orders from new
customers as well as the financial condition and success of its customers, the
telecommunications industry and the global economy. P-Com's customer
concentration also results in concentration of credit risk. As of June 30, 2003,
four customers accounted for 63% of P-Com's total accounts receivable balances.
Many of P-Com's significant recurring customers are located outside the United
States, primarily in the Asia-Pacific Rim areas, United Kingdom, continental
Europe, and Latin America. Some of these customers are implementing new networks
and are themselves in the various stages of development. They may require
additional capital to fully implement their planned networks, which may be
unavailable to them on an as-needed basis, and which P-Com cannot supply in
terms of long-term financing.
If P-Com's customers cannot finance their purchases of its products or
services, this may adversely affect P-Com's business, operations and financial
condition. Financial difficulties of existing or potential customers may also
limit the overall demand for P-Com's products and services. Current customers in
the telecommunications industry have, from time to time, undergone financial
difficulties and may therefore limit their future orders or find it difficult to
pay for products sold to them. Any cancellation, reduction or delay in orders or
shipments, for example, as a result of manufacturing or supply difficulties or a
customer's inability to finance its purchases of P-Com's products or services,
would adversely affect P-Com's business. Difficulties of this nature have
occurred in the past and P-Com believes they can occur in the future. For
instance, in July 2002, P-Com announced a multiple year $100 million supply
agreement with an original equipment manufacturer in China. Even with an
agreement in place, the customer has changed the timing and the product mix
requested, and has cancelled or delayed many of its orders. Enforcement of the
specific terms of the agreement could be difficult and expensive within China,
and P-Com may not ultimately realize the total benefits currently expected in
the contract period.
Finally, acquisitions in the telecommunications industry are common,
which tends to further concentrate the potential customer base in larger
companies.
10
P-COM FACES SUBSTANTIAL COMPETITION AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
P-Com is experiencing intense competition worldwide from a number of
leading telecommunications equipment and technology suppliers. These companies
offer a variety of competitive products and services and some offer broader
telecommunications product lines. These companies include Alcatel Network
Systems, Alvarion, Stratex Networks, Ceragon, Ericsson Limited, Harris
Corporation-Farinon Division, NEC, NERA, Nokia Telecommunications, SIAE,
Siemens, and Proxim. Many of these companies have greater installed bases,
financial resources and production, marketing, manufacturing, engineering and
other capabilities than P-Com does. P-Com faces actual and potential competition
not only from these established companies, but also from start-up companies that
are developing and marketing new commercial products and services. Some of
P-Com's current and prospective customers and partners have developed, are
currently developing or could manufacture products competitive with P-Com's
products. Nokia and Ericsson have developed competitive radio systems, and there
is new technology featuring free space optical systems now in the marketplace.
The principal elements of competition in P-Com's market and the basis
upon which customers may select its systems include price, performance, software
functionality, perceived ability to continue to be able to meet delivery
requirements, and customer service and support. Recently, certain competitors
have announced the introduction of new competitive products, including related
software tools and services, and the acquisition of other competitors and
competitive technologies. P-Com expects competitors to continue to improve the
performance and lower the price of their current products and services and to
introduce new products and services or new technologies that provide added
functionality and other features. New product and service offerings and
enhancements by P-Com's competitors could cause a decline in sales or loss of
market acceptance of its systems. New offerings could also make P-Com's systems,
services or technologies obsolete or non-competitive. In addition, P-Com is
experiencing significant price competition and expects that competition to
intensify.
P-COM'S OPERATING RESULTS HAVE BEEN ADVERSELY AFFECTED BY DETERIORATING GROSS
MARGINS.
The intense competition for many of P-Com's products has resulted in a
continued reduction in its average selling prices. These reductions have not
been offset by a corresponding decrease in cost of goods sold, resulting in
deteriorating gross margins in many of its product lines. These deteriorating
gross margins may continue in the short term. Reasons for the decline include
the maturation of the systems, the effect of volume price discounts in existing
and future contracts and the intensification of competition.
If P-Com cannot significantly reduce costs, develop new products in a
timely manner, or in the event it fails to achieve increased sales of new
products at a higher average selling price, then it may be unable to offset
declining average selling prices in many of its product lines. If P-Com is
unable to offset declining average selling prices, or achieve corresponding
decreases in manufacturing operating expenses, its gross margins will continue
to decline.
P-COM'S OPERATING RESULTS COULD BE ADVERSELY AFFECTED BY CONTINUED DECLINE IN
CAPITAL SPENDING IN THE TELECOMMUNICATIONS MARKET.
Although much of the anticipated growth in the telecommunications
infrastructure is expected to result from the entrance of new service providers,
many new providers do not have the financial resources of existing service
providers. For example in the United States, most competitive local exchange
carriers are experiencing financial distress. If these new service providers are
unable to adequately finance their operations, they may cancel or delay orders.
Moreover, purchase orders are often received and accepted far in advance of
shipment and, as a result, P-Com typically permits orders to be modified or
canceled with limited or no penalties. In periods of weak capital spending on
the part of traditional customers, P-Com is at risk for curtailment or
cancellation of purchase orders, which can lead to adverse operating results.
Ordering materials and building inventory based on customer forecasts or
11
non-binding orders can also result in large inventory write-offs, such as what
occurred in 2000 and 2001, and continued to incur in 2003.
Global economic conditions have had a depressing effect on sales levels
in the past two and one-half years. The soft economy and reported slowdown in
capital spending in 2001 and 2002 in the United States and European
telecommunications markets have had a significant depressing effect on the sales
levels in both years. In fiscal 2002, P-Com's sales in the United States and
Europe markets totaled $12.2 million, compared to $79.4 million in 2001. This
trend has continued in 2003.
FAILURE TO MAINTAIN ADEQUATE LEVELS OF INVENTORY COULD RESULT IN A REDUCTION OR
DELAY IN SALES AND HARM P-COM'S RESULTS OF OPERATIONS.
P-Com's customers have increasingly been demanding short turnaround on
orders rather than submitting purchase orders far in advance of expected
shipment dates. This practice requires that P-Com keep inventory on hand to meet
market demands. Given the variability of customer needs and purchasing power, it
is difficult to predict the amount of inventory needed to satisfy customer
demand. If P-Com over-estimates or under-estimates inventory requirements to
fulfill customer needs, or if purchase orders are terminated by customers,
P-Com's results of operations could continue to be adversely affected. In
particular, increases in inventory or cancellation of purchase orders could
adversely affect operations if the inventory is ultimately not used or becomes
obsolete. This risk was realized in the large inventory write-downs from 1999 to
2002, and a $5.5 million write-down in the first two quarters of 2003.
P-COM'S LIMITED MANUFACTURING CAPACITY AND SOURCES OF SUPPLY MAY AFFECT ITS
ABILITY TO MEET CUSTOMER DEMAND, WHICH WOULD HARM ITS SALES AND DAMAGE ITS
REPUTATION.
P-Com's internal manufacturing capacity, by design, is very limited.
Under certain market conditions, as for example when there is high capital
spending and rapid system deployment, P-Com's internal manufacturing capacity
will not be sufficient to fulfill customers' orders. P-Com would therefore rely
on contract manufacturers to produce its systems, components and subassemblies.
P-Com'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 P-Com's systems are obtained from a sole supplier or a
limited group of suppliers. Many of these suppliers are in difficult financial
positions as a result of the significant slowdown that P-Com, too, has
experienced. P-Com's reliance on contract manufacturers and on sole suppliers or
a limited group of suppliers involves risks. P-Com has from time to time
experienced an inability to obtain, or to receive in a timely manner, an
adequate supply of finished products and required components and subassemblies.
This inability is due to the above factors and, in some cases, P-Com's financial
condition. As a result, P-Com has less control over the price, timely delivery,
reliability and quality of finished products, components and subassemblies.
A significant ramp-up of production of products and services could
require P-Com to make substantial capital investments in equipment and
inventory, in recruitment and training of additional personnel and possibly in
investment in additional manufacturing facilities. If undertaken, P-Com
anticipates these expenditures would be made in advance of increased sales. In
this event, operating results would be adversely affected from time-to-time due
to short-term inefficiencies associated with the addition of equipment and
inventory, personnel or facilities and these cost categories may periodically
increase as a percentage of revenues.
12
FAILURE TO MAINTAIN A VALID CERTIFICATE FOR ISO 9001:1994 AND UPGRADE THE
CERTIFICATE TO ISO 9001:2000 MAY ADVERSELY AFFECT OUR SALES.
Many of P-Com's customers require their vendors to maintain a valid ISO
Quality certificate before placing purchase orders. P-Com has had a certificate
since December 7, 1993. On December 15, 2003, ISO requires all holders of ISO
9001:1994 to upgrade to ISO 9001:2000. If P-Com is unsuccessful in its efforts
to upgrade to ISO 9001:2000, its ability to secure purchase orders for its
products may be adversely affected.
P-COM'S BUSINESS DEPENDS ON THE ACCEPTANCE OF ITS PRODUCTS AND SERVICES, AND IT
IS UNCERTAIN WHETHER THE MARKET WILL ACCEPT AND DEMAND ITS PRODUCTS AND SERVICES
AT LEVELS NECESSARY FOR SUCCESS.
P-Com's future operating results depend upon the continued growth and
increased availability and acceptance of micro cellular, personal communications
networks/personal communications services and wireless local loop access
telecommunications services in the United States and internationally. The volume
and variety of wireless telecommunications services or the markets for and
acceptance of the services may not continue to grow as expected. The growth of
these services may also fail to create anticipated demand for P-Com's systems.
Predicting which segments of these markets will develop and at what rate these
markets will grow is difficult.
Some sectors of the telecommunications market will require the
development and deployment of an extensive and expensive telecommunications
infrastructure. In particular, the establishment of personal communications
networks/personal communications services networks requires significant capital
expenditures. Communications providers may determine not to make the necessary
investment in this infrastructure, or the creation of this infrastructure may
not occur in a timely manner, as has been the case in 2001 through the second
quarter of 2003. Moreover, one potential application of P-Com's technology, the
use of its systems in conjunction with the provision of alternative wireless
access in competition with the existing wireline local exchange providers,
depends on the pricing of wireless telecommunications services at rates
competitive with those charged by wireline operators. Rates for wireless access
must become competitive with rates charged by wireline companies for this
approach to be successful. Absent that, consumer demand for wireless access will
be negatively affected. If P-Com allocates resources to any market segment that
does not grow, it may be unable to reallocate capital and other resources to
other market segments in a timely manner, ultimately curtailing or eliminating
its ability to enter the other segments.
Certain current and prospective customers are delivering services and
features that use competing transmission media, such as fiber optic and copper
cable, particularly in the local loop access market. To successfully compete
with existing products and technologies, P-Com must offer systems with superior
price and performance characteristics and extensive customer service and
support. Additionally, P-Com must supply these systems on a timely and
cost-effective basis, in sufficient volume to satisfy these prospective
customers' requirements, in order to induce them to transition to P-Com's
technologies. Any delay in the adoption of P-Com's systems and technologies may
result in prospective customers using alternative technologies in their next
generation of systems and networks. P-Com's financial condition may prevent
P-Com from meeting this customer demand or may dissuade potential customers from
purchasing from P-Com.
Prospective customers may design their systems or networks in a manner
that excludes or omits P-Com's products and technology. Existing customers may
not continue to include P-Com's systems in their products, systems or networks
in the future. P-Com's technology may not replace existing technologies and
achieve widespread acceptance in the wireless telecommunications market. Failure
to achieve or sustain commercial acceptance of P-Com's currently available radio
systems or to develop other commercially acceptable radio systems would
materially adversely affect P-Com.
13
DUE TO P-COM'S INTERNATIONAL SALES AND OPERATIONS, P-COM IS EXPOSED TO ECONOMIC
AND POLITICAL RISKS AND SIGNIFICANT FLUCTUATIONS IN THE VALUE OF FOREIGN
CURRENCIES RELATIVE TO THE UNITED STATES DOLLAR.
As a result of P-Com's current heavy dependence on international
markets, especially in the United Kingdom, the European continent, the Middle
East, China, and Latin America, P-Com faces economic, political and foreign
currency fluctuations that are often more volatile than those commonly
experienced in the United States. Approximately 90% of P-Com's sales in the
six-month period ended June 30,2003 were made to customers located outside of
the United States. Historically, P-Com's international sales have been
denominated in British pounds sterling, Euros or United States dollars. A
decrease in the value of British pounds or Euros relative to United States
dollars, if not hedged, will result in exchange loss for P-Com if it has Euro or
British pounds sterling denominated sales. Conversely, an increase in the value
of Euro and British pounds sterling will result in increased margins for P-Com
on Euro or British pounds sterling denominated sales as its functional currency
is in United States dollars. For international sales that P-Com would require to
be United States dollar-denominated, such a decrease in the value of foreign
currencies could make its systems less price- competitive if competitors choose
to price in other currencies and could adversely affect its financial condition.
P-Com funds its Italian subsidiary's operating expenses, which are
denominated in Euros. An increase in the value of Euro currency, if not hedged
relative to the United States dollar, could result in more costly funding for
P-Com's Italian operations, and as a result, higher cost of production to it as
a whole. Conversely, a decrease in the value of Euro currency will result in
cost savings for P-Com.
Additional risks are inherent in P-Com's international business
activities. These risks include:
o changes in regulatory requirements;
o costs and risks of localizing systems (homologation) in
foreign countries;
o availability of suitable export financing, particularly in the
case of large projects which P-Com must ship in short periods;
P-Com's bank line of credit allows this financing up to $4.0
million, subject to numerous conditions;
o timing and availability of export licenses, tariffs and other
trade barriers;
o difficulties in staffing and managing foreign operations,
branches and subsidiaries;
o difficulties in managing distributors;
o terrorist activities;
o recurrence of worldwide health epidemic similar to SARS, which
significantly affected P-Com's ability to travel and do
business in Asia and the Pacific Rim areas;
o potentially adverse tax consequences; and
o difficulty in accounts receivable collections, if applicable.
Due to political and economic instability in new markets, economic,
political and foreign currency fluctuations may be even more volatile than
conditions in developed countries. Countries in the Asia/Pacific, African, and
Latin American regions have in recent years experienced weaknesses in their
currency, banking and equity markets. These weaknesses have adversely affected
and could continue to adversely affect demand for P-Com's products.
14
P-COM'S INTERNATIONAL OPERATIONS SUBJECT P-COM TO THE LAWS, REGULATIONS AND
LOCAL CUSTOMS OF THE COUNTRIES IN WHICH IT CONDUCTS BUSINESS, WHICH MAY BE
SIGNIFICANTLY DIFFERENT FROM THOSE OF THE UNITED STATES.
In many cases, local regulatory authorities own or strictly regulate
international telephone companies. Established relationships between
government-owned or government-controlled telephone companies and their
traditional indigenous suppliers of telecommunications often limit access to
these markets. The successful expansion of P-Com's international operations in
some markets will depend on its ability to locate, form and maintain strong
relationships with established companies providing communication services and
equipment in designated regions. The failure to establish these regional or
local relationships or to successfully market or sell P-Com's products in
specific international markets could limit its ability to compete in today's
highly competitive local markets for broadband wireless equipment.
In addition, many of P-Com's customer purchases and other agreements
are governed by a wide variety of complex foreign laws, which may differ
significantly from United States laws. Therefore, P-Com may be limited in its
ability to enforce its rights under those agreements and to collect damages, if
awarded in any litigation.
GOVERNMENTAL REGULATIONS AFFECTING MARKETS IN WHICH P-COM COMPETES COULD
ADVERSELY AFFECT ITS BUSINESS AND RESULTS OF OPERATIONS.
Radio communications are extensively regulated by the United States and
foreign governments as well as by international treaties. P-Com's systems must
conform to a variety of domestic and international requirements established to,
among other things, avoid interference among users of radio frequencies and to
permit interconnection of equipment. Historically, in many developed countries,
the limited availability of radio frequency spectrum has inhibited the growth of
wireless telecommunications networks. Each country's regulatory process differs.
To operate in a jurisdiction, P-Com must obtain regulatory approval for its
systems and comply with differing regulations.
Regulatory bodies worldwide continue to adopt new standards for
wireless telecommunications products. The delays inherent in this governmental
approval process may cause the cancellation, postponement or rescheduling of the
installment of communications systems by P-Com's customers and P-Com. The
failure to comply with current or future regulations or changes in the
interpretation of existing regulations could result in the suspension or
cessation of operations. Those regulations or changes in interpretation could
require P-Com to modify its products and services and incur substantial costs in
order to comply with the regulations and changes.
In addition, P-Com is also affected by domestic and international
authorities' regulation of the allocation and auction of the radio frequency
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, P-Com
could experience delays in orders. Similarly, failure by regulatory authorities
to allocate suitable frequency spectrum could have a material adverse effect on
P-Com's results. In addition, delays in radio frequency spectrum auction process
in the United States could delay P-Com's ability to develop and market equipment
to support new services.
P-Com operates in a regulatory environment subject to significant
change. Regulatory changes, which are affected by political, economic and
technical factors, could significantly impact P-Com's operations by restricting
its development efforts and those of its customers, making current systems
obsolete or increasing competition. Any such regulatory changes, including
changes in the allocation of available spectrum, could have a material adverse
effect on P-Com's business, financial condition and results of operations. P-Com
may also find it necessary or advisable to modify its systems and services to
15
operate in compliance with these regulations. These modifications could be
expensive and time-consuming.
RISKS RELATING TO THE OPERATIONS OF SPEEDCOM FOLLOWING THE ACQUISITION
SPEEDCOM MAY HAVE INSUFFICIENT ASSETS AND CASH FLOW TO PAY ITS OBLIGATIONS AS
THEY BECOME DUE.
Following completion of the Acquisition, SPEEDCOM's assets will consist
of shares of P-Com common stock received in the Acquisition, which will not be
marketable by SPEEDCOM for at least 185 days following completion of the
Acquisition, and up to $200,000 of cash and accounts receivable, as determined
in accordance with the following formula. SPEEDCOM will be entitled to retain
$200,000 of cash and accounts receivable, provided, that for every dollar of
accounts payable that SPEEDCOM reduces through negotiations with its creditors,
SPEEDCOM shall receive credit for $0.50 for each such dollar reduction, which
such credit shall be retained by SPEEDCOM. As of September 2, 2003, SPEEDCOM had
accounts receivable of approximately $515,000 and accounts payable of $814,000.
Therefore, if the Acquisition had occurred on that date, SPEEDCOM would have
retained cash and accounts receivable in the amount of $200,000.
The Asset Purchase Agreement obligates SPEEDCOM to retain certain
liabilities. If the Acquisition occurred on September 2, 2003, these liabilities
would have amounted to approximately $2.0 million in the aggregate. Therefore,
if the Acquisition had occurred on September 2, 2003, SPEEDCOM would have had
cash and accounts receivable in the amount of $200,000 and liabilities in the
amount of $2.0 million.
SPEEDCOM MAY NOT BE ABLE TO SELL ITS SHARES OF P-COM COMMON STOCK ON ACCEPTABLE
TERMS OR AT ALL.
As part of the Acquisition, SPEEDCOM will receive 67,500,000 shares of
P-Com common stock in consideration for its assets. Assuming that SPEEDCOM
receives 67,500,000 shares of P-Com common stock in the Acquisition and based on
the closing price of P-Com common stock on September 2, 2003, these shares would
have a value of $12,825,000. The shares of P-Com common stock that SPEEDCOM will
receive in the Acquisition will not be registered under the Securities Act of
1933, as amended (the "Securities Act"), and, as a result, the resale of those
shares by SPEEDCOM will be subject to substantial restrictions.
Under the registration rights agreement that P-Com and SPEEDCOM will
enter into upon completion of the Acquisition, SPEEDCOM will be granted the
right to have the resale of its shares of P-Com common stock registered for
resale in the public markets. But this registration right will not be
exercisable by SPEEDCOM for at least 185 days following completion of the
Acquisition. The market for P-Com common stock is limited, and SPEEDCOM may not
be able to sell its shares of P-Com common stock on acceptable terms or at all,
even after the resale of those shares has been registered pursuant to the
Securities Act.
SPEEDCOM MAY LACK THE FINANCIAL RESOURCES TO FUND ITS CONTINUING OPERATIONS.
Following the closing of the Acquisition, SPEEDCOM will become a
holding company. As such, its only source of revenues will be earnings on its
investment portfolio, consisting of an estimated $200,000 in cash and accounts
receivable, net of its estimated retained liabilities of $2.0 million as of
September 2, 2003, and its shares of P-Com common stock, having a market value
of $12,825,000 as of September 2, 2003. After the Acquisition, SPEEDCOM will
continue to incur expenses, relating primarily to its administration and the
accounting, legal and other expenses related to maintaining its status as a
publicly reporting company under the Securities Exchange Act of 1934. SPEEDCOM's
investment income, together with any proceeds from the sale of its shares of
P-Com common stock, may not be sufficient to pay these expenses as they come
due.
16
SPEEDCOM MAY BECOME SUBJECT TO REGULATION AS AN INVESTMENT COMPANY.
As soon as reasonably possible following the closing of the
Acquisition, SPEEDCOM intends to be engaged primarily in a business other than
that of investing, reinvesting, owning, holding or trading in securities.
Consequently, for a period of one year following the closing of the Acquisition,
SPEEDCOM will not be subject to regulation as an investment company. If, at the
expiration of this one-year period, SPEEDCOM continues to own P-Com common stock
or other investment securities that comprise 40% or more of its total assets,
SPEEDCOM may become subject to extensive regulation as an investment company
under the Investment Company Act of 1940, which would impose significant
regulatory burdens and costs on SPEEDCOM and impose limitations upon its
permitted activities.
RISK RELATING TO CAPITAL MARKETS AND P-COM COMMON STOCK FOLLOWING THE
ACQUISITION
The NASDAQ Small Cap Market has delisted P-Com's common stock and this may
severely limit the ability of P-Com's stockholders to sell any of their shares
of P-Com common stock.
NASDAQ moved P-Com's stock listing from the NASDAQ National Market to
the NASDAQ Small Cap Market, effective August 27, 2002, due to P-Com's failure
to meet certain listing requirements, including a minimum bid price of $1.00 per
share. P-Com subsequently failed to meet certain NASDAQ Small Cap Market
quantitative listing standards, including a minimum $1.00 per share bid price
requirement, and the NASDAQ Listing Qualifications Panel determined that P-Com
common stock would no longer be listed on the NASDAQ Small Cap Market. Effective
March 10, 2003, P-Com's common stock commenced trading electronically on the OTC
Bulletin Board of the National Association of Securities Dealers, Inc. This move
could result in a less liquid market available for existing and potential
stockholders to trade shares of P-Com common stock and could ultimately further
depress the trading price of P-Com common stock.
P-Com's common stock is subject to the SEC's "penny stock" regulation.
For transactions covered by this regulation, broker-dealers must make a special
suitability determination for the purchase of the securities and must have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, the rules
generally require the delivery, prior to the transaction, of a risk disclosure
document mandated by the SEC relating to the penny stock market. The
broker-dealer is also subject to additional sales practice requirements.
Consequently, the penny stock rules may restrict the ability of broker-dealers
to sell shares of P-Com common stock and may affect the ability of holders to
sell P-Com common stock in the secondary market, and the price at which a holder
can sell P-Com common stock.
P-COM'S PROSPECTS FOR OBTAINING ADDITIONAL FINANCING ARE UNCERTAIN AND FAILURE
TO ACHIEVE PROFITABILITY OR OBTAIN NEEDED FINANCING WILL AFFECT ITS ABILITY TO
PURSUE FUTURE GROWTH, HARM ITS BUSINESS OPERATIONS AND AFFECT ITS ABILITY TO
CONTINUE AS A GOING CONCERN.
If P-Com is unable to achieve profitability or raise additional debt or
equity financing, it will not be able to continue as a going concern. P-Com's
future capital requirements will depend upon many factors, including a
re-energized telecommunications market, development costs of new products and
related software tools, potential acquisition opportunities, maintenance of
adequate manufacturing facilities and contract manufacturing agreements,
progress of research and development efforts, expansion of marketing and sales
efforts and status of competitive products. Additional financing may not be
available in the future on acceptable terms or at all. P-Com's history of
substantial operating losses could also severely limit P-Com's ability to raise
additional financing. In addition, given the recent price of its common stock,
if P-Com raises additional funds by issuing equity securities, additional
significant dilution to its stockholders could result.
If P-Com is unable to increase sales, decrease costs, or obtain
additional equity or debt financing, P-Com may be required to close business or
product lines, further restructure or refinance its debt or delay, scale back
17
further or eliminate its research and development program, or manufacturing
operations. P-Com may also need to obtain funds through arrangements with
partners or others that may require it to relinquish its rights to certain
technologies or potential products or other assets. P-Com's inability to obtain
capital, or its ability to obtain additional capital only upon onerous terms,
could very seriously damage its business, operating results and financial
condition.
ISSUING ADDITIONAL SECURITIES AS A MEANS OF RAISING CAPITAL AND THE FUTURE SALES
OF THESE SECURITIES IN THE PUBLIC MARKET COULD LOWER P-COM'S STOCK PRICE AND
ADVERSELY AFFECT ITS ABILITY TO RAISE ADDITIONAL CAPITAL IN SUBSEQUENT
FINANCINGS.
P-Com has traditionally relied on debt and equity financings to meet
its working capital needs, including issuances of Series B Preferred Stock and
Series C Preferred Stock in August and October 2003, respectively. If the
securities that P-Com issues in these financings are subsequently sold in the
public market, the trading price of its common stock may be negatively affected.
As of October 29, 2003, the last reported sale price of P-Com common stock was
$0.20. If the market price of P-Com common stock continues to decrease, P-Com
may not be able to conduct additional financings in the future on acceptable
terms or at all, and its ability to raise additional capital will be
significantly limited.
IF P-COM'S PROPOSAL TO AMEND ITS CERTIFICATE OF INCORPORATION IS APPROVED, P-COM
WILL BE ABLE TO CONDUCT ADDITIONAL EQUITY FINANCING TRANSACTIONS, WHICH MAY BE
DILUTIVE TO ITS STOCKHOLDERS.
Having a sufficient number of authorized shares of P-Com common stock
to issue to SPEEDCOM in the Acquisition is only one of the reasons why P-Com is
asking its stockholders to approve the proposal to amend its certificate of
incorporation. If P-Com's certificate of incorporation is amended and the number
of authorized shares of P-Com common stock is increased to 700,000,000, assuming
exercise or conversion of all outstanding options, warrants and other
convertible securities, P-Com will have approximately 115,000,000 shares
available for issuance following the Acquisition. P-Com may use these shares to
conduct additional financing transactions in which shares of P-Com common stock
or other securities that are convertible or exercisable for shares of P-Com
common stock are issued. Given the current market price of P-Com common stock,
any additional financing that involves the issuance of P-Com common stock or
other securities that are convertible into or exercisable for P-Com common stock
will result in significant dilution to P-Com's stockholders, including SPEEDCOM
following the Acquisition.
IF P-COM'S PROPOSAL TO AMEND ITS BYLAWS IS APPROVED, P-COM WILL HAVE A GREATER
ABILITY TO CONDUCT FINANCING TRANSACTIONS USING ITS EQUITY SECURITIES AND, AS A
RESULT, MAY CAUSE FURTHER DILUTION TO ITS STOCKHOLDERS.
If P-Com's proposal to amend its bylaws is approved by P-Com's
stockholders, P-Com will be able to issue securities that are convertible into
or exercisable for shares of P-Com common stock at a conversion or exercise
price that is subject to downward adjustment without obtaining stockholder
approval. This downward adjustment mechanism is designed to protect the holders
of these securities from having their investments diluted by future issuances of
P-Com common stock at a lower price per share. This is accomplished by issuing
an increased number of shares of P-Com common stock to these security holders
upon the conversion or exercise of those securities. If the market price of
P-Com common stock continues to decline and P-Com is forced to continue raising
capital through dilutive equity financings, the holders of these convertible
securities will be protected from any dilution that may occur but, as a result,
P-Com's other stockholders will be diluted to a greater extent than if these
convertible securities did not exist.
18
P-COM'S STOCK PRICE HAS BEEN VOLATILE AND HAS EXPERIENCED SIGNIFICANT DECLINE,
AND IT MAY CONTINUE TO BE VOLATILE AND CONTINUE TO DECLINE.
In recent years, the stock market in general, and the market for shares
of small capitalization technology stocks in particular, have experienced
extreme price fluctuations. These fluctuations have often negatively affected
small cap companies such as P-Com, and may impact its ability to raise equity
capital in periods of liquidity crunch. Companies with liquidity problems also
often experience downward stock price volatility. P-Com believes that factors
such as announcements of developments relating to its business (including any
financings or any resolution of liabilities), announcements of technological
innovations or new products or enhancements by P-Com or its competitors,
developments in the emerging countries' economies, sales by competitors, sales
of significant volumes of P-Com common stock into the public market,
developments in its relationships with customers, partners, lenders,
distributors and suppliers, shortfalls or changes in revenues, gross margins,
earnings or losses or other financial results that differ from analysts'
expectations, regulatory developments and fluctuations in results of operations
could and have caused the price of P-Com common stock to fluctuate widely and
decline over the past two years during the telecommunications recession. The
market price of P-Com common stock may continue to decline, or otherwise
continue to experience significant fluctuations in the future, including
fluctuations that are unrelated to P-Com's performance.
P-COM HAS ADOPTED ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN
ACQUISITION OF P-COM.
P-Com's stockholder rights plan, certificate of incorporation, equity
incentive plans, bylaws and Delaware law may have a significant effect in
delaying, deferring or preventing a change in control and may adversely affect
the voting and other rights of other holders of P-Com common stock.
The rights of the holders of P-Com common stock will be subject to, and
may be adversely affected by, the rights of any other preferred stock that may
be issued in the future, including the Series A Junior Participating Preferred
Stock that may be issued pursuant to the stockholder rights plan, upon the
occurrence of certain triggering events. In general, the stockholder rights plan
provides a mechanism by which the share position of anyone that acquires 15% or
more (or 20% or more in the case of the State of Wisconsin Investment Board and
Firsthand Capital Management) of P-Com's common stock will be substantially
diluted. Future issuance of stock or additional preferred stock could have the
effect of making it more difficult for a third party to acquire a majority of
P-Com's outstanding voting stock.
ISSUING ADDITIONAL SHARES BY SALE OF P-COM'S SECURITIES IN THE PUBLIC MARKET AS
A PRIMARY MEANS OF RAISING WORKING CAPITAL COULD LOWER P-COM'S STOCK PRICE AND
IMPAIR ITS ABILITY IN NEW STOCK OFFERINGS TO RAISE FUNDS TO CONTINUE OPERATIONS.
Future sales of P-Com's common stock, particularly shares issued upon
the exercise or conversion of outstanding or newly issued securities upon
exercise of its outstanding options, could have a significant negative effect on
the market price of P-Com's common stock. These sales might also make it more
difficult for P-Com to sell equity securities or equity-related securities in
the future at a time and price that it would deem appropriate.
As of June 30, 2003, P-Com had approximately 40,118,000 shares of
common stock outstanding. The closing market price of its shares was $0.09 per
share on that date. As of June 30, 2003, there were 2,661,317 options
outstanding that are vested. Based upon option exercise prices related to vested
options on June 30, 2003, there would be insignificant dilution or capital
raised for unexercised in-the-money options.
19
THE CONVERSION OR EXERCISE OF P-COM'S OUTSTANDING CONVERTIBLE SECURITIES WILL
HAVE A SIGNIFICANT DILUTIVE EFFECT ON P-COM'S EXISTING STOCKHOLDERS.
In August 2003, P-Com's remaining 7% Convertible Notes due 2005
converted into 1,000,000 shares of Series B Convertible Preferred Stock. The
Series B Convertible Preferred Stock are convertible into approximately
105,690,000 shares of P-Com's common stock. The conversion or exercise of
P-Com's outstanding convertible securities, including the Series B Convertible
Preferred Stock and warrants, into shares of P-Com's common stock (which
requires stockholder approval of an increase in the number of authorized common
stock) will result in substantial dilution to P-Com's existing stockholders. In
order to consummate the asset purchase of SPEEDCOM, P-Com intends to issue
67,500,000 additional shares of common stock. Additionally, on October 3, 2003,
P-Com issued approximately 8,370 shares of Series C Convertible Preferred Stock.
The Series C Convertible Preferred Stock and the warrants issued in connection
with the Series C Convertible Preferred Stock are convertible into approximately
235,000,000 shares of P-Com's common stock. These issuances will result in
additional substantial dilution to P-Com's existing stockholders.
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This joint proxy statement contains forward-looking statements that
involve substantial risks and uncertainties. In some cases you can identify
these statements by forward-looking words such as "anticipate," "believe,"
"could," "estimate," "expect," "intend," "may," "should," "will," and "would" or
similar words. In particular, statements regarding expected strategic benefits,
advantages and other effects of the Acquisition described in "The
Acquisition"?"P-Com's Reasons for the Acquisition" beginning on page 36 and "The
Acquisition"?"SPEEDCOM's Reasons for the Acquisition" beginning on page 33 and
elsewhere in this joint proxy statement are forward-looking statements. You
should read forward-looking statements carefully because they may discuss our
future expectations, contain projections of P-Com's and SPEEDCOM's future
results of operations or of our financial position or state other
forward-looking information. P-Com and SPEEDCOM believe that it is important to
communicate their future expectations to their investors. However, there may be
events in the future that P-Com and SPEEDCOM are not able to accurately predict
or control. The factors listed above in the section captioned "Risk Factors," as
well as any cautionary language in this joint proxy statement, provide examples
of risks, uncertainties and events that may cause the actual results to differ
materially from any expectations they describe. Actual results or outcomes may
differ materially from those predicted in the forward-looking statements due to
the risks and uncertainties inherent in their business, including risks and
uncertainties in:
o market acceptance of and continuing demand for their products;
o their ability to protect their intellectual property;
o the impact of competitive products, pricing and customer
service and support;
o their ability to obtain additional financing to support their
operations;
o obtaining and maintaining regulatory approval where required;
o changing market conditions and other risks detailed in this
joint proxy statement; and
o other risks detailed in this joint proxy statement.
You should also consider carefully the statements under "Risk Factors"
beginning on page 7 and other sections of this joint proxy statement and in the
other documents filed with the SEC, which address factors that could cause their
actual results to differ from those set forth in the forward-looking statements.
You should not place undue reliance on any forward-looking statements, which
reflect the views of P-Com's and SPEEDCOM's management only as of the date of
this prospectus. P-Com and SPEEDCOM are not obligated to update any
forward-looking statements to reflect events or circumstances that occur after
the date on which such statement is made.
20
ANNUAL MEETING OF P-COM STOCKHOLDERS
GENERAL
The board of directors of P-Com, Inc., a Delaware corporation, asks
that you appoint its representatives as proxies to vote your shares of P-Com
common stock at the annual meeting of the stockholders of P-Com to be held on
December 2, 2003. The annual meeting will be held at 10:00 a.m., Pacific Time at
P-Com's corporate headquarters, located at 3175 S. Winchester Boulevard,
Campbell, California 95008. To appoint the proxies, please sign and return the
enclosed form of proxy card. These proxy solicitation materials were mailed on
or about November 3, 2003, to all stockholders entitled to vote at the annual
meeting.
PURPOSE OF THE ANNUAL MEETING
At the annual meeting, P-Com will ask its stockholders to approve the
following matters:
1. To approve an amendment to P-Com's certificate of
incorporation to increase the number of shares of common stock
authorized for issuance from 69,000,000 shares to 700,000,000
shares.
2. To approve an amendment to P-Com's certificate of
incorporation to implement a reverse split of P-Com's common
stock at a ratio between 1-for-10 and 1-for-30. The ratio at
which the reverse stock split will be implemented will be
selected by P-Com's board of directors in its discretion, and
the reverse stock split will be effected by the filing of a
certificate of amendment in one of the forms attached to this
joint proxy statement as Annex B.
3. To approve an amendment to P-Com's bylaws to permit the
issuance of securities that are convertible, exercisable or
exchangeable into shares of P-Com common stock at a
conversion, exercise or exchange price per share that is
subject to downward adjustment without having to obtain the
approval of the holders of a majority of P-Com's outstanding
common stock.
4. To approve the price-based antidilution feature of some of
P-Com's outstanding preferred stock and warrants, which will
enable the conversion and exercise prices of these securities
to be adjusted downward in the event that P-Com subsequently
issues additional shares of its common stock or other
securities convertible into or exercisable for shares of its
common stock at a price per share that is less than the price
per share paid by the purchasers of these securities.
5. To approve an amendment to P-Com's 1995 Stock Option/Stock
Issuance Plan (which is referred to in this joint proxy
statement as the "Stock Option Plan") to (i) increase the
number of shares of P-Com common stock reserved for issuance
under the Stock Option Plan from 5,786,000 shares to
77,786,000 shares, and (ii) extend the term of the Stock
Option Plan from 10 years to 15 years.
6. To elect two directors to P-Com's board of directors to serve
for three-year terms ending upon the 2006 annual meeting of
stockholders or until a successor is duly elected and
qualified.
7. To ratify the appointment of Aidman Piser & Company as
independent auditors of P-Com for the fiscal year ending
December 31, 2003.
8. To grant P-Com's management the discretionary authority to
adjourn the annual meeting to a date or dates not later than
December 31, 2003, if necessary to enable P-Com's board of
directors to solicit additional proxies in favor of any of the
proposal listed above.
9. To consider such other matters as may properly come before the
annual meeting or any adjournment of the annual meeting.
21
RECOMMENDATION OF P-COM'S BOARD OF DIRECTORS
P-Com's board of directors has approved the Acquisition agreement and
the Acquisition and has determined that the Acquisition is in the best interests
of P-Com and its stockholders. In order the complete the Acquisition, P-Com's
stockholders must approve the proposal to amend P-Com's certificate of
incorporation to increase the number of shares of common stock that P-Com is
authorized to issue. The board of directors of P-Com has approved the amendment
to increase the number of authorized shares of P-Com common stock and recommends
that P-Com stockholders vote FOR the proposal to amend P-Com's certificate of
incorporation to increase the number of shares of common stock that P-Com is
authorized to issue from 69,000,000 to 700,000,000.
P-Com's board of directors has approved the amendment to implement a
reverse split of P-Com's common stock at a ration between 1-for-10 and 1-for-30
and recommends that P-Com stockholders vote FOR the proposal to amend P-Com's
certificate of incorporation to effect the reverse stock split.
P-Com's board of directors has approved the proposed amendment to
P-Com's bylaws to permit the issuance of securities that are convertible,
exercisable or exchangeable into shares of P-Com common stock at a conversion,
exercise or exchange price per share that is subject to downward adjustment
without having to obtain the approval of the holders of a majority of P-Com's
outstanding common stock. P-Com's board of directors recommends that P-Com
stockholders vote FOR the proposal to amend P-Com's bylaws.
P-Com's board of directors previously approved four separate private
financing transactions in which P-Com issued convertible preferred stock and
warrants that are convertible into or exercisable for shares of P-Com common
stock at a conversion or exercise price that is subject to downward adjustment.
The price-based antidilution feature of these securities is currently
ineffective. Pursuant to P-Com's bylaws, as currently in effect, the price-based
antidilution feature of these securities must be approved by the holders of a
majority of P-Com's outstanding common stock in order to take effect. P-Com's
board of directors recommends that P-Com stockholders vote FOR the proposal to
approve the price-based antidilution feature of these securities.
P-Com's board of directors has approved the proposed amendment to
P-Com's Stock Option Plan to (i) increase the number of shares of P-Com common
stock reserved for issuance under the Stock Option Plan from 5,586,000 shares to
77,586,000 shares, and (ii) extend the term of the Stock Option Plan from 10
years to 15 years. P-Com's board of directors recommends that P-Com stockholders
vote FOR the proposal to amend P-Com's Stock Option Plan.
P-Com's board of directors has approved the nomination of John A.
Hawkins and Sam Smookler for election to the board of directors of P-Com to
serve for three-year terms ending upon the 2006 annual meeting of stockholders
or until their successors are duly elected and qualified. P-Com's board of
directors recommends that P-Com stockholders vote FOR the election of these two
director nominees.
P-Com's board of directors has approved the appointment of Aidman Piser
& Company as independent auditors of P-Com for the fiscal year ending December
31, 2003. P-Com's board of directors recommends that P-Com stockholders vote FOR
the ratification of the appointment of Aidman Piser & Company as independent
auditors of P-Com.
It may be necessary to adjourn the annual meeting. If a quorum is not
present at the annual meeting, the annual meeting may need to be adjourned to
enable P-Com's board of directors to solicit additional proxies. If a quorum is
present but the number of shares voting in favor of any of the proposals listed
above is insufficient to approve that proposal under Delaware law, then, if the
adjournment proposal has received the affirmative vote of the holders of a
majority of the shares present in person or represented by proxy at the meeting
and voting on the proposal, P-Com's management will have the discretion to
adjourn the annual meeting to a date or dates not later than December 31, 2003
22
to provide P-Com's board of directors additional time to solicit proxies in
favor of that proposal. P-Com's board of directors recommends that P-Com
stockholders vote FOR the adjournment proposal.
To assure that your shares of P-Com common stock and Series C Preferred
Stock are represented at the annual meeting, please complete, date and sign the
enclosed proxy and mail it promptly in the postage-paid envelope provided or
submit your proxy electronically by telephone or via the Internet, whether or
not you plan to attend the meeting. You may revoke your proxy at any time before
votes are cast at the meeting.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of P-Com common stock and Series C Preferred
Stock at the close of business on October 15, 2003, the record date for P-Com's
annual meeting, are entitled to receive notice of and to vote at the annual
meeting. On the record date, the following numbers of shares of each class of
P-Com stock were issued and outstanding:
o 43,517,644 shares of P-Com common stock were issued and
outstanding and held by approximately 593 holders of record.
o no shares of P-Com Series A Junior Participating Preferred
Stock were issued or outstanding,
o approximately 1,000,000 shares of P-Com Series B Preferred
Stock were issued and outstanding and held by three holders of
record.
o approximately 8,370 shares of P-Com Series C Preferred Stock
were issued and outstanding and held by approximately 185
holders of record.
QUORUM AND VOTE REQUIRED
At the annual meeting, the holders of shares of each class of P-Com
stock are entitled to vote as follows:
o Holders of P-Com common stock will be entitled to one vote per
share of common stock held as of the record date.
o Holders of P-Com Series B Preferred Stock will not be entitled
vote.
o Holders of P-Com Series C Preferred Stock will be entitled to
one vote for each share of P-Com common stock issuable upon
conversion of the Series C Preferred Stock held as of the
record date.
A quorum of stockholders is necessary to hold a valid meeting. A quorum
will be present at the annual meeting if shares representing a majority of the
votes entitled to be cast are represented in person or by proxy. If a quorum is
not present at the annual meeting, P-Com expects that the meeting will be
adjourned or postponed to solicit additional proxies. Abstentions and "broker
non-votes" count as being present to establish a quorum. A "broker non-vote"
occurs when a broker is not permitted to vote because the broker does not have
instructions from the beneficial owner of the shares and the broker does not
have the discretion under applicable exchange rules to vote on matters
presented.
Each of the proposals to approve amendments to P-Com's certificate of
incorporation (Proposals 1 and 2), to approve an amendment to P-Com's bylaws
(Proposal 3) and to approve the price-based antidilution feature of some of
P-Com's outstanding preferred stock and warrants (Proposal 4) requires the
affirmative vote of (i) the holders of a majority of the shares of P-Com common
stock outstanding as of the record date, voting as a separate class, and (ii)
the holders of a majority of the shares of P-Com common stock and Series C
Preferred Stock outstanding as of the record date, voting together as a single
23
class. Abstentions and broker non-votes will have the same effect as a vote
against these proposals.
Directors are elected by a plurality vote, which means that the two
nominees who receive the most votes will be elected to the board of directors of
P-Com. P-Com stockholders may not cumulate their votes in the election of
directors. Abstentions and broker non-votes will not affect the outcome of the
vote on the election of directors.
All other proposals will be decided by the affirmative vote of the
holders of a majority of the shares of P-Com common stock and Series C Preferred
Stock present in person or represented by proxy at the annual meeting and
entitled to vote on the matters presented. Abstentions and broker non-votes will
not affect the outcome of the vote on these proposals.
All votes will be tabulated by the inspector of election appointed for
the meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes.
PROXIES
All shares of P-Com common stock and Series C Preferred Stock
represented by properly executed proxies and received in time for the annual
meeting (and not revoked) will be voted at the annual meeting in the manner
specified by the grantors of those proxies. Properly executed proxies that do
not contain voting instructions will be voted FOR each of the proposals
described in the accompanying notice of annual meeting and this joint proxy
statement, and the proxy holder may vote the proxy in its discretion as to any
other matter which may properly come before the meeting.
If you are a holder of shares of P-Com common stock or Series C
Preferred Stock, in order for your shares to be included in the vote, you must
vote your shares by one of the following means:
o in person by written ballot;
o by proxy by completing, signing and dating the enclosed proxy
and returning it in the enclosed postage paid envelope;
o in the United States, Canada and Puerto Rico, by telephone by
calling 1-877-PRX-VOTE (1-877-779-8683), as noted on the proxy
card; or
o via the Internet by visiting http://www.eproxyvote.com/pcom,
as noted on the proxy card.
Please note, however, that if your shares are held of record by a
broker, bank or other nominee and you wish to vote those shares in person at the
annual meeting, you must obtain from the nominee holding your P-Com common stock
or Series C Preferred Stock a properly executed legal proxy, identifying you as
a P-Com stockholder, authorizing you to act on behalf of the nominee at the
annual meeting, and identifying the number of shares with respect to which the
authorization is granted.
Only shares affirmatively voted for the approval of the proposals set
forth above, including properly executed proxies that do not contain voting
instructions, will be counted as votes in favor of such proposals. Brokers who
hold shares of P-Com common stock or Series C Preferred Stock in street name for
customers who are the beneficial owners of those shares may not give a proxy to
vote those shares without specific instructions from those customers.
P-Com does not expect that any matter other than the proposals set
forth above will be brought before its annual meeting. If, however, other
matters are properly presented, the persons named as proxies will vote in
accordance with their judgment.
24
REVOCATION OF PROXIES
All properly signed proxies that P-Com receives before the vote at the
annual meeting that are not revoked will be voted at the annual meeting
according to the instructions indicated on the proxies or, if no direction is
indicated, to approve each of the proposals described in the accompanying notice
of annual meeting and this joint proxy statement. P-Com stockholders may revoke
their proxies at any time before it is exercised by taking any of the following
actions:
o delivering a written notice to the corporate secretary of
P-Com by any means, including facsimile, bearing a date later
than the date of the proxy, stating that the proxy is revoked;
o signing and delivering a proxy relating to the same shares and
bearing a later date before the vote at the meeting;
o delivering electronically by telephone or the Internet a valid
proxy relating to the same shares and bearing a later date
before the vote at the meeting; or
o attending the meeting and voting in person by written ballot,
although attendance at the meeting will not, by itself, revoke
a proxy.
APPRAISAL RIGHTS UNDER DELAWARE LAW
P-Com stockholders are not entitled to appraisal rights in connection
with the Acquisition or any of the other matters submitted to P-Com's
stockholders for approval.
EXPENSES; SOLICITATION
P-Com will mail a copy of this joint proxy statement to each holder of
record of its common stock and Series C Preferred Stock as determined on the
record date for P-Com's annual meeting. P-Com will pay the expenses of
soliciting proxies to be voted at its annual meeting, except that P-Com and
SPEEDCOM will share equally the expenses incurred in connection with filing and
printing this joint proxy statement. After the original mailing of the proxies
and other soliciting materials, P-Com will request brokers, custodians, nominees
and other record holders of P-Com common stock and Series C Preferred Stock to
forward copies of the proxy and other soliciting materials to persons for whom
they hold shares of P-Com common stock and Series C Preferred Stock and to
request authority for the exercise of proxies. In those cases, upon the request
of the record holders, P-Com will reimburse such holders for their reasonable
expenses. P-Com intends to retain Georgeson Shareholder Communication Inc. as
its proxy solicitor in connection with the joint proxy statement. The estimated
cost for the engagement is $15,000. The services to be provided by Georgeson
Shareholder Communications Inc. consist of the following: (i) advance review of
proxy materials, (ii) dissemination of broker search cards, (iii) distribution
of proxy materials, (iv) solicitation of ADP, brokers, banks and institutional
holders, and (v) delivery of executed proxies. The original solicitation of
proxies by mail may be supplemented by a solicitation by telephone or other
means by directors, officers or employees of P-Com. No additional compensation
will be paid to these individuals for any such services. Except as described
above, P-Com does not presently intend to solicit proxies other than by mail.
SHARES HELD BY P-COM DIRECTORS AND EXECUTIVE OFFICERS
As of the record date, the directors and executive officers of P-Com
owned approximately 1,442,059 outstanding shares of P-Com common stock and
approximately 65 shares of P-Com Series C Preferred Stock. The common stock
owned by the directors and executive officers of P-Com represented approximately
3.3% of the 43,517,644 shares of P-Com common stock outstanding on that date.
25
SPECIAL MEETING OF THE SPEEDCOM STOCKHOLDERS
GENERAL
The board of directors of SPEEDCOM Wireless Corporation, a Delaware
corporation, asks that you appoint its representatives as proxies to vote your
shares of SPEEDCOM common stock at the special meeting of the stockholders of
SPEEDCOM to be held on December 2, 2003. The special meeting will be held at
10:00 a.m., local time at the corporate headquarters of SPEEDCOM Wireless
Corporation, located at 7020 Professional Parkway East, Sarasota, Florida 34240.
To appoint the proxies, please sign and return the enclosed form of proxy card.
These proxy solicitation materials were mailed on or about November 3, 2003, to
all stockholders entitled to vote at the special meeting.
PURPOSE OF THE SPECIAL MEETING
At the special meeting, SPEEDCOM will ask its stockholders to approve
the following matters:
1. To adopt and approve the Asset Purchase Agreement, dated June
16, 2003, between SPEEDCOM and P-Com and to approve the
Acquisition whereby P-Com will acquire substantially all of
the assets of SPEEDCOM and assume certain liabilities of
SPEEDCOM.
2. To adopt an amendment to SPEEDCOM's Amended and Restated
Certificate of Incorporation to increase the number of
authorized shares of common stock from 250,000,000 to
500,000,000 shares.
3. To grant SPEEDCOM's management the discretionary authority to
adjourn the special meeting to a date or dates not later than
December 31, 2003, if necessary to enable SPEEDCOM's board of
directors to solicit additional proxies in favor of any of the
proposals listed above.
4. To consider such other matters as may properly come before the
special meeting or any adjournment of the special meeting.
RECOMMENDATION OF SPEEDCOM'S BOARD OF DIRECTORS
After careful consideration, SPEEDCOM's board of directors has approved
the Asset Purchase Agreement and the related Acquisition, and recommends a vote
FOR the proposal to approve and adopt the Asset Purchase Agreement and the
Acquisition.
SPEEDCOM's board of directors has approved the proposed amendment to
SPEEDCOM's Amended and Restated Certificate of Incorporation to increase the
number of authorized shares of common stock from 250,000,000 to 500,000,000.
SPEEDCOM's board of directors recommends that SPEEDCOM stockholders vote FOR the
proposal to amend SPEEDCOM's Amended and Restated Certificate of Incorporation.
It may be necessary to adjourn the special meeting. If a quorum is not
present at the special meeting, the special meeting may need to be adjourned to
enable SPEEDCOM's board of directors to solicit additional proxies. If a quorum
is present but the number of shares voting in favor of any of the proposals
listed above is insufficient to approve that proposal under Delaware law, then,
if the adjournment proposal has received the affirmative vote of the holders of
a majority of the shares present in person or represented by proxy at the
meeting and voting on the proposal, SPEEDCOM's management will have the
discretion to adjourn the special meeting to a date or dates not later than
December 31, 2003 to provide SPEEDCOM's board of directors additional time to
solicit proxies in favor of that proposal. SPEEDCOM's board of directors
recommends that SPEEDCOM stockholders vote FOR the adjournment proposal.
26
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of SPEEDCOM common stock at the close of
business on October 23, 2003, the record date for SPEEDCOM's special meeting,
are entitled to receive notice of and to vote at the special meeting. On the
record date, 20,092,022 shares of SPEEDCOM common stock were issued and
outstanding and held by approximately 1,200 holders of record.
QUORUM AND VOTE REQUIRED
At the special meeting, the holders of shares of SPEEDCOM common stock
will be entitled to cast one vote per share of common stock held as of the
record date. Only holders of SPEEDCOM common stock on the record date will be
entitled to vote at the SPEEDCOM special meeting.
A quorum of stockholders is necessary to hold a valid meeting. A quorum
will be present at the SPEEDCOM special meeting if shares representing a
majority of the votes entitled to be cast are represented in person or by proxy.
If a quorum is not present at the special meeting, SPEEDCOM expects that the
meeting will be adjourned or postponed to solicit additional proxies.
Abstentions and "broker non-votes" count as being present to establish a quorum.
A "broker non-vote" occurs when a broker is not permitted to vote because the
broker does not have instructions from the beneficial owner of the shares and
the broker does not have the discretion under applicable exchange rules to vote
on matters presented.
The proposal to approve and adopt the Asset Purchase Agreement and the
Acquisition and the proposal to amend SPEEDCOM's Amended and Restated
Certificate of Incorporation each requires the affirmative vote of the holders
of a majority of the shares of SPEEDCOM common stock outstanding as of the
record date. Abstentions and broker non-votes will have the same effect as a
vote against these proposals.
The adjournment proposal will be decided by the affirmative vote of the
holders of a majority of the shares of SPEEDCOM common stock present in person
or represented by proxy at the special meeting and entitled to vote on the
matters presented. Abstentions and broker non-votes will not affect the outcome
of the vote on these proposals.
All votes will be tabulated by the inspector of election appointed for
the meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes.
PROXIES
All shares of SPEEDCOM common stock represented by properly executed
proxies and received in time for the special meeting (and not revoked) will be
voted at the special meeting in the manner specified by the grantors of those
proxies. Properly executed proxies that do not contain voting instructions will
be voted FOR each of the proposals described in the accompanying notice of
special meeting and this joint proxy statement, and the proxy holder may vote
the proxy in its discretion as to any other matter which may properly come
before the meeting.
If you are a holder of shares of SPEEDCOM common stock, in order for
your shares to be included in the vote, you must vote your shares by one of the
following means:
o in person by written ballot; or
o by proxy by completing, signing and dating the enclosed proxy
and returning it in the enclosed postage paid envelope;
Please note, however, that if your shares are held of record by a
broker, bank or other nominee and you wish to vote those shares in person at the
special meeting, you must obtain from the nominee holding your SPEEDCOM common
stock a properly executed legal proxy, identifying you as a SPEEDCOM
27
stockholder, authorizing you to act on behalf of the nominee at the special
meeting, and identifying the number of shares with respect to which the
authorization is granted.
Only shares affirmatively voted for the approval of the proposals set
forth above, including properly executed proxies that do not contain voting
instructions, will be counted as votes in favor of such proposals. Brokers who
hold shares of SPEEDCOM common stock in street name for customers who are the
beneficial owners of those shares may not give a proxy to vote those shares
without specific instructions from those customers.
SPEEDCOM does not expect that any matter other than the proposals set
forth above will be brought before its special meeting. If, however, other
matters are properly presented, the persons named as proxies will vote in
accordance with their judgment.
REVOCATION OF PROXIES
All properly signed proxies that SPEEDCOM receives before the vote at
the special meeting that are not revoked will be voted at the special meeting
according to the instructions indicated on the proxies or, if no direction is
indicated, to approve the proposals described in the accompanying notice of
special meeting and this joint proxy statement. SPEEDCOM stockholders may revoke
their proxies at any time before it is exercised by taking any of the following
actions:
o delivering a written notice to the corporate secretary of
SPEEDCOM by any means, including facsimile, bearing a date
later than the date of the proxy, stating that the proxy is
revoked;
o signing and delivering a proxy relating to the same shares and
bearing a later date before the vote at the special meeting;
o attending the special meeting and voting in person by written
ballot, although attendance at the special meeting will not,
by itself, revoke a proxy.
APPRAISAL RIGHTS UNDER DELAWARE LAW
SPEEDCOM stockholders are not entitled to appraisal rights in
connection with the Acquisition or any of the other matters submitted to
SPEEDCOM's stockholders for approval.
EXPENSES; SOLICITATION
SPEEDCOM will mail a copy of this joint proxy statement to each holder
of record of its common stock as determined on the record date for SPEEDCOM's
special meeting. SPEEDCOM will pay the expenses of soliciting proxies to be
voted at its special meeting, except that P-Com and SPEEDCOM will share equally
the expenses incurred in connection with filing and printing this joint proxy
statement. After the original mailing of the proxies and other soliciting
materials, SPEEDCOM will request brokers, custodians, nominees and other record
holders of SPEEDCOM common stock to forward copies of the proxy and other
soliciting materials to persons for whom they hold shares of SPEEDCOM common
stock and to request authority for the exercise of proxies. In those cases, upon
the request of the record holders, SPEEDCOM will reimburse such holders for
their reasonable expenses. The original solicitation of proxies by mail may be
supplemented by a solicitation by telephone or other means by directors,
officers or employees of SPEEDCOM. No additional compensation will be paid to
these individuals for any such services. Except as described above, SPEEDCOM
does not presently intend to solicit proxies other than by mail.
28
SHARES HELD BY SPEEDCOM DIRECTORS AND EXECUTIVE OFFICERS
As of the record date, the directors and executive officers of SPEEDCOM
owned 15,000 outstanding shares of SPEEDCOM common stock. These shares
represented approximately less than 1% of the 20,092,022 shares of SPEEDCOM
common stock outstanding on that date.
THE ACQUISITION
GENERAL
Under the terms of the Asset Purchase Agreement, dated June 16, 2003,
between P-Com and SPEEDCOM, P-Com will purchase substantially all of the
operating assets of SPEEDCOM. As payment for the assets of SPEEDCOM, P-Com will
issue 67,500,000 shares of its common stock to SPEEDCOM, and assume certain
liabilities of SPEEDCOM. SPEEDCOM may retain up to $200,000 of its cash and
accounts receivable based on the following formula. P-Com will assume a maximum
amount of $1,200,000 of SPEEDCOM's accounts payable. For every dollar that
SPEEDCOM reduces through negotiations with its creditors, SPEEDCOM shall receive
credit for $0.50 for each such dollar reduction, which credit shall be retained
by SPEEDCOM.
COMPLETION AND EFFECTIVENESS OF THE ACQUISITION
The Acquisition will be completed when all of the conditions to
completion of the Acquisition are satisfied or waived, including the approval of
the amendment to P-Com's certificate of incorporation to increase the number of
authorized shares of P-Com common stock by the stockholders of P-Com and the
approval and adoption of the Asset Purchase Agreement and the Acquisition by the
stockholders of SPEEDCOM.
P-Com and SPEEDCOM are working toward completing the Acquisition as
quickly as possible. P-Com and SPEEDCOM intend to complete the Acquisition
promptly after the stockholders of P-Com approve the amendment to P-Com's
certificate of incorporation and the stockholders of SPEEDCOM approve the
Acquisition at their respective meetings. P-Com and SPEEDCOM expect to complete
the Acquisition in the fourth quarter of 2003.
SHARES ISSUED BY P-COM TO SPEEDCOM
As payment for the assets of SPEEDCOM, P-Com will issue to SPEEDCOM
67,500,000 shares of P-Com common stock. P-Com anticipates that approximately
363,000,000 shares of its common stock will be issued and outstanding
immediately following the closing of the Acquisition, based on the following
facts and assumptions:
o approximately 43,517,644 shares of P-Com common stock are
currently outstanding;
o the issuance of approximately 105,690,000 shares of its common
stock upon the conversion of its outstanding Series B
Convertible Preferred Stock;
o the issuance of 67,500,000 shares of P-Com common stock to
SPEEDCOM; and
o the issuance of approximately 146,460,290 shares of P-Com
common stock upon the conversion of its outstanding Series C
Convertible Preferred Stock.
If the foregoing assumptions are correct and approximately 43,517,644
shares of P-Com common stock are outstanding immediately prior to the closing of
the Acquisition, then immediately following the completion of the Acquisition,
the shares of P-Com common stock issued to SPEEDCOM will equal approximately
18.6% of the total outstanding shares of P-Com common stock.
29
The number of shares of common stock issued and outstanding immediately
following the closing of the Acquisition excludes the issuance of shares of
common stock upon exercise of options and warrants of P-Com.
LIABILITIES TO BE ASSUMED BY P-COM
Pursuant to the Asset Purchase Agreement, P-Com will assume all of the
liabilities of SPEEDCOM described below, and will not assume any other
liabilities of SPEEDCOM.
Accounts Payable. P-Com will assume all of SPEEDCOM's accounts payable
generated in the ordinary course of its business prior to the completion of the
Acquisition up to a maximum amount of $1,200,000. P-Com will not assume certain
specified accounts payable of SPEEDCOM in the aggregate amount of approximately
$2.0 million. As of September 2, 2003, the total accounts payable of SPEEDCOM
amounted to approximately $814,000.
Accrued Expenses. P-Com will assume only the following accrued liabilities of
SPEEDCOM:
o Accrued payroll and vacation pay expenses, not to exceed
$150,000 in the aggregate. As of September 2, 2003, these
expenses amounted to approximately $184,000;
o Severance obligations in an amount not to exceed $107,500
owing to former employees of SPEEDCOM;
o Customer deposits, which amounted to approximately $113,000 as
of September 2, 2003; and
o SPEEDCOM's other accrued expenses in an amount not to exceed
$25,000. As of September 2, 2003, these expenses amounted to
approximately $42,000.
Notes and Leases Payable. P-Com will assume only the following promissory notes
and lease payment obligations of SPEEDCOM:
o Up to $3,000,000 in promissory notes, provided that those
notes have been renegotiated so that the principal amounts due
thereunder will not be payable for at least 36 months
following the completion of the Acquisition, and the
applicable interest rate will not to exceed 7%. As of
September 2, 2003, the total amount owed by SPEEDCOM under its
promissory notes amounted to approximately $3.9 million;
o Capital lease obligations, not to exceed $27,000. As of
September 2, 2003, these lease obligations amounted to
approximately $21,000;
o Operating lease obligations related to properties, computer
equipment and other operating assets of SPEEDCOM. As of
September 2, 2003, these lease obligations amounted to
approximately $4,300,000; and
o All amounts owed by SPEEDCOM to P-Com. As of September 2,
2003, these amounts amounted to approximately $925,000.
ASSETS AND LIABILITIES TO BE RETAINED BY SPEEDCOM
The Asset Purchase Agreement entitles SPEEDCOM to retain up to $200,000
in cash and accounts receivable. The amount of accounts receivable that SPEEDCOM
may retain is limited to one-half of the amount by which its accounts payable,
which would otherwise be assumed by P-Com, are reduced prior to the completion
of the Acquisition as a result of negotiations between SPEEDCOM and its
creditors.
30
The Asset Purchase Agreement provides that SPEEDCOM will retain all of
the liabilities not assumed by P-Com, as described above. The assets retained by
SPEEDCOM may not be sufficient for SPEEDCOM to pay its remaining liabilities
when and as they become due following the Acquisition.
REQUIRED STOCKHOLDER APPROVALS
In order to consummate the Acquisition with SPEEDCOM, P-Com must obtain
stockholder approval to amend its certificate of incorporation to increase the
number of shares of common stock that P-Com is authorized to issue. In order to
consummate the Acquisition with P-Com, SPEEDCOM must obtain stockholder approval
for the Acquisition.
APPRAISAL OR DISSENTERS' RIGHTS
Under Delaware law, P-Com and SPEEDCOM stockholders are not entitled to
appraisal rights in connection with the Acquisition.
MATERIAL UNITED STATES INCOME TAX CONSEQUENCES OF THE ACQUISITION
SPEEDCOM will recognize gain from the Acquisition in an amount equal to
the difference between the fair market value of the consideration received from
the sale of its assets and liabilities and SPEEDCOM's adjusted tax basis in
those same assets and liabilities. However, SPEEDCOM currently has sufficient
net operating losses to offset the taxable gain based on the current terms of
the Acquisition.
The Acquisition will not materially affect P-Com stockholders and
SPEEDCOM stockholders for United States income tax purposes.
THIS DISCUSSION DOES NOT ADDRESS TAX CONSEQUENCES THAT MAY VARY WITH,
OR ARE CONTINGENT ON, INDIVIDUAL CIRCUMSTANCES. MOREOVER, IT DOES NOT ADDRESS
ANY NON-INCOME TAX OR ANY FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF THE
ACQUISITION. TAX MATTERS ARE VERY COMPLICATED, AND THE TAX CONSEQUENCES OF THE
ACQUISITION TO YOU WILL DEPEND UPON THE FACTS OF YOUR PARTICULAR SITUATION.
ACCORDINGLY, P-COM AND SPEEDCOM STRONGLY URGE YOU TO CONSULT WITH A TAX ADVISOR
TO DETERMINE THE PARTICULAR FEDERAL, STATE, LOCAL OR FOREIGN INCOME OR OTHER TAX
CONSEQUENCES TO YOU OF THE ACQUISITION.
NO FINANCIAL ADVISORS
Neither P-Com nor SPEEDCOM has obtained the opinion of any financial
advisor or other third party as to the fairness of the Acquisition to the
stockholders of P-Com and SPEEDCOM from a financial point of view, or as to any
other matters. The respective boards of directors of P-Com and SPEEDCOM did not
believe that obtaining such an opinion would be an appropriate use of corporate
funds. Such an opinion is not required by the Delaware General Corporation Law.
Nevertheless, the respective boards of directors of P-Com and SPEEDCOM each
believe that the Acquisition is in the best interests of the stockholders of
their respective companies.
Because of the absence of a fairness opinion, there will be no
independent assurance from an expert that the consummation of the Acquisition is
fair from a financial point of view to the stockholders of either P-Com or
SPEEDCOM.
BACKGROUND OF THE ACQUISITION
In light of the current industry and financial market conditions, both
P-Com and SPEEDCOM regularly evaluate a wide variety of different strategies to
increase revenue and achieve profitability, and business scenarios to improve
their competitive positions and enhance their respective stockholder values,
including opportunities for acquisitions of other companies or product lines,
possible partnerships or alliances, and other strategic transactions. In
particular, throughout much of 2002 and the first quarter of 2003, P-Com,
31
together with its financial advisor, Cagan McAfee Capital Partners, LLC
("CMCP"), considered and investigated a variety of possible strategic
transactions. Similarly, throughout 2002 and 2003, SPEEDCOM, through its
principal investor group, explored various strategic transactions designed to
improve SPEEDCOM's financial position.
On March 10 and 11, 2003, Michael Sternberg, the former Chief Executive
Officer of SPEEDCOM, and Mark Schaftlein, the current Interim Chief Financial
Officer of SPEEDCOM, met with its principal investor group in New York, at the
offices of H.C. Wainwright & Co., Inc. ("Wainwright"). Wainwright acted as
financial advisors to the investment group. The purpose of the meeting was to
consider a possible transaction with P-Com, as well as other alternatives to
remaining a separate corporation. Prior to that meeting, management of P-Com was
introduced to representatives of Wainwright, the purpose of which was to explore
whether Wainwright could assist P-Com in obtaining additional debt or equity
capital. Representatives of Wainwright then discussed with management of P-Com
the possibility of combining SPEEDCOM and P-Com, in addition to obtaining bridge
financing for P-Com.
P-Com's management reviewed SPEEDCOM's public filings and determined
that combining with SPEEDCOM was consistent with P-Com's strategy of acquiring
or merging with similar companies offering complementary products in the fixed
wireless communications industry. Similarly, SPEEDCOM's management determined
that combining with P-Com represented the most desirable course of action given
the difficult industry and market conditions, as well as the synergies
represented by the combined companies.
On March 20, 2003, P-Com held a special meeting of its board of
directors to consider the terms offered by the investor group represented by
Wainwright to provide P-Com with bridge financing. At that meeting, the board of
directors was briefed regarding the opportunity to acquire SPEEDCOM.
Contemporaneous with the negotiations with Wainwright of a bridge
financing transaction, George Roberts, P-Com's Chief Executive Officer, met with
Mr. Sternberg to discuss a possible transaction between SPEEDCOM and P-Com. The
initial meeting occurred on March 21, 2003. At that meeting, SPEEDCOM and P-Com
signed a mutual non-disclosure agreement relating to the possible combination of
the two companies.
On March 26, 2003, P-Com obtained bridge financing from SPEEDCOM's
principal investor group in the amount of $1.5 million, of which $400,000 was
loaned to SPEEDCOM, in anticipation of an acquisition of SPEEDCOM. Discussions
between Wainwright, P-Com and SPEEDCOM continued through March and early April
2003.
On April 8, 2003, P-Com proposed a draft term sheet based on the
discussions between the parties. The parties determined to stay the execution of
a term sheet pending completion of due diligence, and resolution of certain
issues pertaining to valuation, deal structure and integration.
On May 7, 8 and 9, 2003, Mr. Schlaftlein met with Daniel Rumsey,
P-Com's Acting Chief Financial Officer and General Counsel, at P-Com's offices
in Campbell, California. The primary purpose of the meetings was to better
understand the company that would result from the combination of SPEEDCOM and
P-Com, and to exchange certain information necessary to evaluate their
respective businesses, and a potential transaction. Numerous issues were
discussed relating to the combination of the two companies, including
capabilities, synergies, organization and pro-forma financial projections.
On May 8, 2003, P-Com held a special meeting of its board of directors.
At that meeting, Messrs. Rumsey and Roberts reviewed the opportunity presented
by SPEEDCOM, and advised the directors regarding management's intent to conduct
further due diligence and negotiate a transaction involving the acquisition of
SPEEDCOM.
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On May 14 and 15, 2003, Don Meiners, P-Com's Vice President Operations,
visited SPEEDCOM in Sarasota, Florida to evaluate the capabilities of both
engineering and operations, and staffing issues, and reported back to Messrs.
Rumsey and Roberts regarding his findings.
From May 18 to May 21, 2003, Messrs. Rumsey, Roberts and Laird Cagan of
CMCP met with Messrs. Schlaftlein and Craig Roos, a member of SPEEDCOM's board
of directors, in New York at the officers of Wainwright. At the meetings, each
company presented an overview of its business, including product descriptions,
projections, and possible strategic business opportunities. Representatives of
both companies also discussed the potential synergies that could arise from a
combination of the two companies. At those meetings, the attendees discussed a
proposed structure whereby P-Com would acquire substantially all of the assets
of SPEEDCOM, and agreed to a timetable to negotiate and execute a definitive
agreement. No definitive agreement was reached at that point.
Following the meetings in New York, on May 22, 2003, Mr. Cagan visited
SPEEDCOM's offices in Sarasota, Florida to review SPEEDCOM's operations. On that
date, P-Com held a special meeting of the board of directors. At that meeting,
directors were briefed by management regarding opportunities presented by the
acquisition, the status of negotiations, and proposed acquisition terms. A final
briefing of the board of directors of P-Com occurred at a special meeting of the
board held on June 5, 2003. At that meeting, Messrs. Rumsey and Roberts briefed
the board of directors of P-Com regarding the final results of their due
diligence findings, and recommended that the board of directors approve the
draft Asset Purchase Agreement presented at the meeting. The board of directors
unanimously approved the draft Asset Purchase Agreement at that meeting, subject
to changes to the Asset Purchase Agreement deemed advisable by management of
P-Com, and in the best interests of its shareholders.
On June 5, 2003, SPEEDCOM held a special meeting of its board of
directors to discuss the terms of the Asset Purchase Agreement. The meeting was
attended by all members of the board, in addition to Messrs. Schaftlein and Sean
McGuinness, counsel to SPEEDCOM. The following week, on June 9, 2003, the board
of directors reconvened to review the transaction, and to further discuss the
issues described below under "SPEEDCOM's Reasons for the Acquisition." After
considering these issues, the board of directors voted unanimously to approve
the Acquisition. The board of directors then directed Mr. Schaftlein to complete
the negotiations with management of P-Com, and to execute the Asset Purchase
Agreement, with such changes as deemed necessary and advisable by management of
SPEEDCOM.
On June 10 and 13, 2003, P-Com's Senior Vice President, Worldwide
Sales, Randy Carl, visited SPEEDCOM's offices in Sarasota, Florida to meet with
SPEEDCOM's sales staff, and to conduct a review of SPEEDCOM's sales and
marketing organizations. Mr. Carl's findings were presented to Messrs. Roberts
and Rumsey following the conclusion of his trip.
On June 16, 2003, the Asset Purchase Agreement and related documents
were executed and delivered. The next day, SPEEDCOM and P-Com issued a joint
public announcement of the Acquisition. On September 2, 2003, SPEEDCOM and P-Com
entered into the First Amendment to the Asset Purchase Agreement. The First
Amendment to the Asset Purchase Agreement fixed the number of shares of common
stock to be issued to SPEEDCOM in connection with the Acquisition at 67,500,000.
The First Amendment was agreed to in consideration for the additional working
capital loans required by SPEEDCOM pending consummation of the Acquisition, and
the relative operating results of P-Com and SPEEDCOM during the period leading
up to the date of the First Amendment.
SPEEDCOM'S REASONS FOR THE ACQUISITION
In approving the Asset Purchase Agreement and in recommending that
SPEEDCOM's stockholders approve the Acquisition, the SPEEDCOM board of directors
33
consulted with SPEEDCOM's management, as well as its legal advisors, and
considered a number of factors. The board considered information from a variety
of sources, including:
o the familiarity of SPEEDCOM's board of directors and
management with the business, operations and prospects of
P-Com;
o the familiarity of SPEEDCOM's board of directors and
management with the wireless telecommunications industry and
other companies in that industry;
o the board's exploration of the possibility of a business
combination with P-Com, the attractiveness and viability of
other potential business combinations, business ventures, or
strategic transactions, the alternative of remaining an
independent company, a potential liquidation of SPEEDCOM, and
the board's assessment of the risks and potential rewards
associated with these strategic alternatives, as well as the
time and costs associated with these strategic alternatives;
o current financial market conditions and historical market
prices, volatility, and trading information about the P-Com
common stock and the SPEEDCOM common stock;
o consultations with SPEEDCOM's management and advisors
concerning the business, operations, financial condition,
organizational structure, technology, products and services,
and competitive positions of P-Com and SPEEDCOM on both an
historical and prospective basis;
o written reports from and discussions with SPEEDCOM's
management and advisors regarding the results of their due
diligence investigations of P-Com; and
o information from SPEEDCOM's management and from research
reports from industry analysts regarding trends in the
wireless communications industry, including the expected
duration of the current economic downturn and the relative
degree to which the current economic downturn is expected to
continue to affect P-Com and SPEEDCOM.
In reaching its decision to approve the Asset Purchase Agreement and to
recommend that the SPEEDCOM stockholders vote to approve the Acquisition,
SPEEDCOM's board of directors identified the following material factors, which,
taken as a whole, supported its decision:
o the opportunity for SPEEDCOM to become a strategically
important part of a company that has had more success in
generating revenue than SPEEDCOM;
o the risks associated with remaining independent in light of
the extended downturn in the wireless communications industry;
o the absence of more attractive strategic alternatives to the
proposed Acquisition, despite the efforts undertaken to
identify such alternatives;
o the risks and delays associated with a possible liquidation of
SPEEDCOM;
o the possibility that the trading market for the common stock
of the combined company would be more liquid than the trading
market for SPEEDCOM common stock;
o the board's assessment of the financial terms of the
Acquisition in light of SPEEDCOM's recent operating
performance, current industry and financial market conditions,
the relative contributions expected to be made by the two
companies to the results of operations of the combined
company, and the historical trading prices and volatility of
P-Com common stock and SPEEDCOM common stock; and
o the terms and conditions of the Asset Purchase Agreement.
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In its deliberations concerning the Acquisition, SPEEDCOM's board of
directors also identified and considered a number of risks and potentially
negative factors, including the following:
o the fact that P-Com's revenues have declined substantially
since fiscal 2000, the risk that P-Com would not meet revenue
expectations, the risk that revenue contemplated by announced
contracts would not be realized, and the risk that P-Com's
expense reduction programs would be inadequate to return it to
profitability or would disrupt the ability of the combined
company to carry out its business plan;
o the fact that P-Com has substantial current, long-term, and
contingent liabilities, and has substantial negative working
capital;
o the risk that the downturn in P-Com's business would cause its
current suppliers and manufacturing partners to cease doing
business with the combined company, either at all or on
acceptable terms;
o the risk that the combined company would need to raise
additional capital within a short time after the Acquisition
and would be unable to do so, either at all or on acceptable
terms;
o the possible adverse effects of the public announcement of the
Acquisition on the sales of P-Com and SPEEDCOM and their
respective relationships with employees, suppliers and
strategic partners, including the possibility that the
combined company might not succeed in retaining key employees
of P-Com and SPEEDCOM;
o the significant costs that had been and would be incurred by
SPEEDCOM in seeking to complete the Acquisition, including
severance costs and legal, accounting, financial advisor and
other fees relating to the Acquisition;
o the risk that the integration of SPEEDCOM and P-Com would be
an expensive, complex, and time-consuming process that could
disrupt the business of either or both companies if not
completed in a timely and efficient manner;
o the risk that the contemplated and potential benefits of the
Acquisition might not be realized;
o the risk that the Acquisition might not be completed and the
potential adverse effects of the failure to complete the
Acquisition on SPEEDCOM's operating results, the trading price
of SPEEDCOM common stock, business partners, customers,
suppliers, and SPEEDCOM's ability to attract and retain key
management and other personnel;
o the likelihood that the termination fee payable under the
Asset Purchase Agreement would deter a third-party acquisition
proposal more favorable to the holders of SPEEDCOM common
stock than the proposed Acquisition with P-Com;
o the risk that SPEEDCOM would have to pay a termination fee if
the Asset Purchase Agreement were terminated under some
circumstances; and
o other applicable risks described in this joint proxy statement
under the heading "Risk Factors" beginning on page 7.
After due consideration, SPEEDCOM's board of directors concluded that
the potential benefits to SPEEDCOM and its stockholders of the Acquisition
outweighed the risks associated with the Acquisition.
Although this discussion summarizes the material factors discussed by
SPEEDCOM's board of directors at meetings of the board, it is not an exhaustive
list of all the factors considered by the board. In view of the wide variety of
factors considered in connection with the board's evaluation of the Acquisition
and the complexity of these matters, the board did not quantify or otherwise
assign relative weights to the positive or negative factors described above.
Rather, SPEEDCOM's board made its determination based on the totality of the
information it considered. In addition, individual members of SPEEDCOM's board
may have given different weights to different factors. The members of the board
35
were aware that one of the directors of SPEEDCOM may have interests in the
Acquisition in addition to, or different from, their interests as stockholders
of SPEEDCOM, and the board considered these interests in deciding to recommend
the transaction.
INTERESTS OF SPEEDCOM'S DIRECTORS AND EXECUTIVE OFFICERS IN THE ACQUISITION
The Asset Purchase Agreement obligates P-Com to assume SPEEDCOM's
obligations under the employment agreements between SPEEDCOM and two of its
executive officers. These employment agreements entitle these officers to
receive severance payments for stated periods if their employment is terminated
following a change in control of SPEEDCOM. A change in control of SPEEDCOM, as
defined in these employment agreements has already occurred as a result of
changes in the composition of SPEEDCOM's board of directors that occurred in the
first quarter of 2002.
R. Craig Roos, a director of SPEEDCOM, has agreed to join the board of
directors of P-Com following consummation of the Acquisition. The receipt of any
compensation as a result of his election to the board of directors of P-Com may
influence this director in making his recommendation that you vote in favor of
the Asset Purchase Agreement and the Acquisition.
RECOMMENDATION OF SPEEDCOM'S BOARD OF DIRECTORS
After careful consideration, SPEEDCOM's board of directors determined
that the Acquisition is in the best interests of SPEEDCOM and its stockholders
and declared the Acquisition advisable. SPEEDCOM's board of directors has
approved the Asset Purchase Agreement and the related Acquisition and recommends
that SPEEDCOM stockholders vote FOR the approval of the Asset Purchase Agreement
and the Acquisition.
In considering the recommendation of the SPEEDCOM board of directors
with respect to the Asset Purchase Agreement, you should be aware that certain
directors and executive officers of SPEEDCOM have interests in the Acquisition
that are different from, or are in addition to, the interests of SPEEDCOM
stockholders. Please see the preceding section entitled "Interests of SPEEDCOM's
Directors and Executive Officers in the Acquisition."
P-COM'S REASONS FOR THE ACQUISITION
In approving the Acquisition and in recommending that P-Com's
stockholders approve the amendment to P-Com's certificate of incorporation to
increase the number of authorized shares of P-Com common stock, the P-Com board
of directors considered a number of factors, including, but not limited to, the
following:
o Information concerning P-Com's and SPEEDCOM's respective
businesses, prospects, business plans, financial performance
and condition, results of operations, technology and
competitive positions;
o P-Com management's view of the positive results of combining
the operations and businesses of P-Com and SPEEDCOM,
including:
o The ability to acquire a lower price-point unlicensed
point-to-point and spread spectrum wireless access
system to compliment P-Com's existing product line;
o The ability to capture additional sales in the
enterprise and government market, where SPEEDCOM has
existing relationships;
o The enlargement of P-Com's distribution network as a
result of the addition of SPEEDCOM's distribution
network;
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o The ability to move some of P-Com's manufacturing
operations to Florida in order to take advantage of
lower cost-of-living expenses and labor costs;
o The ability to substantially reduce administrative
and operating costs by combining two public
companies; and The ability to obtain additional
working capital and consummate its restructuring
plan;
o The current state of the telecommunications industry and the
current state of P-Com;
o The due diligence investigation conducted by P-Com's
management and legal and financial advisors;
o The terms of the Asset Purchase Agreement, including price and
structure, which were considered by both the P-Com board of
directors and management of P-Com to provide a fair and
equitable basis for the Acquisition;
o The presentations by representatives of Cagan McAfee Capital
Partners, LLC regarding the financial aspects of the
Acquisition, including the valuation of SPEEDCOM; and
o The current financial market conditions and historical stock
market prices, volatility and trading information.
In arriving at its determination that the Acquisition is in the best
interest of P-Com and its stockholders, the board of directors carefully
considered the terms of the Asset Purchase Agreement and the other transaction
documents, as well as the potential impact of the purchase on P-Com. In
authorizing the sale, the board of directors considered the factors set out
above as well as the following factors:
o SPEEDCOM's product line is complementary to that of P-Com's;
o A stronger and more compelling portfolio of products created
by the addition of SPEEDCOM's product line, including the
SPEEDLAN 9000, as a result of the Acquisition;
o SPEEDCOM's expertise and experience in the enterprise and
government markets, which will enhance P-Com's ability to
effectively penetrate these markets; and
o The significant consolidation occurring in the wireless
industry and the need for P-Com to combine in order to offer
additional products, networking technologies and other product
offerings in order to maintain its position as a leading
source for wireless equipment and networks with a broad array
of products.
The P-Com board of directors also considered a number of potentially
negative factors, including, but not limited to:
o the risk that the potential benefits sought in the Acquisition
might not be fully realized;
o the risk that, despite the efforts of P-Com and SPEEDCOM, key
technical, sales and management personnel might not remain
employees of the combined company following the Acquisition;
o the technical difficulties of integrating broadband wireless
access products, networks, technologies and companies;
o the potential negative effect on P-Com's stock price
associated with public announcement of the proposed
Acquisition;
o the potential negative effect on P-Com's stock price if
revenue, earnings and cash flow expectations of P-Com
following the Acquisition are not met;
37
o the potential dilutive effect on P-Com's common stock price if
revenue and earnings expectations for SPEEDCOM's business
operations are not met;
o the ability to successfully manage the combined operations of
P-Com and SPEEDCOM given P-Com's limited management resources;
and
o the other risks and uncertainties discussed above under "Risk
Factors" beginning on page 7.
In view of the variety of factors considered in connection with its
evaluation of the Acquisition, the P-Com board of directors did not find it
practical to, and did not quantify or otherwise attempt to, assign relative
weight to the specific factors considered in reaching its conclusions.
Additionally, the P-Com board of directors did not undertake to make any
specific determination as to whether any particular factor, or any aspect of any
particular factor, was favorable or unfavorable to its ultimate determination,
but rather conducted an overall analysis of the factors described above. In
considering the factors described above, individual members of the board of
directors may have given different weight to different factors. After taking
into account all of the factors set forth above, the members of the P-Com board
of directors concluded that the Asset Purchase Agreement and the related
Acquisition were advisable and in the best interests of, P-Com and its
stockholders and that P-Com should proceed with the Acquisition.
RECOMMENDATION OF P-COM'S BOARD OF DIRECTORS
After careful consideration, P-Com's board of directors has determined
that the Acquisition is in the best interests of P-Com and its stockholders. In
order to complete the Acquisition, P-Com's certificate of incorporation must
first be amended to increase the number of authorized shares of P-Com common
stock. In order to complete the Acquisition, P-Com's board of directors
recommends that P-Com stockholders vote FOR the proposal to amend P-Com's
certificate of incorporation, as described in the section entitled "P-Com's
Proposal to Amend its Certificate of Incorporation" beginning on page 103 of
this joint proxy statement.
THE ASSET PURCHASE AGREEMENT
The following is a brief summary of the some of the material terms of
the Asset Purchase Agreement. This summary does not purport to be complete, and
is qualified in its entirety by reference to the text of the Asset Purchase
Agreement, which is attached as Annex A to this joint proxy statement.
REPRESENTATIONS AND WARRANTIES
The Asset Purchase Agreement contains customary representations and
warranties of SPEEDCOM and P-Com relating to, among other things:
o due organization and good standing;
o corporate authorization to enter into the Asset Purchase
Agreement, enforceability of the Asset Purchase Agreement,
required board of directors and stockholder approvals to
complete the Acquisition,
o financial statements;
o documents filed with the SEC;
o absence of material changes or events since March 31, 2003;
o compliance with applicable laws;
o required governmental approvals and filings; and
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o payment of fees to brokers, investment bankers, finders or
financial advisors in connection with the Asset Purchase
Agreement and the Acquisition;
Additional representations and warranties made by P-Com to SPEEDCOM
relate to, among other things:
o capitalization;
o valid issuance of P-Com common stock to SPEEDCOM; and
o compliance with material agreements;
Additional representations and warranties made by SPEEDCOM to P-Com
relate to, among other things:
o undisclosed liabilities;
o title to properties and assets;
o tax matters;
o product liability;
o title to intellectual property;
o material contracts and commitments;
o labor relations;
o employee benefit matters;
o transactions with interested parties;
o environmental matters;
o accuracy of books and records;
o customers and suppliers; and
o accredited investor status.
CONDITIONS TO THE COMPLETION OF THE ACQUISITION
The obligations of P-Com and SPEEDCOM to complete the Acquisition are
subject to the satisfaction or waiver of various conditions on or before the
date on which the Acquisition is completed, and include, in addition to other
customary closing conditions, the following:
o The stockholders of SPEEDCOM must have approved and adopted
the Asset Purchase Agreement, and the P-Com stockholders must
have approved and adopted the amendment to P-Com's certificate
of incorporation to increase the number of P-Com's authorized
shares of common stock;
o The representations and warranties made by the other party
must be true as of the date of the Asset Purchase Agreement
and as of the date that the Acquisition is completed;
o The other party must have performed or complied with all of
the covenants, conditions and other obligations under the
Asset Purchase Agreement required to be performed or complied
with by it on or before the date of the completion of the
Acquisition;
o There must be no pending or threatened lawsuit challenging the
Acquisition by any body or agency of any federal, state or
local government and the consummation of the Acquisition must
not be enjoined by a court of competent jurisdiction as of the
date that the Acquisition is completed;
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o Each company must have received and approved the form and
substance of all certificates, instruments, opinions, and
other documents delivered or to be delivered to the other
company;
o Each party shall have delivered to the other party an
officer's certificate, dated as of the date that the
Acquisition is completed, to the effect that all of the
conditions to complete the Acquisition have been satisfied;
o P-Com must have consummated an equity financing transaction
generating at least $5,000,000 in gross proceeds to P-Com;
o All principal and accrued and unpaid interest on P-Com's 7%
Convertible Subordinated Notes due 2005 must have been
converted into equity securities of P-Com at a conversion
price of at least $.20 per share of common stock; and
o P-Com must have converted all of the convertible promissory
notes issued on March 26, 2003, May 18, 2003, and August 5,
2003 in the aggregate face amount of $2,700,000 into shares of
P-Com common stock or the securities issued in connection with
a qualified financing;
The obligation of P-Com to complete the Acquisition is subject to the
satisfaction or waiver of the following additional conditions on or before the
date on which the Acquisition is completed:
o P-Com must have received all licenses from all appropriate
governmental agencies or third parties to operate SPEEDCOM's
business in the same manner as SPEEDCOM has operated the
business prior to the completion of the Acquisition;
o SPEEDCOM must have delivered to P-Com all required approvals
and consents to the Asset Purchase Agreement;
NO SOLICITATION
Subject to the exceptions described below, SPEEDCOM and P-Com agreed
that they will not, and will cause their respective directors, officers,
employees and representatives not to:
o solicit or encourage the submission of any acquisition
proposal relating to that company by any person other than the
other party to the Asset Purchase Agreement; or
o participate in any discussions or negotiations with, disclose
any information concerning that company, afford any access to
the properties, books or records of that company, or otherwise
assist, facilitate or encourage, or enter into any agreement
or understanding with, any person in connection with an
acquisition proposal relating to that company other than the
other party to the Asset Purchase Agreement; or
o directly or indirectly make or authorize any statement or
recommendation in support of any acquisition proposal relating
to that company made by any person other than the other party
to the Asset Purchase Agreement.
However, before obtaining stockholder approval of the Asset Purchase
Agreement and the Acquisition, SPEEDCOM or P-Com may, to the extent that its
board of directors determines in good faith, after consultation with outside
legal counsel, that the fiduciary duties of the board of directors under
applicable law require it to do so:
o participate in discussions and negotiations regarding an
acquisition proposal relating to that company with the person
making the acquisition proposal after that person has
delivered a written superior proposal; and
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o furnish information to the person making the acquisition
proposal relating to that company after that person has
delivered a written superior proposal.
SPEEDCOM or P-Com may furnish information to the person making the
acquisition proposal only if:
o it has first notified the other party of the information to be
provided by it to the person making the acquisition proposal;
o it has notified the other party of the acquisition proposal,
the terms of the acquisition proposal and the identity of the
person making the acquisition proposal; and
o the person making the acquisition proposal has signed a
confidentiality agreement in a form approved by the other
party to the Asset Purchase Agreement.
In the Asset Purchase Agreement, "acquisition proposal" generally means
any proposal relating to any possible acquisition of a company, by merger,
purchase of at least 50% of its outstanding shares, purchase of all or
substantially all of its assets, or otherwise.
In the Asset Purchase Agreement, "superior proposal" means any
unsolicited bona fide acquisition proposal relating to a company by a third
party, which the company's board of directors determines, in its good faith
reasonable judgment, after consultation with its independent financial advisors,
could reasonably be expected to result in a transaction more favorable to the
company's stockholders than the proposed Acquisition and for which financing, to
the extent required, is then committed or which, in the good faith reasonable
judgment of the board of the company, after consultation with its independent
financial advisors, is reasonably capable of being financed by the third party
and which is likely to be completed.
If SPEEDCOM or P-Com receives a superior proposal, its board of
directors may approve the superior proposal or recommend the superior proposal
to its stockholders if the board determines in good faith, after consultation
with outside legal counsel, that such action is required by its fiduciary duties
under applicable law, and if it does so, it may amend or withdraw its
recommendation of the Acquisition. However, if SPEEDCOM's or P-Com's board of
directors approves a superior proposal or recommends the superior proposal and
either party terminates the Asset Purchase Agreement, provided that the
terminating party is not in material breach of the Asset Purchase Agreement, the
company whose board of directors approved or recommended the superior proposal
must pay the other party a $500,000 termination fee.
ADDITIONAL AGREEMENTS
Registration Rights Agreement
In the Asset Purchase Agreement, P-Com and SPEEDCOM have agreed to
enter into a registration rights agreement on the date of completion of the
Acquisition. The registration rights agreement will provide SPEEDCOM with the
following registration rights:
o SPEEDCOM will have the right to demand the registration of its
shares of P-Com common stock, which may be exercised only
once, and P-Com will be obligated to keep the registration
effective until SPEEDCOM has resold all of its shares of P-Com
common stock to the public;
o SPEEDCOM will have the unlimited right to have its shares of
P-Com common stock included in registration statements filed
by P-Com registering the resale of P-Com common stock held by
parties other than SPEEDCOM, subject to customary limitations
including a pro rata cutback; and
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o when P-Com is eligible to register its common stock for resale
using a registration statement on Form S-3, SPEEDCOM will have
the right to register the resale of its shares of P-Com common
stock pursuant to a registration statement on Form S-3 once in
any given 12-month period, provided that the aggregate amount
of shares being registered for resale is at least $1,000,000,
and subject to other customary limitations.
SPEEDCOM may not exercise any of the foregoing registration rights
granted in the registration rights agreement until at least 185 days have passed
since the date of execution of the registration rights agreement.
Employment Agreements
P-Com shall extend an offer to employ certain employees of SPEEDCOM,
who will be determined by P-Com and SPEEDCOM prior to completing the
Acquisition. If these employees of SPEEDCOM accept P-Com's offer of employment,
they will be employed on an "at-will" basis following the Acquisition.
No Solicitation of Employees
With the exception of the SPEEDCOM employees to whom P-Com may extend
an offer of employment, P-Com may not solicit any of SPEEDCOM's employees.
TERMINATION OF THE ASSET PURCHASE AGREEMENT
The Asset Purchase Agreement may be terminated and the Acquisition
abandoned with the prior authorization of the party's respective board of
directors as follows:
o By mutual agreement in writing by P-Com and SPEEDCOM at any
time prior to the closing date of the transaction before or
after the requisite stockholder approvals;
o By either P-Com or SPEEDCOM, before or after the requisite
stockholder approvals, if the closing of the Acquisition does
not occur by December 31, 2003 or if any obligation of the
terminating party to consummate the Acquisition has become
incapable of satisfaction before December 31, 2003 due to a
final and non-appealable government order;
o By either P-Com or SPEEDCOM, before or after the requisite
stockholder approvals, if the other party materially breaches
any of the representations, warranties or covenants set forth
in the Asset Purchase Agreement at any time before the closing
and such breach cannot be cured within thirty (30) days of the
receipt of written notice of such breach, provided that the
other party is not in material breach;
o By either P-Com or SPEEDCOM if the party's board of directors
enters into or publicly announces its intention to enter into
another acquisition agreement, withdraws its recommendation to
the stockholders and after receipt of an acquisition proposal,
fails to publicly confirm within ten (10) days after the other
party's request, its recommendation that the stockholders
adopt and approve the Asset Purchase Agreement and the
transactions contemplated thereby, or if the party or any of
its representatives take any of the actions proscribed in
Section 6.9(a) and (b), respectively, of the Asset Purchase
Agreement;
o By either party upon delivery of written notice that the
requisite approval of SPEEDCOM's stockholders has not been
received; or
o By either party upon delivery of written notice that the
requisite approval of P-Com's stockholders has not been
received.
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In the event that the Asset Purchase Agreement is validly terminated by
either P-Com or SPEEDCOM as provided by the above bullet points, excepting the
third and fourth bullet points, the Asset Purchase Agreement will become void
and have no effect with the exception of certain miscellaneous provisions. Upon
termination of the Asset Purchase Agreement in accordance with the third and
fourth bullet points, the breaching party shall pay the non-breaching party
$500,000.
FEES AND EXPENSES
P-Com and SPEEDCOM will each pay its own fees and expenses incurred in
connection with the Asset Purchase Agreement.
SPEEDCOM will pay to P-Com a $500,000 termination fee if P-Com
terminates the Asset Purchase Agreement because
o of a material breach of the Asset Purchase Agreement by
SPEEDCOM;
o SPEEDCOM's board of directors approves an acquisition proposal
and withdraws its recommendation of the Acquisition;
o an acquisition proposal remains in effect 60 days prior to
December 31, 2003 and SPEEDCOM's stockholders have not
approved and adopted the Asset Purchase Agreement and the
Acquisition,
P-Com will pay to SPEEDCOM a $500,000 termination fee if SPEEDCOM
terminates the Asset Purchase Agreement because
o of a material breach of the Asset Purchase Agreement by P-Com;
o P-Com's board of directors approves an acquisition proposal
and withdraws its recommendation of the Acquisition;
o an acquisition proposal remains in effect 60 days prior to
December 31, 2003 and P-Com's stockholders have not approved
the amendment to P-Com's certificate of incorporation to
increase the number of authorized shares of common stock.
P-COM'S BUSINESS
OVERVIEW
P-Com develops, manufactures, and markets microwave radios for
point-to-point, spread spectrum and point-to-multipoint applications for
telecommunications networks worldwide. Cellular and personal communications
providers employ P-Com's point-to-point systems for backhaul between remote
tower sites and switching centers. Network service providers and Internet
service providers are able, through the deployment of P-Com equipment and
systems, to respond to the demands for high-speed wireless access services, such
as Internet access associated with business-to-business and e-commerce business
processes. Through deployment of P-Com's systems, network providers can quickly
and efficiently establish integrated Internet, data, voice, and video
communications for their customers, then expand and grow those services as
demand increases. The wireless broadband networking market is a subset of the
global telecommunications, cellular, personal services communications, wireless
Internet access, and private network markets. Because of the number of
sub-markets for various products globally, reliable market statistics are not
readily available.
P-Com's point-to-point, spread spectrum and point-to-multipoint
products contributed 71% (2001:74%) and 21% (2001:13%) and 8% (2001:13%) of
P-Com's equipment revenue, respectively, in 2002.
43
Since early 2000, because of a severe industry downturn related to
curtailed capital spending by operators and integrators of telecommunications
systems globally, P-Com has disposed of non-core businesses (including
Technosystem, Cemetel, Control Resources, RT Masts and P-Com Network Services,
Inc.), reduced employee headcount sharply, closed non-essential offices, and
reduced capital expenditure significantly. Notwithstanding the downturn, P-Com
raised $72 million in private equity financings during fiscal years 2000 to
2002. P-Com currently has $4.0 million in availability under a secured line of
credit from a commercial bank. P-Com's business has been severely distressed and
it has endured the bankruptcy and related loss of revenues and write-offs of its
single largest customer in 2001. Short-term demand levels for broadband wireless
products such as P-Com's is unclear. However, P-Com believes that should a
market turnaround occur, wireless equipment solutions such as those offered by
P-Com will continue to be attractive to broadband access providers from a
viewpoint of cost efficiency, applications and ease of deployment.
P-Com was organized on August 23, 1991 as a Delaware Corporation.
INDUSTRY BACKGROUND
During the 1990s, the demand for additional multimedia infrastructure,
and in particular Internet usage growth, fueled network expansion using both
wireline and wireless protocols. Speed, reliability and economies of scale are
the key elements inherent in commercially successful networked systems.
Broadband wireless access was found to supply an efficient and particularly
economical means to meet this growing demand for information transfer. Wireless
networks are constructed using microwave radios and other equipment to connect
cell sites, wireline and other fixed asset systems. P-Com's broadband wireless
products and services are targeted to add value to the integrated service
providers and wireless telephone operators globally. P-Com's products are
designed to be frequency specific by country if required.
The broadband wireless market developed into two commercially
recognized architectures for voice and data transmission: point-to-point and
point-to-multipoint. P-Com has developed and sold equipment in commercial
quantities for both formats. P-Com does not provide products for wireline
sub-sectors of the telecommunications market, including wireline systems and
cable systems. Since 2000, system build out has been in a significant slowdown
in the United States, Latin America, and European telecommunications markets.
Demand for wireless broadband products is currently deeply depressed. P-Com
cannot ensure the proliferation of its products or guarantee a given market
share of the global telecommunications equipment market in future years.
Additionally, there are competing technologies which service the
telecommunication sector's hardware demands.
BROADBAND WIRELESS IMPLEMENTATION
Global deregulation of telecommunications markets and the related
allocation of radio frequencies for broadband wireless access transmission have
spurred competition to supply wireless-based systems as a cost-effective
alternative to traditional wireline service delivery systems. Broadband wireless
systems are competitive due to the relatively short set up and deployment time,
high return on capital investment, and ability to connect customers quickly once
the transmission hardware and software infrastructure are in place. Moreover,
network operators can mitigate the risk of "stranded capital costs" inherent in
wireline hardware. Such systems do not scale as well as the wireless
alternatives as user's needs expand or change over time.
End users who need to transport information from one location to
another have a choice of wired or wireless solutions. Wired solutions typically
take the form of lines that are leased from telephone companies. The associated
lease payments tend to be less attractive than the cost of ownership of a
wireless digital microwave system. Wireless transmission of voice, data and
video traffic has become a desirable alternative to wired solutions due to its
advantages in cost, speed of deployment, reliability, range, and ease of
44
installation, especially in developing countries. Incumbent telephone companies
also are historically slow to deploy leased lines, especially when the user is a
cellular operator who essentially competes directly with them. Wireless digital
microwave radios, on the other hand, can be deployed immediately upon receiving
location rights. P-Com believes, particularly in a time of stringent capital
asset rationalization, the wireless choice will be economical and effective.
GLOBAL PRIVATIZATION AND DEREGULATION: STIMULI TO BROADBAND WIRELESS ACCESS
GROWTH
In many parts of the world, telecommunications services are inadequate,
unreliable or non-existent due to the lack of existing infrastructure.
Additionally, many such countries have privatized the state-owned
telecommunications monopoly and opened their markets to competitive network
service providers. P-Com believes competitive service providers in such markets
often find deployment of wireless broadband the quickest, most economical and
scalable means of providing reliable, modern telecommunications services.
For the communications service providers of the world to be able to
utilize P-Com's wireless broadband systems (including P-Com's
point-to-multipoint and point-to-point radio systems), they must own the
licenses required to operate the systems. Once the service provider has obtained
the license, they must then determine, from a number of competing systems
(including non-broadband wireless systems), the one that appears best suited for
their particular application.
NETWORK ARCHITECTURE BOTTLENECKS
Fiber optic networks have received much attention because of the speed
and quality associated with the 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. 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, with its inherent distance limitations. This local
access "bottleneck" denies users the real benefits afforded by fiber optic
backbones because the highest speed that 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, P-Com believes a broadband wireless
solution is attractive to incumbent and competitive carriers alike because the
local access speed restrictions are not an issue with broadband wireless
equipment.
THE P-COM STRATEGY
P-Com's goal is to be the leading worldwide supplier of
high-performance point-to-point, spread spectrum and point-to-multipoint
wireless access equipment. P-Com's strategy to accomplish this objective is to:
o Focus on point-to-point, spread spectrum and
point-to-multipoint microwave markets. P-Com designs products
specifically for the millimeter wave (licensed) and spread
spectrum (unlicensed) microwave frequency bands. P-Com has
designed P-Com's core architecture to optimize the systems for
operation at millimeter and microwave frequencies.
o Continue expansion of P-Com's identified global market
opportunities. P-Com has met the standards established by the
European Telecommunications Standards Institute ("ETSI") and
achieved regulatory approval for P-Com systems in Argentina,
Australia, Austria, Brazil, Canada, China, the Czech Republic,
Latvia, France, Germany, Greece, Hungary, Italy, Japan,
Jordan, Mexico, Saudi Arabia, Spain, and the United Kingdom,
as well as the United States. P-Com continues to seek to
obtain type approval in other countries as the markets develop
45
and the need arises. P-Com maintains international sales
and/or support offices in Italy, China, Singapore and the
United Kingdom.
o 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 and "building blocks" across the
range of P-Com products. This approach assists in
manufacturing cost reduction through volume component
purchases and enabling a standardized manufacturing process.
Utilization of turnkey contract manufacturers eliminates
expensive in-house manufacturing assembly, and provides
ability to scale up or down as market conditions dictate.
o Exploit engineering synergies. Due to similarities among
P-Com's product lines, P-Com has created new design
architectures that strive to obtain commonality in different
products. This approach reduces manufacturing costs and
affords improved time to market and feature sets.
o Maximize P-Com's customers' revenue. One of the main
objectives of the access providers who buy broadband wireless
products from P-Com or P-Com's 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 wireless broadband
system, the greater the access provider's revenue production
potential. Because P-Com's products are scaleable, users can
quickly maximize throughput-utilizing software alone to meet
network demands. This allows network operators to make optimum
use of their allocated frequency bandwidth, thus maximizing
revenue.
o Leverage and maintain software leadership. P-Com
differentiates its systems through proprietary software
embedded in the Indoor Unit, Outdoor Unit, and in the Windows
and SNMP-based software tools. This software is designed to
allow P-Com to deliver to its 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 wireless broadband, point-to-point
wireless broadband, and spread spectrum systems, with each product targeting a
specific market.
Point-to-point wireless broadband systems are typically deployed by
cellular operators for wireless cellular interconnect and backhaul. Cellular
interconnect comprises any of the wireless connections between a Base Station
Transceiver, Base Station Controller, and Mobile Switching Center. Backhaul, or
the transport of cellular traffic between mobile wireless towers and the mobile
switching office on cellular phone networks, is a typical application for
point-to-point equipment.
Point-to-point wireless broadband is a dedicated link wireless
technology enabling 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. As mobile
service usage continues to grow, cellular service providers will have to
continue to scale down existing cells into smaller ones to reuse precious
spectrum. With each such division of cells comes opportunity for new wireless
point-to-point applications because of the need for more backhauls.
Spread spectrum radios are license-free, that is it does not require
the Federal Communication Commission's approval (or other regulatory body in
foreign countries) before P-Com equipment is deployed, and they are generally
less expensive than licensed products. They are sold through Value Added
Resellers and system integrators for private and public networks, providing
last-mile wireless connectivity.
46
Internet service providers and system operators typically use
point-to-multipoint where bandwidth availability is critical to profitable
system operation. Point-to-multipoint broadband wireless service is a wireless
technology that provides the high-speed access service. This service 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 it can be
expanded as demand for service dictates. Nonetheless, P-Com's and its
competitors' point-to-multipoint products operating in the high bandwidth
licensed spectrum have not gained sufficient market share in the wireless
broadband market, and it is unclear when sales of these products will
materialize, if at all.
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 Frequency Division Multiple Access ("FDMA") or Time Division
Multiple Access ("TDMA") mode, 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 guarantee higher quality service levels to their customers.
To complete P-Com's product portfolio, P-Com has original equipment
manufacturer agreements with fSona Communications Corporation and Microwave
Networks, Inc. for two additional products. fSona provides an unlicensed Free
Space Optics radio, which uses advanced line-of-sight wireless laser
communications technology to enable secure, high-speed connections from 155 to
1500 Megabits per second ("Mbps"). Microwave Networks, Inc. provides a private
labeled version of their 155 Mbps SDH (Synchronous Digital Hierarchy) radio that
is available in many frequencies including 18, 23, 26 and 38 GHz.
The greater the number of frequencies provided for by the wireless
broadband manufacturer, the greater the manufacturer's potential market
penetration. 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 and 50 GHz.
P-Com provides both point-to-multipoint and point-to-point systems in a
broad range of frequencies. P-Com's competitors generally provide either
point-to-multipoint or point-to-point, but seldom both. By providing such a
broad range of design options and a network management system that is common
across all P-Com radio systems, P-Com gives broadband wireless service providers
more design latitudes than those available from many competing systems and
enable providers to tailor their equipment mix 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.
Certain limitations are common to all wireless broadband systems like
those provided by P-Com. Among the more common of these limitations are the
requirements for line-of-sight between the hubs and the remote sites; spacing
between the hubs and the remote stations; signal transmit/receive power level
interference; poor performance if there is improper antenna alignment; and
adjacent cell interference due to improper power levels. Professional execution
of installation, path and site commissioning are mandatory for a reliable
network.
TECHNOLOGY
P-Com's technological approach to point-to-multipoint, point-to-point,
and spread spectrum digital microwave radio systems is, in P-Com's opinion,
meaningfully different from conventional approaches. Through the use of
proprietary designs, P-Com can quickly produce highly integrated, feature-rich
47
systems. The results of these integrated designs are reliability, ability to
customize customer specific designs and continuing ability to be cost
competitive, particularly in the current market.
P-Com's products are optimized for streamlined components, immunity to
noise and interference, ease of high-volume manufacturing and installation. Yet
P-Com's radios contain superior features. Equally important, because critical
components and building blocks perform common functions across different product
lines, P-Com's design philosophy is to design sections of each radio in a way
that enable the designs to be reused with little or no modification in a
different product line.
P-Com's point-to-point and spread spectrum microwave radios consist of
three primary assemblies: the Indoor Unit, the Outdoor Unit and the antenna. The
Indoor Unit houses the digital signal processing and the interfaces to the
Outdoor Unit via a single coaxial cable. The Outdoor Unit, a radio frequency
drum or enclosure, which is installed outdoors, establishes the specific
frequencies for transmitting and receiving data. The antenna interfaces directly
to the Outdoor Unit via proprietary P-Com technology.
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 P-Com's
systems includes PC-based sophisticated diagnostics, maintenance, network
management, and system configuration tools.
Competing systems also employ the Indoor Unit/Outdoor Unit concept but
P-Com's products are differentiated by how P-Com implements the components
within the Indoor Unit and Outdoor Unit. By moving many frequency-sensitive
components to the Outdoor Unit, the user is afforded improved reliability, lower
cost and easier interchangeability.
P-Com believes that its spread spectrum products are industry leaders,
especially with P-Com's latest product release line of AirPro Goldo. AirPro Gold
represents P-Com's latest generation of license-free spread spectrum radios that
address many markets including wireless Internet and the voice and data or E1
market. Rather than develop separate products for each market and application,
P-Com created a single radio architecture that offers that ability to rapidly
and reliably change the interface of the radio depending on the application. By
inserting a series of plug-in modules, the radio interface can be changed to
connect to different types of services. The simplest model, AirPro Gold.Net,
offers wireless Internet connectivity via an ethernet port to address the
wireless Internet and Hotspot markets. The voice and data market requires a
different network interface to connect to the network. By simply installing a
plug-in module, AirPro Gold.Net is transformed into a completely different
product, AirPro Gold E1. Thus the functionality is changed from a wireless
Internet radio to a 4 Mbps or E1 point-to-point radio. Additional advantages of
this architecture are simplified stocking and the ability to change the radio
interface as dictated by customer requirements. No other broadband wireless
radio company at present offers such diverse functionality.
P-Com's third product line, point-to-multipoint systems operating in
the high bandwidth licensed spectrum, has been deemphasized resulting from the
absence of sales in recent periods attributable to the product line. These
systems are composed of base station equipment transmitting to many remote
terminals within a certain radius or sector. This "downlink" carries data
packets known as Asynchronous Transfer Mode cells over the link, which allow
many different media to be supported, including voice, data, fax, IP, Frame
Relay, 10 BaseT, and many other services. The return, or up-link from the Remote
to the Base Station, can operate in either FDMA or TDMA mode.
FDMA uses one or more discrete radio channels with constant throughput;
similar to ordinary telephone lines in that the channel is occupied and consumes
the same bandwidth whether a voice conversation is occurring or not. FDMA's
advantage is that the connection is always available. However, keeping the
channel occupied whether traffic is present is inefficient. TDMA addresses the
issue of channel efficiency by dynamically assigning bandwidth only when it is
needed. P-Com's point-to-multipoint system is the only solution to offer
48
simultaneous FDMA and TDMA operation. 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 a greater
versatility for the customer and higher levels of network flexibility by
allowing both FDMA and TDMA to be simultaneously deployed within a sector thus
providing the network access operator the flexibility to design the network to
uniquely match the specific traffic profiles within individual sectors.
The range of the point-to-multipoint system is determined by many
factors, the most significant aspect of which is the modulation mode. P-Com's
point-to-multipoint system employs a sophisticated software-selectable
modulation technique called quadrature amplitude modulation, which can operate
in any of three levels: 4, 16 and 64 level quadrature amplitude modulation. The
highest level, 64 quadrature amplitude modulation, offers the highest throughput
but shortest range, contrasted by 4 quadrature amplitude modulation that offers
the longest range but lower throughput. This beneficial feature of software
selectable modulation offers the network operator the ability to tailor the
system for optimum range or optimum throughput. This provides the network
provider with the capability to best match the capacity load of the customer
base and 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 adding expansion cards
into the sector Indoor Unit, increase the overall throughput, and hence
capacity, within the sector. This is achieved without the duplication of any of
the more expensive microwave Outdoor Unit equipment.
SERVICES
On April 30, 2003, P-Com entered into an Asset Purchase Agreement with
JKB Global, LLC to sell certain assets of P-Com Network Services, Inc., P-Com's
discontinued service business. The total cash consideration was approximately
$105,000, plus the assumption of certain liabilities. The sale of P-Com Network
Services, Inc. was consummated on April 30, 2003.
MANUFACTURING AND TESTING
P-Com's Campbell, California facility received its initial ISO 9001
registration in December 1993, and maintains a current certification. P-Com's
ISO 9001 registration for the United Kingdom sales and customer support facility
was received in 1996 and it has current certifications; P-Com's ISO 9001
registration for the Tortona facility in Italy was first received in 1996 and it
has current certification. P-Com's production facility in Melbourne, Florida was
ISO 9001 certified in 1999. On December 15, 2003, ISO requires all holders of
ISO 9001:1994 to upgrade to ISO 9001:2000. If P-Com is unsuccessful in its
efforts to upgrade to ISO 9001:2000, its ability to secure purchase orders for
its products may be adversely affected. Once a system reaches commercial status,
P-Com contracts with one or more of several 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.
P-Com tests and manufactures systems in P-Com's California, Italy and
Florida locations prior to shipment to its customers. Testing includes the
complete Indoor-Outdoor unit assembly, thereby providing customers with a
completely tested end-to-end system.
P-Com's designs make every effort to use components that are readily
available from multiple sources, but in some cases, components that are single
source or sole source must be used. Most manufacturers provide P-Com with
advanced notice of the discontinuation of a device, but in the current depressed
economy some manufacturers have discontinued components with little or no
notice. When components are discontinued it may cause a significant expense to
redevelop a replacement component and may even disrupt the flow of products from
P-Com's manufacturing facilities.
49
SALES CHANNELS AND P-COM CUSTOMERS
P-Com's wireless access systems are sold internationally and
domestically directly through its own sales force as well as through strategic
partners, distributors, systems providers, and original equipment manufacturers.
In 2002, P-Com's customers include:
CUSTOMER PERCENTAGE OF
REVENUE
Myntahl Corporation.................................................................... 14%
Orange Personal Communications System.................................................. 11%
Vodafone (Mannesmann).................................................................. 7%
During 2002, sales to Myntahl Corporation and Orange Personal
Communications System accounted for 14% and 11% of P-Com's total sales,
respectively. P-Com expects that sales to a relatively small number of customers
will continue to account for a high percentage of its sales in the foreseeable
future. Although the composition of P-Com's largest customer group may vary from
period to period, the loss of a significant customer or a major reduction in
orders by any significant customer, through reductions due to market, economic
or competitive conditions in the telecommunications industry, may adversely
affect its business, financial condition, and results of operations. While P-Com
generally enters into written agreements with its major customers, P-Com
generally does not provide for minimum purchase commitments. P-Com's ability to
maintain or increase its sales in the future will depend, in part, upon its
ability to obtain orders from new customers as well as the financial condition
and success of P-Com customers, and the economy in general.
P-Com's product sales segment is located primarily in the United
States, with manufacturing and/or sales support operations in Italy, the United
Kingdom, Singapore, and China. P-Com develops, manufactures and/or market
networks access systems for use in the worldwide wireless telecommunications
market.
P-Com's backlog was approximately $2.9 million as of December 31, 2002,
as compared to approximately $5.9 million as of December 31, 2001. The decrease
was due to continuing worldwide recession in capital spending within the
telecommunications industry and lack of forecast clarity from continuing
customers. P-Com includes in backlog only those firm customer commitments to be
shipped within the following twelve months. A significant portion of P-Com's
backlog scheduled for shipment in the twelve months following December 31, 2002
can be cancelled, since orders are often made substantially in advance of
shipment, and most of P-Com's contracts provide that orders may be cancelled
with limited or no penalties for a specified period before shipment. Therefore,
backlog is not necessarily indicative of future sales for any particular period.
RESEARCH AND DEVELOPMENT
P-Com has a continuing research and development program to enhance its
existing systems and related software tools and to introduce new systems. P-Com
invested approximately $12.7 million, $19.8 million and $20.2 million in 2002,
2001, and 2000, respectively, in research and development efforts and expects to
continue to invest material resources in research and development to maintain
superior features creating value for many customers.
P-Com's research and development efforts can be classified into two
distinct efforts: (1) increasing the functionality of its radio systems under
development by adding additional frequencies and capacities to its product
lineup, its network management system software offering, and developing other
advancements to radio systems, 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 to integrate voice, data, video and facsimile in one offering.
50
P-Com's current efforts may not result in new product introductions or material
modifications to existing products. The wireless telecommunications market is
subject to rapid technological change, frequent new product introductions and
enhancements, product obsolescence, changes in end-user requirements and
evolving industry standards globally.
P-Com's ability to be competitive in this market will depend in
significant part upon its ability to successfully develop, introduce, and sell
new systems and enhancements and related software tools on a timely and cost
effective basis that respond to changing customer requirements. P-Com has
experienced and may continue to experience delays from time to time in
completing development and introduction of new systems, and enhancements for
related software tools. P-Com has in place a Product Qualification / Quality
Assurance structure that ensures product acceptance in the marketplace before
and after commencement of commercial shipments.
SALES AND MARKETING
P-Com's sales and marketing efforts are directed from P-Com's corporate
offices in Campbell, California. P-Com has sales operations and customer support
facilities in the United Kingdom and Italy that serve the European market, and
in China and Singapore for Asian markets. Internationally, P-Com uses a variety
of sales channels, including system providers, original equipment manufacturers,
dealers, and local agents. P-Com also sells directly to its customers. P-Com has
established agent relationships in numerous other countries in the Asia/Pacific
region, the Middle East, Latin America, and Europe.
Typically, P-Com's sales process commences with the solicitation of
bids by prospective customers. If selected to proceed further, P-Com may provide
systems for incorporation into system trials, or P-Com may proceed directly to
contract negotiations. When system trials are required and successfully
completed, P-Com 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 and/or enhanced.
P-Com believes that, due to the complexity of its radio systems, a high
level of technical sophistication is required on the part of P-Com's sales and
marketing personnel. In addition, P-Com believes that after-sale customer
service programs are fundamental to customer satisfaction and the potential for
follow-on business. New customers are provided engineering assistance for
installation of the initial 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. P-Com's customer
service efforts are supplemented by P-Com system providers.
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. P-Com has experienced competition worldwide from a number
of leading telecommunications companies that offer a variety of competitive
products and services, including Alcatel Network Systems, Alvarion, Stratex
Communication Systems Networks, Ericsson, Harris-Farinon Division, NEC, Nokia,
Nortel, SIAE, Hughes Network Systems and Proxim. Many of these companies have
substantially greater installed bases, financial resources and production,
marketing, manufacturing, engineering and other capabilities than P-Com. P-Com
faces actual and potential competition not only from these established
companies, but also from start-up companies that are developing and marketing
new commercial products and services, such as Digital Subscriber Line ("DSL").
P-Com may also face competition in the future from new market entrants
offering competing technologies. P-Com's results of operations may depend in
part upon the extent to which customers who choose to rely on wireless
strategies, elect to purchase from outside sources rather than develop and
51
manufacture their own radio systems. Customers may choose not to rely on, or
expand, their reliance on P-Com as an external source of supply for their radio
systems. Recently, some of P-Com's competitors have announced the introduction
of competitive products, including related software tools, and the acquisition
of other competitors and competitive technologies.
Competition is especially intense during the current period of
depressed demand for telecommunications infrastructure equipment. P-Com 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 P-Com's competitors prior to its introduction of competing
technology could cause a significant decline in sales or loss of market
acceptance of P-Com systems or intense price competition, or make P-Com systems
or technologies obsolete or noncompetitive. P-Com has experienced significant
price competition and expects price competition to intensify in view of the
current market downturn. This has adversely affected P-Com's gross margins and
business, financial condition and results of operations. P-Com believes that its
ability to continue to compete successfully is based on factors both within and
outside of P-Com's control. Timing of new product line introductions,
performance characteristics of P-Com's equipment and the ability of P-Com's own
customers to be successful all play key roles. P-Com will continue to be
required to expend significant resources on new product development, cost
reduction and enhancements.
The principal elements of competition in P-Com's market, and the basis
upon which customers may select P-Com's systems, include price, performance,
software functionality, and ability to meet delivery requirements and customer
service and support.
GOVERNMENT REGULATION
Radio telecommunications are subject to extensive regulation by the
United States and foreign governmental agencies and international treaties.
P-Com's systems must conform to a variety of domestic and international
requirements established to, among other things, avoid interference among users
of radio frequencies and to permit interconnection of equipment. 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 P-Com to operate within a specific country's jurisdiction,
P-Com 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 telecommunications products. The
delays inherent in this governmental approval process may cause the
cancellation, postponement or rescheduling of the installation of communications
systems by P-Com and its customers, which in turn may have prevented or delayed
the sale of systems by P-Com 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 in that particular jurisdiction. These regulations and
changes could require P-Com to modify its products and incur substantial costs
and delays to comply with these time-consuming regulations and changes. In
addition, P-Com is also affected by the regulation, allocation and auction of
radio frequency spectrum by domestic and international authorities. 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. If personal communications service operators
and others are delayed in deploying their systems, P-Com could experience delays
in orders for its products. Failure by the regulatory authorities to allocate
suitable frequency spectrum could adversely affect P-Com's business, financial
condition and results of operations.
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The regulatory environment in which P-Com operates is subject to
significant change. Regulatory changes, which are affected by political,
economic and technical factors, could significantly impact P-Com's operations by
restricting the development efforts of its customers, making current systems
obsolete or increasing the opportunity for additional competition. Any of these
regulatory changes, including changes in the allocation of available spectrum,
could adversely affect P-Com's business and results of operations. P-Com might
deem it necessary or advisable to modify its systems to operate in compliance
with applicable regulations. These modifications could be extremely expensive
and time consuming.
INTELLECTUAL PROPERTY
P-Com relies on its ability to obtain and enforce combination of
patents, trademarks, trade secrets, copyrights, and a variety of other measures
to protect P-Com's intellectual property rights. P-Com currently holds fourteen
United States patents and six United States copyrights on software. P-Com
generally enters into confidentiality and nondisclosure agreements with service
providers, customers and others, and to limit access to and distribution of
P-Com's proprietary technology. P-Com also enters into software license
agreements with its customers and others. However, these measures may not
provide adequate protection for P-Com's trade secrets and other proprietary
information. Disputes over the ownership of P-Com's intellectual property rights
may still arise and P-Com's trade secrets and proprietary technology may
otherwise become known or be independently developed by competitors. Any patent
owned by P-Com may be invalidated, circumvented or challenged, the rights
granted thereunder may not provide competitive advantages to P-Com or any of
P-Com's pending or future patent applications may not be issued with the scope
of the claims sought by P-Com, if at all. Furthermore, others may develop
similar products or software, duplicate P-Com's products or software or design
around the patents owned by P-Com, or third parties may assert intellectual
property infringement claims against P-Com. In addition, foreign intellectual
property laws may not adequately protect P-Com's intellectual property rights
abroad. Failure to protect P-Com's proprietary rights could adversely affect
P-Com's business, financial condition, and results of operations.
Litigation may be necessary to enforce P-Com's patents, copyrights, and
other intellectual property rights, to protect P-Com'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. This litigation could
result in substantial costs and diversion of resources and could adversely
affect P-Com's business, financial condition and results of operations
regardless of the outcome of the litigation. Infringement, invalidity, right to
use or ownership claims by third parties or claims for indemnification resulting
from infringement claims may be asserted in the future and these assertions may
adversely affect P-Com's business, financial condition, and results of
operations. If any claims or actions are asserted against P-Com, P-Com may seek
to obtain a license under a third party's intellectual property rights. However,
a license may not be available under reasonable terms or at all. In addition, if
P-Com decides to litigate these claims, the litigation could be extremely
expensive and time consuming and could adversely affect P-Com's business,
financial condition and results of operations, regardless of the outcome of the
litigation.
EMPLOYEES
As of September 2, 2003, P-Com and its subsidiaries employed a total of
135 employees, including 71 in Operations, 23 in Research and Development, 22 in
Sales and Marketing and 19 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 P-Com's employees are represented by a labor
union, and P-Com has not experienced any work stoppages to date. P-Com Germany
employed 15 prior to its closure in July 2001. RT Masts employed 170 before it
was sold in February 2001.
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PROPERTIES
LOCATION OF LEASE FACILITY FUNCTIONS SQUARE FOOTAGE DATE LEASE EXPIRES
-------------------------- --------- -------------- ------------------
Headquarters, Campbell, CA......... Administration/Customer 61,000 November 2005
Support/Sales/Engineering; Manufacturer
Campbell, CA(1).................... Manufacturing/Research 30,000 July 2003
Redditch, England(2)............... Sales/Customer Support 5,500 September 2003
Watford, England................... Research/Development 7,500 April 2008
Redditch, England.................. Warehouse 6,800 September 2004
Dulles, VA(3)...................... Administration 8,750 September 2003
Sterling, VA(4).................... Sales/Customer Support/Warehouse 15,000 September 2003
Phoenix, AZ(5)..................... Services 2,540 January 2003
Melbourne, FL(6)................... Research/Development 8,697 July 2004
Beijing, China..................... Sales/Customer Support 3,180 July 2004
Singapore.......................... Sales/Customer Support 560 October 2003
-----------
(1) Facility was closed in February 2003, and by agreement with the
landlord, the lease terminated on July 28, 2003.
(2) Facility was closed in April 2002, and by agreement with the landlord,
the lease was terminated in September 2003.
(3) Facility was closed in February 2003, and by agreement with the
landlord, the lease was terminated in September 2003.
(4) Facility was occupied by P-Com Network Services, Inc. until June 2003.
By agreement with the landlord, the lease was terminated on September
1, 2003.
(5) Facility was closed upon expiration of the lease.
(6) This facility's lease was amended in April 2003, reducing the square
footage from 22,225 to 8,697 square feet.
P-Com Italia, S.p.A., owns and maintains its corporate headquarters in
Tortona, Italy. This facility, consisting of approximately 36,000 square feet,
provides design, test, manufacturing, mechanical, and warehouse functions.
LEGAL PROCEEDINGS
On June 20, 2003, Agilent Financial Services, Inc. filed a complaint
against P-Com for Breach of Lease, Claim and Delivery and Account Stated, in the
Superior Court of the State of California, County of Santa Clara. The amount
claimed in the complaint is $2,512,509, and represents accelerated amounts due
under the terms of capitalized equipment leases of P-Com. On June 27, 2003, the
parties filed a Stipulation for Entry of Judgment and Proposed Order of
Dismissal of Action Without Prejudice. Under the terms of the Stipulation, P-Com
paid Agilent $50,000 on July 15, 2003, $100,000 on September 1, 2003, and is
obligated to pay monthly payments of $50,000 for fourteen months, from October
1, 2003, up to and including November 1, 2004, and $1,725,000 on December 1,
2004. As a result of the Stipulation, judgment under the Complaint will not be
entered unless and until P-Com defaults under the terms of the Stipulation. In
the event P-Com satisfies each of its payment obligations under the terms of the
Stipulation, the complaint will be dismissed, with prejudice.
On April 4, 2003, Christine Schubert, Chapter 7 Trustee for Winstar
Communications, Inc. et al, filed a Motion to Avoid and Recover Transfers
Pursuant to 11 U.S.C. oo 547 and 550, in the United States Bankruptcy Court for
the District of Delaware and served the Summons and Notice on July 22, 2003. The
54
amount of the alleged preferential transfers to P-Com is approximately $13.7
million. P-Com has reviewed the Motion and believes that the payments made by
Winstar Communications, Inc. are not voidable preference payments under the
United States Bankruptcy Code. P-Com intends to defend the Motion.
Other than the amounts claimed by Christine Schubert, Chapter 7 Trustee
for Winstar Communications, Inc., the amount of ultimate liability with respect
to each of the currently pending actions is less than 10% of P-Com's current
assets. In the event P-Com is unable to satisfactorily resolve these and other
proceedings that arise from time to time, its financial position and results of
operations may be materially affected.
MARKET PRICE AND DIVIDEND INFORMATION
P-Com's common stock was quoted in the NASDAQ National Market under the
symbol PCOM, until August 26, 2002. Due to P-Com's failure to meet certain
listing requirements, including a minimum bid price of $1.00 per share, NASDAQ
moved P-Com's stock listing from the NASDAQ National Market to the NASDAQ Small
Cap Market, effective August 27, 2002. Additionally, NASDAQ notified P-Com that,
subject to maintaining compliance with the various rules necessary for continued
listing on the NASDAQ Small Cap Market, P-Com's stock could be delisted from the
NASDAQ Small Cap Market unless it reached and maintained the minimum $1 bid
price for a period of 10 consecutive days by February 10, 2003. P-Com did not
meet this minimum bid price requirement, and effective March 10, 2003, P-Com's
common stock was delisted from the Small Cap Market and now trades on the OTC
Bulletin Board operated by the National Association of Securities Dealers, Inc.
This change could result in a less liquid market available for existing and
potential stockholders to trade shares of P-Com's common stock and could
ultimately further depress the trading price of its common stock.
In addition, P-Com's common stock is subject to the SEC's "penny stock"
regulation. For transactions covered by this regulation, broker-dealers must
make a special suitability determination for the purchase of the securities and
must have received the purchaser's written consent to the transaction prior to
the purchase. Additionally, for any transaction involving a penny stock, the
rules generally require the delivery, prior to the transaction, of a risk
disclosure document mandated by the SEC relating to the penny stock market. The
broker-dealer is also subject to additional sales practice requirements.
Consequently the penny stock rules may restrict the ability of broker-dealers to
sell P-Com's common stock and may affect the ability of holders to sell the
common stock in the secondary market, and the price at which a holder can sell
the common stock.
The following table sets forth the range of high and low sale prices,
as reported on the NASDAQ National Market, NASDAQ Small Cap Market and OTC
Bulletin Board for the first, second, and third quarters of 2003 and each
quarter in 2002 and 2001. These quotations reflect inter-dealer prices, without
retail mark-up, markdown or commission and may not necessarily represent actual
transactions.
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As of August 21, 2003, there were 586 holders of record of P-Com common
stock.
PRICE RANGE OF
COMMON STOCK
HIGH LOW
---- ---
2001:
First Quarter........................................................................... $1.10 $0.25
Second Quarter.......................................................................... 0.30 0.11
Third Quarter........................................................................... 0.14 0.05
Fourth Quarter.......................................................................... 0.08 0.03
2002:
First Quarter........................................................................... $0.37 $0.13
Second Quarter.......................................................................... 0.36 0.09
Third Quarter........................................................................... 0.82 0.19
Fourth Quarter.......................................................................... 0.38 0.15
2003:
First Quarter........................................................................... $0.31 $0.09
Second Quarter.......................................................................... $0.13 $0.06
Third Quarter........................................................................... $0.34 $0.09
Dividends
To date, P-Com has not paid any cash dividends on shares of its common
stock. P-Com currently anticipates that it will retain any available funds for
use in the operation of its business, and does not anticipate paying any cash
dividends in the foreseeable future.
P-COM'S QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
P-Com has international sales and facilities and is, therefore, subject
to foreign currency rate exposure. Historically, P-Com's international sales
have been denominated in British pounds sterling, Euros, and United States
dollars. The functional currencies of P-Com's wholly owned foreign subsidiaries
are the local currencies. Assets and liabilities of these subsidiaries are
translated into United States 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 P-Com's overall currency rate exposure at June 30, 2003, a near-term
10% appreciation or depreciation of the United States dollar would have an
insignificant effect on P-Com's financial position, results of operations and
cash flows over the next fiscal year. P-Com does not use derivative financial
instruments for speculative or trading purposes.
The estimated fair value of P-Com's fixed rate convertible subordinated
notes is approximately 30% of par, or $6.6 million at June 30, 2003. The
estimates of fair value will vary over time depending on P-Com's financial
condition and expected future cash flows.
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P-COM'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
P-Com's management's discussion and analysis of financial condition and
results of operations contain forward-looking statements, which involve risks
and uncertainties. P-Com's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the section entitled "Risk Factors" beginning on
page 7 of this joint proxy statement.
OVERVIEW
P-Com supplies broadband wireless equipment and services for use in
telecommunications networks. Currently, P-Com ships 2.4 GHz and 5.7 GHz spread
spectrum (unlicensed) radio systems, as well as 7 GHz, 13 GHz, 14 GHz, 15 GHz,
18 GHz, 23 GHz, 26 GHz, 38 GHz and 50 GHz point-to-point radio systems. P-Com's
performance in 2002 continued to be impacted by the capital expenditure level
reductions maintained by the telecommunications industry in the United States
and globally. The net loss in 2002 included inventory related charges to product
costs of sales of $5.8 million, and a goodwill impairment write-off of $16.9
million related to the carrying value of P-Com's services business subsidiary,
arising from P-Com's adoption of Financial Accounting Standard ("FAS") 142.
P-Com implemented cost reduction programs, including a headcount reduction of
approximately 186 employees or 48% compared to previous year's headcount and
termination of facility leases. These cost reductions were insufficient to
offset the impact of the reduction in revenue and continued low gross profit
margins in a depressed industry.
In the first quarter of 2003, P-Com decided to exit the services
business. Accordingly, this business is reported as a discontinued operation and
P-Com recorded losses from its operations for the year ended December 31, 2002,
2001, and 2000.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of P-Com's financial condition and
results of operations are based upon P-Com's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires P-Com to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, P-Com evaluates its
estimates. P-Com bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
P-Com believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements:
Management's use of estimates and assumptions
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States 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 periods. Actual results could differ from those estimates,
and such differences could be material and affect the results of operations
reported in future periods.
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Fair value of financial instruments
P-Com measures its financial assets and liabilities in accordance with
accounting principles generally accepted in the United States. The estimated
fair value of P-Com's Convertible Subordinated Notes due 2005 was approximately
30% of par or $6.0 million at June 30, 2003 and $6.7 million at December 31,
2002. The estimated fair value of cash, accounts receivable and payable, bank
loans and accrued liabilities at June 30, 2003 and December 31, 2002
approximated cost due to the short maturity of these assets and liabilities.
Revenue Recognition
Revenue from product sales is recognized upon transfer of title and
risk of loss, which is upon shipment of the product, provided no significant
obligations remain and collection is probable. Provisions for estimated warranty
repairs, returns and other allowances are recorded at the time revenue is
recognized.
Allowance for Doubtful Accounts
P-Com maintains an allowance for doubtful accounts for estimated losses
from the inability of its customers to make required payments. P-Com evaluates
its allowance for doubtful accounts based on the aging of its accounts
receivable, the financial condition of its customers and their payment history,
P-Com's historical write-off experience and other assumptions. In order to limit
its credit exposure, P-Com requires irrevocable letters of credit and even
prepayment from certain of its customers before commencing production.
Inventory
Inventory is stated at the lower of cost or market, cost being
determined on a first-in, first-out basis. P-Com assesses its inventory carrying
value and reduces it if necessary, to its net realizable value based on customer
orders on hand, and internal demand forecasts using management's best estimate
given the information currently available. Demand from P-Com's customers is
highly unpredictable, and can fluctuate significantly as a result of factors
beyond P-Com's control. P-Com's inventories include parts and components that
are specialized in nature or subject to rapid technological obsolescence. P-Com
maintains an allowance for inventories for potentially excess and obsolete
inventories and gross inventory levels that are carried at costs that are higher
than their market values. If P-Com determines that market conditions are less
favorable than those projected by management, such as an unanticipated decline
in demand not meeting its expectations, additional inventory write-downs may be
required.
Property and Equipment
Property and equipment are stated at cost and include tooling and test
equipment, computer equipment, furniture, land and buildings, and
construction-in-progress. Depreciation is computed using the straight-line
method based upon the useful lives of the assets ranging from three to seven
years, and in the case of buildings, 33 years. Leasehold improvements are
amortized using the straight-line method based upon the shorter of the estimated
useful lives or the lease term of the respective assets.
Impairment of long- lived assets
In the event that certain facts and circumstances indicate that the
long-lived assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation were required, the estimated future undiscounted
cash flows associated with the asset would be compared to the asset's carrying
amount to determine if write-down is required. A $599,000 impairment valuation
charge in connection with property and equipment for P-Com's point-to-multipoint
product line was charged to restructuring charges in the first quarter of 2003,
58
and a further $2.5 million impairment charge for the point-to-multipoint
property and equipment was recorded in the second quarter of 2003.
Concentration of credit risk
Financial instruments that potentially subject P-Com to significant
concentrations of credit risk consist principally of cash equivalents and trade
accounts receivable. P-Com places its cash equivalents in a variety of financial
instruments such as market rate accounts and United States government agency
debt securities. P-Com, by policy, limits the amount of credit exposure to any
one financial institution or commercial issuer.
P-Com performs on-going credit evaluations of its customers' financial
condition to determine the customer's credit worthiness. Sales are then
generally made either on 30 to 60 day payment terms, cash on delivery or letters
of credit. P-Com extends credit terms to international customers of up to 90
days, which is consistent with prevailing business practices.
At June 30, 2003 and December 31, 2002, approximately 63% and 43%,
respectively, of trade accounts receivable represent amounts due from four and
three customers, respectively.
Accounting for Income Taxes
P-Com records a valuation allowance to reduce its deferred tax assets
to the amount that is more likely than not to be realized. P-Com considers
historical levels of income, expectations and risks associated with estimates of
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance. In the event that P-Com
determines that it would be able to realize deferred tax assets in the future in
excess of the net recorded amount, an adjustment to the deferred tax asset would
increase income in the period the determination was made.
YEARS ENDED 2002, 2001 AND 2000
Sales
Sales consist of revenues from radio systems sales and out-of-warranty
repairs and support services offered.
In 2002, 2001 and 2000, sales were approximately $29.7 million, $73.2
million and $183.6 million, respectively. The 59% decrease in sales from 2001 to
2002 was primarily due to the absence of sales to United States competitive
local exchange carriers, lack of continuing equipment sales to certain customers
in the United Kingdom and the overall decline in global spending for
telecommunications. The 60% decrease in sales from 2000 to 2001 was primarily
due to significantly decreased product sales to competitive local exchange
carrier customers, on which P-Com had heavily relied. P-Com's major customer,
Winstar, declared bankruptcy in April 2001.
Sales to Orange Personal Communications Services accounted for
approximately 11%, 23% and 9% of total sales in 2002, 2001 and 2000,
respectively. Sales to Myntahl Corporation accounted for approximately 14% of
total sales in 2002. Sales to T-Mobile (previously known as Mercury-One-to-One)
accounted for approximately 18% of 2001 sales, and 4% of 2002 sales.
During 2002, P-Com generated 10% of its sales in the United States, 20%
in the United Kingdom, 51% in Asia, and 4% in other geographical regions. During
2001, P-Com generated 22% of its sales in the United States, 44% in the United
Kingdom, 22% in Asia, particularly in the Pacific Rim and 12% in other
geographical regions. During 2000, P-Com generated 44% of its sales in the
United States, 31% in the United Kingdom, 10% in Continental Europe, and 15% in
other geographic regions, particularly in the Pacific Rim.
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Many of P-Com's largest customers use its products and services to
build telecommunications 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 P-Com
accordingly.
The significant worldwide contraction in the capital spending of the
telecommunications industry negatively affected P-Com's sales in 2002 and the
second half of 2001. This trend has continued in the first quarter of 2003.
P-Com was not able to adjust operating expense levels drastically enough to
result in a profitable operating result in 2002, and given the sales level
decline experienced, P-Com could not expect to be profitable at the sales levels
experienced in 2002.
Gross Profit
Cost of sales consists primarily of costs related to materials, labor
and overhead, freight and duty. In 2002, 2001, and 2000, gross profit (loss) was
$(1,091), $(21.7) million and $22.6 million, respectively, or (4%),(30%), and
12%, respectively.
In 2002, 2001, and 2000, product gross margins were negatively affected
by inventory and other related charges of $5.8 million, $30.0 million, and $21.7
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 15%, 11%, and 24% in 2002,
2001, and 2000, respectively. The higher gross margin in 2002 was due to a
reduction of direct production overhead and several sales transactions to the
Middle East market at improved prices. In 2001, the reduced gross profit margins
related to reduced economies of scale and to pricing pressure on the
point-to-point Tel-Link products as a result of the relative maturity of this
legacy product line, the global economic slowdown and availability of highly
competitive alternative products in the marketplace. Gross profit turned
negative in the second half of 2001. Unless sales recover significantly, despite
the cost cutting measures in place, P-Com will remain unprofitable.
Research and Development
Research and development expenses consist primarily of costs associated
with new product development. P-Com's 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.
In 2002, 2001, and 2000, research and development expenses were
approximately $12.7 million, $19.8 million and $20.2 million, respectively. As a
percentage of product sales, research and development expenses increased from
27% in 2001 to 43% in 2002, primarily due to the lower sales levels. Research
and development expenses in 2001 and 2002 continued to be significant due to the
substantial final development efforts on the new Encore point-to-point and
AirPro Gold spread spectrum products in preparation for commercial rollout in
2002. As a percentage of product sales, research and development expenses
increased from 11% in 2000 to 27% in 2001, primarily due to the lower sales
levels.
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 2002, 2001, and 2000, selling and
marketing expenses were $6.6 million, $7.6 million, and $11.4 million,
respectively. As a percentage of sales, selling and marketing expenses increased
from 10% in 2001 to 22% in 2002, primarily due to lower sales levels. As a
percentage of sales, selling and marketing expenses increased from 6% in 2000 to
10% in 2001, primarily due to the same reason, year-on-year basis.
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General and Administrative
General and administrative expenses consist primarily of salaries and
other expenses for management, as well as finance, accounting, data processing,
public company costs, legal, and other professional services. In 2002, 2001, and
2000, general and administrative expenses, were $10.8 million, $26.1 million
(excluding a $11.6 million receivable valuation charge relating to the
bankruptcy filing of Winstar), and $18.2 million, respectively. As a percentage
of sales, general and administrative expenses were at 36% (excluding the $11.6
million receivable valuation charge) in 2001 as well as in 2002. As a percentage
of sales, general and administrative expenses increased from 10% in 2000 to 36%
in 2001 due to the decreased sales levels and the inability to reduce fixed
expenses as rapidly as the decrease in sales.
Change in Accounting Principle
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. P-Com adopted SFAS 142 on January 1, 2002, and, as a result,
stopped recording goodwill amortization but did record a transitional impairment
charge of $5.5 million in the first quarter of 2002, representing the difference
between the fair value of expected cash flows from the services business unit,
and its book value.
Goodwill Amortization and Impairment
Under previous accounting treatment, goodwill was amortized quarterly
upon a fixed schedule. Goodwill was amortized on a straight-line basis over the
period of expected benefit of 20 years. In 2001 and 2000, goodwill amortization
was approximately $2.4 million and $4.1 million, respectively. In the second
quarter of 2000, management reviewed the carrying value of goodwill related to
its 1998 acquisition of the Cylink Wireless Group. Based upon its assessment of
future value of revenue flows estimated to be provided from this acquisition, a
$15 million impairment charge was recorded. Management also determined it
appropriate to amortize the remaining goodwill related to the Cylink Wireless
Group over a 4 1'2 year period beginning in July 2000. In 2001, management again
reviewed the carrying value of goodwill related to Cylink Wireless Group. Based
on the changes to the forecast future cash flows and the replacement of the
Cylink Wireless Group spread spectrum products with its successor AirPro Gold
line, P-Com determined that the residual goodwill arising from the acquisition
of Cylink Wireless Group in 1998 was impaired and recorded a charge of $5.6
million in the third quarter of 2001.
Goodwill Impairment
Management reviewed the carrying value of goodwill related to the
services business unit, and based upon its assessment of future cash value of
revenue flows and the current depressed business condition of the
telecommunications services market, recorded an $11.4 million impairment charge
in the fourth quarter of 2002.
Restructuring and Other Charges
In the fourth quarter of 2002, P-Com determined that there was a need
to reevaluate its inventory carrying value in light of the continuing worldwide
slowdown in the global telecommunications market, especially with regard to an
assessment of future demand for P-Com's point-to-multipoint product range. This
resulted in a $5.8 million inventory charge to product cost of sales, of which
$5.0 million was for point-to-multipoint inventories, and $0.8 million was for
spread spectrum inventories.
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In the first quarter of 2001, P-Com recorded a $10.0 million inventory
related charge to product cost of sales, and incurred a $11.6 million receivable
valuation charge, a direct result of the bankruptcy of Winstar. In the third
quarter of 2001, P-Com determined that there was a need to reevaluate its
inventory carrying value in the light of the significant slowdown in the global
telecommunication market, and the phasing out of and replacement of current
product designs. The evaluation included an assessment of future demand for
certain of P-Com's lower speed and lower frequency TelLink point-to-point
products, and resulted in total charges to product costs of sales of
approximately $18.0 million in the third quarter of 2001. Additionally $2.0
million was charged to product cost of sales in the fourth quarter of 2001.
In the second quarter of 2000, P-Com 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 United Kingdom and other European markets
and toward the United States market, and the resulting anticipated decrease in
demand for certain of P-Com's 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 the inventory reserve of approximately $17.4 million and accrued
liabilities of approximately $4.3 million, both relating to P-Com's product
segment. In addition, P-Com performed a review of the carrying value and
remaining life of long-lived assets associated with its 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.
P-Com increased inventory reserves and related purchase liabilities
through charges to product cost of sales in the second quarter of 2000. Of the
$17.0 million charge for additional reserves, $15.4 million related to the
TelLink point-to-point product line. An additional reserve of approximately $1.0
million was added in the second quarter of 2000 to adjust the carrying value of
certain modules of the point-to-multipoint radio line.
Loss on Discontinued Business
In the first quarter of 2003, P-Com decided to exit its service
business, P-Com Network Services, Inc. Accordingly, this business is reported as
a discontinued operation and P-Com recorded losses from its operations for the
year ended December 31, 2002, 2001 and 2000. On April 30, 2003, P-Com entered
into an Asset Purchase Agreement with JKB Global, LLC to sell certain assets of
P-Com Network Services, Inc. P-Com is a guarantor of P-Com Network Services,
Inc.'s obligations under its premises lease, through July 2007. As part of the
sale to JKB Global, LLC, JKB Global, LLC has agreed to sublet the premises from
P-Com Network Services, Inc. for one year beginning May 1, 2003. The terms of
the sublease required JKB Global, LLC to pay less than the total amount of rent
due under the terms of the master lease. As a result, P-Com remained liable
under the terms of the guaranty for the deficiency, and the total obligation
under the terms of the master lease was approximately $1.5 million. This amount
was accrued in the second quarter of 2003 as loss on disposal of discontinued
operations. In September 2003, P-Com entered into an agreement to terminate the
premises lease in consideration for the payment to the landlord of $240,000.
Interest Expense
In 2002, 2001, and 2000, interest expense was $2.5 million, $1.9
million, and $4.6 million, respectively. In 2002, interest expense primarily
relates to the borrowings on the bank line, the 4.25% Convertible Subordinated
Notes, the issuance of the 7% Convertible Subordinated Notes effective November
1, 2002, note conversion expenses and interest on equipment leases.
Approximately $0.8 million was charged to interest expense in 2002 (zero in
2001) related to conversion of the 4.25% Convertible Subordinated Notes to
common stock, in compliance with SFAS 84. In 2001, interest expense primarily
62
relates to the 4.25% Convertible Subordinated Notes, fees incurred in setting up
the Loan and Security Agreement with Foothill Capital Corporation and interest
on equipment leases. For 2000, interest expense consisted primarily of interest
and fees incurred on the 4.25% Notes and borrowings under P-Com's bank lines of
credit, interest on the principal amount of equipment leases, and contractual
penalties for late filing of the registration statement in connection with the
issuance of the Series B Convertible Preferred Stock and the related warrants.
Approximately $1.9 million was charged to interest expense in 2000 related to
amortization of the fair value of warrants issued to P-Com's lender group in
January 2000. The higher interest expense in 2002 compared to 2001 is due
primarily to the recognition of $771,000 of note conversion expenses in
compliance with SFAS 84. The reduction in interest expense in 2001 compared to
the prior year was primarily due to reduced debt levels outstanding in these
periods.
Gain on Sale of Subsidiary
P-Com recognized a gain of approximately $9.8 million in 2001 on the
sale of RT Masts in February 2001.
Other Income (Expense), Net
In 2002, other expense, net related primarily to losses on vendor
settlements of $1.2 million, and writing off of a notes receivable of $0.8
million. These were partially offset by exchange gain arising from Euro and
United Kingdom pound denominated receipts when these currencies appreciated
against United States dollars and other miscellaneous income.
In 2001, other expense, net was comprised primarily of losses related
to the write-down of property and equipment and foreign currency translation
loss offset by an earn out royalty payment related to the 2000 sale of the
Control Resources Corporation subsidiary, and investment income from available
cash balances. In 2000, other expense, net represented primarily a $3.5 million
loss in the first quarter on the sale of P-Com's Cemetel unit, foreign exchange
losses of approximately $5.0 million and the write-off of a 1998 investment in a
Poland-based telecommunications venture of $1.3 million. This was partially
offset by interest income on excess cash balances, and a gain of $2.6 million on
the sale of Control Resources Corporation in April 2000.
Provision (Benefit) for Income Taxes
In 2002 and 2001, P-Com recorded a net tax benefit of $(0.5) million
and $(0.6) million, respectively, relating to recovery of prior year's federal
income tax, offset by income taxes attributable to foreign jurisdictions that
had local taxable income for both years.
In 2000, P-Com recorded tax provisions of $10.9 million, 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. No
benefit was recognized in 2002, 2001, and 2000 for net operating losses
incurred.
Extraordinary Item
In the second quarter of 2002, P-Com repurchased 4.25% Convertible
Subordinated Notes with a face value of $1.75 million for approximately $367,000
in cash.
In January 2000, P-Com repurchased $7.0 million of its 4.25%
Convertible Subordinated Notes by issuing 677,000 shares of newly issued P-Com
common stock with a fair market value of $5.1 million. The extraordinary gain
resulting from this transaction amounted to $1.9 million.
63
SIX MONTHS ENDED JUNE 30, 2003
RESULTS OF OPERATIONS
Sales
For the three months ended June 30, 2003, total sales were
approximately $5.0 million as compared to $8.1 million for the same period in
the prior year. For the six months ended June 30, 2003, total sales were
approximately $9.6 million, compared to $15.9 million for the same period in the
prior year. The decrease in total sales for the six-months ended June 30, 2003
as compared to 2002 was principally attributable to a $4.6 million decrease in
point-to-point and spread spectrum product shipments to the Asia-Pacific Rim
countries. The continuing capital expenditure control measures implemented by
North American and European telecommunication companies have continued to
adversely impact P-Com's sales. Approximately $2.9 million of P-Com's sales in
the second quarter of 2003 are from out-of-warranty repair activities, an
increase of $0.9 million over the previous quarter.
During the six-month period ended June 30, 2003 and 2002, four and
three customers accounted for a total of 53% and 41% of P-Com's total sales,
respectively.
During the six months ended June 30, 2003, P-Com generated
approximately 29% of its sales in the Asia-Pacific Rim areas and the Middle East
combined. During the same period in 2002, P-Com generated 54% of its sales in
the Asia-Pacific Rim and the Middle East combined. The United Kingdom market
contributed 33% of the P-Com's revenue in the six months ended June 30, 2003,
compared to 18% in the same period in 2002. P-Com's next largest market is the
European continent, which generated approximately 18% of its revenue in the six
months ended June 30, 2003, compared to 13% in the same period in 2002.
Many of P-Com's largest customers use its product to build
telecommunication network infrastructures. These purchases represent significant
investments in capital equipment and are required for network rollout in a
geographic area or market. Consequently, the customer may have different
requirements from year to year and may vary its purchase levels from P-Com
accordingly. As noted, the worldwide slowdown in the telecommunications industry
is significantly affecting P-Com's customers and revenue levels.
Gross Profit
Gross profit for the three months ended June 30, 2003 and 2002, was
$841,000 and $1.4 million, respectively, or 17% and 18% of sales in each of the
respective quarters. Excluding the $0.3 million inventory and related charges
recorded in the second quarter, product gross profit margins for the quarter
ended June 30, 2003 would have been 23%. The higher gross margin was
attributable principally to a higher percentage of total revenue in the second
quarter from the sale of unlicensed equipment and out-of-warranty repairs, which
provide higher gross margins compared to newly developed product sales that have
not yet reached the volume required for higher margins. The inventory and
related charge in the second quarter of 2003 consists of $1.2 million for
P-Com's point-to-multipoint, and $0.9 million for P-Com's legacy Tel-link
point-to-point and Air-link spread spectrum products, offset by a write-back of
$1.8 million of accounts payable and purchase commitment liabilities arising
from vendor settlements. The charges related to P-Com's point-to-multipoint,
Tel-link and Air-link products were taken in view of the less favorable market
conditions for these products. For the six months ended June 30, 2003 and 2002,
gross profit was $1.4 million (excluding inventory and related charges of $3.6
million) and $2.2 million, or 15% and 14% of sales, respectively. The higher
gross margin was attributable principally to a higher percentage of total
revenue during the six month period coming from the sale of unlicensed equipment
and out-of-warranty repairs, which provide higher gross margins compared to
newly developed product sales that have not yet reached the volume required for
64
higher margins. Including the inventory and related charges of $3.6 million,
gross loss for the six months ended June 30, 2003 is (23%).
Because of the sluggish economic environment surrounding the wireless
telecommunications industry, P-Com closely monitors its inventory carrying
value, and particularly with regard to a timely assessment of future demand for
its point-to-multipoint, and its other legacy product lines. P-Com's reviews, as
stated above, have resulted in a $2.0 million charge to cost of sales for its
point-to-multipoint, Tel-Link point-to-point and Air-link spread spectrum
inventories during the three months ended June 30, 2003. In the first quarter of
2003, P-Com recorded a $3.4 million inventory related charge to cost of sales,
of which $2.0 million was related to its point-to-multipoint inventories.
Because P-Com has substantially reserved all remaining inventories in the
aforementioned product lines, future material charges are not expected. However,
additional charges for obsolescence or excessive quantities may arise from other
product lines as management continues to review its inventories.
Research and Development
For the three months ended June 30, 2003 and 2002, research and
development expenses were approximately $1.7 million and $3.7 million,
respectively. For the six months ended June 30, 2003 and 2002, research and
development expenses were approximately $3.6 million and $7.8 million,
respectively. The decrease in research and development expense was due to the
restructuring of the point-to-multipoint operations, reduced depreciation
charges, reduced staffing levels and substantial completion of product
development efforts related to P-Com's point-to-point Encore and AirPro Gold
spread spectrum radios. As a percentage of sales, research and development
expenses were at 34% for the three months ended June 30, 2003, compared to 46%
for the three months ended June 30, 2002. The percentage decrease is due to
significant expense reduction efforts as mentioned above.
Selling and Marketing
For the three months ended June 30, 2003 and 2002, sales and marketing
expenses were approximately $0.8 million and $1.7 million, respectively. For the
six months ended June 30, 2003 and 2002, sales and marketing expenses were
approximately $1.8 million and $3.5 million, respectively. The decrease in sales
and marketing spending is due to lower commission payments in light of decreased
sales in the Asia-Pacific Rim areas, headcount reductions and reduced traveling
expenses. As a percentage of sales, selling and marketing expenses was 17% for
the three months ended June 30, 2003, compared to 21% for the three months ended
June 30, 2002. The percentage decrease was caused by significant savings in
sales and marketing expenses, as described above.
General and Administrative
For the three months ended June 30, 2003 and 2002, general and
administrative expenses were approximately $1.6 million and $3.2 million,
respectively. For the six months ended June 30, 2003 and 2002, general and
administrative expenses were approximately $3.2 million and $6.2 million,
respectively. The decrease in general and administrative expense in the second
quarter of 2003 is attributable to a realization of savings from cost reduction
programs that continued from 2002 to 2003, including headcount reductions,
lowering of salaries, reduced consulting and legal expenses, and facilities
consolidation. As a percentage of sales, general and administrative expenses
were 31% for the three months ended June 30, 2003, compared to 39% for the three
months ended June 30, 2002. The percentage decrease is due to P-Com's success in
significantly reducing its expenses throughout the year.
65
Asset Impairment and Other Restructuring Charges
In the event that certain facts and circumstances indicate that the
long-lived assets may be impaired, an evaluation of recoverability would be
performed. When an evaluation occurs, management conducts a probability analysis
based on the weighted future undiscounted cash flows associated with the asset.
The results are then compared to the asset's carrying amount to determine if an
impairment is necessary. The cash flow analysis for the property and equipment
is performed over the shorter of the expected useful lives of the assets, or the
expected life cycles of P-Com's product line. An impairment charge is recorded
if the net cash flows derived from the analysis are less than the asset's
carrying value. P-Com deems that the property and equipment is fairly stated if
the future undiscounted cash flows exceed its carrying amount.
In the first and second quarter of 2003, P-Com determined that there
was a need to reevaluate the carrying value of its property and equipment, which
are held for sale, relating to its point-to-multipoint product line. The
evaluation was performed in light of the continuing slowdown in the global
telecommunications market for this product line. The evaluation resulted in a
$2.5 million provision for asset impairment in the second quarter of 2003, and a
$0.6 million provision in the first quarter of 2003.
The aforementioned charges were based upon management's determination
that the assets had no fair value (in regards of future cash flows, salvage or
otherwise) and, therefore, resulted in no remaining net asset carrying value
related to P-Com's point-to-multipoint product lines. Because P-Com has
substantially reserved all remaining long-lived assets in the aforementioned
product lines, future material charges are not expected. However, additional
charges for obsolescence or impairments may arise from other products lines as
management continues to review its long-lived assets.
In connection with the workforce reduction in May 2003, P-Com recorded
a $0.2 million charge in the second quarter of 2003 relating to a severance
package given to certain of its executive officers.
Loss on discontinued business
In the first quarter of 2003, P-Com decided to exit its services
business, P-Com Network Services, Inc. Accordingly, beginning in the first
quarter of 2003, this business is reported as a discontinued operation and P-Com
recorded losses from its operations and from the disposal of the services
business unit relating to writing down of assets to net realizable value. On
April 30, 2003, P-Com entered into an Asset Purchase Agreement with JKB Global,
LLC to sell certain assets of P-Com Network Services, Inc. P-Com is a guarantor
of P-Com Network Services, Inc.'s obligations under its premises lease, through
July 2007. As part of the sale to JKB Global, LLC, JKB Global, LLC has agreed to
sublet the premises from P-Com Network Services, Inc. for one year beginning May
1, 2003. The terms of the sublease required JKB Global, LLC to pay less than the
total amount of rent due under the terms of the master lease. As a result, P-Com
remained liable under the terms of the guaranty for the deficiency, and the
total obligation under the terms of the master lease was approximately $1.5
million. This amount was accrued in the second quarter of 2003 as loss on
disposal of discontinued operations. In September 2003, P-Com entered into an
agreement to terminate the premises lease in consideration for the payment to
the landlord of $240,000.
Change in accounting principle
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. P-Com adopted FAS 142 on January 1, 2002, and, as a result,
recorded a transitional impairment charge of $5.5 million in the first quarter
of 2002, representing the difference between the fair value of expected cash
flows from the services business unit, and its book value.
66
Interest Expense
For the three months ended June 30, 2003 and 2002, interest expense was
$0.6 million and $0.7 million, respectively. Interest expense for the second
quarter of 2003 comprised primarily of interest on the principal amount of
P-Com's Convertible Subordinated Notes due 2005, interest on its bank line of
credit, interest on capital leases and amortization of discount on the
promissory notes. The higher expense levels in the second quarter of 2002 were
due to the recording of $198,000 of notes conversion expense in connection with
SFAS 84, Induced Conversion of Convertible Debt. For the six months ended June
30, 2003 and 2002, interest expense was $1.1 million and $1.0 million,
respectively. The higher expense in 2003 was due to the higher interest rate on
the Convertible Subordinated Notes due 2005, which was raised to 7% per annum on
November 1, 2002, compared to 4.25% per annum previously, and amortization of
discount on the Convertible Subordinated Notes due 2005.
Gain on Debt, Restructuring and Other Income, Net
For the three-month period ended June 30, 2003, gain on debt
restructuring and other income, net, totaled $2.4 million compared to $1.1
million for the comparable three-month period in 2002. For the six-month period
ended June 30, 2003, gain on debt restructuring and other income, net, totaled
$2.5 million compared to $1.5 million for the corresponding period in 2002. The
higher amount in 2003 was due to $1.5 million of gain on redemption of
Convertible Subordinated Notes due 2005, and $0.8 million of gain from the sale
of property and equipment.
During the quarterly period ended June 30, 2003, P-Com settled a vendor
liability with a carrying value of $2.3 million in exchange for fixed assets,
which had nominal value, and the recovery of 920,000 shares of common stock that
the vendor owned. The gain on this transaction was allocated based upon the
relative fair values of the assets received or issued. The common shares
acquired were valued at $0.1 million and recorded in treasury. The remainder of
the gain was allocated to debt restructuring and gain on disposal of fixed
assets in the amount of $1.5 million and $0.9 million, respectively.
Provision (Benefit) for Income Taxes
P-Com has not recorded the tax benefit of its net operating losses
since the criteria for recognition has not been achieved. The net operating
losses will be available to offset future taxable income, subject to certain
limitations and expirations.
LIQUIDITY AND CAPITAL RESOURCES
Since P-Com's inception in August 1991, P-Com has financed its
operations and capital requirements through net proceeds of approximately $97.2
million from its initial and two follow-on public offerings of P-Com common
stock; $110.2 from private placements of P-Com common stock; $32.2 million from
four preferred stock financings; $97.5 million from the 4.25% Notes issued in
1997; and borrowings under bank lines of credit and equipment lease
arrangements.
In 2002, P-Com used approximately $14.5 million of cash in operating
activities, primarily due to the net loss of $54.3 million, offset by
depreciation charges of $6.6 million, non-cash charges to cost of sales for
inventory related charges aggregating $5.8 million, and an impairment charge
related to goodwill of $16.9 million. In addition, P-Com experienced decreases
in inventories, other accrued liabilities, accounts receivable, and prepaid
expenses related to lower levels of sales and operations level reductions caused
by the current downturn.
During the six-month period ended June 30, 2003, P-Com used
approximately $1.6 million of cash in operating activities, primarily due to its
net loss of $16.4 million, offset by a $3.6 million non-cash loss related to
inventory and related charges, $3.1 million of property and equipment impairment
charges, and depreciation expense of $2.7 million. Significant contributions to
cash flow resulted from a net reduction in inventories of $1.8 million, a net
67
reduction in trade receivables of $1.5 million, and a net reduction in prepaid
and other current assets of $0.6 million. These were partially offset by a pay
down of accounts payable of $0.7 million.
During the six-month period ended June 30, 2002, P-Com used
approximately $10.8 million of cash in operating activities, primarily related
to the net loss of $23.2 million, including a $5.5 million non-cash goodwill
impairment charge, $1.8 million of inventory and related charges, and
depreciation expense of $3.5 million, offset by a $1.4 million gain on the
redemption of certain Convertible Subordinated Notes due 2005. Other significant
contributions to cash flow from operations for the six-month period ended June
30, 2002 were cash generated through inventory usage of $6.6 million, and a net
increase of trade payables of $1.3 million. These were offset by a net decrease
of other accrued liabilities of $8.4 million.
During 2002, P-Com received net proceeds of approximately $5.0 million
through investing activities. The net proceeds resulted primarily from the
decrease in restricted cash of $2.5 million, and proceeds from sale of property
and equipment of $0.3 million and a contribution of $2.9 million from changes in
the net assets of discontinued operations, offset by acquisition of property and
equipment of $0.6 million.
During the six-month period ended June 30, 2003, net cash flows used by
investing activities were minimal. P-Com generated $0.9 million from changes in
the net assets of discontinued operations, offset by a $400,000 loan to SPEEDCOM
and a $0.6 million increase in restricted cash. During the six-month period
ended June 30, 2002, P-Com generated approximately $8.3 million of cash from
investing activities due to the decrease in restricted cash of $2.9 million and
a contribution of $2.9 million from changes in the net assets of discontinued
operations, offset by $0.4 million related to an asset acquisition.
In 2002, P-Com received net proceeds of approximately $7.7 million
through financing activities. P-Com received approximately $7.3 million and $0.4
million in June 2002 and December 2002, respectively, in net proceeds from the
issuance of P-Com common stock, and drew $2.6 million from P-Com's available
bank line. P-Com used $2.1 million to redeem a total face value of $3.5 million
of the 4.25% Notes in June 2002 and in November 2002. P-Com further remitted
$0.5 million under its capital lease obligations.
During the six-month period ended June 30, 2003, P-Com generated $0.5
million in cash from financing activities, primarily from the issuance of the
convertible promissory notes, which generated net proceeds of approximately $1.7
million, after deducting expenses, and $0.3 million from the issuance of common
stock, offset by a $1.2 million repayment of borrowings under P-Com's credit
facility with Silicon Valley Bank and a $0.3 million payment of P-Com's capital
lease obligations. The convertible promissory notes bear interest at 10% per
annum, and mature one year from the date of issuance. The convertible promissory
notes are subordinated to outstanding borrowings under the credit facility with
Silicon Valley Bank but are senior to the Convertible Subordinated Notes due
2005. P-Com repurchased $2.3 million of the Convertible Subordinated Notes with
excess property and equipment, thereby reducing its obligations under the
Convertible Subordinated Notes due 2005 to $20.1 million. During the six-month
period ended June 30, 2002, P-Com generated $9.9 million cash flows from
financing activities, primarily through $7.5 million net proceeds from the
issuance of common stock, and $3.0 million cash advances from a bank based on
P-Com's qualifying trade receivables, offset by payments for capital leases and
the repurchase of the Convertible Subordinated Notes due 2005.
P-Com's principal sources of liquidity as of December 31, 2002
consisted of approximately $0.9 million of cash and cash equivalents, and
additional amounts that P-Com may borrow under the existing credit facility with
Silicon Valley Bank. Cumulative operating losses have seriously affected P-Com's
liquidity in 2002. At December 31, 2001, P-Com had approximately $2.5 million in
cash and cash equivalents. P-Com further had $2.9 million in restricted cash
resulting from an attachment, as part of a dispute with a vendor. The dispute
68
had been fully resolved and the attachment removed in February 2002, resulting
in approximately $1.4 million being released to P-Com at that time.
As of June 30, 2003, P-Com's principal sources of liquidity consisted
of approximately $0.2 million of cash and cash equivalents, and remaining
amounts available under the credit facility with Silicon Valley Bank.
At December 31, 2002, P-Com had negative working capital of
approximately $1.8 million. The negative working capital resulted from P-Com's
continuing operating losses, higher loan from bank balance and a $5.5 million
inventory write-down to net realizable value. Unless P-Com is able to generate
sufficient profitable sales, or obtain new equity, P-Com may have insufficient
working capital to fund its operations.
At June 30, 2003, P-Com had negative working capital of approximately
$33.5 million. The negative working capital resulted from P-Com's continuing
operating losses, reclassification of $20.1 million of Convertible Subordinated
Notes due 2005 to current due to default on interest payments, and a $5.5
million inventory write-down to net realizable value and accrual of other
charges. On May 1, 2003, P-Com was obligated to make a $784,000 interest payment
on its Convertible Subordinated Notes due 2005, and a $202,000 payment with
respect to a promissory note restructured in November 2002. P-Com did not make
either of the required payments, and received waivers with respect to such
payments through the date of the restructuring of the Convertible Subordinated
Notes due 2005, as discussed below. If P-Com fails to (i) obtain additional debt
or equity financing; (ii) generate sufficient revenues from new and existing
products sales; (iii) obtain agreements from its creditors to reduce the amount
owed and extend repayment terms; (iv) negotiate agreements to settle outstanding
litigation; or (v) renew the credit facility with Silicon Valley Bank when it
expires in September 2003, P-Com will have insufficient capital to continue its
operations. Without sufficient capital to fund its operations, P-Com will no
longer be able to continue as a going concern.
On September 20, 2002, P-Com and Silicon Valley Bank entered into a
Credit Facility Agreement for a total facility of $5.0 million, consisting of a
$1.0 million borrowing line based on domestic receivables, and a Loan and
Security Agreement under the Export-Import ("EXIM") program for a $4.0 million
borrowing line based on export related inventories and receivables. The bank
makes cash advances equal to 70% of eligible accounts receivable balances for
both the EXIM program and domestic lines, and up to $1.2 million for eligible
inventories under the EXIM program. Advances under these loan agreements bear
interest at the bank's prime rate plus 2.5% per annum. The loan agreements
expire on September 20, 2003, and are secured by all receivables, deposit
accounts, general intangibles, investment properties, inventories, cash,
property, plant and equipment of P-Com. P-Com has issued a $4.0 million secured
promissory note underlying these loan agreements to the bank. As of December 31,
2002, the loan amount payable to the bank was $2.9 million. P-Com was not in
compliance with the loan agreements' revenue and minimum tangible net worth
covenants as of December 31, 2002, and, on March 4, 2003, P-Com received a
limited waiver from the bank for the designated revenue default, and a limited
forbearance from exercising its rights and remedies arising from the tangible
net worth default until the earlier of (i) March 15, 2003, or (ii) the
occurrence of an event of default. On March 24, 2003, P-Com received a waiver
from the bank of the non-compliance with the minimum tangible net worth covenant
as of December 31, 2002, and the cross default arising from the non-compliance.
P-Com also received from the bank in the same waiver agreement a limited
forbearance from exercising its rights and remedies arising from P-Com's
non-compliance with the tangible net worth covenant as of January 31, 2003 until
the earlier of (i) April 15, 2003, or (ii) the occurrence of an event of default
other than the January 2003 default. Under the terms of the forbearance, the
bank reserved its right to immediately cease extending credit without further
notice, and the right, in its discretion, to have the outstanding debt
obligations bear interest at the default rate of interest, which includes an
additional 4% penalty charge.
69
On June 30, 2003, the Credit Facility was amended as follows. Silicon
Valley Bank will make cash advances equal to 70% of eligible accounts receivable
balances for both the EXIM program and domestic lines, and up to $750,000 for
eligible inventories under the EXIM program, subject to a limit of not more than
30% of eligible trade receivables. As of June 30, 2003, the loan amount payable
to the bank under the credit facility aggregated approximately $1.4 million.
P-Com has an unsecured overdraft line with a bank in Italy, for
borrowings up to $83,000, based on domestic trade receivables. Borrowings under
this line bear interest at 4.5% per annum. As of June 30, 2003, the overdraft
amount drawn on this line was approximately $53,000.
On March 26, 2003, P-Com completed a bridge financing transaction in
which it issued $1.5 million of 10% convertible promissory notes with a maturity
date of one year from the date of issuance. These convertible promissory notes
are subordinated to the existing bank line of credit, but senior to the $22.4
million Convertible Subordinated Notes due 2005.
On May 28, 2003, P-Com completed a bridge financing transaction in
which it issued $0.3 million of 10% convertible promissory notes with a maturity
date of one year from the date of issuance. These convertible promissory notes
are subordinated to the existing bank line of credit, but senior to the $22.4
million Convertible Subordinated Notes due 2005.
Given (i) P-Com's deteriorating cash position; (ii) the impending
expiration of P-Com's credit facility; (iii) the aging of P-Com's accounts
payable; (iv) the size and working capital needs of P-Com's business; and (v)
P-Com's history of losses P-Com's ability to continue as a going concern is
doubtful in the absence of additional funding in the short term. Additional
financing may not be available to P-Com on acceptable terms, or at all, when
required by us. Without sufficient capital to fund its operations, P-Com will be
unable to continue as a going concern despite making significant reductions in
its operating expense levels over the past 12 months. In addition to receiving
new funds, P-Com needs to significantly increase sales, reduce its short-term
liabilities by inducing creditors to agree to accept reduced payments, forbear
on the amount owing or to offer extended payment terms. If P-Com is unable to
increase sales to a sufficient level, or to reach agreements with any or enough
of its creditors, P-Com will not be able to continue as a going concern. As a
result of these circumstances, P-Com's independent accountants' opinion on its
consolidated financial statements for the year ended December 31, 2002 includes
an explanatory paragraph indicating that these matters raise substantial doubt
about P-Com's ability to continue as a going concern. If additional funds are
raised through the issuance of equity securities, further dilution to the
existing stockholders will result.
The following summarizes P-Com's contractual obligations at December
31, 2002, and the effect such obligations are expected to have on its liquidity
and cash flow in future periods:
LESS THAN ONE TO THREE TO AFTER
OBLIGATIONS (IN $000): ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS TOTAL
---------------------- -------- ----------- ---------- ---------- --------
Convertible subordinated notes....................... $0 $22,390 $0 $0 $22,390
Non-cancelable operating lease obligations........... 3,001 6,788 466 0 10,255
Loan payable to bank................................. 2,908 0 0 0 2,908
Senior subordinated secured promissory notes......... 202 0 0 0 202
Open purchase order commitments...................... 1,073 0 0 0 1,073
Capital lease obligations............................ 435 2,077 0 0 2,512
TOTAL................................................ $7,619 $31,255 $466 $0 $39,340
As a result of P-Com's default under certain capital lease obligations,
the total amount due has been accelerated to the current period.
70
The following summarizes P-Com's contractual obligations at June 30,
2003, and the effect such obligations are expected to have on its liquidity and
cash flow in future periods:
LESS THAN ONE TO THREE TO AFTER
OBLIGATIONS (IN $000): ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS TOTAL
---------------------- -------- ----------- ---------- ---------- --------
Convertible Subordinated Notes....................... $20,090 $0 $0 $0 $20,090
Convertible promissory note.......................... 2,002 0 0 0 2,002
Non-cancelable operating lease obligations........... 783 3,816 736 0 5,335
Capital lease obligations............................ 241 1,983 0 0 2,224
Loan payable to banks................................ 1,403 0 0 0 1,403
Purchase order commitments........................... 1,238 0 0 0 1,238
TOTAL................................................ $25,757 $5,799 $736 $0 $32,292
P-Com does not have any material commitments for capital equipment.
Additional future capital requirements will depend on many factors, including
P-Com's plans to increase manufacturing capacity, working capital requirements
for its operations and its internal free cash flow from operations.
RECENT DEVELOPMENTS
On July 18, 2003, as a result of the restructuring of its Convertible
Subordinated Notes due 2005, the principal amount and accrued interest of
$21,138,000 was converted into 1,000,000 shares of Series B Convertible
Preferred Stock with a stated value of $21.138 per share. Each share of Series B
Convertible Preferred Stock converts into a number of shares of P-Com common
stock equal to the stated value divided by $0.20. The holders of Series B
Convertible Preferred Stock have agreed to convert the Series B Convertible
Preferred Stock into common stock upon receipt of stockholder approval to
increase the number of authorized shares of P-Com common stock to allow for
conversion.
On July 18, 2003, P-Com completed a bridge financing transaction in
which it issued $0.9 million of 10% convertible promissory notes with a maturity
date of one year from the date of issuance. These convertible promissory notes
were converted into Series C Preferred Stock, in connection with the Series C
Financing, as discussed below.
On September 25, 2003, P-Com renewed its credit facility for an
additional year, until September 25, 2004. The renewed credit facility allows
for maximum borrowings of up to $4.0 million.
On October 3, 2003, P-Com closed $11.0 million in Series C Preferred
Stock (the "Series C Financing") with a stated value of $1,750 per share,
resulting in net proceeds of approximately $7.9 million after deducting expenses
related to the Series C Financing, and payment of certain claims related to
P-Com's restructuring. Dividends accrue on the Series C Preferred Stock
beginning 12 months after the closing, at 6% per annum paid semi-annually in
cash or common stock, at the option of P-Com, and increasing to 8% per annum
beginning 24 months after the closing. At P-Com's option, the Series C Preferred
Stock is mandatorily convertible one hundred eighty days after the effective
date of the registration statement covering the shares of common stock issuable
upon the conversion of the Series C Preferred Stock, and upon the satisfaction
of the following conditions: (i) for ten consecutive days, the common stock
closes at a bid price equal to or greater than $0.20; (ii) the continued
effectiveness of the registration statement; (iii) all shares of common stock
issuable upon conversion of the Series C Preferred Stock and Series C-1 and
Series C-2 Warrants are authorized and reserved for issuance, are registered
under the Securities Act for resale by the holders, and are listed or traded on
the Bulletin Board or other national exchange; (iv) there are no uncured
redemption events; and (v) all amounts accrued or payable under the Series C
Preferred Stock Certificate of Designation or registration rights agreement have
been paid. The holders of the Series C Preferred Stock also received 7,000
Series C-1 Warrants and 7,000 Series C-2 Warrants for each share purchased. The
Series C-1 Warrants have a term of five years and an initial exercise price of
$0.15 per warrant, increasing to $0.18 per warrant on the first anniversary of
71
the closing date. The Series C-2 Warrants have a term of five years and an
initial exercise price of $0.18 per warrant, increasing to $0.22 per warrant
eighteen months after the closing date.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period commencing July 1, 2003. P-Com believes that the
adoption of this standard will have no material impact on its financial
statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. The statement amends and
clarifies accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. This
statement is designed to improve financial reporting such that contracts with
comparable characteristics are accounted for similarly. The statement, which is
generally effective for contracts entered into or modified after June 30, 2003,
is not anticipated to have a significant effect on P-Com' s financial position
or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity. This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This statement is effective for financial instruments entered into or
modified after May 31, 2003, and is otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. At June 30, 2003, P-Com had
no such financial instruments outstanding and therefore adoption of this
standard had no financial reporting implications. On August 5, 2003, P-Com
issued shares of Series B Preferred Stock, which have certain terms that, while
improbable, may require their mandatory redemption for cash. P-Com believes that
accounting for these securities as a mezzanine security, outside of equity,
under Staff Accounting Bulletin No. 64 (SAB 64) is appropriate.
SPEEDCOM'S BUSINESS
OVERVIEW
SPEEDCOM is a Delaware corporation. SPEEDCOM manufactures, configures
and delivers a variety of broadband fixed-wireless products, including its award
winning SPEEDLAN family of wireless ethernet bridges and routers. Internet
service providers, telecommunications carriers and other service providers, and
private organizations in the United States of America and more than 80 foreign
countries worldwide, use SPEEDCOM's products to provide broadband "last-mile"
wireless connectivity in various point-to-point and point-to-multipoint
configurations at speeds up to 155 megabits per second and distances up to 25
miles. SPEEDCOM's products provide high-performance broadband fixed wireless
solutions specifically designed for building-to-building local area network
connectivity and wireless Internet distribution.
SPEEDCOM's wireless products are designed to meet the "backbone" and
"last-mile" needs of two distinct market sectors: the service provider market
and the enterprise market. The service provider market is comprised of various
Internet service providers and telecommunication carriers, which provide fixed
wireless broadband Internet connectivity to business and residential customers.
The enterprise market is comprised of corporations, schools, universities,
governments and the military, which need wireless campus-wide private data
72
networks. In both cases, SPEEDCOM's wireless broadband products provide the user
with lower cost of ownership and significantly reduced installation time
compared to alternative wired solutions. Service providers and enterprise
customers alike choose SPEEDCOM solutions based on their reputation for
reliability, performance, service, and value.
SPEEDCOM operates in a single dominant operating segment, as that term
is defined in Statements on Financial Accounting Standards No. 131, "Disclosures
About Segments of an Enterprise."
SPEEDCOM sells its wireless broadband products in domestic and
international markets through both an indirect channel of distributors,
resellers, and original equipment manufacturers and a direct sales force.
SPEEDCOM sells its products in over 80 countries, with international sales
amounting to approximately 46% and 53% of SPEEDCOM's total 2002 and 2001
revenues, respectively. The following table sets forth revenues by geographic
area:
GEOGRAPHIC AREA 2002 2001
--------------- ---- ----
North America.................................................................. 54% 47%
Africa......................................................................... 14% 12%
Asia and the Pacific Rim....................................................... 11% 15%
Latin America.................................................................. 8% 16%
European Union................................................................. 5% 3%
Other Foreign Areas............................................................ 8% 7%
INDUSTRY BACKGROUND AND COMPETITION
The fixed wireless broadband market is at an early stage of development
and is rapidly evolving. The outdoor fixed wireless broadband market is made up
of two distinct sectors: the enterprise market, which is comprised of
corporations, schools, universities, the military, and other similar private
customers who use SPEEDCOM products and services to establish site-wide wireless
networks; and the service provider market, which is comprised of Internet
service providers and telecommunication carriers. These companies use SPEEDCOM's
products as integral components of their high performance "backbone" and/or
"last-mile" networks that carry high-speed Internet, voice, video, and data
technologies to their business and residential customers.
Fixed wireless networks use licensed, unlicensed or a combination of
licensed and unlicensed radio frequencies to provide network access for both
data and voice applications. SPEEDCOM's wireless broadband network products are
designed to run principally on unlicensed radio frequencies, often referred to
as "public bands," that do not require a license with the Federal Communications
Commission ("FCC") (the 2.4 gigahertz frequency and the 5.7 gigahertz frequency
are unlicensed frequencies used by SPEEDCOM's products). In the public bands,
the industry has adopted standards for use of unlicensed frequencies and
attempts to create compatibility among vendors, which is called the Institute of
Electrical and Electronics Engineers ("IEEE") 802.11b specification. However,
this standard, which is more appropriate for indoor or short-range wireless
connectivity, sacrifices speed and cost for compatibility and mobility. Because
speed, range, and cost are most often more important to the users of fixed
wireless equipment, SPEEDCOM offers a suite of products that do not strictly
adhere to IEEE 802.11b and instead use slightly modified specifications that are
specifically designed for outdoor fixed-wireless connectivity.
Also in the public band, frequency interference is a significant
engineering concern. Currently, fixed wireless users can choose between two
radio frequency technologies that are designed to minimize the risk of
interference, known as direct sequence spread spectrum and frequency hopping
spread spectrum. SPEEDCOM products generally use direct sequence spread
spectrum, which provides for greater data throughput, longer range and less
interference that SPEEDCOM's customers require in their network products.
73
Although there are many standards and frequencies that companies can
adhere to or utilize, the core technology employed in SPEEDCOM's products is
flexible enough to address the needs of both the licensed and unlicensed bands
as well as the various types of transmission methods.
The market for SPEEDCOM's products is very competitive, and it is
expected that competition will increase in the future, both with respect to the
products SPEEDCOM currently offers, and those that it may develop in the future.
Within the wireless industry, business is intensely competitive and is
characterized by rapid technological change, frequent introduction of new
products and evolving industry standards. SPEEDCOM's management believes that
SPEEDCOM's principal competitive advantages in the fixed wireless broadband
market include:
o expertise and familiarity with unlicensed 2.4 gigahertz spread
spectrum technology, wireless data communication protocols and
broadband technology;
o product performance, features, functionality and reliability;
o price/performance characteristics;
o timeliness of new product introductions;
o adoption of emerging industry standards;
o customer service and support;
o size and scope of distribution network; and
o brand name.
Within the fixed wireless broadband equipment industry, the primary
competitors are Airspan, Motorola, Proxim, Nokia, Aironet (part of Cisco
Systems) and Alvarion. SPEEDCOM also experiences competition from a number of
smaller companies that provide wireless data communication products. In
addition, SPEEDCOM competes with offerings from local telephone companies and
public telephone and telegraph operators around the world. These offerings
typically consist of a data connection a customer leases from the local
telephone operator, typically as part of a multi-year contract for services.
SPEEDCOM's products offer several advantages over telephone company based
offerings: competitive performance, no recurring monthly payments, and
return-on-investment often in less than six months. Because some telephone
company based offerings can be used at distances greater than SPEEDCOM's
products, the two types of solutions may also act as a complimentary solution
for a customer. While some telephone company offerings have the advantage of
being able to connect buildings at distances greater than can be done using
wireless products, the two types of connections are not mutually exclusive and
can be used in combination to connect remote buildings.
BUSINESS STRATEGY
Prior to entering into the Asset Purchase Agreement with P-Com,
SPEEDCOM's strategy has been to continue providing a complete line of wireless
broadband products to sell to Internet service providers and private data
network users. SPEEDCOM intended to accomplish this strategy primarily through
its existing product line and the internal development of new products and
services. SPEEDCOM also intended to promote the wider use of its products by
establishing strategic relationships with partners who can reach additional
segments of the market. SPEEDCOM has also sought to merge with one or more
companies which complement SPEEDCOM's product offerings in order to facilitate
growth. If the Acquisition is completed, SPEEDCOM's strategy will be to reduce
its operating expenses and seek out revenue generating products and operating
businesses for possible investment, acquisition or merger. See the section
74
entitled "Plans After the Acquisition" for more information regarding SPEEDCOM's
plans after the Acquisition.
EXISTING AND FUTURE PRODUCTS
SPEEDCOM offers a complete line of wireless broadband equipment.
SPEEDCOM's high performance wireless bridge/router systems connect existing
enterprise local area networks for point-to-point and point-to-multi-point,
campus area, or metropolitan area networks. Within the current product line,
SPEEDCOM offers eight SPEEDLAN products, which use unlicensed radio frequencies
to communicate at 11 megabits per second at distances up to 25 miles, and two
licensed microwave products, which use licensed radio frequencies to communicate
at 52 or 155 megabits per second at distances up to ten miles. Because the
performance and distance a particular product is capable of reaching varies
depending on the end-user's network configuration, topography, and other
engineering variables, these network performance values may vary from
application to application. SPEEDCOM derives revenue to a lesser extent from
wireless equipment installation and field support services, which are contracted
with its resellers and directly with end-users. These services include radio
frequency site survey and path analysis, equipment installation and on site
trouble shooting of problems during operation of the equipment.
SPEEDCOM is developing additional SPEEDLAN products with smaller size,
greater functionality and greater ease of use for new markets. Currently,
SPEEDCOM is developing a next generation of fixed wireless broadband products,
which are to be based on the 802.11a and/or 802.16 standards, operating in the
5.7 gigahertz band. SPEEDCOM expects that the new products will deliver
throughput at rates up to 54 megabits per second, nearly five times as fast as
today's SPEEDLAN products. SPEEDCOM intends to utilize its own proprietary board
design and software, utilizing many off the shelf radio components available
from one of several manufacturers of 54 megabits per second radio chip sets
(currently being developed).
SPEEDCOM's research and development expenses during the fiscal years
ended December 31, 2002 and 2001 were $256,170 and $424,299, respectively.
LICENSED TECHNOLOGY AND INTELLECTUAL PROPERTY
In January 2001, SPEEDCOM acquired worldwide rights to PacketHopo, a
wireless routing software developed by SRI International for aggregate
consideration of $1,599,500. Under the terms of the agreement, SPEEDCOM obtained
rights to SRI International's PacketHopo technology in the fixed wireless
infrastructure market for certain specific frequencies below 6 gigahertz. SRI
International received $360,000 in cash and a total of 325,000 shares of common
stock of SPEEDCOM that was issued in four tranches. Each tranche was measured on
the specific date that the stock was issued. As of June 30, 2003, the $360,000
in cash and the value of the shares at the date of grant less amortization are
classified in intellectual property, net on SPEEDCOM's balance sheet, and are
being amortized using the straight-line method over the six year term of the
agreement. A refined version of the PacketHopo technology provides the mesh
capabilities in SPEEDCOM's 9000 series products.
CUSTOMERS
No customer accounted for more than 10% of SPEEDCOM's revenue for the
years ended December 31, 2002 or December 31, 2001. In addition, no customer
accounted for more than 10% of SPEEDCOM's gross accounts receivable as of
December 31, 2002. One customer accounted for 97% of SPEEDCOM's lease receivable
as of December 31, 2002. Two customers accounted for 31% of SPEEDCOM's gross
accounts receivable as of December 31, 2001. One customer accounted for 11% of
SPEEDCOM's revenue for the six months ended June 30, 2002. No customer accounted
for more than 10% of SPEEDCOM's revenue for the three months ended June 30, 2002
or for the three and six months ended June 30, 2003. Two customers accounted for
18% and 10% of SPEEDCOM's gross accounts receivable as of June 30, 2003.
75
SPEEDCOM intends to continue to attempt to diversify and expand its customer
base with its current limited resources and maintain overhead costs at low
levels. A material curtailment of purchases by one or more significant customers
of SPEEDCOM could have a material adverse effect on SPEEDCOM's business,
financial condition, and results of operations.
SUPPLIERS
Many of the key hardware and software components necessary for the
assembly of SPEEDCOM's products are only available from a single supplier or
from a limited number of suppliers. SPEEDCOM has experienced delays and
shortages in the supply of components in the past and could experience delays
and shortages in the future. SPEEDCOM generally does not maintain a significant
inventory of components and does not have many long-term supply contracts with
its suppliers. As a result, there is a significant risk that SPEEDCOM may not
have access to materials to meet its customers' requirements. SPEEDCOM, on an
on-going basis, searches for alternative vendors or analyzes whether in-house
manufacturing would be more cost beneficial. In the event that a single supplier
became unavailable, and another supplier could not be identified that
manufactured the same product, SPEEDCOM would attempt to use an alternative
product in the assembly or redesign the finished product.
SALES AND MARKETING
SPEEDCOM generates its sales through two primary means: direct sales to
its larger strategic end customers and indirect sales through a distributor
network consisting of telecommunications specialists that sell SPEEDCOM's
products to a local or regional customer base, as well as provide post
installation service, if any.
As of June 30, 2003, SPEEDCOM employed or had consultant contracts with
27 salespeople, technical support and system engineers who sell to certain end
users (primarily Internet service providers and larger private data network
clients). The sales force is also responsible for maintaining the distributor
network sales channel. SPEEDCOM currently has over 350 distributors and other
dealers.
Indirect sales (i.e., sales to dealers/value added resellers) have
historically been SPEEDCOM's main source of revenue. SPEEDCOM will continue to
support this business channel, expanding both domestically and internationally.
Telemarketing, supported by sales engineers for design services, provides the
primary sales engines, augmented, in part, by a direct sales team to reach large
corporate and institutional accounts as well as telecommunication carriers and
Internet service providers.
SPEEDCOM recognizes revenue for financial reporting purposes upon
shipment of the products to the customer, including when a distributor is
involved in the transaction. Customers may exchange or return merchandise within
30 days if the product is found to be non-functional upon delivery. SPEEDCOM
accrues a provision for estimated returns, based upon its actual historical
return experience, concurrent with revenue recognition. SPEEDCOM also derives
revenue from extended maintenance agreements, for periods of one to three years.
Revenue on extended maintenance agreements is deferred and recognized on a
straight-line basis over the term of the agreement.
EMPLOYEES
As of June 30, 2003, SPEEDCOM had approximately 56 full-time employees
and consultants. None of SPEEDCOM's employees are represented by a labor union
and SPEEDCOM believes that its relations with its employees are good.
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PROPERTIES
As of December 31, 2002, SPEEDCOM leased approximately 40,000 square
feet of office and light industrial space in Sarasota, Florida, which included
8,000 square feet of manufacturing capacity, under a lease with a remaining term
of approximately 12 years. SPEEDCOM's rent, including maintenance, was
approximately $59,000 per month for this facility. SPEEDCOM also leases offices
in Sao Paulo, Singapore, and Shanghai.
In February 2003, SPEEDCOM renegotiated the lease for the Sarasota
property, reducing the square footage leased from approximately 40,000 to
approximately 17,000, and reducing the monthly rent from approximately $59,000
per month to approximately $25,000 per month. As consideration for this lease
modification, SPEEDCOM paid to the landlord $100,000 for the lease modification
and $150,000 for building modifications in order to convert the building from
single tenant occupancy to multi-tenant occupancy. In March 2003, SPEEDCOM also
began leasing 8,000 square feet in Sarasota, Florida from a landlord
unaffiliated with its current landlord. This space serves as SPEEDCOM's new
manufacturing facility. The rent for this facility is approximately $4,500 per
month.
LEGAL PROCEEDINGS
SPEEDCOM is engaged from time to time in legal proceedings, but is not
currently engaged in any legal proceedings that are expected to have a material
effect on its business.
MARKET PRICE AND DIVIDEND INFORMATION
The following table sets forth the quarterly high and low per share
closing sales price of SPEEDCOM's common stock for the periods shown, as quoted
on the OTC Bulletin Board until February 2001, as quoted on the NASDAQ Small Cap
Market until August 2002, and as quoted on the OTC Bulletin Board thereafter.
(SPEEDCOM was listed on the NASDAQ Small Cap Market in February 2001 and
delisted from the NASDAQ Small Cap Market in August 2002). The quotations
represent stock prices between dealers and do not include retail mark-up,
markdown or commission and may not represent actual transactions.
HIGH LOW
---- ---
2003
First Quarter............................................................... $0.06 $0.02
Second Quarter.............................................................. $0.09 $0.04
Third Quarter............................................................... $0.13 $0.05
2002
First Quarter............................................................... $0.94 $0.42
Second Quarter.............................................................. $0.69 $0.11
Third Quarter............................................................... $0.19 $0.02
Fourth Quarter.............................................................. $0.07 $0.04
2001
First Quarter............................................................... $9.13 $3.44
Second Quarter.............................................................. $5.25 $2.00
Third Quarter............................................................... $2.70 $0.92
Fourth Quarter.............................................................. $1.35 $0.43
Dividends have not been declared or paid during any periods presented.
As of March 14, 2003, there were approximately 1,200 stockholders of
record of SPEEDCOM's common stock (which amount does not include the number of
stockholders whose shares are held of record by banks, brokerage houses or other
institutions, but include each such institution as one stockholder).
77
PLANS AFTER THE ACQUISITION
Assuming the Acquisition had occurred on September 2, 2003, upon the
completion of the sale, after the payment of transaction-related costs and
certain other outstanding obligations, SPEEDCOM would have had cash and /or
accounts receivable available of approximately $200,000, shares of P-Com common
stock having a market value of approximately $12,825,000, debt of approximately
$2.0 million and no revenue producing business operations. Following closing,
SPEEDCOM's immediate plan will be to reduce significantly its monthly overhead
so as to best preserve its available cash while developing revenue generating
opportunities. Specifically, SPEEDCOM's management intends to reduce its monthly
expenses from approximately $500,000 per month (including non-cash expenses) to
approximately $25,000 per month as a result of the Acquisition, and by reducing
its employees, and its dependence upon outside professionals. SPEEDCOM will
continue to spend limited amounts on salaries, insurance, rent, communications,
and other normal general and administrative expenses.
Initially, SPEEDCOM will operate with two part-time employees. Mark
Schaftlein, who currently is SPEEDCOM's interim chief financial officer, will
become its chief executive officer, and he will remain as its interim chief
financial officer. His mandate will be to develop business opportunities for
SPEEDCOM. To this end, SPEEDCOM will seek out revenue generating products and
operating businesses for possible investment, acquisition or merger. Mr.
Schaftlein intends to seek and evaluate numerous operating businesses with the
intent to increase stockholder value as a result of its investment in such
operating subsidiaries or entities.
SPEEDCOM'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPEEDCOM's management's discussion and analysis of financial condition
and results of operations contain forward-looking statements, which involve
risks and uncertainties. SPEEDCOM's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the section entitled "Risk Factors"
beginning on page 7 of this joint proxy statement.
CRITICAL ACCOUNTING POLICIES
Introduction
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 amounts reported in
the financial statements and related notes. SPEEDCOM evaluates its estimates and
judgments on an on-going basis. SPEEDCOM bases its estimates on historical
experience and on assumptions that it believes to be reasonable under the
circumstances. SPEEDCOM's experience and assumptions form the basis for its
judgments about the carrying value of its assets and liabilities that are not
readily apparent from other sources. Actual results may vary from what SPEEDCOM
anticipates and different assumptions or estimates about the future could change
SPEEDCOM's reported results. SPEEDCOM believes the following accounting policies
are the most critical to SPEEDCOM, in that they are important to the portrayal
of its financial statements and they require SPEEDCOM's most difficult,
subjective or complex judgments in the preparation of its financial statements:
78
Revenue Recognition
SPEEDCOM recognizes revenue on its wireless communications products in
accordance with SEC Staff Accounting Bulletin No. 101, "REVENUE RECOGNITION IN
FINANCIAL STATEMENTS." Under these guidelines, SPEEDCOM defers revenue
recognition on transactions if any of the following exist: persuasive evidence
of an arrangement does not exist, title has not transferred, product payment is
contingent upon performance of installation or service obligations, the price is
not fixed or determinable or payment is not reasonably assured. SPEEDCOM accrues
a provision for estimated returns concurrent with revenue recognition. In
addition, SPEEDCOM defers revenue associated with long-term customer maintenance
contracts. SPEEDCOM recognizes the value of these contracts on a straight-line
basis over the length of the customer contract.
Allowances for Doubtful Accounts
Allowances for doubtful accounts receivable are maintained based on
historical payment patterns, aging of accounts receivable, and actual write-off
history. Allowances are also maintained for future sales returns and allowances
based on an analysis of recent trends of product returns.
Impairment of Long-Lived Assets
In assessing the recoverability of its long-lived assets, SPEEDCOM must
make assumptions regarding estimated future cash flows and other factors to
determine the fair value of the respective assets. If these estimates or their
related assumptions change in the future, SPEEDCOM may be required to record
impairment charges for these assets.
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YEARS ENDED DECEMBER 31, 2002 AND 2001
The following table sets forth the percentage of net revenues
represented by certain items in SPEEDCOM's Statements of Operations for the
periods indicated.
FISCAL YEAR
ENDED
DECEMBER 31,
------------
2002 2001
---- ----
Net revenues............................................................................. 100% 100%
Cost of goods sold....................................................................... 59% 59%
---- ----
Gross margin............................................................................. 41% 41%
Operating costs and expenses:
Salaries and related................................................................... 39% 37%
General and administrative............................................................. 31% 23%
Selling expenses....................................................................... 13% 12%
Provision for bad debt................................................................. 6% 6%
Depreciation and amortization.......................................................... 9% 4%
Severance costs........................................................................ 8% 4%
---- ----
106% 86%
---- ----
Loss from operations..................................................................... (65)% (45)%
Other expense:
Interest expense, net.................................................................. (4)% (21)%
Other expense, net..................................................................... (1)% (2)%
---- ----
(5)% (23)%
---- ----
Net loss before extraordinary items...................................................... (70)% (68)%
Extraordinary loss from early extinguishment of debt..................................... - (26)%
---- ----
Net loss................................................................................. (70)% (94)%
Assumed dividend from beneficial conversion feature of preferred stock................... - (37)%
---- ----
Net loss attributable to common stockholders............................................. (70)% (131)%
---- ----
SPEEDCOM's net revenues decreased 47% from approximately $14,460,000
for the year ended December 31, 2001 to approximately $7,676,000 for the year
ended December 31, 2002. This decrease was due to unexpected delays in spending
decisions by SPEEDCOM's potential and current customers during 2002 as compared
to 2001. This factor, combined with the challenging economic environment in both
the United States of America and overseas, contributed to disappointing results.
Revenues from customers in foreign geographic areas decreased to 46% of revenues
for the year ended December 31, 2002 as compared to 53% of revenues the year
ended December 31, 2001.
Cost of goods sold decreased 47% from approximately $8,567,000 for the
year ended December 31, 2001 to approximately $4,502,000 for the year ended
December 31, 2002, due to decreases in SPEEDCOM's revenues. However, as a result
of managing product costs and maintaining pricing levels, gross margin as a
percentage of sales increased slightly to 41.3% during the year ended 2002,
compared to 40.7% during the year ended December 31, 2001.
Salaries and related, general and administrative and selling expenses
decreased by 39% from approximately $10,458,000 for the year ended December 31,
2001 to approximately $6,372,000 for the year ended December 31, 2002. This
decrease was primarily due to a decrease in salaries and related expenses of
approximately $2,369,000 related to decreased headcount, a decrease in general
and administrative expenses of approximately $1,029,000 related to reduced
spending on professional services, travel, investor relations and consultants,
80
partially offset by increases in rent expense, and a decrease in selling
expenses of approximately $688,000 related primarily to reduced trade show
participation.
Provision for bad debts decreased 52% from approximately $873,000
during the year ended December 31, 2001 to approximately $420,000 for the year
ended December 31, 2002. During the year ended December 31, 2002, SPEEDCOM
converted two of its leases receivable, recorded at approximately $1,290,000,
into a new lease receivable with approximately $336,000 which was due and
collected immediately, five payments of $50,000 due over a five-month period and
a balloon payment of approximately $328,000 due in August 2002. As a result of
this restructuring of the leases, SPEEDCOM recorded a provision for bad debt of
approximately $395,000 for the year ended December 31, 2002.
In the fourth quarter of 2000 and in the first and second quarters of
2001, SPEEDCOM sold products from its SPEEDLAN product line for approximately
$574,000 to a large Korean based company ("Korean Customer"). One of the major
clients of SPEEDCOM's customer declared bankruptcy early in 2001, which had a
significant financial impact on the Korean Customer. SPEEDCOM recorded a
provision for bad debt of approximately $456,000 during the year ended December
31, 2001 related to the remaining balance of the receivable. Excluding these two
significant unusual items in each of the years, provisions for bad debts
decreased 94% from approximately $417,000 for the year ended December 31, 2001
to approximately $25,000 during the year ended December 31, 2002. The decrease
is a result of significantly lower accounts receivable balances at 2002 compared
to 2001 plus the use of letters of credit and other instruments that had the
effect of minimizing credit risk in 2002.
During the year ended December 31, 2002, SPEEDCOM recorded severance
costs of approximately $630,000 in accordance with the separation agreements, as
amended, between SPEEDCOM and its former Chief Executive Officer and its former
Chief Operating Officer. The costs include severance pay and other employee
benefits, including amounts to be paid over future periods and the write off of
notes receivable-related party, as discussed below. During 2001, SPEEDCOM sold
its InstallGuys division to SPEEDCOM's former Chief Executive Officer. In
return, SPEEDCOM received two 6% secured promissory notes in the aggregate
principal amount of approximately $211,000. In October 2001, SPEEDCOM loaned
InstallGuys an additional $50,000 at 6% interest. The notes and interest were
due in August 2004. As a stipulation to the separation agreement, as amended,
between SPEEDCOM and its former Chief Executive Officer, SPEEDCOM forgave all
indebtedness owed by InstallGuys. Consequently, SPEEDCOM charged the notes
receivable-related party to severance expense during the year ended December 31,
2002.
During the year ended December 31, 2001, SPEEDCOM recorded severance
costs of approximately $532,000, reflecting employee termination costs relating
to staff reductions. The staff reductions included 20 employees (two at the
executive management level) and were completed in the third and fourth quarters
of 2001. The costs include severance pay and other employee benefits, including
amounts to be paid over future periods. SPEEDCOM is currently in default on the
two executive management severance agreement payment plans.
SPEEDCOM's interest expense decreased from approximately $3,173,000 for
the year ended December 31, 2001 to approximately $396,000 for the year ended
December 31, 2002. This decrease was due to notes payable and loans from
stockholders that were converted to preferred stock during 2001. The conversion
of the loans to preferred stock triggered substantial interest expense related
to the unamortized portion of the discount on the convertible loans. Interest
income decreased from approximately $111,000 for the year ended December 31,
2001 to approximately $64,000 for the year ended December 31, 2002 as a result
of fewer leasing agreements.
SPEEDCOM recorded an extraordinary loss from the early extinguishment
of debt related to the conversions of loans and debt to preferred stock and
warrants during 2001 of approximately $3,786,000. When the nonconvertible loans
81
originated, value was allocated to warrants based on the Black-Scholes pricing
model. This value was being amortized over the maturity of the loans. When the
loans were converted to preferred stock, Series A Warrants and Series B
Warrants, the difference in the carrying value as compared to the combined fair
value of the warrants and preferred stock was immediately expensed to loss from
the early extinguishment of debt.
Net loss attributable to common stockholders decreased 72% from
approximately $18,944,000, or $1.96 per share, in 2001 to approximately
$5,356,000, or $0.47 per share, in 2002 as a result of the foregoing factors.
During 2001, SPEEDCOM converted (i) redeemable preferred stock, (ii)
Series A Warrants, (iii) Series B Warrants that were issued in June 2001 and
(iv) loans to stockholders in exchange for (i) preferred stock, (ii) Series A
Warrants and (ii) Series B Warrants. This conversion was due to SPEEDCOM's
commitment to the holders of its redeemable preferred stock and warrants issued
in June 2001 that if SPEEDCOM issued similar instruments at more favorable
terms, SPEEDCOM would adjust the terms of the securities issued in June 2001 to
be equal to the more favorable terms. As such, the conversion ratio was changed
to two shares of common stock for each share of preferred stock rather than the
ratio of one share of common stock for each share of preferred stock applicable
to the preferred stock issued in June 2001. SPEEDCOM has recorded an assumed
dividend of approximately $2,292,000, which equals the increase in the intrinsic
value of the preferred stock based on the incremental number of shares of common
stock that may be obtained on conversion of the preferred stock into common
stock valued at the price per share on the date of issuance.
Also in 2001, SPEEDCOM issued (i) preferred stock, (ii) Series A
Warrants and (iii) Series B Warrants for approximately $2,397,000 in cash, net
of stock issuance costs. The preferred stock has a beneficial conversion feature
valued at approximately $1,479,000 based on the value of the warrants and the
ability to convert the preferred stock to two shares of common stock. This
amount is recorded as an assumed dividend from beneficial conversion feature
because the preferred stock was convertible when issued.
The terms of the preferred stock provide that if SPEEDCOM has not
executed a definitive agreement with respect to a bona fide merger, stock sale
or sale of all or substantially all of SPEEDCOM's assets, which would result in
a change of control of SPEEDCOM prior to December 28, 2001, the conversion price
shall be adjusted so that each share of preferred stock shall convert into 2.25
shares of common stock. Because SPEEDCOM did not meet these terms, the
conversion price of the preferred stock was adjusted so that each share of
preferred stock shall convert into 2.25 shares of common stock. During the year
ended December 31, 2001, SPEEDCOM recorded an assumed dividend from beneficial
conversion feature of approximately $1,502,000, which equals the increase in the
intrinsic value of the preferred stock based on the incremental number of shares
of common stock that may be obtained on conversion of the preferred stock into
common stock valued at the price per share on the issuance dates. The following
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table sets forth the percentage of net revenues represented by certain items in
SPEEDCOM's Statements of Operations for the periods indicated.
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----
Net revenues......................................................... 100% 100% 100% 100%
Cost of goods sold................................................... 70% 64% 64% 59%
---- ---- ---- ----
Gross margin......................................................... 30% 36% 36% 41%
Operating costs and expenses:
Salaries and related............................................... 66% 56% 49% 51%
General and administrative......................................... 52% 51% 47% 42%
Selling expenses................................................... 18% 13% 16% 13%
Provision for bad debt............................................. 4% 2% 2% 11%
Depreciation and amortization...................................... 21% 13% 15% 10%
Severance costs.................................................... 10% 40% 4% 17%
---- ---- ---- ----
171% 175% 133% 144%
---- ---- ---- ----
Loss from operations................................................. (141)% (139)% (97)% (103)%
Other (expense) income:
Interest expense................................................... (19)% (5)% (12)% (4)%
Interest income.................................................... 0% 1% 0% 1%
---- ---- ---- ----
Other expense, net................................................. (0)% (3)% (0)% (1)%
---- ---- ---- ----
(19)% (7)% (12)% (4)%
---- ---- ---- ----
Net loss............................................................. (160)% (146)% (109)% (107)%
===== ====== ====== ======
SIX MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002
Net revenues decreased 26% from approximately $3,338,000 for the six
months ended June 30, 2002 to approximately $2,459,000 for the six months ended
June 30, 2003. This decrease was due to price reductions by SPEEDCOM, unexpected
delays in spending decisions by both potential and current customers during 2003
as compared to 2002 and component shortages created by cash flow issues. These
factors, combined with the challenging economic environment in both the United
States of America and overseas, contributed to disappointing results. Revenues
from customers in foreign geographic areas increased to 59% of revenues for the
six months ended June 30, 2003 as compared to 52% of revenues the six months
ended June 30, 2002. The percentage of sales from international customers is
expected to decrease slightly during the remainder of the year ended December
31, 2003.
Cost of goods sold decreased 19% from approximately $1,964,000 for the
six months ended June 30, 2002 to approximately $1,582,000 for the six months
ended June 30, 2003, due to decreases in SPEEDCOM's revenues. In addition, gross
margin as a percentage of sales decreased five percentage points from 41% for
the six months ended June 30, 2002 to 36% for the six months ended June 30, 2003
as a result of price reductions by SPEEDCOM and lower cost absorption of fixed
costs due to decreased revenue.
Salaries and related, general and administrative and selling expenses
decreased by 22% from approximately $3,544,000 for the six months ended June 30,
2002 to approximately $2,751,000 for the six months ended June 30, 2003. This
decrease was primarily due to a decrease in salaries and related expenses of
approximately $514,000 related to decreased headcount (55 at June 30, 2002
versus 48 at June 30, 2003) and a decrease in general and administrative
expenses of approximately of $249,000 related to decreased accounting, legal and
investor relations expenses.
83
Provision for bad debt decreased 87% from approximately $359,000 during
the six months ended June 30, 2002 to approximately $46,000 for the six months
ended June 30, 2003. During the six months ended June 30, 2002, SPEEDCOM
converted two of its leases receivable, recorded at approximately $1,290,000,
into a new lease receivable with approximately $336,000, which was due and
collected immediately, five payments of $50,000 due over a five-month period and
a balloon payment of approximately $328,000 due in August 2002. As a result of
this restructuring of the leases, SPEEDCOM recorded a provision for bad debt of
approximately $395,000 for the six months ended June 30, 2002.
During the six months ended June 30, 2003, SPEEDCOM recorded severance
costs of $90,000 in accordance with the separation agreement between SPEEDCOM
and its former Vice President of Marketing and Product Development. The costs
include severance pay to be paid over future periods.
During the six months ended June 30, 2002, SPEEDCOM recorded severance
costs of approximately $555,000 in accordance with the separation agreement, as
amended, between SPEEDCOM and its former Chief Executive Officer. The costs
include severance pay and other employee benefits and the write off of notes
receivable-related party, as described below. During 2001, SPEEDCOM sold its
InstallGuys division to SPEEDCOM's then Chief Executive Officer. In return,
SPEEDCOM received two 6% secured promissory notes totaling approximately
$211,000. In October 2001, SPEEDCOM loaned InstallGuys an additional $50,000 at
6% interest. As a stipulation to the separation agreement, as amended, between
SPEEDCOM and its former Chief Executive Officer, SPEEDCOM forgave all
indebtedness owed by InstallGuys. Consequently, SPEEDCOM charged the notes
receivable-related party to severance expense during the six months ended June
30, 2002.
Interest expense increased from approximately $144,000 for the six
months ended June 30, 2002 to approximately $303,000 for the six months ended
June 30, 2003. This increase was due to the addition of notes payable and loans
from related parties during 2002 and 2003 of $3,943,000. Interest income
decreased from approximately $52,000 for the six months ended June 30, 2002 to
approximately $8,000 for the six months ended June 30, 2003 as a result of fewer
leasing agreements.
Net loss decreased 25% from approximately $3,569,000, or $0.34 per
share, in the six months ended June 30, 2002 to approximately $2,673,000, or
$0.18 per share, in the six months ended June 30, 2003 as a result of the
foregoing factors.
THREE MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002
Net revenues decreased 38% from approximately $1,390,000 for the three
months ended June 30, 2002 to approximately $868,000 for the three months ended
June 30, 2003. This decrease was due to price reductions by SPEEDCOM, unexpected
delays in spending decisions by both potential and current customers during 2003
as compared to 2002 and component shortages created by cash flow issues. These
factors, combined with the challenging economic environment in both the United
States of America and overseas, contributed to disappointing results. Revenues
from customers in foreign geographic areas increased to 62% of revenues for the
three months ended June 30, 2003 as compared to 38% of revenues the three months
ended June 30, 2002. The percentage of sales from international customers is
expected to decrease slightly during the remainder of the year ended December
31, 2003.
Cost of goods sold decreased 31% from approximately $885,000 for the
three months ended June 30, 2002 to approximately $606,000 for the three months
ended June 30, 2003, due to decreases in SPEEDCOM's revenues. In addition, gross
margin as a percentage of sales decreased six percentage points from 36% for the
three months ended June 30, 2002 to 30% for the three months ended June 30, 2003
as a result of price reductions by SPEEDCOM and lower cost absorption of fixed
costs due to decreased revenue.
84
Salaries and related, general and administrative and selling expenses
decreased by 29% from approximately $1,669,000 for the three months ended June
30, 2002 to approximately $1,180,000 for the three months ended June 30, 2003.
This decrease was primarily due to a decrease in salaries and related expenses
of approximately $210,000 related to decreased headcount (55 at June 30, 2002
versus 48 at June 30, 2003) and a decrease in general and administrative
expenses of approximately of $258,000 related to decreased rent, accounting,
legal and investor relations expenses.
During the three months ended June 30, 2003, SPEEDCOM recorded
severance costs of $90,000 in accordance with the separation agreement between
SPEEDCOM and its former Vice President of Marketing and Product Development. The
costs include severance pay to be paid over future periods.
During the three months ended June 30, 2002, SPEEDCOM recorded
severance costs of approximately $555,000 in accordance with the separation
agreement, as amended, between SPEEDCOM and its former Chief Executive Officer.
The costs include severance pay and other employee benefits and the write off of
notes receivable-related party, as described below. During 2001, SPEEDCOM sold
its InstallGuys division to SPEEDCOM's then Chief Executive Officer. In return,
SPEEDCOM received two 6% secured promissory notes totaling approximately
$211,000. In October 2001, SPEEDCOM loaned InstallGuys an additional $50,000 at
6% interest. As a stipulation to the separation agreement, as amended, between
SPEEDCOM and its former Chief Executive Officer, SPEEDCOM forgave all
indebtedness owed by InstallGuys. Consequently, SPEEDCOM charged the notes
receivable-related party to severance expense during the three months ended June
30, 2002.
Interest expense increased from approximately $80,000 for the three
months ended June 30, 2002 to approximately $164,000 for the three months ended
June 30, 2003. This increase was due to the addition of notes payable and loans
from related parties during 2002 and 2003 of $3,943,000. Interest income
decreased from approximately $13,000 for the three months ended June 30, 2002 to
approximately $1,000 for the three months ended June 30, 2003 as a result of
fewer leasing agreements.
Net loss decreased 32% from approximately $2,036,000, or $0.19 per
share, in the three months ended June 30, 2002 to approximately $1,390,000, or
$0.10 per share, in the three months ended June 30, 2003 as a result of the
foregoing factors.
TAXES
At June 30, 2003, SPEEDCOM had net operating loss carryforwards for
federal income tax purposes of approximately $21,618,000. The net operating loss
carryforwards expire at various dates through the year 2022. Utilization of
SPEEDCOM's net operating loss may be subject to substantial annual limitation
due to the ownership change limitations provided by the Internal Revenue Code
and similar state provisions. Such annual limitation could result in the
expiration of the net operating loss before utilization.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 2002, SPEEDCOM used approximately
$2,368,000 of cash for operating activities. This was primarily due to
SPEEDCOM's net loss for the period and decreases in accounts payable and accrued
expenses partially offset by decreases in accounts receivable and leases
receivable. SPEEDCOM purchased approximately $26,000 of fixed assets during the
year ended December 31, 2002 as compared to approximately $493,000 during the
same period in 2001. SPEEDCOM received approximately $2,459,000 from its
financing activities primarily through proceeds from stockholder loans,
partially offset by net payments on factored accounts receivable.
During the six months ended June 30, 2003, SPEEDCOM used approximately
$1,488,000 of cash for operating activities. This was primarily due to
SPEEDCOM's net loss for the period and increases in other assets partially
85
offset by decreases in inventory, accounts receivable and leases receivable.
SPEEDCOM purchased approximately $60,000 of fixed assets during the six months
ended June 30, 2003 as compared to approximately $6,000 during the same period
in 2002. SPEEDCOM does not have any material commitments for capital
expenditures in the future. SPEEDCOM received approximately $1,400,000 from its
financing activities through proceeds from related party and third party loans.
As of June 30, 2003, SPEEDCOM had cash of approximately $206,000.
During the year ended December 31, 2002, SPEEDCOM borrowed an aggregate
$2,928,000 from three institutional investors that are SPEEDCOM stockholders.
During the three months ended March 31, 2003, SPEEDCOM borrowed an aggregate
$340,000 from three institutional investors that are SPEEDCOM stockholders. The
loans bear an interest rate of 15% and are payable December 31, 2003.
During the six months ended June 30, 2003, SPEEDCOM borrowed an
aggregate $1,015,000 from institutional investors who are stockholders. The
loans bear an interest rate of 15% and are payable December 31, 2003. Also
during the six months ended June 30, 2003, SPEEDCOM borrowed $400,000 from
P-Com. The loan bears an interest rate of 10% for the first six months and 13%
for the remainder of the term of the note, due March 21, 2005. The note is
convertible at $0.12 per common share. Additionally, in July 2003, SPEEDCOM
borrowed another $300,000 from P-Com, at an interest rate of 10% for the first
six months and 13% for the remainder of the term of the note, due July 16, 2004.
P-Com will continue to fund SPEEDCOM with P-Com's own financings between July
2003 and the completion of the Acquisition.
During the six months ended June 30, 2002, SPEEDCOM used approximately
$1,068,000 of cash for operating activities. This was primarily due to
SPEEDCOM's net loss for the period and decreases in accounts payable and accrued
expenses partially offset by decreases in accounts receivable, leases
receivable, and inventory. SPEEDCOM purchased approximately $6,000 of fixed
assets during the six months ending June 30, 2002 as compared to approximately
$402,000 during the same period in 2001. SPEEDCOM received approximately
$1,388,000 from its financing activities primarily through proceeds from
stockholder loans partially offset by payments to factored accounts receivable.
As of June 30, 2002, SPEEDCOM had cash of approximately $590,000.
Projected cash flows from SPEEDCOM's current operations are not
sufficient to finance SPEEDCOM's current and projected working capital
requirements. It is essential that SPEEDCOM obtain additional capital to execute
its business plan for the remainder of 2003 and 2004. SPEEDCOM will seek
additional capital to fund working capital deficits, develop next generation
products and to take advantage of opportunities that may arise. This additional
capital could come from the sale of common or preferred stock, from borrowings,
or from a strategic transaction such as a merger. There can be no assurance that
such financing will be available on acceptable terms, if at all. If SPEEDCOM is
unable to secure significant additional financing, SPEEDCOM will have to further
downsize its business or explore other alternatives. The financial statements do
not include any adjustments that might arise as a result of this uncertainty.
Management's plans to sustain SPEEDCOM's operations include augmenting
revenue opportunities, curtailing operating expenses as a percentage of revenue
and raising additional capital from external sources, as discussed above. During
the six months ended June 30, 2003, management effectively lowered its operating
expenses by approximately $1,558,000 over amounts incurred during the six months
ended June 30, 2002. In addition, during the six months ended June 30, 2003
management raised cash of $1,415,000 from loans from related parties and third
party investors, of which approximately $400,000 (borrowed from P-Com) is
eventually convertible to equity. SPEEDCOM also borrowed $300,000 in July 2003
under a secured promissory note from P-Com, which is convertible to equity.
While management is actively addressing multiple sources of capital, there can
86
be no assurance that SPEEDCOM will generate adequate cash from these and similar
sources during the remainder of 2003 and 2004.
COMMITMENTS AND OFF BALANCE SHEET INSTRUMENTS
SPEEDCOM's only material commitments involve leases for office and
manufacturing facilities and computer and office equipment under operating
leases. Rent expense under operating leases amounted to approximately $253,000
and $401,000 for the six months ended June 30, 2003 and 2002, respectively.
During 2002 and 2003, SPEEDCOM entered into several payment plan
agreements with vendors that set up monthly commitments by SPEEDCOM to pay off
balances that were past due. SPEEDCOM is currently in default on several of
these payment obligations. SPEEDCOM's terms with most of its suppliers and other
vendors are net 30. In many cases, SPEEDCOM is past due with these suppliers and
vendors. SPEEDCOM is currently engaged in legal proceedings related to some of
the defaults discussed above. None of these proceedings are expected to have a
material effect on SPEEDCOM's business.
In addition, SPEEDCOM is in default on two severance agreements entered
into during 2000.
SPEEDCOM also has two employment contracts, which guarantee that if a
change of control occurs, the employee may elect to resign from SPEEDCOM and
receive a lump sum payment of six month's salary. In 2002, a change of control,
as defined in the agreements, did occur. However, there has not been any
indication that the employees covered under the employment contracts are
considering resigning from SPEEDCOM.
SPEEDCOM has entered into an asset purchase agreement to sell
substantially all of its assets and liabilities to P-Com for approximately
67,500,000 shares of P-Com common stock. As a stipulation to this agreement,
SPEEDCOM would be required to pay to P-Com $500,000 if SPEEDCOM terminated the
asset purchase agreement under certain circumstances, such as a breach of the
agreement or if SPEEDCOM's board of directors approved an alternative proposal
to the P-Com asset purchase agreement. SPEEDCOM believes that the probability of
these circumstances occurring is remote.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board issued SFAS No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. The statement amends and clarifies accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. This statement is designed to improve
financial reporting such that contracts with comparable characteristics are
accounted for similarly. The statement, which is generally effective for
contracts entered into or modified after June 30, 2003, is not anticipated to
have a significant effect on SPEEDCOM's financial position or results of
operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity. This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This statement is effective for financial instruments entered into or
modified after May 31, 2003, and is otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. SPEEDCOM currently has no
such financial instruments outstanding or under consideration and therefore
adoption of this standard currently has no financial reporting implications.
In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Valuable Interest Entities. This interpretation clarifies rules
relating to consolidation where entities are controlled by means other than a
majority voting interest and instances in which equity investors do not bear the
residual economic risks. This interpretation is effective immediately for
variable interest entities created after January 31, 2003 and for interim
87
periods beginning after June 15, 2003 for interests acquired prior to February
1, 2003. SPEEDCOM currently has no ownership in variable interest entities and
therefore adoption of this standard currently has no financial reporting
implications.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock
Based CompensationoTransition and Disclosure. SFAS No. 148 establishes standards
for two alternative methods of transition to the fair value method of accounting
for stock-based employee compensation under SFAS No. 123, ACCOUNTING FOR STOCK
BASED COMPENSATION (SFAS No. 123). SFAS No. 148 also amends and augments the
disclosure provisions of SFAS No. 123 and the Accounting Principles Board
("APB") No. 28, INTERIM FINANCIAL REPORTING to require disclosure in the summary
of significant accounting policies for all companies the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
The transition standards and disclosure requirements of SFAS No. 148 are
effective for fiscal years and interim periods ending after December 15, 2002.
SFAS No. 148 does not require SPEEDCOM to transition from the intrinsic
approach provided in APB No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. In
addition, SPEEDCOM does not currently plan to transition to the fair value
approach in SFAS No. 123. However, SPEEDCOM has adopted the additional
disclosure requirements of SFAS No. 148 in its notes to financial statements.
In November 2002, the FASB issued Interpretation 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. Under Interpretation 45 guarantees,
contracts and indemnification agreements are required to be initially recorded
at fair value. Current practice provides for the recognition of a liability only
when a loss is probable and reasonably estimable, as those terms are defined
under SFAS No. 5, ACCOUNTING FOR CONTINGENCIES. In addition, Interpretation 45
requires significant new disclosures for all guarantees even if the likelihood
of the guarantor's having to make payments under the guarantee is remote. The
disclosure requirements are effective for financial statements of interim and
annual periods ending after December 15, 2002. The initial recognition and
measurement provisions of Interpretation 45 are applicable on a prospective
basis to guarantees, contracts or indemnification agreements issued or modified
after December 31, 2002.
SPEEDCOM currently has no guarantees, contracts or indemnification
agreements that would require fair value treatment under the new standard.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, LIABILITY RECOGNITION FOR
CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY
(INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING) (EITF 94-3). SFAS No. 146
requires the recognition of a liability for costs associated with exit or
disposal activities when the liability is actually incurred. Under EITF 94-3,
such costs were generally recognized in the period in which an entity committed
to an exit plan or plan of disposal. While both standards covered costs
associated with one-time termination benefits (e.g. severance pay or stay-bonus
arrangements), SFAS No. 146 provides standards that provide for the timing of
recognition of these types of benefits. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002.
Management's plans with respect to the continuation of SPEEDCOM are
described in the notes to SPEEDCOM's financial statements contained in the Form
10-QSB filed with the SEC on August 11, 2003. While there is currently no
specific plans to exit activities as part of these plans, any such activity
would require the application of SFAS No. 146. During 2002, SPEEDCOM incurred
severance costs as described in the notes to SPEEDCOM's financial statements
contained in the Form 10-KSB filed with the SEC on April 11, 2003. While
88
SPEEDCOM's accounting for the severance cost followed EITF 94-3, there would
have been no material difference had SFAS No. 146 been in effect.
In April 2002, the FASB issued SFAS No. 145, Rescission of SFAS No. 4,
44 and 64, Amendment of SFAS No. 13 and Technical Corrections. SFAS No. 145
rescinds SFAS No. 4, REPORTING GAINS AND LOSSES FROM EXTINGUISHMENTS OF DEBT
(SFAS No. 4), which required all gains and losses from extinguishments of debt
to be aggregated and, if material, classified as an extraordinary item, net of
related income tax effect. As a result of the rescission of SFAS No. 4, the
classification of gain and losses arising from debt extinguishments requires
consideration of the criteria for extraordinary accounting treatment provided in
APB No. 30, REPORTING THE RESULTS OF OPERATIONS. In the absence of SFAS No. 4,
debt extinguishments that are not unusual in nature and infrequent in occurrence
would be treated as a component of net income or loss from continuing
operations. SFAS No. 145 is effective for financial statements issued for fiscal
years beginning after May 15, 2002.
During the year ended December 31, 2001, SPEEDCOM properly recorded a
loss on the early extinguishments of debt of approximately $3,786,000 as an
extraordinary item on the statement of operations. In the absence of SFAS No. 4,
caused by SFAS No. 145, such transaction would not have met the criteria for
extraordinary treatment. Management has elected not to early adopt SFAS No. 145
in connection with its Form 10-KSB filed with the SEC on April 11, 2003, which
is permissible under the standard. Had management early adopted the standard,
the loss on early extinguishments recognized in 2001 would have been
reclassified as other expense in the financial statements.
89
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following tables present selected historical and pro forma
financial data of P-Com and the selected historical financial data of SPEEDCOM.
The unaudited pro forma financial data of P-Com gives effect to the SPEEDCOM
Acquisition.
P-COM SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data for the
years ended December 31, 2000, 2001 and 2002 were derived from P-Com's audited
financial statements included elsewhere in this joint proxy statement. The
selected historical consolidated financial data for the years ended December 31,
1998 and 1999 were derived from P-Com's records restated for discontinued
operations described in Note (1), below. The selected financial data for the six
months ended June 30, 2002 and 2003 were derived from the unaudited condensed
consolidated financial statements of P-Com. In P-Com's opinion, the unaudited
interim financial data includes all adjustments, consisting of normal recurring
adjustments, necessary for the fair presentation of its interim results of
operation. The pro forma information is unaudited and has been derived from the
Unaudited Pro Forma Financial Information, beginning on page 93 of this joint
proxy statement. This information should be read in conjunction with P-Com's
Management's Discussion and Analysis of Financial Condition and Results of
Operations, beginning on page 57 of this joint proxy statement, the Unaudited
Pro Forma Financial Information, beginning on page 93 of this joint proxy
statement, and P-Com's financial statement and related notes, beginning on page
F-1 of this joint proxy statement.
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
HISTORICAL PRO FORMA
1998 1999 2000 2001 2002 2002
---- ---- ---- ---- ---- ----
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue, net............................... $118,948 $116,409 $183,606 $73,236 $29,686 $37,362
Gross profit (loss)........................ 25,119 9,031 22,641 (21,654) (1,091) 2,083
Loss from continuing operations............ (63,238) (66,647) (64,094) (75,327) (44,522) (48,971)
Net loss from continuing operations
applicable to common stockholders............ (65,077) (85,168) (64,094) (75,327) (44,522) (48,971)
Basic net loss from continuing operations
per share.................................. (7.52) (7.47) (4.11) (4.55) (1.74) (0.53)
Diluted net loss from continuing operations
per share.................................... (7.52) (7.47) (4.11) (4.55) (1.74) (0.53)
Shares used in computing basic net loss per
common share (1)........................... 8,650 11,399 15,600 16,551 25,546 93,046
Shares used in computing diluted net loss
from continuing operations per common
share (1).................................... 8,650 11,399 15,600 16,551 25,546 93,046
Cash dividends declared.................... - - - - - -
90
SIX MONTHS ENDED JUNE 30,
HISTORICAL PRO FORMA
2002 2003 2003
---- ---- ----
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue, net........................................................................ $15,942 $9,582 $12,041
Gross profit (loss)................................................................. 2,224 (2,168) (1,291)
Loss from continuing operations..................................................... (14,768) (12,774) (15,347)
Net loss from continuing operations applicable to common stockholders............... (14,768) (12,774) (15,347)
Basic and diluted net loss per share applicable to common stockholders.............. (0.76) (0.33) (0.14)
Shares used in computing basic and diluted net loss from continuing operations per 19,437 38,634 106,134
common share (1)....................................................................
Cash dividends declared............................................................. - - -
DECEMBER 31, JUNE 30,
HISTORICAL HISTORICAL PRO FORMA
1998 1999 2000 2001 2002 2003 2003
---- ---- ---- ---- ---- ---- ----
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.... $26,460 $10,667 $25,754 $5,436 $1,276 $760 $966
Working capital (deficiency). 82,669 38,618 78,932 (9,171) (1,776) (33,265) (37,891)
Total assets................. 315,217 218,746 216,219 92,234 35,723 19,019 33,059
Long-term obligations, less 109,694 38,644 30,106 680 24,466 1,983 1,990
current portion................
Total stockholders' equity 99,409 89,215 95,247 24,256 (15,350) (30,139) (22,417)
(deficit)......................
Book value per common share.. 2.17 1.32 1.18 1.43 (0.45) (0.75) (0.21)
-----------
(1) The historical financial statements for the years ended December 31,
1998 to December 31, 2002 have been restated to give effect to P-Com
Network Services, Inc. as a discontinued operation.
(2) During the six months ended June 30, 2003, P-Com recorded changes of
approximately $3.7 million related to excess and obsolete inventories
and $3.4 million related to the write down of fixed assets.
(3) Adjusted for 1-for-5 reverse stock split implemented on June 27, 2002.
(4) In 2002, P-Com recorded charges of approximately $5.8 million related
to excess and obsolete inventory and a write-down of goodwill carrying
value relating to the services business of $11.4 million.
(5) In 2001, P-Com recorded charges of approximately $30.0 million related
to excess inventory and inventory purchase commitments, $5.8 million
related to a write-down of goodwill and other intangibles, and $11.6
million increase in bad debt expense related to a customer bankruptcy.
(6) In 2000, P-Com recorded charges of approximately $21.7 million related
to excess inventory and inventory purchase commitments, $15.0 million
related to write-down of goodwill, and a $9.9 million increase in the
valuation allowance against the carrying value of deferred tax assets.
(7) In 1999, P-Com recorded restructuring and other charges of
approximately $36.5 million.
(8) In 1998, P-Com recorded restructuring and other charges of
approximately $26.6 million.
(9) In connection with the acquisition of substantially all of the assets
of Cylink Wireless Group in 1998, $15.4 million of purchase price
attributed to in-process research and development was expensed.
91
SPEEDCOM SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data were for the years
ended December 31, 1998, 1999, 2000, 2001 and 2002 were derived from the audited
financial statements of SPEEDCOM. The selected financial data for the six months
ended June 30, 2002 and 2003 were derived from the unaudited condensed financial
statements of SPEEDCOM. In SPEEDCOM's opinion, the unaudited financial data
include all adjustments, consisting of normal recurring adjustments, necessary
for the fair presentation of its interim results of operations. This information
should be read in conjunction with SPEEDCOM's Management's Discussion and
Analysis of Financial Condition and Results of Operations, beginning on page 78
of this joint proxy statement, and SPEEDCOM's financial statements and related
notes included in its Annual Report on Form 10-KSB, incorporated herein by
reference.
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------- -------------------------
1998 1999 2000 2001 2002 2002 2003
---- ---- ---- ---- ---- ---- ----
STATEMENTS OF OPERATIONS DATA:
Revenue, net............................ $5,171 $4,978 $10,662 $14,460 $7,676 $3,338 $2,459
Gross profit............................ 2,330 1,953 4,878 5,893 3,174 1,374 877
Loss from continuing operations......... (1,265) (791) (2,578) (9,884) (5,356) (3,569) (2,673)
Net loss from continuing operations (1,265) (791) (2,578) (9,884) (5,356) (3,569) (2,673)
applicable to common stockholders.........
Basic and diluted net loss from (0.21) (0.11) (0.31) (1.02) (0.47) (0.34) (0.18)
continuing operations per share...........
Shares used in computing basic and 6,092 7,060 8,267 9,678 11,432 10,538 14,491
diluted net loss from continuing operations
per share.................................
Cash dividends declared................. - - - - - - -
DECEMBER 31, JUNE 30,
------------ --------
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents................................. $- $109 $227 $274 $346 $206
Working capital (deficiency).............................. (535) (417) 1,326 955 (2,566) (4,651)
Total assets.............................................. 1,912 1,463 6,994 8,558 4,526 3,319
Long-term obligations, less current portion............... 163 175 311 53 19 407
Total stockholders' equity (deficit)...................... (495) (348) 2,829 4,510 (751) (3,424)
Book value per common share............................... (0.08) (0.05) 0.30 (0.25) (0.43) (0.61)
92
P-COM'S UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined financial information of
P-Com gives effect to the Acquisition as if that transaction had occurred as of
June 30, 2003 as it relates to the pro forma balance sheet and as of January 1,
2003 and 2002 as it relates to the pro forma statements of operations for the
six months ended June 30, 2003 and the year ended December 31, 2002. The
unaudited pro forma financial information is based upon P-Com's assumptions and
adjustments that are described in the accompanying notes and do not include any
adjustments related to the integration of SPEEDCOM with P-Com. Pro forma
financial information is not necessarily indicative of the financial position or
results of operations that would have been achieved had the transaction occurred
on the aforementioned dates. The following pro forma financial information
should be read in conjunction with P-Com's financial statements and its
management's discussion and analysis included elsewhere in this joint proxy
statement.
93
P-COM'S UNAUDITED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 2003
PRO FORMA
P-COM SPEEDCOM PRO FORMA FOR THE
HISTORICAL HISTORICAL ADJUSTMENTS TRANSACTION
---------- ---------- ----------- -----------
(RESTATED)
Current assets:
Cash and cash equivalents............................... $180 $206 $386
Restricted cash............................................... 580 - 580
Accounts receivable........................................... 3,203 336 3,539
Inventories................................................... 6,132 1,018 7,150
Other current assets.......................................... 3,815 125 3,940
---------- ---------- ----------- -------------
13,910 1,685 15,595
Property and equipment.......................................... 4,831 451 5,282
Intangible assets............................................... 0 958 (958)(b)
12,149 (d) 12,149
Other assets.................................................... 278 225 (400)(e) 103
---------- ---------- ----------- -------------
$19,019 $3,319 $10,791 $33,129
========== ========== =========== =============
Current liabilities:
Accounts payable.............................................. $7,525 $1,057 $8,582
Accrued liabilities........................................... 14,895 1,097 (205)(c) 16,037
250 (a)
Note payable.................................................. 1,403 62 1,465
Convertible subordinated notes................................ 20,090 0 20,090
Convertible promissory notes.................................. 1,338 0 1,338
Liabilities of discontinued operations........................ 1,924 0 1,924
Notes payable-related parties................................. 0 4,120 4,120
---------- ---------- ----------- -------------
Total current liabilities....................................... 47,175 6,336 45 53,556
Other long-term liabilities..................................... 1,983 407 (400)(e) 1,990
---------- ---------- ----------- -------------
Total liabilities............................................... 49,158 6,743 (355) 55,546
---------- ---------- ----------- -------------
Stockholders' equity:
Preferred stock............................................... 0 5,456 (5,456)(f) 0
Common stock.................................................. 334,996 17,815 (17,815)(f) 342,718
7,722 (a)
Accumulated deficit........................................... (365,165) (26,695) 26,695 (f) (365,165)
Comprehensive items........................................... 30 0 30
---------- ---------- ----------- -------------
Total stockholders' deficit..................................... (30,139) (3,424) 11,146 (22,417)
---------- ---------- ----------- -------------
Total liabilities and stockholders deficit...................... $19,019 $3,319 $10,791 $33,129
========== =========== =========== =============
See accompanying notes.
94
P-COM'S UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003
PRO FORMA
P-COM SPEEDCOM PRO FORMA FOR THE
HISTORICAL HISTORICAL ADJUSTMENTS TRANSACTION
---------- ---------- ----------- -----------
Sales............................................................ $9,582 $2,459 $12,041
Cost of sales.................................................... 11,750 1,582 13,332
---------- ---------- -----------
(2,168) 877 (1,291)
---------- ---------- -----------
Costs and expenses:
Research and development....................................... 3,625 475 4,100
Selling and marketing.......................................... 1,762 1,216 2,978
General and administrative..................................... 3,186 1,560 $(138)(g) 4,608
Asset impairment and restructuring............................. 3,362 3,362
Interest and other expense (income)............................ (1,329) 299 (1,030)
---------- ---------- ----------- -----------
.......................................Total costs and expenses 10,606 3,550 (138) 14,018
---------- ---------- ----------- -----------
Loss from continuing operations.................................. $(12,774) $(2,673) $138 $(15,309)
========== ========== =========== ===========
Basic and diluted loss per common share from continuing operations $(0.33) $(0.14)
========== ============
Weighted average common shares................................... 38,634 $67,500 (h) 106,134
========== ============= ============
See accompanying notes.
95
P-COM'S UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002
PRO FORMA
P-COM SPEEDCOM PRO FORMA FOR THE
HISTORICAL HISTORICAL ADJUSTMENTS TRANSACTION
---------- ---------- ----------- -----------
Sales............................................................ $29,686 $7,676 $37,362
Cost of sales.................................................... 30,777 4,502 35,279
---------- ---------- -----------
(1,091) 3,174 2,083
---------- ---------- -----------
Costs and expenses:
Research and development....................................... 12,745 256 13,001
Selling and marketing.......................................... 6,621 3,463 10,084
General and administrative..................................... 10,750 4,408 $(277)(g) 14,251
(630)(i)
Impairments.................................................... 11,409 - 11,409
Interest and other............................................. 2,376 403 2,779
---------- ---------- ----------- -----------
Total costs and expenses....................................... 43,901 8,530 (907) 51,524
---------- ---------- ----------- -----------
Income tax benefit............................................... 470 - 470
---------- ---------- ----------- -----------
Loss from continuing operations.................................. $(44,522) $(5,356) $907 $(48,971)
========== ========== ============= ===========
Basic and diluted loss per common share from continuing operations $(1.74) $(0.53)
========== ============= ===========
Weighted average common shares................................... 25,546 67,500 (h) 93,046
========== ============= ===========
See accompanying notes.
96
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
NOTE 1. SPEEDCOM PURCHASE
P-Com, Inc. will account for the SPEEDCOM purchase transaction using
the purchase method of accounting. Under the purchase method of accounting, the
total purchase price, plus the fair value of assumed liabilities, is allocated
to the net tangible and identifiable intangible assets acquired, based upon
their respective fair values. The total estimated purchase price of $7,722,000
consists of 67,500,000 shares of P-Com, Inc. common stock, valued using market
values for such shares around the commitment date ($0.114), plus $250,000 of
estimated expenses. A final determination of the fair values of assets acquired
and liabilities assumed cannot be made prior to the completion of the purchase
transaction. Accordingly, the allocations reflected in the pro forma financial
statements are preliminary and subject to change. The preliminary estimated
allocation that is reflected in the accompanying pro forma financial statements
as of June 30, 2003 is as follows:
Current assets.................................................... $1,685,000
Property and equipment............................................ 451,000
Goodwill.......................................................... 12,149,000
Other assets...................................................... 225,000
Assumed liabilities............................................... (6,538,000)
------------
$7,972,000
============
The pro forma purchase price has been allocated to the fair values of
assets acquired and liabilities assumed based upon management's best estimates,
as follows:
Current assets consist of accounts receivables that are recorded at
estimated net realizable value and work in process inventories that are recorded
at estimated selling prices, less costs to complete and a reasonable sales
margin.
Property and equipment are recorded at estimated replacement costs.
Assumed liabilities are recorded at estimated net present values of
future cash outlays for liabilities due in over one year and the face values of
future cash outlays for all current liabilities.
GOODWILL.
In accordance with Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, goodwill resulting from the purchase, if
any, will not be amortized into operations. Rather, such amounts will be tested
for impairment at least annually. In the event that management of P-Com
determines that the value of goodwill has become impaired, an accounting charge
for the amount of the impairment will be recorded.
NOTE 2. SUMMARY OF PRO FORMA ADJUSTMENTS
The pro forma adjustments in the unaudited pro forma financial
information are as follows:
a. These adjustments record the issuance of 67,500,000 shares of
common stock, valued at the average market price around the
commitment date of the transaction, and $250,000 of estimated
expenses.
b. This adjustment combines the SPEEDCOM intangible asset amounts
with goodwill for purposes of final allocation upon completion
of the transaction.
97
c. This adjustment eliminates certain accrued severance amounts,
which are not an assumed liability.
d. This adjustment records preliminary goodwill arising from the
transaction, which is subject to final allocation upon
completion of the transaction.
e. These adjustments eliminate the investment balance between
P-Com and SPEEDCOM.
f. These adjustments eliminate SPEEDCOM equity accounts.
g. These adjustments eliminate the amortization of SPEEDCOM
intangible assets.
h. These adjustments reflect the affect on loss per share of the
P-Com common stock issued in the transaction.
i. This adjustment eliminates severance expense, which is not an
assumed liability.
98
SPEEDCOM'S PROPOSAL TO AMEND ITS CERTIFICATE OF INCORPORATION
THE PROPOSED AMENDMENT
SPEEDCOM's board of directors has determined that it would be in
SPEEDCOM's best interest to amend the first paragraph of Article IV of
SPEEDCOM's certificate of incorporation to increase the number of authorized
shares of SPEEDCOM common stock from 250,000,000 shares to 500,000,000 shares.
After the amendment, that paragraph will read in its entirety, as follows:
"The total number of shares of capital stock which the
corporation is authorized to issue is 510,000,000 of which 500,000,000
shares shall be common stock, $0.001 par value per share ("Common
Stock"), and 10,000,000 shall be preferred stock, $0.001 par value per
share ("Preferred Stock")."
The amendment will be effected by filing an amendment to SPEEDCOM's
certificate of incorporation with the Secretary of State of the State of
Delaware. The amendment will become effective when the filing is accepted by the
Delaware Secretary of State.
PURPOSE AND BACKGROUND OF THE INCREASE IN AUTHORIZED SHARES
SPEEDCOM's authorized capital currently consists of 250,000,000 shares
of common stock, par value $.001 per share, and 10,000,000 shares of preferred
stock, par value $.001 per share. Under the terms of SPEEDCOM's certificate of
incorporation and bylaws, SPEEDCOM's board of directors has the authority to
divide the shares of preferred stock into series, to establish and modify the
preferences, limitations and relative rights of each share of SPEEDCOM preferred
stock, and otherwise to impact or modify SPEEDCOM's capitalization. SPEEDCOM's
board of directors has invoked such authority to establish two classes of
preferred stock, the Series A convertible preferred stock, of which 5,000,000
shares are authorized (and of which no shares are currently outstanding), and
the Series B convertible preferred stock, of which 5,000,000 shares are
authorized (and of which 3,835,554 shares are currently outstanding).
As of the record date for the special meeting, SPEEDCOM's
capitalization was as follows:
o 20,092,022 shares of common stock were outstanding;
o 8,629,988 shares of common stock were reserved for future
issuance upon conversion of SPEEDCOM's Series B convertible
preferred stock (excluding SPEEDCOM common stock payable as
dividends on the Series B convertible preferred stock, which
accrue monthly at the rate of 14%;
o 7,160,810 shares of common stock were reserved for future
issuance upon conversion of SPEEDCOM's Series A warrants;
o 1,152,026 shares of common stock were reserved for future
issuance upon conversion of other SPEEDCOM warrants;
o 13,837,500 shares of common stock were reserved for future
issuance upon conversion of certain convertible promissory
notes issued by SPEEDCOM to P-Com;
o 45,000 shares of common stock were reserved for future
issuance upon conversion of other convertible promissory notes
issued by SPEEDCOM; and
o 3,000,000 shares of common stock were reserved for future
issuance under SPEEDCOM's stock incentive plans and employee
stock plans, of which approximately 1,444,074 shares were
covered by outstanding options.
Thus, as of the record date for the special meeting, a total of
53,917,346 shares of SPEEDCOM's common stock were either issued and outstanding
or reserved for issuance as described above
99
Moreover, the antidilution provisions applicable to SPEEDCOM's Series B
convertible preferred stock, its warrants and certain of its convertible
promissory notes, provide that the amount of common stock issuable upon the
conversion or exercise of such securities will be increased under certain
circumstances. For example, pursuant to the antidilution provisions applicable
to SPEEDCOM's Series B convertible preferred stock, if SPEEDCOM issues common
stock or common stock equivalents at a purchase price, conversion price or
warrant or option exercise price that is less than the current Series B
convertible preferred stock conversion price of $1.125 per share, the conversion
price of the Series B convertible preferred stock will be reduced (and the
number of shares of common stock issuable upon conversion of the preferred stock
correspondingly increased) using a customary weighted average basis formula.
Similarly, under the antidilution provisions of SPEEDCOM's Series A
warrants, (1) the exercise price will be lowered to equal the purchase price,
conversion price or warrant or option exercise price for any common stock or
common stock equivalent issued (other than to employees) at a purchase price,
conversion price or warrant or option exercise price less than the current per
share exercise price of the applicable warrants ($0.12 in the case of the Series
A warrants), and (2) the number of shares of common stock issuable upon the
exercise of the Series A warrants will be correspondingly increased.
Alternatively, (1) the exercise price of the Series A warrants will be reduced
by the percentage by which the purchase price, conversion price or warrant or
option exercise price of any issued security (other than to any person that is
not an employee) is less than the current market price of the common stock, and
(2) the number of the Series A warrants will be correspondingly increased, if
this formula results in a lower exercise price than the adjustment described in
the preceding sentence. Similar antidilution provisions apply to outstanding
warrants to acquire 513,333 shares of SPEEDCOM's common stock at an exercise
price of $0.12 per share.
SPEEDCOM is proposing to increase the total number of its authorized
shares of common stock to 500,000,000 so that it will have sufficient authorized
but unissued common stock to permit conversion and exercise of all of its
currently outstanding securities, and in addition enable it to respond quickly
to opportunities to raise capital in public or private offerings and issue
shares in business combinations. The additional authorized shares may be used
for any proper corporate purpose approved by the SPEEDCOM board of directors
(subject only to such stockholder approval requirements as may apply in the case
of business combination transactions). The availability of additional authorized
shares will enable the SPEEDCOM board of directors to act with flexibility and
dispatch when favorable opportunities arise to enhance its capital structure.
Additional shares may be issued in connection with public or private offerings
for cash, acquisitions of other businesses, employee benefit plans and stock
dividends.
SPEEDCOM believes that the proposed increase in authorized common stock
will make sufficient shares available for use pursuant to the purposes described
herein. Other than as specified above and as permitted or required under its
employee benefit plans and under outstanding options, warrants and other
securities convertible into common stock, SPEEDCOM has no present arrangements,
agreements or understandings for the use of the additional shares proposed to be
authorized. No additional action or authorization by the stockholders would be
necessary prior to the issuance of any additional shares, unless required by
applicable law or the rules of any stock exchange or quotation system on which
SPEEDCOM's common stock is then listed or quoted. SPEEDCOM reserves the right to
seek a further increase in authorized shares from time to time in the future as
SPEEDCOM considers appropriate.
EFFECT ON OUTSTANDING COMMON STOCK
The additional shares of common stock authorized by the proposed
amendment would have the same privileges as the shares of common stock currently
authorized and issued. Stockholders do not have preemptive rights under
SPEEDCOM's certificate of incorporation and will not have such rights with
100
respect to the additional authorized shares of common stock. The increase in
authorized shares would not affect the terms or rights of holders of existing
shares of common stock. All outstanding shares of common stock would continue to
have one vote per share on all matters to be voted on by the stockholders,
including the election of directors.
The issuance of any additional shares of common stock may, depending on
the circumstances under which those shares are issued, reduce stockholders'
equity per share and, unless additional shares are issued to all stockholders on
a pro rata basis, will reduce the percentage ownership of common stock of
existing stockholders. In addition, if the board of directors elects to issue
additional shares of common stock, such issuance could have a dilutive effect on
the earnings per share, voting power and shareholdings of current stockholders.
SPEEDCOM expects, however, to receive consideration for any additional shares of
common stock issued, thereby reducing or eliminating any adverse economic effect
to each stockholder of such dilution.
The proposed increase in the authorized number of shares of common
stock will not otherwise alter or modify the rights, preferences, privileges or
restrictions of the common stock.
POTENTIAL ANTI-TAKEOVER EFFECT
The proposed amendment to increase the number of authorized shares of
SPEEDCOM's common stock could, under certain circumstances, have an
anti-takeover effect. For example, in the event of a hostile attempt to take
over control of SPEEDCOM, it may be possible for SPEEDCOM to endeavor to impede
the attempt by issuing shares of its common stock, thereby diluting or impairing
the voting power of the other outstanding shares of common stock and increasing
the potential costs to acquire control of SPEEDCOM. The amendment therefore may
have the effect of discouraging unsolicited takeover attempts, thereby
potentially limiting the opportunity for SPEEDCOM's stockholders to dispose of
their shares at the higher price generally available in takeover attempts or
that may be available under a merger proposal. The proposed amendment may have
the effect of permitting SPEEDCOM's current management, including the current
board of directors, to retain its position, and place it in a better position to
resist changes that stockholders may wish to make if they are dissatisfied with
the conduct of its business. This proposal to increase the authorized common
stock has been prompted by business and financial considerations.
APPROVALS REQUIRED
The affirmative vote of the holders of a majority of the shares of
SPEEDCOM common stock outstanding on the record date is required to approve this
proposal to amend SPEEDCOM's certificate of incorporation.
RECOMMENDATION OF SPEEDCOM'S BOARD OF DIRECTORS
SPEEDCOM's board of directors has determined that the proposed
amendment to SPEEDCOM's certificate of incorporation is in the best interests of
SPEEDCOM and its stockholders and recommends that the stockholders of SPEEDCOM
vote FOR the proposal to amend SPEEDCOM's certificate of incorporation to
increase the number of authorized shares of SPEEDCOM common stock from
250,000,000 shares to 500,000,000 shares.
P-COM'S AND SPEEDCOM'S ADJOURNMENT PROPOSALS
If at the SPEEDCOM special meeting, the number of shares of SPEEDCOM
common stock voting in favor of any SPEEDCOM proposal is insufficient to approve
that proposal under Delaware law, SPEEDCOM's management intends to move to
adjourn the special meeting in order to enable SPEEDCOM's board of directors to
solicit additional proxies in favor of that proposal. In that event, SPEEDCOM
will ask its stockholders to vote only upon the adjournment proposal and any
101
other proposals that have a sufficient number of shares voting in their favor,
but not upon any proposal with an insufficient number of shares voting in its
favor.
Similarly, if at the P-Com annual meeting the number of shares of P-Com
common stock voting in favor of any P-Com proposal is insufficient to approve
that proposal under Delaware law, P-Com's management intends to move to adjourn
the annual meeting in order to enable P-Com's board of directors to solicit
additional proxies in favor of that proposal. In that event, P-Com will ask its
stockholders to vote only upon the adjournment proposal and any other proposals
that have a sufficient number of shares voting in their favor, but not upon any
proposal with an insufficient number of shares voting in its favor.
In the adjournment proposal, SPEEDCOM and P-Com are asking their
respective stockholders to authorize the holder of any proxy solicited by the
SPEEDCOM board of directors or the P-Com board of directors to vote in favor of
granting management the discretionary authority to adjourn the SPEEDCOM special
meeting or the P-Com annual meeting, as the case may be, and any later
adjournments of those meetings, in each case to a date or dates not later than
December 31, 2003, in order to enable the SPEEDCOM board of directors or the
P-Com board of directors or both, as the case may be, to solicit additional
proxies in favor of approving any proposal that initially lacks a sufficient
number of shares voting in its favor.
If the stockholders of SPEEDCOM or P-Com approve the adjournment
proposal, management of SPEEDCOM or P-Com, as the case may be, could adjourn the
meeting and any adjourned session of the meeting to a date or dates not later
than December 31, 2003 and use the additional time to solicit additional proxies
in favor of approving any proposal that initially lacks a sufficient number of
shares voting in its favor, including the solicitation of proxies from
stockholders that have previously voted against the relevant proposal. Among
other things, approval of the adjournment proposals could mean that, even if
SPEEDCOM or P-Com has received proxies representing a sufficient number of votes
to defeat any particular proposal, SPEEDCOM's management or P-Com's management
or both could adjourn the SPEEDCOM special meeting or the P-Com annual meeting
or both, as the case may be, without a vote on that proposal for up to 30 days
and seek during that period to convince the holders of those shares to change
their votes in favor of that particular proposal.
Under Delaware law, approval of the adjournment proposal for SPEEDCOM
will require the affirmative vote of the holders of a majority of the shares of
SPEEDCOM common stock present in person or represented by proxy and entitled to
vote at the special meeting of stockholders.
Under Delaware law, approval of the adjournment proposal for P-Com will
require the affirmative vote of the holders of a majority of the shares of P-Com
common stock and Series C Preferred Stock present in person or represented by
proxy and entitled to vote at the special or annual meeting of stockholders, as
the case may be.
The SPEEDCOM board of directors believes that, if the number of shares
of SPEEDCOM common stock voting in favor of any SPEEDCOM proposal is
insufficient to approve the proposal, it is in the best interests of the
SPEEDCOM stockholders to enable the SPEEDCOM board of directors, for a limited
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period of time, to continue to seek additional votes in favor of the proposal in
order to obtain its approval.
The SPEEDCOM board of directors recommends that SPEEDCOM stockholders
vote FOR the proposal to grant SPEEDCOM management the discretionary authority
to adjourn the SPEEDCOM special meeting to a date or dates not later than
December 31, 2003.
The P-Com board of directors believes that, if the number of shares of
P-Com common stock and Series C Preferred Stock voting in favor of any P-Com
proposal is insufficient to approve the proposal, it is in the best interests of
the P-Com stockholders to enable the P-Com board of directors, for a limited
period of time, to continue to seek additional votes in favor of the proposal in
order to obtain its approval.
The P-Com board of directors recommends that P-Com stockholders vote
FOR the proposal to grant P-Com's management the discretionary authority to
adjourn the P-Com annual meeting to a date or dates not later than December 31,
2003.
P-COM'S PROPOSAL TO AMEND ITS CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF SHARES OF AUTHORIZED COMMON STOCK
GENERAL
The board of directors of P-Com has adopted resolutions approving, and
requesting that the stockholders authorize, an amendment to P-Com's certificate
of incorporation to increase the number of authorized shares of P-Com common
stock from 69,000,000 shares to 700,000,000 shares. This amendment will not
change the total number of authorized shares of P-Com's preferred stock, which
is currently 2,000,000 shares. The board of directors of P-Com has determined
that this amendment is advisable and in the best interests of P-Com and its
stockholders and has directed that it be submitted for the approval of the P-Com
stockholders. This increase in the number of authorized shares of P-Com common
stock will become effective upon filing the amendment with the Secretary of
State of the State of Delaware. P-Com currently plans to file the amendment as
soon as reasonably practicable after receiving approval from its stockholders.
However, the board of directors reserves the right pursuant to Section 242(c) of
the Delaware General Corporation Law, notwithstanding stockholder approval and
without further action by the stockholders, to determine not to proceed with
this proposed increase in the number of authorized shares of P-Com common stock
if, at any time before the filing of the proposed amendment with the Secretary
of State of the State of Delaware, the board of directors, in its sole
discretion, determines that the increase in the number of authorized shares of
common stock is no longer in the best interests of P-Com and its stockholders.
If this proposal is approved, the first paragraph of Article IV of the
certificate of incorporation will be amended to reflect an increase of
631,000,000 shares in the number of authorized shares of P-Com's common stock.
The proposed amendment to the first paragraph of Article IV of P-Com's
certificate of incorporation is set forth in its entirety below:
"This Corporation is authorized to issue two (2) classes of stock, to
be designated, respectively, "Common Stock" and "Preferred Stock." The
total number of shares that this Corporation is authorized to issue is
Seven Hundred Two Million (702,000,000)shares. Seven Hundred Million
(700,000,000) shares shall be Common Stock, par value $.0001 per share,
and Two Million (2,000,000) shares shall be Preferred Stock, par value
$.0001 per share."
The italicized portions of the proposed amendment set forth above
reflect the only proposed changes to the first paragraph of Article IV of
P-Com's certificate of incorporation as presently in effect, and they are
italicized solely to illustrate the specific amendment proposed.
PURPOSE OF AND RATIONALE FOR PROPOSED AMENDMENT
The objective of the proposed increase in the number of authorized
shares of common stock is to ensure that P-Com has a sufficient number of shares
of common stock authorized for future issuances and other corporate purposes,
including the following:
o approximately 67,500,000 shares of P-Com common stock to be
issued to SPEEDCOM in connection with the Acquisition;
o approximately 105,690,000 shares of P-Com common stock to be
issued upon conversion or exercise, as the case may be, of
P-Com's outstanding Series B Convertible Preferred Stock;
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o approximately 235,000,000 shares of P-Com common stock to be
issued upon conversion of P-Com's outstanding Series C
Preferred Stock and Series C-1 and C-2 Warrants; and
o approximately 77,786,000 shares of P-Com common stock to be
reserved for issuance under P-Com's 1995 Stock Option/Stock
Issuance Plan, as proposed to be amended.
As of October 28, 2003, there were approximately 43,517,644 shares of
P-Com common stock issued and outstanding, and approximately 541,446,585 shares
of P-Com common stock reserved for issuance under P-Com's 1995 Stock
Option/Stock Issuance Plan, options, warrants, convertible notes and other
convertible securities, and other written agreements, of which 498,729,887 are
subject to stockholder approval. P-Com currently does not have enough authorized
shares available for issuance to consummate the Acquisition with SPEEDCOM or to
permit the conversion of some of its outstanding convertible securities,
including convertible preferred stock and warrants recently issued in connection
with private financing transactions on March 26, 2003, May 28, 2003, July 18,
2003 and October 3, 2003. When P-Com's board of directors approved the issuance
of these convertible securities, it realized that a sufficient number of
authorized and unissued shares of common stock would not be available for
issuance upon their conversion under P-Com's certificate of incorporation, as
currently in effect. P-Com's board of directors nevertheless approved the
issuance of these convertible securities in order to meet P-Com's immediate
working capital needs while seeking stockholder approval to increase the number
of authorized shares of common stock at P-Com's 2003 annual meeting of
stockholders.
For this reason and for the other reasons discussed in this joint proxy
statement, the board of directors of P-Com believes that the number of shares of
P-Com common stock available for issuance should be increased in order to
provide P-Com with the flexibility to issue shares in connection with future
financings and strategic acquisitions, debt restructurings or resolutions,
equity compensation and incentives to employees and officers, forward stock
splits and other corporate purposes that may occur in the future without the
delay and expense associated with obtaining special stockholder approval each
time an opportunity requiring the issuance of shares of common stock arises.
Such a delay might deny P-Com the flexibility that the board of directors views
as important in facilitating the effective use of P-Com's securities.
P-Com also constantly evaluates potential transactions with third
parties that may involve the issuance of P-Com common stock, such as financing
transactions, debt restructuring transactions and business combination
transactions. P-com plans to continue initiating discussions with third parties
regarding potential investments, the restructuring or other resolution of its
outstanding debts, asset purchases, acquisitions and other transactions. The
board of directors, therefore, believes that it is prudent to increase the
number of authorized shares of common stock from 69,000,000 to 700,000,000 in
order to have a sufficient number of shares of common stock to meet P-Com's
business needs, which may include raising additional capital, converting
outstanding debt into shares of common stock, issuing common stock in connection
with potential acquisitions and permitting the conversion or exercise of P-Com's
outstanding convertible securities.
EFFECT OF PROPOSED AMENDMENT
The increase in the authorized shares of P-Com common stock will not
have an immediate effect on the rights of existing stockholders. The conversion
or exercise of P-Com's outstanding convertible securities will have a
significant dilutive effect on P-Com's existing stockholders. If the
stockholders approve the proposed amendment and the certificate of incorporation
is amended, P-Com will issue 67,500,000 shares of common stock to consummate the
Acquisition with SPEEDCOM, and approximately 474,000,000 shares of common stock
will be reserved for issuance upon conversion or exercise of P-Com's outstanding
convertible securities, including its Series B Preferred Stock and Series C
Preferred Stock. As a result, the total number of shares of P-Com's common stock
104
proposed to be issued in connection with the Acquisition and following
conversion or exercise of P-Com's outstanding convertible securities represents
1117% of the shares of P-Com common stock currently issued and outstanding.
The proposed increase in the number of authorized shares of P-Com
common stock will also provide a sufficient number of authorized and unissued
shares of common stock for reservation and issuance upon the conversion or
exercise of P-Com's outstanding convertible securities.
If the proposal to increase the number of authorized shares of P-Com
common stock is not approved, P-Com will be unable:
o to consummate the Acquisition;
o to satisfy its obligation to issue shares of common stock upon
the conversion or exercise of its Series B Preferred Stock,
Series C Preferred Stock and some of its warrants, and thereby
trigger a default under the provisions of those securities.
Under the default provisions of P-Com's Series B Preferred
Stock and Series C Preferred Stock, the holders of the
preferred stock may elect to redeem all of their outstanding
shares for cash. If P-Com is unable to redeem the holder's
outstanding shares, then the shares shall accrue interest per
annum at the lower of 24% or the highest interest rate
permitted by applicable law until fully redeemed.
o to issue any additional options or shares of common stock
under its 1995 Stock Option/Stock Issuance Plan; and
o to raise additional funds through equity financings to meet
its working capital needs.
Current holders of common stock do not have preemptive or similar
rights, which means that they do not have a right to purchase a proportionate
share of any new issuances of P-Com's common stock in order to maintain their
proportionate ownership of P-Com. This issuance of additional shares of common
stock will have a dilutive effect on earnings per share and on the equity and
voting power of existing holders of P-Com common stock. It may also adversely
affect the market price of P-Com's common stock. However, in the event
additional shares are issued in transactions that position P-Com to take
advantage of favorable business opportunities or provide working capital
sufficient to allow P-Com to pursue and/or expand its business plan, the market
price may increase. This proposed amendment to P-Com's certificate of
incorporation will not otherwise alter or modify the rights, preferences,
privileges or restrictions of the common stock.
ANTI-TAKEOVER EFFECTS
Although this proposed amendment to P-Com's certificate of
incorporation is not motivated by anti-takeover concerns and is not considered
by the board of directors to be an anti-takeover measure, the availability of
additional authorized shares of common stock could enable the board of directors
to issue shares defensively in response to a takeover attempt or to make an
attempt to gain control of P-Com more difficult or time-consuming. For example,
shares of common stock could be issued to purchasers who might side with
management in opposing a takeover bid which the board of directors determines is
not in the best interests of P-Com and its stockholders, thus diluting the
ownership and voting rights of the person seeking to obtain control of P-Com. In
certain circumstances, the issuance of common stock without further action by
the stockholders may have the effect of delaying or preventing a change of
control of P-Com, may discourage bids for P-Com's common stock at a premium over
the market price of the common stock and may adversely affect the market price
of the common stock. Thus, increasing the authorized number of shares of common
stock could render more difficult and less likely a hostile asset purchase,
tender offer or proxy contest, assumption of control by a holder of a large
block of P-Com's stock, and the possible removal of P-Com's incumbent
management. P-Com is not aware of any proposed attempt to take over P-Com or of
any attempt to acquire a large block of P-Com's common stock.
105
APPROVALS REQUIRED
The affirmative vote of (i) the holders of a majority of the shares of
P-Com common stock outstanding on the record date, voting as a separate class,
and (ii) the holders of a majority of the shares of P-Com common stock and
Series C Preferred Stock outstanding on the record date, voting together as a
single class, is required to approve this proposal to amend P-Com's certificate
of incorporation.
RECOMMENDATION OF P-COM'S BOARD OF DIRECTORS
The board of directors has determined that the proposed amendment to
P-Com's certificate of incorporation is in the best interests of P-Com and its
stockholders and recommends that the stockholders of P-Com vote FOR the proposal
to amend P-Com's certificate of incorporation to increase the number of
authorized shares of P-Com common stock from 69,000,000 shares to 700,000,000
shares.
P-COM'S PROPOSAL TO AMEND ITS CERTIFICATE OF INCORPORATION
TO EFFECT A REVERSE STOCK SPLIT
GENERAL
The board of directors of P-Com believes it would be in the best
interests of P-Com and its stockholders to adopt an amendment to P-Com's
certificate of incorporation, authorizing a reverse split of P-Com common stock
at a ratio between 1-for-10 and 1-for-30 (i.e., 1-for-10, 1-for-15, 1-for-20,
etc.). If this proposal is approved by P-Com's stockholders at the P-Com annual
meeting, then at any time during the 12-month period following the annual
meeting, P-Com's board of directors will have the sole discretion to determine
whether or not to effect a reverse stock split and, if so, at which of the
approved ratios. If the board of directors elects to implement the reverse stock
split at one of the approved ratios, it would be authorized to do so without any
further stockholder action. Granting this discretion to the board of directors,
rather than approving an immediate reverse stock split at a specified ratio,
will provide the board of directors with maximum flexibility to react to the
then-current market conditions and, therefore, to act in the best interests of
P-Com and its stockholders.
If this proposal is approved, P-Com would be authorized to effect any
one, but not more than one, of the alternative reverse stock splits. As soon as
one of the reverse stock splits is effected, no other stock splits may be
effected unless P-Com again seeks and obtains stockholder approval.
If approved, the reverse stock split would be effected by filing one of
the amendments to P-Com's certificate of incorporation that are attached to this
joint proxy statement as Annex B. A separate amendment is attached for each of
the proposed ratios (i.e., 1-for-10, 1-for-15, 1-for-20, etc.). If the board of
directors elects to implement one of the approved amendments, the number of
issued and outstanding shares of P-Com common stock would be reduced in
accordance with the selected ratio, and the total number of authorized shares of
P-Com common stock would be correspondingly reduced. The reverse stock split
would become effective upon the filing of the selected amendment with the
Delaware Secretary of State. P-Com's board of directors may, at its sole
discretion, elect not to implement any of the approved reverse stock splits,
even if this proposal is approved by P-Com's stockholders.
The board of directors of P-Com has approved, subject to stockholder
approval, each of the proposed amendments to P-Com's certificate of
incorporation that are attached to this joint proxy statement as Annex B. The
board of directors recommends that P-Com stockholders vote FOR the proposal to
amend P-Com's certificate of incorporation to effect a reverse stock split of
P-Com's outstanding common stock and correspondingly reduce the total number of
106
shares of P-Com common stock authorized for issuance, at a ratio between
1-for-10 and 1-for-30 to be chosen by the board of directors.
PURPOSE AND BACKGROUND OF THE REVERSE STOCK SPLIT
P-Com's primary objective in proposing the reverse stock split is to
attempt to raise the per share trading price of its common stock in an effort to
regain its listing on The Nasdaq Stock Market ("Nasdaq"). Before P-Com common
stock may be listed on Nasdaq, it must satisfy certain listing requirements. One
of these listing requirements is that P-Com common stock must have a minimum bid
price of $4.00 per share. On September 2, 2003, the closing bid price of P-Com
common stock on the OTC Bulletin Board was $0.19.
P-Com intends that the reverse stock split will increase the bid price
per share of its common stock above the $4.00 per share minimum bid price, and
thereby satisfy one of Nasdaq's listing requirements. However, P-Com cannot be
certain that the reverse stock split will, initially or in the future, have the
intended effect of raising the bid price of its common stock above $4.00 per
share.
In addition to P-Com's desire to be listed on Nasdaq, the board of
directors of P-Com believes that the low market price of P-Com common stock
impairs its marketability and acceptance by institutional investors and other
members of the investing public and creates a negative impression of P-Com.
Theoretically, decreasing the number of shares of common stock outstanding
should not, by itself, affect the marketability of the shares, the type of
investor who would be interested in acquiring them, or P-Com's reputation in the
financial community. In practice, however, many investors and market makers
consider low-priced stocks as unduly speculative in nature and, as a matter of
policy, avoid investment and trading in such stocks. The presence of these
negative perceptions may adversely affect not only the pricing of P-Com common
stock but also its trading liquidity. In addition, these perceptions may affect
P-Com's commercial business and its ability to raise additional capital through
equity and debt financings.
P-Com hopes that the decrease in the number of shares of its
outstanding common stock resulting from the reverse stock split, and the
anticipated increase in the per share trading price, will encourage greater
interest in its common stock among members of the financial community and the
investing public and possibly create a more liquid market for P-Com's
stockholders. However, the possibility exists that stockholder liquidity may be
adversely affected by the reduced number of shares which would be outstanding if
the reverse stock split is effected, particularly if the price per share of
P-Com common stock begins a declining trend after the reverse stock split is
effected.
P-Com cannot be certain that the reverse stock split will achieve any
of the desired results, or that the price per share of its common stock
immediately following the reverse stock split will increase, or that the
increase, if any, will be sustained for any period of time.
P-Com is not aware of any present efforts by anyone to accumulate its
common stock, and the proposed reverse stock split is not intended to be an
anti-takeover device.
EFFECTS OF THE REVERSE STOCK SPLIT
The principal effects of the reverse stock split will be to decrease
the number of outstanding shares of P-Com common stock and correspondingly
decrease the total number of shares of P-Com common stock authorized for
issuance. On September 2, 2003, the closing bid price for P-Com common stock on
the OTC Bulletin Board was $0.19 per share. By decreasing the number of
outstanding shares of common stock without altering the aggregate economic
interest represented by those shares, P-Com believes the market price will be
proportionally increased.
Each share of P-Com common stock that is outstanding immediately prior
to the reverse stock split will, immediately following the reverse stock split,
represent a fraction (one-tenth, one-fifteenth, one-twentieth, etc.) of a share
107
of P-Com common stock. The ratio selected by P-Com's board of directors will
determine what this fraction is. The total number of shares of P-Com common
stock held by each stockholder will be recomputed automatically following the
reverse stock split. If the total number of shares of P-Com common stock held by
a stockholder immediately prior to the reverse stock split is not evenly
divisible by the ratio chosen by the board of directors, that stockholder will
not receive a fractional share but instead will receive a cash payment equal to
the fraction of a share that stockholder otherwise would have been entitled to
receive multiplied by the last reported sale price of P-Com common stock before
the reverse stock split took effect.
The proposed amendment to P-Com's certificate of incorporation to
effect the reverse stock split will also decrease the total number of shares of
P-Com common stock authorized for issuance. This means that the ratio between
the number of outstanding shares P-Com common stock and total number of
authorized shares of P-Com common stock will remain unchanged by the reverse
stock split.
The total number of outstanding shares of P-Com preferred stock and the
total number of authorized shares of P-Com preferred stock will not be affected
by the reverse stock split.
The following table sets forth the number of shares of P-Com common
stock that would be authorized for issuance and outstanding immediately
following a reverse stock split at each of the proposed ratios. The figures
presented in the table below are based on the assumptions that there are
approximately 500,000,000 shares of P-Com common stock issued and outstanding
and 700,000,000 shares of P-Com common stock authorized for issuance.
SHARES OF COMMON
PROPOSED REVERSE STOCK TO BE TOTAL # OF SHARES
STOCK SPLIT RATIO OUTSTANDING TO BE AUTHORIZED
----------------- ---------------- ----------------
1-for-10................................................. 50,000,000 70,000,000
1-for-15................................................. 33,333,333 46,666,667
1-for-20................................................. 25,000,000 35,000,000
1-for-25................................................. 20,000,000 28,000,000
1-for-30................................................. 16,666,667 23,333,333
The proposed amendment to P-Com's certificate of incorporation to
effect the reverse stock split will not otherwise alter or modify the rights,
preferences, privileges or restrictions of the P-Com common stock.
EFFECT ON OUTSTANDING SECURITIES
As of the record date for the P-Com annual meeting, the P-Com had
outstanding the following securities, other than its common stock:
o approximately 1,000,000 shares of Series B Convertible
Preferred Stock, which are convertible into approximately
105,690,000 shares of P-Com common stock;
o 8,370 shares of Series C Convertible Preferred Stock, which
are convertible into approximately 146,460,290 shares of P-Com
common stock;
o stock options to purchase an aggregate of 2,327,785 shares of
P-Com common stock with exercise prices ranging from $0.15 to
$105.47 per share; and
o warrants to purchase an aggregate of 150,822,834 shares of
P-Com common stock with exercise prices ranging from $.001 to
$0.9393 per share.
Under the terms of these securities, when the reverse stock split
becomes effective, the number of shares of common stock issuable upon their
conversion or exercise will be decreased and their conversion or exercise prices
108
per share will be increased in accordance with the ratio chosen by P-Com's board
of directors.
NO EFFECT ON LEGAL ABILITY TO PAY DIVIDENDS
P-Com's board of directors has not in the past declared, nor does it
have any plans to declare in the foreseeable future, any distributions of cash,
dividends or other property, and P-Com is not in arrears on any dividends. P-Com
does not believe that the reverse stock split will have any effect with respect
to future distributions, if any, to its stockholders.
PAYMENT FOR FRACTIONAL SHARES; EXCHANGE OF STOCK CERTIFICATES
P-Com will appoint Equiserve Trust Company, N.A., 150 Royall Street,
Canton, MA 02021, (781) 575-3120, to act as exchange agent for holders of P-Com
common stock in connection with the reverse stock split. P-Com will deposit with
the exchange agent, as soon as practicable after the effective date of the
reverse stock split, cash in an amount equal to the value of the estimated
aggregate number of fractional shares that will result from the reverse stock
split. The funds required to purchase the fractional share interests will be
paid from P-Com's cash reserves. P-Com's stockholder list shows that some of its
outstanding common stock is registered in the names of clearing agencies and
broker nominees. Because P-Com does not know the numbers of shares held by each
beneficial owner for whom the clearing agencies and broker nominees are record
holders, P-Com cannot predict with certainty the number of fractional shares
that will result from the reverse stock split or the total amount it will be
required to pay for fractional share interests. However, P-Com does not expect
that the amount will be material.
As of the record date for the P-Com annual meeting, P-Com had
approximately 593 holders of record of its common stock (although P-Com had
significantly more beneficial holders). P-Com does not expect the reverse stock
split and the payment of cash in lieu of fractional shares to result in a
significant reduction in the number of record holders. P-Com presently does not
intend to seek any change in its status as a reporting company for federal
securities law purposes, either before or after the reverse stock split.
On or after the effective date of the reverse stock split, P-Com will
mail a letter of transmittal to each of its stockholders. Each P-Com stockholder
will be able to obtain a certificate evidencing its post-reverse-split shares of
P-Com common stock and, if applicable, cash in lieu of a fractional share only
by sending the exchange agent its old stock certificate(s), together with the
properly executed and completed letter of transmittal and such evidence of
ownership of the shares as P-Com may require. P-Com stockholders will not
receive certificates for post-reverse-split shares unless and until their old
certificates are surrendered. P-Com stockholders should not forward their
certificates to the exchange agent until they receive the letter of transmittal,
and they should only send in their certificates with the letter of transmittal.
The exchange agent will send each stockholder's new stock certificate and
payment in lieu of any fractional share promptly after receipt of that
stockholder's properly completed letter of transmittal and old stock
certificate(s).
Stockholders will not have to pay any service charges in connection
with the exchange of their certificates or the payment of cash in lieu of
fractional shares.
DISSENTERS' RIGHTS OF APPRAISAL
Delaware law does not provide for appraisal rights with respect to this
proposal.
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APPROVALS REQUIRED
The affirmative vote of (i) the holders of a majority of the shares of
P-Com common stock outstanding on the record date, voting as a separate class,
and (ii) the holders of a majority of the shares of P-Com common stock and
Series C Preferred Stock outstanding on the record date, voting together as a
single class, is required to approve this proposal to amend P-Com's certificate
of incorporation.
RECOMMENDATION OF P-COM'S BOARD OF DIRECTORS
The board of directors has determined that the proposed amendment to
P-Com's certificate of incorporation is in the best interests of P-Com and its
stockholders and recommends that the stockholders of P-Com vote FOR the proposal
to amend P-Com's certificate of incorporation to implement a reverse split of
P-Com common stock at a ratio between 1-for-10 and 1-for-30.
P-COM'S PROPOSAL TO AMEND ITS BYLAWS
GENERAL
The board of directors of P-Com currently believes that it would be in
the best interests of P-Com and its stockholders to adopt an amendment to
P-Com's bylaws to permit the issuance of securities that are convertible,
exercisable or exchangeable into shares of P-Com common stock having a
conversion, exercise or exchange price per share that is subject to downward
adjustment, in the event that P-Com subsequently issues additional shares of its
common stock or other securities convertible into its common stock at a lower
effective price per share. The issuance of securities with this price adjustment
feature is currently subject to stockholder approval under Article VII, Section
8(iii) of P-Com's bylaws. The proposed amendment would still subject the
issuance of any securities convertible into shares of P-Com common stock having
a conversion, exercise or exchange price per share that is subject to downward
adjustment to stockholder approval, but only if the adjustment is based on the
market price of P-Com common stock at the time of the conversion, exercise or
exchange.
P-Com's board of directors approved the proposed amendment to P-Com's
Bylaws on April 23, 2003, subject to stockholder approval, and recommends that
the stockholders vote FOR the proposal to approve the amendment to P-Com's
bylaws.
If this proposal is approved by P-Com's stockholders, Article VII,
Section 8(iii) of P-Com's bylaws will be amended and restated to permit the
issuance of securities convertible into shares of P-Com common stock having a
conversion, exercise or exchange price per share that is subject to downward
adjustment without stockholder approval, unless the downward adjustment is based
on the market price of P-Com common stock at the time of the conversion,
exercise or exchange. The proposed amendment to Article VII, Section 8(iii) of
P-Com's bylaws is set forth in its entirety below:
"Section 8. Unless approved by a majority vote of the shares
of common stock of the corporation outstanding, the corporation shall
not:
"(iii) sell or issue any security of the corporation
convertible, exercisable or exchangeable into shares of common stock of
the corporation, having a conversion, exercise or exchange price per
share which is subject to downward adjustment based entirely on the
market price of the common stock at the time of conversion, exercise or
exchange of such security into common stock."
The italicized portion of the proposed amendment set forth above
reflects the only proposed change to the current bylaw provision, and it is
italicized solely to illustrate the specific amendment proposed.
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PURPOSE OF THE PROPOSED AMENDMENT TO THE BYLAWS
P-Com's primary objective in proposing the amendment to its bylaws is
to provide P-Com with the ability to obtain financing on terms commonly required
by potential investors who would purchase securities convertible into shares of
P-Com's common stock without having to obtain stockholder approval.
In the view of P-Com's management, the current bylaw provision
unnecessarily restricts P-Com's ability to obtain needed financing, because it
significantly limits P-Com's ability to issue convertible securities whose
conversion, exercise or exchange prices are subject to adjustment for the
purpose of preventing dilution caused by the issuance of additional shares of
P-Com common stock or other securities convertible into common stock at an
effective price per share that is less than the price paid by the initial
investors. This is commonly referred to as price-based antidilution protection.
The proposed amendment to the bylaws would permit the issuance of convertible
securities with price-based antidilution protection without stockholder
approval, but prevent the issuance of convertible securities whose conversion,
exercise or exchange prices are subject to adjustment based on the market price
of P-Com's common stock at the time of conversion, exercise or exchange without
stockholder approval.
EFFECTS OF THE PROPOSED AMENDMENT TO THE BYLAWS
If P-Com's stockholders approve the proposed amendment to the bylaws,
P-Com will be able to issue securities convertible into shares of its common
stock having a conversion, exercise or exchange price per share that is subject
to downward adjustment in all circumstances except where such downward
adjustment is based on the market price of the P-Com common stock at the time of
the conversion, exercise or exchange.
The proposed amendment to P-Com's bylaws will not otherwise alter or
modify the rights, preferences, privileges or restrictions of the P-Com common
stock.
EFFECT ON OUTSTANDING NOTES, OPTIONS AND WARRANTS
The proposed amendment to P-Com's bylaws will not affect notes,
options, warrants or other convertible securities that are currently issued and
outstanding.
APPROVALS REQUIRED
The affirmative vote of (i) the holders of a majority of the shares of
P-Com common stock outstanding on the record date, voting as a separate class,
and (ii) the holders of a majority of the shares of P-Com common stock and
Series C Preferred Stock outstanding on the record date, voting together as a
single class, is required to approve this proposal to amend Article VII, Section
8(iii) of P-Com's bylaws.
RECOMMENDATION OF P-COM'S BOARD OF DIRECTORS
The board of directors of P-Com recommends that P-Com stockholders vote
FOR the approval of the proposed amendment of P-Com's bylaws to provide for the
issuance of securities convertible into shares of P-Com common stock having a
conversion, exercise or exchange price per share that is subject to downward
adjustment without stockholder approval, except in instances where the
adjustment is based on the market price of P-Com common stock at the time of
conversion, exercise or exchange.
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P-COM'S PROPOSAL TO APPROVE THE PRICE-BASED ANTIDILUTION FEATURE OF CERTAIN
CONVERTIBLE SECURITIES
GENERAL
On March 26, 2003, May 28, 2003 and July 18, 2003, P-Com consummated
private financing transactions in which a group of affiliated investors
purchased the following convertible securities issued by P-Com:
o Series A Stock Purchase Warrants (which are referred to in
this joint proxy statement as the "Series A Warrants") for the
purchase of up to 4,074,075 shares of P-Com common stock at an
exercise price of $0.12 per share;
o Series B Stock Purchase Warrants (which are referred to in
this joint proxy statement as the "Series B Warrants") for the
purchase of up to 5,703,704 shares of P-Com common stock at an
exercise price of $0.20 per share;
o Series A-1 Stock Purchase Warrants (which are referred to in
this joint proxy statement as the "Series A-1 Warrants") for
the purchase of up to 4,074,075 shares of P-Com common stock
at an exercise price of $0.001 per share; and
o Series B-1 Stock Purchase Warrants (which are referred to in
this joint proxy statement as the "Series B-1 Warrants") for
the purchase of up to 5,703,704 shares of P-Com common stock
at an exercise price of $0.001 per share.
On October 3, 2003, P-Com consummated a private financing transaction
in which investors purchased the following convertible securities issued by
P-Com:
o Approximately 8,370 shares of Series C Convertible Preferred
Stock (which is referred to in this joint proxy statement as
the "Series C Preferred Stock"), with a face value of $1,750
per share. Each share of Series C Preferred Stock is
convertible into a number of shares of P-Com common stock
equal to the face value divided by $0.10;
o Series C-1 Stock Purchase Warrants (which are referred to in
this joint proxy statement as the "Series C-1 Warrants") for
the purchase of up to 44,036,090 shares of P-Com common stock
at an initial exercise price of $0.15 per share, which will
automatically increase to $0.18 per share 12 months following
their date of issuance.
o Series C-2 Stock Purchase Warrants (which are referred to in
this joint proxy statement as the "Series C-2 Warrants") for
the purchase of up to 44,036,090 shares of P-Com common stock
at an initial exercise price of $0.18 per share, which will
automatically increase to $0.22 per share 18 months following
their date of issuance.
The Series A Warrants, Series B Warrants, Series C Preferred Stock,
Series C-1 Warrants and Series C-2 Warrants are currently convertible or
exercisable, as the case may be, into shares of P-Com common stock and they
contain a price-based antidilution feature that is currently ineffective. The
Series A-1 Warrants and Series B-1 Warrants do not contain any price-based
antidilution protection and they are not currently exercisable into shares of
P-Com common stock. The exercisability of the Series A Warrants and the Series
A-1 Warrants are mutually exclusive. Likewise, the exercisability of the Series
B Warrants and the Series B-1 Warrants are mutually exclusive. If P-Com's
stockholders approve the price-based antidilution feature of the Series A
Warrants and the Series B Warrants, then the Series A-1 Warrants and the Series
B-1 Warrants will immediately terminate without ever being exercisable by their
holders. If P-Com's stockholders do not approve the price-based antidilution
feature of the Series A Warrants and the Series B Warrants, then the Series A
Warrants and the Series B Warrants will immediately terminate and the Series A-1
Warrants and the Series B-1 Warrants will become immediately exercisable without
the price-based antidilution feature.
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The price-based antidilution protection feature of the Series A
Warrants, Series B Warrants, Series C Preferred Stock, Series C-1 Warrants and
Series C-2 Warrants will not become effective unless it is approved by P-Com's
stockholders, as required by P-Com's bylaws. Article VII, Section 8(iii) of
P-Com's bylaws currently requires that the holders of a majority of P-Com's
outstanding common stock approve the issuance of any security that is
convertible, exercisable or exchangeable into shares of P-Com common stock at a
conversion, exercise or exchange price that is subject to downward adjustment.
The issuance of the Series A Warrants, Series B Warrants, Series C Preferred
Stock, Series C-1 Warrants, and Series C-2 Warrants without stockholder approval
did not violate P-Com's bylaws because the price-based antidilution feature of
these securities has been ineffective since their issuance and will remain
ineffective unless approved by P-Com's stockholders, in accordance with the
bylaws.
If P-Com is unable to obtain the approval of its stockholders for the
price-based antidilution feature of the Series A Warrants, and Series B Warrants
prior to December 31, 2003, the following will occur:
o Series C Preferred Stock, Series C-1 Warrants, and Series C-2
Warrants will remain outstanding in accordance with their
terms, and the price-based antidilution feature of these
securities will remain ineffective.
o The Series A Warrants and Series B Warrants will terminate and
be of no further force or effect; and
o The Series A-1 Warrants and Series B-1 Warrants will become
immediately exercisable for shares of P-Com common stock.
If P-Com is unable to obtain the approval of its stockholders for the
price-based antidilution feature of the Series C Preferred Stock, Series C-1
Warrants, and Series C-2 Warrants prior to the 90th day following their date of
issuance, which is January 2, 2004, the following will occur:
o The holders of the Series C Preferred Stock will have the
right to have their shares of Series C Preferred Stock
redeemed by P-Com; and
o The holders of the Series C-1 Warrants and the Series C-2
Warrants will have the right to have those warrants redeemed
by P-Com.
PURPOSE OF THE PROPOSED APPROVAL OF THE PRICE-BASED ANTIDILUTION FEATURE OF
P-COM'S CONVERTIBLE SECURITIES
P-Com's primary purpose in requesting that its stockholders approve the
price-based antidilution feature of the Series A Warrants, Series B Warrants,
Series C Preferred Stock, Series C-1 Warrants, and Series C-2 Warrants is to (i)
allow the price-based antidilution feature of these convertible securities to
take effect, (ii) effect the termination of the Series A-1 Warrants and Series
B-1 Warrants, as discussed below, and (iii) prevent the occurrence of a
redemption event that would give the holders of the Series C Preferred Stock,
Series C-1 Warrants, and Series C-2 Warrants the right to have those securities
redeemed by P-Com.
EFFECT ON OUTSTANDING OPTIONS AND WARRANTS
If P-Com's proposal to approve the issuance of the Series A Warrants,
Series B Warrants, Series C Preferred Stock, Series C-1 Warrants, and Series C-2
Warrants is approved by P-Com's stockholders before December 31, 2003, the
following will occur:
o the price-based antidilution protection feature of the Series
A Warrants, Series B Warrants, Series C Preferred Stock,
Series C-1 Warrants and Series C-2 Warrants will become
effective; and
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o the Series A-1 Warrants and Series B-1 Warrants will terminate
and be of no further force or effect.
APPROVALS REQUIRED
The affirmative vote of (i) the holders of a majority of the shares of
P-Com common stock outstanding on the record date, voting as a separate class,
and (ii) the holders of a majority of the shares of P-Com common stock and
Series C Preferred Stock outstanding on the record date, voting together as a
single class, is required to approve this proposal to approve the price-based
antidilution feature of the Series A Warrants, Series B Warrants, Series C
Preferred Stock, Series C-1 Warrants and Series C-2 Warrants.
RECOMMENDATION OF P-COM'S BOARD OF DIRECTORS
The board of directors of P-Com recommends that P-Com stockholders vote
FOR the approval of the price-based antidilution feature of the Series A
Warrants, Series B Warrants, Series C Preferred Stock, Series C-1 Warrants and
Series C-2 Warrants, which will allow the conversion or exercise price of these
securities to be adjusted downward.
P-COM'S PROPOSAL TO AMEND ITS 1995 STOCK OPTION/STOCK ISSUANCE PLAN
P-Com's stockholders are being asked to approve an amendment to P-Com's
1995 Stock Option/Stock Issuance Plan (the "1995 Plan") that will effect the
following changes: (i) increase the maximum number of shares of P-Com common
stock authorized for issuance over the term of the 1995 Plan by an additional
72,000,000 shares from 5,786,000 shares to 77,786,000 shares of P-Com common
stock; and (ii) extend the term of the 1995 Plan from 10 years to 15 years.
The proposed 72,000,000-share increase is intended to ensure that a
sufficient reserve of common stock remains available under the 1995 Plan in
order to allow P-Com to continue to utilize equity incentives to attract and
retain the services of key individuals essential to P-Com's long-term growth and
success. P-Com relies significantly on equity incentives in the form of stock
option grants in order to attract and retain key employees in the market in
which P-Com competes for such talented individuals. P-Com believes that such
equity incentives are necessary for P-Com to remain competitive in the
marketplace for executive talent and other key employees. Option grants will be
made under the 1995 Plan to newly hired and continuing employees on the basis of
competitive market factors and individual performance levels.
The 72,000,000-share increase in the maximum number of shares
authorized for issuance under the 1995 Plan was authorized by P-Com's board of
directors on August 14, 2003, subject to approval by P-Com's stockholders at the
P-Com's annual meeting.
The following is a summary of the principal features of the 1995 Plan,
as so amended. This summary does not, however, purport to be a complete
description of all the provisions of the 1995 Plan. Any stockholder of P-Com who
wishes to obtain a copy of the actual plan document may do so upon written
request to P-Com's Chief Financial Officer at P-Com's principal executive
offices in Campbell, California. The 1995 Plan serves as the successor to
P-Com's 1992 Stock Option Plan (the "1992 Plan") that terminated in connection
with the initial public offering of P-Com's common stock. All outstanding
options under the 1992 Plan at the time of such termination were transferred to
the 1995 Plan.
All share numbers which appear in this proposal reflect the 2-for-1
forward stock splits of P-Com's common stock effected on October 2, 1995 and
September 25, 1997 through a dividend of one share of common stock for each
outstanding share of common stock. They also reflect the 1-for-5 reverse stock
split effected on June 27, 2002.
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EQUITY INCENTIVE PROGRAMS
The 1995 Plan consists of three separate equity incentive programs: (i)
a Discretionary Option Grant Program, (ii) a Stock Issuance Program and (iii) an
Automatic Option Grant Program. The principal features of each of these programs
are described below. The Compensation Committee of P-Com's board of directors
administers the provisions of the 1995 Plan (other than the Automatic Option
Grant Program) with respect to all officers and directors of P-Com subject to
the short-swing trading restrictions of the federal securities laws ("Section 16
Insiders"). With respect to all other participants, the 1995 Plan may be
administered by either the Compensation Committee or a special stock option
committee (the "Secondary Committee") comprised of one or more directors
appointed by the board of directors or by the entire board of directors itself.
Each entity, whether the Compensation Committee, the Secondary Committee or the
board of directors, will be referred to in this summary as the Plan
Administrator with respect to its particular administrative functions under the
1995 Plan, and each Plan Administrator will have complete discretion (subject to
the provisions of the 1995 Plan) to authorize option grants and direct stock
issuances under the 1995 Plan within the scope of its administrative
jurisdiction. However, all grants under the Automatic Option Grant Program will
be made in strict compliance with the provisions of that program, and no
administrative discretion will be exercised by any Plan Administrator with
respect to the grants made under such program.
SHARE RESERVE
As of August 21, 2003, 5,786,891 shares of P-Com common stock had been
reserved for issuance over the term of the 1995 Plan.
Should any option terminate prior to exercise in full, the shares
subject to the unexercised portion of that option will be available for
subsequent option grants. In addition, any unvested shares issued under the 1995
Plan and subsequently repurchased by P-Com at the option exercise or direct
issue price paid per share pursuant to P-Com's repurchase rights under the 1995
Plan will be added back to the number of shares of common stock reserved for
issuance under the 1995 Plan and will accordingly be available for reissuance
through one or more subsequent option grants or direct stock issuances made
under the 1995 Plan. However, shares subject to any option surrendered in
accordance with the stock appreciation right provisions of the 1995 Plan will
not be available for subsequent issuance.
CHANGES IN CAPITALIZATION
If any change is made to the outstanding shares of common stock by
reason of any recapitalization, stock dividend, stock split, reverse stock
split, combination of shares, exchange of shares or other change in corporate
structure effected without P-Com's receipt of consideration, appropriate
adjustments will be made to (i) the maximum number and class of securities
issuable under the 1995 Plan, (ii) the maximum number and class of securities
for which any one participant may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances under the 1995
Plan, (iii) the number and class of securities for which option grants will
subsequently be made under the Automatic Option Grant Program to each
newly-elected or continuing non-employee director and (iv) the number and class
of securities and the exercise price per share in effect under each outstanding
option under the 1995 Plan (including the options transferred from the 1992 Plan
to the 1995 Plan). All such adjustments will be designed to preclude the
enlargement or dilution of participant rights and benefits under the 1995 Plan.
ELIGIBILITY
Employees, non-employee directors, and independent consultants and
advisors to P-Com and its subsidiaries (whether now existing or subsequently
established) will be eligible to participate in the Discretionary Option Grant
115
and Stock Issuance Programs. Non-employee members of P-Com's board of directors
will also be eligible to participate in the Automatic Option Grant Program.
As of September 2, 2003, 6 executive officers, 3 non-employee directors
and 122 other employees were eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs, and the 3 non-employee directors were also
eligible to participate in the Automatic Option Grant Program.
VALUATION
The fair market value per share of common stock on any relevant date
under the 1995 Plan will be the closing selling price per share on that date, as
reported on the OTC Bulletin Board. On September 2, 2003, the closing selling
price of P-Com common stock was $0.19 per share.
DISCRETIONARY OPTION GRANT PROGRAM
Grants
The Plan Administrator has complete discretion under the Discretionary
Option Grant Program to determine which eligible individuals are to receive
option grants or stock issuances, the time or times when such grants or
issuances are to be made, the number of shares subject to each such grant or
issuance, the status of any granted option as either an incentive stock option
or a non-statutory option under the federal tax laws, the vesting schedule (if
any) to be in effect for the option grant or stock issuance and the maximum term
for which any granted option is to remain outstanding. All expenses incurred in
administering the 1995 Plan will be paid by P-Com.
Price and Exercisability
The exercise price per share for options granted under the
Discretionary Option Grant Program may not be less than one hundred percent of
the fair market value per share of common stock on the option grant date.
No option will have a term in excess of 10 years, and each option will
generally become exercisable in one or more installments over the optionee's
period of service with P-Com. Also, one or more options may be granted that are
immediately exercisable for all the option shares, but any shares acquired under
those options will be subject to repurchase by P-Com, at the exercise price paid
per share, upon the optionee's cessation of service with P-Com prior to vesting
in those shares. Finally, one or more options may be granted that are
immediately vested for all the option shares and are not subject to any
repurchase right. The Plan Administrator may at any time cancel P-Com's
outstanding repurchase rights with respect to any such unvested shares and
thereby accelerate the vesting of those shares.
The exercise price may be paid in cash or in shares of the common
stock. Outstanding options may also be exercised through a same-day sale program
pursuant to which a designated brokerage firm is to effect an immediate sale of
the shares purchased under the option and pay over to P-Com, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
exercise price for the purchased shares plus all applicable withholding taxes.
No optionee will have any stockholder rights with respect to the option
shares until such optionee has exercised the option and paid the exercise price
for the purchased shares. Options are generally not assignable or transferable
other than by will or the laws of inheritance and, during the optionee's
lifetime, the option may be exercised only by such optionee. However, the Plan
Administrator may allow non-statutory options to be transferred or assigned
during the optionee's lifetime to one or more members of the optionee's
immediate family or to a trust established exclusively for one or more such
family members, to the extent such transfer or assignment is in furtherance of
the optionee's estate plan.
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TERMINATION OF SERVICE
Upon the optionee's cessation of employment or service, the optionee
will have a limited period of time in which to exercise his or her outstanding
options for any shares in which the optionee is vested at that time. However, at
any time while the options remain outstanding, the Plan Administrator will have
complete discretion to extend the period following the optionee's cessation of
employment or service during which his or her outstanding options may be
exercised. The Plan Administrator will also have complete discretion to
accelerate the exercisability or vesting of those options in whole or in part at
any time.
STOCK APPRECIATION RIGHTS
The Plan Administrator is authorized to issue two types of stock
appreciation rights in connection with option grants made under the
Discretionary Option Grant Program:
Tandem stock appreciation rights provide the holders with the right to
surrender their options for an appreciation distribution from P-Com equal in
amount to the excess of (a) the fair market value of the vested shares of common
stock subject to the surrendered option over (b) the aggregate exercise price
payable for those shares. Such appreciation distribution may, at the discretion
of the Plan Administrator, be made in cash or in shares of common stock.
Limited stock appreciation rights may be provided to one or more
Section 16 insiders as part of their option grants. Any option with such a
limited stock appreciation right may be surrendered to P-Com upon the successful
completion of a hostile tender offer for more than 50% of P-Com's outstanding
voting stock. In return for the surrendered option, the officer will be entitled
to a cash distribution from P-Com in an amount per surrendered option share
equal to the excess of (a) the highest price per share of common stock paid in
connection with the tender offer over (b) the exercise price payable for such
share.
CANCELLATION AND REGRANT OF OPTIONS
On and prior to August 30, 2000, the Plan Administrator had the
authority to effect the cancellation of any or all options outstanding under the
1995 Plan and to grant, in substitution therefore, new options covering the same
or different numbers of shares of common stock but with an exercise price per
share based upon the fair market value of the common stock on the new grant
date. However, after August 30, 2000, no option cancellation/regrant programs
can be effected by the Plan Administrator without prior stockholder approval,
and any subsequent amendment or other change to this stockholder-approval
requirement of the 1995 Plan must also be approved by the stockholders.
STOCK ISSUANCE PROGRAM
Shares may be sold under the Stock Issuance Program at a price per
share not less than their fair market value, payable in cash or through a
promissory note payable to P-Com. Shares may also be issued as a bonus for past
services.
The shares issued as a bonus for past services will be fully vested
upon issuance. All other shares issued under the program will be subject to a
vesting schedule tied to the performance of service or the attainment of
performance goals. The Plan Administrator will, however, have the discretionary
authority at any time to accelerate the vesting of any and all unvested shares
outstanding under the 1995 Plan.
AUTOMATIC OPTION GRANT PROGRAM
Under the Automatic Option Grant Program, non-employee directors will
receive option grants at specified intervals over their period of service on the
board of directors. All grants under the Automatic Option Grant Program will be
117
made in strict compliance with the express provisions of such program. Each
individual who served as a non-employee director on February 1, 1996 was
automatically granted on that date a non-statutory option to purchase 8,000
shares of common stock. (All share numbers in this section pertaining to
pre-June 2002 periods have been adjusted to reflect the June 2002 one-for-five
reverse split of P-Com's common stock.) Each individual who first becomes a
non-employee director after February 1, 1996, whether through election by the
stockholders or appointment by the board of directors, will automatically be
granted, at the time of such initial election or appointment, a non-statutory
option to purchase 8,000 shares of common stock, provided such individual has
not previously been in P-Com's employ.
On the date of each of P-Com's annual meetings, beginning with the 1997
annual meeting, each individual who is to continue to serve as a non-employee
director, whether or not such individual is standing for re-election at that
particular annual meeting, will automatically be granted a non-statutory option
to purchase 800 shares of common stock, provided such individual has not
received an option grant under the Automatic Option Grant Program within the
preceding 6 months. There will be no limit on the number of such 800-share
option grants that any single non-employee director may receive over his or her
period of service on P-Com's board of directors, and non-employee directors who
have previously been in P-Com's employ will be eligible to receive one or more
of those annual grants.
Each automatic option grant will have an exercise price per share equal
to 100% of the fair market value per share of common stock on the grant date.
The option will have a maximum term of 10 years, subject to earlier termination
at the end of the 12-month period measured from the date of the optionee's
cessation of service on P-Com's board of directors. Each option will be
immediately exercisable for all of the option shares. However, any shares
purchased under any automatic option grant are subject to repurchase by P-Com,
at the exercise price paid per share, upon the optionee's cessation of board
service prior to vesting in those shares. The initial 8,000-share automatic
option grant will vest in a series of 8 successive equal quarterly installments
upon the optionee's completion of each successive 3-month period of service as a
director over the 24-month period measured from the grant date. All annual
800-share automatic option grants shall be fully vested upon grant.
Each automatic option will remain exercisable for a twelve-month period
following the optionee's cessation of service as a member of P-Com's board of
directors. In no event, however, may the option be exercised after the
expiration date of the option term. During the applicable post-service exercise
period, the option may not be exercised for more than the number of option
shares (if any) in which the board member is vested at the time of his or her
cessation of board service.
The shares subject to each automatic option grant which is subject to
vesting requirements, will immediately vest upon (i) the optionee's death or
permanent disability while a board member, (ii) an acquisition of P-Com by asset
purchase or asset sale, (iii) the successful completion of a tender offer for
more than 50% of P-Com's outstanding voting stock or (iv) a change in the
majority of the board of directors effected through one or more proxy contests
for board membership effected during a 36-month period.
Upon the successful completion of a hostile tender offer for more than
50% of P-Com's outstanding voting stock, each outstanding automatic option grant
may be surrendered to P-Com for a cash distribution per surrendered option share
in an amount equal to the excess of (a) the highest price per share of common
stock paid in connection with such tender offer over (b) the exercise price
payable for such share. Stockholder approval of this proposal will also
constitute pre-approval of each option granted with such a surrender right on or
after the date of P-Com's 2003 annual meeting and the subsequent exercise of
that right in accordance with the foregoing terms.
The remaining terms and conditions of each automatic option grant will
in general conform to the terms summarized above for option grants made under
the Discretionary Option Grant Program and will be incorporated into the option
agreement evidencing the automatic grant.
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GENERAL PROVISIONS
Acceleration
If P-Com is acquired by asset purchase or asset sale, each outstanding
option under the 1995 Plan that is not to be assumed by the successor
corporation will automatically accelerate in full, and all unvested shares under
the 1995 Plan will immediately vest, except to the extent P-Com's repurchase
rights with respect to those shares are to be assigned to the successor
corporation. If the optionee's service with P-Com or any successor entity is
subsequently terminated within 18 months after the acquisition, any options that
are assumed in connection with such acquisition will immediately become
exercisable for all the option shares, and any unvested shares that do not vest
at the time of such acquisition will immediately vest in full. However, the Plan
Administrator has the authority to grant options that will immediately vest upon
an acquisition of P-Com, regardless of whether those options are assumed by the
successor corporation. The Plan Administrator also has the discretionary
authority to provide for the full and immediate vesting of all outstanding stock
options and unvested shares under the Discretionary Option Grant and Stock
Issuance Programs in connection with a change in control of P-Com (whether by
successful tender offer for more than 50% of the outstanding voting stock or a
change in the majority of P-Com's board of directors by reason of one or more
proxy contests for the election of directors), with such vesting to occur either
at the time of such change in control or upon the subsequent termination of the
individual's service.
The acceleration of vesting upon a change in the ownership or control
of P-Com may be seen as an anti-takeover provision and may have the effect of
discouraging a asset purchase proposal, a takeover attempt or other efforts to
gain control of P-Com.
Financial Assistance
The Plan Administrator may institute a loan program to assist one or
more participants in financing the exercise of outstanding options or the
purchase of shares under the 1995 Plan. The Plan Administrator will have
complete discretion to determine the terms of any such financial assistance.
However, the maximum amount of financing provided any individual may not exceed
the cash consideration payable for the issued shares plus all applicable taxes.
Any such financing may be subject to forgiveness in whole or in part, at the
discretion of the Plan Administrator, over the participant's period of service.
All outstanding options under the predecessor 1992 Plan which were
transferred to the 1995 Plan will continue to be governed by the terms of the
agreements evidencing those options, and no provision of the 1995 Plan will
affect or otherwise modify the rights or obligations of the holders of the
transferred options with respect to their acquisition of P-Com common stock.
However, the Plan Administrator has complete discretion to extend one or more
provisions of the 1995 Plan to the transferred options, to the extent those
options do not otherwise contain such provisions.
OPTION GRANTS
The following table sets forth (i) the number of shares of common stock
subject to options granted under the 1995 Plan during the period from January 1,
2002 through December 31, 2002 and (ii) the weighted average exercise price
payable per share under those options, with respect to the following persons:
o P-Com's "named executive officers," who consist of P-Com's
Chief Executive Officer and each of its four other most highly
compensated executive officers who were executive officers of
P-Com on December 31, 2002 and whose salary and bonus for the
fiscal year ended December 31, 2002 was in excess of $100,000;
o All current executive officers of P-Com, as a group;
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o All current directors of P-Com who are not executive officers,
as a group; and
o All current employees of P-Com, including all current officers
of P-Com who are not executive officers, as a group.
OPTION TRANSACTIONS DURING FISCAL YEAR 2002
NUMBER OF SECURITIES WEIGHTED AVERAGE
UNDERLYING EXERCISE PRICE OF
NAME OPTIONS GRANTED (#) OPTIONS GRANTED ($)
---- ------------------- -------------------
George P. Roberts(1) 915,443 .98
Chairman of the Board of Directors and Former Chief Executive Officer
Leighton J. Stephenson(2) 55,000 1.10
Former Chief Financial Officer and Vice President, Finance
and Administration
Alan T. Wright(3) 65,000 1.10
Former Chief Operating Officer
Ben L. Jarvis(4) 37,479 1.10
Former Executive Vice President and General Manager,
P-Com Network Services
Caroline Baldwin Kahl(5) 27,415 1.10
Former Vice President, General Counsel and Secretary
Randall L. Carl 45,000 1.01
Senior Vice President, Worldwide Sales
All current executive officers, as a group (4 persons)................. 1,181,837 1.00
All current directors who are not executive officers, as a group (4
persons)............................................................... 198,040 0.81
All current employees, including all current officers who are not
executive officers, as a group (346 persons)........................... 604,335 1.09
-----------
(1) Mr. Roberts resigned from his position as Chief Executive Officer
effective September 1, 2003. Mr. Roberts remains the Chairman of the
Board of Directors.
(2) Mr. Stephenson resigned from P-Com effective April 1, 2003.
(3) Mr. Wright's employment with P-Com was terminated effective July 24,
2003.
(4) Mr. Jarvis' employment with P-Com was terminated effective June 30,
2003.
(5) Ms. Kahl resigned from P-Com effective March 14, 2003.
As of August 21, 2003, options covering 2,467,799 shares of P-Com
common stock were outstanding under the 1995 Plan, 2,192,559 shares remained
available for future option grant or direct issuance and 1,126,533 shares have
been issued pursuant to the exercise of outstanding options under the 1995 Plan.
NEW PLAN BENEFITS
The following table sets forth (i) the number of shares of common stock
subject to options that will be granted under the 1995 Plan if the proposed
amendments to the 1995 Plan are approved and (ii) the weighted average exercise
120
price payable per share under those options, with respect to the following
persons:
o P-Com's named executive officers;
o All current executive officers of P-Com, as a group;
o All current directors of P-Com who are not executive officers,
as a group; and
o All current employees of P-Com, including all current officers
of P-Com who are not executive officers, as a group.
NAME NUMBER OF SECURITIES WEIGHTED AVERAGE
UNDERLYING EXERCISE PRICE OF
OPTIONS GRANTED (#) OPTIONS GRANTED ($)
George P. Roberts(1) 557,000 $0.11
Chairman of the Board of Directors and Former Chief Executive Officer
Leighton J. Stephenson(2) o o
Former Chief Financial Officer and Vice President, Finance and
Administration
Alan T. Wright(3) o o
Former Executive Vice President, Operations
Ben L. Jarvis(4) o o
Former Executive Vice President and General Manager, P-Com Network
Services
Caroline Baldwin Kahl(5) o o
Former Vice President and General Counsel
Randall L. Carl 2,200,000 $0.11
Senior Vice President, Worldwide Sales
All current executive officers, as a group (4 persons)(6).............. 9,957,000 $0.15
All current directors who are not executive officers, as a group (3
persons)............................................................... 1,671,000 $0.11
All current employees, including all current officers who are not
executive officers, as a group (112 persons)........................... 11,637,000 $0.11
-----------
(1) Mr. Roberts resigned from his position as Chief Executive Officer
effective September 1, 2003. Mr. Roberts remains the Chairman of the
Board of Directors.
(2) Mr. Stephenson resigned from P-Com effective April 1, 2003.
(3) Mr. Wright's employment with P-Com was terminated effective July 24,
2003.
(4) Mr. Jarvis' employment with P-Com was terminated effective June 30,
2003.
(5) Ms. Kahl resigned from P-Com effective March 14, 2003.
(6) The current executive officers consist of George Roberts, Sam Smookler,
Daniel Rumsey, and Randall L. Carl.
As of August 21, 2003, options to purchase an aggregate of 23,628,000
shares of P-Com common stock have been granted contingent upon the
72,000,000-share increase that is the subject of this proposal. If stockholder
121
approval of the increase is obtained, P-Com will incur a charge to earnings
equal to the increase (if any) between the exercise price of those options and
the closing selling price per share of P-Com's stock on the date of P-Com's 2003
annual meeting. As of August 13, 2003 the closing selling price per share of
P-Com common stock was $0.11. Assuming that P-Com's stock price is the same on
the date of the 2003 annual meeting and that stockholder approval of the
72,000,000 share increase is obtained at the annual meeting, P-Com estimates
that it will not incur a charge to earnings because the stock price has not
increased. If stockholder approval of the proposed 72,000,000 share increase is
not obtained at the 2003 annual meeting, the options to purchase 23,628 shares
granted contingent upon the 72,000,000-share increase will automatically expire
and be of no further force or effect.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about P-Com's common stock
that may be issued upon the exercise of options, warrants and rights under all
of its existing equity compensation plans as of December 31, 2002, including the
1995 Plan and the Purchase Plan.
NUMBER OF SHARES REMAINING
NUMBER OF SECURITIES WEIGHTED AVERAGE AVAILABLE FOR FUTURE ISSUANCE
ISSUABLE UPON EXERCISE OF EXERCISE PRICE OF UNDER EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS (EXCLUDING SECURITIES REFLECTED
PLAN CATEGORY WARRANTS AND RIGHTS (A) WARRANTS AND RIGHTS (B) IN COLUMN (A)) (C)
------------- ----------------------- ----------------------- --------------------------------
Equity compensation plans approved
by stockholders................... 3,051,567 $12.0513 1,608,791
Equity compensation plans not
approved by stockholders.......... - - -
---------- ---------- -----------
Total............................. 3,051,567 $12.0513 1,608,791
========== ========== ===========
At December 31, 2002, P-Com did not have any equity compensation plans
not approved by stockholders and has not made any equity grants outside of its
stockholder-approved plans. Additionally, P-Com has not assumed any equity
grants or equity compensation plans pursuant to acquisitions.
AMENDMENT AND TERMINATION
The board of directors may amend or modify the 1995 Plan in any or all
respects whatsoever, subject to any stockholder approval required under
applicable law or regulation or pursuant to the express provisions of the 1995
Plan summarized above. The board of directors may terminate the 1995 Plan at any
time. If the proposed amendments to the 1995 Plan are not approved, the 1995
Plan will, in all events, terminate on January 10, 2005. If the proposed
amendments to the 1995 Plan are approved, the 1995 Plan will, in all events,
terminate on January 10, 2010.
FEDERAL INCOME TAX CONSEQUENCES
Options granted under the 1995 Plan may be either incentive stock
options that satisfy the requirements of Section 422 of the Internal Revenue
Code or non-statutory options that are not intended to meet such requirements.
The Federal income tax treatment for the two types of options differs as
follows:
Incentive Options. No taxable income is recognized by the optionee at the time
of the option grant, and no taxable income is generally recognized at the time
the option is exercised. The optionee will, however, recognize taxable income in
the year in which the purchased shares are sold or otherwise made the subject of
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a taxable disposition. For Federal income tax purposes, dispositions are divided
into two categories: (i) qualifying dispositions and (ii) disqualifying
dispositions. A qualifying disposition occurs if the sale or other disposition
is made more than 2 years after the option grant date and more than 1 year after
the exercise date. If the sale or disposition occurs before these two periods
are satisfied, then a disqualifying disposition will result.
Upon a qualifying disposition, the optionee will recognize long-term
capital gain or loss in an amount equal to the excess or shortfall of (i) the
amount realized upon the sale or other disposition of the purchased shares over
(ii) the exercise price paid for the shares. If there is a disqualifying
disposition of the shares, then generally the excess of (i) the fair market
value of those shares on the exercise date over (ii) the exercise price paid for
the shares will be taxable as ordinary income to the optionee. Any additional
gain or loss recognized upon the disposition will be recognized as a capital
gain or loss by the optionee.
If the optionee makes a disqualifying disposition of the purchased
shares, then generally P-Com will be entitled to an income tax deduction, for
the taxable year in which such disposition occurs, equal to the excess of (i)
the fair market value of such shares on the option exercise date over (ii) the
exercise price paid for the shares. If the optionee makes a qualifying
disposition, P-Com will not be entitled to any income tax deduction.
Non-Statutory Options. No taxable income is recognized by an optionee upon the
grant of a non-statutory option. The optionee will in general recognize ordinary
income, in the year in which the option is exercised, equal to the excess of the
fair market value of the purchased shares on the exercise date over the exercise
price paid for the shares, and the optionee will be required to satisfy the tax
withholding requirements applicable to such income.
If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by P-Com in the event of the optionee's
termination of service prior to vesting in those shares, then the optionee will
not recognize any taxable income at the time of exercise but will have to report
as ordinary income, as and when P-Com's repurchase right lapses, an amount equal
to the excess of (i) the fair market value of the shares on the date the
repurchase right lapses over (ii) the exercise price paid for the shares. The
optionee may, however, elect under Section 83(b) of the Internal Revenue Code to
include as ordinary income in the year of exercise of the option an amount equal
to the excess of (i) the fair market value of the purchased shares on the
exercise date over (ii) the exercise price paid for such shares. If the Section
83(b) election is made, the optionee will not recognize any additional income as
and when the repurchase right lapses.
P-Com will be entitled to an income tax deduction equal to the amount
of ordinary income recognized by the optionee with respect to the exercised
non-statutory option. The deduction will in general be allowed for the taxable
year of P-Com in which such ordinary income is recognized by the optionee.
STOCK APPRECIATION RIGHTS
An optionee who is granted a stock appreciation right will recognize
ordinary income in the year of exercise equal to the amount of the appreciation
distribution. P-Com will be entitled to an income tax deduction equal to such
distribution for the taxable year in which the ordinary income is recognized by
the optionee.
DIRECT STOCK ISSUANCE
The tax principles applicable to direct stock issuances under the 1995
Plan will be substantially the same as those summarized above for the exercise
of non-statutory option grants.
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DEDUCTIBILITY OF EXECUTIVE COMPENSATION
P-Com anticipates that any compensation deemed paid by it in connection
with the disqualifying disposition of incentive stock option shares or the
exercise of non-statutory options with exercise prices equal to the fair market
value of the option shares on the grant date will qualify as performance-based
compensation for purposes of Code Section 162(m) and will not have to be taken
into account for purposes of the $1 million limitation per covered individual on
the deductibility of the compensation paid to certain executive officers of
P-Com. Accordingly, all compensation deemed paid under the 1995 Plan with
respect to such dispositions or exercises will remain deductible by P-Com
without limitation under Code Section 162(m).
GOLDEN PARACHUTE RULES
Code Section 280G provides that if certain executives receive payments
that are made because of a change in control of P-Com, then a portion of those
payments will be (i) subject to a 20% excise tax imposed on the executives that
receive such payments, and (ii) nondeductible by P-Com. For this purpose, the
acceleration of the vesting of stock options is treated as a payment. These
adverse tax consequences only apply though, (i) if the total amount of the
payments to such an executive equal or exceed 300% of his or her average annual
compensation and (ii) to the extent that the payments actually exceed his or her
average annual compensation.
ACCOUNTING TREATMENT
Option grants or stock issuances with exercise or issue prices less
than the fair market value of the shares on the grant or issue date will result
in a compensation expense to P-Com's earnings equal to the difference between
the exercise or issue price and the fair market value of the shares on the grant
or issue date. Such expense will be amortized against P-Com's earnings over the
period that the option shares or issued shares are to vest.
Option grants or stock issuances with exercise or issue prices equal to
the fair market value of the shares at the time of issuance or grant generally
will not result in any charge to P-Com's earnings, but P-Com must disclose, in
pro-forma statements to P-Com's financial statements, the impact those option
grants would have upon P-Com's reported earnings were the fair value of those
options treated as compensation expense. Whether or not granted at a discount,
the number of outstanding options may be a factor in determining P-Com's
earnings per share on a fully diluted basis.
In addition, any option grants made to non-employee consultants (but
not non-employee directors) will result in a direct charge to P-Com's reported
earnings based upon the fair value of the option measured initially as of the
grant date and then subsequently on the vesting date of each installment of the
underlying option shares. Such charge will accordingly be adjusted to reflect
the appreciation (if any) in the value of the option shares over the period
between the grant date of the option and the vesting date of each installment of
the option shares. Should any outstanding options under the 1995 Plan be
repriced, then that repricing will also trigger a direct charge to P-Com's
reported earnings measured by the appreciation in the value of the underlying
shares between the grant of the repriced option and the date the repriced option
is exercised for those shares or terminates unexercised.
Should one or more optionee be granted stock appreciation rights that
have no conditions upon exercisability other than a service or employment
requirement, then such rights will result in a compensation expense to P-Com's
earnings. Accordingly, at the end of each fiscal quarter, the amount (if any) by
which the fair market value of the shares of common stock subject to such
outstanding stock appreciation rights has increased from the prior quarter-end
would be accrued as compensation expense, to the extent such fair market value
is in excess of the aggregate exercise price in effect for those rights.
124
APPROVALS REQUIRED
The affirmative vote of the holders of a majority of the shares of
P-Com common stock and Series C Preferred Stock outstanding on the record date,
voting together as a single class, is required to approve this proposal to
approve the proposed amendment to P-Com's 1995 Plan to (i) increase the maximum
number of shares of P-Com common stock authorized for issuance over the term of
the 1995 Plan by an additional 72,000,000 shares from 5,786,000 shares to
77,786,000 shares of P-Com common stock; and (ii) extend the term of the 1995
Plan from 10 years to 15 years.
If P-Com's stockholders do not approve the proposal to amend the 1995
Plan, then neither of the proposed amendments to the 1995 plan will be
implemented. The 1995 Plan will, however, continue to remain in effect, and
option grants and direct stock issuances may continue to be made under the 1995
Plan until all the shares of common stock available for issuance under the 1995
Plan, as currently in effect, have been issued pursuant to such option grants
and direct stock issuances. However, all options granted by the board of
directors contingent upon stockholder approval of the proposed amendments would
be terminated.
RECOMMENDATION OF P-COM'S BOARD OF DIRECTORS
The board of directors of P-Com recommends that P-Com stockholders vote
FOR the proposed amendments to P-Com's 1995 Plan.
P-COM'S PROPOSAL TO ELECT ITS DIRECTOR NOMINEES
TO THE P-COM BOARD OF DIRECTORS
GENERAL
P-Com's certificate of incorporation provides for a classified board of
directors consisting of three classes of directors with staggered three-year
terms. Each class consists, as nearly as possible, of one-third of the total
number of directors. The class whose term of office expires at the 2003 annual
meeting currently consists of two directors. The directors elected to this class
will serve for a term of three years, expiring at the 2006 annual meeting of
stockholders or until a successor has been duly elected. The nominees listed
below are currently directors of P-Com.
Each nominee for election has agreed to serve if elected, and
management has no reason to believe that such nominee will be unavailable to
serve. If the nominees are unable or decline to serve as a director at the time
of the annual meeting, the proxies will be voted for any nominee who may be
designated by the present board of directors to fill the vacancy. Unless
otherwise instructed, the proxy holders will vote the proxies received by them
FOR the nominees named below.
NOMINEES FOR TERM ENDING UPON THE 2006 ANNUAL MEETING OF STOCKHOLDERS
John A. Hawkins, 43, has served as a director of P-Com 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 of High End Systems and NTE, Inc.
Samuel Smookler, 63, has served as Chief Executive Officer and a
Director of P-Com since September 2003. Mr. Smookler served as Chief Executive
Officer and Chairman of Maxima Corporation, a developer of high capacity optical
wireless transmission systems from August 2002 to August 2003. Mr. Smookler
served as Chief Executive Officer and as a director of Stratex Networks from May
2000 through December 2001. Prior to such appointment, he served as President
and Chief Operating Officer of Stratex Networks from January 1998. Mr. Smookler
was President and Chief Operating Officer of Signal Technology Corporation, a
manufacturer of electronic components and subsystems, from February 1997 to
January 1998. He served as Vice President and General Manager of the
Interconnection Products Division of Augat Corporation, a manufacturer of
telecommunications connection products, from November 1994 to February 1997. Mr.
125
Smookler served as General Manager of a division of M/A-COM, Inc., a
manufacturer of radio and microwave communications products, from February 1992
to November 1994.
CONTINUING DIRECTOR FOR TERM ENDING UPON THE 2005 ANNUAL MEETING OF STOCKHOLDERS
George P. Roberts, 70, is a founder of P-Com and has served as Chief
Executive Officer and a Director from October 1991 to May 2001, and as interim
Chief Executive Officer since January 2002. Mr. Roberts resigned from his
position as interim Chief Executive Officer on September 1, 2003. Since
September 1993, he has also served as Chairman of the Board of Directors.
Brian T. Josling, 60, has served as Director of P-Com since September
1999. Since December 2000 until November 2002, he has served as the President of
Fuel Cells, Canada, the Canadian Association of fuel cell and hydrogen
companies. Mr. Josling is a professional corporate director having served on
twelve boards in Canada and the United States from 1993 to present. He also
currently serves on the board of directors of Membrane Reactor Technology Ltd.,
Wmode, Inc., and Conduit Ventures Ltd.
CONTINUING DIRECTOR FOR TERM ENDING UPON THE 2004 ANNUAL MEETING OF STOCKHOLDERS
Frederick R. Fromm, 54, has served as a Director of P-Com since June
2001. Since May 2003, Mr. Fromm has been President and Chief Executive Officer
of Gluon Networks, Inc. a telecommunications equipment company. From July 2000
to October 2001, he was President, and from Nov. 2001 to October 2002 he was
also Chief Executive Officer of Oplink Communications, Inc., an optical
components company. From October 1998 to July 2000 he was President and Chief
Executive Officer of Siemens Information and Communications Networks, Inc., a
telecommunications equipment company. From October 1996 to October 1998 he was
President and Chief Executive Officer of Siemens Telecom Networks, Inc. a
telecommunications equipment company.
BOARD COMMITTEES AND MEETINGS
The board of directors held 25 meetings and acted by unanimous written
consent 13 times during the fiscal year ended December 31, 2002. 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 2002.
The Audit Committee currently consists of two directors, Mr. Josling
and Mr. Fromm, subsequent to the resignation of Brigadier General Harold Johnson
(Ret.). The committee is primarily responsible for approving the services
performed by P-Com's independent accountants and reviewing their reports
regarding P-Com's accounting practices and systems of internal accounting
controls. The Audit Committee held 4 meetings during 2002. The Audit Committee
has a written charter.
The Compensation Committee currently consists of two directors, Mr.
Hawkins and Mr. Fromm, and is primarily responsible for reviewing and approving
P-Com's general compensation policies and setting compensation levels for its
executive officers. The Compensation Committee also has the authority to
administer P-Com's Employee Stock Purchase Plan and its 1995 Stock Option/Stock
Issuance Plan and to make option grants thereunder. The Compensation Committee
did not hold any meetings and acted by unanimous written consent 11 times during
2002.
DIRECTOR COMPENSATION
Non-employee directors do not receive cash compensation for their
services as directors.
Under the Automatic Option Grant Program as now contained in P-Com's
1995 Plan, each individual who first joins the board of directors as a
non-employee director will receive, at the time of such initial election or
appointment, an automatic option grant to purchase 8,000 shares of common stock,
126
provided such person has not previously been in P-Com's employ. In addition, on
the date of each annual stockholders meeting, each individual who continues to
serve as a non-employee director, whether or not such individual is standing for
re-election at that particular annual meeting, will be granted an option to
purchase 800 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
P-Com 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.
On August 13, 2003, under the Discretionary Option Grant Program, each
member of the board of directors received a discretionary option grant of
557,000 shares of common stock at an exercise price of $0.11 per share. Each
grant is contingent upon stockholder approval of the amendment to P-Com's 1995
Stock Option/Stock Issuance Plan. The contingent option grant will vest with
respect to 25% of the option shares upon the optionee's completion of one year
of service as a director. The remaining option shares shall vest in a series of
thirty-six successive equal monthly installments upon the completion of each
additional month of service as a director, such date measured from the
anniversary date of the vesting commencement date.
APPROVALS REQUIRED
Directors are elected by a plurality of the votes cast at the annual
meeting. This means that the two director nominees who receive the highest
number of votes will be elected to P-Com's board of directors.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The board of directors of P-Com recommends that the P-Com stockholders
vote FOR the election of each of the nominees named above.
P-COM'S PROPOSAL TO RATIFY THE SELECTION OF ITS INDEPENDENT AUDITORS
GENERAL
Effective August 7, 2003, P-Com agreed to retain Aidman, Piser &
Company as the principal accountant to audit P-Com's financial statements for
the fiscal year ending December 31, 2003. Concurrently with the agreement to
engage Aidman, Piser & Company, P-Com's former accountants,
PricewaterhouseCoopers LLP resigned as P-Com's independent accountants. P-Com's
board of directors approved the decision to change accountants.
During P-Com's two most recent fiscal years and any subsequent interim
period, there were no disagreements between P-Com and PricewaterhouseCoopers LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which disagreements, if not
resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused it
to make a reference to the subject matter of the disagreements in connection
with its reports.
The board of directors has selected Aidman, Piser & Company,
independent public accountants, to audit the financial statements of P-Com for
the fiscal year ending December 31, 2003, and recommends that stockholders vote
for ratification of such appointment. The affirmative vote of a majority of the
shares of P-Com stock represented and voting at the P-Com annual meeting is
required to ratify the selection of Aidman, Piser & Company. In the event of a
negative vote on ratification, the board of directors will reconsider its
selection. Even if the selection is ratified, the board of directors in its
discretion may direct the appointment of a different independent auditing firm
at any time during the year if the board of directors believes that such a
change would be in the best interests of P-Com and its stockholders.
127
A representative of Aidman Piser & Company is expected to be present at
the annual meeting, will have the opportunity to make a statement if he or she
desires to do so, and will be available to respond to appropriate questions.
Other than the provision of services by Aidman Piser & Company to P-Com
in connection with audit and tax engagements, neither Aidman Piser & Company nor
any of its affiliates has any relationship with P-Com or any of its affiliates,
except in the firm's capacity as P-Com's auditor.
APPROVALS REQUIRED
The affirmative vote of a majority of the shares of P-Com common stock
and Series C Preferred Stock present in person or represented by proxy and
entitled to vote at the P-Com annual meeting is required to approve this
proposal to ratify the selection Aidman Piser & Company as P-Com's independent
accountants.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The board of directors recommends that P-Com stockholders vote FOR the
ratification of the appointment of Aidman Piser & Company to serve as P-Com's
independent auditors for the fiscal year ending December 31, 2003.
P-COM'S 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 its "named executive
officers," who consist of P-Com's Chief Executive Officer, and each of P-Com's
four other most highly compensated executive officers, who were executive
officers on December 31, 2002 and whose salary and bonus for the fiscal year
ended December 31, 2002 was in excess of $100,000.
128
2002 SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-----------------------------------------------
LONG-TERM
COMPENSATION
AWARDS SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($)(1) BONUS ($) OPTIONS (#)
--------------------------- ---- ------------- --------- ----------------
George P. Roberts(2) 2002 145,670 - 915,443
Chairman of the Board of Directors and Former Chief Executive 2001 355,175 - -
Officer 2000 376,000 - 75,000
Alan T. Wright(3) 2002 214,524 - 65,000
Former Chief Operating Officer 2001 253,232 96,000 27,000
2000 164,307 25,000 38,000
Ben L. Jarvis(4) 2002 203,807 - 37,479
Former Executive Vice President & General Manager, P-Com Network 2001 242,019 - 14,000
Services 2000 151,538 - 20,000
Caroline Baldwin Kahl(5) 2002 150,169 - 27,415
Former Vice President and General Counsel 2001 171,259 - 12,000
2000 145,961 - 5,000
Leighton J. Stephenson(6) 2002 171,522 - 55,000
Former Vice President & Administration and Chief Financial 2001 197,484 - 10,000
Officer 2000 66,153 - 45,000
Randall L. Carl 2002 158,650 11,400 45,000
Senior Vice President, Worldwide Sales 2001 - - -
2000 - - -
-----------
(1) Includes amounts deferred under P-Com's 401(k) Plan.
(2) Mr. Roberts resigned from his position as Chief Executive Officer
effective September 1, 2003. Mr. Roberts remains as Chairman of the
board of directors of P-Com.
(3) Mr. Wright's employment with P-Com was terminated effective July 24,
2003.
(4) Mr. Jarvis' employment with P-Com was terminated effective June 30,
2003.
(5) Ms. Kahl resigned from P-Com effective March 14, 2003.
(6) Mr. Stephenson resigned from P-Com effective April 1, 2003.
129
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option
grants made to each of the named executive officers for the 2002 fiscal year. No
stock appreciation rights were granted to these individuals during such fiscal
year.
INDIVIDUAL GRANT POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION FOR OPTION
TERM(1)
NUMBER OF % OF TOTAL EXERCISE PRICE EXPIRATION DATE 5%($) 10%($)
---------- ----------- --------------- --------------- ----- ------
SECURITIES OPTIONS ($/SH)
UNDERLYING GRANTED TO
OPTIONS GRANTED EMPLOYEES IN
(#) FISCAL YEAR
George P. Roberts.............. 413,999 23.18 $1.10 02/04/12 $286,398 $725,789
83,667 4.68 0.75 03/22/12 39,463 100,008
417,777 23.39 0.90 04/24/12 18,780 37,600
Alan T. Wright................. 65,000 3.64 1.10 02/04/12 44,966 113,953
Ben L. Jarvis.................. 37,479 2.10 1.10 02/04/12 25,928 65,705
Caroline Baldwin Kahl.......... 27,415 1.53 1.10 02/04/12 18,966 48,062
Leighton J. Stephenson......... 55,000 3.10 1.10 02/04/12 38,048 96,421
Randall L. Carl................ 25,000 1.40 1.10 02/04/12 17,295 43,828
20,000 1.12 0.90 04/24/12 11,320 28,687
-----------
(1) P-Com cannot assure any executive officer or any other holder of its
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
P-Com, at the option exercise price paid per share, should the
individual cease service with P-Com 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)
P-Com be acquired by asset purchase 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 P-Com.
(3) Each option granted on 02/04/02 is exercisable upon the latter of (i) 6
months from the date of grant or (ii) stockholder approval of an
increase to the share reserve for (50%) of the option shares upon the
completion of one (1) year of service measured from the vesting
commencement date and for the balance of the option shares in a series
of twelve (12) successive equal monthly installments upon completion of
each additional month of service over twelve (12) month period measured
from the first anniversary of the vesting commencement date.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The table below sets forth certain information with respect to the
named executive officers concerning the exercise of options during 2002 and
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unexercised options held by such individuals as of the end of such fiscal year.
No stock appreciation rights were exercised during 2002 nor were any stock
appreciation rights outstanding at the end of such fiscal year.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE MONEY
SHARES ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END (#) OPTIONS AT FISCAL YEAR-END(1)
NAME EXERCISE (#) REALIZED ($)(2) EXERCISABLE (3) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------------- -------------- --------------- ------------- ----------- -------------
George P. Roberts................. - $- 598,681 674,429 $- $-
Alan T. Wright.................... - - 39,059 90,941 - -
Ben L. Jarvis..................... - - 23,522 51,436 - -
Caroline Baldwin Kahl............. - - 19,805 35,025 - -
Leighton J. Stephenson............ - - 30,099 79,901 - -
Randall L. Carl................... - - 17,708 52,292 - -
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(1) Based on the fair market value of the option shares at the end of 2002
fiscal year ($0.19 per share based on the closing selling price on the
NASDAQ National Market as of December 31, 2002) less the exercise
price.
(2) Based on the fair market value of the shares on the exercise date less
the exercise price paid for those shares.
(3) The options are immediately exercisable for all the options shares.
However, any shares purchased under the options are subject to
repurchase by P-Com, 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, 2002, the following number of shares were
unvested: Mr. Roberts- 674,429 shares; Mr. Stephenson- 79,901 shares;
Mr. Wright- 90,941 shares; Mr. Jarvis- 51,436 shares; and Ms. Kahl-
35,025 shares; and Mr. Carl- 52,292 shares. The table shows these as
"unexercisable."
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT ARRANGEMENTS AND CHANGE OF
CONTROL AGREEMENTS
The Compensation Committee of the Board of Directors, as Plan
Administrator of the 1995 Stock Option/Stock Issuance Plan, has the authority to
provide for accelerated vesting of the shares of common stock subject to any
outstanding options held by the Chief Executive Officer and any other executive
officer or any unvested share issuances actually held by such individual, in
connection with certain changes in control of P-Com or the subsequent
termination of the officer's employment following the change in control event.
P-Com has entered into severance agreements (the "Agreements") with
George Roberts, Chairman of the Board of Directors and Acting Chief Executive
Officer, Leighton J. Stephenson, former Chief Financial Officer and Vice
President, Finance and Administration, and Ben L. Jarvis, Executive Vice
President and General Manager, P-Com Network Services, Inc., (individually, the
"Officer" and collectively the "Officers"), dated May 31, 2001, December 7,
2000, and December 7, 2000 respectively. Each of these Agreements provides for
the following benefits should the Officer's employment terminate, either
voluntarily or involuntarily, for any reason within twenty-four (24) months
following a change in control: (a) a severance payment in an amount equal to two
(2) times his annual rate of base salary; (b) a bonus for Mr. Stephenson in an
amount equal to the greater of either (i) two (2) times the full amount of the
Officer's target bonus for the fiscal year in which the termination occurs or
(ii) two (2) times the full amount of his target bonus for the fiscal year in
which a change in control occurs, and a bonus for Mr. Roberts in an amount equal
to the target bonus specified for the fiscal year in which involuntary
termination occurs; (c) the shares subject to each outstanding option held by
the Officer (to the extent not then otherwise fully vested) will automatically
vest so that each such option will become immediately exercisable for all the
option shares as fully-vested shares; and (d) P-Com will, at its own expense,
provide Mr. Stephenson and his dependants with continued health care coverage
131
from the earlier of 24 months from termination or the first date that they are
covered under another employer's benefit program, and for Mr. Roberts and his
dependents continued health care coverage for their lives. A change in control
will be deemed to occur under the Agreements upon: (a) an asset purchase or
consolidation in which securities possessing fifty percent (50%) or more of the
total combined voting power of P-Com's outstanding securities are transferred to
a person or persons different from the persons holding those securities
immediately prior to such transaction, (b) the sale, transfer or other
disposition of all or substantially all of the assets of P-Com in complete
liquidation or dissolution of P-Com; (c) a hostile take-over of P-Com, whether
effected through a tender offer for more than twenty-five percent (25%) of
P-Com'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
P-Com or a person that directly or indirectly controls, is controlled by, or is
under common control with, P-Com), 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 P-Com's
outstanding securities pursuant to a tender or exchange offer made directly to
P-Com'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.
In addition to the above severance agreements, P-Com also entered into
certain benefits agreements, with Mr. Stephenson, Mr. Jarvis and Alan T. Wright,
Chief Operating Officer, dated April 8, 2002. Each of these agreements provides
for the following benefits should the officers' employment terminate
involuntarily:
o salary continuation payments in an aggregate amount equal to
the greater of the officers' annual base salary in effect
immediately prior to the involuntary termination of the
officer's base salary in effect as of January 1, 2002;
o unvested options held by the officers will continue to vest
for a period of one year following the date of the involuntary
termination, and all vested but unexercised options will
remain exercisable until the expiration of the one-year period
following the date of the involuntary termination;
o a lump sum payment for all unpaid vacation days accrued by the
officer through the date of the involuntary termination; and
o indemnification of the officer to the same extent provided for
other officers and directors under P-Com's restated
certificate of incorporation, bylaws, indemnification
agreements and insurance policies.
Mr. Jarvis' employment with P-Com was terminated effective June 30,
2003. In connection with his termination, Mr. Jarvis entered into a letter
agreement with P-Com, dated October 24, 2003 thereby terminating his benefits
agreement dated April 18, 2002. The letter agreement provides for (a) severance
payments totaling $122,040.06 in bi-weekly installments, beginning July 1, 2003
and ending July 1, 2005; (b) an amount equal to the cost to P-Com to continue
health care benefits under COBRA for a period of nine (9) months, such payments
to be paid in lieu of payments made by P-Com to continue his health care
benefits under COBRA; and (c) all outstanding unvested options to acquire common
stock on the termination date shall continue to vest and shall remain
exercisable until June 30, 2004. In the event that Mr. Jarvis finds employment
paying an annual salary equal to half of the aggregate severance payment during
the twelve months following July 1, 2003, the severance and COBRA payments shall
terminate.
Mr. Wright's employment with P-Com was terminated effective July 24,
2003. In connection with his termination, Mr. Wright entered into a letter
132
agreement with P-Com, dated August 18, 2003 thereby terminating his benefits
agreement dated April 18, 2002. The letter agreement provides for (a) severance
payments totaling $133,500 in bi-weekly installments, beginning July 11, 2003
and ending July 11, 2005; (b) P-Com shall pay continuation of health benefits
under COBRA for a period of twelve (12) months from the date of termination. In
the event that Mr. Wright finds employment paying an annual salary equal to half
of the aggregate severance payment during the twelve months following August 1,
2003, the severance and COBRA payments shall terminate.
P-Com has entered into an Employment and Continuity of Benefits
Agreement with George P. Roberts, dated May 31, 2001, outlining his continued
employment with P-Com as Chairman of the Board following his resignation as
Chief Executive Officer on May 30, 2001.
The agreement provides for (a) an employment period commencing May 31,
2001 through May 30, 2002. Should this agreement remain in effect through May
30, 2002 then Mr. Roberts' employment under this agreement shall automatically
renew for another one-year term commencing May 31, 2002 and continuing through
May 30, 2003, unless written notice of non-renewal is received from Mr. Roberts
on or before May 1, 2002; (b) termination of employment may be effected by (1)
resignation by Mr. Roberts with at least 60 days prior written notice, (2)
termination for cause by majority vote of the Board, or (3) failure of P-Com's
stockholders to re-elect Mr. Roberts to the Board; (c) cash compensation will be
paid to Mr. Roberts' in a base salary in accordance with P-Com's payroll
practices for salaried employees; (d) a target bonus equal to a percentage of
Mr. Roberts base salary may be earned in accordance with P-Com's management
incentive program, and shall be determined by the Board; (e) throughout the
employment period, Mr. Roberts shall be eligible to participate in all benefit
plans that are made available to P-Com's executives and for which Mr. Roberts
qualifies.
P-Com has entered into a letter agreement with George P. Roberts, dated
April 28, 2003, thereby extending the employment period under the Employment and
Continuity of Benefits Agreement with Mr. Roberts through May 30, 2005. The
letter agreement provides for the amendment of the Employment and Continuity of
Benefits Agreement upon the assignment of a new Chief Executive Officer of
P-Com. Effective September 1, 2003, due his resignation and the appointment of a
new Chief Executive Officer of P-Com, Mr. Roberts' salary will amount to half
his salary prior to recent reductions, with one half of the salary, $188,000,
paid in cash, and the other half paid in common stock of P-Com.
P-Com 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, subject to the agreements described above.
In addition to the indemnification provisions contained in P-Com's
certificate of incorporation and bylaws, P-Com has entered into separate
indemnification agreements with each of its directors and officers. These
agreements require P-Com, 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 P-Com) 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 P-Com.
P-COM'S COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of P-Com's board of directors currently
consists of Mr. Fromm and Mr. Hawkins. Neither of these individuals was an
officer or employee of P-Com at any time during the 2002 Fiscal Year or at any
other time, nor did they have a business relationship with P-Com.
133
No executive officer of P-Com 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 P-Com's board of directors
or Compensation Committee.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF P-COM ON
EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is responsible for
establishing the base salary and incentive cash bonus programs for P-Com's
executive officers. The Committee also has the exclusive responsibility for the
administration of P-Com's 1995 Stock Option/Stock Issuance Plan, under which
grants may be made to executive officers and other key employees of P-Com.
Compensation Philosophy
Since the initial public offering of P-Com common stock in March 1995,
it has been the Committee's policy and objective to provide P-Com's executive
officers and other key employees with competitive compensation opportunities
based upon their contribution to the financial success of P-Com, the enhancement
of corporate and stockholder values, the market levels of compensation in effect
at companies with which P-Com competes for executive talent, the financial
resources of P-Com 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 2002 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 overall compensation contingent upon P-Com'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 P-Com competes for executive talent, (ii) annual
performance awards payable in cash and based upon P-Com's financial performance
and the market performance of its common stock and (iii) long-term equity
incentive awards with overlapping vesting schedules that strengthen the
mutuality of interests between the executive officers and P-Com's stockholders
while fostering retention of existing personnel.
The Committee recognizes that the highly specialized industry sector in
which P-Com operates is extremely competitive, yet in 2003 was and continued to
be subjected to extreme economic downturn with significant reduction in force
actions prevalent across most companies in the sector. The current market is one
of soft demand for industry-specific executives, particularly in the engineering
and/or operations management areas. It is crucial that P-Com reward and be
assured of retaining the executive personnel essential to the attainment of
P-Com's performance goals, and who can successfully manage organizations through
distressed economic times. For these reasons, the Committee believes executive
compensation arrangements must remain competitive with those offered by other
companies of similar complexity and performance records (the "peer group"), but
must realistically track P-Com's present financial condition in order to provide
adequate incentive to P-Com's executive officers to continue to provide services
to P-Com.
Cash Compensation
A key objective of P-Com's current executive compensation program is to
position its key executives to earn cash compensation reflective of peer groups
in the current industry climate. During 2002, the Committee reviewed and relied
on technology industry compensation surveys in its assessment of appropriate
compensation levels.
134
The fiscal year 2002 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 current
financial condition of P-Com. Base salary decisions are made as part of a formal
review process. Along with all exempt employees, each executive officer's salary
was reduced by 10% of base salary in April 2002 and again by 20% of base salary
in July 2002.
The annual incentive compensation provided to P-Com's executive
officers is in the form of cash bonuses based on the Committee's assessment of
P-Com's financial performance for the year, the individual officer's
contribution to that performance, and individual compensation incentive goals.
For the 2002 fiscal year, the Committee recommended a bonus payment of $11,400
to Randall L. Carl, Executive Vice-President of Sales for meeting certain
performance objectives. No cash bonus was awarded to any other 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 P-Com from the perspective of an owner
with an equity stake in the business. Each grant allows the individual to
acquire shares of P-Com 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 P-Com. Accordingly, the option will provide a return to the
executive officer only if the executive officer remains employed by P-Com 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 P-Com, 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 P-Com 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 P-Com's executive
officers.
Chief Executive Officer Performance and Compensation
Mr. George Roberts was elected interim Chief Executive Officer
effective January 2002 and did not receive any additional salary over and above
his base compensation as Chairman of the Board of Directors during the year.
Mr. Roberts was granted 413,999 non-qualifying stock options with an
exercise price of $1.10, 83,667 non-qualifying stock options with an exercise
price of $0.75, and 417,777 non-qualifying stock options with an exercise price
of $0.90 during the fiscal year. The grants were made in significant part to
provide an incentive to Mr. Roberts in light of two substantial salary
reductions that occurred during the fiscal year, resulting in a monthly salary
of $2,340 subsequent to May 2002.
In the committee's view, the total compensation package provided to Mr.
Roberts for the 2002 fiscal year is appropriate in the markets the industry
served, in light of P-Com's financial condition.
135
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 P-Com's
executive officers for the 2002 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 its executive officers for fiscal 2003 will exceed that limit.
Options granted under P-Com'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 P-Com'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 P-Com'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 P-Com's executive officers
provide an appropriate level of total remuneration which properly aligns P-Com's
performance and the interests of P-Com's stockholders with competitive and
equitable executive compensation in a balanced and reasonable manner, for both
the short and long-term.
M. Frederick Fromm
Member, Compensation Committee
John A. Hawkins
Member, Compensation Committee
OWNERSHIP OF P-COM'S SECURITIES
The following table sets forth certain information known to P-Com with
respect to the beneficial ownership of P-Com's common stock as of June 30, 2003,
by (i) all persons who are beneficial owners of five percent (5%) or more of
P-Com's common stock, (ii) each director of P-Com, (iii) each person that served
as P-Com's Chief Executive Officer in 2002, (iv) four other persons serving as
executive officers of P-Com on December 31, 2002 who were the most highly
compensated by P-Com in 2002, and (v) all current directors and executive
officers as a group. Each of the stockholders has sole voting and investment
136
power with respect to the shares beneficially owned, subject to community
property laws, where applicable.
BENEFICIAL OWNER SHARES PERCENTAGE
BENEFICIALLY OF SHARES
OWNED (#) BENEFICIALLY
OWNED(1)
Cagan McAfee Capital Partners LLC 3,000,000 7.48
10600 North De Anza Boulevard, Suite 250
Cupertino, CA 95014
State of Wisconsin Investment Board 2,292,857 5.72
P.O. Box 7842
Madison, WI 53707
John A. Hawkins(2)......................................................................... 29,666 *
Brian T. Josling(3)........................................................................ 39,166 *
Frederick R. Fromm(4)...................................................................... 28,966 *
Gen. Harold R. Johnson (Ret.)(5)........................................................... 6,800 *
George P. Roberts(6)....................................................................... 1,150,672 2.87
Alan T. Wright(7).......................................................................... 89,626 *
Ben L. Jarvis(8)........................................................................... 52,756 *
Leighton J. Stephenson(9).................................................................. 1,487 *
Caroline Baldwin Kahl(10).................................................................. 1,450 *
Randall L. Carl(11)........................................................................ 126,249 *
All current directors and executive officers as a group (7 persons) (12)................... 1,445,106 3.6
-----------
* Less than one percent of the outstanding common stock.
(1) Percentage of ownership is based on 40,117,644 shares of common stock
outstanding on June 30, 2003. Shares of common stock subject to stock
options that are currently exercisable or will become exercisable
within 60 days after June 30, 2003 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) Includes 29,666 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after
June 30, 2003.
(3) Includes 33,166 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after
June 30, 2003.
(4) Includes 28,966 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after
June 30, 2003.
(5) Includes 6,800 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after
June 30, 2003. Gen. Johnson (Ret.) resigned from P-Com's Board
effective January 16, 2003.
(6) Includes 1,090,568 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after
June 30, 2003. Mr. Roberts resigned as Chief Executive Officer on
September 1, 2003. Mr. Roberts remains the Chairman of the board of
directors.
(7) Includes 88,579 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after
June 30, 2003. Mr. Wright resigned from P-Com effective June 24, 2003.
137
(8) Includes 52,756 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after
June 30, 2003. Mr. Jarvis resigned from P-Com effective June 30, 2003.
(9) Includes 0 shares issuable upon exercise of options that are currently
exercisable or will become exercisable within 60 days after June 30,
2003. Mr. Stephenson resigned from P-Com effective April 1, 2003.
(10) Includes 0 shares issuable upon exercise of options that are currently
exercisable or will become exercisable within 60 days after June 30,
2003. Ms. Kahl resigned from P-Com effective March 14, 2003.
(11) Includes 45,623 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after
June 30, 2003.
(12) Includes 1,289,038 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after
June 30, 2003.
STOCK PERFORMANCE GRAPH FOR 1996 - 2002
The graph depicted below shows a comparison of cumulative total
stockholder returns for P-Com, the Standard & Poor's 500 Index and the Standard
& Poor's Communications Equipment Manufacturers Index.
GRAPH CHART
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(1) The graph assumes that $100 was invested on January 1,1996, in P-Com
common stock and in each index, and that all dividends were reinvested.
No cash dividends have been declared on P-Com common stock.
(2) Stockholder returns over the indicated period should not be considered
indicative of future stockholder returns.
Notwithstanding anything to the contrary set forth in any of P-Com'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 P-Com 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 P-Com under those
statutes.
138
CERTAIN TRANSACTIONS
All future transactions between P-Com 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 P-Com than could be obtained from unaffiliated third
parties.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The members of the board of directors, the executive officers of P-Com
and persons who hold more than 10% of P-Com's outstanding common stock are
subject to the reporting requirements of Section 16(a) of the Securities
Exchange Act of 1934, that require them to file reports with respect to their
ownership of the common stock and their transactions in such common stock. Based
upon (i) the copies of Section 16(a) reports that P-Com received from such
persons for their 2002 fiscal year transactions in the common stock and their
common stock holdings, and (ii) the written representations received from one or
more of such persons that no annual Form 5 reports were required to be filed by
them for the 2002 Fiscal Year, P-Com believes that all reporting requirements
under Section 16(a) for such fiscal year were met in a timely manner by its
directors, executive officers and greater than 10% beneficial owners.
DESCRIPTION OF P-COM'S SECURITIES
This section describes the material terms of P-Com's capital stock, its
restated certificate of incorporation as currently in effect and as amended
immediately following the completion of the Acquisition. This section also
summarizes relevant provisions of the Delaware General Corporation Law, which is
referred to as Delaware law.
AUTHORIZED CAPITAL STOCK
Total Shares. P-Com is currently authorized to issue a total of 71,000,000
shares of capital stock consisting of:
o 69,000,000 shares of common stock, par value $0.0001 per
share; and
o 2,000,000 shares of preferred stock, par value $0.0001 per
share.
If P-Com's proposal to amend its certificate of incorporation to
increase the number of authorized shares of common stock is approved, P-Com will
be authorized to issue a total of 702,000,000 shares of capital stock consisting
of:
o 700,000,000 shares of common stock, par value $0.0001 per
share; and
o 2,000,000 shares of preferred stock, par value $0.0001 per
share.
P-COM COMMON STOCK
Holders of P-Com common stock are entitled to one vote for each share
held on all matters submitted to a vote of the P-Com stockholders. Holders of
P-Com common stock are entitled to receive dividends, ratably, if any, as may be
declared by the P-Com board of directors out of legally available funds, subject
to any preferential dividend rights of any outstanding preferred stock. If P-Com
liquidates, dissolves or winds up, the holders of P-Com common stock are
entitled to share ratably in all assets remaining after satisfaction of
liabilities and the liquidation preference of any then outstanding shares of
preferred stock. Holders of common stock have no preemptive rights and no right
139
to convert their common stock onto any other securities. There are no redemption
or sinking fund provisions applicable to the P-Com common stock. The rights,
preferences and privileges of holders of P-Com common stock are subject to, and
may be adversely affected by, the rights of holders of shares of any series of
preferred stock which P-Com may designate and issue in the future without
further stockholder approval.
Following the completion of the Acquisition, P-Com anticipates that
approximately 584,964,229 shares of its common stock will be outstanding, of
which, approximately 498,729,887 shares of common stock will be reserved for
issuance upon conversion or exercise of outstanding convertible securities.
P-COM PREFERRED STOCK
The P-Com board of directors is authorized to issue from time to time,
without further stockholder approval, up to an aggregate of 2,000,000 shares of
preferred stock in one or more series and to fix or alter the designations,
preferences, rights and any qualifications, limitations or restrictions of the
shares of each series, including the dividend rights, dividend rates, conversion
rights, voting rights, term of redemption, including sinking fund provisions,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of any series. P-Com may issue P-Com
preferred stock in ways which may delay, defer or prevent a change in control of
P-Com without further action by P-Com stockholders and may adversely affect the
voting and other rights of the holders of P-Com common stock. The issuance of
P-Com preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of P-Com common stock, including the loss of voting
control to others. P-Com has no present plans to issue any shares of preferred
stock.
Series A Preferred Stock. P-Com has designated 500,000 shares of its preferred
stock as Series A Junior Participating Preferred Stock, which are issuable under
certain circumstances under P-Com's stockholder rights plan. No shares of Series
A Preferred Stock are currently issued or outstanding.
Series B Preferred Stock. P-Com has designated 1,000,000 shares of its
preferred stock as Series B Convertible Preferred Stock, of which approximately
1,000,000 shares were issued and outstanding as of the record date.
The holders of P-Com's Series B Preferred Stock are entitled to receive
dividends when and if declared by P-Com's board of directors and to share
pro-rata (on an as-converted basis) in all dividends and other distributions
when and if declared by P-Com's board of directors with respect to P-Com's
common stock.
The Series B Preferred Stock has a face value of $21.138 per share and
is convertible into a number of shares of common stock equal to the face value
plus accrued dividends, if any, divided by a conversion price of $0.20 per
share. Each share of Series B Preferred Stock may be converted into shares of
P-Com common stock at the option of the holder at any time. Furthermore, P-Com
may require the conversion of all outstanding shares of Series B Preferred Stock
into shares of its common stock if the following conditions, among others, are
met:
o the closing bid price of P-Com common stock equals or exceeds
$0.40 per share for the 10 consecutive trading days prior to
the conversion;
o a registration statement covering the resale of all shares of
P-Com common stock issuable upon conversion of the Series B
Preferred Stock is declared effective by the SEC; and
o the shares of P-Com common stock issuable upon conversion of
the Series B Preferred Stock are authorized and reserved for
issuance.
The holders of the Series B Preferred Stock have agreed to convert
their shares of Series B Preferred Stock into shares of common stock, subject to
certain limitations, upon approval by stockholders of the amendment to P-Com's
140
certificate of incorporation to increase the number of shares of common stock
authorized for issuance from 69,000,000 to 700,000,000 shares.
The holders of the Series B Preferred Stock have the right to require
P-Com to purchase all or part of their shares of Series B Preferred Stock for
cash upon the occurrence of certain events, including, among others, the
following:
o P-Com or any of its subsidiaries makes an assignment for the
benefit of creditors;
o P-Com or any of its subsidiaries institutes bankruptcy,
insolvency, reorganization or liquidation proceedings or any
other proceeding for the relief of debtors;
o P-Com sells substantially all of its assets, merges or
consolidates with another company, or engages in a transaction
or series of transactions that results in a third-party owning
more than 50% of its outstanding common stock;
o P-Com fails to make any payment on any of its indebtedness in excess
of $250,000.
In the event of the liquidation of P-Com, the holders of Series B
Preferred Stock have the preferential right to receive the face value of their
shares of Series B Preferred Stock plus any accrued and unpaid dividends before
any amounts are distributed to the holders of P-Com's common stock or Series A
Preferred Stock.
The holders of Series B Preferred Stock are not entitled to any voting
rights.
Series C Preferred Stock. P-Com has designated 10,000 shares of its preferred
stock as Series C Convertible Preferred Stock, of which approximately 8,370
shares were issued and outstanding as of the record date.
The holders of P-Com's Series C Preferred Stock are entitled to receive
dividends at the rate of 6% per annum commencing one year after their issuance
and at the rate of 8% per annum commencing two years after their issuance.
The Series C Preferred Stock has a face value of $1,750 per share and
is convertible into a number of shares of common stock equal to the face value
plus accrued dividends, if any, divided by a conversion price of $0.10 per
share. Each share of Series C Preferred Stock may be converted into shares of
P-Com common stock at the option of the holder at any time, subject to
stockholder approval of P-Com's proposal to increase the number of authorized
shares of common stock. Furthermore, P-Com may require the conversion of all
outstanding shares of Series C Preferred Stock into shares of its common stock
if the following conditions, among others, are met:
o the closing bid price of P-Com common stock equals or exceeds
$0.20 per share for the 10 consecutive trading days prior to
the conversion;
o a registration statement covering the resale of all shares of
P-Com common stock issuable upon conversion of the Series C
Preferred Stock is declared effective by the SEC; and
o the shares of P-Com common stock issuable upon conversion of
the Series C Preferred Stock are authorized and reserved for
issuance.
The holders of the Series C Preferred Stock have the right to require
P-Com to purchase all or part of their shares of Series C Preferred Stock for
cash upon the occurrence of certain events, including, among others, the
following:
o P-Com or any of its subsidiaries makes an assignment for the
benefit of creditors;
o P-Com's stockholders do not approve P-Com's proposals to
increase the number of authorized shares of common stock and
to approve the issuance of the Series C Preferred Stock;
141
o P-Com or any of its subsidiaries institutes bankruptcy,
insolvency, reorganization or liquidation proceedings or any
other proceeding for the relief of debtors;
o P-Com sells substantially all of its assets, merges or
consolidates with another company, or engages in a transaction
or series of transactions that results in a third-party owning
more than 50% of its outstanding common stock;
o P-Com fails to make any payment on any of its indebtedness in
excess of $250,000.
In the event of the liquidation of P-Com, the holders of Series C
Preferred Stock have the preferential right to receive the face value of their
shares of Series C Preferred Stock plus any accrued and unpaid dividends before
any amounts are distributed to the holders of P-Com's common stock, Series A
Preferred Stock or Series B Preferred Stock.
The holders of Series C Preferred Stock are entitled to vote together
with the holders of P-Com common stock on all matters submitted to P-Com's
stockholders and to cast a number of votes equal to the number of shares of
P-Com common stock issuable upon conversion of their shares of Series C
Preferred Stock.
P-COM STOCKHOLDER RIGHTS PLAN
P-Com currently has in effect a stockholder rights plan, which is
governed by the terms and conditions contained in the Amended and Restated
Rights Agreement, dated as of January 24, 2001, between P-Com and Fleet National
Bank, as rights agent. In the event that P-Com is acquired in a asset purchase
or other business combination transaction or 50% or more of its consolidated
assets or earning power are sold, each holder of P-Com common stock will have
the right to receive 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 right. In the event that any person becomes the
beneficial owner of 15% or more of the outstanding shares of P-Com's common
stock proper provision shall be made so that each holder of P-Com common stock,
other than the acquiring person, will thereafter have the right to receive that
number of shares of common stock or preferred stock (or cash, other securities
or property) of P-Com having a market value of two times the exercise price of
the right.
The rights plan has certain anti-takeover effects. The rights plan will
cause substantial dilution to a person or group that attempts to acquire P-Com
on terms not approved by P-Com's board of directors. The rights plan should not
interfere with any asset purchase or other business combination approved by the
board of directors because the rights granted to each holder of common stock may
be redeemed by P-Com prior to such asset purchase or other business combination.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND P-COM'S CERTIFICATE OF
INCORPORATION AND BYLAWS
Provisions of Delaware law and P-Com's organizational documents could
make the acquisition of P-Com and the removal of incumbent officers and
directors more difficult. These provisions are expected to discourage some
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of P-Com to negotiate with it first. P-Com
believes that the benefits of increased protection of its potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to acquire
or restructure P-Com outweigh the disadvantages of discouraging such proposals
because, among other things, that negotiation could result in an improvement of
their terms.
P-Com is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, this statute prohibits a publicly-held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date that the
142
person became an interested stockholder unless (with certain exceptions) the
business combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes an asset purchase, asset or stock sale, or other
transaction resulting in a financial benefit to the stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
P-Com's restated certificate of incorporation also provides that
P-Com's board of directors shall be classified into three classes of directors,
with the term of office of each class expiring in successive years. In any given
year, only those directors of a particular class will have their terms of office
expire, preventing the replacement or removal of a majority of the board in any
single election. Furthermore, under Delaware law, directors of a corporation
with a classified board may be removed only for cause unless the corporation's
restated certificate of incorporation provides otherwise. P-Com's restated
certificate of incorporation does not provide otherwise.
These provisions may have the effect of delaying, deferring or
preventing a change in control of P-Com without further action by its
stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for P-Com's common stock is EquiServe
Trust Company, N.A.
QUOTATION
P-Com common stock is quoted on the OTC Bulletin Board under the symbol
"PCOM." The par value of P-Com's common stock is $0.0001 per share. The holders
of the common stock shall be entitled to receive dividends, when and as declared
by the board of directors of P-Com. The common stock is not redeemable (except
for repurchases of common stock held by employees upon termination of
employment).
SUBMISSION OF STOCKHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended, stockholders may present proper proposals for inclusion in a company's
proxy statement and for consideration at the next annual meeting of its
stockholders by submitting their proposals to the company in a timely manner.
Each stockholder may submit no more than one proposal, and that proposal,
including any accompanying supporting statement, may not exceed 500 words.
Additionally, eligibility to submit a proposal must be demonstrated by the
stockholder by delivering to P-Com or SPEEDCOM, as applicable, a written
statement from the record holder of the stockholder's securities, verifying
that, at the time the proposal was submitted, the stockholder, for at least one
year, continuously held P-Com or SPEEDCOM securities, as applicable, with a
market value of $2,000 or more. The stockholder must also submit a written
statement stating that the stockholder intends to continue to hold the
securities through the date of the meeting of the stockholders.
P-Com. Proposals of P-Com stockholders that are intended to be presented at
P-Com's 2004 annual meeting of stockholders must be received by P-Com at its
corporate offices no later than May 6, 2004, 2004 in order to be considered for
possible inclusion in the proxy statement and form of proxy relating to the 2004
annual meeting. If a stockholder intends to submit a proposal at the 2004 annual
meeting of stockholders which is not submitted in time to be eligible for
inclusion in the proxy statement relating to that meeting, the stockholder must
give notice to P-Com no later than June 4, 2004, in accordance with the
requirements set forth in the Securities Exchange Act of 1934, as amended. If a
stockholder fails to comply with the foregoing notice provisions, the proposal
may not be brought before the meeting. All notices of proposals by stockholders,
whether or not to be included in P-Com's proxy materials, should be sent to:
143
P-Com, Inc., 3175 S. Winchester Boulevard, Campbell, California 95008,
Attention: Secretary.
SPEEDCOM. Proposals of SPEEDCOM stockholders that are intended to be presented
at SPEEDCOM's 2004 annual meeting of stockholders must be received by SPEEDCOM
at its corporate offices no later than December 2, 2003 in order to be
considered for possible inclusion in the proxy statement and form of proxy
relating to the 2004 annual meeting. If a stockholder intends to submit a
proposal at the 2004 annual meeting of stockholders which is not submitted in
time to be eligible for inclusion in the proxy statement relating to that
meeting, the stockholder must give notice to SPEEDCOM no later than December 2,
2003, in accordance with the requirements set forth in the Securities Exchange
Act of 1934, as amended. If a stockholder fails to comply with the foregoing
notice provisions, the proposal may not be brought before the meeting. All
notices of proposals by stockholders, whether or not to be included in
SPEEDCOM's proxy materials, should be sent to: SPEEDCOM Wireless Corporation,
7020 Professional Parkway East, Sarasota, Florida 34240, Attention: Secretary.
INCORPORATION OF OTHER DOCUMENTS BY REFERENCE
The SEC allows SPEEDCOM to "incorporate by reference" information that
they file with the SEC, which means that SPEEDCOM can disclose important
information to you by referring you to those documents. You may read and copy
any materials we file with the SEC at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
information incorporated by reference is an important part of this joint proxy
statement. We incorporate by reference the documents listed below under Item
13(b) and Item 14(e) of Schedule 14A of Regulation 14A under the Securities
Exchange Act of 1934, as amended:
o SPEEDCOM's Annual Report on Form 10-KSB for the year ended
December 31, 2002, filed with the SEC on April 11, 2003.
o SPEEDCOM's Quarterly Report on Form 10-QSB for the quarterly
period ended June 30, 2003, filed with the SEC on August 14,
2003.
If so requested, SPEEDCOM will provide a copy of the incorporated
filing(s), without charge, by first class mail or equally prompt means within
one business day of its receipt of your request. Please send your requests by
writing to Mr. Gil Sharell, at SPEEDCOM's principal executive offices, located
at 7020 Professional Parkway East, Sarasota, Florida 34240.
OTHER MATTERS
P-Com and SPEEDCOM know of no other matters that will be presented for
consideration at the annual meeting of P-Com stockholders and the special
meeting of SPEEDCOM stockholders. If any other matters properly come before the
annual meeting of P-Com stockholders or the special meeting of SPEEDCOM
stockholders, it is the intention of the persons named in the enclosed form of
proxy to vote the shares they represent as the board of directors of P-Com or
SPEEDCOM, as the case may be, may recommend. Discretionary authority with
respect to such other matters is granted by the execution of the enclosed proxy.
THE BOARD OF DIRECTORS OF P-COM, INC.
THE BOARD OF DIRECTORS OF SPEEDCOM
WIRELESS CORPORATION
Dated: October 31, 2003
144
FINANCIAL STATEMENTS P-COM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
PAGE
Financial Statements:
Report of Independent Auditors......................................................................... F-2
Consolidated Balance Sheets at December 31, 2002, 2001 and 2000........................................ F-3
Consolidated Statements of Operations for the years ended December 31, 2002, 2001, and 2000............ F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Loss for the years ended December 31, F-5
2002, 2001, and 2000...........................................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000............ F-6
Notes to Consolidated Financial Statements............................................................. F-7
Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts.......................................................... F-32
Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002................................ F-33
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2002...... F-34
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002................ F-35
Notes to Condensed Consolidated Financial Statements........................................................... F-36
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.
F-1
REPORT OF INDEPENDENT AUDITORS
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, 2002, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has suffered recurring losses
from operations and has an accumulated deficit that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. These financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for goodwill effective January 1, 2002.
As discussed in Note 3 to the consolidated financial statements, the
Company changed its method of accounting associated with revenue recognition
effective January 1, 2000.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
March 31, 2003, except as to Notes 1c, 12b, 17d, 17e, 17f and 17g
as to which the date is September 3, 2003.
F-2
P-COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ -----------
ASSETS
Current assets:
Cash and cash equivalents........................................ $861 $2,525 $25,754
Restricted cash........................................................ 415 2,911 o
Accounts receivable, net of allowance of $379, $1,080 and $3,810, 4,797 5,508 48,614
respectively.............................................................
Inventory.............................................................. 12,433 30,392 60,320
Prepaid expenses and other assets...................................... 3,402 7,016 13,242
Assets of discontinued operations...................................... 2,923 9,775 21,868
------------ ------------ -----------
Total current assets................................................... 24,831 58,127 169,798
Property and equipment, net.............................................. 10,511 16,596 20,970
Goodwill and others assets............................................... 381 17,511 25,451
------------ ------------ -----------
Total assets........................................................... $35,723 $92,234 $216,219
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable....................................................... $8,144 $8,007 $30,073
Other accrued liabilities.............................................. 6,774 21,238 33,199
Note payable........................................................... - - 10,911
Loan payable to bank................................................... 2,604 - -
Deferred contract obligations.......................................... 8,000 8,000 8,000
Convertible subordinated notes......................................... o 29,299 o
Liabilities of discontinued operations................................. 1,085 754 8,683
------------ ------------ -----------
Total current liabilities.............................................. 26,607 67,298 90,866
Long-term liabilities:
Convertible subordinated notes......................................... 22,390 o 29,299
Other long term liabilities............................................ 2,076 680 807
------------ ------------ -----------
Total liabilities...................................................... 51,073 67,978 120,972
------------ ------------ -----------
Stockholders' equity (deficit):
Series A Preferred Stock............................................... - - -
Common Stock........................................................... 16 8 8
Additional paid-in capital............................................. 333,740 319,994 316,515
Accumulated deficit.................................................... (348,766) (294,460) (218,922)
Accumulated other comprehensive loss................................... (340) (1,286) (2,354)
------------ ------------ -----------
Total stockholders' equity (deficit)................................... (15,350) 24,256 95,247
------------ ------------ -----------
Total liabilities and stockholders' equity............................... $35,723 $92,234 $216,219
============ ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
P-COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ -----------
Sales.................................................................... $29,686 $73,236 $183,606
Cost of sales............................................................ 30,777 94,890 160,965
------------ ------------ -----------
Gross profit (loss).................................................... (1,091) (21,654) 22,641
Operating expenses:
Research and development............................................... 12,745 19,800 20,241
Selling and marketing.................................................. 6,621 7,637 11,371
General and administrative............................................. 10,750 26,070 18,181
Receivable valuation charges........................................... o 8,034 19,550
Goodwill impairment.................................................... 11,409 o o
------------ ------------ -----------
Total operating expenses............................................... 41,525 61,541 69,343
------------ ------------ -----------
Loss from continuing operations.......................................... (42,616) (83,195) (46,702)
Interest expense......................................................... (2,457) (1,946) (4,629)
Gain on sale of subsidiary............................................... o 9,814 o
Gain on retirement of convertible notes.................................. 1,393 o 1,890
Other expense, net....................................................... (1,312) (618) (3,736)
------------ ------------ -----------
Loss from continuing operations before income taxes, loss from
discontinued operations and cumulative effect of change in accounting
principle................................................................ (44,992) (75,945) (53,177)
Provision (benefit) for income taxes..................................... (470) (618) 10,917
------------ ------------ -----------
Loss from continuing operations before loss from discontinued operations (44,522) (75,327) (64,094)
and cumulative effect of change in accounting principle..................
Loss from discontinued operations........................................ (4,284) (211) (4,321)
------------ ------------ -----------
Loss on discontinued operations before cumulative effect of change in
accounting principle..................................................... (48,806) (75,538) (68,415)
Cumulative effect of change in accounting principle...................... (5,500) - (1,534)
------------ ------------ -----------
Net loss................................................................. $(54,306) $(75,538) $(69,949)
============ ============ ===========
Basic and diluted loss per share:
Loss from continuing operations.......................................... (1.74) (4.55) (4.11)
Loss from discontinued operations........................................ (0.17) (0.01) (0.28)
Cumulative effect of change in accounting principle...................... (0.22) - (0.10)
------------ ------------ -----------
Basic and diluted net loss per share applicable to common stockholders... $(2.13) $(4.56) $(4.48)
============ ============ ===========
Shares used in basic and diluted per share computation................... 25,546 16,551 15,600
============ ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
P-COM, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE LOSS (In thousands)
ACCUMULATED
RETAINED OTHER
ADDITIONAL EARNINGS COMPREHENSIVE
COMMON STOCK PAID-IN (ACCUMULATED INCOME COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT) (LOSS) LOSS TOTAL
------ ------ ------- -------- ------ ---- -----
Balance at December 31, 1999...... 13,480 $7 $238,721 $(148,973) $(540) $89,215
Issuance of common stock for cash, 2,106 1 61,206 - - 61,207
net of issuance costs of $125.....
Issuance of warrants for common - - 1,902 - - 1,902
stock in conjunction with line of
credit borrowings.................
Conversion of notes payable to 135 - 4,382 - - 4,382
common stock......................
Issuance of common stock upon 32 600 600
exercise of warrant...............
Stock based compensation expense - - 372 - 372
from acceleration of option vesting
Issuance of common stock upon 295 - 8,098 - 8,098
exercise of stock options.........
Issuance of common stock under 78 - 1,234 - - 1,234
employee stock purchase plan......
Cumulative translation adjustment. - - - (1,814) (1,814) (1,814)
Net loss.......................... - - (69,949) (69,949) (69,949)
--------
Comprehensive income (loss)....... $(71,763)
------ ------ ------- -------- ------ -------- ---------
Balance at December 31, 2000...... 16,126 8 316,515 (218,922) (2,354) 95,247
Issuance of common stock for cash. 760 - 3,000 o - 3,000
Stock-based compensation expense.. - - 29 o - 29
Issuance of common stock under 79 - 450 o - 450
employee stock purchase plan......
Cumulative translation adjustment. - - o 1,068 1,068 1,068
Net loss.......................... - - (75,538) - (75,538) (75,538)
Comprehensive loss................ $(74,470)
------ ------ ------- -------- ------ -------- ---------
Balance at December 31, 2001...... 16,965 $8 $319,994 $(294,460) $(1,286) $24,256
------ ------ ------- -------- ------ -------- ---------
Balance at December 31, 2001...... 16,965 $8 $319,994 $(294,460) $(1,286) $24,256
Issuance of Common Stock for cash, 14,797 7 7,706 - - 7,713
net of issuance costs of $821.....
Issuance of warrants for Common - - 64 - - 64
Stock in conjunction with line of
credit borrowings.................
Issuance of Common Stock as part of 1,282 1 1,272 - - 1,273
vendor settlements................
Conversion of notes payable to 1,367 3 4,186 - - 4,189
Common Stock......................
Issuance of warrants for Common - - 480 - - 480
Stock for services rendered.......
Issuance of Common Stock under 27 - 35 - - 35
employee stock purchase plan......
Cumulative translation adjustment. - - - - 946 946 946
Net loss.......................... - - - (54,306) (54,306) (54,306)
Comprehensive loss................ (53,360)
------ ------ ------- -------- ------ -------- ---------
Balance at December 31, 2002...... 34,438 $19 $333,737 $(348,766) $(340) $(15,350)
====== ====== ======== ========== ====== ======== =========
The accompanying notes are an integral part of these financial statements.
F-5
P-COM, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
2002 2001 2000
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................................................. $(54,306) $(75,538) $(69,949)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain (Loss) on sale of subsidiary................................................... - (9,814) (2,645)
Depreciation........................................................................ 6,602 8,845 10,313
Loss on disposal of property and equipment.......................................... 153 1,367 5,251
Deferred income taxes............................................................... - - 9,858
Amortization of stock warrants...................................................... 546 159 1,745
Compensation expense related to stock options....................................... - 29 372
Notes conversion expense............................................................ 771 - -
Gain on retirement of convertible notes............................................. (1,393) - (1,890)
Cumulative effect of change in accounting principle................................. 5,500 - 1,534
Write-off of notes receivable....................................................... 159 - -
Loss on discontinued operations..................................................... 4,284 211 4,321
Amortization of goodwill............................................................ - 2,411 4,147
Goodwill impairment................................................................. 11,409 5,621 15,000
Write-down of long term investments................................................. - 234 1,320
Inventory valuation and other charge................................................ 5,770 30,000 21,679
Accounts receivable valuation charge................................................ - 11,837 -
Changes in assets and liabilities:
Accounts receivable, net of reserve................................................. 979 31,088 (16,495)
Inventory........................................................................... 12,664 5,567 (38,648)
Prepaid expenses and other assets................................................... 3,874 6,953 1,602
Accounts payable.................................................................... 440 (23,581) 7,904
Other accrued liabilities........................................................... (11,963) (15,634) 8,624
--------- --------- ---------
Net cash used in operating activities............................................... (14,511) (20,245) (35,957)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment............................................... (596) (2,502) (8,037)
Cash paid on disposal of discontinued operations.................................... - - (2,000)
Proceeds from sale of property and equipment........................................ 251 - 700
Proceeds from sale of subsidiary.................................................... - 12,088 6,860
Increase (decrease) in restricted cash.............................................. 2,496 (2,911) -
Net assets (liabilities) of discontinued operation.................................. 2,900 (435) (3,716)
--------- --------- ---------
Net cash provided by (used in) investing activities................................. 5,051 6,240 (6,193)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of Notes................................................................... (2,111) (10,992) (12,487)
Proceeds from issuance of common stock, net of expenses............................. 7,713 3,000 61,206
Proceed from exercise of stock options and warrants................................. - o 9,932
Proceeds from Employee Stock Purchase Plan.......................................... 35 450 o
Proceeds from loan payable to bank.................................................. 2,604 o o
Proceeds from (issuance of) notes receivable........................................ - 864 (250)
Payments under capital lease obligations............................................ (497) (2,568) (193)
--------- --------- ---------
Net cash provided by (used in) financing activities................................. 7,744 (9,246) 58,208
--------- --------- ---------
Effect of exchange rate changes on cash............................................. 52 22 (970)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.................................. (1,664) (23,229) 15,088
Cash and cash equivalents at beginning of the year.................................... 2,525 25,754 10,666
--------- --------- ---------
Cash and cash equivalents at end of the year.......................................... $861 $2,525 $25,754
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-6
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. THE COMPANY
P-Com, Inc. ("P-Com") 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.
P-Com 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.
B. REVERSE STOCK SPLIT
On June 27, 2002, P-Com implemented a 1 for 5 reverse stock split of
its common stock. Unless specifically noted otherwise, all references to share
and per share data for all periods presented have been adjusted to give effect
to this reverse split.
C. DISCONTINUED OPERATIONS
As disclosed in note 12, the financial statements for December 31,
2002, 2001 and 2000 have been reclassified to reflect P-Com's services business
unit as a discontinued operation.
D. LIQUIDITY
Through December 31, 2002, P-Com has incurred substantial losses and
negative cash flows from operations and, as of December 31, 2002, had an
accumulated deficit of $348.8 million. For the year ended December 31, 2002,
P-Com recorded a net loss of $54.3 million and used $14.5 million cash in
operating activities. At December 31, 2002, P-Com had approximately $0.9 million
in cash and cash equivalents, drawn from the bank line discussed below. The loan
payable to the bank was $2.9 million (inclusive of $0.3 million in respect of
the discontinued services business) on December 31, 2002. In June 2002, P-Com
sold approximately 11,464,000 shares of unregistered common stock at a per share
price of $0.70, for an aggregate net proceeds of approximately $7.3 million. In
December 2002, P-Com sold approximately 3,333,333 shares of unregistered common
stock at a per share price of $0.15, for an aggregate net proceeds of
approximately $0.4 million.
In order to conserve cash, P-Com has implemented cost cutting measures
and is actively seeking additional debt and equity financing. On November 1,
2002, P-Com issued $22,390,000 aggregate face value of 7% Convertible
Subordinated Notes due November 1, 2005, in exchange for the same amount of
4.25% Convertible Subordinated Notes which matured on November 1, 2002. The 7%
Convertible Subordinated Notes are convertible into P-Com's common stock at
$2.10 per share, subject to adjustment. If P-Com fails to generate sufficient
revenues from new and existing products sales, induce other creditors to
forebear or convert to equity, raise additional capital or obtain new debt
financing, P-Com would have insufficient capital to fund its operations. Without
sufficient capital to fund its operations, P-Com would no longer be able to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or to amounts and classification of liabilities that may be necessary if
P-Com is unable to continue as a going concern.
On September 20, 2002, P-Com entered into a credit facility agreement
with Silicon Valley Bank for up to $5 million in borrowings. As of December 31,
2002, the loan amount payable to Silicon Valley bank was $2.9 million (inclusive
of $0.3 million in respect of the discontinued services business). However as of
F-7
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
December 31, 2002, P-Com was not in compliance with the revenue and minimum
tangible net worth covenants provided in the Silicon Valley Bank documents, and
has on March 4, 2003 received a limited waiver from Silicon Valley Bank for the
designated revenue default, and a limited forbearance from exercising its rights
and remedies arising from the tangible net worth default until the earlier of
(i) March 15, 2003, or (ii) the occurrence of an event of default. On March 24,
2003, P-Com received a waiver from Silicon Valley Bank of the non-compliance
with the minimum tangible net worth covenant as of December 31, 2002 and the
cross default arising from the non-compliance. P-Com also received from Silicon
Valley Bank in the same agreement a limited forbearance from exercising its
rights and remedies arising from P-Com's non-compliance with the tangible net
worth covenant as of January 31, 2003; until the earlier of (i) April 15, 2003,
or (ii) the occurrence of an event of default other than the January 2003
default. Under the terms of the forbearance, Silicon Valley Bank reserved its
right to immediately cease extending credit without further notice, and the
right, in its discretion, to have the outstanding debt obligations bear interest
at the default rate of interest, which includes an additional 4% penalty charge.
E. 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 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 P-Com and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION
The functional currencies of our foreign subsidiaries are the local
currencies. Assets and liabilities of these subsidiaries are translated into
United States dollars at exchange rates in effect at the balance sheet date.
Income and expense items are translated at average exchange rates for the
period.
Accumulated net translation adjustments are recorded as a component of
comprehensive income (loss) in stockholders' equity. Foreign exchange
transaction gains and losses are included in the results of operations in the
periods incurred, and were not material in all periods presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS
P-Com measures its financial assets and liabilities in accordance with
accounting principles generally accepted in the United States. The estimated
fair value of its Convertible Subordinated Notes was approximately 30% of par or
$6.7 million at December 31, 2002 compared to 30% of par or $8.8 million at
December 31, 2001. The estimated fair value of cash, accounts receivable and
payable, bank loans and accrued liabilities at December 31, 2002 and 2001
approximated cost due to the short maturity of these assets and liabilities.
F-8
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CASH AND CASH EQUIVALENTS
P-Com considers all highly liquid debt instruments with a maturity when
acquired of three months or less to be cash equivalents.
RESTRICTED CASH
As of December 31, 2001, P-Com had $2.9 million of restricted cash
resulting from an attachment in the third quarter of 2001 related to a dispute
with a vendor. The dispute has been fully resolved and the attachment dissolved
in February 2002, resulting in approximately $1.4 million being released to
P-Com, and $1.5 million paid to the vendor.
As of December 31, 2002, P-Com has approximately $0.4 million of
restricted cash that is designated as cash collateral for the credit facility
agreement with Silicon Valley Bank.
REVENUE RECOGNITION
Revenue from product sales is recognized upon transfer of title and
risk of loss, which is upon shipment of the product provided no significant
obligations remain and collection is probable. Provisions for estimated warranty
repairs, returns and other allowances are recorded at the time revenue is
recognized. Revenue from service sales is recognized ratably over the
contractual period or as the service is performed.
INVENTORY
Inventory is stated at the lower of cost or market, cost being
determined on a first-in, first-out basis. Inventory is reduced, if necessary,
to its net realizable value based on customer orders and demand forecasts using
management's best estimate given the information currently available.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and include tooling and test
equipment, computer equipment, furniture, land and buildings, and
construction-in-progress. Depreciation is computed using the straight-line
method based upon the useful lives of the assets ranging from three to seven
years, and in the case of building, 33 years. Leasehold improvements are
amortized using the straight-line method based upon the shorter of the estimated
useful lives or the lease term of the respective assets.
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Research and development costs are expensed as incurred. P-Com'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.
F-9
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
GOODWILL
Goodwill represents the excess of the purchase price over the fair
value of the net assets of acquired companies accounted for as purchase business
combinations. P-Com adopted FAS 142 on January 1, 2002, and as a result, stopped
recording goodwill amortization. P-Com periodically analyzes the carrying value
of goodwill, and recorded $11.4 million of impairment charges in the fourth
quarter of 2002 and $5.5 million of transitional impairment charges in the first
quarter of the year ended December 31, 2002, representing the difference between
the fair value of expected cash flows from the services business unit, and its
book value.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that the long-lived
assets may be impaired, an evaluation of recoverability would be performed. If
an evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying amount to
determine if a write-down is required.
COMPREHENSIVE INCOME (LOSS)
Under SFAS 130, Reporting Comprehensive Income, P-Com is required to
display comprehensive income and its components as part of our full set of
financial statements. The measurement and presentation of net income did not
change. Comprehensive income comprises net income and other comprehensive
income. Other comprehensive income includes certain changes in equity of P-Com
that are excluded from net income. Specifically, SFAS 130 requires unrealized
gains and losses on P-Com's foreign currency translation, that were reported
separately in stockholders' equity, to be included in, accumulated other
comprehensive income. Comprehensive income (loss) in 2002, 2001 and 2000 has
been reflected in the Consolidated Statement of Stockholders' Equity and
Comprehensive Loss.
ACCOUNTING FOR STOCK-BASED COMPENSATION
P-Com 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
its stock at the date of grant over the stock option exercise price. P-Com
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.
F-10
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject P-Com to significant
concentrations of credit risk consist principally of cash equivalents and trade
accounts receivable. P-Com places its cash equivalents in a variety of financial
instruments such as market rate accounts and United States Government agency
debt securities. P-Com, by policy, limits the amount of credit exposure to any
one financial institution or commercial issuer.
To date, P-Com has sold most of its products in international markets.
Sales to several customers have been denominated in British pounds sterling and
Euro and, at December 31, 2002, 2001 and 2000, amounts due from these customers
represented 29%, 59% and 48%, 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.
P-Com performs on-going credit evaluations of its customers' financial
condition to determine the customer's credit worthiness. Sales are then
generally made either on 30 to 90 day payment terms, COD or letters of credit.
P-Com extends credit terms to international customers of up to 90 days, which is
consistent with prevailing business practices.
At December 31, 2002 and 2001, approximately 43% and 56%, respectively,
of trade accounts receivable represent amounts due from three customers,
respectively. For the year ended December 31, 2002, 2001 and 2000, two, two and
three customers accounted for 26%, 41%, and 62% of total sales respectively.
F. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") 145, Recission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Among other matters, SFAS 145 rescinded SFAS No. 4, Reporting Gains
and Losses from Extinguishment of Debt thereby eliminating the requirement that
gains and losses from the extinguishment of debt be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect. As a
result, the criteria in APB Opinion No. 30, Reporting Results of
OperationsoReporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions will
be used to classify those gains and losses. SFAS 145 is effective for P-Com
commencing January 1, 2003. The adoption of SFAS 145 will result in the
reclassification of extraordinary gains on retirement of notes to interest
expense.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that an
entity has issued, including a reconciliation of changes in the entity's product
warranty liabilities. The initial recognition and initial measurement provisions
of FIN 45 are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. P-Com believes that
the adoption of this standard will have no material impact on its financial
statements.
F-11
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation, Transition and Disclosure. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
requires that disclosures of the pro forma effect of using the fair value method
of accounting for stock-based employee compensation be displayed more
prominently and in a tabular format. Additionally, SFAS No. 148 requires
disclosure of the pro forma effect in interim financial statements. The
transition and annual disclosure requirements of SFAS No. 148 are effective for
P-Com's financial statements for the year ending December 31, 2003. The interim
disclosure requirements are effective for interim periods commencing January 1,
2003. P-Com believes that the adoption of this standard will have no material
impact on its financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period commencing July 1, 2003. P-Com believes that the
adoption of this standard will have no material impact on its financial
statements.
In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS 146 requires that a liability for costs
associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. SFAS 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption is not expected to have a material impact on P-Com's
financial position and results of operations.
2. CHANGE IN ACCOUNTING PRINCIPLE
GOODWILL Effective January 1, 2002, P-Com adopted Statements of
Financial Accounting Standards Nos. 141 and 142 ("SFAS 141" and "SFAS 142"),
Business Combinations and Goodwill and Other Intangible Assets, respectively.
Pursuant to the impairment recognition provisions of SFAS 142, P-Com conducted
an evaluation of the impact of adopting SFAS 142. Accordingly, under the
transitional provisions of SFAS 142, a goodwill impairment loss of $5.5 million
was recorded related to P-Com's services segment during the first quarter of
2002, representing the difference between the fair value of expected cash flows
from the services business unit, and its book value. The fair value of the
services segment was estimated using a discounted cash flows model over a
four-year period from 2002 to 2005. A residual value was calculated assuming
that the services business unit will continue as a going concern beyond the
discrete projected period. A discount factor of 25% was used to compute the
present value of expected future cash flows. The residual of the goodwill
balance amount of $11.4 million was also assessed to be impaired in the fourth
quarter of 2002, and a charge was recorded for the same amount.
F-12
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The following sets forth a reconciliation of net loss and loss per
share information for the year ended December 31, 2002, 2001 and 2000 as
adjusted for the non-amortization provisions of SFAS 142 (in thousands, except
per share amounts):
FOR THE YEAR ENDED DECEMBER 31,
2002 2001 2000
---- ---- ----
Reported net loss............................................. $(54,306) $(75,538) $(69,949)
Add back: Goodwill amortization............................. - 2,411 $4,147
--------- --------- ---------
Adjusted net loss............................................. (54,306) (73,127) (65,802)
--------- --------- ---------
Basic and diluted loss per share
Reported net loss............................................. $(2.13) $(4.56) $(4.48)
Add back: Goodwill amortization............................. - 0.15 0.27
--------- --------- ---------
Adjusted net loss............................................. $(2.13) $(4.42) $(4.22)
--------- --------- ---------
Weighted average number of shares............................. 25,546 16,551 15,600
========= ========= =========
Changes in the carrying amount of goodwill for the year ended December
31, 2002, 2001 and 2000 are as follows (in $000):
2002 2001 2000
--------- --------- ---------
Balance at January 1,............................................ $ 16,909 $ 24,941 $ 44,088
Goodwill amortization expense.................................... - (2,411) (4,147)
Transition impairment............................................ (5,500) - -
Impairment charge................................................ (11,409) (5,621) (15,000)
--------- --------- ---------
Balance at December 31,.......................................... $ - $ 16,909 $ 24,941
========= ========= =========
3. CHANGE IN ACCOUNTING PRINCIPLE
REVENUE RECOGNITION Effective January 1, 2000, P-Com 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. P-Com previously recognized revenue upon
shipment of product, provided no significant obligations remained and collection
was probable. This policy was changed to recognition upon transfer of title and
risk of loss, which is generally upon shipment of the product provided no
significant obligations remain and collection is probable. In accordance with
SAB No. 101, P-Com 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 P-Com'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.
F-13
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. BALANCE SHEET COMPONENTS
Inventory consists of the following (in thousands of dollars):
AS OF DECEMBER 31,
-------------------------------------
2002 2001 2000
-------- -------- -------
Raw materials.................................................. $36,599 $37,829 36,366
Work-in-process................................................ 3,921 11,912 20,757
Finished goods................................................. 11,190 18,213 22,637
Inventory at customer sites.................................... 290 1,035 6,550
-------- -------- -------
52,000 68,989 86,310
Less: Inventory reserves....................................... (39,567) (38,597) (25,990)
-------- -------- -------
12,433 30,392 60,320
======== ======== =======
Property and equipment consists of the following (in thousands of
dollars):
AS OF DECEMBER 31,
--------------------------------------
USEFUL LIFE 2002 2001 2000
----------- -------- ------- --------
Tooling and test equipment...... 3 - 5 years $32,658 $33,057 $37,545
Computer equipment.............. 3 years 8,033 7,979 11,809
Furniture and fixtures.......... 5 years 2,682 3,140 3,822
Land and buildings and leasehold 5 to 7, and 33 years 1,754 2,293 2,863
improvements....................
Construction in process......... 118 799 -
-------- ------- -------
45,245 47,268 56,039
Less: Accumulated depreciation and amortization............... (34,734) (30,672) (35,069)
-------- ------- -------
$10,511 $16,596 $20,970
======== ======= =======
The above amounts include items under capital leases and related
accumulated amortization of $6,990 and $3,370 at December 31, 2002, $7,158 and
$1,979 at December 31, 2001, and $3,634 and $974 at December 31, 2000,
respectively.
Goodwill and other assets consist of the following (in thousands):
DECEMBER 31,
-------------------------------------
2002 2001 2000
------- ------- -------
Goodwill:
CSM(P-Com Network Services, Inc.)............................. $22,295 $22,295 $22,295
Cylink........................................................ 34,261 34,261 34,261
------- ------- -------
56,556 56,556 56,556
Less: Accumulated amortization and impairment................. (56,556) (39,647) (31,615)
Net goodwill.................................................. - 16,909 24,941
Other assets.................................................. 381 602 510
------- ------- -------
$381 $17,511 $25,451
======= ======= =======
F-14
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In 2002, management reviewed the carrying value of the goodwill related
to the service business line. Based upon its assessment of future cash flows
estimated to be provided by the business line, the carrying value of the
goodwill of $16.9 million was assessed as impaired and a charge for the full
amount was recorded.
In 2001 and 2000, management reviewed the carrying value of the
goodwill related to the business line acquired from Cylink Wireless Group in
1998. Based on the changes to the forecasted future cash flows and the
replacement of the Cylink spread spectrum products with the AirPro Gold line, it
was determined that the residual goodwill arising from the Cylink Wireless Group
acquisition was impaired and recorded a $5.6 million charge in 2001, and a $15
million charge in 2000.
Other accrued liabilities consist of the following (in thousands):
AS OF DECEMBER 31,
--------------------------------
2002 2001 2000
------ ------- -------
Purchase commitment..................................................... $2,195 $10,002 $6,687
Deferred revenue........................................................ 290 2,280 11,920
Accrued employee benefits............................................... 860 1,013 1,678
Accrued warranty(b)..................................................... 936 2,843 6,323
Income taxes payable.................................................... 64 281 1,566
Lease obligations....................................................... 435 2,095 1,428
Senior subordinated secured promissory note(a).......................... 202 o o
Interest payable........................................................ 276 208 208
Other................................................................... 1,516 2,516 3,389
------ ------- --------
$6,774 $21,238 $33,199
====== ======= ========
-----------
(a) In lieu of the interest payment on the 4.25% Convertible Subordinated
Notes that were due on November 1, 2002, P-Com issued the Senior
Subordinated Secured Promissory Note to a note holder. The Senior
Subordinated Secured Promissory Note bears interest at 7% per annum,
and matures on May 1, 2003. After maturity, interest shall accrue at
the rate of 9% per annum. The Senior Subordinated Secured Promissory
Note is secured against certain property and equipment.
(b) A summary of product warranty reserve activity is as follows (in
thousands):
2002
--------
Balance at January 1,........................................................................ $ 2,843
Additions relating to products sold.......................................................... 430
Payments..................................................................................... (2,337)
--------
Balance at December 31,...................................................................... $ 936
========
Deferred contract obligations
Under a joint license and development contract, P-Com determined that a
related Original Equipment Manufacturer agreement provided for subsequent
payments of $8.0 million specifically earmarked for marketing our products
manufactured under this joint license and development contract. As of December
F-15
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
31, 2002 and 2001, payment obligations of $8.0 million under this contract
remained outstanding, and P-Com has in February 2003 written to contest the
amount claimed by the vendor.
Other long-term liabilities consist of the following (in thousands):
DECEMBER 31,
2002 2001 2000
Capital lease obligations....................................................... $2,076 $680 $703
Other........................................................................... o o 104
$2,076 $680 $807
5. BORROWING ARRANGEMENTS
On September 20, 2002, P-Com and Silicon Valley Bank entered into a
Loan and Security Agreement for a $1 million borrowing line based on domestic
receivables, and a Loan and Security Agreement under the Export-Import ("EXIM")
program for a $4.0 million borrowing line based on export related inventories
and receivables (together, the "Agreements"). Silicon Valley Bank makes cash
advances equal to 70% of eligible accounts receivable balances for both the EXIM
program and domestic lines, and up to $1.2 million for eligible inventories
under the EXIM program. Advances under these Agreements bear interest at the
bank's prime rate plus 2.5% per annum. The Agreements expire on September 20,
2003, and are secured by all receivables, deposit accounts, general intangibles,
investment properties, inventories, cash, property, plant and equipment of
P-Com. P-Com had also issued a $4 million secured promissory note underlying
these Agreements to Silicon Valley Bank. These Agreements supersede the Accounts
Receivable Purchase Agreement dated June 26, 2002. As of December 31, 2002, the
loan amount payable to Silicon Valley Bank under these Agreements aggregated
$2.9 million. P-Com is not in compliance with the Agreements' revenue and
minimum tangible net worth covenants as of December 31, 2002, and has on March
4, 2003 received a limited waiver from Silicon Valley Bank for the designated
revenue default, and a limited forbearance from exercising its rights and
remedies arising from the tangible net worth default until the earlier of (i)
March 15, 2003, or (ii) the occurrence of an event of default.
On March 24, 2003, P-Com received a waiver from Silicon Valley Bank of
the non-compliance with the minimum tangible net worth covenant as of December
31, 2002, and the cross default arising from the non-compliance. P-Com also
received from Silicon Valley Bank in the same waiver agreement a limited
forbearance from exercising its rights and remedies arising from P-Com's
non-compliance with the tangible net worth covenant as of January 31, 2003;
until the earlier of (i) April 15, 2003, or (ii) the occurrence of an event of
default other than the January 2003 default. Under the terms of the forbearance,
Silicon Valley Bank reserved its right to immediately cease extending credit
without further notice, and the right, in its discretion, to have the
outstanding debt obligations bear interest at the default rate of interest,
which includes an additional 4% penalty charge.
On March 29, 2001, P-Com and Foothill Capital Corporation entered into
a Loan and Security Agreement with a borrowing capacity of up to $25.0 million.
The Loan and Security Agreement was to mature in March 2004. Borrowings under
the Loan and Security Agreement were limited to 85% of eligible accounts
receivable. At December 31, 2002, there were no outstanding borrowings under the
Loan and Security Agreement. P-Com was not in compliance with certain financial
F-16
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
covenants in this Loan and Security Agreement as of December 31, 2001. The Loan
and Security Agreement was terminated on February 6, 2002.
In January 2000, P-Com entered into a secured line-of-credit agreement
for $12.0 million. The line matured and was repaid in full on January 31, 2001.
Borrowings under the line bore interest at the greater of prime rate plus 2% (8%
per annum at December 31, 2000). In connection with the loan agreement, P-Com
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. P-Com recorded a discount to amounts
recorded under the loan agreement of approximately $2.0 million, which
represented the estimated fair value of the warrants. Such discount was
amortized to interest expense over the term of the loan resulting in $159,000
and $1,745,0000 of interest expense in 2001 and 2000, respectively.
On November 5, 1997, P-Com issued $100 million in 4.25% Convertible
Subordinated Notes due November 1, 2002. The 4.25% Convertible Subordinated
Notes were convertible at the option of the holder into shares of P-Com common
stock at an initial conversion price of $27.46 per share and at $24.73 per share
subsequent to October 2000. Interest on the 4.25% Convertible Subordinated Notes
is paid semi-annually on May 1 and November 1 of each year. In 2002, 2000 and
1999, P-Com issued common stock in exchange for a portion of these 4.25%
Convertible Subordinated Notes and recorded extraordinary gains as noted below.
P-Com has restructured the repayment of the 4.25% Convertible Subordinated
Notes. As part of the restructuring, P-Com, on November 1,2002 issued
$22,390,000 aggregate face value of 7% Convertible Subordinated Notes due
November 1, 2005, in exchange for the same amount of 4.25% Convertible
Subordinated Notes. The 7% Convertible Subordinated Notes are convertible to
P-Com's common stock at $2.10 per share, subject to adjustment.
A summary of Convertible Subordinated Notes activity is as follows:
GAIN ON
SHARES CONVERSION
AMOUNT ISSUED OR REDEMPTION
---------- ---------------- ------------------
(THOUSANDS) (MILLIONS)
Issuance of $100 million in Convertible Subordinate Notes
in November 1997......................................... $100 - $-
---------- ---------------- ------------------
Balance at December 31, 1997........................... 100 - -
Conversion of Notes in December 1998..................... (14) 493 5
---------- ---------------- ------------------
Balance at December 31, 1998........................... 86 493 5
Conversion of Notes in January and February 1999......... (26) 562 7
Conversion of Notes in December 1999..................... (24) 472 6
---------- ---------------- ------------------
Balance at December 31, 1999........................... 36 1,527 18
Conversion of Notes in January 2000...................... (7) 135 2
---------- ---------------- ------------------
Balance at December 31, 2000 and 2001.................. 29 1,662 20
Conversion of Notes in May and July 2002................. (3) 1,367 -
Redemption of Notes in June and November 2002............ (4) 1
---------- ---------------- ------------------
Balance at December 31, 2002........................... $22 3,029 $21
========== ================ ==================
F-17
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. CAPITAL STOCK
The authorized capital stock of P-Com consists of 69 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.
COMMON STOCK
In June 2002, P-Com sold approximately 11,464,000 shares of
unregistered Common Stock at a per share price of $0.70, for an aggregate net
proceeds of approximately $7.3 million. In December 2002, P-Com sold
approximately 3,333,333 shares of unregistered Common Stock at a per share price
of $0.15, for an aggregate net proceeds of approximately $0.4 million. The
shares have subsequently been registered for resale.
In July 2001, P-Com issued approximately 759,600 shares of unregistered
Common Stock at a per share price of $3.95, for aggregate proceeds of $3.0
million.
In January 2000, P-Com sold approximately 1,506,200 shares of Common
Stock at a per share price of $28.55, for an aggregate purchase price of $43.0
million. The shares were subsequently registered for resale in October 2000. As
a result of the late registration of these shares, P-Com was required to issue
the holders warrants to purchase 271,600 shares of Common Stock at an exercise
price of $19.00 per share.
In August 2000, P-Com sold 600,000 shares of unregistered Common Stock
at a per share price of $30.55, for an aggregate purchase price of $18.2
million. The shares have subsequently been registered for resale.
At December 31, 2002, P-Com had 6,113,000 shares of Common Stock
reserved for issuance of warrants and options.
COMMON STOCK WARRANTS
As a result of the issuance of the Common Stock in May 2002 as part of
vendor settlements, the issuance of the Common Stock in June 2002 and December
2002 for cash, the restructuring of the conversion price of the 4.25%
Convertible Subordinated Notes in November 2002, and warrants issued to Silicon
Valley Bank in May 2002 and September 2002, the warrant exercise price and
number of shares issuable mentioned below were adjusted in accordance with the
formula contained in the anti-dilution clauses of the warrants.
In March 2002, P-Com issued warrants to purchase 600,000 shares of
common stock to a consultant in connection with financial advisory services
F-18
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. CAPITAL STOCK (continued
rendered. The warrants were valued using Black Scholes option pricing model. The
fair value of $480,000 was expensed fully to general and administrative expense
during the year ended December 31, 2002.
In September 2002, in conjunction with the bank line of credit, P-Com
issued warrants to purchase 300,000 shares of common stock to Silicon Valley
Bank. The warrants were valued using Black Scholes option pricing model. The
fair value of $64,000 was expensed fully during the year ended December 31,
2002.
A summary of issued and outstanding warrants to purchase Common Stock
is as follows:
OLD NEW
NUMBER ANTI-DILUTION EXERCISE EXERCISE
(IN THOUSANDS) ADJUSTMENTS TOTAL $ PRICE $ PRICE
-------------- ----------- ----- ------- --------
June 1999 issuance......... 248 603 851 15.00 4.38
August 1999 issuance....... 36 104 140 25.00 6.43
January 2000 issuance...... 88 - 88 42.50 42.50
January 2000 issuance...... 40 52 92 28.55 12.44
October 2000 issuance...... 272 272 19.00 19.00
October 2000 exercise...... (32) (32) 19.00 19.00
March 2002 issuance........ 600 600 1.02 1.02
September 2002 issuance.... 300 300 0.72 0.72
December 2002 issuance..... 750 750 0.30 0.30
--------------- ------------ ------
Balance at December 31, 2002 2,302 759 3,061
=============== ============ ======
STOCKHOLDER RIGHTS AGREEMENT
On September 26, 1997, the Board of Directors of P-Com adopted a
Stockholder Rights Agreement (the "Rights Agreement"). Pursuant to the Rights
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 Rights Agreement.
In general, the Rights will be exercisable only if a person or group
acquires 15% or more of P-Com'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 P-Com's Common Stock. In the case of the State of Wisconsin Investment
Board, Firsthand Capital Management, Alpha Capital and StoneStreet Limited
Partnership the threshold figure is 20% rather than 15%. If, after the Rights
become exercisable, P-Com 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 P-Com's Common Stock, the Board,
in its sole discretion, may redeem the Rights for $0.0001 per Right.
F-19
7. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS On January 11, 1995, P-Com'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").
The 1995 Plan authorizes the issuance of up to 2,986,892 shares of
Common Stock as of December 31, 2002.
The 1995 Plan contains three equity incentive programs: a Discretionary
Option Grant Program, and a Stock Issuance Program for officers and employees of
P-Com and independent consultants and advisors to P-Com and an Automatic Option
Grant Program for non-employee members of its 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 8,000 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 800 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 each
such initial grant shall vest, in a series of eight equal quarterly installments
upon the optionee's completion of each three months of continued service as a
board member over the 24-month period measured from the option grant date. The
shares, which are subject to the annual 800 share option, are fully vested at
the grant date.
F-20
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes stock option activity under P-Com's 1995
Plan (in thousands, except per share amounts):
2002 2001 2000
---- ---- ----
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Outstanding at beginning of year.......... 1,436 $29.21 1,523 $33.10 1,327 $31.80
Granted................................. 2,046 1.01 336 11.55 888 33.55
Exercised............................... - - - - (295) 27.50
Canceled................................ (430) 16.82 (423) 28.80 (397) 34.00
------ ------ ------
Outstanding at end of year................ 3,052 12.05 1,436 29.20 1,523 33.10
====== ===== ======
Options exercisable at year-end........... 1,190 24.53 734 36.10 522 37.45
====== ===== ======
Weighted-average fair value of options
granted during the year................. $0.77 $10.15 $26.60
====== ===== ======
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2002 (in thousands, except per share
amounts):
OPTIONS OPTIONS
OUTSTANDING EXERCISABLE
------------------------------------- --------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
LIFE EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES (IN YEARS) PRICE SHARES PRICE
------------------------ ------ ---------- -------- -------- --------------
$ 0.37 - 14.38................................................. 2,040 7.18 $1.52 382 $2.42
15.00 - 23.75................................................. 403 6.72 17.21 311 17.27
25.00 - 29.06................................................. 186 6.78 28.37 137 28.46
31.56 - 36.25................................................. 202 6.64 34.15 151 34.20
41.25 - 49.69................................................. 97 3.64 47.19 97 47.19
66.25 - 68.75................................................. 51 6.63 66.79 39 66.90
86.25 - 105.45................................................. 73 4.67 91.12 73 91.12
------ ---------- -------- -------- --------------
3,052 6.87 $12.05 1,190 $24.53
====== ========== ======== ======== ==============
EMPLOYEE STOCK PURCHASE PLAN On January 11, 1995, P-Com'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 300,000 shares of Common Stock have been reserved for issuance under
the Purchase Plan. Awards and terms are established by P-Com's Board of
Directors. The Purchase Plan may be canceled at any time at the discretion of
F-21
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
its Board of Directors prior to its expiration in January 2005. Under the Plan,
P-Com sold approximately 27,000, 79,000, and 78,000, shares in 2002, 2001, and
2000, respectively. The Board of Directors suspended the plan in January 2002.
Because P-Com 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 its two stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans, consistent with the method of SFAS 123, P-Com's
net loss and net loss per share would have been reduced to the pro forma amounts
indicated as follows:
2002 2001 2000
---- ---- ----
Net loss applicable to common stockholders
As reported........................................... $(54,306) $(75,538) $(69,949)
Pro forma................................................... $(57,054) $(81,676) $(78,219)
Net loss per share
As reportedoBasic and Diluted............................... $ (2.13) $ (4.55) $ (4.50)
Pro formaoBasic and Diluted................................. $ (2.23) $ (4.93) $ (5.01)
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 2002, 2001, and 2000, respectively: expected
volatility of 158%, 125%, and 95%; weighted-average risk-free interest rates of
3.1%, 4.1%, and 6.2%; weighted-average expected lives of 4.0, 3.5, and 3.7;
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 2002, 2001, and
2000, respectively: expected volatility of 197%, 157%, and 95% weighted-average
risk-free interest rates of 1.7%, 3.5%, and 6.2%, 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 2002, 2001, and
2000 was $0.83, $5.47, and $6.03, respectively. 401(K) PLAN P-Com 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, P-Com to make matching contributions. To date, no matching
contributions have been made.
F-22
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
8. RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 2002, P-Com recorded a $5.8 million inventory
related charge to product cost of sales. P-Com determined that there was a need
to reevaluate its inventory carrying value in the light of the continuing world
wide slowdown in the global telecommunications market, especially with regard to
an assessment of future demand for the point-to-multipoint product range, and
this resulted in a $5.0 million charge to product cost of sales for
point-to-multipoint inventories, and a $0.8 million charge for spread spectrum
inventories.
In the first quarter of 2001, P-Com recorded a $10.0 million inventory
related charge to product cost of sales, and incurred an $11.6 million
receivable valuation charge included in general and administrative expenses, as
a result of the bankruptcy of a major customer. In the third quarter of 2001,
P-Com determined that there was a need to reevaluate its inventory carrying
value in the light of the significant slowdown in the global telecommunications
market and the phasing out of and replacement of current product designs. The
evaluation included an assessment of future demand for certain of its lower
speed and lower frequency Tel-Link point-to-point products, and resulted in
total charges to product cost of sales of approximately $18.0 million in the
quarter. A further $2.0 million was charged to product cost of sales in the
fourth quarter of 2001.
In the second quarter of 2000, P-Com 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 United Kingdom and other European markets
and toward the United States market, and the resulting anticipated decrease in
demand for certain of its lower speed and lower frequency Tel-Link
point-to-point products, and resulted in total charges of approximately $21.7
million during the second quarter of 2000. These charges consisted of increases
to inventory reserve of approximately $17.4 million and accrued liabilities of
approximately $4.3 million, both relating to its product segment. In addition,
P-Com performed a review of the carrying value and remaining life of long-lived
assets associated with its product segment and recorded write-downs of
approximately $15.0 million of goodwill and an approximately $9.9 million
write-off of deferred tax assets in 2000.
The increase in inventory reserves and related purchases liabilities
was charged to product cost of sales in the second quarter of 2000. Of the $17.0
million charge for additional reserves, $15.4 million related to the
aforementioned Tel-Link point-to-point product line. An additional reserve of
approximately $1.0 million was added in the second quarter of 2000 to adjust the
carrying value of certain modules of the point-to-multipoint radio line.
F-23
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
9. SALES AND PROPERTY AND EQUIPMENT BY GEOGRAPHIC REGION
The allocation of sales by geographic customer destination and
property, plant and equipment, net are as follows (in thousands):
% OF TOTAL
FOR 2002 2002 2001 2000
-------- ------- ------- -------
North America........................................ 10% $2,949 $16,151 $80,147
United Kingdom....................................... 20% 5,894 32,361 57,061
Europe............................................... 15% 4,487 2,289 18,135
Asia................................................. 51% 15,018 16,495 8,637
Other Geographic Regions............................. 5% 1,338 5,940 19,626
-------- ------- ------- --------
100% $29,686 $73,236 $183,606
======== ======= ======= ========
2002 2001 2000
---- ---- ----
Property, plant and equipment, net
United States....................................................... $9,060 $14,848 $18,266
United Kingdom...................................................... 109 345 1,234
Italy............................................................... 1,332 1,388 1,349
Other geographic regions............................................ 10 15 121
------- ------- --------
Total............................................................... $10,511 $16,596 $20,970
======= ======= ========
10. NET LOSS PER SHARE
For purposes 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 its Common Stock for the period
because the effect would be antidilutive. Also, because losses were incurred in
the years 2002, 2001, and 2000, all options, warrants, and convertible notes are
excluded from the computations of diluted net loss per share because they are
antidilutive.
11. INCOME TAXES
Loss before discontinued operations, extraordinary items, income taxes
and cumulative effect of accounting change consists of the following (in
thousands):
YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
----------- --------- ---------
Domestic...................................................... $(46,086) $(76,919) $(58,653)
Foreign....................................................... (299) 974 346
----------- --------- ---------
$(46,385) $(75,945) $(58,307)
=========== ========= =========
F-24
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
The provision (benefit) for income taxes consists of the following (in
thousands):
2002 2001 2000
--------- --------- ----------
Current:
Federal............................................................. $(503) $(1,131) $-
State............................................................... - 13 -
Foreign............................................................. 33 543 1,282
--------- --------- ----------
(470) (575) 1,282
--------- --------- ----------
Deferred:
Federal............................................................. - - 8,792
State............................................................... - - 1,066
--------- --------- ----------
- - 9,858
--------- --------- ----------
Total............................................................... $(470) $(575) $11,140
========= ========= ==========
Deferred tax assets consist of the following (in thousands):
DECEMBER 31,
------------------------------------------
2002 2001 2000
------------ ----------- -----------
Net operating loss carryforwards........................... $80,082 $70,810 $54,663
Credit carryforwards....................................... 11,183 10,267 4,302
Intangible assets.......................................... 9,765 13,235 12,177
Credit carryforwards....................................... 20,614 22,353 18,412
------------ ----------- -----------
Intangible assets.......................................... 121,644 116,665 89,554
Valuation allowance........................................ (121,644) (116,665) (89,554)
------------ ----------- -----------
Net deferred tax asset..................................... $0 $0 $0
============ =========== ===========
For federal and state tax purposes, a portion of P-Com's net operating
loss carry forwards may be subject to certain limitations on utilization in case
of change in ownership as defined by federal and state tax law.
Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their bases for
financial reporting purposes. In addition, future tax benefits, such as net
operating loss carry forwards, are recognized to the extent that realization of
such benefits is more likely than not. P-Com has assessed its ability to realize
future tax benefits, and concluded that as a result of the history of losses, it
was more likely than not, that such benefits would not be realized. Accordingly,
P-Com has recorded a full valuation allowance against future tax benefits.
As of December 31, 2002, P-Com had a federal net operating loss
carryforward of approximately $220,000,000. If not utilized, the losses will
begin to expire in 2017.
F-25
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
Reconciliation of the statutory federal income tax rate to its
effective tax rate is as follows:
2002 2001 2000
---- ---- ----
U.S. federal statutory rate............................................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit............................ 0.0 0.0 0.0
Change in valuation allowance............................................. 0.0 0.0 (17.9)
Foreign income taxes at different rate.................................... 0.5 (0.7) (2.3)
Net operating loss........................................................ (35.0) (35.0) (35.0)
Other, net................................................................ (1.4) 0.0 0.0
----- ------ -------
(0.9)% (0.7)% (20.2)%
===== ====== =======
12. ACQUISITIONS AND DIVESTITURES
A. On March 28, 1998, P-Com 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. P-Com 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, P-Com 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
theresults of operations of P-Com.
On February 24, 1997, P-Com 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.
P-Com initially paid $2.6 million in cash, and an additional payment of $0.7
million was made on March 31, 1998. Technosystem designs, manufactures and
markets equipment for transmitters and transponders for television and radio
broadcasting. In 1999, P-Com announced its intention to dispose of Technosystem
and completed its disposition in 2000.
On March 7, 1997, P-Com acquired substantially all of the assets of
Columbia Spectrum Management, L.P., a Vienna, Virginia-based company, for $7.8
million in cash and 797,000 shares of Common Stock valued at approximately $14.5
million. Columbia Spectrum Management, L.P. provides turnkey relocation services
for microwave paths over spectrum allocated by the Federal Communications
Commission for personal communications services and other emerging technologies.
P-Com accounted for its acquisitions of Technosystem and Columbia
Spectrum Management, L.P. 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
Columbia Spectrum Management, L.P. and Technosystem are being amortized over
twenty and ten years, respectively, using the straight-line method.
F-26
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
On May 29, 1997, P-Com acquired all of the outstanding shares of
capital stock of Control Resources Corporation, a provider of integrated network
access devices to network service providers, in exchange for 1,503,000 shares of
P-Com's Common Stock.
On November 27, 1997, P-Com acquired all of the outstanding shares of
capital stock of RT Masts Limited and Telematics in exchange for 766,000 and
248,000 shares of its Common Stock, respectively. RT Masts Limited, 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.
P-Com accounted for its acquisitions of Control Resources Corporation,
RT Masts Limited and Telematics as pooling-of-interests.
In February 2000, P-Com completed the divestiture of two Italian
subsidiaries, Technosystem, S.p.A. and Cemetel S.r.L., resulting in additional
losses for the first quarter of 2000 of approximately $4.0 million and $3.5
million, respectively.
In April 2000, P-Com sold Control Resources Corporation resulting in a
gain of approximately $2.6 million.
On February 7, 2001, P-Com sold RT Masts Limited, to SpectraSite
Transco, for approximately $12.0 million in cash, an additional $750,000 in a
6-month escrow account, and a $750,000 note receivable due in 2008 with interest
due annually at LIBOR, realizing a gain of $9.8 million on the transaction. RT
Masts Limited was primarily engaged in providing site preparation, installation,
and maintenance of wireless broadband radio systems for cell phone services
providers in the United Kingdom. RT Masts Limited provided approximately $20.0
million in revenues to P-Com's consolidated operations in 2000 and has
historically been included as a component of its service sales segment.
B. LOSS ON DISCONTINUED OPERATIONS
In the first quarter of 2003, P-Com committed to a plan to sell its
services business, P-Com Network Services, Inc.. The service business consists
of organizations primarily located in the United States, which provide
comprehensive network services including system and program planning, and
management, path design, and installation for the wireless communications
market. Accordingly, this business is reported as a discontinued operation and
the financial statement information related to this business has been presented
on one line, titled "Loss on Discontinued Operations" in the Consolidated
Statements of Operations for the years ended December 31, 2002, 2001 and 2000.
On April 30, 2003, P-Com entered into an Asset Purchase Agreement with JKB
Global, LLC to sell certain assets of P-Com Network Services, Inc.. The total
cash consideration was approximately $105,000, plus the assumption of certain
liabilities.
P-Com is a guarantor of P-Com Network Services, Inc.'s obligations
under its premises lease, through July 2007. As part of the sale to JKB Global,
LLC, JKB Global, LLC has agreed to sublet the premises from P-Com Network
Services, Inc. for one year beginning May 1, 2003. The terms of the sublease
require JKB Global, LLC to pay less than the total amount of rent due under the
terms of the master lease. As a result, P-Com remains liable under the terms of
the guaranty for the deficiency, under the terms of the master lease of
approximately $1.5 million, and the amount is accrued as loss on disposition of
discontinued operations in the second quarter of 2003, which was the period that
such loss was incurred, as disclosed in Note 10 to the financial statements.
F-27
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
In August 1999, P-Com 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. The additional loss of $4.0 million arising from
divesting Technosystem was recorded as loss from discontinued operations in the
Statement of Operations in the first quarter of 2000 and is included in the
table below.
Summarized results of the combined discontinued businesses are as
follows (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
-------- -------- --------
Sales................................................................ $ 3,337 $30,838 $50,795
-------- -------- --------
Loss from operations................................................. $(4,284) $ (211) $(4,321)
Provision for income taxes........................................... - - -
-------- -------- --------
Net loss............................................................. $(4,284) $ (211) $(4,321)
======== ======== ========
The assets and liabilities of the discontinued operations consisted of
the following (in thousands):
DECEMBER 31,
---------------------------------
2002 2001 2000
----------- --------- ----------
Total assets related to discontinued operations
Cash............................................................. $342 $4,578 $1,787
Accounts receivable.................................................... 763 2,418 14,845
Inventory.............................................................. 1,206 1,554 2,518
Prepaid expenses and other assets...................................... 10 121 425
Property plant and equipment........................................... 529 1,031 2,196
Other assets........................................................... 73 73 97
----------- --------- ----------
$2,923 $9,775 $21,868
=========== ========= ==========
Total liabilities related to discontinued operations
Accounts payable....................................................... $466 $136 $6,020
Other accrued liabilities.............................................. 315 618 2,663
Loan payable to bank................................................... 304 o o
----------- --------- ----------
$1,085 $754 $8,683
=========== ========= ==========
13. COMMITMENTS
OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES In August 1998, P-Com
entered into a capital lease for equipment in the amount of $1,600 with interest
accruing at the rate of 6.3% per annum. The lease is accounted for as a
sale-leaseback transaction, which expires in January 2003. In 2000, P-Com
entered into several capital leases for equipment in the amount of $1,869 with
interest accruing at 11%. These leases expire in 2002. In 2001, P-Com entered
into several capital leases for equipment in the amount of $3,212 with interest
accruing at 11%. In 2002, P-Com entered into several capital leases for
F-28
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
equipment in the amount of $459 with interest accruing at 7.25%. Future minimum
lease payments required under these leases are as follows (in thousands):
YEAR ENDING DECEMBER 31,
2003............................................................................................ $827
2004............................................................................................ 2,129
----------
Total minimum lease payments.................................................................... 2,956
Less: Amount representing interest.............................................................. (444)
----------
Present value of net minimum lease payments..................................................... $2,512
==========
The present value of net minimum lease payments are reflected in the
December 31, 2002 and 2001 balance sheets as a component of other accrued
liabilities and other long-term liabilities of $2,512 and $2,775, respectively.
P-Com leases its facilities under non-cancelable operating leases,
which expire at various times through 2008. The leases require P-Com to pay
taxes, maintenance and repair costs. Future minimum lease payments under its
non-cancelable operating leases at December 31, 2002 are as follows (in
thousands):
YEAR ENDING DECEMBER 31,
2003........................................................................................... $3,001
2004........................................................................................... 3,215
2005........................................................................................... 3,091
2006........................................................................................... 482
2007........................................................................................... 402
Thereafter..................................................................................... 64
----------
$10,255
==========
During 2002, 2001, and 2000, the amount of rent expense incurred by
P-Com under non-cancelable operating leases was $3,230, $4,196, and $3,180,
respectively.
14. 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's stockholders who purchased or otherwise acquired its Common Stock
between April 1997 and September 11, 1998. The plaintiffs alleged various state
securities laws violations by P-Com and certain of its officers and directors.
The complaints sought compensatory, punitive and other damages, attorneys' fees
and injunctive and/or equitable relief.
On December 3, 1998, the Superior Court of California, County of Santa
Clara, entered an order consolidating all of the above complaints. P-Com reached
an agreement in principle on October 25, 2001 to settle the consolidated
securities class action suit. On February 8, 2002, pursuant to that agreement in
principle, the court entered final judgment approving the settlement. Under the
terms of the settlement, all claims against P-Com and all other defendants were
dismissed without admission of liability or wrong doing by any party. The $16.0
million settlement was funded entirely by its directors and officers liability
insurance.
F-29
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
15. SUPPLEMENTAL CASH FLOW INFORMATION
The following provides additional information concerning supplemental
disclosure of cash flow activities.
YEAR ENDED DECEMBER 31,
2002 2001 2000
---- ---- ----
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes................................................ $0 $353 $435
========= ========= ==========
Cash paid for interest.................................................... $1,829 $1,605 $2,725
========= ========= ==========
NON-CASH TRANSACTIONS During 2002 and 2001, $459 and $3,212 of fixed assets were
acquired through the assumption of capital lease liabilities respectively.
During 2002 and 2000, P-Com issued shares of Common Stock in exchange
for Convertible Subordinated Notes. In conjunction with these transactions, the
Company recorded Convertible Subordinated Notes conversion expense of $711 for
the year ended December 31, 2002, in accordance with FAS 84, and extraordinary
gain of $1.4 million and $1.9 million for the year ended December 31, 2002 and
December 31, 2000, respectively. See Note 5 for additional information.
During 2002, P-Com issued shares of Common Stock valued at $1.27
million in connection with various settlement payment to vendors. P-Com also
issued warrants to purchase common stock to a consultant in lieu of services
rendered, to Silicon Valley Bank for the bank line of credit, to investors in
conjunction with the common stock issuances, and certain warrant holders
anti-dilution adjustments.
16. RELATED PARTY TRANSACTIONS
In June 2002, P-Com paid $2.5 million in professional fees, and in
March 2002 issued 600,000 common stock warrants at an exercise price of $1.02
per share, to Cagan McAfee Capital Partners in connection with services rendered
for restructuring of the 4.25% Convertible Subordinated Notes, financial
advisory services for arranging the Silicon Valley Bank line of credit and
equity raising transactions, and retainer fees. Cagan McAfee Capital Partners
invested in approximately 25% of the private equity placement of $8.25 million
completed in June 2002. P-Com further paid consulting fees totaling
approximately $264,000 in 2002 to Cagan McAfee Capital Partners.
Myntahl Corporation, an appointed distributor in China also invested
approximately 13% of the private equity placement of $8.25 million completed in
June 2002. P-Com further has sales of approximately $4.2 million to Myntahl, and
paid approximately $0.5 million in commission and $0.2 million in consulting
fees to Myntahl during the year ended December 31, 2002.
F-30
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
17. SUBSEQUENT EVENTS
a. P-Com issued 2,100,000 common stock at $0.18 a share to an existing
stockholder for cash in January 2003.
b. Effective March 10, 2003, P-Com's Common Stock was delisted by the
Nasdaq SmallCap Market, and is now traded on the OTC Bulletin Board of the
National Association of Securities Dealers, Inc., under the symbol PCOM.OB.
c. On March 26, 2003, P-Com issued $1.5 million 10% Convertible Bridge
Notes, with maturity date of one year from the date of issuance. The 10%
Convertible Bridge Notes are automatically convertible to common stock upon
P-Com completing an additional $3 million minimum equity or equity-linked
financing at a 10% or 20% premium to the face value of the 10% Convertible
Bridge Notes, subject to the execution of certain financing transactions. The
10% Convertible Bridge Notes are subordinated to the existing secured bank line
of credit, but senior to the $22.4 million outstanding 7% Convertible
Subordinated Notes, due November 1, 2005.
d. P-Com issued 4,500,000 shares of its Common Stock to two outside
consultants in April 2003 for investment banking advisory services and public
and investor relations services.
e. On April 30, 2003, P-Com entered into an Asset Purchase Agreement
with JKB Global, LLC to sell certain assets of P-Com Network Services, Inc.
P-Com is a guarantor of P-Com Network Services, Inc.'s obligations under its
premises lease, through July 2007. As part of the sale to JKB Global, LLC, JKB
Global, LLC has agreed to sublet the premises from P-Com Network Services, Inc.
for one year beginning May 1, 2003. The terms of the sublease required JKB
Global, LLC to pay less than the total amount of rent due under the terms of the
master lease. As a result, P-Com remained liable under the terms of the guaranty
for the deficiency, and the total obligation under the terms of the master lease
was approximately $1.5 million. This amount was accrued in the second quarter of
2003 as loss on disposal of discontinued operations. In September 2003, P-Com
entered into an agreement to terminate the premises lease in consideration for
the payment to the landlord of $240,000.
f. In July 2003, P-Com closed an additional Bridge Notes financing,
resulting in gross proceeds to P-Com of approximately $0.9 million. In
connection with the Bridge Notes financing, P-Com loaned to SPEEDCOM $500,000 in
the form of a two-year 10% note, which is convertible into Common Stock of
SPEEDCOM.
g. On August 4, 2003, the principal amount and accrued interest of
$21,138,000 due under the terms of the Convertible Subordinated Notes due 2005
converted into 1,000,000 shares of Series B Convertible Preferred Stock with a
stated value of $21.138 per share. Each share of Series B Convertible Preferred
Stock converts into Common Stock of P-Com at $0.20 per share. The Series B
Convertible Preferred Stock contains certain provisions that may result in a
mandatory cash redemption. As a result, P-Com will reflect the carrying value of
these instruments as a mezzanine security outside of stockholders' equity. The
holders of the Series B Convertible Preferred Stock have agreed to exercise
their conversion options upon receipt of stockholder approval increasing the
number of authorized shares of Common Stock to allow for conversion, and upon
completion of an equity financing resulting in gross proceed to P-Com of at
least $3.0 million.
F-31
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2000, 2001, AND 2002
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS
BEGINNING STATEMENT FROM BALANCE AT
OF YEAR OF OPERATIONS RESERVES END OF YEAR
---------- --------- ---------- ----------
Allowance for doubtful accounts:
Year ended December 31, 2000........................ $14,899 696 (11,785) 3,810
Year ended December 31, 2001.............................. 3,810 11,837* (14,567) 1,080
Year ended December 31, 2002.............................. 1,080 258 (959) 379
Inventory related reserves:
Year ended December 31, 2000.............................. $16,180 17,361 (7,551) 25,990
Year ended December 31, 2001.............................. 25,990 30,000 (17,393) 38,597
Year ended December 31, 2002.............................. 38,597 5,770 (4,800) 39,567
-----------
* $11.6 million was a direct result of the bankruptcy of Winstar.
F-32
PART I- FINANCIAL INFORMATION
ITEM 1.
P-COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, UNAUDITED)
JUNE 30, DECEMBER 31,
2003 2002
-------- -----------
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $180 $861
Restricted cash.............................................................................. 580 415
Accounts receivable, net..................................................................... 3,203 4,797
Inventory.................................................................................... 6,132 12,433
Prepaid expenses and other assets............................................................ 3,678 3,402
Assets of discontinued operation............................................................. 137 2,923
-------- -----------
Total current assets......................................................................... 13,910 24,831
Property and equipment, net.................................................................... 4,831 10,511
Other assets................................................................................... 278 381
-------- -----------
Total assets................................................................................. $19,019 $35,723
======== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................................................................. $7,525 $8,144
Other accrued liabilities.................................................................... 6,895 6,774
Deferred contract obligations................................................................ 8,000 8,000
Loan payable to bank......................................................................... 1,403 2,604
Convertible subordinated notes............................................................... 20,090 -
Convertible promissory notes................................................................. 1,338 -
Liabilities of discontinued operation........................................................ 1,924 1,085
-------- -----------
Total current liabilities.................................................................... 47,175 26,607
Convertible subordinated notes................................................................. - 22,390
Other long-term liabilities.................................................................... 1,983 2,076
-------- -----------
Total liabilities............................................................................ 49,158 51,073
-------- -----------
Stockholders' equity (deficit):
Common Stock................................................................................. 16 16
Additional paid-in capital................................................................... 335,054 333,740
Accumulated deficit.......................................................................... (365,165) (348,766)
Accumulated other comprehensive income (loss)................................................ 30 (340)
Common stock held in treasury at cost.......................................................... (74) o
-------- -----------
Total stockholders' equity (deficit)......................................................... (30,139) (15,350)
-------- -----------
Total liabilities and stockholders' equity..................................................... $19,019 $35,723
======== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-33
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data, unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ---------------------
2003 2002 2003 2002
---- ---- ---- ----
Sales...................................................................... $4,965 $8,110 $9,582 $15,942
Cost of sales.............................................................. 4,124 6,671 11,750 13,718
------ ------- ------- -------
Gross profit (loss)...................................................... 841 1,439 (2,168) 2,224
------ ------- ------- -------
Operating expenses:
Research and development/engineering..................................... 1,706 3,696 3,625 7,827
Selling and marketing.................................................... 827 1,676 1,762 3,499
General and administrative............................................... 1,551 3,151 3,186 6,187
Asset impairment and restructuring charges............................... 2,763 - 3,362 -
------ ------- ------- -------
Total operating expenses................................................. 6,847 8,523 11,935 17,513
------ ------- ------- -------
Operating loss............................................................. (6,006) (7,084) (14,103) (15,289)
Interest expense........................................................... (607) (660) (1,124) (1,020)
Gain on debt extinguishment................................................ 1,500 - 1,500 1,393
Other income, net.......................................................... 855 1,093 953 148
------ ------- ------- -------
Loss from continuing operations before loss from discontinued operations,
and cumulative effect of change in accounting principle.................... (4,258) (6,651) (12,774) (14,768)
Loss from discontinued operations.......................................... (1,767) (1,391) (3,625) (2,951)
------ ------- ------- -------
(6,025) (8,042) (16,399) (17,719)
Cumulative effect of change in accounting principle........................ - - - (5,500)
------ ------- ------- -------
Net loss................................................................... $(6,025) $(8,042) $(16,399) $(23,219)
====== ======= ======= ========
Basic and diluted loss per share:
Loss from continuing operations.......................................... $(0.11) $(0.31) $(0.33) $(0.76)
Loss from discontinued operations........................................ (0.04) (0.06) (0.09) (0.15)
Cumulative effect of change in accounting principle...................... - - - (0.28)
------ ------- ------- -------
Basic and diluted net loss per share applicable to common stockholders..... $(0.15) $(0.37) $(0.42) $(1.19)
====== ======= ======= ========
40,731 21,865 38,634 19,437
Shares used in basic and diluted per share computation.....................
====== ======= ======= ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-34
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
SIX MONTHS ENDED JUNE 30,
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................................ $(16,399) $(23,219)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss from discontinued operations................................................................. 3,625 2,951
Depreciation...................................................................................... 2,696 3,508
(Gain) loss on disposal of property and equipment................................................. (886) 229
Cumulative effect of change in accounting principle............................................... - 5,500
Inventory valuation and other related charges..................................................... 3,608 1,805
Asset impairment and other restructuring charges.................................................. 3,108 -
Amortization of discount on promissory notes...................................................... 135
Amortization of warrants.......................................................................... - 280
Notes conversion expense.......................................................................... - 198
Stock compensation expense........................................................................ 482 -
Gain on redemption of convertible notes........................................................... (1,500) (1,393)
Write-off of notes receivable..................................................................... 100 150
Changes in operating assets and liabilities:
Accounts receivable............................................................................... 1,519 (184)
Inventory......................................................................................... 1,802 6,575
Prepaid expenses and other assets................................................................. 557 (71)
Accounts payable.................................................................................. (686) 1,327
Other accrued liabilities......................................................................... 288 (8,407)
--------- ---------
Net cash used in operating activities............................................................. (1,551) (10,751)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan to Speedcom.................................................................................. (400) -
Acquisition of property and equipment............................................................. - (431)
(Increase) decrease in restricted cash............................................................ (165) 2,911
Proceeds from sale of discontinued operations..................................................... 105 -
Net assets of discontinued operation.............................................................. 824 2,897
--------- ---------
Net cash (used in) provided by investing activities............................................... 364 5,377
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net........................................................... 307 7,496
Proceeds (payments) on bank loan.................................................................. (1,202) 2,976
Proceeds from convertible promissory note......................................................... 1,668 -
Payments under capital lease obligations.......................................................... (289) (202)
Redemption of convertible notes................................................................... - (384)
--------- ---------
Net cash provided by financing activities......................................................... 484 9,886
--------- ---------
Effect of exchange rate changes on cash............................................................. 22 63
--------- ---------
Net increase (decrease) in cash and cash equivalents................................................ (681) 4,575
Cash and cash equivalents at beginning of the period................................................ 861 2,525
--------- ---------
Cash and cash equivalents at end of the period...................................................... $180 $7,100
--------- ---------
Supplemental cash flow disclosures:
Cash paid for interest.............................................................................. $281 $762
========== ==========
Non-cash transactions:
Issuance of common stock for consulting services.................................................... $450 $-
========== ==========
Issuance of warrants for consulting services........................................................ $- $480
========== ==========
Redemption of convertible notes in exchange for property and equipment.............................. $2,300 $-
========== ==========
Treasury stock acquired in exchange for property and equipment...................................... $74 $-
========== ==========
Issuance of common stock in settlement with creditors............................................... $- $1,273
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-35
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the
information and footnotes required by generally accepted accounting principles
for complete consolidated financial statements.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) considered necessary for a fair presentation of
P-Com, Inc.'s (referred to herein, together with its wholly-owned subsidiaries,
as "P-Com") financial condition as of June 30, 2003, and the results of their
operations and their cash flows for the three months ended June 30, 2003 and
2002. These unaudited condensed consolidated financial statements should be read
in conjunction with P-Com's audited 2002 consolidated financial statements,
including the notes thereto, and the other information set forth therein,
included in P-Com's Annual Report on Form 10-K for the year ended December 31,
2002. Operating results for the three-month and six-month periods ended June 30,
2003 are not necessarily indicative of the operating results that may be
expected for the year ending December 31, 2003.
DISCONTINUED OPERATIONS
As more fully discussed in Note 10, the financial statements for
December 31, 2002 and June 30, 2003 have been reclassified to reflect P-Com's
services business unit as a discontinued operation.
CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 2002, P-Com adopted the Statement of Financial
Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets.
Pursuant to the impairment recognition provisions of SFAS 142, P-Com timely
completed its evaluation of the effects of adopting SFAS 142. Accordingly, under
the transitional provisions of SFAS 142, a goodwill impairment loss of $5.5
million was recorded related to its services segment during the first quarter of
2002. The pro forma effects of this change in accounting principle are not
material to the accompanying financial statements.
LIQUIDITY AND MANAGEMENT'S PLAN
The accompanying consolidated financial statements have been prepared
assuming that P-Com will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. As reflected in the financial statements, for the six-month period
ended June 30, 2003, P-Com incurred a net loss of $16.4 million and used $1.6
million cash in its operating activities. As of June 30, 2003, P-Com has
accumulated deficit of $365.2 million. At June 30, 2003, P-Com had approximately
$0.2 million in cash and cash equivalents, drawn principally from a credit
facility with Silicon Valley Bank, and a working capital deficiency of
approximately $33.2 million. These conditions raise substantial doubt about
P-Com's ability to continue as a going concern.
The negative conditions are partially mitigated by certain financing
activities and management's plans to restructure the operating expenses and
financial condition of P-Com. In January 2003, P-Com sold 2.1 million shares of
common stock to an existing stockholder for aggregate net proceeds of $307,000.
Additionally, P-Com closed a $1.5 million convertible note financing in March
2003, and an additional $300,000 convertible note financing in May 2003,
resulting in aggregate net proceeds of $1.7 million (the "Bridge Notes").
F-36
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
At June 30, 2003, P-Com owed $0.8 million of interest on the 7%
Convertible Subordinated Notes and $0.2 million on a promissory note, each due
on May 1, 2003. P-Com defaulted in the payment of interest under the terms of
the 7% Convertible Subordinated Notes and under the terms of the $0.2 million
note, but obtained waivers with respect to such defaults from the creditors. On
August 4, 2003, the principal and accrued interest of $21,138,000 due under the
terms of the 7% Convertible Subordinated Notes was converted into 1,000,000
shares of Series B Convertible Preferred Stock. P-Com is currently negotiating
the settlement of the $0.2 million promissory note, and is in negotiations with
its other creditors to reduce the amounts owed to such creditors. In order to
finance the payment of reduced amounts that have been offered to such creditors,
P-Com is seeking additional debt or equity financing. Such financing is
necessary for P-Com to fully execute management's debt restructuring plan.
If P-Com is unsuccessful in its plans to (i) obtain additional debt or
equity financing; (ii) generate sufficient revenues from new and existing
products sales; (iii) obtain agreements from its creditors to reduce the amount
owed and extend repayment terms; (iii) negotiate agreements to settle
outstanding litigation; or (iv) renew the credit facility with Silicon Valley
Bank when it expires in September 2003, P-Com will have insufficient capital to
continue its operations. Without sufficient capital to fund its operations,
P-Com will no longer be able to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or to amounts and classification of
liabilities that may be necessary if P-Com is unable to continue as a going
concern.
2. NET LOSS PER SHARE
For purposes 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 P-Com's common stock for the
period because the effect would be anti-dilutive. Because losses were incurred
in the three and six months ended June 30, 2003 and 2002, all options, warrants,
and convertible notes are excluded from the computations of diluted net loss per
share because they are anti-dilutive.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period commencing July 1, 2003. P-Com believes that the
adoption of this standard will have no material impact on its financial
statements.
F-37
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. The statement amends and
clarifies accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. This
statement is designed to improve financial reporting such that contracts with
comparable characteristics are accounted for similarly. The statement, which is
generally effective for contracts entered into or modified after June 30, 2003,
is not anticipated to have a significant effect on P-Com's financial position or
results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity. This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This statement is effective for financial instruments entered into or
modified after May 31, 2003, and is otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. At June 30, 2003, P-Com had
no such financial instruments outstanding and therefore adoption of this
standard has no financial reporting implications. On August 5, 2003, P-Com
issued shares of Series B Preferred Stock, which have certain terms that, while
improbable, may require their mandatory redemption for cash. P-Com believes that
accounting for these securities as a mezzanine security, outside of equity,
under Staff Accounting Bulletin No. 64 ("SAB 64"), is appropriate.
4. BORROWING ARRANGEMENTS
On September 20, 2002, P-Com and Silicon Valley Bank entered into a
credit facility. The credit facility consists of a Loan and Security Agreement
for a $1.0 million borrowing line based on domestic receivables, and a Loan and
Security Agreement under the Export-Import ("EXIM") program for a $4.0 million
borrowing line based on export related inventories and receivables. The credit
facility provides for cash advances equal to 70% of eligible accounts receivable
balances for both the EXIM program and domestic lines, and up to $750,000 for
eligible inventories (limited to 30% of eligible accounts receivable), under the
EXIM program. Advances under the credit facility bear interest at Silicon Valley
Bank's prime rate plus 2.5% per annum. The credit facility expires on September
20, 2003, and is secured by all receivables, deposit accounts, general
intangibles, investment properties, inventories, cash, property, plant and
equipment of P-Com. P-Com has also issued a $4.0 million secured promissory note
underlying the credit facility to Silicon Valley Bank. As of June 30, 2003, the
loan amount payable to Silicon Valley Bank under the credit facility aggregated
$1.4 million.
Silicon Valley Bank has amended the credit facility to limit further
borrowing for eligible inventories to $1.0 million during the period April 21,
2003 to May 10, 2003. On and after May 11, 2003, borrowings on eligible
inventories were further reduced to $750,000.
P-Com has an unsecured overdraft line with a bank in Italy, for
borrowings up to $83,000, based on domestic trade receivables. Borrowings under
this line bear interest at 4.5% per annum. The amount outstanding on this
overdraft line at June 30, 2003 was approximately $52,000.
F-38
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
5. CONVERTIBLE PROMISSORY NOTES AND WARRANTS
The Convertible Promissory Notes (Bridge Notes) and Warrants consisted
of the following components at the date of issuance (in thousands, unaudited):
JUNE 30
2003
-------
Convertible Bridge Notes....................................................................... $1,338
Beneficial Conversion Feature.................................................................. -
Warrants for Common Stock...................................................................... 462
-------
$1,800
=======
On March 26, 2003, P-Com closed the $1.5 million (face value) Bridge
Notes and Warrants financing. On May 28, 2003, P-Com received an additional
$300,000 (face value) Bridge Notes and Warrants financing.
The Bridge Notes are contingently convertible into common stock of
P-Com upon the completion of an equity-based financing in an amount equal to at
least $3.0 million and the amendment of P-Com's articles of incorporation to
increase the number of authorized common stock. The Bridge Notes bear interest
at 10% per annum, and the rate will increase to 13% per annum if they remain
outstanding six months after the issuance date. The $1.5 million Bridge Notes
mature on March 25, 2004, and the $0.3 million Bridge Notes mature on May 27,
2004, and both are subordinated to the amounts due to Silicon Valley Bank under
the credit facility. The Bridge Notes are senior to the Convertible Subordinated
Notes.
In connection with the issuance of the $1.5 million Bridge Notes, P-Com
issued detachable Series A Warrants, with a three-year term, to purchase a total
of 2,500,000 shares of P-Com's common stock, at $0.12 per share, and Series B
Warrants, with a three-year term, to purchase 3,500,000 shares of P-Com's common
stock, at $0.20 per share. In connection with the issuance of the $0.3 million
Bridge Notes, P-Com issued detachable Series A Warrants, with a three-year term,
to purchase a total of 500,000 shares of its common stock, at $0.12 per share,
and Series B Warrants, with a three-year term, to purchase 700,000 shares of its
common stock, at $0.20 per share. The exercise price of the Series A and Series
B Warrants could be reduced to $0.001 per share of common stock should P-Com
fail to obtain stockholder approval for a proposed amendment to its Bylaws to
permit the issuance of convertible securities with certain conversion, exercise
or exchange price adjustment provisions. P-Com and the investor group have
agreed to extend the period of time that it has to obtain stockholder approval
to December 31, 2003. P-Com allocated the proceeds of the compound instrument to
the Bridge Notes and the Warrants based upon their relative fair values. The
fair value of the warrants was estimated using the Black-Scholes model, with the
following assumptions: expected volatility of 197%, weighted-average risk free
interest rate of 2.12%, weighted average expected lives of 3 years, and a zero
dividend yield. The value of the warrants has been disclosed in Note 5 to the
financial statements, and is being amortized over the maturity period of the
Bridge Notes to interest expense. The face value of the Bridge Notes was
considered their fair value for purposes of this allocation.
In addition, the conversion terms afforded the $1.5 million Bridge
Notes resulted in a beneficial conversion feature, represented by the amount
that the market value of the common stock on the commitment date exceeded the
conversion rate. The beneficial conversion feature which amounts to
approximately $1.1 million, which exceeds the current carrying value of the
Bridge Notes, will be recorded at an amount equal to the face value of the
Bridge Notes when the contingencies referred to above, are resolved, if ever.
F-39
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The carrying value of the Bridge Notes is being accreted to their
respective face values through periodic charges to interest expense. Total
amortization of the discounts amounted to $135,000 for the six months ended June
30, 2003.
6. BALANCE SHEET COMPONENTS
Inventory consists of the following (in thousands, unaudited):
JUNE 30, DECEMBER 31,
2003 2002
--------- -------------
Raw materials............................................................. $3,151 $9,748
Work-in-process........................................................... 962 1,580
Finished goods............................................................ 1,943 815
Inventory at customer sites............................................... 76 290
--------- -------------
$6,132 $12,433
========= =============
Other accrued liabilities consist of the following (in thousands,
unaudited):
JUNE 30, DECEMBER 31,
2003 2002
--------- -------------
Purchase commitment....................................................... $1,238 $2,195
Accrued warranty(a)....................................................... 901 936
Accrued employee benefits................................................. 838 943
Value added tax payable................................................... 414 248
Customer advances......................................................... 320 267
Lease obligations......................................................... 241 435
Senior subordinated secured promissory note(b)............................ 202 202
Interest payable.......................................................... 1,145 276
Other..................................................................... 1,596 1,272
--------- -------------
$6,895 $6,774
========= =============
-----------
(a) A summary of product warranty reserve activity is as follows:
Balance at January 1, 2003......................................................................... $936
Additions relating to products sold................................................................ 300
Payments........................................................................................... (335)
--------
Balance at June 30, 2003........................................................................... $901
========
(b) In lieu of the payment of interest due on certain of P-Com's 4.25%
Convertible Subordinated Notes due on November 1, 2002, P-Com issued a
promissory note in the amount of approximately $0.2 million. The
promissory note bears interest at 7% per annum, and matured on May 1,
2003. After maturity, interest shall accrue at the rate of 9% per
annum. The promissory note is secured by certain property and equipment
of P-Com. P-Com is in default under the terms of the promissory note,
and is currently negotiating to restructure the note.
F-40
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Deferred contract obligations
In connection with a Joint Development and License Agreement, P-Com
entered into an Original Equipment Manufacturer Agreement with a vendor. Under
the Original Equipment Manufacturer Agreement, P-Com agreed to pay the vendor
$8.0 million for the vendor's marketing efforts for P-Com products manufactured
under the Joint Development License Agreement. As of June 30, 2003 and 2002,
this $8.0 million payment obligation remains outstanding because P-Com believes
that the vendor has not performed its marketing obligations. P-Com has written
to contest the vendor's claim for $8.0 million and has asserted additional
claims against the vendor in the amount of $11,634,803, exclusive of interest.
7. INDEMNIFICATIONS
Officer and Director Indemnifications
As permitted under Delaware law and to the maximum extent allowable
under that law, P-Com has agreements whereby P-Com indemnifies its current and
former officers and directors for certain events or occurrences while the
officer or director is, or was serving, at its request in such capacity. These
indemnifications are valid as long as the director or officer acted in good
faith and in a manner that a reasonable person believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The maximum potential amount of future payments P-Com could be
required to make under these indemnification agreements is unlimited; however,
P-Com has a director and officer insurance policy that limits its exposure and
enables P-Com to recover a portion of any future amounts paid. As a result of
its insurance policy coverage, P-Com believes the estimated fair value of these
indemnification obligations is minimal.
Other Indemnifications
As is customary in P-Com's industry, as provided for in local law in
the United States and other jurisdictions, many of P-Com's standard contracts
provide remedies to its customers, such as defense, settlement, or payment of
judgment for intellectual property claims related to the use of its products.
From time to time, P-Com indemnifies customers against combinations of loss,
expense, or liability arising from various triggering events related to the sale
and the use of its products and services. In addition, from time to time, P-Com
also provides protection to customers against claims related to undiscovered
liabilities or additional product liability. In P-Com's experience, claims made
under such indemnifications are rare and the associated estimated fair value of
the liability is not material.
8. COMMON STOCK
In January 2003, P-Com sold 2.1 million shares of common stock to an
existing stockholder at a per share price of $0.18, for aggregate net proceeds
of $307,000.
In April 2003, P-Com issued 1,500,000 and 3,000,000 shares of common
stock to Liviakis Financial Communications Inc., and Cagan McAfee Capital
Partners, LLC. The common stock issued to Cagan McAfee Capital Partners was
F-41
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
8. COMMON STOCK (Continued)
issued in consideration for certain investment banking and other services
provided to the Company by Cagan McAfee Capital Partners, and the common stock
issued to Liviakis Financial Communications, Inc. was issued in consideration
for certain financial, public and investor relations services provided to P-Com
by Liviakis Financial Communications Inc. The common stock issued for these
services was valued at the market prices on the dates issued. Aggregate
compensation expense associated with these transactions during the six months
ended June 30, 2003 amounted to $450,000. P-Com incurred $1.28 million charges
during the six months ended June 30, 2002 as a result of the issuance of Common
Stock in connection with certain legal settlements and the redemption of certain
of the 4.25% Convertible Subordinated Notes.
In June 2003, P-Com acquired 920,000 shares of common stock in exchange
for property and equipment valued at $74,000. These shares are held in treasury.
In June 2002, P-Com sold approximately 11,464,000 shares of
unregistered common stock at a per share price of $0.70, for an aggregate net
proceeds of approximately $7.5 million. In May 2002, P-Com issued approximately
1,281,000 shares of unregistered common stock at an average price of $0.99 per
share in settlement of amounts owing to vendors.
In the second quarter of 2002, P-Com issued an aggregate of 284,121 new
shares of its common stock with a fair market value of $0.2 million upon the
conversion of the 4.25% Convertible Subordinated Notes with a principal value of
$0.7 million.
9. ASSET IMPAIRMENT AND OTHER RESTRUCTURING CHARGES/CREDITS
P-Com continually monitors its inventory carrying value in the light of
the soft global telecommunications market, especially with regard to an
assessment of future demand for its point-to-multipoint, and its other legacy
product line, and this has resulted in a $2.0 million charge to cost of sales
for its point-to-multipoint, end of life Tel-Link point-to-point and Air-link
spread spectrum inventories during the three months ended June 30, 2003. In the
first quarter of 2003, P-Com recorded a $3.4 million inventory related charge to
cost of sales, of which $2.0 million was related to its point-to-multipoint
inventories. These charges were offset by credits of $1.8 million in the second
quarter associated with adjustments to purchase and other commitment reserves,
also credited to cost of sales.
In the first and second quarter of 2003, P-Com continued to reevaluate
the carrying value of property and equipment relating to its point-to-multipoint
product line, that are held for sale. The evaluation resulted in a $2.5 million
provision for asset impairment in the second quarter of 2003, and $0.6 million
provision in the first quarter of 2003. As a result of these adjustments, there
is no remaining net book value of property and equipment related to the
point-to-multipoint product line.
In connection with a workforce reduction in May 2003, P-Com accrued a
$0.2 million charge relating to severance packages given to certain of its
executive officers. All pertinent criteria for recognition of this liability
were met during the period of recognition.
During the quarterly period ended June 30, 2003, P-Com settled a vendor
liability with a carrying value of $2.3 million in exchange for fixed assets,
which had nominal value, and the recovery of 920,000 shares of common stock that
the vendor owned. The gain on this transaction was allocated based upon the
relative fair values of the assets received or issued. The common shares
acquired were valued at $0.1 million and recorded in treasury. The remainder of
F-42
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
9. ASSET IMPAIRMENT AND OTHER RESTRUCTURING CHARGES/CREDITS(Continued)
the gain was allocated to debt restructuring and gain on disposal of fixed
assets in the amount of $1.5 million and $0.9 million, respectively.
10. LOSS ON DISCONTINUED OPERATIONS
In the first quarter of 2003, P-Com committed to a plan to sell its
services business, P-Com Network Services, Inc. Accordingly, beginning in the
first quarter of 2003, this business is reported as a discontinued operation and
the financial statement information related to this business has been presented
on one line, titled "Discontinued Operations" in the Consolidated Statements of
Operations for the three-month and six-months ended June 30, 2003 and 2002. On
April 30, 2003, P-Com entered into an Asset Purchase Agreement with JKB Global,
LLC to sell certain assets of P-Com Network Services, Inc. The total cash
consideration was approximately $105,000, plus the assumption of certain
liabilities. P-Com is a guarantor of P-Com Network Services, Inc.'s obligations
under its premises lease, through July 2007. As part of the sale to JKB Global,
LLC, JKB Global, LLC has agreed to sublet the premises from P-Com Network
Services, Inc. for one year beginning May 1, 2003. The terms of the sublease
require JKB Global, LLC to pay less than the total amount of rent due under the
terms of the master lease. As a result, P-Com remains liable under the terms of
the guaranty for the deficiency, under the terms of the master lease of
approximately $1.5 million, and the amount is accrued as loss on disposition of
discontinued operations in the second quarter of 2003, which was the period that
such loss was incurred. The liability remaining for this guarantee amounts to
$1.5 million as of June 30, 2003.
Summarized results of P-Com Network Services, Inc. are as follows (in thousands):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------------------------------
2003 2002 2003 2002
---------- -------- -------- ---------
Sales................................................ $ 119 $ 625 $ 1,065 $ 1,133
========= ======== ======== =========
Loss from operations................................. $ (248) $(1,391) $ (702) $ (2,951)
Loss on disposition of discontinued operations....... (1,519) - (2,923) -
---------- -------- -------- ---------
(1,767) (1,391) (3,625) (2,951)
Provision for income taxes........................... - - - -
---------- -------- -------- ---------
Net loss............................................. $(1,767) $(1,391) $(3,625) $ (2,951)
========= ======== ======== =========
F-43
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The assets and liabilities of the discontinued operations consisted of
the following (in thousands):
JUNE 30, DECEMBER 31,
2003 2002
---- ----
Total assets related to discontinued operations
Cash.............................................................. $90 $342
Accounts receivable..................................................... 7 763
Inventory............................................................... o 1,206
Prepaid expenses and other assets....................................... o 10
Property plant and equipment............................................ o 529
Other assets............................................................ 40 73
$137 $2,923
Total liabilities related to discontinued operations
Accounts payable........................................................ 309 466
Accrued rent............................................................ 1,518 o
Loan payable to bank.................................................... o 326
Other accrual........................................................... 97 293
$1,924 $1,085
The accrued rent arises from a guaranty in connection with the master
lease agreement as discussed in Note 12b to the financial statements.
11. SALES BY GEOGRAPHIC REGION AND CONCENTRATIONS
The breakdown of product sales by geographic region is as follows (in
thousands):
FOR THREE MONTHS FOR SIX MONTHS ENDED
ENDED JUNE 30
JUNE 30
2003 2002 2003 2002
---- ---- ---- ----
North America................................................. $475 $994 $759 $1,760
United Kingdom................................................ 1,619 1,550 3,196 2,919
Europe........................................................ 1,088 975 1,720 2,119
Asia.......................................................... 1,210 4,446 2,816 8,634
Other Geographic Regions...................................... 573 145 1,091 510
$4,965 $8,110 $9,582 $15,942
During the six-month period ended June 30, 2003 and 2002, four and
three customers accounted for a total of 53% and 41% of P-Com's total sales,
respectively.
F-44
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
12. EMPLOYEE STOCK OPTION EXPENSE
P-Com continues to apply the intrinsic method in accounting for stock
based employee compensation and, accordingly, has reflected the appropriate
disclosure provisions of SFAS No. 123. Had stock-based compensation costs for
its two stock-based compensation plans been determined and reported on the fair
value method at the grant dates for awards under those plans, consistent with
the method of SFAS 123, its net loss and net loss per share would have been
reported as follows:
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- ------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net loss applicable to Common Stockholders
As reported............................. $(6,025) $(8,042) $(16,399) $(23,219)
Pro forma..................................... $(6,389) $(9,256) $(17,344) $(25,665)
Net loss per share
As reportedoBasic and Diluted................. $(0.15) $(0.37) $(0.42) $(1.19)
Pro formaoBasic and Diluted................... $(0.16) $(0.42) $(0.45) $(1.32)
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 2003 and 2002, respectively: expected volatility
of 197% and 125%; weighted-average risk-free interest rates of 2.1% and 4.1%;
weighted-average expected lives of 4.0 and 3.5; respectively, and a zero
dividend yield.
13. COMPREHENSIVE LOSS
Comprehensive loss is comprised of P-Com's reported net loss and the
currency translation adjustment associated with its foreign operations.
Comprehensive loss was $5.7 million and $7.0 million for the three months ended
June 30, 2003 and 2002, respectively. Comprehensive loss was $16.1 million and
$22.1 million for the six months ended June 30, 2003 and 2002, respectively.
14. PROPOSED ACQUISITION OF ASSETS AND CERTAIN LIABILITIES OF SPEEDCOM
On June 16, 2003, P-Com entered into a definitive agreement to acquire
the operating assets of SPEEDCOM Wireless Corporation ("SPEEDCOM"), in exchange
for approximately 67.5 million shares of P-Com common stock and the assumption
of certain liabilities, including approximately $3.0 million in subordinated
debt of SPEEDCOM. SPEEDCOM manufactures, configures and delivers a variety of
broadband fixed-wireless products, including its award-winning SPEEDLAN family
of wireless Ethernet bridges and routers. Internet service providers,
telecommunications carriers and other service providers, and private
organizations in the U.S. and more than 80 foreign countries worldwide, use
SPEEDCOM's products to provide broadband "last-mile" wireless connectivity in
various point-to-point and point-to-multipoint configurations at speeds up to
155 megabits per second and distances up to 25 miles. SPEEDCOM's products
provide high-performance broadband fixed wireless solutions specifically
designed for building-to-building local area network connectivity and wireless
Internet distribution.
The subordinated debt to be assumed is expected to be amended to become
convertible into shares of P-Com common stock at approximately $0.20 per share.
The shares proposed to be issued to SPEEDCOM will equal approximately 30% of
F-45
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
P-Com's outstanding common stock immediately upon closing, assuming the
conversion of the Series B Convertible Preferred Stock as mentioned in Note 17
to the financial statements, and shares to be issued in connection with certain
financing activities. The acquisition will enable P-Com to expand its spread
spectrum product offerings and expand its distribution network. The SPEEDCOM
transaction is subject to stockholder approval of SPEEDCOM, and requires
stockholder approval of an increase in the number of authorized shares of P-Com
common stock.
In anticipation of the acquisition, P-Com has advanced $400,000 to
SPEEDCOM under a 10% convertible promissory note, as of June 30, 2003. An
additional $300,000 was advanced to SPEEDCOM under similar terms and conditions
in July 2003 and as further discussed in Note 17, an additional $200,000 was
advanced to SPEEDCOM under similar terms and conditions on August 5, 2003,
bringing the total advance to SPEEDCOM to $900,000 as of that date. P-Com
carries the amounts due in other current assets and currently plans to apply the
amounts to the ultimate purchase price of SPEEDCOM.
15. CONTINGENCIES
On February 26, 2003, GLP Intressenter AB filed a complaint against
P-Com United Kingdom, Inc., in the Birmingham County Court, United Kingdom, for
P-Com's default under the commercial lease between the two parties. GLP
Intressenter AB holds a judgment against P-Com, filed on March 7, 2003, in the
amount of $34,757.10. P-Com is currently negotiating a settlement of amounts due
GLP Intressenter AB, and the total liability is accrued on P-Com's financial
statements.
On June 17, 2003, NVA Development Corporation filed a Motion for
Judgment against P-Com for payment in the amount of $80,427, arising out of
P-Com's guaranty, of P-Com Network Services, Inc.'s performance, under a Lease
Termination Agreement between NVA Development Corporation and P-Com Network
Services, Inc.. P-Com Network Services, Inc. breached the terms of payment under
the Lease Termination Agreement. P-Com is currently negotiating a settlement of
amounts owed NVA Development Corporation. Until such settlement, if any, P-Com
has recorded all amounts due under the lease agreement.
On April 4, 2003, Christine Schubert, Chapter 7 Trustee for Winstar
Communications, Inc. et al, filed a Motion to Avoid and Recover Transfers
Pursuant to 11 U.S.C. oo547 and 550, in the United States Bankruptcy Court for
the District of Delaware and served the Summons and Notice on July 22, 2003. The
amount of the alleged preferential transfers to P-Com is approximately $13.7
million. P-Com has reviewed the Motion and believes that the payments made by
Winstar Communications, Inc. are not voidable preference payments under the
United States Bankruptcy Code. In the opinion of management, the circumstances
surrounding this matter do not rise to the level that P-Com is required to
record a liability. Any liability for this matter, if any, will be recorded when
and if estimable.
The Brevard County of Florida has filed a tax lien encumbering all
property, plant and equipment owned by P-Com located in the County for payment
of delinquent personal property taxes. The balance on June 30, 2003 claimed by
Brevard County is approximately $120,000. P-Com is currently preparing an
amended property tax return to address the unpaid taxes. Although P-Com is
negotiating this matter with the taxing authority, management has determined
that the criteria for liability recognition has been met and has recorded the
liability.
F-46
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
16. RELATED PARTY TRANSACTIONS
As mentioned in Note 8 to the financial statements, P-Com issued
3,000,000 shares of Common Stock to Cagan McAfee Capital Partners in April 2003,
as consideration for investment banking advisory services rendered. P-Com
further paid finder's fees totaling approximately $30,000 in the first quarter
of 2003 to Cagan McAfee Capital Partners for new equity raised in the quarter.
P-Com accounted for the fees as a reduction of proceeds from the offering
reflected in equity.
Myntahl Corporation, a shareholder of P-Com, is also an appointed
distributor in China and acts as its agent in Mexico. P-Com has sales of
approximately $0.5 million to Myntahl, and accrued approximately $11,000 in
commissions to Myntahl during the three months ended June 30, 2003. P-Com has
sales of approximately $0.9 million to Myntahl, and incurred approximately
$69,000 in commissions to Myntahl during the six months ended June 30, 2003.
17. SUBSEQUENT EVENTS
In July 2003, P-Com closed an additional Bridge Notes financing,
resulting in gross proceeds to it of approximately $0.6 million. In connection
with the Bridge Notes financing, P-Com will provide to SPEEDCOM a loan in the
amount of $200,000 in the form of a two-year 10% note, which is convertible into
Common Stock of SPEEDCOM.
On August 4, 2003, the principal amount and accrued interest of
$21,138,000 due under the terms of the 7% Convertible Subordinated Notes was
converted into 1,000,000 shares of Series B Convertible Preferred Stock with a
stated value of $21.138 per share. Each share of Series B Convertible Preferred
Stock converts into common stock of P-Com at $0.20 per share. The Series B
Convertible Preferred Stock contains certain provisions that may result in a
mandatory cash redemption. As a result, P-Com will reflect the carrying value of
these instruments as a mezzanine security outside of stockholders' equity.
The holders of the Series B Convertible Preferred Stock have agreed to
exercise their conversion options upon receipt of shareholder approval
increasing the number of authorized shares of common stock to allow for
conversion, and upon completion of an equity financing resulting in gross
proceed to P-Com of at least $3.0 million.
F-47
P-COM, INC.
PROXY
2003 ANNUAL MEETING OF STOCKHOLDERS
NOVEMBER __, 2003
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF P-COM, INC.
The undersigned hereby appoints Samuel Smookler and Daniel W. Rumsey and each of
them as Proxyholders of the undersigned, with full power of substitution, and
hereby authorizes them to represent and to vote, as designated below, all of the
shares of common stock of P-Com, Inc., held of record by the undersigned on
October 15, 2003, at the Annual Meeting of Stockholders of P-Com, Inc. to be
held on November __, 2003 or at any adjournment or postponement thereof.
The Board of Directors recommends a vote FOR Proposal Nos. 1, 2, 3, 4, 5, 6, 7,
and 8. This Proxy, if properly executed, will be voted as specified below and on
the reverse side. This Proxy will be voted FOR Proposal Nos. 1, 2, 3, 4, 5, 6,
7, and 8 if it is properly signed, but if no specification is made.
PLEASE SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
P R O X Y
FOLD AND DETACH HERE
P-COM, INC.
C/O EQUISERVE TRUST COMPANY N.A. P.O. BOX 8694
EDISON, NJ 08818-8694
2406
[X]
FOR ABSTAIN AGAINST
Please mark votes as in this example.
6. To elect two directors to serve for "three-year" terms ending 1.
Proposal to amend P-Com's certificate of upon the 2006 annual meeting
of stockholders or until their incorporation to increase the number of
successors are duly elected and qualified. shares of common stock
authorized for issuance from 69,000,000 to 700,000,000 shares.
01) John A. Hawkins
02) Samuel Smookler FOR WITHHELD 2. Proposal to amend P-Com's certificate of
incorporation to implement a reverse split
FOR WITHHELD of P-Com's common stock at a ratio between
ALL FROM ALL 1-for-10 and 1-for-20.
NOMINEES NOMINEES
3.
Proposal to amend P-Com's bylaws to
permit the issuance of securities that
are convertible, exercisable or exchangeable
------------------------------------------ into shares of P-Com common.
For all nominees except as written above
4. Proposal to approve the issuance of
convertible notes, convertible preferred
stock and warrants, each of which are
convertible into or exercisable for shares
of P-Com common.
5. Proposal to amend P-Com's 1995 Stock
Option/Stock Issuance Plan ("Stock Option
Plan").
7. To ratify the appointment of Aidman Piser &
Company as independent auditors of P-Com for
the fiscal year ending December 31, 2003.
8. To grant P-Com's management the
discretionary authority to adjourn the
annual meeting to a date or dates not later
than December __, 2003, if necessary to
enable P-Com's board of directors to solicit
additional proxies in favor of any of the
proposals listed above. Please sign exactly
as your name(s) is (are) shown on the share
certificate to which the Proxy applies. When
shares are held by joint tenants, both
should sign. When signing as an attorney,
executor, administrator, trustee or
guardian, please give full title as such. If
a corporation, please sign in full corporate
name by President or other authorized
officer. If a partnership, please sign in
partnership name by authorized person.
In their discretion, the Proxyholders are authorized
to vote upon such other matters as may properly come
before the meeting, including the election of any
director if any of the above nominees is unable to
serve or for good cause will not serve.
Signature: Date: Signature: Date:
------------------------ ----------------- ---------------------- ---------------------
FOLD AND DETACH HERE
ANNEX A
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT ("Agreement") is entered into as of this
16th day of June, 2003, by and between P-Com, Inc., a Delaware corporation
("Purchaser") and SPEEDCOM Wireless Corporation, a Delaware corporation
("Seller").
RECITALS
WHEREAS, the Boards of Directors of Purchaser and Seller believe it is
in the best interests of each company that Purchaser acquire certain listed
assets and assume certain listed liabilities of Seller.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the parties hereby agree as follows:
ARTICLE I
PURCHASE AND SALE OF ASSETS
SECTION 1.1 DESCRIPTION OF ASSETS TO BE ACQUIRED.
On the terms and subject to the conditions set forth in this Agreement,
at the Closing Time (as defined in Section 7.1), Seller will convey, sell,
transfer, assign, and deliver to Purchaser and Purchaser shall purchase and
acquire from Seller, all right, title, and interest in and to the assets,
properties, and rights of Seller specifically referred to in this Section 1.1
(collectively, the "Assets") free and clear of all liens, pledges, charges,
claims, actions, suits, proceedings, security interests or other encumbrances of
any sort ("Liens"), other than as set forth on Schedule 1.1. The Assets consist
of the following:
(a) All of Seller's interests in the machinery, equipment,
instruments, computer hardware and software, tooling, furniture,
fixtures, motor vehicles, supplies, repair and maintenance parts,
demonstration units and other fixed assets, together with manufacturer
or vendor warranties associated therewith, listed on Schedule 1.1 (a);
(b) All of Seller's inventories of raw materials (together
with any manufacturer or vendor warranties associated therewith),
work-in-process, finished goods and supplies, including scrapwork and
rework, listed on Schedule 1.1 (b);
(c) All of Seller's claims and rights under all agreements,
contracts, licenses, leases, franchises, instruments, documents,
purchase and sale orders and other executory commitments, all cash,
cash equivalents and bank accounts owned by Seller at the Closing Date
and all of Seller's permits, consents and certificates of any
regulatory, administrative or other governmental agency or body, listed
on Schedule 1.1 (c) hereto;
(d) All of Seller's interests in the leasehold[s] listed on
Schedule 1.1(d), and all related rights, easements and uses which
benefit or burden any such property;
(e) All of Seller's right, title and interest to trademarks,
trademark rights, service marks, service mark rights, copyrights, trade
names, trade name rights, fictitious business names, nondisclosure
agreements, confidentiality agreements, assignment of inventions
agreements, proprietary information and inventions agreements, works of
authorship, inventions, software, source code, industrial models,
industrial designs, utility models and certificates of invention,
designs emblems and logos, trade secrets, know-how, manufacturing
formulae, technical information, patents, patent applications, mask
work registrations, inventions, franchises, franchise rights, customer
and supplier lists listed on Schedule 1.1(e), together with the
goodwill associated therewith and all other proprietary rights,
information and processes;
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(f) All accounts and notes receivable of Seller, all of which
are listed on Schedule 1.1(f);
(g) Duplicates of all of Seller's original books of account,
general ledgers, sales invoices, purchase orders, accounts payable and
payroll records, tax returns and supporting schedules, drawings, files,
papers and all other records relating to Seller's business;
(h) All rights under express or implied warranties from
suppliers of Seller's business only to the extent such warranties
relate to the business;
(i) All of the causes of action, judgments, and claims or
demands of whatever kind or description arising out of the activities
of Seller's business, but only to the extent such causes of action,
judgments and claims or documents relate to the business; and
(j) All goodwill of Seller's business.
SECTION 1.2 DESCRIPTION OF ASSETS TO BE RETAINED. Notwithstanding any
provision to the contrary in this Agreement, the rights, properties and assets
(collectively, the "Excluded Assets") as set forth on Schedule 1.2 will not be
included in the Assets.
SECTION 1.3 NON-ASSIGNMENT OF CERTAIN ASSETS. Notwithstanding anything
to the contrary in this Agreement, to the extent that the assignment or
subcontracting hereunder of any of the Assets shall require the consent of any
other party (or in the event that any of the same shall be nonassignable or
unable to be subcontracted), neither this Agreement nor any action taken
pursuant to its provisions shall constitute an assignment or subcontract or an
agreement to assign or subcontract if such assignment or subcontract or
attempted assignment or subcontract would constitute a breach thereof or result
in the loss of diminution thereof; provided however, in each such case, that
Seller shall use its commercially reasonable efforts to obtain the consent of
such other party to an assignment to Purchaser. If such consent is not obtained
by the Closing, Seller shall cooperate with Purchaser in any arrangement
designed for Purchaser to perform Seller's obligation with respect to such Asset
after the Closing and for Purchaser to receive the benefits under any Asset
after the Closing, which arrangements may include enforcement, for the account
and benefit of Purchaser, of any and all rights of Seller against any other
person arising out of the breach or cancellation by such other person or
otherwise, all of such actions of Seller to be at the direction and expense of
Purchaser.
ARTICLE II
LIABILITIES OF SELLER
SECTION 2.1 ASSUMED LIABILITIES. Purchaser hereby agrees to assume,
satisfy or perform only those liabilities and obligations of Seller specifically
identified on Schedule 2.1 attached hereto (collectively, the "Assumed
Liabilities").
SECTION 2.2 LIABILITIES NOT ASSUMED. Other than the Assumed
Liabilities, Purchaser shall not assume, nor shall Purchaser or any affiliate,
or any officer, director, employee, stockholder or agent of Purchaser, be deemed
to have assumed or guaranteed, any liabilities, obligations, litigation,
disputes, debts, payables, counterclaims, rights of set-off or return, or
commitments or claims, whether such liabilities are contingent or otherwise, or
direct or indirect, of Seller in existence on or prior to or after the Closing
Time or based on any events, facts or circumstances in existence prior to the
Closing Time (collectively, the "Excluded Liabilities"). Without limiting the
generality of the foregoing, the Excluded Liabilities shall include any
liabilities or claims arising from or related to the termination of employees of
Seller on or before the Closing Date, or liabilities or claims arising from or
related to Employee Plans as defined in Section 5.16.
SECTION 2.3 RISK OF LOSS. In the event any of the Assets are
unavailable for delivery to Purchaser on the Closing Date as a result of risks
for which such Assets were insured by Seller, Purchaser may at its option elect
(i) to require Seller to deliver to Purchaser assignments of Seller's rights
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under its insurance policies, if any, applicable to such Assets and to close on
that basis, or (ii) to not close due to the failure of a condition to Closing if
the rights described in (i) above are not fully assignable and the amount of the
loss reasonably can be expected to be in excess of five hundred thousand dollars
($500,000). Seller hereby agrees to use its reasonable best efforts to make such
assignment of rights if Purchaser so elects.
ARTICLE III
PURCHASE PRICE
SECTION 3.1 CONSIDERATION. Upon the terms and subject to the conditions
contained in this Agreement, in consideration for the Assets and in full payment
therefore, Purchaser will pay, or cause to be paid, to Seller the Purchase Price
set forth in Section 3.2.
SECTION 3.2 PAYMENT OF PURCHASE PRICE. The purchase price ("Purchase
Price") to be paid or payable by Purchaser to Seller shall consist of Sixty
Seven Million, Five Hundred Thousand (67,500,000) shares of Purchaser's common
stock, par value $.001 per share (the "Common Stock"). The shares of Common
Stock issuable in payment of the Purchase Price are herein sometimes referred to
as the "Securities." The Purchase Price shall be subject to adjustment under the
circumstances and in the manner set forth in Schedule 3.2 attached hereto.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Seller, subject to such
exceptions as are specifically disclosed in the disclosure schedules supplied by
Seller to Purchaser (collectively the "Seller Disclosure Schedules"), as
referenced within the applicable Sections and dated as of the date hereof, which
disclosures shall be deemed to be representations and warranties hereunder, as
follows:
SECTION 4.1 ORGANIZATION. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
SECTION 4.2 AUTHORIZATION. Subject to Purchaser obtaining stockholder
approval to increase the number of authorized shares of Common Stock necessary
to consummate the transaction, Purchaser has full corporate power and authority
to enter into this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. Purchaser has taken all
necessary and appropriate corporate action with respect to the execution and
delivery of this Agreement, and subject to Purchaser obtaining stockholder
approval to increase the number of authorized shares of Common Stock necessary
to consummate the transaction, this Agreement constitutes a valid and binding
obligation of Purchaser, enforceable in accordance with its respective terms:
(i) except as limited by applicable bankruptcy, insolvency,
moratorium, reorganization, or other laws affecting creditors' rights
and remedies generally; and
(ii) except as the indemnification provisions contained in
this Agreement may be limited by principles of public policy.
SECTION 4.3 FINANCIAL STATEMENTS. Each of the consolidated financial
statements (including, in each case, any related notes thereto) included in the
Purchaser SEC Reports (as defined in Section 4.4) (the "Purchaser Financial
Statements") was prepared in accordance with U.S. generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
involved and each fairly presented the consolidated financial position of
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Purchaser as of the respective dates thereof and the consolidated results of its
operations and cash flows for the periods indicated, except that the unaudited
interim financial statements were or are subject to normal and recurring
year-end adjustments which were not or are not expected to be material in
amount. Purchaser's revenue recognition policies with respect to the Purchaser
Financial Statements have been made in accordance with GAAP. Purchaser maintains
a standard system of accounting in accordance with GAAP. All of Purchaser's
general ledgers, books and records are located at Purchaser's principal place of
business. Purchaser's financial reserves are adequate to cover claims incurred.
SECTION 4.4 SEC FILINGS. Purchaser has filed all forms, reports and
documents required to be filed with the SEC since January 1, 2000 and has made
available to Seller, in the form filed with the SEC, (i) its annual report on
Form 10-K for the fiscal years ended December 31, 2000, 2001 and 2002, (ii) its
quarterly report on Form 10-Q for the period ended March 31, 2003, (iii) all
proxy statements relating to Purchaser's meetings of stockholders (whether
annual or special) held since January 1, 2000, (iv) all other reports or
registration statements filed by Purchaser with the SEC since January 1, 2000,
and (v) all amendments and supplements to all such reports, proxy statements and
registration statements filed by Purchaser with the SEC. All such required
forms, reports and documents (including those enumerated in clauses (i) through
(v) of the preceding sentence) are referred to herein as the "Purchaser SEC
Reports." As of their respective dates, the Purchaser SEC Reports (i) were
prepared in accordance with the requirements of the Securities Act of 1933, as
amended (the "Securities Act"), or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as the case may be, and the rules and regulations
of the SEC thereunder applicable to such Purchaser SEC Reports, and (ii) did not
at the time they were filed (or if amended or superseded by a filing prior to
the date of this Agreement, then on the date of such filing) contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. None of
Purchaser's subsidiaries is required to file any forms, reports or other
documents with the SEC.
SECTION 4.5 CAPITALIZATION. The authorized capital stock of Purchaser
consists, or will consist immediately prior to the Closing, of:
(a) Preferred Stock. Two million (2,000,000) shares of
Preferred Stock, $.0001 par value, of which 500,000 shares are
designated Series A Junior Participating Preferred Stock, and none of
which are issued or outstanding. The rights, privileges and preferences
of the Series A Preferred Stock will be as stated in Purchaser's
Amended and Restated Certificate of Incorporation. The parties agree
and acknowledge that Purchaser may issue shares of Series A Preferred
Stock in connection with a Qualified Financing, as such term is defined
in Section 8.1(g) below.
(b) Common Stock. Sixty-nine million (69,000,000) shares of
Common Stock, of which 41,037,644 shares were issued and outstanding as
of June 3, 2003. All such shares have been duly authorized, and all
such issued and outstanding shares have been validly issued (including,
without limitation, issued in compliance with applicable federal and
state securities laws), are fully paid and nonassessable and are free
of any liens or encumbrances other than any liens or encumbrances
created by or imposed thereon by the holders thereof.
(c) Other Securities. As of June 3, 2003, Purchaser had
reserved 5,786,892 shares of Common Stock for issuance pursuant to
Purchaser's 1995 Stock Option/Stock Issuance Plan (the "Stock Option
Plan"), under which options were outstanding for 2,415,374 shares, and
10,216,701 shares of Common Stock for issuance upon exercise of
outstanding warrants. As of June 6, 2003, Purchaser had outstanding
$20,090,000 principal amount of 7% Convertible Subordinated Notes
("Convertible Notes"), convertible into 12,853,175 shares of Common
Stock. All shares of Common Stock subject to issuance as aforesaid,
upon issuance on the terms and conditions specified in the instruments
pursuant to which they are issuable, shall be duly authorized, validly
issued, fully paid and nonassessable. Since June 1, 2003, there have
been no amendments of any Purchaser stock options, warrants or
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Convertible Notes and no changes in the capital structure of Purchaser
other than issuances of Common Stock upon the exercise of options
granted under the Stock Option Plan.
SECTION 4.6 VALID ISSUANCE.
(a) The Securities, when issued and delivered in accordance with the
terms of this Agreement, will be duly and validly issued, fully paid and
nonassessable and will be free and clear of any preemptive rights, security
interests, claims, liens or other encumbrances.
(b) The issuance of the Securities are (assuming no change in
applicable law) issued in full compliance with applicable state and federal
securities laws.
SECTION 4.7 NO CONFLICT OR DEFAULT. Neither the execution and delivery
of this Agreement, nor compliance with the terms and provisions hereof and
thereof, including the consummation of the transactions contemplated hereby and
thereby, will violate any statute, regulation or ordinance of any governmental
authority, or conflict with or result in the breach of any term, condition or
provision of Purchaser's Certificate of Incorporation or Bylaws (or similar
constituent documents), or of any agreement, deed, contract, mortgage,
indenture, writ, order, decree, legal obligation or instrument to which
Purchaser is a party or by which Purchaser's assets are bound, or constitute a
default (or an event which, with the lapse of time or the giving of notice, or
both, would constitute a default) thereunder.
SECTION 4.8 ABSENCE OF CERTAIN CHANGES AND EVENTS. Except as set forth
in Schedule 4.8, or as otherwise disclosed in the Purchaser SEC Reports, since
March 31, 2003, there has not been:
(a) Any material adverse change in the financial condition,
results of operation, assets, liabilities, business or prospects of
Purchaser or any occurrence, circumstance or combination thereof which
reasonably could be expected to result in any such material adverse
change;
(b) Any material transaction relating to or involving
Purchaser (other than the transactions contemplated herein) which was
entered into or carried out by Purchaser other than in the ordinary and
usual course of business;
(c) Any adverse relationships or conditions with vendors or
customers that may have a material adverse effect on Purchaser; and
(d) Any other event or condition of any character that has
resulted in a material adverse effect, or may reasonably be expected to
have a material adverse effect, upon Purchaser.
SECTION 4.9 COMPLIANCE WITH LAWS. Except as otherwise set forth in
Schedule 4.9, or as otherwise disclosed in the Purchaser SEC Reports, Purchaser
has complied and is in compliance with all applicable foreign, federal, state,
and local laws, statutes, licensing requirements, rules, and regulations, and
judicial or administrative decisions where the failure to comply could have a
material adverse effect on Purchaser. There is no order issued, investigation,
or proceeding pending or notice served on Purchaser or, to Purchaser's
knowledge, threatened, with respect to any violation of any law, ordinance,
order, writ, decree, rule, or regulation issued by any federal, state, local, or
foreign court or governmental agency or instrumentality.
SECTION 4.10 CONSENTS. The execution and delivery of this Agreement by
Purchaser does not, and the performance of this Agreement by Purchaser shall
not, require any consent, approval, authorization or permit of, or filing with
or notification to, any governmental or regulatory authority, domestic or
foreign, or any other third party, including licensors and lenders, except for
(i) the approval by Purchaser's shareholders of an increase in the authorized
Common Stock of Purchaser; (ii) compliance with the applicable requirements, if
any, of the bulk sales laws; and (iii) consent of Silicon Valley Bank.
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SECTION 4.11 BROKER'S AND FINDER'S FEES/CONTRACTUAL LIMITATIONS. Except
as set forth in Schedule 4.11, no agent, broker, investment banker, person or
firm acting on behalf of or under the authority of Purchaser is or will be
entitled to any broker's or finder's fee or any other commission directly or
indirectly in connection with any transactions contemplated hereby. Neither
Purchaser nor any of its officers, directors, employees, agents or
representatives (collectively "Representatives") are or have been subject to any
agreement, letter of intent, or understanding of any kind which prohibits,
limits, or restricts Purchaser or its Representatives from negotiating, entering
into and consummating this Agreement and the transactions contemplated hereby
and thereby.
SECTION 4.12 DISCLOSURE OF INFORMATION. Purchaser believes it has
received all the information it considers necessary or appropriate for deciding
whether to enter into this Agreement and thereby contract to purchase the
Assets. Purchaser further represents that it has had an opportunity to ask
questions and receive answers from Seller regarding the terms and conditions of
the offering of the Assets and the business, properties, prospects and financial
condition of Seller.
SECTION 4.13 COMPLETE DISCLOSURE. No representation or warranty made by
Purchaser in this Agreement, nor any financial statements prepared and furnished
or to be prepared and furnished by Purchaser or its representatives to Seller
pursuant hereto or in connection with the transactions contemplated hereby,
contains or will contain any untrue statement of a material fact, or omits or
will omit to state a material fact necessary to make the statements or facts
contained herein or therein not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Purchaser, subject to such exceptions
as are specifically disclosed in the disclosure schedules supplied by Seller to
Purchaser (collectively the "Seller Disclosure Schedules"), as referenced within
the applicable Sections and dated as of the date hereof, which disclosures shall
be deemed to be representations and warranties hereunder, as follows:
SECTION 5.1 ORGANIZATION; GOOD STANDING. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has the corporate power and authority to own, lease and operate
its properties and to carry on its business as the same is now being conducted.
Seller is qualified as a foreign corporation and is in good standing in such
other jurisdictions in which the failure to be so qualified would have a
material adverse effect on the Assets taken as a whole (or Purchaser's interest
in or use of any material portion thereof following the Closing) (a "Material
Adverse Effect"). Except as set forth in Schedule 5.1, Seller does not own,
directly or indirectly, any equity or other ownership interest in or control any
corporation, partnership, joint venture or other entity. Seller has property,
employees or operations relating to the Assets only in the jurisdictions set
forth on Schedule 5.1(a).
SECTION 5.2 AUTHORIZATION. Subject to Seller obtaining the requisite
shareholder approval, Seller has the full corporate power and authority to enter
into this Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby, including the execution and delivery of the
general conveyances, bills of sale, assignments and other documents and
instruments evidencing the conveyance of the Assets or delivered in accordance
with Section 7.2 hereunder (the "Closing Documents"). Subject to Seller
obtaining the requisite shareholder approval, Seller has taken all necessary and
appropriate corporate action with respect to the execution and delivery of any
Closing Documents, and no other corporate proceedings on the part of Seller are
necessary to authorize this Agreement or to consummate the transactions
contemplated hereby and thereby. Subject to Seller obtaining the requisite
shareholder approval, this Agreement constitutes valid and binding obligation of
Seller, enforceable against Seller in accordance with its terms: (i) except as
limited by applicable bankruptcy, insolvency, moratorium, reorganization or
other laws affecting creditors' rights and remedies generally, (ii) except as
may be required by bulk sales provisions of the applicable state laws and (iii)
except as the indemnification provisions contained in this Agreement may be
limited by principles of public policy. The execution and delivery of this
Agreement by Seller does not, and, as of the Closing, the consummation of the
transactions contemplated hereby and thereby will not, conflict with, or result
in any violation of or default under (with or without notice or lapse of time,
or both), or give rise to a right of termination, cancellation or acceleration
of any obligation or loss of any benefit under (any such event, a "Conflict")
(i) any provision of the Certificate of Incorporation or Bylaws of Seller or
(ii) any material mortgage, indenture, lease, contract or other agreement or
material instrument, permit, concession, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to Seller or by
which its properties or assets are bound, except where such Conflict would not
have a Material Adverse Effect.
SECTION 5.3 FINANCIAL STATEMENTS. Each of the financial statements
(including, in each case, any related notes thereto) included in the Seller SEC
Reports (as defined in Section 5.4) delivered by Seller to Purchaser (the
"Seller Financial Statements") was prepared in accordance with GAAP applied on a
consistent basis throughout the periods involved and each fairly presented the
financial position of Seller as of the respective dates thereof and the results
of its operations and cash flows for the periods indicated, except that the
unaudited interim financial statements were or are subject to normal and
recurring year-end adjustments which were not or are not expected to be material
in amount. Seller's revenue recognition policies with respect to the Seller
Financial Statements have been made in accordance with GAAP. Seller maintains a
standard system of accounting in accordance with GAAP. All of Seller's general
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ledgers, books and records are located at Seller's principal place of business.
Seller's financial reserves are adequate to cover claims incurred.
SECTION 5.4 SEC FILINGS. Seller has filed all forms, reports and
documents required to be filed with the SEC since January 1, 2000 and has made
available to Purchaser, in the form filed with the SEC, (i) its annual report on
Form 10-K for the fiscal years ended December 31, 2000, 2001 and 2002, (ii) its
quarterly report on Form 10-Q for the period ended March 31, 2003, (iii) all
proxy statements relating to Seller's meetings of stockholders (whether annual
or special) held since January 1, 2000, (iv) all other reports or registration
statements filed by Seller with the SEC since January 1, 2000, and (v) all
amendments and supplements to all such reports, proxy statements and
registration statements filed by Seller with the SEC. All such required forms,
reports and documents (including those enumerated in clauses (i) through (v) of
the preceding sentence and Seller's March 31, 2003 Form 10-Q) are referred to
herein as the "Seller SEC Reports." As of their respective dates, Seller SEC
Reports (i) were prepared in accordance with the requirements of the Securities
Act or the Exchange Act, as the case may be, and the rules and regulations of
the SEC thereunder applicable to such Seller SEC Reports, and (ii) did not at
the time they were filed (or if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing) contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. None of
Seller's subsidiaries is required to file any forms, reports or other documents
with the SEC.
SECTION 5.5 ABSENCE OF CERTAIN CHANGES AND EVENTS. Except as set forth
in Schedule 5.5, or as otherwise disclosed in Seller SEC Reports, since March
31, 2003, there has not been:
(a) Any material adverse change in the financial condition,
results of operation, assets, liabilities, business, or prospects of
Seller or any occurrence, circumstance, or combination thereof which
reasonably could be expected to result in any such material adverse
change;
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(b) Any material transaction relating to or involving Seller
(other than the transactions contemplated herein) which was entered
into or carried out by Seller other than in the ordinary and usual
course of business;
(c) Any modification, waiver, change, amendment, release,
rescission, accord and satisfaction, or termination of, or with respect
to, any term, condition, or provision of any material contract,
agreement, license, or other instrument to which Seller is a party and
relating to or affecting the Assets, other than any satisfaction by
performance in accordance with the terms thereof in the usual and
ordinary course of business and consistent with prior practice;
(d) Any adverse relationships or conditions with vendors or
customers that may have a Material Adverse Effect;
(e) Any other event or condition of any character that has
resulted in a Material Adverse Effect, or may reasonably be expected to
have a Material Adverse Effect;
(f) Any labor disputes or disturbances materially affecting
Seller in an adverse manner, including, without limitation, the filing
of any petition or charge of unfair labor practices with the National
Labor Relations Board; or
(g) Any purchase or lease of, or any agreements to purchase or
lease, capital assets for Seller in excess of $10,000 individually, or
in excess of $50,000 in the aggregate.
SECTION 5.6 UNDISCLOSED LIABILITIES. There are no debts, liabilities or
obligations, other than the Excluded Liabilities with respect to which the
Assets are subject, liquidated, unliquidated, accrued, absolute, contingent, or
otherwise, that are not specifically identified in the Financial Statements.
Seller has not guaranteed the repayment of any obligations of any third party,
including affiliates and affiliated entities or persons.
SECTION 5.7 PROPERTIES. Seller has good, valid and marketable title to
all assets, tangible and intangible, purported to be owned by Seller, including
the Assets, reflected on the Financial Statements. All such assets purported to
be owned by Seller are free and clear of all mortgages, liens, charges, security
interests or other encumbrances of any nature whatsoever except as reflected in
the Financial Statements and except for liens for current taxes not delinquent,
liens imposed by operation of law and liens incurred in the ordinary course of
business. All Assets, including machinery and equipment, owned, leased or
otherwise used by Seller are in good operating condition and repair, reasonable
wear and tear excepted, and are suitable and adequate for use in the ordinary
course of business and conform in all material respects to all applicable laws.
All leases relating to Seller's business are binding, valid and enforceable in
accordance with their terms. After the Closing Time, Purchaser will be entitled
to the continued use and possession of the property leased by Seller, for the
terms specified in such leases and for the purposes for which such property is
used. There is no pending or, to Seller's knowledge threatened, condemnation or
similar proceeding affecting any of the real property used in the business
leased by Seller.
SECTION 5.8 TAXES.
(a) No Tax (as defined below) is required to be withheld pursuant to
Section 1445 of the Code as a result of the transfers contemplated by this
Agreement.
(b) There are no liens, except as disclosed in Schedule 1.1, for Taxes
upon the Assets except liens for current Taxes not yet due. Seller's unpaid
Taxes do not exceed the reserve for Taxes established on Seller's books and
records. No governmental entity (a "Taxing Authority") responsible for the
imposition of any Tax (domestic or foreign) has asserted that Seller owes any
Taxes other than as shown on its tax returns and paid with such returns.
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(c) None of the assets (including the Assets) of Seller (i) is property
that is required to be treated as owned by any other person pursuant to the
so-called "safe harbor lease" provisions of former Section 168(f)(8) of the
Code, (ii) directly or indirectly secures any debt the interest on which is tax
exempt under Section 103(a) of the Code or (iii) is "tax exempt use property"
within the meaning of Section 168(h) of the Code. The transactions contemplated
herein are not subject to the tax withholding provisions of Code Section 3406,
or of Subchapter A of Chapter 3 of the Code or of any other provision of law in
any jurisdiction. Seller is not and has never been a member of a group permitted
or required to file consolidated Tax returns and is not party to any agreement
relating to the payment or sharing of liability for Taxes. Seller has not filed
consent under Section 341(f) of the Code.
(d) For purposes of this Agreement, "Tax" (and, with correlative
meaning, "Taxes" and "Taxable") means (i) any net income, alternative or add-on
minimum tax, gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, withholding, payroll, employment, excise,
severance, stamp, occupation, premium, property, environmental or windfall
profit tax, custom, duty or other tax, governmental fee or other like assessment
or charge of any kind whatsoever, together with any interest or any penalty,
addition to tax or additional amount imposed by any Taxing Authority responsible
for the imposition of any such tax (domestic or foreign), (ii) any liability for
the payment of any amounts of the type described in (i) as a result of being a
member of an affiliated, consolidated, combined or unitary group for any Taxable
period and (iii) any liability for the payment of any amounts of the type
described in (i) or (ii) as a result of any express or implied obligation to
indemnify any other person.
SECTION 5.9 COMPLIANCE WITH LAWS. Seller has complied and is in
compliance with all applicable foreign, federal, state, and local laws,
statutes, licensing requirements, rules, and regulations, and judicial or
administrative decisions where the failure to comply could have a Material
Adverse Effect. There is no order issued, investigation, or proceeding pending
or notice served on Seller or, to Seller's knowledge, threatened, with respect
to any violation of any law, ordinance, order, writ, decree, rule, or regulation
issued by any federal, state, local, or foreign court or governmental agency or
instrumentality applicable to the Assets.
SECTION 5.10 CONSENTS. The execution and delivery of this Agreement by
Seller does not, and the performance of this Agreement by Seller shall not,
require any consent, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority, domestic or foreign,
or any other third party (except as may be required to notify the preferred
investors), including licensors and lenders, except for (i) the approval by
Seller's shareholders of this Agreement and the transactions contemplated
hereby, (ii) compliance with the applicable requirements, if any, of the bulk
sales laws, and (iii) consent from SDS and/or its affiliated lenders.
SECTION 5.11 PRODUCT LIABILITY. There are no defects in the design or
technology embodied in any product of Seller which Seller currently markets or
has marketed in the past that impairs or are likely to impair the intended use
of the product or injure any consumer of the product or third party, except that
warranty claims may arise in the normal course of business, for products shipped
prior to the Closing Time, in an aggregate amount of no more than the warranty
reserves established on the most recent balance sheet of Seller. Seller has
delivered to Purchaser copies of its warranty policies and all outstanding
warranties or guarantees relating to any of Seller's products other than
warranties or guarantees implied by law. There is no claim asserting (a) any
damage, loss or injury caused by any product of Seller, or (b) any breach of any
express or implied product warranty or any other similar claim with respect to
any product of Seller other than standard warranty obligations (to replace,
repair or refund) made by Seller in the ordinary course of business.
SECTION 5.12 PROPRIETARY RIGHTS.
(a) Seller (i) owns all right, title and interest in, (ii) is licensed,
or (iii) is otherwise entitled to exercise, without restriction, all rights to
all patents, trademarks, trade names, service marks, copyrights, mask works,
trade secrets and other intellectual property rights, and any applications or
registrations therefore, and all inventions, mask work layouts, net lists,
source code, object code, schematics, technical drawings, technology, know-how,
processes, formulas, algorithms, computer software programs, documentation, and
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all other tangible and intangible information or material in any form which form
part of the Assets, without any conflict with or infringement of the rights of
others and free and clear of any Liens (collectively, the "Intellectual Property
Rights"). Seller has the right to use, sell, license, assign, transfer, convey
or dispose of the Intellectual Property Rights or the products, processes and
materials covered thereby.
(b) Schedule 5.12(b) sets forth: (i) all copyrights, patents, patent
applications, trademarks, service marks, trade names, and other company, product
or service identifiers owned by or licensed to Seller with respect to the
Intellectual Property Rights; (ii) the jurisdictions) in which an application
for patent or application for registration, if any, of each Intellectual
Property Right has been made, including the respective application numbers and
dates; (iii) the jurisdiction(s), if any, in which each such Intellectual
Property Right has been patented or registered, including the respective patent
or registration numbers and dates; and (iv) all licenses, sublicenses and other
agreements to which Seller is a party and pursuant to which any other party is
authorized to use, exercise, or receive any benefit from the Intellectual
Property Rights (other than to end-user licenses entered into in the ordinary
course of business). Seller has delivered to Purchaser copies of all licenses,
sublicenses, and other agreements identified pursuant to clause (iv) above.
Seller and, to the knowledge of Seller, each other party thereto, is in
compliance with all material terms and conditions of all such licenses,
sublicenses, and other agreements. Seller has no knowledge of any claim,
threatened claim or facts indicating that Seller or any other party thereto has
breached any material terms or conditions of such licenses, sublicenses, or
other agreements.
(c) Seller has taken all necessary and appropriate steps, including,
without limitation, the filing of copyright, and trademark applications to
perfect and protect its interest in the Intellectual Property Rights in the
United States. Seller has the exclusive right to file, prosecute, and maintain
such applications and the patents and registrations that issue therefrom.
(d) To Seller's knowledge, after due inquiry, all patents and
registered trademarks, service marks, and other company, product or service
identifiers and copyrights held by Seller are valid and enforceable.
(e) Seller has secured or is in the process of securing valid written
assignments from all consultants and employees who contributed to the creation
or development of the Intellectual Property Rights of the rights to such
contributions that Seller does not already own by operation of law except where
failure to secure such assignments would not have a Material Adverse Effect.
(f) To Seller's knowledge, there has not been and there is not now any
unauthorized use, infringement or misappropriation of any of the Intellectual
Property Rights by any third party, including, without limitation, any service
provider of Seller.
(g) Seller has not brought any actions or lawsuits alleging (i)
infringement of any of the Intellectual Property Rights or (ii) breach of any
license, sublicense or other agreement authorizing another party to use the
Intellectual Property Rights. To Seller's knowledge, there do not exist any
facts that could form the basis of any such action or lawsuit. Seller has not
entered into any agreement granting any third party the right to bring
infringement actions with respect to, or otherwise to enforce rights with
respect to, any of the Intellectual Property Rights.
(h) No person has asserted or, to the knowledge of Seller, threatened
to assert any claims with respect to the Intellectual Property Rights (i)
contesting the right of Seller to use, exercise, sell, license, transfer or
dispose of any of the Intellectual Property Rights or any products, processes or
materials covered thereby or (ii) challenging the ownership, validity or
enforceability of any of the Intellectual Property Rights. No Intellectual
Property Right is subject to any outstanding order, judgment, decree,
stipulation or agreement related to or restricting in any manner the licensing,
assignment, transfer or conveyance thereof by Seller.
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(i) Schedule 5.12(i) sets forth: (i) all copyrights, patents, patent
applications, trademarks, service marks, trade names, trade secrets and other
company, product or service identifiers licensed to Seller ("In-Licensed
Intellectual Property Rights") and (ii) all licenses, sublicenses and other
agreements to which Seller is a party and pursuant to which Seller is authorized
to use, exercise, or receive any benefit from any In-Licensed Intellectual
Property Right (other than commercially available, i.e., "off-the-shelf"
software). Seller has delivered to Purchaser copies of all licenses, sublicenses
and other agreements identified pursuant to clause (ii) above. Seller and, to
Seller's knowledge, each other party thereto is in compliance with all material
terms and conditions of all such licenses, sublicenses, and other agreements.
Seller has no knowledge of any claim, threatened claim or the existence of any
facts indicating that Seller or any other party thereto has breached any
material terms or conditions of such licenses, sublicenses, or other agreements.
(j) No In-Licensed Intellectual Property Right is subject to any
outstanding order, judgment, decree, stipulation or agreement related to, or
restricting in any manner, the use or licensing thereof by Seller.
(k) Seller has the right to sell, assign, transfer, and convey all of
its right, title and interest in and to the Intellectual Property Rights and
In-Licensed Intellectual Property Rights to Purchaser. Seller is not, nor will
be as a result of the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby or thereby, in violation
of, breach of nor will Seller forfeit, terminate or in any way impair any
material Intellectual Property Right or In-Licensed Intellectual Property Right
whether or not pursuant to any license, sublicense or agreement with respect to
the Intellectual Property Rights or In-Licensed Intellectual Property Rights set
forth or required to be set forth in Seller Schedules, or in any way impair the
right of Purchaser to use, sell, license or dispose of or to bring any action
for the infringement of, any Intellectual Property Right or In-Licensed
Intellectual Property Right or any products or technology designed, developed,
manufactured, sold or serviced by Seller (collectively, "Products").
(l) To Seller's knowledge, the manufacture, marketing, license, sale or
use of any Products anywhere in the world does not (i) violate any material
license or agreement with any third party, or (ii) infringe on any intellectual
property right of any third party. Seller does not know of any claims to the
effect that the manufacture, marketing, license, sale or use of any Product
infringes any copyright, patent, trade secret, or other intellectual property
right of any third party or violates any license or agreement with any third
party. Seller has not received service of process or been charged in writing as
a defendant in any claim, suit, action or proceeding that alleges that any Asset
infringes any patents, trademarks, service marks, trade secret rights,
copyrights or other intellectual property rights of any third party, which has
not been finally adjudicated prior to the date hereof. Seller does not have any
outstanding restrictions or infringement liability with respect to any patent,
trade secret, trademark, service mark, copyright or other intellectual property
right of another which relates to the Assets.
(m) Seller has taken all necessary and appropriate steps to protect and
preserve the confidentiality of, and proprietary rights in, all inventions,
algorithms, formulas, schematics, technical drawings, ideas, know-how, processes
not otherwise protected by patents or patent applications, source code, program
listings, and trade secrets ("Confidential Information"), including, without
limitation, marking all such Confidential Information with appropriate
"Proprietary" or "Confidential" legends, establishing policies for the handling,
disclosure, and use of Confidential Information, and the acquisition of valid
written nondisclosure agreements from any party (including Seller employees)
receiving Confidential Information (the form of which has been provided to
Purchaser and its counsel), except where failure to take such steps would not
have a Material Adverse Effect. All Confidential Information is presently, and
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as of the Closing will be, located at Seller's address as set forth in this
Agreement. No person other than Seller has used, divulged or appropriated
Confidential Information except for the benefit of Seller. No person has used,
divulged or appropriated Confidential Information to the detriment of Seller
other than pursuant to the terms of written agreements between Seller and such
other persons.
SECTION 5.13 CONTRACTS AND COMMITMENTS.
(a) Schedule 5.13 sets forth a list of all outstanding licenses,
contracts or other agreements, whether or not in writing, to which obligations
are owing by Seller and which are related to the Assets or pursuant to which
Seller derives any benefits relating to the Assets (collectively "Contracts").
(b) Seller has performed all of its obligations under the terms of each
Contract, and is not in default thereunder, except has noted in Schedule 2.1, in
either case, except where such non-performance or default would have a Material
Adverse Effect. No event or omission has occurred which but for the giving of
notice or lapse of time or both would constitute a default by Seller or, to
Seller's knowledge, any other party thereto under any such Contract where such
default by any such party could have a Material Adverse Effect. Each Contract is
valid and binding on Seller and, to the knowledge of Seller, on each other party
thereto and is in full force and effect.
SECTION 5.14 NO CONFLICT OR DEFAULT. Neither the execution and delivery
of this Agreement, nor compliance with the terms and provisions hereof and
thereof, including the consummation of the transactions contemplated hereby and
thereby, will violate any statute, regulation, or ordinance of any governmental
authority, or conflict with or result in the breach of any term, condition, or
provision of Seller's Articles of Incorporation or Bylaws (or similar
constituent documents), as presently in effect, or of any agreement, deed,
contract, mortgage, indenture, writ, order, decree, legal obligation, or
instrument to which Seller is a party or by which it or they or any of the
Assets are or may be bound, or constitute a default (or an event which, with the
lapse of time or the giving of notice, or both, would constitute a default)
thereunder.
SECTION 5.15 LABOR RELATIONS.
(a) Seller has not failed to comply in any respect with Title VII of
the Civil Rights Act of 1964, as amended, the Fair Labor Standards Act, as
amended, the Occupational Safety and Health Act of 1970, as amended, all
applicable federal, state, and local laws, rules, and regulations relating to
employment, and all applicable laws, rules and regulations governing payment of
minimum wages and overtime rates, and the withholding and payment of taxes from
compensation of employees.
(b) There are no labor controversies pending or threatened between
Seller and any of its employees or any labor union or other collective
bargaining unit representing any of the employees.
(c) Seller has never entered into a collective bargaining agreement or
other labor union contract relating to the business and applicable to the
employees.
(d) Except as disclosed on Schedule 5.15(d), there are no written
employment or separation agreements, or oral employment or separation agreements
other than those establishing an "at-will" employment relationship between
Seller and any of the employees.
SECTION 5.16 EMPLOYEE BENEFIT PLANS.
(a) Schedule 5.16 lists all employee benefit plans (as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) and all bonus, stock option, stock purchase, incentive, deferred
compensation, supplemental retirement, severance and other similar fringe or
employee benefit plans, programs or arrangements, and any current or former
employment or executive compensation or severance agreements, written or
otherwise, for the benefit of, or relating to, any employee of Seller, any trade
or business (whether or not incorporated) which is a member or which is under
common control with Seller (an "ERISA Affiliate") within the meaning of Section
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414 of the Code (together, the "Employee Plans"), and a copy of each such
Employee Plan has been provided to Purchaser.
(b) None of the Employee Plans promises or provides retiree medical or
other retiree welfare benefits to any person; (ii) there has been no "prohibited
transaction," as such term is defined in Section 406 of ERISA and Section 4975
of the Code, with respect to any Employee Plan, which could result in any
material liability of Seller; (iii) all Employee Plans are in compliance in all
respects with the requirements prescribed by any and all statutes (including
ERISA and the Code), orders, or governmental rules and regulations currently in
effect with respect thereto (including all applicable requirements for
notification to participants or the Department of Labor, Internal Revenue
Service or Secretary of the Treasury), and Seller has performed all material
obligations required to be performed by it under, is not in any material respect
in default under or violation of, and has no knowledge of any default or
violation by any other party to, any of the Employee Plans; (iv) each Employee
Plan intended to qualify under Section 401(a) of the Code and each trust
intended to qualify under Section 501(a) of the Code does so qualify and a
favorable determination letter with respect to each such Employee Plan and trust
has been received from the Internal Revenue Service (the "IRS"), and nothing has
occurred which may reasonably be expected to cause the loss of such
qualification or exemption; (v) all contributions required to be made to any
Employee Plan pursuant to Section 412 of the Code, the terms of the Employee
Plan or any collective bargaining agreement, have been made on or before their
due dates and a reasonable amount has been accrued for contributions to each
Employee Plan for the current plan years; (vi) with respect to each Employee
Plan, no "reportable event" within the meaning of Section 4043 of ERISA
(excluding any such event for which the thirty (30) day notice requirement has
been waived under the regulations to Section 4043 of ERISA) nor any event
described in Section 4062, 4063 or 4041 of ERISA has occurred; and (vii) no
Employee Plan is covered by, and Seller has not incurred or expects to incur any
liability under, Title IV of ERISA or Section 412 of the Code.
SECTION 5.17 BROKER'S AND FINDER'S FEES / CONTRACTUAL LIMITATIONS. No
agent, broker, investment banker, person or firm acting on behalf of or under
the authority of Seller is or will be entitled to any broker's or finder's fee
or any other commission directly or indirectly in connection with any
transactions contemplated hereby, except as noted in Schedule 5.17. Neither
Seller nor any of its officers, directors, employees, agents or representatives
(collectively "Representatives") are or have been subject to any agreement,
letter of intent, or understanding of any kind which prohibits, limits or
restricts Seller or its Representatives from negotiating, entering into and
consummating this Agreement and the transactions contemplated hereby and
thereby.
SECTION 5.18 INTERESTED PARTY RELATIONSHIPS. Except as set forth in
Seller's SEC Documents, neither Seller, nor to Seller's knowledge any
shareholder of Seller, nor any officer and director or family member thereof, or
any corporation, partnership or other entity which, directly or indirectly,
alone or together with others, controls, is controlled by or is in common
control with, any officer or director or family member thereof has any material
financial interest, direct or indirect, in any material supplier or customer,
any party to any contract which is material to the business, or any competitor
with the business.
SECTION 5.19 ENVIRONMENTAL MATTERS. Seller (i) has obtained all
applicable permits, licenses and other authorizations which are required under
foreign, federal, state or local laws relating to pollution or protection of the
environment, including laws relating to emissions, discharges, releases or
threatened releases of pollutants, contaminants, or hazardous or toxic materials
or wastes into ambient air, surface water, ground water, or land or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants or hazardous or
toxic materials or wastes by Seller (or their respective agents); (ii) are in
compliance with all terms and conditions of such required permits, licenses and
authorization, and also are in compliance with all other limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
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schedules and timetables contained in such laws or contained in any regulation,
code, plan, order, decree, judgment, notice or demand letter issued, entered,
promulgated or approved thereunder; (iii) are not aware of nor have received
notice of any event, condition, circumstance, activity, practice, incident,
action or plan which is reasonably likely to interfere with or prevent continued
compliance or which would give rise to any common law or statutory liability, or
otherwise form the basis of any claim, action, suit or proceeding, based on or
resulting from Seller's (or its agent's) manufacture, processing, distribution,
use, treatment, storage, disposal, transport, or handling, or the emission,
discharge, or release into the environment, of any pollutant, contaminant, or
hazardous or toxic material waste; (iv) have taken all actions necessary under
applicable requirements of Federal, state or local environmental laws, rules or
regulations to register any products or materials required to be registered by
Seller (or any of its agents) thereunder; and (v) are not aware of any
contaminated soil or groundwater at any of the properties or portions thereof
owned or operated, leased or previously owned or leased by Seller. Seller does
not require any permits relating to pollution or protection of the environment,
including laws relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants, or hazardous or toxic materials or wastes
into ambient air, surface water, ground water, or land or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants or hazardous or toxic
materials or wastes by Seller (or its agents). Seller has disclosed to Purchaser
all documents relating to tests previously conducted or to be conducted in the
future for potential contamination at any of Seller's facilities, whether owned
or leased, including soil and water tests.
SECTION 5.20 BOOKS AND RECORDS. The books and records of Seller to
which Purchaser has been given access are the true books and records of Seller
and accurately and fairly reflect the underlying facts and transactions in all
respects.
SECTION 5.21 COMPLETE DISCLOSURE. No representations or warranties made
by Seller in this Agreement, nor any financial statements prepared and furnished
or to be prepared and furnished by Seller or its representatives to Purchaser
pursuant hereto or in connection with the transactions contemplated hereby,
contains or will contain any untrue statement of a material fact, or omits or
will omit to state a material fact necessary to make the statements or facts
contained herein or therein not misleading.
SECTION 5.22 BACKLOG. Schedule 5.22 sets forth the backlog of orders
that Seller is to ship and contract work to be performed as of May 31, 2003.
Seller either possess sufficient inventory of parts, materials and personnel to
produce the same within their scheduled delivery dates or such parts or
materials have lead times such that Seller can acquire such parts and materials
in time to produce and ship such backlog in accordance with its schedule
shipping date.
SECTION 5.23 CUSTOMERS AND SUPPLIERS. None of Seller's ten (10) largest
customers and ten (10) largest suppliers during the twelve months ended March
31, 2003 (determined on the basis of both revenues and bookings during such
period) has terminated, or to the knowledge of Seller intends to materially
reduce or terminate, the amount of its business with Seller.
SECTION 5.24 INVENTORY. Schedule 5.24 sets forth a list of all of the
inventories of Seller as of the date hereof (the "Inventories"). The Inventories
are valued at cost (determined on a first-in first-out basis) or market,
whichever is lower, with adequate allowances for excess and obsolete materials
and materials below standard quality in accordance with GAAP consistently
applied. The quality and quantity of the Inventories are such that the
Inventories are readily usable and saleable in the normal course of business of
Seller, except such amounts as are reserved in accordance with GAAP consistently
applied. All items included in such Inventories are owned by Seller. All
Inventories materially in excess of reasonable estimated requirements for the
business based on current operations for the three (3) months from the date
hereof are set forth in Schedule 5.24. Except as disclosed in Schedule 5.24,
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Seller holds no Inventories manufactured to customer specifications effectively
rendering the Inventories saleable only to that customer.
SECTION 5.25 PAYABLES; RECEIVABLES. All the accounts receivable and
notes receivable owing to Seller as of the date hereof are set forth in Schedule
5.25 and constitute valid and enforceable claims arising from bona fide
transactions in the ordinary course of business, and there are no contingent or
asserted claims, rights of return or other rights of set-off against any
thereof, except to the extent appropriately reserved for in the Seller Financial
Statements. As of the date hereof, except as set forth in Schedule 5.25, there
is (i) no account debtor or note debtor delinquent in its payment by more than
30 days, (ii) no account debtor or note debtor that has refused (or threatened
to refuse) to pay its obligations for any reason, (iii) no account debtor or
note debtor that is insolvent or bankrupt, and (iv) no account receivable or
note receivable which is pledged to any third party by Seller. Seller does not
hold deposits from customers or has not received prepaid service contract
revenue or other prepaid revenue.
SECTION 5.26 INVESTMENT ENTIRELY FOR OWN ACCOUNT. This Agreement is
made with Seller in reliance upon Seller's representation to Purchaser, which by
Seller's execution of this Agreement, Seller hereby confirms, that the
Securities to be received by Seller in payment of the Purchase Price will be
acquired by Seller for its own account, not as a nominee or agent, and not with
a view to the resale or distribution of any part thereof, and that Seller has no
present intention of selling, granting any participation in or otherwise
distributing the same. By executing this Agreement, Seller further represents
that Seller does not have any contract, undertaking, agreement or arrangement
with any person to sell, transfer or grant participations to such person or to
any third person, with respect to any of the Securities.
SECTION 5.27 DISCLOSURE OF INFORMATION. Seller believes it has received
all the information it considers necessary or appropriate for deciding whether
to enter into this Agreement and thereby contract to purchase the Securities.
Seller further represents that it has had an opportunity to ask questions and
receive answers from Purchaser regarding the terms and conditions of the
offering of the Securities and the business, properties, prospects and financial
condition of Purchaser.
SECTION 5.28 INVESTMENT EXPERIENCE. Seller acknowledges that it is able
to fend for itself, can bear the economic risk of its investment, and has such
knowledge and experience in financial or business matters that it is capable of
evaluating the merits and risks of the investment in the Securities. Seller also
represents it has not been organized for the purpose of acquiring the
Securities.
SECTION 5.29 RESTRICTED SECURITIES. Seller understands that the
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from Purchaser
in a transaction not involving a public offering and that under such laws and
applicable regulations such Securities may be resold without registration under
the Act only in certain limited circumstances. In the absence of an effective
registration statement covering the Securities or an available exemption from
registration under the Act, the Securities must be held indefinitely. In this
connection, Seller represents that it is familiar with Commission Rule 144, as
presently in effect ("Rule 144"), and understands the resale limitations imposed
thereby and by the Act.
SECTION 5.30 FURTHER LIMITATIONS ON DISPOSITION. Without in any way
limiting the representations set forth above, Seller further agrees not to make
any disposition of all or any portion of the Securities unless and until the
transferee has agreed in writing for the benefit of Seller to be bound by this
Section 5.30 and:
(a) There is then in effect a registration statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
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(b) (i) Seller shall have notified Purchaser of any proposed
disposition and shall have furnished Purchaser with a detailed
statement of the circumstances surrounding the proposed disposition,
and (ii) Seller shall have furnished Purchaser with an opinion of
outside counsel, at Seller's expense, reasonably satisfactory to
Purchaser, to the effect that such disposition will not require
registration of such shares under the Act. It is agreed that Purchaser
will require opinions of counsel for transactions made pursuant to Rule
144(k).
SECTION 5.31 LEGENDS. Seller understands that, until such time as the
Securities have been registered under the Act or may otherwise be sold by Seller
under Rule 144(k), the certificates for the Securities shall bear a restrictive
legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR IN ANY OTHER
JURISDICTION. THE SECURITIES REPRESENTED HEREBY MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE
SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT
TO RULE 144 OF SUCH ACT."
Purchaser agrees that it shall, immediately prior to a registration
statement covering the Securities being declared effective, deliver to its
transfer agent an opinion letter of counsel opining that at any time such
registration statement is effective, the transfer agent shall issue, in
connection with the issuance of the Securities, certificates representing such
Securities without the restrictive legend above, provided such Securities are to
be sold pursuant to the prospectus contained in such registration statement.
Upon receipt of such opinion, Purchaser shall cause the transfer agent to
confirm, for the benefit of the holders, that no further opinion of counsel is
required at the time of transfer in order to issue such shares without such
restrictive legend.
The legend set forth above shall be removed and Purchaser shall issue a
certificate without such legend to the holder of any Security upon which is it
stamped (unless otherwise required by state securities laws) (i) the sale of
such Security is registered under the Act (including registration pursuant to
Rule 416 thereunder); (ii) such holder provides Purchaser with an opinion of
counsel, in form, substance and scope customary for opinions of counsel in
comparable transactions, to the effect that a public sale or transfer of such
Security may be made without registration under the Act; or (iii) such holder
provides Purchaser with reasonable assurances that such Security can be sold
under Rule 144. In the event the above legend is removed from any Security and
thereafter the effectiveness of a registration statement covering such Security
is suspended or Purchaser determines that a supplement or amendment thereto is
required by applicable securities laws, then upon reasonable advance written
notice to Seller, Purchaser may require that the above legend be placed on any
Security that cannot then be sold pursuant to an effective registration
statement or under Rule 144 and Seller shall cooperate in the replacement of
such legend. Such legend shall thereafter be removed when such Security may
again be sold pursuant to an effective registration statement or under Rule 144.
ARTICLE VI
COVENANTS
SECTION 6.1 PROXY STATEMENT. As promptly as practicable after the
execution of the Agreement, Purchaser and Seller shall cooperate with each other
by providing information required to prepare and file with the SEC their
respective proxy statements (each a "Proxy Statement"). Should Purchaser and
Seller elect to file a joint Proxy Statement, Purchaser and Seller shall
cooperate in the preparation and filing of such joint Proxy Statement. Purchaser
and Seller shall notify the other party promptly upon the receipt of any
comments from the SEC or its staff or any other government official in
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connection with any filing made pursuant hereto and of any request by the SEC or
its staff or any other government official for any amendment or supplement to
the Proxy Statement or any other filing with the SEC or for additional
information and shall provide to the other party copies of all correspondence
between such party or any of its representatives, on the one hand, and the SEC
or its staff or any other government official, on the other hand, with respect
to the Proxy Statement or any other such filing.
SECTION 6.2 CONSENTS. Seller shall use its best efforts to obtain all
consents of and authorizations by third parties and to make all filings with and
give all notices to third parties that may be necessary or required in order to
consummate the sale of the Assets, and shall take such additional actions as
Purchaser may reasonably request so that the transactions contemplated by this
Agreement may be expeditiously consummated. Purchaser shall use its best efforts
to obtain all consents required to issue the Securities to Seller.
SECTION 6.3 EMPLOYMENT OFFERS. Purchaser shall offer to employ such
employees (and only such employees) of Seller as are listed on Schedule 6.3;
provided, however, that Purchaser shall not agree to maintain such employment
for any particular period of time and, if such offers are accepted, such
employees will be employed on an "at will" basis. Purchaser shall not solicit
any employees of Seller other than those set forth on Schedule 6.3.
SECTION 6.4 COBRA. Seller shall comply with the health care
continuation coverage requirements of the Consolidated Omnibus Budget
Reconciliation Act of 1985 ("COBRA") applicable to employees of Seller who are
terminated by Seller on or before the Closing Time.
SECTION 6.5 MAIL AND RECEIVABLES PAYMENTS. From and after the Closing
Time, Seller shall endorse any check or any other evidence of indebtedness or
payment received by Seller on account of any Accounts after the Closing Time to
the order of Purchaser or take other appropriate actions and shall promptly
forward such payment to Purchaser no later than five (5) business days after
actual receipt by Seller. Purchaser and Seller shall each provide to the other
all the cooperation that the other may reasonably request in connection with the
collection of the Accounts.
SECTION 6.6 NOTIFICATION OF CERTAIN MATTERS. Each party shall give
prompt notice to the other of (i) the occurrence, or non-occurrence, of any
event the occurrence, or non-occurrence, of which would be likely to cause any
representation or warranty contained in this Agreement to be untrue or
inaccurate and (ii) any failure of Purchaser or Seller, as the case may be, to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by them hereunder; provided, however, that the delivery of any
notice pursuant to this Section 6.6 shall not limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
SECTION 6.7 FURTHER ACTION. Upon the terms and subject to the
conditions hereto, Purchaser and Seller hereto shall use all reasonable efforts
to take, or cause to be taken, all actions and to do, or cause to be done, all
other things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement to
obtain in a timely manner all necessary waivers, consents and approvals and to
effect all necessary registrations and filings, and to otherwise satisfy or
cause to be satisfied all conditions precedent to its obligations under this
Agreement.
SECTION 6.8 COVENANTS AGAINST DISCLOSURE. Seller and Purchaser agree to
maintain the confidentiality of the terms and conditions of this Agreement;
provided, however, that Seller may provide copies of this Agreement and related
documents to any party who acquires, or proposes to acquire, all or
substantially all of the capital stock or remaining assets of Seller; provided,
further, however, any party hereto may disclose information to the extent
required by securities laws or as compelled by court order. Neither Seller nor
Purchaser shall disseminate (except to each other) any press release or
announcement concerning the transactions contemplated by this Agreement without
the prior written consent of the other party; provided, however, that either of
the parties hereto may disseminate information to its employees and legal and
accounting representatives.
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SECTION 6.9 NO SHOP.
(a) (i) Seller will not, and will cause its respective directors,
officers, employees, representatives, investment bankers, agents and affiliates
not to, directly or indirectly, (i) solicit or encourage submission of any
inquiries, proposals or offers by any person, entity or group (other than
Purchaser and its affiliates, agents and representatives), or (ii) participate
in any discussions or negotiations with, or disclose any information concerning
Seller or any of its subsidiaries to, or afford any access to the properties,
books or records of Seller or any of its subsidiaries to, or otherwise assist,
facilitate or encourage, or enter into any agreement or understanding with, any
person, entity or group (other than Purchaser and its affiliates, agents and
representatives), in connection with any Acquisition Proposal with respect to
Seller. For the purposes of Section 6.9(a) of this Agreement, an "Acquisition
Proposal" shall mean any proposal relating to the possible acquisition of
Seller, whether by way of merger, purchase of at least 50% of the capital stock
of Seller, purchase of all or substantially all of the assets of Seller, or
otherwise. In addition, subject to the other provisions of this Section 6.9,
from and after the date of this Agreement until the earlier of the Closing Time
or the termination of this Agreement, Seller and its subsidiaries will not, and
will cause their respective directors, officers, employees, representatives,
investment bankers, agents and affiliates not to, directly or indirectly, make
or authorize any statement, recommendation or solicitation in support of any
Acquisition Proposal with respect to Seller made by any person, entity or group
(other than Purchaser and its affiliates). Seller will immediately cease any and
all existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing.
(ii) Notwithstanding the provisions of paragraph (i) above,
prior to the approval of this Agreement by the stockholders of Seller,
Seller may, to the extent the Board of Directors of Seller determines,
in good faith, after consultation with outside legal counsel, that the
Board's fiduciary duties under applicable law require it to do so,
participate in discussions or negotiations with, and, subject to the
requirements of paragraph (iii) below, furnish information to any
person, entity or group after such person, entity or group shall have
delivered to Seller in writing, a Superior Proposal. For the purposes
of Sections 6.9(a) of this Agreement, a "Superior Proposal" means an
unsolicited, bona fide Acquisition Proposal which the Board of
Directors of Seller in its good faith reasonable judgment determines,
after consultation with its independent financial advisors, could
reasonably be expected to result in a transaction more favorable to the
stockholders of Seller from a financial point of view than the
transactions contemplated by this Agreement and for which financing, to
the extent required, is then committed or which, in the good faith
reasonable judgment of the Board of Directors (after consultation with
independent financial advisors), is reasonably capable of being
financed by such person, entity or group and which is likely to be
consummated.
(iii) Seller may furnish information to a person, entity or
group that has made a Superior Proposal only if Seller (a) first
notifies Purchaser of the information proposed to be disclosed, (b)
first complies with the provisions of paragraph (v) below and (c)
provides such information pursuant to a confidentiality agreement in
form approved by Purchaser.
(iv) If Seller receives a Superior Proposal, nothing contained
in this Agreement shall prevent the Board of Directors of Seller from
approving such Superior Proposal or recommending such Superior Proposal
to Seller's stockholders, if the Board determines in good faith, after
consultation with outside legal counsel, that such action is required
by its fiduciary duties under applicable law; in such case, the Board
may amend or withdraw its recommendation of the asset purchase
contemplated herein.
(v) Seller will (i) notify Purchaser immediately if any
inquiry or proposal is made or any information or access is requested
in connection with an Acquisition Proposal or potential Acquisition
Proposal and (ii) immediately communicate to Purchaser the terms and
conditions of any such Acquisition Proposal or potential Acquisition
Proposal or inquiry and the identity of the offeror or potential
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offeror. In addition to the foregoing, Seller shall provide Purchaser
with at least forty-eight (48) hours' prior written notice (or such
lesser prior written notice as provided to the members of Seller's
Board of Directors but in no event less than eight (8) hours) of any
meeting of Seller's Board of Directors at which Seller's Board of
Directors is reasonably expected to consider a Superior Proposal and
provide Purchaser with at least two (2) business days' prior written
notice (or such lesser prior notice as provided to the members of
Seller's Board of Directors but in no event less than eight (8) hours)
of a meeting at which Seller's Board of Directors is reasonably
expected to recommend a Superior Proposal to its stockholders.
(vi) Nothing contained in this Section 6.9 shall prevent
Seller or its Board of Directors from complying with the provisions of
Rules 14e-2 and 14d-9 promulgated under the Exchange Act.
(b) (i) From and after the date of this Agreement until the earlier of
the Closing Time or the termination of this Agreement, Purchaser and its
subsidiaries will not, and will cause their respective directors, officers,
employees, representatives, investment bankers, agents and affiliates not to,
directly or indirectly, (i) solicit or encourage submission of any inquiries,
proposals or offers by any person, entity or group (other than Seller and its
affiliates, agents and representatives), or (ii) participate in any discussions
or negotiations with, or disclose any information concerning Seller or any of
its subsidiaries to, or afford any access to the properties, books or records of
Purchaser or any of its subsidiaries to, or otherwise assist, facilitate or
encourage, or enter into any agreement or understanding with, any person, entity
or group (other than Seller and its affiliates, agents and representatives), in
connection with any Acquisition Proposal with respect to Purchaser. For the
purposes of Section 6.9(b) of this Agreement, an "Acquisition Proposal" shall
mean any proposal relating to the possible acquisition of Purchaser, whether by
way of merger, purchase of at least 50% of the capital stock of Purchaser,
purchase of all or substantially all of the assets of Purchaser, or otherwise.
In addition, subject to the other provisions of this Section 6.9, from and after
the date of this Agreement until the earlier of the Closing Time or the
termination of this Agreement, Purchaser and its subsidiaries will not, and will
cause their respective directors, officers, employees, representatives,
investment bankers, agents and affiliates not to, directly or indirectly, make
or authorize any statement, recommendation or solicitation in support of any
Acquisition Proposal with respect to Purchaser made by any person, entity or
group (other than Seller and its affiliates). Purchaser will immediately cease
any and all existing activities, discussions or negotiations with any parties
conducted heretofore with respect to any of the foregoing.
(ii) Notwithstanding the provisions of paragraph (i) above,
prior to the approval of this Agreement by the stockholders of
Purchaser, Purchaser may, to the extent the Board of Directors of
Purchaser determines, in good faith, after consultation with outside
legal counsel, that the Board's fiduciary duties under applicable law
require it to do so, participate in discussions or negotiations with,
and, subject to the requirements of paragraph (iii) below, furnish
information to any person, entity or group after such person, entity or
group shall have delivered to Purchaser in writing, a Superior
Proposal. For the purposes of Sections 6.9(b) of this Agreement, a
"Superior Proposal" means an unsolicited, bona fide Acquisition
Proposal which the Board of Directors of Purchaser in its good faith
reasonable judgment determines, after consultation with its independent
financial advisors, could reasonably be expected to result in a
transaction that, without the asset purchase, is more favorable to the
stockholders of Purchaser from a financial point of view than such
transaction with the asset purchase and for which financing, to the
extent required, is then committed or which, in the good faith
reasonable judgment of the Board of Directors (after consultation with
independent financial advisors), is reasonably capable of being
financed by such person, entity or group and which is likely to be
consummated.
(iii) Purchaser may furnish information to a person, entity or
group that has made a Superior Proposal only if Purchaser (a) first
notifies Seller of the information proposed to be disclosed, (b) first
complies with the provisions of paragraph (v) below and (c) provides
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such information pursuant to a confidentiality agreement in a form
approved by Seller.
(iv) If Purchaser receives a Superior Proposal, nothing
contained in this Agreement shall prevent the Board of Directors of
Purchaser from approving such Superior Proposal or recommending such
Superior Proposal to Purchaser's stockholders, if the Board determines
in good faith, after consultation with outside legal counsel, that such
action is required by its fiduciary duties under applicable law; in
such case, the Board may amend or withdraw its recommendation of the
asset purchase.
(v) Purchaser will (i) notify Seller immediately if any
inquiry or proposal is made or any information or access is requested
in connection with an Acquisition Proposal or potential Acquisition
Proposal and (ii) immediately communicate to Seller the terms and
conditions of any such Acquisition Proposal or potential Acquisition
Proposal or inquiry and the identity of the offeror or potential
offeror. In addition to the foregoing, Purchaser shall provide Seller
with at least forty-eight (48) hours' prior written notice (or such
lesser prior written notice as provided to the members of Purchaser's
Board of Directors but in no event less than eight (8) hours) of any
meeting of Purchaser's Board of Directors at which Purchaser's Board of
Directors is reasonably expected to consider a Superior Proposal and
provide Seller with at least two (2) business days' prior written
notice (or such lesser prior notice as provided to the members of
Purchaser's Board of Directors but in no event less than eight (8)
hours) of a meeting at which Purchaser's Board of Directors is
reasonably expected to recommend a Superior Proposal to its
stockholders.
(vi) Nothing contained in this Section 6.9 shall prevent
Purchaser or its Board of Directors from complying with the provisions
of Rules 14e-2 and 14d-9 promulgated under the Exchange Act.
SECTION 6.10 REGISTRATION RIGHTS. At the Closing, Purchaser and Seller
shall enter into a Registration Rights Agreement, in substantially the form
attached hereto as Exhibit 6.10.
SECTION 6.11 BULK SALES LAWS. Purchaser and Seller each hereby waive
compliance by Seller with the provisions of the "bulk sales," "bulk transfer" or
similar laws of any state.
SECTION 6.12 ALLOCATION OF TRANSFER TAXES. Purchaser and Seller will
agree to the allocation of the transfer taxes incurred in connection with the
transactions contemplated herein within 30 days following the execution of this
Agreement.
ARTICLE VII
CLOSING
SECTION 7.1 CLOSING TIME. The closing of the transactions contemplated
by this Agreement shall occur as soon as reasonably practicable after the
approval by each of Purchaser's and Seller's shareholders of the transactions
contemplated by this Agreement ("Shareholder Approval") (the date and time of
the Closing being the "Closing Time"). The Closing shall take place no later
than December 31, 2003. The Closing shall take place at the offices of
Purchaser, 3175 S. Winchester Blvd., Campbell, California 95008, or at such
other place as may be agreed to in writing by Purchaser and Seller. The
"Closing" shall mean the deliveries to be made by Seller and Purchaser at the
Closing Time in accordance with this Agreement.
SECTION 7.2 DELIVERIES BY SELLER. At the Closing, Seller shall deliver
to Purchaser all duly and properly executed, the following:
(a) (1) A good and sufficient bill of sale in the form
attached as Exhibit 7.2(a) (the "Bill of Sale") for the Assets to be
transferred from Seller to Purchaser selling, delivering, transferring,
and assigning to Purchaser title to all of Seller's right, title, and
interest to the Assets, free and clear of all mortgages, pledges,
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liens, encumbrances, security interests, equities, charges, and
restrictions of any nature whatsoever.
(b) Valid assignments of rights for all Contracts and other
third party or governmental consents necessary in order for Purchaser
to operate Seller's business.
(c) Valid patent, patent application, trademark, trademark
application, trade secret, domain name and other intellectual property
assignments in the forms attached as Exhibit 7.2(c).
(d) Valid proprietary information and invention agreements
executed by the employees of Seller listed in Schedule 6.3.
(e) The Registration Rights Agreement.
(f) An accepted offer of employment with Purchaser from all
the employees of Seller listed on Schedule 6.3.
(g) Copies of all books and records related to Seller.
(h) The certificates and other documents required to be
delivered as a condition to closing pursuant to Section 8.1.
SECTION 7.3 DELIVERIES BY PURCHASER. At the Closing, Purchaser shall
deliver to Seller:
(a) The Purchase Price in the form of a stock certificate in
the name of Seller.
(b) The Registration Rights Agreement.
(c) The certificates and other documents required to be
delivered as a condition to closing pursuant to Section 8.2.
SECTION 7.4 FURTHER ASSURANCES. At or after the Closing Time, Seller
and Purchaser shall prepare, execute, and deliver, at its expense, such further
instruments of conveyance, sale, assignment, or transfer, and shall take or
cause to be taken such other or further action, as any party shall reasonably
request of any other party at any time or from time to time in order to perfect,
confirm, or evidence in Purchaser's title to all or any part of the Assets or to
consummate, in any other manner, the terms and provisions of this Agreement.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS
SECTION 8.1 CONDITIONS TO OBLIGATIONS OF PURCHASER. Each and every
obligation of Purchaser to be performed at the Closing shall be subject to the
satisfaction as of or before the Closing Time of the following conditions
(unless waived in writing by Purchaser):
(a) Representations and Warranties. The representations and
warranties of Seller set forth in this Agreement shall have been true
and correct when made and shall be true and correct at and as of the
Closing Time as if such representations and warranties were made as of
such date and time.
(b) Performance of Agreement. All covenants, conditions, and
other obligations under this Agreement which are to be performed or
complied with by Seller, including necessary approvals of Seller's
Board of Directors and shareholders, shall have been fully performed
and complied with at or prior to the Closing Time.
(c) Shareholder Approval. This Agreement shall have been
approved and adopted by the requisite vote of Seller's shareholders
under applicable law and pursuant to Seller's Certificate of
Incorporation.
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(d) Absence of Governmental or Other Objection. There shall be
no pending or threatened lawsuit challenging the transaction by any
body or agency of the federal, state, or local government or by any
third party, and the consummation of the transaction shall not have
been enjoined by a court of competent jurisdiction as of the Closing
Time.
(e) Approval of Documentation. The form and substance of all
certificates, instruments, opinions, and other documents delivered or
to be delivered to Purchaser under this Agreement shall be satisfactory
to Purchaser in all respects.
(f) Qualified Financing. The Purchaser shall have consummated
an equity financing transaction generating at least $5,000,000 in net
proceeds to the Purchaser ("Qualified Financing").
(g) Licenses. Purchaser shall have received all licenses from
all appropriate governmental agencies or third parties to operate
Seller's Business in the same manner as Seller operated the business
prior to the Closing Time.
(h) Note Conversion. All principal and accrued but unpaid
interest on the Purchaser's 7% Convertible Subordinated Notes due 2005
(the "Notes") shall have converted into Shares of Common Stock of the
Purchaser at a conversion price of at least $.20 per share of Common
Stock ("Note Conversion Price").
(i) Bridge Note Conversion. Purchaser shall have converted
each of its promissory notes totaling $1,500,000 issued on March 26,
2003, and any additional promissory notes issued from March 26, 2003
until the Closing, into Shares of Common Stock of the Purchaser
(collectively, the "Bridge Notes"), in accordance with the terms of
such Bridge Notes.
(j) Officer's Certificate. Seller shall have delivered to
Purchaser an officer's certificate, dated the date of the Closing, to
the effect that all of the conditions to Closing set forth in this
Section 8.1 have been satisfied.
(k) Required Consents. Seller shall have delivered to
Purchaser all required approvals and consents to the Agreement so as to
be in compliance with Section 5.10.
SECTION 8.2 CONDITIONS TO OBLIGATIONS OF SELLER. Each and every
obligation of Seller to be performed at the Closing Time shall be subject to the
satisfaction as of or before such time of the following conditions (unless
waived in writing by Seller):
(a) Representations and Warranties. Purchaser's
representations and warranties set forth in this Agreement shall have
been true and correct when made and shall be true and correct at and as
of the Closing Time as if such representations and warranties were made
as of such time and date.
(b) Performance of Agreement. All covenants, conditions, and
other obligations under this Agreement which are to be performed or
complied with by Purchaser, including necessary approvals of
Purchaser's Board of Directors and shareholders, shall have been fully
performed and complied with at or prior to the Closing Time,
(c) Shareholder Approval. This Agreement and the increase in
authorized shares of Purchaser shall have been approved and adopted by
the requisite vote of Purchaser's shareholders under applicable law and
pursuant to Purchaser's Certificate of Incorporation.
(d) Absence of Governmental or Other Objection. There shall be
no pending or threatened lawsuit challenging the transaction by any
body or agency of the federal, state, or local government, and the
consummation of the transaction shall not have been enjoined by a court
of competent jurisdiction as of the Closing Time.
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(e) Performance of Agreement. All covenants, conditions, and
other obligations under this Agreement which are to be performed or
complied with by Purchaser, including necessary approvals of
Purchaser's Board of Directors and shareholders, shall have been fully
performed and complied with at or prior to the Closing Time, including
the delivery of the instruments and documents in accordance with
Section 7.3 hereof.
(f) Approval of Documentation. The form and substance of all
certificates, instruments, opinions, and other documents delivered or
to be delivered to Seller under this Agreement shall be satisfactory to
Seller in all respects.
(g) Officer's Certificate. Purchaser shall have delivered to
Seller an officer's certificate, dated the date of the Closing, to the
effect that all of the conditions to Closing set forth in this Section
8.2 have been satisfied.
(h) Qualified Financing. The Purchaser shall have consummated
a Qualified Financing.
(i) Note Conversion. The Notes shall have converted into
Common Stock of the Purchaser at the Note Conversion Price.
(j) Bridge Note Conversion. The Bridge Notes shall have
converted into Common Stock of the Purchaser in accordance with their
terms.
ARTICLE IX
INDEMNIFICATION
9.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of each party hereto set forth in this Agreement (as modified by
Seller Schedules) shall survive until the date that is one year after the
Closing Date; provided, however, that the representations and warranties
contained in Sections 5.6, 5.8, 5.11 and 5.12(a) shall survive until the date
that is three (3) years after the Closing Date. All covenants and agreements
made by the parties to this Agreement that contemplates performance following
the Closing Date shall survive the Closing Date. All other covenants and
agreements, including without limitation Section 6.8 of this Agreement, shall
not survive the Closing Date and shall terminate as of the Closing.
9.2 OBLIGATION OF SELLER TO INDEMNIFY, REIMBURSE, ETC. Subject to the
limitations set forth in Sections 9.1, 9.5 and 9.6, Seller and its successors
and assigns, jointly and severally, shall indemnify, reimburse, defend and hold
harmless Purchaser and its respective successors and assigns and each of their
respective directors, officers, employees, and its respective successors and
assigns from and against any claims, losses, liabilities, damages, causes of
action, costs and expenses (including reasonable attorney's, accountant's,
consultant's and expert's fees and expenses) (collectively "Losses") resulting
from, imposed upon, incurred or suffered by any of them, directly or indirectly,
based upon, arising out of or otherwise in respect of (i) any inaccuracy in or
any breach of any representation or warranty of Seller (after taking into
account the exceptions to such representations and warranties which are set
forth on the Seller Schedules), and (ii) the nonfulfillment or breach on the
part of Seller of any unwaived covenant or agreement set forth in this Agreement
which survives the Closing Date in accordance with Section 9.1.
9.3 OBLIGATION OF PURCHASER TO INDEMNIFY, REIMBURSE, ETC. Subject to
the limitations set forth in Sections 9.1, 9.5 and 9.6, Purchaser and its
respective successors and assigns, jointly and severally, shall indemnify,
defend and hold harmless Seller and its respective successors and assigns and
each of its respective directors, officers, employees, and its respective
successors and assigns from and against any Losses resulting from, imposed upon,
incurred or suffered by any of them, directly or indirectly, based upon, arising
out of or otherwise in respect of (i) any inaccuracy in or breach of any
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representation or warranty of Purchaser (after taking into account the
exceptions to such representations and warranties which are set forth on the
Purchaser Schedules) and (ii) the nonfulfillment on the part of Purchaser of any
unwaived covenant or agreement set forth in this Agreement which survives the
Closing Date in accordance with Section 9.1.
9.4 NOTICE AND OPPORTUNITY TO DEFEND AGAINST THIRD PARTY CLAIMS.
(a) Promptly after receipt from any third party by any party hereto of
a written notice of any demand, claim or circumstance that, immediately or with
the lapse of time, would give rise to a claim or the commencement (or threatened
commencement) of any action, proceeding or investigation (an "Asserted
Liability") that may result in Losses for which indemnification may be sought
hereunder, the party seeking indemnification pursuant to Section 9.2 or 9.3 (the
"Indemnitee") shall give written notice thereof (the "Claims Notice") to the
party obligated to provide indemnification pursuant to Section 9.2 or 9.3 (the
"Indemnifying Party"), provided, however, that a failure to give such notice
shall not prejudice the Indemnitee's right to indemnification hereunder except
to the extent that the Indemnifying Party is actually and materially prejudiced
thereby. The Claims Notice shall describe the Asserted Liability in reasonable
detail, and shall indicate the amount (estimated, if necessary) of the Losses
that have been or may be suffered by the Indemnitee when such information is
available.
(b) The Indemnifying Party may elect to compromise or defend, at its
own expense and by its own counsel, any Asserted Liability. If the Indemnifying
Party elects to compromise or defend such Asserted Liability, it shall, within
20 business days following its receipt of the Claims Notice (or sooner, if the
nature of the Asserted Liability so requires) notify the Indemnitee of its
intent to do so, and the Indemnitee shall cooperate, at the expense of the
Indemnifying Party, in the compromise of, or defense against, such Asserted
Liability. If the Indemnifying Party elects not to compromise or defend the
Asserted Liability, fails to notify the Indemnitee of its election as herein
provided or contests its obligation to provide indemnification under this
Agreement, the Indemnitee may pay, compromise or defend such Asserted Liability
with all reasonable costs and expenses borne by the Indemnifying Party.
Notwithstanding the foregoing, neither the Indemnifying Party nor the Indemnitee
may settle or compromise any claim without the consent of the other party,
provided, however, that such consent to settlement or compromise shall not be
unreasonably withheld. In any event, the Indemnitee and the Indemnifying Party
may participate, at their own expense, in the defense of such Asserted
Liability; provided, however, that if the Indemnitee reasonably determines that
there is a conflict of interest between the Indemnified Party and the
Indemnitee, the fees of such counsel shall be borne by the Indemnifying Party.
If the Indemnifying Party chooses to defend any claim, the Indemnitee shall make
available to the Indemnifying Party any books, records or other documents within
its control that are necessary or appropriate for such defense.
9.5 PROCEDURE FOR INDEMNIFICATION WITH RESPECT TO NON-THIRD PARTY
CLAIMS. In the event that Purchaser, on the one hand, and Seller, on the other
hand, assert the existence of a claim giving rise to Losses (but excluding
claims resulting from the assertion of liability by third parties), Indemnitee
shall give written notice to the Indemnifying Party. Such written notice shall
state that it is being given pursuant to this Section 9.5, specify the nature
and amount of the claim asserted and indicate the date on which such assertion
shall be deemed accepted and the amount of the claim deemed a valid claim (such
date to be established in accordance with the next sentence). If Indemnifying
Party, within sixty (60) days after the mailing of notice by Indemnitee, shall
not give written notice to Indemnitee announcing its intent to contest such
assertion of Indemnitee, such assertion shall be deemed accepted and the amount
of claim shall be deemed a valid claim. In the event, however, that Indemnifying
Party contests the assertion of a claim by giving such written notice to
Indemnitee within said period, then the parties shall act in good faith to reach
agreement regarding such claim. In the event that litigation shall arise with
respect to any such claim, the prevailing party shall be entitled to
reimbursement of costs and expenses incurred in connection with such litigation,
including attorney's fees, if the parties hereto, acting in good faith, cannot
reach agreement with respect to such claim within ten (10) days after such
notice.
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9.6 NET INDEMNITY. The amount of any Losses from and against which
either party is liable to indemnify, reimburse, defend and hold harmless the
other party or any other person pursuant to Section 9.2 or Section 9.3 shall be
reduced by any insurance or other recoveries or any tax benefit that such
indemnified person realizes or may realize as a result of or in connection with
such Loss and increased by any taxes such indemnified person realizes or may
realize in respect of indemnification for such Loss.
9.7 LIMITS ON INDEMNIFICATION. Absent fraud or willful misconduct of
any party (for which there shall be no limitation of liability of any party), no
party shall have any right to seek indemnification under this Agreement (i)
until Losses which would otherwise be indemnifiable hereunder and have been
incurred by such party and other indemnitees associated with or related to such
party exceed $100,000, after insurance or other recoveries, and on an after-tax
basis, in the aggregate (provided that after such $100,000 amount has been
satisfied, the Indemnitee shall be entitled to recover all Losses, including
such $100,000 amount); or (ii) for an aggregate amount in excess of $1,000,000.
The parties to this Agreement shall have liabilities and obligations for Losses
under this Article IX only with respect to claims submitted or notice of claims
provided during the relevant time period of survivability of the specific
representation, warranty, covenant or agreement as set forth herein.
Notwithstanding the expiration dates of the representations, warranties,
covenants and agreements set forth herein, if any party to this Agreement shall
provide notice to the other parties with respect to the submission of a claim
during the time period of survivability of such representation, warranty,
covenant or agreement, such Indemnifying Party's (as defined herein) liability
or obligation for Losses identified in such notice shall continue in full force
and effect until a final determination of such liability or obligation with
respect to those claims timely made.
ARTICLE X
TERMINATION
10.1 TERMINATION OF AGREEMENT. The parties may terminate this Agreement
with the prior authorization of their respective Board of Directors as provided
below:
(a) This Agreement may be terminated by the mutual written
consent of the parties at any time prior to the Closing Time before or
after the approval of this Agreement and the transactions contemplated
hereby by the Purchaser shareholders or the Seller shareholders.
(b) This Agreement may be terminated by either Purchaser or
Seller, before or after the approval of this Agreement and the
transactions contemplated hereby by the Purchaser shareholders or the
Seller shareholders, (i) if the Closing Time shall not have occurred by
December 31, 2003 (the "Outside Date") (unless the failure to
consummate the transactions contemplated hereby by such date is due to
the action or failure to act of the party seeking to terminate) or (ii)
if any condition to the obligation of the terminating party to
consummate the transactions contemplated hereby shall have become
incapable of being satisfied prior to the Outside Date as of a result
of a governmental order that is final and non-appealable.
(c) This Agreement may be terminated by Seller at any time
prior to the Closing Time, before or after the approval of this
Agreement and the transactions contemplated hereby by the Purchaser
shareholders or the Seller shareholders, in the event that Purchaser
shall have breached any of its representations, warranties or covenants
under this Agreement which breach (i) would give rise to the failure of
a condition set forth in Section 8.2 above, and (ii) cannot be or has
not been cured within 30 days after the giving of written notice by
Seller to Purchaser of such breach (provided that Seller is not then in
material breach of any representation, warranty or covenant contained
in this Agreement).
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(d) This Agreement may be terminated by Purchaser at any time
prior to the Closing Time, before or after the approval of this
Agreement and the transactions contemplated hereby by the Purchaser
shareholders or the Seller shareholders, in the event that the Seller
shall have breached any of its representations, warranties or covenants
under this Agreement which breach (i) would give rise to the failure of
a condition set forth in Section 8.1 above, and (ii) cannot be or has
not been cured within 30 days after the giving of written notice by
Purchaser to Seller of such breach (provided that Purchaser is not then
in material breach of any representation, warranty or covenant
contained in this Agreement).
(e) This Agreement may be terminated by Purchaser (i) if
Seller's Board of Directors (A) enters into or publicly announces its
intention to enter into an agreement or agreement in principle with
respect to an Acquisition Proposal, and (B) withdraws its
recommendation to the Seller shareholders of this Agreement or the
transactions contemplated hereby, and (C) after the receipt of an
Acquisition Proposal, fails to confirm publicly, within ten days after
the request of Purchaser, its recommendation to the Seller shareholders
that the Seller shareholders adopt and approve this Agreement and the
transactions contemplated hereby; or (ii) if Seller or any of its
Representatives takes any of the actions that would be proscribed by
Section 6.9(a) above.
(f) This Agreement may be terminated by Seller (i) if
Purchaser's Board of Directors (A) enters into or publicly announces
its intention to enter into an agreement or agreement in principle with
respect to a Acquisition Proposal, and (B) withdraws its recommendation
to the Purchaser shareholders that the Purchaser shareholders approve
the issuance of the Securities as provided by the Agreement or, if
necessary, that the Purchaser shareholders approve an amendment to the
Certificate of Incorporation of Purchaser to increase the authorized
number of Purchaser Shares, and (C) after receipt of a Purchaser
Acquisition Proposal, fails to publicly confirm, within ten days after
the request of Seller, its recommendation to the Purchaser shareholders
described in the foregoing clause (B); or (ii) if Purchaser or any of
its Representatives takes any of the actions that would be proscribed
by Section 6.9(b).
(g) Either party may terminate this Agreement by giving
written notice to the other party at any time after the special meeting
of the Seller shareholders called for the purpose of approving this
Agreement and the transactions contemplated hereby in the event that
such matters fail to receive the requisite approval by the Seller
shareholders.
(h) Either party may terminate this Agreement by giving
written notice to the other party at any time after the special meeting
of the Purchaser's shareholders called for the purpose of approving
this Agreement and the transactions contemplated hereby in the event
that such matters fail to receive the requisite approval by the
Purchaser shareholders.
10.2 EFFECT OF TERMINATION.
(a) Except as provided in clauses (b) or (c) of this Section 10.2, if
either party terminates this Agreement pursuant to Section 10.1 above, all
rights and obligations of the parties hereunder shall terminate without any
liability of either party to the other party (except for any liability of any
Party then in breach); provided, however, that this Section 10.2 and Article XI
below, shall survive any such termination.
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(b) If this Agreement is terminated (i) by Purchaser pursuant to
Section 10.1(d) or Section 10.1(e), or (ii) any person makes an Acquisition
Proposal that remains in effect on the date 60 days prior to the Outside Date
and the requisite approval of the Seller's shareholders is not obtained prior to
termination of this Agreement pursuant to Section 10.1(b), then, within sixty
(60) days after such termination, Seller shall pay Purchaser the sum of $500,000
in immediately available funds.
(c) If this Agreement is terminated (i) by Seller pursuant to Section
10.1(c) or Section 10.1(f) or (ii) any person makes a Prohibited Purchaser
Acquisition Proposal that remains in effect on the date 60 days prior to the
Outside Date and the requisite approval of the Purchaser shareholders is not
obtained prior to termination of this Agreement pursuant to Section 10.1(b),
then, within sixty (60) days after such termination, Purchaser shall pay the
Company the sum of $500,000 in immediately available funds.
ARTICLE XI
MISCELLANEOUS PROVISIONS
SECTION 11.1 NOTICE. All notices and other communications required or
permitted under this Agreement shall be delivered to the parties at the address
set forth below, or at such other address that they designate by notice to all
other parties in accordance with this Section 11.1. All notices and
communications shall be deemed to have been received: (i) in the case of
personal delivery, on the date of such delivery; (ii) in the case of telex or
facsimile transmission, on the date on which the sender receives confirmation by
telex or facsimile transmission that such notice was received by the addressee,
provided that a copy of such transmission is additionally sent by mail as set
forth in (iv) below; (iii) in the case of overnight air courier, on the second
business day following the day sent, with receipt confirmed by the courier; and
(iv) in the case of mailing by first class certified or registered mail, postage
prepaid, return receipt requested, on the fifth business day following such
mailing:
If to Purchaser: P-Com, Inc.
3175 S. Winchester Blvd.
Campbell, CA 95008
Attention: General Counsel
Telephone: (408) 866-3666
Facsimile: (408) 866-3655
with a copy to: Sheppard, Mullin, Richter & Hampton LLP
800 Anacapa Street
Santa Barbara, CA 93101
Attention: Theodore R. Maloney, Esq.
Telephone: (805) 879-1812
Facsimile: (805) 568-1955
If to Seller: SPEEDCOM Wireless Corporation
7020 Professional Parkway East
Sarasota, FL 34240
Attention: Chief Executive Officer
Telephone: (941) 907-2300
Facsimile: (941) 907-2394
with a copy to: Swidler Berlin Shereff Friedman, LLP
3000 K Street, N.W., Suite 300
Washington, DC 20007
Attention: Sean P. McGuinness, Esq.
Telephone: (202) 945-6979
Facsimile: (202) 295-8478
SECTION 11.2 ENTIRE AGREEMENT. This Agreement, the exhibits and
schedules hereto, and the documents referred to herein embody the entire
agreement and understanding of the parties hereto with respect to the subject
matter hereof, and supersede all prior and contemporaneous agreements and
understandings, oral or written, relative to said subject matter.
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SECTION 11.3 REMEDIES OF PURCHASER. Seller agrees that the Assets are
unique and not otherwise readily available to Purchaser. Accordingly, Seller
acknowledges that, in addition to all other remedies to which Purchaser are
entitled, Purchaser shall have the right to enforce the terms of this Agreement
by a decree of specific performance, provided Purchaser is not in material
default hereunder.
SECTION 11.4 BINDING EFFECT, ASSIGNMENT. This Agreement and the various
rights and obligations arising hereunder shall inure to the benefit of and be
binding upon Seller, its successors and permitted assigns, and Purchaser and its
successors and permitted assigns. Neither this Agreement nor any of the rights,
interests, or obligations hereunder shall be transferred or assigned (by
operation of law or otherwise) by either of the parties hereto without the prior
written consent of the other party.
SECTION 11.5 EXPENSES OF TRANSACTION, TAXES. Each party shall bear its
own costs and expenses in connection with this Agreement.
SECTION 11.6 WAIVER, CONSENT. This Agreement may not be amended except
by a writing executed by the parties hereto, and no waiver of any of the
provisions or conditions of this Agreement or any of the rights of a party
hereto shall be effective or binding unless such waiver shall be in writing and
signed by the party claimed to have given or consented thereto. Except to the
extent that a party hereto may have otherwise agreed in writing, no waiver by
that party of any condition of this Agreement or breach by the other party of
any of its obligations or representations hereunder or thereunder shall be
deemed to be a waiver of any other condition or subsequent or prior breach of
the same or any other obligation or representation by the other party, nor shall
any forbearance by the first party to seek a remedy for any noncompliance or
breach by the other party be deemed to be a waiver by the first party of its
rights and remedies with respect to such noncompliance or breach.
SECTION 11.7 THIRD-PARTY BENEFICIARIES. Except as otherwise expressly
provided for in this Agreement, nothing herein, expressed or implied, is
intended or shall be construed to confer upon or give to any person, firm,
corporation, or legal entity, other than the parties hereto, any rights,
remedies, or other benefits under or by reason of this Agreement.
SECTION 11.8 SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
SECTION 11.9 GOVERNING LAW. This Agreement shall in all respects be
construed in accordance with and governed by the laws of the State of Delaware
as applied to agreements among Delaware residents entered into and to be
performed entirely within the State of Delaware.
SECTION 11.10 ATTORNEYS' FEES. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement or to protect the
rights obtained hereunder the prevailing party shall be entitled to its
reasonable attorneys' fees, costs, and disbursements in addition to any other
relief to which it may be entitled.
SECTION 11.11 COOPERATION AND RECORDS RETENTION. Seller and Purchaser
shall (i) each provide the other with such assistance as may reasonably be
requested by them in connection with the preparation of any tax return,
statement, report form or other document (hereinafter collectively a "Tax
Return"), or in connection with any audit or other examination by any taxing
authority or any judicial or administrative proceedings relating to liability
for Taxes, (ii) each retain and provide the other, with any records or other
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information which may be relevant to any such Tax Return, audit or examination,
proceeding or determination, and (ii) each provide the other with any final
determination of any such audit or examination, proceeding or determination that
affects any amount required to be shown on any Tax Return of the other for any
period. Without limiting the generality of the foregoing, Seller and Purchaser
shall retain, until the applicable statute of limitations (including any
extensions) have expired, copies of all Tax Returns, supporting work schedules
and other records or information which may be relevant to such Tax Returns for
all tax periods or portions thereof ending before or including the Closing Time
and shall not destroy or otherwise dispose of any such records without first
providing the other party with a reasonable opportunity to review and copy the
same. Purchaser shall keep the original copies of the records at its facilities
in California and elsewhere, if applicable, and, at Seller's expense, shall
provide copies of the Records to Seller upon request.
SECTION 11.12 COUNTERPARTS. This Agreement may be executed
simultaneously in multiple counterparts, each of which shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
P-COM, INC.
By:
Name: George P. Roberts
Title: Chief Executive Officer
SPEEDCOM WIRELESS CORPORATION
By:
Name: Michael A. Sternberg
Title: Chief Executive Officer
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SCHEDULES TO ASSET PURCHASE AGREEMENT
The following schedules refer to the Asset Purchase Agreement (the
Agreement") dated as of June , 2003, by and between SPEEDCOM Wireless
Corporation, a Delaware corporation ("Seller"), and P-Com, Inc., a Delaware
corporation ("Purchaser").
Nothing in the following schedules is intended to broaden the scope of
any representation or warranty contained in the Agreement or to create any
covenant on the part of either Party.
To the extent more than one representation and warranty contained in
the Agreement requires the same disclosure, the appearance of such disclosure on
any single schedule herein shall serve as disclosure for all other
representations and warranties to which such disclosure applies. The failure by
either Party to cross-reference any disclosure on any particular schedule shall
not constitute a breach by that Party of the applicable representation or
warranty as long as the matter is disclosed elsewhere in these schedules.
Inclusion of any item in the schedules (1) does not represent a
determination by either Party that such item is material nor shall it be deemed
to establish a standard of materiality (it being the intent that such Party
shall not be penalized for having disclosed more than it may be required by the
terms of the Agreement), (2) does not represent a determination by such Party
that such item did not arise in the ordinary course of business and (3) shall
not constitute, or be deemed to be, an admission concerning such item by the
Party. The items in the schedules are descriptions of instruments or brief
summaries of certain aspects of each Party, such Party's business and the
business of such Party (to such Party's knowledge). Such descriptions and
summaries are qualified in their entirety by reference to the more detailed
information in documents attached hereto or previously delivered or made
available to either Party and its representatives.
Capitalized terms used but not defined herein shall have the same
meanings ascribed to them in the Agreement. The headings in the following
schedules are for reference only and shall not affect the disclosures contained
therein.
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SCHEDULE 1.1
Seller's assets are subject to the following liens:
1. All tangible and intangible assets of Seller secure
$4,143,000 of notes payable (this amount could increase as new bridge
loans are given).
2. Seller has various capital leases (approximately $27,000 in
total) for software, phones and equipment that are collateralized by
assets of Seller.
3. Seller owes the Florida Department of Revenue $28,173 (as
of the date this schedule was prepared), for which the Florida
Department of Revenue has filed a claim.
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SCHEDULE 1.1(A)
Furniture and Fixtures..................................................................... $157,653
Automobiles................................................................................ 7,600
Store and Warehouse Equipment.............................................................. 223,733
Leasehold Improvements..................................................................... 144,436
Computers and Office Equipment............................................................. 1,013,387
------------
Gross...................................................................................... 1,546,809
Accumulated Depreciation................................................................... 1,064,108
------------
Net........................................................................................ $482,701
============
Note that these numbers are subject to adjustment based on small purchases made
between the date that this schedule was prepared and the Closing Date and
depreciation.
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SCHEDULE 1.1(B)
Raw Materials.............................................................................. $662,311
Finished Goods............................................................................. 576,155
------------
Gross...................................................................................... 1,238,466
Reserve.................................................................................... 83,353
------------
Net........................................................................................ $1,155,113
============
Note that these numbers are subject to adjustment based on purchases and sales
made between the date that this schedule was prepared and the Closing Date, as
well as adjustments to the obsolescence reserve.
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SCHEDULE 1.1(C)
Cash.................................................. $201,416 (115,472 foreign accounts)
Prepaid Expenses...................................... 21,434
Rental Deposits....................................... 219,026
Utility Deposits...................................... 6,397
Leases Receivable..................................... 110,338
-----------
Total................................................. $558,611
===========
Note that these numbers are subject to adjustment based on amortization,
payments made and payments received between the date this schedule was prepared
and the Closing Date. Notwithstanding the foregoing, the total of the itemized
accounts herein on the Closing Date, exclusive of leases receivable, shall not
be less than the total amount set forth in this Schedule 1.1(c).
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SCHEDULE 1.1(D)
All leasehold improvements are listed on Schedule 1.1(a).
A-36
SCHEDULE 1.1(E)
SRI Intellectual Property.................................................................. $1,599,500
Amortization............................................................................... 618,714
----------
Net........................................................................................ $980,786
==========
Note that these numbers are subject to adjustment based on amortization between
the date this schedule was prepared and the Closing Date.
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SCHEDULE 1.1(F)
Accounts Receivable.......................................................................... $628,889
Reserve...................................................................................... 121,020
--------
Net.......................................................................................... $507,869
========
Note that these numbers are subject to adjustment based on sales and payments
received between the date this schedule was prepared and the Closing Date and
adjustments in the bad debt and credit memo reserves. Notwithstanding the above,
the total accounts receivable on the Closing Date shall not be less than the
amount set forth in this Schedule 1.1(f), less the Excluded Assets as set forth
on Schedule 1.2.
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SCHEDULE 1.2
Seller shall retain up to $200,000 in accounts receivable, which amount
shall be determined as a result of AP Reductions obtained by Seller, as more
particularly set forth in Schedule 2.1.
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SCHEDULE 2.1
Purchaser will assume all of the liabilities of Seller described below,
subject to the applicable notes, which qualify the liabilities assumed by
Seller:
Accounts Payable........................................................................ $1,135,024*
Accrued Expenses........................................................................ 921,094**
Deferred Revenue........................................................................ 24,411
Notes and Leases Payable................................................................ 4,387,121***
VP Employment Contracts................................................................. 175,000****
Total................................................................................... $6,642,650
-----------
* Purchaser shall assume all of the accounts payable generated in the
ordinary course of business subject to a maximum amount of $1,200,000,
which amount shall be reduced by any agreements entered into between
existing creditors and Seller to reduce the amount of the accounts
payable ("AP Reductions"). For every dollar saved as a result of AP
Reductions, Seller shall get credit for $.50 of each such dollar, which
credit shall be retained by Seller as an Excluded Asset. The accounts
payable assumed by Purchaser shall specifically exclude the obligation
to Jenkens & Gilchrist, attorneys to investors of Seller, which
obligation shall be an Excluded Liability.
** Purchaser shall only assume Seller's (i) accrued payroll and vacation
pay liability of no more than $150,000; (ii) severance obligations to
Bill Davis of no more than $17,500.00; (iii) customer deposits; (iv)
amounts due and payable by Seller to Purchaser; and (v) other accrued
expenses totaling no more than $25,000. Seller shall not assume any
other accrued expenses, which expenses shall constitute Excluded
Liabilities. By way of example, and not by limitation, Excluded
Liabilities shall include (x) all severance and related obligations to
Jay Wright and Bruce Sanguinetti; (y) accrued interest payable to
Seller's equity or debt investors, other than Purchaser; and (z) any
notes or accrued interest obligations to past or current directors of
Seller.
*** Purchaser shall only assume (i) up to $3,000,000 in promissory notes,
which notes shall be renegotiated so that principal and accrued
interest are due and payable according to the following terms: (A) a
maturity of not less than 36 months; and (B) annual interest rate not
to exceed 7%; (ii) capital lease obligations of no more than $27,000;
and (iii) amounts due and payable by Seller to Purchaser. All other
Notes and Leases Payable shall constitute Excluded Liabilities.
**** Seller has three employment contracts which shall be assumed or
renegotiated by Purchaser: one with the VP of Marketing, one with the
VP of Research and Development and one with the VP of Finance and
Accounting. These employment contracts guarantee six months' salary in
the case of two contracts and twelve months' salary in the case of one
contract upon a change of control to the employees, if they leave the
new combined company. This change of control has already occurred.
Seller is past due on many of its payment to vendors who
originally gave Seller net 30 terms. Seller has provided P-Com with a
list of its aged payables.
Seller is required to start accruing dividends on the
outstanding preferred stock in August 2003.
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Seller is currently involved in a settlement negotiation with
Racks. A liability for this settlement has not been recorded yet
because the agreement has not been signed yet. Estimated liability to
Seller is $12,000.
Seller is currently involved in litigation with XeTel
Corporation. This litigation is in the early stages. Seller gave a PO
to XeTel with terms net 30, and subsequently cancelled shipment. The
equipment was never delivered, but XeTel is claiming that they incurred
costs buying the inventory for Seller. XeTel is claiming to have
$101,527 of inventory. Seller examined the list and can use $70,035 of
the inventory that XeTel has. Settlement possible.
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SCHEDULE 3.2
Assumptions:
1. Purchaser anticipates that approximately 163,000,000 shares of
its Common Stock ("Share Value") will be issued and
outstanding immediately prior to the Closing, which amount
assumes (i) 41,037,644 shares of Common Stock issued and
outstanding as of the date hereof, (ii) the issuance of shares
upon conversion of the Purchaser's 7% Convertible Subordinated
Notes due 2005 in satisfaction of the condition precedent
described in Section 8.1(h) of the Agreement; (iii) the
issuance of shares upon conversion of certain promissory notes
of the Purchaser totaling $1,500,000 issued on March 26, 2003;
(iii) the issuance of certain shares to persons or entities
under existing obligations or proposed in connection with
transactions contemplated by this Agreement; provided,
however, the Share Value shall not include any dilution
incurred as a result of the consummation of a Qualified
Financing, or shares issuable in connection with any
transaction approved by the Parties in writing.
2. In the event Purchaser's Share Value exceeds 180,000,000 just
prior to the Closing, the shares of Common Stock constituting
the Purchase Price shall be increased so that the percentage
ownership of Seller in Purchaser immediately after Closing
equals 29.3%.
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SCHEDULE 4.8
Not applicable.
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SCHEDULE 4.9
Not applicable.
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SCHEDULE 4.11
Cagan McAfee Capital Partners shall receive compensation in the amount
of 2% of the Purchase Price in connection with the transactions contemplated
hereby.
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SCHEDULE 5.1
Speedcell Corporation Common Stock (written off as worthless).
A-46
SCHEDULE 5.1(A)
Seller is qualified to conduct business as a foreign corporation in the
following jurisdictions:
Florida
Maryland
California
Spain
Brazil
Singapore
Shanghai
Canada
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SCHEDULE 5.5
Seller received a bridge loan in the initial principal amount of
$200,000 on May 15, 2003.
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SCHEDULE 5.12(B)
Trade Marks
SPEEDVIEW November 15, 2002 Registration #263946 United States
SPEEDVOICE June 1, 1998 Registration #2186017 United States
SPEEDCOM March 21, 2000 Registration #2330579 United States
Trade Names
SPEEDLAN
SPEEDWAVE
Licenses
Intellectual Property License Agreement between SRI International and Seller
dated January 10, 2001.
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SCHEDULE 5.12(I)
Trade Marks
SPEEDVIEW November 15, 2002 Registration #263946 United States
SPEEDVOICE June 1, 1998 Registration #2186017 United States
SPEEDCOM March 21, 2000 Registration #2330579 United States
Trade Names
SPEEDLAN
SPEEDWAVE
Licenses
Intellectual Property License Agreement between SRI International and Seller
dated January 10, 2001.
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SCHEDULE 5.13
Warrant No. W-1 to Purchase 146,667 Shares of Common Stock issued to S.A.C.
Capital Associates, LLC.
Warrant No. W-2 to Purchase 73,333 Shares of Common Stock issued to SDS Merchant
Fund, L.P.
Warrant No. W-3 to Purchase 220,000 Shares of Common Stock issued to Oscar
Private Equity Investments, L.P.
Warrant No. W-4 to Purchase 73,333 Shares of Common Stock issued to Bruce
Sanguinetti.
Purchase Agreement, dated August 23, 2001, by and among Seller and Purchasers,
as defined.
Registration Rights Agreement dated August 23, 2001, by and among Seller and
Purchasers, as defined.
Form of Series A Warrant of Seller dated August 23, 2001.
Form of Series B Warrant of Seller dated August 23, 2001.
Settlement Agreement between Seller and I.W. Miller Group, Inc. dated June 25,
2001.
Secured Promissory Note dated April 26, 2002 between Seller and DMG Legacy Fund,
LLC.
Secured Promissory Note dated May 7, 2002 between Seller and DMG Legacy Fund,
LLC.
Secured Promissory Note dated April 26, 2002 between Seller and DMG Legacy
Institutional Fund LLC.
Secured Promissory Note dated May 7, 2002 between Seller and DMG Legacy
Institutional Fund LLC.
Secured Promissory Note dated April 26, 2002 between Seller and DMG Legacy
International LTD.
Secured Promissory Note dated May 7, 2002 between Seller and DMG Legacy
International LTD.
Letter Loan Agreement dated April 26, 2002.
Security Agreement dated April 26, 2002.
Letter Agreement dated April 26, 2002.
Agreement to Vote Shares dated April 26, 2002.
Secured Promissory Note dated June 10, 2002 between Seller and SDS Merchant
Fund, L.P.
Secured Promissory Note dated June 11, 2002 between Seller and SDS Merchant
Fund, L.P.
Secured Promissory Note dated June 12, 2002 between Seller and SDS Merchant
Fund, L.P.
Secured Promissory Note dated June 25, 2002 between Seller and DMG International
LTD.
Secured Promissory Note dated June 25, 2002 between Seller and DMG Legacy Fund
LLC.
Secured Promissory Note dated June 25, 2002 between Seller and DMG Legacy
Institutional Fund LLC.
Letter Loan Agreement dated June 10, 2002.
Security Agreement dated June 10, 2002.
Secured Promissory Note dated August 8, 2002 between Seller and DMG Legacy Fund
LLC.
Secured Promissory Note dated August 8, 2002 between Seller and DMG
International LTD.
Secured Promissory Note dated August 8, 2002 between Seller and DMG Legacy
Institutional Fund LLC.
Letter Loan Agreement dated August 8, 2002.
Security Agreement dated August 8, 2002.
Secured Promissory Note dated September 18, 2002 between Seller and DMG Legacy
Fund LLC.
Secured Promissory Note dated September 18, 2002 between Seller and DMG
International LTD.
Secured Promissory Note dated September 18, 2002 between Seller and DMG Legacy
Institutional Fund LLC.
Letter Loan Agreement dated September 18, 2002.
Security Agreement dated September 18, 2002.
Secured Promissory Note dated November 11, 2002 between Seller and DMG Legacy
Fund LLC.
Secured Promissory Note dated November 11, 2002 between Seller and DMG
International LTD.
Secured Promissory Note dated November 11, 2002 between Seller and DMG Legacy
Institutional Fund LLC.
Letter Loan Agreement dated November 11, 2002.
Security Agreement dated November 11, 2002.
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Secured Promissory Note dated December 24, 2002 between Seller and DMG Legacy
Fund LLC.
Secured Promissory Note dated December 24, 2002 between Seller and DMG
International LTD.
Secured Promissory Note dated December 24, 2002 between Seller and DMG Legacy
Institutional Fund LLC.
Letter Loan Agreement dated December 24, 2002.
Security Agreement dated December 24, 2002.
Secured Promissory Note dated January 31, 2003 between Seller and DMG Legacy
Fund LLC.
Secured Promissory Note dated January 31, 2003 between Seller and DMG
International LTD.
Secured Promissory Note dated January 31, 2003 between Seller and DMG Legacy
Institutional Fund LLC.
Letter Loan Agreement dated January 31, 2003.
Security Agreement dated January 31, 2003.
Note Purchase Agreement dated March 26, 2003.
Convertible Promissory Note dated March 26, 2003.
Letter Loan Agreement dated April 14, 2003.
Security Agreement dated April 14, 2003.
Secured Promissory Note dated April 14, 2003 between Seller and SDS Merchant
Fund L.P.
Letter Loan Agreement dated April 29, 2003.
Security Agreement dated April 29, 2003.
Secured Promissory Note dated April 29, 2003 between Seller and North Sound
Legacy Institutional Fund LLC.
Secured Promissory Note dated April 29, 2003 between Seller and North Sound
Legacy International LTD.
Severance Agreement between Seller and William Davis.
Severance Agreement between Seller and Bruce Sanguinetti. SPEEDCOM has received
default notice.
Severance Agreement between Seller and Jay Wright.
SPEEDCOM has received default notice.
Employment Agreement between Seller and Patrick Pacifico
Employment Agreement between Seller and Sara Byrne
Employment Agreement between Seller and Philip Decker
Employment Memo between Seller and Drew Darby
Promissory Note between Seller and IW Miller
Promissory Note between Seller and Mark Boyce
Promissory Note between Seller and John von Harz
Capital Lease between Seller and Telogy
Capital Lease between Seller and American PackagingCapital
Capital Lease between Seller and Graybar
Rental Lease Agreement between Seller and Lakewood Ranch, as amended
Rental Lease Agreement between Seller and Charles Young
Rental Lease Agreements for the Brazil, Shanghai and Singapore offices (one year
lease terms)
Operating Lease Agreement between Seller and GE Capital
Operating Lease Agreement between Seller and Dell Computers
Operating Lease Agreement between Seller and De Lage
Operating Lease Agreement between Seller and J&J Leasing
Penalty on late registration of S-3 to the preferred investors $163,970
A-52
SCHEDULE 5.15(D)
Employment Agreement between Seller and Patrick Pacifico
Employment Agreement between Seller and Sara Byrne
Employment Agreement between Seller and Philip Decker
Employment Memo between Seller and Drew Darby
A-53
SCHEDULE 5.16
SELLER'S 401(K) PLAN
SELLER'S 1998 EMPLOYEE STOCK OPTION PLAN
SELLER'S 2000 EMPLOYEE STOCK OPTION PLAN
Severance Agreement between Seller and William Davis. Severance Agreement
between Seller and Bruce Sanguinetti Severance Agreement between Seller and Jay
Wright Employment Agreement between Seller and Patrick Pacifico Employment
Agreement between Seller and Sara Byrne Employment Agreement between Seller and
Philip Decker Employment Memo between Seller and Drew Darby
A-54
SCHEDULE 5.17
In connection with the transactions contemplated herein, H.C.
Wainwright will receive a fee of $150,000. In connection with H.C. Wainwright's
services in connection with the conversion of the SDS loans to equity, H.C.
Wainwright will receive an additional fee of $150,000. Such fees shall be
payable in stock of the Seller.
A-55
SCHEDULE 5.22
Backlog as of 5/28/03 is $22,257 that will not ship in May because of
inventory lead-time issues.
A-56
SCHEDULE 5.24
Raw Materials.............................................................................. $662,311
Finished Goods............................................................................. 576,155
----------
Gross...................................................................................... $1,238,466
Standard Reserve........................................................................... $83,353
Reserve for Nonuse in 3 Months............................................................. 30,104
----------
Net........................................................................................ $1,185,217
==========
Note that these numbers are subject to adjustment based on purchases and sales
made between the date that this schedule was prepared and the Closing Date, as
well as adjustments to the obsolescence reserves.
A-57
SCHEDULE 5.25
Seller has furnished to Purchaser an aging of its Accounts Receivable
and Accounts Payable as of various dates and can request an updated aging at any
time (last aging date given 5/28/03). There are numerous instances where Seller
has not been paid within terms or has not paid within terms as can be observed
from these agings.
Receivables relate to products that can be returned by customers, but
Seller has an established reserve for such returns that is evaluated every
quarter. As of March 31, 2003, Seller believes this reserve was adequate. Bad
debt is always possible as well, but Seller has an established reserve for
payment refusals that is evaluated every quarter. As of March 31, 2003, Seller
believes this reserve was adequate.
Seller does accept deposits and prepayments both for maintenance
contracts that extend over a period of time and for shipments yet to be made.
A-58
SCHEDULE 6.3
To be determined prior to Closing.
A-59
EXHIBIT 6.10
FORM OF REGISTRATION RIGHTS AGREEMENT
EXHIBIT 7.2(A)
FORM OF BILL OF SALE
EXHIBIT 7.2(B)
FORM OF ASSIGNMENT OF CONTRACTS
EXHIBIT 7.2(C)
FORM OF ASSIGNMENT OF INTELLECTUAL PROPERTY
A-60
FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT
This FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT, dated as of September
2, 2003 (the "Amendment"), is entered into by and between P-Com, Inc., a
Delaware corporation (the "Company"), and SPEEDCOM Wireless Corporation, a
Delaware corporation ("SPEEDCOM").
WHEREAS, the Company and SPEEDCOM are parties to that certain Asset
Purchase Agreement, dated as of June 16, 2003 (the "Asset Purchase Agreement"),
under which the Company agreed to purchase substantially all of the assets of
SPEEDCOM and to assume certain liabilities of SPEEDCOM;
WHEREAS, the consideration for the asset purchase consists of
67,500,000 shares of Common Stock of the Company, such number of shares subject
to adjustment;
WHEREAS, certain covenants to closing in the Asset Purchase Agreement
require that all of the principal and accrued but unpaid interest on the
Company's 7% Convertible Subordinated Notes due 2005 (the "Notes") shall have
converted into shares of Common Stock of the Company at a conversion price of at
least $.20 per share of Common Stock;
WHEREAS, certain covenants to closing in the Asset Purchase Agreement
require that the Company shall have consummated an equity financing transaction
generating at least $5,000,000 in net proceeds to the Purchaser ("Qualified
Financing").
WHEREAS, certain covenants to closing in the Asset Purchase Agreement
require that the Company shall have converted certain promissory notes into
share of Common Stock of the Company in accordance with the terms of such
promissory notes;
WHEREAS, the Parties desire to amend the Asset Purchase Agreement as
set forth below.
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. Capitalized terms used but not defined herein
shall have the same meanings given to such terms in the Asset Purchase
Agreement.
2. Amendment to Section 3.2. Section 3.2 of the Asset Purchase
Agreement is hereby amended and restated in its entirety to read as
follows:
"PAYMENT OF PURCHASE PRICE. The purchase price ("Purchase
Price") to be paid or payable by Purchaser to Seller shall
consist of Sixty-Seven Million, Five Hundred Thousand
(67,500,000) shares of Purchaser's common stock, par value
$.0001 per share (the "Common Stock"). The shares of Common
Stock issuable in payment of the Purchase Price are herein
sometimes referred to as the "Securities."
3. Deletion of Schedule 3.2. Schedule 3.2 of the Asset
Purchase Agreement is hereby deleted.
4. Amendment to Section 8.1(h). Section 8.1(h) of the Asset
Purchase Agreement is hereby amended and restated in its entirety to
read as follows:
"NOTE CONVERSION. All principal and accrued but unpaid
interest on the Purchaser's 7% Convertible Subordinated Notes
due 2005 (the "Notes") shall have converted into shares of
Series B Convertible Preferred Stock of the Purchaser. Each
share of Series B Convertible Preferred Stock is convertible
into a number of shares of P-Com Common Stock equal to the
stated value of the Series B Convertible Preferred Stock
divided by at least $0.20 ("Note Conversion Price")."
1
5. Amendment to Section 8.2(i). Section 8.2(i) of the Asset
Purchase Agreement is hereby amended and restated in its entirety to
read as follows:
"NOTE CONVERSION. The Notes shall have converted into Series B
Convertible Preferred Stock of the Purchaser at the Note
Conversion Price."
6. Amendment to Section 8.1(f). Section 8.1(f) of the Asset
Purchase Agreement is hereby amended and restated in its entirety to
read as follows:
"QUALIFIED FINANCING. The Purchaser shall have consummated an
equity financing transaction generating at least $5,000,000 in
gross proceeds to the Purchaser ("Qualified Financing")."
7. Amendment to Section 8.1(i). Section 8.1(i) of the Asset
Purchase Agreement is hereby amended and restated in its entirety to
read as follows:
"BRIDGE NOTE CONVERSION. Purchaser shall have converted each
of its promissory notes totaling $1,500,000 issued on March
26, 2003, $300,000 issued on May 28, 2003 and $900,000 issued
on August 5, 2003, into shares of equity securities of the
Purchaser (collectively, the "Bridge Notes"), in accordance
with the terms of such Bridge Notes."
8. Amendment to Section 8.2(j). Section 8.1(j) of the Asset
Purchase Agreement is hereby amended and restated in its entirety to
read as follows:
"BRIDGE NOTE CONVERSION. The Bridge Notes shall have converted
into equity securities of the Purchase in accordance with
their terms."
9. Effect. Except as and to the extent amended by this
Amendment, the Asset Purchase Agreement shall remain in full force and
effect in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to Asset Purchase Agreement to be duly executed, all as of the date first above
written.
P-COM, INC.
By: /s/ Daniel W. Rumsey
Printed Name: Daniel W. Rumsey
Title: Vice President and Interim CFO
SPEEDCOM Wireless Corporation
By: /s/ Mark Schaftlein
Printed Name: Mark Schaftlein
Title: Chief Financial Officer
2
ANNEX B
CERTIFICATE OF AMENDMENT
OF RESTATED CERTIFICATE OF INCORPORATION
OF P-COM, INC.
(Pursuant to Section 242 of the
Delaware General Corporation Law)
P-COM, Inc. (the "Corporation"), a corporation organized and existing
under the General Corporation Law of the State of Delaware, by its duly
authorized officers, does hereby certify:
FIRST: That the Board of Directors of the Corporation has duly adopted
resolutions (i) authorizing the Corporation to execute and file with the
Secretary of State of the State of Delaware an amendment of the Corporation's
Restated Certificate of Incorporation to combine each ten (10) outstanding
shares of the Corporation's Common Stock, par value $0.0001 per share, into one
(1) share of Common Stock, par value $0.0001 per share; and (ii) declaring such
amendment to be advisable and recommended for approval by the Stockholders of
the Corporation.
SECOND: That, thereafter, the Stockholders of said Corporation approved
the amendment by written consent of the outstanding shares in accordance with
Section 228 of the Delaware General Corporation Law.
THIRD: That the amendment was duly adopted in accordance with the
provisions of Section 242 of the Delaware General Corporation Law by the Board
of Directors and Stockholders of the Corporation.
FOURTH: That the capital of the Corporation shall not be reduced under
or by reason of said amendment.
FIFTH: That upon the effectiveness of this Certificate of Amendment of
the Restated Certificate of Incorporation, the first paragraph of Article IV of
the Restated Certificate of Incorporation is hereby amended such that, as
amended, said paragraph shall read in its entirety as follows:
"THIS CORPORATION IS AUTHORIZED TO ISSUE TWO (2) CLASSES OF
STOCK, TO BE DESIGNATED, RESPECTIVELY, "COMMON STOCK" AND "PREFERRED
STOCK." THE TOTAL NUMBER OF SHARES THAT THIS CORPORATION IS AUTHORIZED
TO ISSUE IS 72,000,000 SHARES. 70,000,000 SHARES SHALL BE COMMON STOCK,
PAR VALUE $.0001 PER SHARE, AND 2,000,000 SHARES SHALL BE PREFERRED
STOCK, PAR VALUE $.0001 PER SHARE. UPON THIS AMENDMENT OF THIS ARTICLE
IV (THE "EFFECTIVE TIME"), EACH 10 SHARES OF THE COMMON STOCK, PAR
VALUE $0.0001 PER SHARE, OF THE CORPORATION ISSUED AND OUTSTANDING OR
HELD IN TREASURY SHALL BE COMBINED INTO ONE (1) SHARE OF COMMON STOCK,
PAR VALUE $0.0001 PER SHARE, OF THE CORPORATION, WITHOUT ANY ACTION BY
THE HOLDERS THEREOF. EACH STOCKHOLDER WHO, IMMEDIATELY PRIOR TO THE
EFFECTIVE TIME, OWNS A NUMBER OF SHARES OF COMMON STOCK WHICH IS NOT
EVENLY DIVISIBLE BY 10 SHALL, WITH RESPECT TO SUCH FRACTIONAL INTEREST,
BE ENTITLED TO RECEIVE FROM THE CORPORATION CASH IN AN AMOUNT EQUAL TO
SUCH FRACTIONAL INTEREST MULTIPLIED BY THE SALE PRICE OF THE COMMON
STOCK LAST REPORTED IMMEDIATELY PRIOR TO THE EFFECTIVE TIME."
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment of Restated Certificate of Incorporation to be executed by Samuel
Smookler, its Chief Executive Officer, this daof , 20 .
P-COM, INC.
By:
Samuel Smookler
Chief Executive Officer
CERTIFICATE OF AMENDMENT
OF RESTATED CERTIFICATE OF INCORPORATION
OF P-COM, INC.
(Pursuant to Section 242 of the
Delaware General Corporation Law)
P-COM, Inc. (the "Corporation"), a corporation organized and existing
under the General Corporation Law of the State of Delaware, by its duly
authorized officers, does hereby certify:
FIRST: That the Board of Directors of the Corporation has duly adopted
resolutions (i) authorizing the Corporation to execute and file with the
Secretary of State of the State of Delaware an amendment of the Corporation's
Restated Certificate of Incorporation to combine each fifteen (15) outstanding
shares of the Corporation's Common Stock, par value $0.0001 per share, into one
(1) share of Common Stock, par value $0.0001 per share; and (ii) declaring such
amendment to be advisable and recommended for approval by the Stockholders of
the Corporation.
SECOND: That, thereafter, the Stockholders of said Corporation approved
the amendment by written consent of the outstanding shares in accordance with
Section 228 of the Delaware General Corporation Law.
THIRD: That the amendment was duly adopted in accordance with the
provisions of Section 242 of the Delaware General Corporation Law by the Board
of Directors and Stockholders of the Corporation.
FOURTH: That the capital of the Corporation shall not be reduced under
or by reason of said amendment.
FIFTH: That upon the effectiveness of this Certificate of Amendment of
the Restated Certificate of Incorporation, the first paragraph of Article IV of
the Restated Certificate of Incorporation is hereby amended such that, as
amended, said paragraph shall read in its entirety as follows:
"THIS CORPORATION IS AUTHORIZED TO ISSUE TWO (2) CLASSES OF
STOCK, TO BE DESIGNATED, RESPECTIVELY, "COMMON STOCK" AND "PREFERRED
STOCK." THE TOTAL NUMBER OF SHARES THAT THIS CORPORATION IS AUTHORIZED
TO ISSUE IS 48,666,667 SHARES. 46,666,667 SHARES SHALL BE COMMON STOCK,
PAR VALUE $.0001 PER SHARE, AND 2,000,000 SHARES SHALL BE PREFERRED
STOCK, PAR VALUE $.0001 PER SHARE. UPON THIS AMENDMENT OF THIS ARTICLE
IV (THE "EFFECTIVE TIME"), EACH 15 SHARES OF THE COMMON STOCK, PAR
VALUE $0.0001 PER SHARE, OF THE CORPORATION ISSUED AND OUTSTANDING OR
HELD IN TREASURY SHALL BE COMBINED INTO ONE (1) SHARE OF COMMON STOCK,
PAR VALUE $0.0001 PER SHARE, OF THE CORPORATION, WITHOUT ANY ACTION BY
THE HOLDERS THEREOF. EACH STOCKHOLDER WHO, IMMEDIATELY PRIOR TO THE
EFFECTIVE TIME, OWNS A NUMBER OF SHARES OF COMMON STOCK WHICH IS NOT
EVENLY DIVISIBLE BY 15 SHALL, WITH RESPECT TO SUCH FRACTIONAL INTEREST,
BE ENTITLED TO RECEIVE FROM THE CORPORATION CASH IN AN AMOUNT EQUAL TO
SUCH FRACTIONAL INTEREST MULTIPLIED BY THE SALE PRICE OF THE COMMON
STOCK LAST REPORTED IMMEDIATELY PRIOR TO THE EFFECTIVE TIME."
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment of Restated Certificate of Incorporation to be executed by Samuel
Smookler, its Chief Executive Officer, this day of , 20 .
P-COM, INC.
By:
Samuel Smookler
Chief Executive Officer
B-2
CERTIFICATE OF AMENDMENT
OF RESTATED CERTIFICATE OF INCORPORATION
OF P-COM, INC.
(Pursuant to Section 242 of the
Delaware General Corporation Law)
P-COM, Inc. (the "Corporation"), a corporation organized and existing
under the General Corporation Law of the State of Delaware, by its duly
authorized officers, does hereby certify:
FIRST: That the Board of Directors of the Corporation has duly adopted
resolutions (i) authorizing the Corporation to execute and file with the
Secretary of State of the State of Delaware an amendment of the Corporation's
Restated Certificate of Incorporation to combine each twenty (20) outstanding
shares of the Corporation's Common Stock, par value $0.0001 per share, into one
(1) share of Common Stock, par value $0.0001 per share; and (ii) declaring such
amendment to be advisable and recommended for approval by the Stockholders of
the Corporation.
SECOND: That, thereafter, the Stockholders of said Corporation approved
the amendment by written consent of the outstanding shares in accordance with
Section 228 of the Delaware General Corporation Law.
THIRD: That the amendment was duly adopted in accordance with the
provisions of Section 242 of the Delaware General Corporation Law by the Board
of Directors and Stockholders of the Corporation.
FOURTH: That the capital of the Corporation shall not be reduced under
or by reason of said amendment.
FIFTH: That upon the effectiveness of this Certificate of Amendment of
the Restated Certificate of Incorporation, the first paragraph of Article IV of
the Restated Certificate of Incorporation is hereby amended such that, as
amended, said paragraph shall read in its entirety as follows:
"THIS CORPORATION IS AUTHORIZED TO ISSUE TWO (2) CLASSES OF
STOCK, TO BE DESIGNATED, RESPECTIVELY, "COMMON STOCK" AND "PREFERRED
STOCK." THE TOTAL NUMBER OF SHARES THAT THIS CORPORATION IS AUTHORIZED
TO ISSUE IS 37,000,000 SHARES. 35,000,000 SHARES SHALL BE COMMON STOCK,
PAR VALUE $.0001 PER SHARE, AND 2,000,000 SHARES SHALL BE PREFERRED
STOCK, PAR VALUE $.0001 PER SHARE. UPON THIS AMENDMENT OF THIS ARTICLE
IV (THE "EFFECTIVE TIME"), EACH 20 SHARES OF THE COMMON STOCK, PAR
VALUE $0.0001 PER SHARE, OF THE CORPORATION ISSUED AND OUTSTANDING OR
HELD IN TREASURY SHALL BE COMBINED INTO ONE (1) SHARE OF COMMON STOCK,
PAR VALUE $0.0001 PER SHARE, OF THE CORPORATION, WITHOUT ANY ACTION BY
THE HOLDERS THEREOF. EACH STOCKHOLDER WHO, IMMEDIATELY PRIOR TO THE
EFFECTIVE TIME, OWNS A NUMBER OF SHARES OF COMMON STOCK WHICH IS NOT
EVENLY DIVISIBLE BY 20 SHALL, WITH RESPECT TO SUCH FRACTIONAL INTEREST,
BE ENTITLED TO RECEIVE FROM THE CORPORATION CASH IN AN AMOUNT EQUAL TO
SUCH FRACTIONAL INTEREST MULTIPLIED BY THE SALE PRICE OF THE COMMON
STOCK LAST REPORTED IMMEDIATELY PRIOR TO THE EFFECTIVE TIME."
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment of Restated Certificate of Incorporation to be executed by Samuel
Smookler, its Chief Executive Officer, this day of , 20 .
P-COM, INC.
By:
Samuel Smookler
Chief Executive Officer
B-3
CERTIFICATE OF AMENDMENT
OF RESTATED CERTIFICATE OF INCORPORATION
OF P-COM, INC.
(Pursuant to Section 242 of the
Delaware General Corporation Law)
P-COM, Inc. (the "Corporation"), a corporation organized and existing
under the General Corporation Law of the State of Delaware, by its duly
authorized officers, does hereby certify:
FIRST: That the Board of Directors of the Corporation has duly adopted
resolutions (i) authorizing the Corporation to execute and file with the
Secretary of State of the State of Delaware an amendment of the Corporation's
Restated Certificate of Incorporation to combine each twenty-five (25)
outstanding shares of the Corporation's Common Stock, par value $0.0001 per
share, into one (1) share of Common Stock, par value $0.0001 per share; and (ii)
declaring such amendment to be advisable and recommended for approval by the
Stockholders of the Corporation.
SECOND: That, thereafter, the Stockholders of said Corporation approved
the amendment by written consent of the outstanding shares in accordance with
Section 228 of the Delaware General Corporation Law.
THIRD: That the amendment was duly adopted in accordance with the
provisions of Section 242 of the Delaware General Corporation Law by the Board
of Directors and Stockholders of the Corporation.
FOURTH: That the capital of the Corporation shall not be reduced under
or by reason of said amendment.
FIFTH: That upon the effectiveness of this Certificate of Amendment of
the Restated Certificate of Incorporation, the first paragraph of Article IV of
the Restated Certificate of Incorporation is hereby amended such that, as
amended, said paragraph shall read in its entirety as follows:
"THIS CORPORATION IS AUTHORIZED TO ISSUE TWO (2) CLASSES OF
STOCK, TO BE DESIGNATED, RESPECTIVELY, "COMMON STOCK" AND "PREFERRED
STOCK." THE TOTAL NUMBER OF SHARES THAT THIS CORPORATION IS AUTHORIZED
TO ISSUE IS 30,000,000 SHARES. 28,000,000 SHARES SHALL BE COMMON STOCK,
PAR VALUE $.0001 PER SHARE, AND 2,000,000 SHARES SHALL BE PREFERRED
STOCK, PAR VALUE $.0001 PER SHARE. UPON THIS AMENDMENT OF THIS ARTICLE
IV (THE "EFFECTIVE TIME"), EACH 25 SHARES OF THE COMMON STOCK, PAR
VALUE $0.0001 PER SHARE, OF THE CORPORATION ISSUED AND OUTSTANDING OR
HELD IN TREASURY SHALL BE COMBINED INTO ONE (1) SHARE OF COMMON STOCK,
PAR VALUE $0.0001 PER SHARE, OF THE CORPORATION, WITHOUT ANY ACTION BY
THE HOLDERS THEREOF. EACH STOCKHOLDER WHO, IMMEDIATELY PRIOR TO THE
EFFECTIVE TIME, OWNS A NUMBER OF SHARES OF COMMON STOCK WHICH IS NOT
EVENLY DIVISIBLE BY 25 SHALL, WITH RESPECT TO SUCH FRACTIONAL INTEREST,
BE ENTITLED TO RECEIVE FROM THE CORPORATION CASH IN AN AMOUNT EQUAL TO
SUCH FRACTIONAL INTEREST MULTIPLIED BY THE SALE PRICE OF THE COMMON
STOCK LAST REPORTED IMMEDIATELY PRIOR TO THE EFFECTIVE TIME."
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment of Restated Certificate of Incorporation to be executed by Samuel
Smookler, its Chief Executive Officer, this day of , 20 .
P-COM, INC.
By:
Samuel Smookler
Chief Executive Officer
B-4
CERTIFICATE OF AMENDMENT
OF RESTATED CERTIFICATE OF INCORPORATION
OF P-COM, INC.
(Pursuant to Section 242 of the
Delaware General Corporation Law)
P-COM, Inc. (the "Corporation"), a corporation organized and existing
under the General Corporation Law of the State of Delaware, by its duly
authorized officers, does hereby certify:
FIRST: That the Board of Directors of the Corporation has duly adopted
resolutions (i) authorizing the Corporation to execute and file with the
Secretary of State of the State of Delaware an amendment of the Corporation's
Restated Certificate of Incorporation to combine each thirty (30) outstanding
shares of the Corporation's Common Stock, par value $0.0001 per share, into one
(1) share of Common Stock, par value $0.0001 per share; and (ii) declaring such
amendment to be advisable and recommended for approval by the Stockholders of
the Corporation.
SECOND: That, thereafter, the Stockholders of said Corporation approved
the amendment by written consent of the outstanding shares in accordance with
Section 228 of the Delaware General Corporation Law.
THIRD: That the amendment was duly adopted in accordance with the
provisions of Section 242 of the Delaware General Corporation Law by the Board
of Directors and Stockholders of the Corporation.
FOURTH: That the capital of the Corporation shall not be reduced under
or by reason of said amendment.
FIFTH: That upon the effectiveness of this Certificate of Amendment of
the Restated Certificate of Incorporation, the first paragraph of Article IV of
the Restated Certificate of Incorporation is hereby amended such that, as
amended, said paragraph shall read in its entirety as follows:
"THIS CORPORATION IS AUTHORIZED TO ISSUE TWO (2) CLASSES OF
STOCK, TO BE DESIGNATED, RESPECTIVELY, "COMMON STOCK" AND "PREFERRED
STOCK." THE TOTAL NUMBER OF SHARES THAT THIS CORPORATION IS AUTHORIZED
TO ISSUE IS 25,333,333 SHARES. 23,333,333 SHARES SHALL BE COMMON STOCK,
PAR VALUE $.0001 PER SHARE, AND 2,000,000 SHARES SHALL BE PREFERRED
STOCK, PAR VALUE $.0001 PER SHARE. UPON THIS AMENDMENT OF THIS ARTICLE
IV (THE "EFFECTIVE TIME"), EACH 30 SHARES OF THE COMMON STOCK, PAR
VALUE $0.0001 PER SHARE, OF THE CORPORATION ISSUED AND OUTSTANDING OR
HELD IN TREASURY SHALL BE COMBINED INTO ONE (1) SHARE OF COMMON STOCK,
PAR VALUE $0.0001 PER SHARE, OF THE CORPORATION, WITHOUT ANY ACTION BY
THE HOLDERS THEREOF. EACH STOCKHOLDER WHO, IMMEDIATELY PRIOR TO THE
EFFECTIVE TIME, OWNS A NUMBER OF SHARES OF COMMON STOCK WHICH IS NOT
EVENLY DIVISIBLE BY 30 SHALL, WITH RESPECT TO SUCH FRACTIONAL INTEREST,
BE ENTITLED TO RECEIVE FROM THE CORPORATION CASH IN AN AMOUNT EQUAL TO
SUCH FRACTIONAL INTEREST MULTIPLIED BY THE SALE PRICE OF THE COMMON
STOCK LAST REPORTED IMMEDIATELY PRIOR TO THE EFFECTIVE TIME."
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment of Restated Certificate of Incorporation to be executed by Samuel
Smookler, its Chief Executive Officer, this day of , 20 .
P-COM, INC.
By:
Samuel Smookler
Chief Executive Officer
B-5
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