UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
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 [ ]
[ ] 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. 240.14a-12.
P-COM, INC.
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(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] 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.
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2. Aggregate number of securities to which transaction applies.
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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):
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4. Proposed maximum aggregate value of transaction:
5. Total fee paid:
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[ ] 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:
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2. Form, Schedule or Registration Statement No.:
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3. Filing Party:
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4. Date filed:
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[P COM LOGO]
July 13, 2005
Dear Stockholders:
You are cordially invited to attend the 2005 Annual Meeting of the
stockholders of P-Com, Inc. The 2005 Annual Meeting will be held on Friday,
August 12, 2005, at 10:00 a.m. (Pacific time) at our corporate headquarters,
located at 1996 Lundy Avenue, San Jose, California 95131.
Details regarding the business to be conducted at the Annual Meeting are
described in the accompanying Notice of Annual Meeting and Proxy Statement.
Please read these materials carefully. Included with the Proxy Statement is a
copy of our 2005 Annual Report on Form 10-K. We encourage you to read our Annual
Report. It includes our audited financial statements and information about our
operations, markets and products.
Your vote is important. Whether or not you expect to attend the Annual
Meeting and regardless of the number of shares you own, please complete, date,
sign and return the accompanying proxy card in the enclosed postage-paid
envelope or submit your proxy by telephone or the Internet so that your shares
may be represented at the meeting. If you submit a proxy, you can still attend
the Annual Meeting and vote your shares in person.
Thank you for your ongoing support of P-Com. We look forward to seeing you
at the Annual Meeting.
Sincerely,
/s/ Don Meiners
Don Meiners, President
[P COM LOGO]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 12, 2005
TO THE STOCKHOLDERS OF P-COM, INC.:
NOTICE IS HEREBY GIVEN that the 2005 Annual Meeting of Stockholders of
P-Com, Inc., a Delaware corporation, will be held on August 12, 2005 at 10:00
a.m. (Pacific time) at our corporate headquarters, located at 1996 Lundy Avenue,
San Jose, California 95131. At the meeting, you will be asked to vote on the
following matters:
1. The election of two directors to our Board of Directors, each to
serve for a term of three years (or for a term of one year if
Proposal 5 below is approved) or until his successor is elected and
qualified.
2. Ratifying the appointment of Aidman, Piser & Company as our
independent auditors for the fiscal year ending December 31, 2005.
3. The approval of an amendment to our certificate of incorporation to
increase our authorized common stock from 35,000,000 shares to
250,000,000 shares.
4. The approval of an amendment to our certificate of incorporation to
effect a recapitalization whereby each outstanding share of our
Series C Preferred Stock will be automatically converted into a
specified number of shares of our Series G Preferred Stock and
common stock.
5. The approval of an amendment to our certificate of incorporation to
eliminate the provision that divides our Board of Directors into
three classes.
6. The approval of an amendment to our certificate of incorporation to
change our corporate name from "P-Com, Inc." to "Wave Wireless
Corporation."
7. Granting our management the discretionary authority to adjourn the
Annual Meeting to a date or dates not later than August 31, 2005 if
necessary to enable our Board of Directors to solicit additional
proxies in favor of any of the proposals listed above.
8. Such other matters as may properly come before the Annual Meeting or
any adjournment or postponement of the Annual Meeting.
The Proxy Statement that accompanies this Notice of Annual Meeting
contains additional information regarding the proposals to be considered at the
Annual Meeting, and you are encouraged to read it in its entirety.
Only those persons who are stockholders of record at the close of business
on July 1, 2005, the record date for the 2005 Annual Meeting, will be entitled
to receive notice of and to vote, in person or by proxy, at the Annual Meeting
and at any adjournment or postponement of the Annual Meeting.
Your vote is very important and we encourage all of our stockholders to
attend the Annual Meeting in person. HOWEVER, WHETHER OR NOT YOU PLAN TO ATTEND
THE ANNUAL MEETING AND REGARDLESS OF THE NUMBER OF SHARES YOU OWN, PLEASE
COMPLETE, DATE, SIGN AND RETURN THE ACCOMPANYING PROXY CARD IN THE ENCLOSED
POSTAGE-PAID ENVELOPE OR SUBMIT YOUR PROXY BY TELEPHONE OR THE INTERNET AS
PROMPTLY AS POSSIBLE. If you receive more than one proxy card because your
shares are registered in different names and addresses, please sign and return
each proxy card to ensure that all your shares are 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 your shares in person, your proxy will be
revoked automatically and only your vote at the Annual Meeting will be counted.
Sincerely,
/s/ Daniel W. Rumsey
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Daniel W. Rumsey, Secretary
San Jose, California
July 13, 2005
YOUR VOTE IS IMPORTANT
PLEASE (1) COMPLETE, DATE, SIGN 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 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
(1-877-779-8683) 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.
INFORMATION ON P-COM'S WEBSITE
Information on any P-Com website is not part of the enclosed Proxy
Statement and you should not rely on any such information in deciding whether to
approve the proposals described in the enclosed Proxy Statement, unless that
information is also included in the Proxy Statement.
[P COM LOGO]
1996 LUNDY AVENUE
SAN JOSE, CALIFORNIA 95131
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PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 12, 2005
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GENERAL INFORMATION
The Board of Directors of P-Com, Inc., a Delaware corporation (which is
referred to in this Proxy Statement from time to time as "we," "us" and the
"Company"), is soliciting your proxy to vote your shares of our stock at the
2005 Annual Meeting of Stockholders (including any adjournment or postponement
of the Annual Meeting). The Annual Meeting will be held on August 12 2005 at
10:00 a.m. (Pacific time), at our corporate headquarters, located at 1996 Lundy
Avenue, San Jose, California 95131. This Proxy Statement and the accompanying
Notice of Annual Meeting and enclosed proxy card are being mailed on or about
July 13, 2005 to all of our stockholders who are entitled to vote at the Annual
Meeting.
PURPOSE OF THE ANNUAL MEETING
At the Annual Meeting, our stockholders will be asked to vote on the
following matters:
1. The election of two directors to our Board of Directors, each to
serve for a term of three years (or for a term of one year if
Proposal 5 below is approved) or until his successor is elected and
qualified.
2. Ratifying the appointment of Aidman, Piser & Company as our
independent auditors for the fiscal year ending December 31, 2005.
3. The approval of an amendment to our certificate of incorporation to
increase our authorized common stock from 35,000,000 shares to
250,000,000 shares.
4. The approval of an amendment to our certificate of incorporation to
effect a recapitalization whereby each outstanding share of our
Series C Preferred Stock will be automatically converted into a
specified number of shares of our Series G Preferred Stock and
common stock.
5. The approval of an amendment to our certificate of incorporation to
eliminate the provision that divides our Board of Directors into
three classes.
6. The approval of an amendment to our certificate of incorporation to
change our corporate name from "P-Com, Inc." to "Wave Wireless
Corporation."
7. Granting our management the discretionary authority to adjourn the
Annual Meeting to a date or dates not later than August 31, 2005, if
necessary to enable the Board of Directors to solicit additional
proxies in favor of any of the proposals listed above.
8. Any other matters that may properly come before the Annual Meeting
or any adjournment or postponement of the Annual Meeting.
-1-
RECOMMENDATIONS OF THE BOARD OF DIRECTORS
The Board of Directors has approved the nomination of Frederick R. Fromm
and R. Craig Roos for election as directors of the Company, each to serve for a
term of three years ending upon the 2008 Annual Meeting of Stockholders or until
his successor is duly elected and qualified. The Board of Directors recommends
that our stockholders vote FOR the election of these two director nominees
(Proposal 1).
The Board of Directors has approved the appointment of Aidman, Piser &
Company as our independent auditors for the fiscal year ending December 31,
2005. The Board of Directors recommends that our stockholders vote FOR the
ratification of the appointment of Aidman, Piser & Company as our independent
auditors (Proposal 2).
The Board of Directors has approved and declared advisable the amendment
to our certificate of incorporation to increase our authorized common stock from
35,000,000 shares to 250,000,000 shares and recommends that our stockholders
vote FOR the approval of this amendment (Proposal 3).
The Board of Directors has approved and declared advisable the amendment
to our certificate of incorporation to effect a recapitalization whereby each
outstanding share of our Series C Preferred Stock will be automatically
converted into a specified number of shares of our Series G Preferred Stock and
common stock and recommends that our stockholders vote FOR the approval of this
amendment (Proposal 4).
The Board of Directors has approved and declared advisable the amendment
to our certificate of incorporation to eliminate the provision that divides our
Board of Directors into three classes and recommends that our stockholders vote
FOR the approval of this amendment (Proposal 5).
The Board of Directors has approved and declared advisable the amendment
to our certificate of incorporation to change our corporate name from "P-Com,
Inc." to "Wave Wireless Corporation" and recommends that our stockholders vote
FOR the approval of this amendment (Proposal 6).
The Board of Directors recommends that our stockholders vote FOR the
proposal (Proposal 7) to grant our management the discretionary authority to
adjourn the Annual Meeting if necessary to enable the Board of Directors to
solicit additional proxies in favor of any of the proposals described above
(Proposals 1 - 6).
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of our common stock, Series C Preferred Stock and
Series E Preferred Stock at the close of business on July 1, 2005, the record
date for the 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 our
common stock, Series C Preferred Stock and Series E Preferred Stock were issued
and outstanding:
o 12,455,102 shares of our common stock were issued and
outstanding and held by approximately 824 holders of record;
o approximately 6,066 shares of our Series C Preferred Stock
were issued and outstanding and held by approximately 101
holders of record; and
o approximately 923 shares of our Series E Preferred Stock were
issued and outstanding and held by two holders of record.
QUORUM
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 present in person or represented by proxy. With
respect to any matter that requires a separate vote by any class or series, a
majority of the outstanding shares of that class or series, present in person or
represented by proxy, will constitute a quorum for the purpose of voting on that
particular matter.
-2-
Votes withheld, abstentions and "broker non-votes" will be counted as
being present for the purpose of establishing a quorum. A "broker non-vote"
occurs when a broker is not permitted to vote because the broker has not
received voting instructions from the beneficial owner of the shares and the
broker does not have the discretion to vote on the particular matter presented.
If a quorum is not present at the Annual Meeting, a majority of the votes
present at the meeting may adjourn the meeting to another date.
VOTING
At the Annual Meeting, the holders of our common stock, Series C Preferred
Stock and Series E Preferred Stock will be entitled to vote as follows:
o Holders of our common stock will be entitled to one vote per
share of common stock held as of the record date.
o Holders of our Series C Preferred Stock will be entitled to
one vote per share of Series C Preferred Stock held as of the
record date, solely with respect to Proposal 4. On all other
matters, holders of our Series C Preferred Stock will be
entitled to one vote for each share of our common stock
issuable upon conversion of the Series C Preferred Stock held
as of the record date.
o Holders of our Series E Preferred Stock will be entitled to
one vote for each share of our common stock issuable upon
conversion of the Series E Preferred Stock held as of the
record date.
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.
Our 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.
The proposal to approve an amendment to our certificate of incorporation
to increase our authorized common stock (Proposal 3) requires the affirmative
vote of (i) a majority of the shares of our common stock outstanding as of the
record date, voting as a separate class, and (ii) a majority of the shares of
our common stock outstanding as of the record date and the shares of our common
stock issuable upon conversion of our Series C Preferred Stock and Series E
Preferred Stock as of the record date, voting together as a single class.
Abstentions and broker non-votes with respect to either of these proposals will
have the same effect as a vote against the proposal.
The proposal to approve an amendment to our certificate of incorporation
to effect a recapitalization (Proposal 4) requires the affirmative vote of (i) a
majority of the shares of our Series C Preferred Stock outstanding as of the
record date, voting as a separate class, and (ii) a majority of the shares of
our common stock outstanding as of the record date and the shares of our common
stock issuable upon conversion of our Series C Preferred Stock and Series E
Preferred Stock as of the record date, voting together as a single class.
Abstentions and broker non-votes will have the same effect as a vote against
this proposal.
The proposals to approve amendments to our certificate of incorporation to
eliminate the division of our Board of Directors into three classes (Proposal 5)
and to change our corporate name (Proposal 6) each requires the affirmative vote
of a majority of the shares of our common stock outstanding as of the record
date and the shares of our common stock issuable upon conversion of our Series C
Preferred Stock and Series E Preferred Stock as of the record date, voting
together as a single class. Abstentions and broker non-votes will have the same
effect as a vote against this proposal.
All other proposals (Proposals 2 and 7) will be decided by the affirmative
vote of a majority of the shares of our common stock outstanding as of the
record date and the shares of our common stock issuable upon conversion of our
Series C Preferred Stock and Series E Preferred Stock as of the record date
(voting together as a single class), present in person or represented by proxy
at the Annual Meeting and entitled to vote on those matters. An abstention on
any of these proposals will be included in the number of votes cast on that
proposal and, accordingly, will have the same effect as a vote against the
proposal. However, broker non-votes with respect to any of these proposals will
not be included in the number of shares entitled to vote on that proposal and,
accordingly, will have the effect of reducing the number of affirmative votes
required to approve the proposal.
-3-
All votes will be tabulated by the inspector of election appointed for the
Annual Meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes.
PROXIES
All shares of our common stock, Series C Preferred Stock and Series E
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 in favor of each of the
proposals described in the accompanying Notice of Annual Meeting and this 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 our common stock, Series C Preferred
Stock or Series E 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 at the Annual Meeting by written ballot;
o by proxy by completing, signing and dating the enclosed proxy
card 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 shares a properly
executed legal proxy, identifying you as the beneficial owner of the shares,
authorizing you to act on behalf of the nominee at the annual meeting, and
specifying the number of shares with respect to which the authorization is
granted.
We do not expect any matter other than the proposals described in this
Proxy Statement to be brought before the Annual Meeting. If, however, other
matters are properly presented at the Annual Meeting, the persons named as
proxies will be permitted to vote your shares in their discretion.
REVOCATION OF PROXIES
All properly signed proxies that we receive 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 instructions are indicated,
to approve each of the proposals described in the accompanying Notice of Annual
Meeting and this Proxy Statement. You may revoke your proxy at any time before
it is exercised by taking any of the following actions:
o delivering a written notice to the our corporate secretary 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 Annual 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 Annual Meeting; or
-4-
o attending the Annual Meeting and voting in person by written
ballot, although attendance at the meeting, by itself, will
not revoke a proxy.
EXPENSES; SOLICITATION OF PROXIES
This proxy solicitation is made by our Board of Directors, and we will
bear the costs of this solicitation, including the expense of preparing,
printing, assembling and mailing this Proxy Statement and any other material
used in this solicitation of proxies. If it appears desirable to do so to ensure
adequate representation at the Annual Meeting, officers and regular employees of
the Company may communicate with stockholders, banks, brokerage houses,
custodians, nominees and others by telephone, facsimile, e-mail or in person to
request that proxies be furnished. No additional compensation will be paid for
these services. We will furnish copies of this Proxy Statement and other
solicitation materials to banks, brokerage houses, custodians, nominees and
others to be forwarded to the beneficial owners of our stock held in their names
and, upon request, we will reimburse them for their reasonable expenses in
forwarding these materials.
We intend to retain Georgeson Shareholder Communications, Inc. (referred
to in this Proxy Statement as "Georgeson") as our proxy solicitor in connection
with this Proxy Statement. The estimated cost for the engagement is $15,000, and
this amount is not contingent upon either the number of affirmative proxies
granted or the outcome of any particular proposal. The services to be provided
by Georgeson will 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. However, we have expressly
instructed Georgeson not to make any recommendation, either directly or
indirectly, regarding how the holders of our Series C Preferred Stock should
vote on any matter presented in this Proxy Statement. Georgeson may make
recommendations regarding how the holders of our common stock and Series E
Preferred Stock should vote on matters presented in this Proxy Statement, but we
have expressly instructed Georgeson to ascertain, prior to making any such
recommendation, whether a holder of common stock or Series E Preferred Stock is
also a record holder or beneficial holder of any shares of our Series C
Preferred Stock.
APPRAISAL RIGHTS
Our stockholders are not entitled to appraisal rights in connection with
any of the proposals described in this Proxy Statement.
-5-
PROPOSAL 1
ELECTION OF DIRECTORS
GENERAL
Our 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 2005 Annual
Meeting currently consists of two directors. The directors elected to this class
will serve for a term of three years, expiring at the 2008 Annual Meeting of
Stockholders or until a successor has been duly elected and qualified. The
nominees listed below are currently serving as directors of the Company.
If the proposal to eliminate the classification of our Board of Directors
(Proposal 5) is approved, all of our directors will be elected each year at our
annual meeting of stockholders, beginning with our 2006 Annual Meeting.
Each nominee for election has indicated his willingness to serve as a
director if elected, and the Company has no reason to believe that either
nominee will be unable or unwilling to serve if elected. If one or both nominees
are unable or unwilling to serve as a director at the time of the Annual Meeting
or any postponement or adjournment of the Annual Meeting, the proxies will be
voted for any other nominee designated by the current 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.
REQUIRED APPROVALS
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 the Board of Directors. 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.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that our stockholders vote FOR the
election of each of the nominees named below.
NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS FOR TERM ENDING UPON THE 2008
ANNUAL MEETING OF STOCKHOLDERS
Frederick R. Fromm, age 56, has served as a director of the Company since
June 2001. Since February 2004, Mr. Fromm has served as a consultant to several
telecommunications companies. From May 2003 to February 2004, Mr. Fromm was
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, 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.
R. Craig Roos, age 59, joined our Board of Directors in December 2003. Mr.
Roos is founder and sole owner of Roos Capital Planners, Inc., which he formed
in 1979 and which specializes in advisory services to the communications
industry, primarily in the fixed and mobile wireless area. Mr. Roos has served
on the boards of several companies in the wireless, communications, software,
media and telecommunications industries. He served as chairman of MobileMedia
Corporation from 1993 until 1995. Mr. Roos also was a co-founder of Locate, a
digital local access carrier specializing in high-speed T-1 level radio carrier
technologies. Mr. Roos has testified before the United States Congress on
telecommunications issues and is a former chairman of the Alternative Local
Telecommunications Trade Association.
-6-
CONTINUING DIRECTORS FOR TERM ENDING UPON THE 2006 ANNUAL MEETING OF
STOCKHOLDERS
Richard Reiss, age 48, has served as director of the Company since March
2005. Mr. Reiss is currently the Chairman of the Board of Directors of
Glowpoint, Inc., where he has served since May 2000. He served as the Chief
Executive Officer of Glowpoint from May 2000 to April 2002, and as President
from May 2000 to April 2002. Mr. Reiss served as Chairman of the Board of
Directors, President and Chief Executive Officer of All Communications
Corporation from its formation in 1991 until the formation of Glowpoint's
predecessor pursuant to a merger of All Communications Corporation and View
Tech, Inc. in May 2000.
Daniel W. Rumsey, age 44, was appointed by the Board of Directors to fill
the vacancy created by the departure of Brian T. Josling, who resigned from the
Board of Directors on March 1, 2005. Mr. Rumsey currently also serves as our
Chief Restructuring Officer.
CONTINUING DIRECTORS FOR TERM ENDING UPON THE 2007 ANNUAL MEETING OF
STOCKHOLDERS
George P. Roberts, age 72, is a founder of the Company and has served as
our Chairman of the Board since September 1993. Mr. Roberts also served as our
Chief Executive Officer and as a director of the Company from October 1991 to
May 2001, and as our interim Chief Executive Officer from January 2002 to
September 1, 2003.
BOARD COMMITTEES AND MEETINGS
The Board of Directors held 17 meetings and acted by unanimous written
consent 14 times in 2004. 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 of
Directors on which he served in 2004. We encourage our directors to attend the
annual meetings of our stockholders. At our 2004 Annual Meeting of Stockholders,
three directors were in attendance.
The Board of Directors has an Audit Committee and a Compensation
Committee. The Board of Directors does not have a standing nominating committee.
All of our directors participate in the director nomination process, and the
Board of Directors believes that the establishment of a standing nominating
committee is not warranted in view of the fact that a majority of our directors
meet the requirements of an independent director set forth in Rule 4200(a)(15)
of the Marketplace Rules of The NASDAQ Stock Market, Inc.
The Audit Committee, which was established in accordance with Section
3(a)(58)(A) of the Securities Exchange Act of 1934, currently consists of two
directors, Frederick R. Fromm and R. Craig Roos. The Audit Committee is
primarily responsible for approving the services performed by our independent
registered public accounting firm and reviewing their reports regarding our
accounting practices and systems of internal accounting controls. The Board of
Directors has determined that Mr. Roos is a financial expert in that he has (i)
an understanding of generally accepted accounting principles and financial
statements; (ii) the ability to assess the general application of such
principles in connection with the accounting for estimates, accruals and
reserves; (iii) experience preparing, auditing, analyzing and evaluating
financial statements that present a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and complexity of
issues that can reasonably be expected to be raised by our financial statements,
and experience actively supervising one or more persons engaged in those
activities; (iv) an understanding of internal control over financial reporting;
and (v) an understanding of audit committee functions. Both Mr. Fromm and Mr.
Roos meet the requirements of an independent director set forth in Rule
4200(a)(15) of the Marketplace Rules of The NASDAQ Stock Market, Inc. The Audit
Committee held four meetings in 2004. The Audit Committee has a written charter,
a copy of which was attached as Appendix B to the proxy statement relating to
our 2004 Annual Meeting of Stockholders.
The Compensation Committee currently consists of two directors, Frederick
R. Fromm and Richard Reiss. Mr. Reiss was appointed to the Compensation
Committee in April 2005. The Compensation Committee is primarily responsible for
reviewing and approving our general compensation policies and setting
compensation levels for our executive officers. The Compensation Committee also
has the authority to administer our Employee Stock Purchase Plan, our 1995 Stock
Option/Stock Issuance Plan and our 2004 Equity Incentive Plan. The Compensation
Committee held five meetings and acted by unanimous written consent eight times
in 2004.
-7-
DIRECTOR COMPENSATION
Our non-employee directors do not receive cash compensation for their
services as directors. Under our 2004 Equity Incentive Plan, the Compensation
Committee has the authority to make discretionary option grants to our
directors.
STOCKHOLDER COMMUNICATIONS WITH THE BOARD OF DIRECTORS
Our stockholders may contact the Board of Directors or any of the
individual directors by writing to them c/o Daniel W. Rumsey, Chief
Restructuring Officer, General Counsel and Secretary, P-Com, Inc., 1996 Lundy
Avenue, San Jose, California 95131. Inquiries sent by mail will be reviewed,
sorted and summarized by Mr. Rumsey or his designee before they are forwarded to
the Board of Directors or to any individual director.
EXECUTIVE OFFICERS
Daniel W. Rumsey, age 44, was appointed Chief Restructuring Officer on
March 10, 2005 and to our Board of Directors on May 13, 2005. Prior to his
appointment as Chief Restructuring Officer, since March 2003, Mr. Rumsey served
as our Vice President, Acting Chief Financial Officer and General Counsel. Prior
to joining the Company, Mr. Rumsey was Vice President and General Counsel of
Knowledge Kids Network, Inc., a multi-media education company. Knowledge Kids
Network is part of the Knowledge Universe family of companies. Prior to joining
Knowledge Kids Network, Mr. Rumsey was the President and Chief Executive Officer
of Aspen Learning Systems and NextSchool, Inc., which he joined in February
1997. Mr. Rumsey sold Aspen Learning Systems and NextSchool to Knowledge Kids
Network in 1999. Mr. Rumsey has an extensive restructuring, legal and finance
background, dating back to 1987 when he served as a staff attorney in the U.S.
Securities and Exchange Commission's Division of Corporation Finance. He has
also served as Assistant General Counsel for Terra Industries, Inc. and
Associate General Counsel and Corporate Secretary of EchoStar Communications
Corporation. Mr. Rumsey also serves as the Chairman of the Board of Directors of
Prescient Applied Intelligence. Mr. Rumsey received his J.D. from the University
of Denver College of Law in 1985, and his B.S. from the University of Denver in
1983.
Don Meiners, age 43, was appointed President on March 10, 2005. Prior to
his appointment, he served as our Vice President - Operations, and has held a
variety of management roles since he joined the Company in 1992. These include
Vice President of Operations, Vice President Engineering, Vice President
Manufacturing and Vice President of Engineering Program Management. Prior to
joining the Company, Mr. Meiners served in design engineering roles and project
management for Digital Microwave Corporation and Equitorial Inc. Mr. Meiners
graduated from the Missouri Institute Of Technology in 1983.
Carlos Belfiore, age 60, currently serves as our Vice President -
Engineering, and Chief Technical Officer. Prior to joining the Company in
November 2003, he was an independent engineering consultant. Prior to that, Dr.
Belfiore held various management and technical leadership positions at Stratex
Networks, which he joined in 1988, including Senior Director IDU Development,
Director of New Technology Development, Director of Modem Development, and
Senior Scientist. Prior to joining Stratex, Dr. Belfiore was with the Microwave
Communication Division of Harris Corporation, serving as Manager of Advanced
Development and Principal Development Engineer. Dr. Belfiore received a Ph.D. in
electrical engineering from University of Minnesota in 1976.
James D. Bletas, age 60, currently serves as our Vice President - Sales
and Marketing. Mr. Bletas has 35 years of experience in the wireless
telecommunications industry focused on sales and marketing. Prior to joining the
Company, Mr. Bletas founded Wireless Networks International, Inc., a global
distributor of networking and wireless communications products and services.
During his four-year tenure as President and CEO, Mr. Bletas grew the company's
annual revenue to more than $20 million, and expanded the operations to
geographic areas outside of the U.S., including Latin America, the Middle East
and Asia. Before joining Wireless Networks International, Inc., Mr. Bletas was
the Vice President of Sales at Wireless Inc., a pioneer in the licensed exempt
market and an original developer of broadband access and subscriber equipment.
He began his sales career in wireless telecommunications equipment in the
microwave communications division of Harris Corporation, where he last served as
Vice President of Worldwide Sales and Marketing.
-8-
EXECUTIVE COMPENSATION
The following table provides certain information summarizing the
compensation earned for services rendered in all capacities to us and our
subsidiaries for each of the last three fiscal years by our "named executive
officers," who consist of our Chief Executive Officer and each of our four other
most highly compensated executive officers, each of whom were executive officers
as of December 31, 2004 and whose salary and bonus for the fiscal year ended
December 31, 2004 was in excess of $100,000.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
-------------
AWARDS
ANNUAL COMPENSATION -------------
------------------------------------------------------ SECURITIES
SALARY BONUS OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)
------------------------------------ ------ ------- -------- ---------------- ------------ ----------------
Samuel Smookler 2004 252,100 125,000 -- --
Former CEO and Director 2003 139,569 -- 53,083(2) 80,000(3) --
2002 -- -- -- -- --
Daniel W. Rumsey 2004 158,269 -- -- -- --
Chief Restructuring Officer and 2003 104,369 -- -- 73,333 8,000(4)
Director 2002 -- -- -- -- --
Don Meiners 2004 130,046 -- -- -- --
President 2003 103,699 -- -- 73,333 --
2002 115,617 -- -- 983 --
Randall L. Carl(5) 2004 144,054 15,048 -- -- --
Former Senior Vice President, 2003 136,800 36,252 -- 73,600 --
Sales and Marketing 2002 158,650 11,400 -- 1,500 --
Carlos A. Belfiore 2004 138,000 -- -- -- --
Vice President of Engineering and 2003 18,577 -- -- 80,000 --
Chief Technical Officer 2002 -- -- -- -- --
(1) Includes amounts deferred under our 401(k) Plan.
(2) On October 8, 2003, Messrs. Roberts and Smookler each acquired 23.33
shares of our Series C Preferred Stock of, which are convertible into
13,611 shares of common stock, resulting in an effective purchase price of
$3.00 per share of common stock. The closing price per share of common
stock as reported on the OTC Bulletin Board on October 8, 2003 was $6.90
per share.
(3) Mr. Smookler was also granted a warrant to purchase 120,000 shares of our
common stock on the same terms and conditions as this option. Mr.
Smookler's employment with the Company was terminated effective March 10,
2005, and he resigned as a director on that date. The Company has taken
the position that no severance payments are due to Mr. Smookler, and Mr.
Smookler is currently contesting this position. Under the terms of his
existing agreement, Mr. Smookler may be entitled to receive severance
payments totaling $250,000.
(4) Prior to joining the Company full time in April 2003, Mr. Rumsey was paid
$8,000 as a consultant to the Company.
(5) Mr. Carl's employment with the Company was terminated effective March 18,
2005. Mr. Carl's employment agreement requires the payment to him of six
months severance, totaling approximately $72,000.
-9-
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The table below provides certain information with respect to our named
executive officers concerning: (i) the options that they exercised in 2004 and
(ii) the number and value of their unexercised options as of December 31, 2004.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT FISCAL
SHARES VALUE YEAR END(3) YEAR END ($)(1)
ACQUIRED ON REALIZED ------------------------------ --------------------------
NAME EXERCISE (#) ($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------- ------------ -------- ----------- ------------- ----------- -------------
Sam Smookler -- -- 43,333 36,667 -- --
Don Meiners -- -- 26,881 48,891 -- --
Daniel W. Rumsey -- -- 24,444 48,889 -- --
Randall L. Carl -- -- 26,669 49,264 -- --
Carlos A. Belfiore -- -- 25,867 54,133 -- --
(1) Based on the fair market value of the option shares at the 2004 fiscal
year-end ($0.44 per share based on the closing selling price on the OTC
Bulletin Board as of December 31, 2004) less the exercise price.
(2) Based on the fair market value of the shares on the exercise date less the
exercise price paid for those shares.
(3) The options are immediately exercisable for all the options shares.
However, any shares purchased under the options are subject to repurchase
by the Company, at the original exercise price paid per share, upon the
optionee's cessation of service prior to vesting in such shares.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Compensation Committee of the Board of Directors, as Plan
Administrator of our 2004 Equity Incentive Plan, has the authority to provide
for accelerated vesting of any outstanding options held by our executive
officers or any unvested share issuances actually held by these individuals, in
connection with certain changes in control of the Company or the subsequent
termination of an executive officer's employment following a change in control.
We entered into an Employment and Continuity of Benefits Agreement with
George P. Roberts, dated May 31, 2001, outlining his continued employment with
the Company as Chairman of the Board following his resignation as Chief
Executive Officer on May 30, 2001. The agreement provided for (a) an employment
period commencing May 31, 2001 through May 30, 2002. The agreement was
automatically extended through May 30, 2003. On April 28, 2003, we entered into
a letter agreement with Mr. Roberts, thereby extending the employment period
under the Employment and Continuity of Benefits Agreement through May 30, 2005.
The letter agreement provided for the amendment of the Employment and Continuity
of Benefits Agreement upon the assignment of a new Chief Executive Officer of
the Company. Effective September 1, 2003, due to Mr. Roberts' resignation as
Chief Executive Officer, and the appointment of a new Chief Executive Officer of
the Company, Mr. Roberts' salary amounted to half his salary that existed prior
to May 30, 2002, with one half of the salary, $188,000, paid in cash, and the
other half paid in shares of our common stock. Effective June 1, 2005, Mr.
Roberts agreed to waive any entitlement he had to receive cash, shares of our
common stock or other benefits under his Continuity of Benefits Agreement, and
to terminate the Continuity of Benefits Agreement, which had been extended by
the Board of Directors, in consideration for the issuance to him of a warrant to
purchase 600,000 shares of our common stock, exercisable at $.30 per share, and
the continuation of all healthcare coverage previously extended to Mr. Roberts
for the remainder of his natural life.
On July 25, 2003, we entered into an agreement with Sam Smookler, our
former President and Chief Executive Officer. The agreement provided for a
two-year term of employment and an initial salary of $36,000 per month beginning
September 1, 2003 and continuing through December 31, 2003. Beginning on January
1, 2004, Mr. Smookler was paid a base salary of $250,000 per year. On September
2, 2004, Mr. Smookler was paid a cash bonus equal to 50% of his base salary. The
agreement also provided for the grant of an option to purchase a number of
shares equal to two percent of the total number of shares of our common stock
issued and outstanding as of September 2, 2003. By agreement with the Board of
Directors, this number was fixed at 166,666 shares, but this amount was reduced
to 80,000 due to limitations in our 1995 Stock Option/Stock Issuance Plan, and
we granted Mr. Smookler a warrant to purchase 86,666 shares of our common stock
in order to make up the difference. On March 10, 2005, Mr. Smookler resigned
from our Board of Directors and his employment with the Company was terminated.
The Company has taken the position that no severance payments are due to Mr.
Smookler, and Mr. Smookler is currently contesting this position. Under the
terms of his employment agreement, Mr. Smookler may be entitled to receive
payments totaling $250,000. In addition, Mr. Smookler's incentive stock option
to purchase 80,000 shares of common stock vests immediately.
-10-
On April 4, 2003, we entered into an agreement with Daniel Rumsey, our
Chief Restructuring Officer. In the event Mr. Rumsey's employment is
involuntarily terminated, we will be obligated to pay him severance equal to the
greater of his base salary on the date of the agreement or his base salary on
the date of his involuntary termination. We will be obligated to pay this amount
in a series of successive bi-weekly installments over the 12-month period
following the date of his involuntary termination. In addition, each unvested
option previously granted to Mr. Rumsey will continue to vest and remain
exercisable, together with all other vested and unexercised options, in
accordance with their terms and conditions for a period of one year following
the date of his involuntary termination. For purposes of Mr. Rumsey's agreement,
an involuntary termination will be deemed to have occurred in the event of his
involuntarily discharge or dismissal or his voluntary resignation following (a)
a change in the level of management to which he reports, (b) a decrease or
material change in his responsibilities, or (c) a reduction in his base salary.
Mr. Rumsey's annual salary was increased to $240,000, effective March 10, 2005.
In an effort to reduce costs, Mr. Rumsey's annual salary will be reduced to
$190,000, effective July 22, 2005. In the event that Mr. Rumsey's employment is
involuntarily terminated or in the event of a change in control of the Company,
the difference between Mr. Rumsey's current salary and his salary prior to July
22, 2005, will be paid to Mr. Rumsey.
On October 20, 2003, we entered into an agreement with Dr. Carlos
Belfiore, our Vice President of Engineering and Chief Technical Officer. Under
the terms of the agreement, Dr. Belfiore is paid a base salary of $138,000 per
year. Dr. Belfiore was also paid a cash bonus equal to 30% of his base salary on
January 15, 2005. The agreement also provided for the grant of an option to
purchase 91,666 shares of our common stock, but this amount was reduced to
80,000 shares due to limitations in our 1995 Stock Option/Stock Issuance Plan,
and we granted Dr. Belfiore a warrant to purchase 11,666 shares of common stock
in order to make up the difference. In the event Dr. Belfiore's employment is
terminated at any time without cause, we will be obligated to pay Dr. Belfiore
his base salary for six months following his termination, and all options
previously granted to Dr. Belfiore will continue to vest in accordance with
their terms and conditions for a period of two years following the date of his
termination. Following a change in control of the Company, we will be obligated
to pay Dr. Belfiore his base salary for a period of one year and his options
will become fully vested and immediately exercisable. For purposes of Dr.
Belfiore's agreement, a change in control will be deemed to occur upon: (a) a
merger or consolidation in which we are not the surviving entity; (b) the sale,
transfer or other disposition of all or substantially all of our assets in
complete liquidation or dissolution of the Company; (c) a reverse merger in
which we are the surviving entity but in which securities representing 50% or
more of the total combined voting power of our outstanding securities are
transferred to persons other than the persons who held those securities
immediately prior to such merger; and (d) the acquisition, directly or
indirectly by any person or related group of persons of more than 30% of our
outstanding voting securities pursuant to a tender or exchange offer made
directly to our stockholders.
On November 3, 2004, we entered into retention agreements with two of our
senior executives, Don Meiners, our current President and former Vice President
of Operations, and Randall L. Carl, our former Vice President of Sales and
Marketing - Licensed Products. In addition, we entered into an agreement with
Jim Bletas, our Executive Vice President - Sales and Marketing, on March 21,
2005. Under the terms of these agreements, in the event that Mr. Meiners, Mr.
Carl or Mr. Bletas is terminated without cause, we will be obligated to pay his
base salary for a period of six months, and all options previously granted to
him will continue to vest in accordance with their terms for a period of two
years following the date of his termination. Mr. Carl's employment with the
Company was terminated on March 17, 2005.
In the event that Mr. Meiners or Mr. Bletas is terminated within 12 months
of a change in control, we will be obligated to pay his salary for a period of
one year following his termination and all options previously granted to him
will automatically become fully vested and immediately exercisable. For purposes
of each of Messrs. Meiners' and Bletas' agreements, a change in control will be
deemed to have occurred upon: (a) a merger or consolidation in which we are not
the surviving entity; (b) the sale, transfer or other disposition of all or
substantially all of our assets in complete liquidation or dissolution of the
Company; (c) any reverse merger in which we are the surviving entity but in
which securities representing 50% or more of the total combined voting power of
our outstanding securities are transferred to a person(s) other than the
person(s) who held those securities immediately prior to such merger; and (d)
the acquisition, directly or indirectly by a person or related group of persons
of beneficial ownership of more than 30% of our outstanding voting securities
pursuant to a tender or exchange offer made directly to our stockholders.
Messrs. Meiners and Bletas are each entitled to receive the severance benefits
described above if, at any time within 12 months following a change in control:
(i) his level of responsibility at the Company is materially reduced; (ii) his
place of employment is moved to a location that is more than 50 miles from his
place of employment immediately prior to the change in control; or (c) his
salary or bonus plan is reduced without his prior written consent. Each of
Messrs. Meiners' and Bletas' annual salary is $150,000.
-11-
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Debenture Financing Transaction
Pursuant to a Note and Warrant Purchase Agreement, dated November 3, 2004,
a single accredited investor agreed to purchase debentures issued by the Company
in the aggregate principal amount of up to $5,000,000. In addition, we agreed to
issue to this investor warrants to purchase up to 800,000 shares of our common
stock. The warrants have an initial exercise price of $1.50 and a term of five
years. The purchase agreement provided that the debentures and warrants would be
issued in multiple closings. The first closing took place on November 26, 2004,
at which time we issued a debenture in the amount of $3,300,000 and a warrant to
purchase 528,000 shares of our common stock. The second, third, fourth and fifth
closings took place on March 21, March 31, May 2 and June 30, 2005,
respectively, at which time we issued debentures in the amounts of $250,000,
$600,000, $350,000 and $500,000 and warrants to purchase 40,000 shares, 96,000
shares, 56,000 shares and 80,000 shares of our common stock, respectively.
In connection with the Note and Warrant Purchase Agreement, we also
entered into a Registration Rights Agreement, which obligated us to register the
6,000,000 shares of common stock that may be used to pay the amounts due under
the debentures and the 800,000 shares of common stock issuable upon exercise of
the warrants.
In June 2005, we issued 250 shares of our Series F Preferred Stock to the
holder of these debentures as payment of the principal and interest due on March
31, 2005 and as partial payment of the principal and interest due on June 30,
2005. In June 2005, we also issued a warrant to purchase up to 500,000 shares of
our common stock at an exercise price of $0.20 per share to the holder of these
debentures.
Exchange Agreements
In May 2005, we entered into an Exchange Agreement with the holders of all
of our outstanding shares of Series D Preferred Stock. Pursuant to this
agreement, the holders of our Series D Preferred Stock agreed to exchange all of
their shares of Series D Preferred Stock for 1,000 shares of our Series G
Preferred Stock and warrants to purchase up to 1,000,000 shares of our common
stock at an exercise price of $0.001 per share.
In July 2005, we entered into an Exchange Agreement with three of the
holders of our Series C Preferred Stock. Pursuant to this agreement, these
holders have agreed to exchange all of their shares of Series C Preferred Stock
(approximately 2,332 shares) for (i) the same number of shares of our Series G
Preferred Stock that they would have received in exchange for their shares of
Series C Preferred Stock in the recapitalization described in Proposal 4 of this
Proxy Statement and (ii) warrants to purchase up to the same number of shares of
our common stock that they would have received in the recapitalization at an
exercise price of $0.001 per share. The exchange of securities contemplated by
this agreement will be effected immediately prior to the effective time of the
recapitalization.
Other Agreements
See the section entitled "Employment Contracts, Termination of Employment
Arrangements and Change of Control Agreements" above.
-12-
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
This report of the Compensation Committee of the Board of Directors shall
not be deemed incorporated by reference by any general statement incorporating
by reference this Proxy Statement into any filing (whether previously or
hereafter filed) under the Securities Act of 1933, as amended (the "Securities
Act"), or the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
except to the extent that the Company specifically incorporates this information
by reference, and shall not otherwise be deemed filed under either the
Securities Act or the Exchange Act.
The Compensation Committee of the Board of Directors is responsible for
establishing the base salary and incentive cash bonus programs for our executive
officers. The Committee also has the exclusive responsibility for the
administration of our 2004 Equity Incentive Plan, under which grants may be made
to executive officers and other key employees of the Company.
The Compensation Committee is comprised of one non-employee director, who
has no interlocking or other type of relationship that would call into question
his independence as a committee member. The sole member of the Company's
Compensation Committee is Mr. Frederick Fromm. On issues related to executive
compensation, the Compensation Committee consults with the Chief Executive
Officer. The following report of the Compensation Committee describes the
Company's compensation policies during the fiscal year ended December 31, 2004
as they affected the Company's Chief Executive Officer and other executive
officers.
The Committee's objective in determining executive compensation is to
provide our executive officers and other key employees with competitive
compensation opportunities based upon their contribution to the financial
success of the Company, the market levels of compensation in effect at companies
with which the Company competes for executive talent, the personal performance
of such individuals and, most importantly in 2004, the financial resources of
the Company. The Committee may, however, in its discretion, apply different
factors in setting executive compensation for future fiscal years.
The compensation package for each executive officer is comprised of cash
compensation and long-term equity incentive awards. Cash compensation consists
of base salary and annual performance awards.
CASH COMPENSATION
A key objective of our current executive compensation program is to
position its key executives to earn cash compensation reflective of peer groups
in the current industry climate. During 2004, the Committee increased the base
salaries of certain of its key executive officers to more closely align their
salary with their peers, in order to ensure retention of such executives. As a
percentage, the base salaries paid to the Company's executive officers in 2004
were less than the 30% reduction in base salaries taken in 2002, when each
executive officer's salary was reduced along with all exempt employees of the
Company. These reductions were necessary in order for the Company to retain cash
and consummate the restructuring of the Company, which was completed in the
first quarter of 2004. As a result of the Company's failure to achieve its cash
and other objectives in 2004, no performance awards were paid to executive
officers in 2004 - other than to the Company's former sales executive, Randall
L. Carl, who was paid sales performance awards totaling $15,048 in 2004.
LONG-TERM INCENTIVE AWARDS
Equity incentives are provided primarily through stock option grants under
the 2004 Plan. The grants are designed to align the interests of each executive
officer with those of the stockholders and provide each individual with a
significant incentive to manage the Company from the perspective of an owner
with an equity stake in the business. Each grant allows the individual to
acquire shares of our Common Stock at a fixed price per share (the market price
on the grant date) over a specified period of time (up to 10 years). The shares
subject to each option generally vest in installments over a two-to-four-year
period, contingent upon the executive officer's continued employment with the
Company. Accordingly, the option will provide a return to the executive officer
only if the executive officer remains employed by the Company during the
applicable vesting period, and then only if the market price of the underlying
shares appreciates over the option term.
-13-
The number of shares subject to each option grant is set at a level
intended to create a meaningful opportunity for stock ownership based on the
officer's current position with the Company, the base salary associated with
that position, the individual's potential for increased responsibility and
promotion over the option term, the individual's personal performance in recent
periods, and other factors determined important by the Committee. The Committee
also takes into account the recommendations of the Chief Executive Officer of
the Company, in determining the recipients and size of each grant.
No stock option or other grants were issued to the Company's continuing
executive officers in 2004, in light of the grant to the executive officers in
2003. Stock options were, however, granted to Elsbeth Kahn, the Company's former
Vice President, Sales and Marketing. Ms. Kahn was granted an option to purchase
60,000 shares upon joining the Company in April 2004.
CHIEF EXECUTIVE OFFICER'S COMPENSATION
Mr. Samuel Smookler joined the Company as President and Chief Executive
Officer on September 1, 2003. Mr. Smookler resigned from the Company on March
10, 2005. In setting Mr. Smookler's compensation, including his bonus for
2003-2004, the Compensation Committee considered Mr. Smookler's industry
experience, the scope of his responsibilities, the Board's confidence in Mr.
Smookler to lead the Company beyond the restructuring and to return the Company
to profitability, and the recommendation of the Chairman and then interim Chief
Executive Officer. Mr. Smookler's compensation in 2003 reflected amounts paid to
Mr. Smookler designed to replace the income Mr. Smookler lost from his former
employer to join the Company. This payment was required to successfully recruit
Mr. Smookler to the Company. In determining Mr. Smookler's stock option grant,
the Committee considered the percentage ownership interest typically offered
chief executive officers of similarly situated companies, the anticipated impact
of the restructuring on the issued and outstanding capital of the Company, and
the relative number of options granted to other executive officers of the
Company.
Mr. Smookler's base compensation was not changed in 2004. In the
Committee's view, the total compensation package provided to Mr. Smookler for
the 2004 fiscal year is appropriate in the markets the industry served, in light
of P-Com's current performance.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)
Section 162(m) of the Internal Revenue Code, enacted in 1993, generally
disallows a tax deduction to publicly held companies for compensation exceeding
$1.0 million paid to certain of the corporation's executive officers. The
limitation applies only to compensation that is not considered to be
performance-based. The non-performance based compensation to be paid to our
executive officers for the 2004 fiscal year did not exceed the $1.0 million
limit per officer, nor is it expected that the non-performance based
compensation to be paid to our executive officers for fiscal 2005 will exceed
that limit. Options granted under our 1995 and 2004 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 $1.0 million limitation. Because it is very unlikely
that the cash compensation payable to any of our executive officers in the
foreseeable future will approach the $1.0 million limit, the Compensation
Committee has decided at this time not to take any other action to limit or
restructure the elements of cash compensation payable to our executive officers.
The Compensation Committee will reconsider this decision should the individual
compensation of any executive officer ever approach the $1.0 million level.
It is the opinion of the Compensation Committee that the executive
compensation policies and programs in effect for our executive officers provide
an appropriate level of total remuneration which properly aligns our performance
and the interests of our stockholders with competitive and equitable executive
compensation in a balanced and reasonable manner, for both the short and
long-term.
Frederick Fromm
Member, Compensation Committee
-14-
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of our Board of Directors currently consists
solely of Frederick R. Fromm. During 2004, John Hawkins, a former director of
the Company, was also a member of the Compensation Committee until his
resignation from the Board of Directors on November 23, 2004. Neither Mr. Fromm
nor Mr. Hawkins has, at any time, been an officer or employee of the Company or
any of our subsidiaries, and neither Mr. Fromm nor Mr. Hawkins has, at any time
during the past fiscal year, had any relationship with the Company that requires
disclosure pursuant to Item 404 of Regulation S-K under the Securities Exchange
Act of 1934. None of our executive officers currently serves, or at any time
during the past fiscal year has served, as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving on our Board of Directors or Compensation Committee.
STOCK PERFORMANCE GRAPH
The graph depicted below shows a comparison of cumulative total
stockholder returns for the Company, the Standard & Poor's 500 Index and the
Standard & Poor's Communications Equipment Manufacturers Index.
[LINE GRAPH OMITTED]
This graph shall not be deemed incorporated by reference by any general
statement incorporating by reference this Proxy Statement into any filing
(whether previously or hereafter filed) under the Securities Act of 1933, as
amended (the "Securities Act"), or under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), except to the extent that the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under either the Securities Act or the Exchange Act.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules of the Securities and Exchange Commission ("SEC")
require our directors, executive officers and persons who own more than 10% of
our common stock to file reports of their ownership and changes in their
ownership of our common stock with the SEC and to furnish to us copies of those
filed reports. The SEC has established specific due dates for these reports and
requires us to report in this Proxy Statement any failure by these persons to
file or failure to file on a timely basis.
-15-
To our knowledge, based solely on a review of the copies of the reports
furnished to us and written representations that no other reports were required,
we believe that, during our 2004 fiscal year, our directors, executive officers
and persons who own more than 10% of our common stock complied with all Section
16(a) filing requirements, with the exception of Brian Josling (a former
director), who did not file a Form 4 on a timely basis, and Elsbeth Kahn, who
did not file a Form 3 on a timely basis.
REPORT OF THE AUDIT COMMITTEE
This report of the Audit Committee of the Board of Directors shall not be
deemed incorporated by reference by any general statement incorporating by
reference this Proxy Statement into any filing (whether previously or hereafter
filed) under the Securities Act of 1933, as amended (the "Securities Act"), or
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), except to
the extent that the Company specifically incorporates this information by
reference, and shall not otherwise be deemed filed under either the Securities
Act or the Exchange Act.
The Company's management is responsible for the preparation, presentation,
and integrity of the Company's financial statements, accounting and financial
reporting principles, internal controls, and procedures designed to ensure
compliance with accounting standards, applicable laws, and regulations. The
Company's independent auditors, Aidman, Piser & Company, are responsible for
performing an independent audit of the consolidated financial statements and
expressing an opinion on the conformity of those financial statements with
generally accepted accounting principles. The following is the report of the
Audit Committee with respect to the Company's audited financial statements for
the fiscal year ended December 31, 2004, included in the Company's Annual Report
on Form 10-K for that year.
The Audit Committee has reviewed and discussed these audited financial
statements with the Company's management. The Audit Committee has also discussed
with the Company's independent auditors, Aidman, Piser & Company, the matters
required to be discussed by Statement on Auditing Standards No. 61,
Communication with Audit Committees, as amended, which includes, among other
items, matters related to the conduct of the audit of the Company's financial
statements. Further, the Audit Committee has received the written disclosures
and the letter from Aidman, Piser & Company required by Independence Standards
Board Standard No. 1, Independence Discussions with Audit Committees, as
amended, and has discussed with Aidman, Piser & Company the independence of
Aidman, Piser & Company from the Company.
Based on these reviews and discussions, the Audit Committee recommended to
the Company's Board of Directors that the audited financial statements be
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2004 for filing with the Securities and Exchange Commission. The Audit
Committee has recommended the selection of Aidman, Piser & Company as the
Company's independent registered public accounting firm for the fiscal year
ending December 31, 2005.
Submitted by the Audit Committee
of the Board of Directors,
R. Craig Roos
Frederick R. Fromm
-16-
PROPOSAL 2
RATIFICATION OF APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
GENERAL
On August 7, 2003, PricewaterhouseCoopers LLP, ("PricewaterhouseCoopers"),
was dismissed as our independent registered public accounting firm. On August 7,
2003, our Audit Committee approved Aidman, Piser & Company ("Aidman Piser") as
our new independent registered public accounting firm.
The reports of PricewaterhouseCoopers on our financial statements for the
preceding two fiscal years contained no adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principle. However, the reports of PricewaterhouseCoopers contained an
explanatory paragraph indicating that there was substantial doubt about our
ability to continue as a going concern.
In connection with the audits for the two most recent fiscal years in the
period ended December 31, 2002 and through August 7, 2003, there were no
disagreements with PricewaterhouseCoopers, on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of
PricewaterhouseCoopers would have caused them to make reference in their audit
report.
The Board of Directors, upon the recommendation of the Audit Committee,
has selected Aidman Piser to serve as our independent registered public
accounting firm for the fiscal year ending December 31, 2005. A representative
of Aidman Piser 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 to us in connection
with audit and tax engagements, neither Aidman Piser nor any of its affiliates
has any relationship with us or any of our affiliates, except in its capacity as
our independent registered public accounting firm.
REQUIRED APPROVALS
The approval of this proposal to ratify the appointment of Aidman Piser as
our independent registered public accounting firm will require the affirmative
vote of a majority of the shares of our common stock outstanding as of the
record date and the shares of our common stock issuable upon conversion of our
Series C Preferred Stock and Series E Preferred Stock as of the record date
(voting together as a single class), present in person or represented by proxy
at the Annual Meeting and entitled to vote on this proposal. Abstentions will be
included in the number of votes cast on this proposal and, accordingly, will
have the same effect as a vote against this proposal. However, broker non-votes
with respect to this proposal will not be included in the number of shares
entitled to vote on this proposal and, accordingly, will have the effect of
reducing the number of affirmative votes required to approve the proposal.
Our stockholders are not required to ratify the appointment of Aidman
Piser as our independent registered public accounting firm. However, we are
submitting the appointment of Aidman Piser to the stockholders for ratification
as a matter of good corporate practice. If our stockholders do not ratify the
appointment, our Board of Directors and the Audit Committee will reconsider
whether or not to retain Aidman Piser. Even if the appointment is ratified, our
Board of Directors and the Audit Committee in their discretion may direct the
appointment of a different independent accounting firm at any time during the
year if they determine that such a change would be in our best interests.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that our stockholders vote FOR the
ratification of the appointment of Aidman Piser to serve as our independent
registered public accounting firm for the fiscal year ending December 31, 2005.
-17-
PRINCIPAL FEES AND SERVICES OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We were billed the following fees for the services of Aidman Piser during
fiscal years 2004 and 2003:
2004 2003
-------------- -------------
Audit Fees $133,210 $30,000
Audit-Related Fees 36,840 43,000
Tax Fees -- --
All Other Fees -- --
The audit-related fees for the year ended December 31, 2003 were
principally for:
o assisting our management in responding to the Securities and
Exchange Commission's ("SEC") comments to certain reports that
we filed with the SEC pursuant to the Securities Exchange Act
of 1934;
o audits undertaken in connection with our acquisition of
SPEEDCOM Wireless Corporation; and
o audit-related services rendered in connection with our
restructuring activities and filing of registration statements
with the SEC.
The audit-related fees for the year ended December 31, 2004 were
principally related to post-report review procedures to update reports and issue
consents in connection with our filing of registration statements.
AUDIT COMMITTEE PRE-APPROVAL POLICIES
The Audit Committee has adopted an Audit Committee Charter, which sets
forth the policies and procedures pursuant to which services to be performed by
Aidman Piser are to be pre-approved. Under the Audit Committee Charter, proposed
services either may be pre-approved by agreeing to a framework with descriptions
of allowable services with the Audit Committee ("general pre-approval"), or
require the specific pre-approval of the Audit Committee.
Unless a type of service has received general pre-approval, it requires
specific pre-approval by the Audit Committee if it is to be provided by Aidman
Piser.
The Audit Committee will annually review and pre-approve the services that
may be provided by Aidman Piser that are subject to general pre-approval. Under
the Audit Committee Charter, the Audit Committee may delegate authority to one
or more designated members of the Audit Committee to pre-approve audit and
permissible non-audit services. The member to whom such authority is delegated
must report, for informational purposes only, any pre-approval decisions to the
Audit Committee at its next meeting.
-18-
PROPOSAL 3
AMENDMENT TO CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF SHARES OF AUTHORIZED COMMON STOCK
GENERAL
The Board of Directors has adopted resolutions approving, declaring
advisable and recommending that our stockholders approve an amendment to our
certificate of incorporation to increase the number of authorized shares of
common stock from 35,000,000 shares to 250,000,000 shares. This amendment will
not change the total number of authorized shares of our preferred stock, which
is currently 2,000,000 shares. If approved, the increase in the number of
authorized shares of our common stock will become effective upon the filing of a
certificate of amendment with the Secretary of State of the State of Delaware.
We currently plan to file the certificate of amendment as soon as reasonably
practicable after receiving approval of the amendment from our stockholders.
However, the Board of Directors has reserved the right to abandon the proposed
amendment if, at any time before the filing of the certificate of amendment, it
determines that the increase in the number of authorized shares of common stock
is no longer in our best interests.
If this proposal is approved, the first paragraph of Article IV of our
certificate of incorporation will be amended to reflect an increase of
215,000,000 shares in the number of authorized shares of common stock. The
proposed amendment to the first paragraph of Article IV of our certificate of
incorporation is set forth in its entirety in Appendix A to this Proxy
Statement.
PURPOSE OF AND RATIONALE FOR THE PROPOSED AMENDMENT
We are currently authorized to issue a total of 35,000,000 shares of
common stock. Of this amount, 12,455,102 million shares of common stock were
outstanding as of July 1, 2005. In addition we are required to reserve
approximately 23.2 million shares of common stock for issuance upon conversion
or exercise of our outstanding convertible securities. As a result, we currently
have no ability to issue additional shares of our common stock. The objective of
the proposed increase in the number of authorized shares of common stock is to
permit the issuance of additional shares of our common stock in connection with
the proposed recapitalization discussed below (Proposal 4) and to ensure that we
have a sufficient number of shares of common stock authorized and available for
future issuances and other corporate purposes.
In addition to the foregoing reasons, our Board of Directors believes that
the number of shares of our common stock available for issuance should be
increased in order to provide the Company with the flexibility to issue shares
in connection with future financings, 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 us the flexibility that the
Board of Directors views as important in facilitating the effective use of our
securities.
We also constantly evaluate potential transactions with third parties that
may involve the issuance of our common stock, such as financing transactions,
debt restructuring transactions and business combination transactions. We plan
to continue initiating discussions with third parties regarding potential
investments, the restructuring or other resolution of our 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 35,000,000 to 250,000,000 in order to have a
sufficient number of shares of common stock to meet our 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 our outstanding convertible
securities.
EFFECT OF PROPOSED AMENDMENT
The increase in the authorized shares of our common stock will not have an
immediate effect on the rights of existing stockholders. However, if this
proposal to increase our authorized common stock is approved, we will have a
sufficient number of authorized and unissued common stock to effect the
recapitalization described in Proposal 4.
-19-
If the proposal to increase the number of authorized shares of our common
stock is not approved, we will not have the flexibility to issue additional
shares in connection with the various corporate purposes described above,
including, among others, the proposed recapitalization (Proposal 4).
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 our common stock in order to maintain their proportionate
ownership interests in the Company. Therefore, the issuance of any additional
shares of common stock will have a dilutive effect on earnings per share and on
the equity and voting power of our existing common stock holders. It may also
adversely affect the market price of our common stock. However, in the event
additional shares are issued in transactions that position the Company to take
advantage of favorable business opportunities or provide additional working
capital needed to pursue and/or expand our business plan, the market price may
increase. This proposed amendment to our 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 our 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 the Company 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 that the Board of Directors determines is
not in our best interests, thus diluting the ownership and voting rights of the
person seeking to obtain control of the Company. In certain circumstances, the
issuance of common stock without further action by the stockholders may have the
effect of delaying or preventing a change in control of the Company, may
discourage bids for our common stock at a premium over the prevailing market
price and may adversely affect the market price of our common stock. As a
result, increasing the authorized number of shares of our common stock could
render more difficult and less likely a hostile takeover, tender offer or proxy
contest, assumption of control by a holder of a large block of our stock, and
the possible removal of our incumbent management. We are not aware of any
proposed attempt to take over the Company or of any present attempt to acquire a
large block of our common stock.
REQUIRED APPROVALS
The affirmative vote of (i) a majority of the shares of our common stock
outstanding as of the record date, voting as a separate class, and (ii) a
majority of the shares of our common stock outstanding as of the record date and
the shares of our common stock issuable upon conversion of our Series C
Preferred Stock and Series E Preferred Stock as of the record date, voting
together as a single class, will be required to approve this proposal.
Abstentions and broker non-votes will have the same effect as a vote against
this proposal.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors has approved and declared the advisability of the
proposed amendment and recommends that our stockholders vote FOR the proposal to
amend our certificate of incorporation to increase the number of authorized
shares of common stock from 35,000,000 shares to 250,000,000 shares.
-20-
PROPOSAL 4
AMENDMENT TO CERTIFICATE OF INCORPORATION
TO EFFECT A RECAPITALIZATION
GENERAL
The Board of Directors has adopted resolutions approving, declaring
advisable and recommending that our stockholders approve an amendment to our
certificate of incorporation to effect a recapitalization whereby each
outstanding share of our Series C Preferred Stock will be automatically
converted into a specified number of shares of our Series G Preferred Stock and
common stock, as further described below. This recapitalization will not affect
the total number of authorized shares of our preferred stock, which will remain
unchanged at 2,000,000 shares. If approved, the recapitalization will be
effected upon the filing of a certificate of amendment with the Secretary of
State of the State of Delaware. We currently plan to file the certificate of
amendment as soon as reasonably practicable after receiving approval of the
recapitalization from our stockholders. However, the Board of Directors has
reserved the right to abandon the proposed recapitalization if, at any time
before the filing of the certificate of amendment, it determines that the
proposed recapitalization is no longer in our best interests.
If the recapitalization is approved, the first paragraph of Article IV of
our certificate of incorporation will be amended and restated in its entirety to
read as set forth in Appendix A to this Proxy Statement.
A representative of Aidman, Piser & Company, our independent registered
public accounting firm, 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.
BACKGROUND AND PURPOSE OF THE PROPOSED RECAPITALIZATION
Since early 2000, we have experienced reduced revenues, incurred
substantial operating losses from continuing operations and used substantial
cash in our operations. The decline in our business was principally the result
of a prolonged downturn in the telecommunications industry that we believe was
related to reduced capital spending by large carriers and network integrators of
telecommunications systems and substantial competition from other
telecommunications product suppliers. In addition, we experienced reduced demand
for many of our product lines as new products were introduced by our competitors
at lower average selling prices.
In an effort to return the Company to profitability, we substantially
restructured our operations and capital structure in order to reduce the amount
of cash used in our operations and reduce the total amount of our debt and
raised additional working capital. As part of this restructuring process:
o in August 2003, we converted all of our outstanding 7%
Convertible Subordinated Notes due 2005, in the aggregate
principal amount of approximately $21 million, into
approximately 1,000,000 shares of our Series B Preferred
Stock, with a stated value of $21.138 per share;
o in October and December 2003, we raised approximately $17.4
million dollars in gross proceeds through the issuance and
sale of approximately 9,942 shares of our Series C Preferred
Stock, with a stated value of $1,750 per share; and
o in December 2003, we issued 2,000 shares of our Series D
Preferred Stock, with a stated value of $1,000 per share, in
consideration for the extinguishment of our obligations under
three promissory notes in the aggregate principal amount of
$2,000,000.
As a result, we were able to substantially reduce the total amount of our
debt and raise sufficient working capital to continue our operations. In 2004,
we continued to restructure our operations in order to reduce spending, reduce
our debt and secure additional sources of financing. Unfortunately, our previous
restructuring efforts were inadequate to return the Company to profitability. As
a result, our Board of Directors recently approved a new restructuring plan
designed to focus our business on our higher margin products, further curtail
spending, substantially reduce our liabilities and operating and other costs,
and simplify our capital structure, as described below. As part of this plan, we
are proposing to restructure our capitalization by converting each outstanding
share of our Series C Preferred Stock into shares of our Series G Preferred
Stock and common stock.
-21-
Simplification of Capital Structure and Improvement of Balance Sheet
Our primary objective in proposing this recapitalization is to simplify
our existing capital structure. Each of our Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock have different stated values,
conversion rights, dividend rights and liquidation preferences, and accounting
for these differing rights consumes a significant portion of our management's
time and resources. If the recapitalization is approved, we anticipate that all
of our Series B Preferred Stock and Series C Preferred Stock will cease to
exist, leaving only our Series E Preferred Stock, Series F Preferred Stock and
Series G Preferred Stock outstanding, as described below.
In June 2005, the holders of our Series D Preferred Stock voluntarily
exchanged all of their shares of Series D Preferred Stock for 1,000 shares of
our Series G Preferred Stock and warrants to purchase up to 1,000,000 shares of
our common stock. As a result, no shares of our Series D Preferred Stock remain
outstanding at this time. In the proposed recapitalization, all outstanding
shares of our Series C Preferred Stock will be automatically converted into
shares of our Series G Preferred Stock and common stock, thereby eliminating all
outstanding shares of Series C Preferred Stock. In addition, the holders of our
Series B Preferred Stock have agreed to convert all of their shares into common
stock as soon as reasonably practicable. However, no holder of Series B
Preferred Stock is required to convert its shares into common stock if the
conversion would cause the holder or any of its affiliates, individually or in
the aggregate, to beneficially own more than 9.999% of our outstanding common
stock. We anticipate that the increase in the number of outstanding shares of
our common stock resulting from the recapitalization will enable the holders of
our Series B Preferred Stock to convert all of their shares into common stock,
thereby eliminating all outstanding shares of Series B Preferred Stock.
In November 2004, March 2005, May 2005 and June 2005, we raised a total of
$5,000,000 in gross proceeds through the issuance and sale of unsecured
promissory notes in the aggregate principal amount of $5,000,000 and warrants to
purchase 800,000 shares of our common stock to a single investor. Payments of
principal and interest under these promissory notes are due at the end of each
calendar quarter, beginning with March 31, 2005. In June 2005, we issued
approximately 250 shares of our Series F Preferred Stock to the holder of these
promissory notes as payment of the principal and interest due on March 31, 2005
and as partial payment of the principal and interest due on June 30, 2005. We
have the right to convert all outstanding shares of our Series F Preferred Stock
into shares of our common stock, but only if the conversion would not cause the
holder to beneficially own more than 9.99% of our outstanding common stock. We
anticipate that the increase in the number of outstanding shares of our common
stock resulting from the recapitalization will enable us to convert all of our
Series F Preferred Stock into shares of our common stock, thereby eliminating
all outstanding shares of Series F Preferred Stock.
As a result of the restructuring, all of our shares of preferred stock,
which previously were classified as mezzanine securities (a form of debt) on our
balance sheet, will be treated as stockholders' equity.
Reduction in Dividend Liabilities
In addition to simplifying our capital structure, the recapitalization
would also reduce our obligation to pay dividends to the holders of our capital
stock. The holders of our Series C Preferred Stock are currently entitled to
receive dividends at the rate of 6% per annum, and this rate will increase to 8%
per annum in the fourth quarter of 2005. As of the record date, the holders of
our Series C Preferred Stock were entitled to receive approximately $477,700 in
accrued and unpaid dividends, in the aggregate, or approximately $79 per share
of Series C Preferred Stock. The dividends on our Series C Preferred Stock are
cumulative and payable semi-annually, either in cash or shares of our common
stock, resulting in significant dilution for the holders of our common stock.
In the event of our liquidation or any merger, consolidation, sale of
assets or other transaction that is treated as a liquidation for purposes of the
Series C Preferred Stock, we are required to pay the holders of our Series C
Preferred Stock the stated value of their shares plus all accrued and unpaid
dividends prior to any amounts being paid to the holders of our common stock.
The continuous accretion of dividends on our Series C Preferred Stock and the
resulting increase in the liquidation preference of those shares significantly
impairs our ability to obtain additional equity financing on favorable terms as
well as our ability to increase stockholder value.
-22-
If the recapitalization is approved, all of our outstanding shares of
Series C Preferred Stock will be converted into shares of our Series G Preferred
Stock and common stock. Our Series G Preferred Stock is entitled only to share
pro-rata, on an as-converted basis, in any dividends and other distributions
that may be declared by the Board of Directors with respect to our common stock.
Our Board of Directors is not obligated to declare any dividends with respect to
our common stock, and unlike the holders of our Series C Preferred Stock, the
holders of our Series G Preferred Stock will not be entitled to receive any
specified dividends, whether cumulative or non-cumulative.
EFFECT OF THE PROPOSED RECAPITALIZATION
If the proposed recapitalization is approved, each outstanding share of
our Series C Preferred Stock, with a stated value of $1,750 per share, will be
automatically converted into:
o seven-eighths (7/8ths) of a share of our Series G Preferred
Stock, with a stated value of $1,000 per share; and
o 1,750 shares of our common stock.
In addition, if the recapitalization is approved, we will also issue
one-half (1/2) of a share of our Series G Preferred Stock and 2,000 shares of
our common stock for every $1,000 of accrued and unpaid dividends on our Series
C Preferred Stock.
Immediately following the recapitalization, no shares of Series C
Preferred Stock will remain outstanding. Each share of Series C Preferred Stock
that was outstanding immediately prior to the recapitalization will, immediately
after the recapitalization, represent the appropriate number of shares (or
fractions of a share) of our Series G Preferred Stock and common stock into
which that share of Series C Preferred Stock, including all accrued and unpaid
dividends thereon, was automatically converted.
The total number of authorized shares of our common stock and preferred
stock will not be affected by the recapitalization (although the number of
authorized shares of our common stock will be increased if our stockholders
approve Proposal 3 discussed above). Furthermore, if the proposal to increase
our authorized common stock (Proposal 3) is not approved, we will not be able to
implement the recapitalization even if the recapitalization is approved by our
stockholders.
The following table provides a pro-forma comparison of our capitalization,
as it existed on the record date and as it would exist immediately after the
recapitalization.
Following the
As of the Record Date Recapitalization
--------------------- ----------------
Total shares of common stock outstanding 12,455,102 20,024,966*
Total shares of common stock reserved for issuance
upon conversion or exercise of convertible
securities (including preferred stock) 23,152,188* 29,340,628*
Total shares of preferred stock outstanding 116,645* 7,746*
Series A Preferred Stock 0 0
Series B Preferred Stock 108,406* 0(1)
Series C Preferred Stock 6,066* 0
-23-
Following the
As of the Record Date Recapitalization
--------------------- ----------------
Series D Preferred Stock 0 0
Series E Preferred Stock 923* 923*
Series F Preferred Stock 250 250
Series G Preferred Stock 1,000 6,573*
* Approximately.
(1) The holders of our Series B Preferred Stock have agreed to convert all of
their shares into common stock as soon as reasonably practicable. However,
no holder of Series B Preferred Stock is required to convert its shares
into common stock if the conversion would cause the holder or any of its
affiliates, individually or in the aggregate, to beneficially own more
than 9.999% of our outstanding common stock. We anticipate that the
increase in the number of outstanding shares of our common stock resulting
from the recapitalization will enable the holders of our Series B
Preferred Stock to convert all of their shares into common stock.
COMPARISON OF SERIES C PREFERRED STOCK WITH SERIES G PREFERRED STOCK
The relative rights, preferences and privileges of our Series C Preferred
Stock and Series G Preferred Stock are set forth in the respective Certificates
of Designation, which were filed with the Delaware Secretary of State on
September 24, 2003 and June 6, 2005, respectively, and copies of which are
attached to this Proxy Statement as Appendix B and Appendix C, respectively. A
summary of the relative rights, preferences and privileges of all of our capital
stock is also included in this Proxy Statement under the heading "Description of
Our Capital Stock."
The following table summarizes and compares some of the more significant
aspects of our Series C Preferred Stock and Series G Preferred Stock. The
information presented in this table is intended only to highlight certain
aspects of and differences between these two series of our preferred stock, and
it is qualified in its entirety by the more detailed information appearing
elsewhere in this Proxy Statement.
Series C Preferred Stock Series G Preferred Stock
-------------------------------------------- --------------------------------------------
Voting Entitled to cast one vote for each share No voting rights, except as required by
of common stock issuable upon conversion the Delaware General Corporation Law.
of Series C Preferred Stock, together with
the holders of common stock, on all
matters submitted to a vote of the
stockholders.
Conversion Each share is convertible into a number of Each share is convertible into a number of
shares of common stock equal to the stated shares of common stock equal to the
value ($1,750 per share), plus any accrued liquidation preference amount ($1,000 per
and unpaid dividends, divided by the share), divided by the conversion price of
current conversion price of approximately $0.50.
$2.90.
Dividends Entitled to dividends at the rate of 6% Entitled to participate in all dividends
per annum beginning on the first declared on our common stock based on the
anniversary of the date of issuance and 8% number of shares of common stock issuable
per annum beginning on the second upon conversion of Series G Preferred
anniversary of the date of issuance. Stock.
Liquidation Holders of Series C Preferred Stock are Holders of Series G Preferred Stock are
Preference entitled to receive the stated value of entitled to receive $1,000 per share prior
their shares plus all accrued and unpaid to any amounts being paid to the holders
dividends, pari passu, prior to any of our Series F Preferred Stock and Common
amounts being paid to the holders of our Stock.
Series B Preferred Stock and common stock.
-24-
Series C Preferred Stock Series G Preferred Stock
-------------------------------------------- --------------------------------------------
Mandatory We are required to repurchase all None.
Redemption outstanding shares of Series C Preferred
Stock upon the occurrence of certain
specified events.
Protective We are required to obtain the approval of We are required to obtain the approval of
Provisions the holders of a majority of the the holders of at least three-fourths
outstanding shares of Series C Preferred (3/4ths) of the outstanding shares of
Stock prior to taking certain specified Series G Preferred Stock prior to taking
corporate actions. certain specified corporate actions.
Exchange Right Holders of Series C Preferred Stock have None. See the section entitled "Right of
the right to exchange their shares for any Participation" below.
new equity securities issued by the
Company.
Balance Sheet Treated as mezzanine securities (a form of Treated as stockholders' equity on our
Treatment debt) on our balance sheet. balance sheet.
RESTRICTED SECURITIES
The shares of our Series G Preferred Stock and common stock issued in the
recapitalization will be considered "restricted securities," which means that
those shares will be subject to substantial restrictions on transferability
under federal securities laws. Generally, the shares of our Series G Preferred
Stock and common stock received in the recapitalization by former holders of our
Series C Preferred Stock may not be subsequently offered or sold unless the
offer and sale has been registered with the Securities and Exchange Commission
pursuant to an effective registration statement or an exemption from this
registration requirement is available.
Within 90 days following the recapitalization, we will prepare and file a
registration statement covering the offer and sale of the common stock issuable
upon conversion of our Series G Preferred Stock and the common stock issued in
the recapitalization by the holders of those securities.
RIGHT OF PARTICIPATION
In the event that we issue additional equity securities (or any other
securities that are convertible into our equity securities), the holders of our
Series C Preferred Stock currently have the right to exchange their Series C
Preferred Stock (and any common stock received upon conversion of the Series C
Preferred Stock) for a portion of the additional equity securities with a
purchase price equal to the stated value (plus all accrued and unpaid dividends)
of the Series C Preferred Stock being exchanged. This exchange right is
currently set forth in the Certificate of Designation of our Series C Preferred
Stock, a copy of which is attached to this Proxy Statement as Appendix B.
The Certificate of Designation of our Series G Preferred Stock (a copy of
which is attached to this Proxy Statement as Appendix C) does not provide the
holders of our Series G Preferred Stock with any exchange rights or rights to
otherwise participate in equity financings that we may conduct in the future,
and we are not contractually obligated to provide any rights such as these to
the holders of our Series G Preferred Stock. However, if the proposed
recapitalization is approved and in the event that we offer or sell shares of
our common stock (or any securities convertible into our common stock) within 12
months following the date of the 2005 Annual Meeting, we intend to offer the
former holders of our Series C Preferred Stock the right to purchase, for cash,
the newly issued securities on the same terms and conditions as the other
purchasers of those securities, up to an amount equal to the aggregate stated
value of the Series G Preferred Stock then held. However, this right to
participate in future equity financings conducted by the Company will not be
applicable to:
-25-
o the issuance or sale of shares of our common stock (including
options to purchase common stock) to our employees, officers,
directors and consultants;
o the issuance or sale of shares of our Series E Preferred
Stock, Series F Preferred Stock and Series G Preferred Stock;
o the issuance or sale of shares of our common stock (or any
other security convertible into shares of our common stock) in
connection with mergers, acquisitions, strategic business
partnerships and joint ventures; and
o any issuance or sale of our securities as to which the holders
of a majority of our outstanding Series G Preferred Stock have
executed a written waiver of this participation right.
EXCHANGE OF STOCK CERTIFICATES
We will appoint EquiServe Trust Company, N.A., 150 Royall Street, Canton,
MA 02021, (781) 575-3120, to act as exchange agent for holders of our Series C
Preferred Stock in connection with the recapitalization.
On or promptly after the effective date of the recapitalization, we will
mail a letter of transmittal to the holders of our Series C Preferred Stock.
Each such stockholder must then complete and sign the letter of transmittal and
send it, together with all of its old stock certificate(s) representing shares
of our Series C Preferred Stock, to the exchange agent. Upon receipt of these
materials, the exchange agent will promptly deliver new stock certificates
evidencing the appropriate number of shares of our Series G Preferred Stock and
common stock. Holders of our Series C Preferred Stock will not receive new
certificates for their post-recapitalization shares unless and until their old
certificates are surrendered in this manner. In addition, holders of our Series
C Preferred Stock should not forward their old certificates to the exchange
agent until they receive the letter of transmittal, and they should only
surrender their old certificates together with the letter of transmittal.
Holders of our Series C Preferred Stock will not have to pay any service
charges in connection with the exchange of their certificates.
REQUIRED APPROVALS
The affirmative vote of (i) a majority of the shares of our Series C
Preferred Stock outstanding as of the record date, voting as a separate class,
and (ii) a majority of the shares of our common stock outstanding as of the
record date and the shares of our common stock issuable upon conversion of our
Series C Preferred Stock and Series E Preferred Stock as of the record date,
voting together as a single class, will be required to approve this proposal.
Abstentions and broker non-votes will have the same effect as a vote against
this proposal.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors has approved and declared the advisability of the
proposed amendment and recommends that our stockholders vote FOR the proposal to
amend our certificate of incorporation to effect a recapitalization whereby each
outstanding share of Series C Preferred Stock will be automatically converted
into a specified number of shares of our Series G Preferred Stock and common
stock.
-26-
PROPOSAL 5
AMENDMENT TO CERTIFICATE OF INCORPORATION
TO ELIMINATE CLASSIFIED BOARD OF DIRECTORS
GENERAL
The Board of Directors has adopted resolutions approving, declaring
advisable and recommending that our stockholders approve an amendment to our
certificate of incorporation to eliminate the provision that divides our Board
of Directors into three classes. This amendment will not change the total number
of directors that constitute our Board of Directors, which is currently five. If
approved, the declassification of our Board of Directors will become effective
upon the filing of a certificate of amendment with the Secretary of State of the
State of Delaware. We currently plan to file the certificate of amendment as
soon as reasonably practicable after receiving approval of the amendment from
our stockholders. However, the Board of Directors has reserved the right to
abandon the proposed amendment if, at any time before the filing of the
certificate of amendment, it determines that declassification of the Board of
Directors is no longer in our best interests.
If this proposal is approved, the first paragraph of Article VI of our
certificate of incorporation will be amended to reflect the elimination of the
provision that divides our Board of Directors into three classes. The proposed
amendment to the first paragraph of Article VI of our certificate of
incorporation is set forth in its entirety in Appendix A to this Proxy
Statement.
PURPOSE OF AND RATIONALE FOR THE PROPOSED AMENDMENT
The purpose of the proposed declassification of our Board of Directors is
to simplify our corporate governance structure and to increase the
accountability of our directors to our stockholders. By making all of our
directors stand for election each year and by making them subject to removal at
any time, with or without cause (as discussed below), our Board of Directors
believes that each director of the Company would be more accountable to our
stockholders.
Our Board of Directors is currently divided into three classes, with the
number of directors in each class being as nearly equal as possible. The
directors in each class serve for a term of three years, and the terms of office
for the three classes are staggered so that each year only one of the three
classes of directors is elected. The benefits of maintaining a classified board
structure include increased stability in board composition and greater
continuity of experience because a majority of directors at any given time will
have at least one year of experience with the Company. However, the Board of
Directors has determined that the simplification of our corporate governance
structure and the increased accountability of our directors to our stockholders
that would result from declassifying our Board of Directors outweigh the
benefits of maintaining the current classification structure.
EFFECT OF PROPOSED AMENDMENT
The proposed declassification of our Board of Directors will not affect
the election of directors at this year's Annual Meeting. If this proposal is
approved, all of our directors will be elected each year at our annual meeting
of stockholders, beginning with our 2006 Annual Meeting, and the directors that
are elected to office at each annual meeting will serve for a term of one year
until the next succeeding annual meeting.
Delaware law generally provides that any director or the entire board of
directors of a corporation may be removed, with or without cause, by the holders
of a majority of the shares entitled to vote at an election of directors.
However, if a corporation's board of directors is divided into multiple classes,
as ours currently is, Delaware law provides that the directors of such a
corporation may be removed only for cause. Accordingly, our directors may be
removed only for cause at the present time, but if the proposal to declassify
our Board of Directors is approved, our directors will be subject to removal,
with or without cause, at any time by the holders of a majority of our shares
that are entitled to vote on the election of directors.
If the proposal to declassify our Board of Directors is not approved, the
proposed amendment to our certificate of incorporation will not be made and we
will continue to have a classified Board of Directors.
-27-
ANTI-TAKEOVER EFFECTS
Maintaining a classified board has been viewed as an anti-takeover measure
because it prevents a person (or a group of persons) who seeks to acquire
control of the Company from being able to replace a majority of our directors in
any single election. By eliminating the classification of our Board of
Directors, we may become more vulnerable to unsolicited or hostile attempts by
others to acquire control of our Board of Directors.
REQUIRED APPROVALS
The affirmative vote of a majority of the shares of our common stock
outstanding as of the record date and the shares of our common stock issuable
upon conversion of our Series C Preferred Stock and Series E Preferred Stock as
of the record date, voting together as a single class, will be required to
approve this proposal. Abstentions and broker non-votes will have the same
effect as a vote against this proposal.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors has approved and declared the advisability of the
proposed amendment and recommends that our stockholders vote FOR the proposal to
amend our certificate of incorporation to eliminate the provision that divides
our Board of Directors into three classes.
-28-
PROPOSAL 6
AMENDMENT TO CERTIFICATE OF INCORPORATION
TO CHANGE CORPORATE NAME
GENERAL
The Board of Directors has adopted resolutions approving, declaring
advisable and recommending that our stockholders approve an amendment to our
certificate of incorporation to change our corporate name from "P-Com, Inc." to
"Wave Wireless Corporation." If approved, the change in our corporate name will
become effective upon the filing of a certificate of amendment with the
Secretary of State of the State of Delaware. We currently plan to file the
certificate of amendment as soon as reasonably practicable after receiving
approval of the amendment from our stockholders. However, the Board of Directors
has reserved the right to abandon the proposed amendment if, at any time before
the filing of the certificate of amendment, it determines that changing our
corporate name is no longer in our best interests.
If this proposal is approved, Article I of our certificate of
incorporation will be amended to reflect our new corporate name. The proposed
amendment to Article I of our certificate of incorporation is set forth in its
entirety in Appendix A to this Proxy Statement.
PURPOSE OF AND RATIONALE FOR THE PROPOSED AMENDMENT
The purpose of the proposed name change is to align our corporate name
more closely with our principal products and services on a going-forward basis.
In December 2003, we acquired Wave Wireless Networking, a division of SPEEDCOM
Wireless Corporation. As part of this transaction, we acquired the SPEEDLAN
family of license-exempt wireless networking products to supplement our existing
lines of licensed and license-exempt wireless networking equipment. However, our
licensed wireless networking products have proven to be unprofitable and, as
part of our ongoing efforts to reduce our operating expenses and achieve
profitability, our Board of Directors has decided to discontinue production of
our licensed products. As a result, our core business will be increasingly
focused primarily on the development, manufacturing and marketing of our
profitable license-exempt products, which include the SPEEDLAN family of
products that were acquired as part of our acquisition of Wave Wireless
Networking.
Our Board of Directors believes that the proposed name change will be
beneficial to the Company and our shareholders because our customers will
associate the name "Wave Wireless Corporation" with our more successful lines of
license-exempt products. In addition, the adoption of the name "Wave Wireless
Corporation" is an important step in our strategy to focus on and expand our
business of developing, manufacturing and marketing license-exempt wireless
networking products.
However, even if the proposed name change is approved, we will continue to
market and conduct our repair and maintenance business under the name "P-Com."
EFFECT OF PROPOSED AMENDMENT
If approved by our stockholders, the change in our corporate name will not
affect the validity of any of our existing stock certificates that bear the name
"P-Com, Inc." If the proposed name change is approved, stockholders with
certificated shares may continue to hold their existing certificates and the
number of shares represented by those certificates will remain unchanged. New
stock certificates that are issued after the name change becomes effective will
bear the name "Wave Wireless Corporation."
Currently our common stock is quoted on the OTC Bulletin Board of the
National Association of Securities Dealers, Inc. under the symbol "PCMC." If the
proposed name change is approved, we will request a new ticker symbol based on
our new corporate name. Under the rules of the OTC Bulletin Board, we cannot
make any requests for a particular symbol and, as a result, we will not know
what our new symbol will be until it has been assigned by the OTC Bulletin
Board. A new CUSIP number will also be assigned to our common stock following
the name change.
-29-
If the proposal to change our corporate name is not approved, the proposed
amendment to our certificate of incorporation will not be made and our corporate
name will remain unchanged.
REQUIRED APPROVALS
The affirmative vote of a majority of the shares of our common stock
outstanding as of the record date and the shares of our common stock issuable
upon conversion of our Series C Preferred Stock and Series E Preferred Stock as
of the record date, voting together as a single class, will be required to
approve this proposal. Abstentions and broker non-votes will have the same
effect as a vote against this proposal.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors has approved and declared the advisability of the
proposed amendment and recommends that our stockholders vote FOR the proposal to
amend our certificate of incorporation to change our corporate name from "P-Com,
Inc." to "Wave Wireless Corporation."
-30-
PROPOSAL 7
GRANTING MANAGEMENT THE DISCRETIONARY
AUTHORITY TO ADJOURN THE ANNUAL MEETING
GENERAL
If, at the Annual Meeting, the number of shares of our common stock,
Series C Preferred Stock and Series E Preferred Stock voting in favor of any of
the foregoing proposals is insufficient to approve that proposal under Delaware
law, our management intends to move to adjourn the Annual Meeting in order to
enable our Board of Directors to solicit additional proxies in favor of that
proposal. In that event, we will ask our 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.
PURPOSE OF AND RATIONALE FOR THE PROPOSAL
In the adjournment proposal, we are asking our stockholders to authorize
the holder of any proxy solicited by our Board of Directors to vote in favor of
granting management the discretionary authority to adjourn the Annual Meeting
and any later adjournments of the Annual Meeting to a date or dates not later
than August 31, 2005 in order to enable our Board of Directors to solicit
additional proxies in favor of approving any proposal that initially lacks a
sufficient number of shares voting in its favor.
EFFECT OF THE PROPOSAL
If our stockholders approve this adjournment proposal, our management will
be able to adjourn the Annual Meeting and any adjourned session of the Annual
Meeting to a date or dates not later than August 31, 2005 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 this adjournment proposal
could mean that, even if we have received proxies representing a sufficient
number of votes to defeat a particular proposal, our management can adjourn the
Annual Meeting without a vote on that proposal for up to 30 days and, during
that period, seek to convince the holders of those shares to change their votes
in favor of that particular proposal.
REQUIRED APPROVALS
Approval of this adjournment proposal will require the affirmative vote of
a majority of the shares of our common stock outstanding as of the record date
and the shares of our common stock issuable upon conversion of our Series C
Preferred Stock and Series E Preferred Stock as of the record date (voting
together as a single class), present in person or represented by proxy at the
Annual Meeting and entitled to vote on this proposal. Abstentions will be
included in the number of votes cast on this proposal and, accordingly, will
have the same effect as a vote against this proposal. However, broker non-votes
with respect to this proposal will not be included in the number of shares
entitled to vote on this proposal and, accordingly, will have the effect of
reducing the number of affirmative votes required to approve the proposal.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that our stockholders vote FOR the
proposal to grant our management the discretionary authority to adjourn the
Annual Meeting to a date or dates not later than August 31, 2005.
-31-
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information concerning the beneficial
ownership of our common stock, Series C Preferred Stock and Series E Preferred
Stock as of July 1, 2005 by each of the following:
o each person known by us to be the beneficial owner of 5% of
more of the outstanding shares of our common stock, Series C
Preferred Stock and Series E Preferred Stock;
o each of our directors and named executive officers; and
o all of our directors and executive officers as a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power over
securities. Except in cases where community property laws apply or as indicated
in the footnotes to this table, we believe that each stockholder identified in
the table possesses sole voting and investment power over all shares of common
stock, Series C Preferred Stock and Series E Preferred Stock shown as being
beneficially owned by that stockholder. The percentage of beneficial ownership
is based on 12,455,102 shares of common stock, approximately 6,066 shares of
Series C Preferred Stock and approximately 923 shares of Series E Preferred
Stock outstanding as of July 1, 2005. Shares of common stock subject to warrants
and options that are currently exercisable or exercisable within 60 days of July
1, 2005, are considered outstanding and beneficially owned by the stockholder
who holds those warrants or options for the purpose of computing the percentage
ownership of that stockholder but are not treated as outstanding for the purpose
of computing the percentage ownership of any other stockholder. Unless otherwise
indicated below, the address of each stockholder listed below is 1996 Lundy
Avenue, San Jose, California 95131.
SERIES C CONVERTIBLE SERIES E CONVERTIBLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
----------------------------------------- -------------------------- ---------------------------
SHARES
ISSUABLE
PURSUANT NUMBER OF
TO SHARES
WARRANTS BENEFICIALLY
AND OWNED
OPTIONS (INCLUDING
EXERCISABLE THE NUMBER
WITHIN 60 OF SHARES NUMBER OF NUMBER OF
DAYS OF SHOWN IN PERCENTAGE SHARES PERCENTAGE SHARES PERCENTAGE
NAME AND ADDRESS JULY 1, THE FIRST OF SHARES BENEFICIALLY OF SHARES BENEFICIALLY OF SHARES
OF BENEFICIAL OWNER 2005 COLUMN) OUTSTANDING OWNED (1) OUTSTANDING OWNED(2) OUTSTANDING
---------------------------- ------------ ------------ ------------- ------------ ------------ ------------ -----------
North Sound Legacy Fund LLC
1209 Orange Street
Wilmington, DE 19801 (3) -- 1,621,028 13.0% 2,332 38.8% -- --
North Sound Legacy
Institutional Fund LLC
1209 Orange Street
Wilmington, DE 19801 (3) -- 1,621,028 13.0% 2,332 38.8% -- --
North Sound Legacy
International Fund Ltd.
Bison Court, Roadtown
Tortola, BVI
Wilmington, DE 19801 (3) -- 1,621,028 13.0% 2,332 38.8% -- --
SDS Capital Group SPC, Ltd.
113 Church Street
PO Box 134GT
Grand Canyon, Cayman Islands 715,019 1,315,695 9.9% 266 4.4% -- --
Agilent Financial
Services, Inc.
1 CIT Drive, MS4110A
Livingston, NJ 07039 178,571 178,571 1.4% -- -- 555.799 60.2%
Able Electronics Corporation
31033 Huntwood Avenue
Hayward, CA 94544 -- -- -- -- -- 367.332 39.8%
Frederick R. Fromm 9,351 16,275 * 9.32 * -- --
R. Craig Roos -- 17,333 * 23.33 * -- --
George P. Roberts 48,911 68,239 * 23.33 * -- --
Daniel W. Rumsey 30,556 30,556 * -- -- -- --
Richard Reiss -- -- -- -- -- -- --
Don Meiners 32,498 32,570 * -- -- -- --
Sam Smookler (4) 70,519 79,685 * 23.33 * -- --
Carlos A. Belfiore 33,333 33,333 * -- -- -- --
Randall L. Carl (5) 32,867 32,867 * -- -- -- --
All current directors and
executive officers as a
group (7 persons) 154,649 198,306 1.6% 55.98 * -- --
* Less than 1%.
(1) There are no outstanding warrants or options to purchase shares of Series
C Convertible Preferred Stock.
(2) There are no outstanding warrants or options to purchase shares of Series
E Convertible Preferred Stock.
(3) Includes shares beneficially owned by North Sound Legacy Fund LLC, North
Sound Legacy Institutional Fund LLC, and North Sound International Fund
Ltd.
(4) Mr. Smookler resigned as President, Chief Executive Officer and Director
of the Company effective March 10, 2005.
(5) Mr. Carl's employment with the Company was terminated effective March 18,
2005. DESCRIPTION OF OUR CAPITAL STOCK
-32-
This section describes the material terms of our capital stock. This
section also summarizes relevant provisions of the Delaware General Corporation
Law, which is referred to in this Proxy Statement at times simply as Delaware
law.
AUTHORIZED CAPITAL STOCK
We are currently authorized to issue a total of 37,000,000 shares of
capital stock consisting of:
o 35,000,000 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 the proposal to amend our certificate of incorporation to increase the
number of authorized shares of common stock (Proposal 3) is approved, we will be
authorized to issue a total of 252,000,000 shares of capital stock consisting
of:
o 250,000,000 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.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share held
on all matters submitted to a vote of our stockholders. Holders of our common
stock are entitled to receive dividends, ratably, if any, as may be declared by
the Board of Directors out of legally available funds, subject to any
preferential dividend rights of any outstanding preferred stock. If we
liquidate, dissolve or wind up, the holders of our common stock are entitled to
share ratably in all assets remaining after satisfaction of liabilities and the
liquidation preference of any shares of preferred stock that are outstanding at
that time. Holders of common stock have no preemptive rights and no right to
convert their common stock onto any other securities. There are no redemption or
sinking fund provisions applicable to our common stock. The rights, preferences
and privileges of holders of our common stock are subject to, and may be
adversely affected by, the rights of holders of shares of any series of
preferred stock which the Board of Directors may designate and issue in the
future without further stockholder approval. As of the record date, 12,455,102
shares of our common stock were issued and outstanding.
PREFERRED STOCK
The 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. We may issue shares of
our preferred stock in ways which may delay, defer or prevent a change in
control of the Company without further action by our stockholders and may
adversely affect the voting and other rights of the holders of our common stock.
The issuance of our preferred stock with voting and conversion rights may
adversely affect the voting power of the holders of our common stock, including
the loss of voting control to others.
Series A Preferred Stock
We have designated 500,000 shares of our preferred stock as Series A
Junior Participating Preferred Stock, which are issuable under certain
circumstances under our stockholder rights plan, which is described in more
detail below. No shares of Series A Junior Participating Preferred Stock are
currently issued or outstanding.
-33-
Series B Preferred Stock
We have designated 1,000,000 shares of our preferred stock as Series B
Convertible Preferred Stock, of which approximately 108,406 shares were issued
and outstanding as of the record date. The holders of our Series B Preferred
Stock are entitled to certain rights and preferences with respect to the holders
of our common stock, including the following:
o Voting. Except as required by the Delaware law, the holders of
Series B Preferred Stock are not entitled to any voting
rights.
o Conversion. The Series B Preferred Stock has a stated value of
$21.138 per share. Each share of Series B Preferred Stock is
convertible into a number of shares of common stock equal to
the stated value plus any accrued and unpaid dividends divided
by an initial conversion price of $6.00. This conversion price
is subject to adjustment for any stock splits, stock dividends
or similar transactions. Pursuant to an agreement with us, the
holders of our Series B Preferred Stock are obligated to
convert their shares into shares of common stock as soon as
reasonably practicable. However, no holder of Series B
Preferred Stock will be required to convert its shares into
shares of common stock if the conversion would cause the
holder or any of its affiliates, individually or in the
aggregate, to beneficially own more than 9.999% of our
outstanding common stock.
o Dividends. Holders of Series B Convertible Preferred Stock are
entitled to receive dividends, if any, as may be declared by
the Board of Directors out of legally available funds. Holders
of Series B Preferred Stock are also entitled to share
pro-rata, on an as-converted basis, in any dividends or other
distributions that may be declared by the Board of Directors
with respect to the common stock. o Liquidation. If we
liquidate, dissolve or wind up, the holders of Series B
Preferred Stock are entitled to receive the stated value of
their shares plus all accrued and unpaid dividends prior to
any amounts being paid to the holders of our common stock. In
addition, the holders of Series B Preferred Stock are entitled
to share ratably together with the holders of common stock in
all remaining assets after the satisfaction of all other
liquidation preferences.
o Redemption. The holders of Series B Preferred Stock have the
right to require us to purchase all of their shares of Series
B Preferred Stock upon the occurrence of certain events, such
as the following:
o We fail to remove any restrictive legend from certificates
representing shares of our common stock that are issued to
holders who convert their shares of Series B Preferred Stock;
o We make an assignment for the benefit of creditors, or apply
for or consents to the appointment of a receiver or trustee;
o Any bankruptcy, insolvency, reorganization or other proceeding
for the relief of debtors is instituted by or against us and
is not dismissed within 60 days;
o We sell substantially all of our assets, merge or consolidate
with any other entity or engage in a transaction that results
in any person or entity acquiring more than 50% of our
outstanding common stock on a fully diluted basis;
o We fail to pay when due any payment with respect to any of our
indebtedness in excess of $250,000;
-34-
o We breach any agreement for monies owed or owing in an amount
in excess of $250,000 and the breach permits the other party
to declare a default or otherwise accelerate the amounts due
under that agreement; and
o We permit a default under any agreement to remain uncured and
the default would or is likely to have a material adverse
effect on our business, operations, properties or financial
condition.
Series C Preferred Stock
We have designated 10,000 shares of our preferred stock as Series C
Convertible Preferred Stock, of which approximately 6,066 shares were issued and
outstanding as of the record date. The holders of Series C Preferred Stock are
entitled to certain rights and preferences with respect to the holders of our
common stock, including the following:
o Voting. The holders of Series C Preferred Stock are entitled
to vote together with the holders of our common stock, as a
single class, on all matters submitted to a vote of our
stockholders. The holders of Series C Preferred Stock are
entitled to a number of votes equal to the number of shares of
common stock that would be issued upon conversion of their
shares of Series C Preferred Stock.
o Conversion. The Series C Preferred Stock has a stated value of
$1,750 per share. Each share of Series C Preferred Stock is
convertible into a number of shares of common stock equal to
the stated value, plus any accrued and unpaid dividends,
divided by a current conversion price of approximately $2.90.
This conversion price is subject to adjustment for any stock
splits, stock dividends or similar transactions. The
conversion price is also subject to adjustment in the event
that we make a dilutive issuance of common stock or other
securities that are convertible into or exercisable for common
stock at an effective per share purchase price that is less
than the conversion price of the Series C Preferred Stock that
is in effect at the time of the dilutive issuance. The holders
of Series C Convertible Stock may convert their shares into
shares of common stock at any time. However, no holder of
Series C Preferred Stock may convert its shares into shares of
common stock if the conversion would cause the holder or any
of its affiliates, individually or in the aggregate, to
beneficially own more than 9.999% of our outstanding common
stock.
o Dividends. Holders of Series C Preferred Stock are entitled to
receive, out of legally available funds, dividends at the rate
of 6% per annum beginning on the first anniversary of the date
of issuance and 8% per annum beginning on the second
anniversary of the date of issuance. Dividends are payable
semi-annually, either in cash or shares of our common stock.
o Liquidation. If we liquidate, dissolve or wind up, the holders
of Series C Preferred Stock are entitled to receive the stated
value of their shares plus all accrued and unpaid dividends
prior to any amounts being paid to the holders of our Series B
Preferred Stock and common stock. In addition, the holders of
our Series C Preferred Stock are entitled to share ratably
together with the holders of Series B Preferred Stock and our
common stock in all remaining assets after the satisfaction of
all other liquidation preferences.
o Redemption. The holders of Series C Preferred Stock have the
right to require us to purchase all of their shares of Series
C Preferred Stock upon the occurrence of certain events, such
as the following:
o We fail to remove any restrictive legend from certificates
representing shares of our common stock that are issued to
holders who convert their shares of Series C Preferred Stock;
o We make an assignment for the benefit of creditors, or apply
for or consent to the appointment of a receiver or trustee;
-35-
o Any bankruptcy, insolvency, reorganization or other proceeding
for the relief of debtors is instituted by or against us and
is not dismissed within 60 days;
o We sell substantially all of our assets, merge or consolidate
with any other entity or engage in a transaction that results
in any person or entity acquiring more than 50% of our
outstanding common stock on a fully diluted basis;
o We fail to pay when due any payment with respect to any of our
indebtedness in excess of $250,000;
o We breach any agreement for monies owed or owing in an amount
in excess of $250,000 and the breach permits the other party
to declare a default or otherwise accelerate the amounts due
under that agreement; and
o We permit a default under any agreement to remain uncured and
the default would or is likely to have a material adverse
effect on our business, operations, properties or financial
condition.
o Exchange Right. In the event that we issue any equity
securities, the holders of our Series C Preferred Stock have
the right to exchange their Series C Preferred Stock (and any
common stock issued to them upon conversion of their Series C
Preferred Stock) for a number of the newly issued equity
securities with a purchase price equal to the aggregate face
amount of their Series C Preferred Stock (including any Series
C Preferred Stock that was previously converted into common
stock).
Series D Preferred Stock
We had previously designated 2,000 shares of our preferred stock as Series
D Preferred Stock, none of which were outstanding as of the record date. On June
16, 2005, we filed a Certificate of Elimination with the Delaware Secretary of
State, with respect to our Series D Preferred Stock. Upon the filing of the
Certificate of Elimination, all matters set forth in the Certificate of
Designation of our Series D Preferred Stock were eliminated from our certificate
of incorporation.
Series E Preferred Stock
We have designated 2,000 shares of our preferred stock as Series E
Convertible Preferred Stock, of which 923.131 shares were issued and outstanding
as of the record date. The holders of Series E Preferred Stock are entitled to
certain rights and preferences with respect to the holders of our common stock,
including the following:
o Voting. The holders of Series E Preferred Stock are entitled
to vote together with the holders of our common stock, as a
single class, on all matters submitted to a vote of our
stockholders. The holders of Series E Preferred Stock are
entitled to a number of votes equal to the number of shares of
common stock that would be issued upon conversion of their
shares of Series E Preferred Stock.
o Conversion. The Series E Preferred Stock has a liquidation
preference amount equal to $1,000 per share. Each share of
Series E Preferred Stock is convertible into a number of
shares of common stock equal to the liquidation preference
amount divided by the conversion price of $0.50. This
conversion price is subject to adjustment for any stock
splits, stock dividends or similar transactions. The holders
of Series E Convertible Stock may convert their shares into
shares of common stock at any time.
o Dividends. Holders of Series E Preferred Stock are entitled to
receive, out of legally available funds, dividends at the rate
of 6% per annum beginning on the second anniversary of the
date of issuance. Dividends are payable annually, either in
cash or shares of our common stock.
-36-
o Liquidation. If we liquidate, dissolve or wind up, the holders
of Series E Preferred Stock are entitled to receive the
liquidation preference amount ($1,000 per share) of their
shares prior to any amounts being paid to the holders of our
Series B Preferred Stock, Series C Preferred Stock, Series F
Preferred Stock, Series G Preferred Stock and common stock.
Series F Preferred Stock
We have designated 250 shares of our preferred stock as Series F
Convertible Preferred Stock, all of which were issued and outstanding as of the
record date. The holders of Series F Preferred Stock are entitled to certain
rights and preferences with respect to the holders of our common stock,
including the following:
o Voting. Except for the purpose of approving certain specified
corporate actions and as otherwise required by the Delaware
General Corporation Law, the holders of Series F Preferred
Stock do not have any voting rights.
o Conversion. The Series F Preferred Stock has a face amount
equal to $10,000 per share. Each share of Series F Preferred
Stock is convertible into a number of shares of common stock
equal to the face amount divided by the conversion price of
$0.50. This conversion price is subject to adjustment for any
stock splits, stock dividends or similar transactions. We have
the right to convert all outstanding shares of our Series F
Preferred Stock into shares of our common stock, but only if
the conversion would not cause the holder to beneficially own
more than 9.99% of our outstanding common stock.
o Dividends. Holders of Series F Preferred Stock are entitled to
participate in all dividends declared on our common stock,
based on the number of shares of common stock issuable upon
conversion of their Series F Preferred Stock.
o Liquidation. If we liquidate, dissolve or wind up, the holders
of Series F Preferred Stock are not entitled to receive any
preferential amounts prior to any amounts being paid to the
holders of the other classes and series of our capital stock.
Series G Preferred Stock
We have designated 10,000 shares of our preferred stock as Series G
Convertible Preferred Stock, of which 1,000 shares were issued and outstanding
as of the record date. The holders of Series G Preferred Stock are entitled to
certain rights and preferences with respect to the holders of our common stock,
including the following:
o Voting. Except for the purpose of approving certain specified
corporate actions and as otherwise required by the Delaware
General Corporation Law, the holders of Series G Preferred
Stock do not have any voting rights.
o Conversion. The Series G Preferred Stock has a liquidation
preference amount equal to $1,000 per share. Each share of
Series G Preferred Stock is convertible into a number of
shares of common stock equal to the liquidation preference
amount divided by the conversion price of $0.50. This
conversion price is subject to adjustment for any stock
splits, stock dividends or similar transactions. The holders
of Series G Convertible Stock may convert their shares into
shares of common stock at any time. However, no holder of
Series G Preferred Stock may convert its shares into shares of
common stock if the conversion would cause the holder to
beneficially own more than 9.99% of our outstanding common
stock.
-37-
o Dividends. Holders of Series G Preferred Stock are entitled to
participate in all dividends declared on our common stock,
based on the number of shares of common stock issuable upon
conversion of their Series G Preferred Stock.
o Liquidation. If we liquidate, dissolve or wind up, the holders
of Series G Preferred Stock are entitled to receive the
liquidation preference amount ($1,000 per share) of their
shares prior to any amounts being paid to the holders of our
Series F Preferred Stock and common stock.
STOCKHOLDER RIGHTS PLAN
We currently have 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 us and Fleet National Bank, as
rights agent. In the event that we are 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 our common stock will have the right to
receive that number of shares of common stock of the acquiring company which at
the time of the transaction has 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 our common stock, proper provision will be
made so that each holder of our common stock, other than the acquiring person,
will thereafter have the right to receive that number of shares of our common
stock or preferred stock (or cash, other securities or property) 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 us on
terms not approved by our 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 us prior to such asset purchase or other business combination.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF
INCORPORATION
Provisions of Delaware law and our certificate of incorporation could make
the acquisition of the Company and the removal of incumbent 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 the Company to negotiate with us first. We believe that the
benefits of protecting our ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure the Company
outweigh the disadvantages of discouraging such proposals because, among other
things, the negotiation could result in an improvement of the offered terms.
We are 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 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 a
corporation's voting stock.
Our certificate of incorporation also provides that the Board of Directors
will 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 certificate of
incorporation provides otherwise. Our certificate of incorporation does not
provide otherwise.
-38-
These provisions may have the effect of delaying, deferring or preventing
a change in control of the Company without further action by its stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe Trust
Company, N.A.
QUOTATION
Our common stock is quoted on the OTC Bulletin Board under the symbol
"PCMC."
STOCKHOLDER PROPOSALS FOR 2006 ANNUAL MEETING
In order for a stockholder proposal to be included in the Company's proxy
statement for the 2006 Annual Meeting, the stockholder submitting the proposal
and the subject matter of the proposal must satisfy the requirements set forth
in SEC Rule 14a-8 and the proposal must be received by the Company at its
principal executive offices prior to April 14, 2006. If the date of the 2006
Annual Meeting is changed by more than 30 days from the date of the 2005 Annual
Meeting, stockholder proposals intended to be included in the proxy statement
for the 2006 Annual Meeting must be received by the Company within a reasonable
time before the Company begins to print and mail the proxy statement for the
2006 Annual Meeting. Stockholder proposals should be addressed to the Company at
1996 Lundy Avenue, San Jose, California 95131, Attention: Corporate Secretary.
INCORPORATION OF OTHER DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" information that we file
with the SEC, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this Proxy Statement. You may read and copy any materials
we file with the SEC at the SEC's Public Reference Room at 100 F Street, N.E.,
Room 1580, 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.
Enclosed with this Proxy Statement is a copy of our amended Annual Report
on Form 10-K for the year ended December 31, 2004, which was filed with the SEC
on May 13, 2005. We incorporate by reference into this Proxy Statement the
following portions of our Annual Report on Form 10-K:
o Item 7 (Management's Discussion and Analysis of Financial
Condition and Results of Operations);
o Item 7A (Quantitative and Qualitative Disclosures About Market
Risk); and
o Item 8 (Financial Statements).
OTHER MATTERS
We do not know of any other matters that will be presented for
consideration at our 2005 Annual Meeting of Stockholders. However, if any other
matters are properly brought before the Annual Meeting, it is the intention of
the persons named in the enclosed proxy to vote the shares they represent in
accordance with the recommendations of our Board of Directors. Discretionary
authority to vote on such other matters will be granted by the execution of the
enclosed proxy.
By Order of the Board of Directors,
/s/ Daniel W. Rumsey
-----------------------------------------
Daniel W. Rumsey
Secretary
San Jose, California
July 13, 2005
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APPENDIX A
PROPOSED AMENDMENTS TO CERTIFICATE OF INCORPORATION
1. Proposed Amendments to First Paragraph of Article IV of the Certificate of
Incorporation
ARTICLE IV
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 TWO HUNDRED FIFTY TWO MILLION (252,000,000) shares. TWO
HUNDRED FIFTY MILLION (250,000,000) 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. UPON THIS AMENDMENT
OF THIS ARTICLE IV (THE "EFFECTIVE TIME"), (I) EACH SHARE OF SERIES
C CONVERTIBLE PREFERRED STOCK OF THE CORPORATION ISSUED AND
OUTSTANDING SHALL BE AUTOMATICALLY CONVERTED INTO SEVEN-EIGHTHS
(7/8THS) OF A SHARE OF SERIES G CONVERTIBLE PREFERRED STOCK AND ONE
THOUSAND SEVEN HUNDRED FIFTY (1,750) SHARES OF COMMON STOCK OF THE
CORPORATION, WITHOUT ANY ACTION BY THE HOLDERS THEREOF.
The bold and italicized text set forth above reflects the only proposed
changes to the first paragraph of Article IV of our certificate of
incorporation, as described in Proposals 3 and 4 of the attached Proxy
Statement. The text is printed in bold and italics solely to illustrate
the specific amendments proposed.
2. Proposed Amendment to First Paragraph of Article VI of the Certificate of
Incorporation
ARTICLE VI
Elections of directors need not be by written ballot unless the
Bylaws of this Corporation shall so provide. At each annual meeting
of stockholders, directors of the Corporation shall be elected to
hold office until the expiration of the term for which they are
elected, and until their successors have been duly elected and
qualified; except that if any such election shall not be so held,
such election shall take place at a stockholders' meeting called and
held in accordance with the Delaware General Corporation Law.
A-1
The deletion of the stricken text set forth above reflects the only
proposed change to the first paragraph of Article VI of our certificate of
incorporation, as described in Proposal 5 of the attached Proxy Statement.
The stricken text is included here solely to illustrate the specific
amendment proposed.
3. Proposed Amendment to Article I of the Certificate of Incorporation
The name of this Corporation is WAVE WIRELESS CORPORATION.
The bold and italicized text set forth above reflects the only proposed
change to Article I of our certificate of incorporation, as described in
Proposal 6 of the attached Proxy Statement. The text is printed in bold
and italics solely to illustrate the specific amendment proposed.
A-2
APPENDIX B
CERTIFICATE OF DESIGNATION,
PREFERENCES AND RIGHTS
OF
SERIES C CONVERTIBLE PREFERRED STOCK
OF
P-COM, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
P-Com, Inc., a corporation organized and existing under the laws of the State of
Delaware (the "CORPORATION"), hereby certifies that the Board of Directors of
the Corporation (the "BOARD OF DIRECTORS" or the "BOARD"), pursuant to authority
of the Board of Directors as required by Section 151 of the Delaware General
Corporation Law, and in accordance with the provisions of its Certificate of
Incorporation and Bylaws, each as amended and restated through the date hereof,
has and hereby authorizes a series of the Corporation's previously authorized
Preferred Stock, par value $0.0001 per share (the "PREFERRED STOCK"), and hereby
states the designation and number of shares, and fixes the relative rights,
preferences, privileges, powers and restrictions thereof, as follows:
1. DESIGNATION AND AMOUNT
The designation of this series, which consists of Nine Thousand (9,000) shares
of Preferred Stock, is the Series C Convertible Preferred Stock (the "SERIES C
PREFERRED STOCK") and the face amount shall be One Thousand Seven Hundred Fifty
Dollars ($1,750) per share (the "FACE AMOUNT").
2. CERTAIN DEFINITIONS
For purposes of this Certificate of Designation, the following terms shall have
the following meanings:
(a) "BUSINESS DAY" means any day, other than a Saturday or Sunday or a
day on which banking institutions in the State of New York are
authorized or obligated by law, regulation or executive order to
close.
(b) "CLOSING BID PRICE" means, for any security as of any date, the last
bid price of such security on the OTC Electronic Bulletin Board (the
"OTC") or the Bulletin Board Exchange (collectively with the OTC,
the "BULLETIN BOARD") or other principal trading market where such
security is listed or traded as reported by Bloomberg Financial
Markets (or a comparable reporting service of national reputation
selected by the Corporation and reasonably acceptable to holders of
a majority of the then outstanding shares of Series C Preferred
Stock ("MAJORITY HOLDERS") if Bloomberg Financial Markets is not
then reporting closing bid prices of such security) (collectively,
"BLOOMBERG"), or if the foregoing does not apply, the closing sales
price of such security on a national exchange or in the
over-the-counter market on any other electronic bulletin board for
such security as reported by Bloomberg, or, if no such price is
reported for such security by Bloomberg, the average of the bid
prices of all market makers for such security as reported in the
"pink sheets" by the National Quotation Bureau, Inc., in each case
for such date or, if such date was not a trading day for such
security, on the next preceding date which was a trading day. If the
Closing Bid Price cannot be calculated for such security as of
either of such dates on any of the foregoing bases, the Closing Bid
Price of such security on such date shall be the fair market value
as reasonably determined by an investment banking firm selected by
the Corporation and reasonably acceptable to the Majority Holders,
with the costs of such appraisal to be borne by the Corporation.
B-1
(c) "CONVERSION DATE" means, for any Optional Conversion (as defined in
Article IV.A below), the date specified in the notice of conversion
in the form attached hereto (the "NOTICE OF CONVERSION"), so long as
a copy of the Notice of Conversion is faxed (or delivered by other
means resulting in notice) to the Corporation before 11:59 p.m., New
York City time, on the Conversion Date indicated in the Notice of
Conversion; provided, however, that if the Notice of Conversion is
not so faxed or otherwise delivered before such time, then the
Conversion Date shall be the date the holder faxes or otherwise
delivers the Notice of Conversion to the Corporation.
(d) "CONVERSION PRICE" means $0.10, and shall be subject to adjustment
as provided herein.
(e) "DEFAULT CURE DATE" means, as applicable, (i) with respect to a
Conversion Default described in clause (i) of Article VI.A, the date
the Corporation effects the conversion of the full number of shares
of Series C Preferred Stock, and (ii) with respect to a Conversion
Default described in clause (ii) of Article VI.A, the date the
Corporation issues freely tradable shares of Common Stock in
satisfaction of all conversions of Series C Preferred Stock in
accordance with Article IV.A, or (iii) with respect to either type
of a Conversion Default, the date on which the Corporation redeems
shares of Series C Preferred Stock held by such holder pursuant to
Article VI.A.
(f) "ISSUANCE DATE" means the date of the closing under the Securities
Purchase Agreement by and among the Corporation and the purchasers
named therein (the "SECURITIES PURCHASE AGREEMENT"), pursuant to
which the Corporation issues, and such purchasers purchase, shares
of Series C Preferred Stock upon the terms and conditions stated
therein.
(g) "PRICE ADJUSTMENT APPROVAL" means the approval of the Corporation's
stockholders of the anti-dilution and other conversion/exercise
price adjustments contained in the Series C Preferred Stock and the
Warrants, as required by Article VII, Section 8 of the Corporation's
Bylaws.
(h) "REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of the Issuance Date, by and among the
Corporation and the initial holders of Series C Preferred Stock.
(i) "TRADING DAY" means any day on which the principal United States
securities exchange or trading market where the Common Stock is then
listed or traded, is open for trading.
(j) "WARRANTS" means the warrants issued by the Corporation to the
initial holders of Series C Preferred Stock pursuant to the
Securities Purchase Agreement.
3. DIVIDENDS
(a) Commencing on the first anniversary of the Issuance Date, dividends
shall be payable cumulatively out of funds legally available
therefor, at the rate of six percent (6%) per annum, which rate
shall automatically increase to eight percent (8%) per annum on the
second anniversary of the Issuance Date, as to each outstanding
share of Series C Preferred Stock on every successive June 30 and
December 31 (each such date, a "DIVIDEND DATE" and each such
payment, a "Dividend"). Payment of Dividends on each share of Series
C Preferred Stock shall be made, at the option of the Corporation
(subject to the limitations set forth below in Article IV.D), either
(x) in cash or (y) if all of the Required Stock Dividend Conditions
(as defined below) are satisfied, by the issuance of shares of
Common Stock by the Corporation in an amount determined by dividing
the amount of the Dividend that is payable on such share of Series C
Preferred Stock by the average Closing Bid Price of the Common Stock
for the ten (10) trading day period immediately preceding the
applicable Dividend Date.
B-2
B. The "REQUIRED STOCK DIVIDEND CONDITIONS" shall consist of the
following:
(i) a registration statement covering the shares of Common Stock to
be issued as a Dividend shall have been filed by the Corporation and declared
effective by the United States Securities and Exchange Commission, and such
registration statement continues to be effective up through and including the
Dividend Date;
(ii) all shares of Common Stock to be issued as a Dividend are then
(a) authorized and reserved for issuance, (b) registered under the Securities
Act of 1933, as amended (the "SECURITIES ACT"), for resale by the holders and
(c) listed or traded on the Bulletin Board, the Nasdaq National Market or any
other national exchange;
(iii) no Redemption Event (as defined in Article VII.A below) shall
have occurred without having been cured; and
(iv) all amounts, if any, then accrued or payable under this
Certificate of Designation or the Registration Rights Agreement shall have been
paid.
4. CONVERSION
(a) Conversion at the Option of the Holder. Subject to the limitations
on conversions contained in Paragraph C of this Article IV, each
holder of shares of Series C Preferred Stock may, at any time and
from time to time, convert (an "OPTIONAL CONVERSION") each of its
shares of Series C Preferred Stock into a number of fully paid and
nonassessable shares of Common Stock determined in accordance with
the following formula:
FACE AMOUNT + ACCRUED BUT UNPAID DIVIDENDS AS OF THE CONVERSION DATE
--------------------------------------------------------------------
CONVERSION PRICE
(b) Mechanics of Conversion. In order to effect an Optional Conversion,
a holder shall: (x) fax (or otherwise deliver) a copy of the fully
executed Notice of Conversion to the Corporation (Attention:
Secretary) and (y) surrender or cause to be surrendered the original
certificates representing the Series C Preferred Stock being
converted (the "PREFERRED STOCK CERTIFICATES"), duly endorsed, along
with a copy of the Notice of Conversion as soon as practicable
thereafter to the Corporation. Upon receipt by the Corporation of a
facsimile copy of a Notice of Conversion from a holder, the
Corporation shall promptly send, via facsimile, a confirmation to
such holder stating that the Notice of Conversion has been received,
the date upon which the Corporation expects to deliver the Common
Stock issuable upon such conversion and the name and telephone
number of a contact person at the Corporation regarding the
conversion. The Corporation shall not be obligated to issue shares
of Common Stock upon a conversion unless either the Preferred Stock
Certificates are delivered to the Corporation as provided above, or
the holder notifies the Corporation that such Preferred Stock
Certificates have been lost, stolen or destroyed and delivers the
documentation to the Corporation required by Article XIV.B hereof.
(i) Delivery of Common Stock Upon Conversion. Upon the surrender
of Preferred Stock Certificates accompanied by a Notice of
Conversion, the Corporation (itself, or through its transfer
agent) shall, no later than the later of (a) the second
business day following the Conversion Date and (b) the
business day following the date of such surrender (or, in the
case of lost, stolen or destroyed certificates, after
provision of indemnity pursuant to Article XIV.B) (the
"DELIVERY PERIOD"), issue and deliver (i.e., deposit with a
nationally recognized overnight courier service postage
prepaid) to the holder or its nominee (x) that number of
shares of Common Stock issuable upon conversion of such shares
of Series C Preferred Stock being converted and (y) a
certificate representing the number of shares of Series C
Preferred Stock not being converted, if any. Notwithstanding
the foregoing, if the Corporation's transfer agent is
participating in the Depository Trust Company ("DTC") Fast
Automated Securities Transfer program, and so long as the
certificates therefor do not bear a legend (pursuant to the
terms of the Securities Purchase Agreement) and the holder
thereof is not then required to return such certificate for
the placement of a legend thereon (pursuant to the terms of
the Securities Purchase Agreement), the Corporation shall
cause its transfer agent to promptly electronically transmit
the Common Stock issuable upon conversion to the holder by
crediting the account of the holder or its nominee with DTC
through its Deposit Withdrawal Agent Commission system ("DTC
TRANSFER"). If the aforementioned conditions to a DTC Transfer
are not satisfied, the Corporation shall deliver as provided
above to the holder physical certificates representing the
Common Stock issuable upon conversion. Further, a holder may
instruct the Corporation to deliver to the holder physical
certificates representing the Common Stock issuable upon
conversion in lieu of delivering such shares by way of DTC
Transfer.
B-3
(ii) Taxes. The Corporation shall pay any and all taxes that may be
imposed upon it with respect to the issuance and delivery of
the shares of Common Stock upon the conversion of the Series C
Preferred Stock.
(iii) No Fractional Shares. If any conversion of Series C Preferred
Stock would result in the issuance of a fractional share of
Common Stock (aggregating all shares of Series C Preferred
Stock being converted pursuant to a given Notice of
Conversion), such fractional share shall be payable in cash
based upon the ten day average Closing Bid Price at such time,
and the number of shares of Common Stock issuable upon
conversion of the Series C Preferred Stock shall be the next
lower whole number of shares. If the Corporation elects not
to, or is unable to, make such a cash payment, the holder
shall be entitled to receive, in lieu of the final fraction of
a share, one whole share of Common Stock.
(iv) Conversion Disputes. In the case of any dispute with respect
to a conversion, the Corporation shall promptly issue such
number of shares of Common Stock as are not disputed in
accordance with subparagraph (i) above. If such dispute
involves the calculation of the Conversion Price, and such
dispute is not promptly resolved by discussion between the
relevant holder and the Corporation, the Corporation shall
submit the disputed calculations to an independent outside
accountant via facsimile within three business days of receipt
of the Notice of Conversion. The accountant, at the
Corporation's sole expense, shall promptly audit the
calculations and notify the Corporation and the holder of the
results no later than three business days from the date it
receives the disputed calculations. The accountant's
calculation shall be deemed conclusive, absent manifest error.
The Corporation shall then issue the appropriate number of
shares of Common Stock in accordance with subparagraph (i)
above.
(c) Mandatory Conversion by Corporation.
(i) If, at any time after one hundred eighty (180) days from the
effective date of the registration statement (the
"REGISTRATION STATEMENT") required to be filed by the
Corporation pursuant to Section 2(a) of the Registration
Rights Agreement, and subject to Article IV.D hereof, all of
the Required Conditions (as defined below) are satisfied,
then, at the option of the Corporation exercised by the
delivery of written notice (a "MANDATORY CONVERSION NOTICE")
to all holders of the shares of Series C Preferred Stock, the
Company may require the holders of Series C Preferred Stock to
convert all of the outstanding shares of Series C Preferred
Stock into Common Stock pursuant to the applicable conversion
procedures in Article IV.B.
(ii) The "REQUIRED CONDITIONS" shall consist of the following:
(1) the Closing Bid Price of the Common Stock for the ten (10)
consecutive trading days prior to delivery of the Mandatory
Conversion Notice equals or exceeds $0.20 (as adjusted for
stock splits, stock dividends or similar events);
B-4
(2) the Registration Statement continues to be effective up
through and including the date of the Mandatory Conversion
contemplated by this Article IV.C (it being understood that
the Corporation shall comply with its obligations under
Article 3 of the Registration Rights Agreement relating to the
effectiveness of such registration statement);
(3) all shares of Common Stock issuable upon conversion of the
Series C Preferred Stock and exercise of the Warrants are then
(a) authorized and reserved for issuance, (b) registered under
the Securities Act, for resale by the holders and (c) listed
or traded on the Bulletin Board, the Nasdaq National Market or
any other national exchange;
(4) no Redemption Event (as defined in Article VII.A below) shall
have occurred without having been cured; and
(5) all amounts, if any, then accrued or payable under this
Certificate of Designation or the Registration Rights
Agreement shall have been paid.
(iii) In the event any holder of Series C Preferred Stock is unable
to convert all of the outstanding Series C Preferred Stock
that it holds due to the limitations set forth in Article IV.
D hereof, such unconverted Series C Preferred Stock shall
remain outstanding with all of the right and privileges set
forth herein; provided, however, that such shares of Series C
Preferred Stock shall cease to accrue any additional Dividends
hereunder, effective as of the date of the mandatory
conversion specified in the Mandatory Conversion Notice.
(d) Limitations on Conversions. The conversion of shares of Series C
Preferred Stock and the payment of Dividends in shares of Common
Stock shall be subject to the following limitations (each of which
limitations shall be applied independently):
(i) [Reserved].
(ii) Additional Restrictions on Conversion, Payment of Dividends in
Shares of Common Stock or Transfer. In no event shall the
Corporation issue Common Stock to any holder of Series C
Preferred Stock as payment of any Dividend, and in no event
shall a holder of shares of Series C Preferred Stock of the
Corporation have the right to convert shares of Series C
Preferred Stock into shares of Common Stock or to dispose of
any shares of Series C Preferred Stock to the extent that such
right to effect such conversion or disposition would result in
the holder or any of its affiliates together beneficially
owning more than 9.999% of the outstanding shares of Common
Stock. For purposes of this subparagraph, beneficial ownership
shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation
13D-G thereunder. The restriction contained in this
subparagraph may not be altered, amended, deleted or changed
in any manner whatsoever unless the holders of a majority of
the outstanding shares of Common Stock (considered separately
as a single class without giving effect to Article XI hereof)
and the Majority Holders shall approve, in writing, such
alteration, amendment, deletion or change; provided, however,
no such alteration, amendment, deletion or change shall be
effective until the 61st day following the later of the vote
of the holders of the Common Stock or the Majority Holders. In
the event the Corporation is prohibited from issuing Common
Stock to any holder of Series C Preferred Stock as payment of
any Dividend, it shall pay such Dividend to such holder in
cash.
B-5
5. RESERVATION OF SHARES OF COMMON STOCK
Reserved Amount. The Company shall, at and after such time as the Company's
stockholders have approved an amendment to its Restated Certificate of
Incorporation to increase the number of authorized shares of Common Stock from
69,000,000 to at least 6,000,000,000 shares (the "AMENDMENT"), but in no event
later than ninety (90) days following the Issuance Date; provided, however, that
in the event the SEC conducts a full review of the preliminary proxy statement
filed in connection with the Company soliciting proxies to approve the
Amendment, such period may be extended, if reasonably necessary, by an
additional thirty (30) days (the "AMENDMENT DATE"), reserve such number of
shares of its authorized but unissued shares of Common Stock to provide for the
conversion of the Series C Preferred Stock that is equal to (i) the number of
shares of Common Stock issuable upon conversion of the Series C Preferred Stock
issued and outstanding on the Issuance Date, as adjusted to provide for any
subsequent issuances after the Issuance Date but prior to the filing of the
registration statement contemplated by the Registration Rights Agreement,
multiplied by (ii) 125%, and, thereafter, the number of authorized but unissued
shares of Common Stock so reserved (the "Reserved Amount") shall at all times be
sufficient to provide for the full conversion of all of the Series C Preferred
Stock outstanding at the then current Conversion Price thereof (without giving
effect to the limitations contained in Article IV.D). The Reserved Amount shall
be allocated among the holders of Series C Preferred Stock as provided in
Article XIV.C. In the event the Company's stockholders shall not have approved
the Amendment by the Amendment Date, then the Company shall pay to each holder
of Series C Preferred Stock an amount equal to the product of (i) the number of
shares of Series C Preferred Stock then held by such holder multiplied by the
per share purchase price paid by such holder for its shares of Series C
Preferred Stock, multiplied by (ii) two percent (2.0%) for each 30 day period
(or portion thereof) after the Amendment Date and prior to the approval of the
Amendment by the Company's stockholders.
(a) Increases to Reserved Amount. If the Reserved Amount for any three
consecutive trading days (the last of such three trading days being
the "AUTHORIZATION TRIGGER DATE") shall be less than one hundred
twenty-five percent (125%) of the number of shares of Common Stock
issuable upon full conversion of the then outstanding shares of
Series C Preferred Stock (without giving effect to the limitations
contained in Article IV.D), the Corporation shall immediately notify
the holders of Series C Preferred Stock of such occurrence and shall
take immediate action (including, if necessary, seeking stockholder
approval to increase the number of authorized shares of Common
Stock) to increase the Reserved Amount to one hundred twenty-five
percent (125%) of the number of shares of Common Stock then issuable
upon full conversion of all of the outstanding Series C Preferred
Stock at the then current Conversion Price (without giving effect to
the limitations contained in Article IV.D). In the event the
Corporation fails to so increase the Reserved Amount within 90 days
after an Authorization Trigger Date, each holder of Series C
Preferred Stock shall thereafter have the option, exercisable in
whole or in part at any time and from time to time, by delivery of a
Redemption Notice (as defined in Article VII.C) to the Corporation,
to require the Corporation to redeem for cash, at an amount per
share equal to the Redemption Amount (as defined in Article VII.B),
a number of the holder's shares of Series C Preferred Stock such
that, after giving effect to such redemption, the then unissued
portion of such holder's Reserved Amount is at least equal to one
hundred twenty-five percent (125%) of the total number of shares of
Common Stock issuable upon conversion of such holder's shares of
Series C Preferred Stock. If the Corporation fails to redeem any of
such shares within five business days after its receipt of such
Redemption Notice, then such holder shall be entitled to the
remedies provided in Article VII.C.
6. FAILURE TO SATISFY CONVERSIONS
(a) Conversion Defaults. If, at any time, (i) a holder of shares of
Series C Preferred Stock submits a Notice of Conversion and the
Corporation fails for any reason (other than because such issuance
would exceed such holder's allocated portion of the Cap Amount or
Reserved Amount, for which failures the holders shall have the
remedies set forth in Articles V and VI, respectively) to deliver,
on or prior to the fifth business day following the expiration of
the Delivery Period for such conversion, such number of freely
tradable shares of Common Stock to which such holder is entitled
upon such conversion, or (ii) the Corporation provides written
notice to any holder of Series C Preferred Stock (or makes a public
announcement via press release) at any time of its intention not to
issue freely tradable shares of Common Stock upon exercise by any
holder of its conversion rights in accordance with the terms of this
Certificate of Designation (other than because such issuance would
exceed such holder's allocated portion of the Cap Amount or Reserved
Amount or Cap Amount) (each of (i) and (ii) being a "CONVERSION
DEFAULT"), then the holder may elect, at any time and from time to
time prior to the Default Cure Date for such Conversion Default, by
delivery of a Redemption Notice to the Corporation, to have all or
any portion of such holder's outstanding shares of Series C
Preferred Stock redeemed by the Corporation for cash, at an amount
per share equal to the Redemption Amount. If the Corporation fails
to redeem any of such shares within five business days after its
receipt of such Redemption Notice, then such holder shall be
entitled to the remedies provided in Article VII.C.
B-6
(b) Buy-In Cure. Unless the Corporation has notified the applicable
holder in writing prior to the delivery by such holder of a Notice
of Conversion that the Corporation is unable to honor conversions,
if (i) (a) the Corporation fails to promptly deliver during the
Delivery Period shares of Common Stock to a holder upon a conversion
of shares of Series C Preferred Stock or (b) there shall occur a
Legend Removal Failure (as defined in Article VII.A(i) below) and
(ii) thereafter, such holder purchases (in an open market
transaction or otherwise) shares of Common Stock to make delivery in
satisfaction of a sale by such holder of the unlegended shares of
Common Stock (the "SOLD SHARES") which such holder anticipated
receiving upon such conversion (a "BUY-IN"), the Corporation shall
pay such holder, in addition to any other remedies available to the
holder, the amount by which (x) such holder's total purchase price
(including brokerage commissions, if any) for the unlegended shares
of Common Stock so purchased exceeds (y) the net proceeds received
by such holder from the sale of the Sold Shares. For example, if a
holder purchases unlegended shares of Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to shares
of Common Stock it sold for $10,000, the Corporation will be
required to pay the holder $1,000. A holder shall provide the
Corporation written notification and supporting documentation
indicating any amounts payable to such holder pursuant to this
Article VI.B. The Corporation shall make any payments required
pursuant to this Article VI.B in accordance with and subject to the
provisions of Article XIV.E.
7. REDEMPTION DUE TO CERTAIN EVENTS
(a) Redemption by Holder. In the event (each of the events described in
clauses (i)-(vi) below after expiration of the applicable cure
period (if any) being a "REDEMPTION EVENT"):
(i) the Corporation fails to remove any restrictive legend on any
certificate or any shares of Common Stock issued to the
holders of Series C Preferred Stock upon conversion of the
Series C Preferred Stock as and when required by this
Certificate of Designation, the Securities Purchase Agreement
or the Registration Rights Agreement (a "LEGEND REMOVAL
FAILURE"), and any such failure continues uncured for five
business days after the Corporation has been notified thereof
in writing by the holder;
(ii) the Corporation or any subsidiary of the Corporation shall
make an assignment for the benefit of creditors, or apply for
or consent to the appointment of a receiver or trustee for it
or for a substantial part of its property or business, or such
a receiver or trustee shall otherwise be appointed;
(iii) the Corporation's stockholders do not (x) approve the
Amendment or (y) grant the Price Adjustment Approval, in each
case no later than ninety (90) days after the Issuance Date;
provided, however, that in the event the SEC conducts a full
review of the preliminary proxy statement filed in connection
with the Company soliciting proxies to approve the Amendment
and the Price Adjustment Approval, such period may be
extended, if reasonably necessary, by an additional thirty
(30) days.;
B-7
(iv) bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for the relief of debtors
shall be instituted by or against the Corporation or any
subsidiary of the Corporation and if instituted against the
Corporation or any subsidiary of the Corporation by a third
party, shall not be dismissed within 60 days of their
initiation;
(v) the Corporation shall:
(1) sell, convey or dispose of all or substantially all of its
assets (the presentation of any such transaction for
stockholder approval being conclusive evidence that such
transaction involves the sale of all or substantially all of
the assets of the Corporation);
(2) merge, consolidate or engage in any other business combination
with any other entity (other than pursuant to a migratory
merger effected solely for the purpose of changing the
jurisdiction of incorporation of the Corporation and other
than pursuant to a merger in which the Corporation is the
surviving or continuing entity and its capital stock is
unchanged) provided that such merger, consolidation or
business combination is required to be reported by the
Corporation on a Current Report pursuant to Item 1 of Form
8-K, or any successor form;
(3) engage in any transaction or a series of related transactions
resulting in the sale or issuance by the Corporation or any of
its stockholders of any securities to any person or entity, or
the acquisition or right to acquire securities by any person
or entity, in either case acting individually or in concert
with others, such that, following the consummation of such
transaction(s), such person(s) or entity(ies) (together with
their respective affiliates, as such term is used under
Section 13(d) of the Securities Exchange Act of 1934, as
amended) would own or have the right to acquire greater than
fifty percent (50%) of the outstanding shares of Common Stock
(calculated on a fully-diluted basis).
(4) either (i) fail to pay, when due, or within any applicable
grace period, any payment with respect to any indebtedness of
the Corporation in excess of $250,000 due to any third party,
other than payments contested by the Corporation in good
faith, or otherwise be in breach or violation of any agreement
for monies owed or owing in an amount in excess of $250,000
which breach or violation permits the other party thereto to
declare a default or otherwise accelerate amounts due
thereunder, or (ii) suffer to exist any other default or event
of default under any agreement binding the Corporation which
default or event of default would or is likely to have a
material adverse effect on the business, operations,
properties, prospects or financial condition of the
Corporation; or
(vi) except with respect to matters covered by subparagraphs (i) -
(v) above, as to which such applicable subparagraphs shall
apply, the Corporation otherwise shall breach any material
term hereunder or under the Securities Purchase Agreement, the
Registration Rights Agreement or the Warrants, including,
without limitation, the representations and warranties
contained therein (i.e., in the event of a material breach as
of the date such representation and warranty was made) and if
such breach is curable, shall fail to cure such breach within
ten business days after the Corporation has been notified
thereof in writing by the holder; then, upon the occurrence of
any such Redemption Event, each holder of shares of Series C
Preferred Stock shall thereafter have the option, exercisable
in whole or in part at any time and from time to time by
delivery of a Redemption Notice (as defined in Paragraph C
below) to the Corporation while such Redemption Event
continues, to require the Corporation to purchase for cash any
or all of the then outstanding shares of Series C Preferred
Stock held by such holder for an amount per share equal to the
Redemption Amount (as defined in Paragraph B below) in effect
at the time of the redemption hereunder. For the avoidance of
doubt, the occurrence of any event described in clauses (i),
(ii), (iii), (v) and (vi) above shall immediately constitute a
Redemption Event and there shall be no cure period. Upon the
Corporation's receipt of any Redemption Notice hereunder
(other than during the three trading day period following the
Corporation's delivery of a Redemption Announcement (as
defined below) to all of the holders in response to the
Corporation's initial receipt of a Redemption Notice from a
holder of Series C Preferred Stock), the Corporation shall
immediately (and in any event within one business day
following such receipt) deliver a written notice (a
"REDEMPTION ANNOUNCEMENT") to all holders of Series C
Preferred Stock stating the date upon which the Corporation
received such Redemption Notice and the amount of Series C
Preferred Stock covered thereby. The Corporation shall not
redeem any shares of Series C Preferred Stock during the three
trading day period following the delivery of a required
Redemption Announcement hereunder. At any time and from time
to time during such three trading day period, each holder of
Series C Preferred Stock may request (either orally or in
writing) information from the Corporation with respect to the
instant redemption (including, but not limited to, the
aggregate number of shares of Series C Preferred Stock covered
by Redemption Notices received by the Corporation) and the
Corporation shall furnish (either orally or in writing) as
soon as practicable such requested information to such
requesting holder.
B-8
(b) Definition of Redemption Amount. The "REDEMPTION AMOUNT" with
respect to a share of Series C Preferred Stock means an amount equal
to the greater of:
(i) V X M
----------
CP
and (ii) V X R
where:
"V" means the Face Amount thereof plus all accrued Dividends thereon
through the date of payment of the Redemption Amount;
"CP" means the Conversion Price in effect on the date on which the
Corporation receives the Redemption Notice;
"M" means (i) with respect to all redemptions other than redemptions
pursuant to subparagraph (a) or (b) of Article VII.A(v) hereof, the highest
Closing Bid Price of the Corporation's Common Stock during the period beginning
on the date on which the Corporation receives the Redemption Notice and ending
on the date immediately preceding the date of payment of the Redemption Amount
and (ii) with respect to redemptions pursuant to subparagraph (a) or (b) of
Article VII.A(v) hereof, the greater of (a) the amount determined pursuant to
clause (i) of this definition or (b) the fair market value, as of the date on
which the Corporation receives the Redemption Notice, of the consideration
payable to the holder of a share of Common Stock pursuant to the transaction
which triggers the redemption. For purposes of this definition, "fair market
value" shall be determined by the mutual agreement of the Corporation and the
Majority Holders, or if such agreement cannot be reached within five business
days prior to the date of redemption, by an investment banking firm selected by
the Corporation and reasonably acceptable to the Majority Holders, with the
costs of such appraisal to be borne by the Corporation; and
"R" means 120%.
Notwithstanding the foregoing, with respect to a redemption of Series C
Preferred Stock pursuant to subparagraph (c) of Article VII.A(v), the Redemption
Amount with respect to such shares of Series C Preferred Stock shall be the Face
Amount thereof plus all accrued Dividends thereon through the date of payment of
the Redemption Amount.
B-9
(c) Redemption Defaults. If the Corporation fails to pay any holder the
Redemption Amount with respect to any share of Series C Preferred
Stock within five business days after its receipt of a notice
requiring such redemption (a "REDEMPTION NOTICE"), then the holder
of Series C Preferred Stock entitled to redemption shall be entitled
to interest on the Redemption Amount at a per annum rate equal to
the lower of twenty-four percent (24%) and the highest interest rate
permitted by applicable law from the date on which the Corporation
receives the Redemption Notice until the date of payment of the
Redemption Amount hereunder. In the event the Corporation is not
able to redeem all of the shares of Series C Preferred Stock subject
to Redemption Notices delivered prior to the date upon which such
redemption is to be effected, the Corporation shall redeem shares of
Series C Preferred Stock from each holder pro rata, based on the
total number of shares of Series C Preferred Stock outstanding at
the time of redemption included by such holder in all Redemption
Notices delivered prior to the date upon which such redemption is to
be effected relative to the total number of shares of Series C
Preferred Stock outstanding at the time of redemption included in
all of the Redemption Notices delivered prior to the date upon which
such redemption is to be effected.
8. RANK
All shares of the Series C Preferred Stock shall rank (i) prior to the
Corporation's Common Stock, Series A Junior Participating Preferred Stock,
Series B Convertible Preferred Stock and any class or series of capital stock of
the Corporation hereafter created (unless, with the consent of the Majority
Holders obtained in accordance with Article XIII hereof, such class or series of
capital stock specifically, by its terms, ranks senior to or pari passu with the
Series C Preferred Stock) (collectively with the Common Stock and the Series B
Convertible Preferred Stock, the "JUNIOR SECURITIES"); (ii) pari passu with any
class or series of capital stock of the Corporation hereafter created (with the
written consent of the Majority Holders obtained in accordance with Article XIII
hereof) specifically ranking, by its terms, on parity with the Series C
Preferred Stock (the "PARI PASSU SECURITIES"); and (iii) junior to any class or
series of capital stock of the Corporation hereafter created (with the written
consent of the Majority Holders obtained in accordance with Article XIII hereof)
specifically ranking, by its terms, senior to the Series C Preferred Stock
(collectively, the "SENIOR Securities"), in each case as to distribution of
assets upon liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary.
9. LIQUIDATION PREFERENCE
(a) If the Corporation shall commence a voluntary case under the U.S.
Federal bankruptcy laws or any other applicable bankruptcy,
insolvency or similar law, or consent to the entry of an order for
relief in an involuntary case under any law or to the appointment of
a receiver, liquidator, assignee, custodian, trustee, sequestrator
(or other similar official) of the Corporation or of any substantial
part of its property, or make an assignment for the benefit of its
creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in
respect of the Corporation shall be entered by a court having
jurisdiction in the premises in an involuntary case under the U.S.
Federal bankruptcy laws or any other applicable bankruptcy,
insolvency or similar law resulting in the appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or
other similar official) of the Corporation or of any substantial
part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in
effect for a period of 60 consecutive days and, on account of any
such event, the Corporation shall liquidate, dissolve or wind up, or
if the Corporation shall otherwise liquidate, dissolve or wind up,
including, but not limited to, the sale or transfer of all or
substantially all of the Corporation's assets in one transaction or
in a series of related transactions (only in the event a holder does
not elect its rights with respect to such sale or transfer as set
forth in Article X.B, if applicable) and the consolidation or merger
of the Corporation with or into any other entity (only in the event
a holder does not elect its rights with respect to such
consolidation or merger as set forth in Article X.B, if applicable)
(a "LIQUIDATION EVENT"), no distribution shall be made to the
holders of any shares of capital stock of the Corporation (other
than Senior Securities pursuant to the rights, preferences and
privileges thereof) upon liquidation, dissolution or winding up
unless prior thereto the holders of shares of Series C Preferred
Stock shall have received the Liquidation Preference with respect to
each share. If, upon the occurrence of a Liquidation Event, the
assets and funds available for distribution among the holders of the
Series C Preferred Stock and holders of Pari Passu Securities, if
any, shall be insufficient to permit the payment to such holders of
the preferential amounts payable thereon, then the entire assets and
funds of the Corporation legally available for distribution to the
Series C Preferred Stock and the Pari Passu Securities, if any,
shall be distributed ratably among such shares in proportion to the
ratio that the Liquidation Preference payable on each such share
bears to the aggregate Liquidation Preference payable on all such
shares. If, upon the occurrence of a Liquidation Event, the assets
and funds available for distribution among the holders of Senior
Securities, if any, the holders of the Series C Preferred Stock and
the holders of Pari Passu Securities, if any, shall be sufficient to
permit the payment to such holders of the preferential amounts
payable thereon, then after such payment shall be made in full to
the holders of Senior Securities, if any, the holders of the Series
C Preferred Stock and the holders of Pari Passu Securities, if any,
the remaining assets and funds available for distribution shall be
distributed to the holders of any Junior Securities entitled to a
liquidation preference in payment of the aggregate liquidation
preference of all such holders. After such payment shall be made in
full to the holders of any Junior Securities entitled to a
liquidation preference, the remaining assets and funds available for
distribution shall be distributed ratably among the holders of
shares of Series C Preferred Stock, the holders of any other class
or series of Preferred Stock entitled to participate with the Common
Stock in a liquidating distribution and the holders of the Common
Stock, with the holders of shares of Preferred Stock deemed to hold
the number of shares of Common Stock into which such shares of
Preferred Stock are then convertible.
B-10
(b) The purchase or redemption by the Corporation of stock of any class,
in any manner permitted by law, shall not, for the purposes hereof,
be regarded as a liquidation, dissolution or winding up of the
Corporation.
(c) The "LIQUIDATION PREFERENCE" with respect to a share of Series C
Preferred Stock means an amount equal to the Face Amount thereof
plus all accrued Dividends thereon through the date of final
distribution. The Liquidation Preference with respect to any Pari
Passu Securities, if any, shall be as set forth in the Certificate
of Designation filed in respect thereof.
10. ADJUSTMENTS TO THE CONVERSION PRICE
The Conversion Price shall be subject to adjustment from time to time as
follows:
(a) Stock Splits, Stock Dividends, Etc. If, at any time on or after the
Issuance Date, the number of outstanding shares of Common Stock is
increased by a stock split, stock dividend, combination,
reclassification or other similar event, the Conversion Price shall
be proportionately reduced, or if the number of outstanding shares
of Common Stock is decreased by a reverse stock split, combination,
reclassification or other similar event, the Conversion Price shall
be proportionately increased. In such event, the Corporation shall
notify the Corporation's transfer agent of such change on or before
the effective date thereof.
(b) Merger, Consolidation, Etc. If, at any time after the Issuance Date,
there shall be (i) any reclassification or change of the outstanding
shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as
a result of a subdivision or combination), (ii) any consolidation or
merger of the Corporation with any other entity (other than a merger
in which the Corporation is the surviving or continuing entity and
its capital stock is unchanged), (iii) any sale or transfer of all
or substantially all of the assets of the Corporation or (iv) any
share exchange pursuant to which all of the outstanding shares of
Common Stock are converted into other securities or property (each
of (i) - (iv) above being a "CORPORATE CHANGE"), then the holders of
Series C Preferred Stock shall thereafter have the right to receive
upon conversion, in lieu of the shares of Common Stock otherwise
issuable, such shares of stock, securities and/or other property as
would have been issued or payable in such Corporate Change with
respect to or in exchange for the number of shares of Common Stock
which would have been issuable upon conversion had such Corporate
Change not taken place (without giving effect to the limitations
contained in Article IV.D), and in any such case, appropriate
provisions (in form and substance reasonably satisfactory to the
Majority Holders) shall be made with respect to the rights and
interests of the holders of the Series C Preferred Stock to the end
that the economic value of the shares of Series C Preferred Stock
are in no way diminished by such Corporate Change and that the
provisions hereof (including, without limitation, in the case of any
such consolidation, merger or sale in which the successor entity or
purchasing entity is not the Corporation, an immediate adjustment of
the Conversion Price so that the Conversion Price immediately after
the Corporate Change reflects the same relative value as compared to
the value of the surviving entity's common stock that existed
between the Conversion Price and the value of the Corporation's
Common Stock immediately prior to such Corporate Change shall
thereafter be applicable, as nearly as may be practicable in
relation to any shares of stock or securities thereafter deliverable
upon the conversion thereof). The Corporation shall not effect any
Corporate Change unless (i) each holder of Series C Preferred Stock
has received written notice of such transaction at least 45 days
prior thereto, but in no event later than 15 days prior to the
record date for the determination of stockholders entitled to vote
with respect thereto, (ii) if required by Section 4(i) of the
Securities Purchase Agreement, the consent of the Purchasers (as
such term is defined in the Securities Purchase Agreement) shall
have been obtained in accordance with such Section 4(i), and (iii)
the resulting successor or acquiring entity (if not the
Corporation), and, if an entity different from the successor or
acquiring entity, the entity whose capital stock or assets the
holders of the Common Stock are entitled to receive as a result of
such Corporate Change, assumes by written instrument (in form and
substance reasonable satisfactory to the Majority Holders) the
obligations of this Certificate of Designation (including, without
limitation, the obligation to make payments of Dividends accrued but
unpaid through the date of such consolidation, merger or sale and
accruing thereafter). The above provisions shall apply regardless of
whether or not there would have been a sufficient number of shares
of Common Stock authorized and available for issuance upon
conversion of the shares of Series C Preferred Stock outstanding as
of the date of such transaction, and shall similarly apply to
successive reclassifications, consolidations, mergers, sales,
transfers or share exchanges.
B-11
(c) Distributions. If, at any time after the Issuance Date, the
Corporation shall declare or make any distribution of its assets (or
rights to acquire its assets) to holders of Common Stock as a
partial liquidating dividend, by way of return of capital or
otherwise (including any dividend or distribution to the
Corporation's stockholders in cash or shares (or rights to acquire
shares) of capital stock of a subsidiary (i.e., a spin-off)) (a
"DISTRIBUTION"), then the holders of Series C Preferred Stock shall
be entitled, upon any conversion of shares of Series C Preferred
Stock after the date of record for determining stockholders entitled
to such Distribution, to receive the amount of such assets which
would have been payable to the holder with respect to the shares of
Common Stock issuable upon such conversion (without giving effect to
the limitations contained in Article IV.D) had such holder been the
holder of such shares of Common Stock on the record date for the
determination of stockholders entitled to such Distribution. If the
Distribution involves Convertible Securities or Purchase Rights (as
such terms are defined in Paragraph D below) and the right to
exercise or convert any such Convertible Securities or Purchase
Rights would expire in accordance with their terms prior to the
conversion of the Series C Preferred Stock, then the terms of such
Convertible Securities or Purchase Rights shall provide that such
exercise or convertibility right shall remain in effect until 30
days after the date the holder of Series C Preferred Stock receives
such Convertible Securities or Purchase Rights pursuant to the
conversion hereof.
(d) Purchase Rights. If, at any time after the Issuance Date, the
Corporation issues any securities or other instruments which are
convertible into or exercisable or exchangeable for Common Stock
("CONVERTIBLE SECURITIES") or options, warrants or other rights to
purchase or subscribe for Common Stock or Convertible Securities
("PURCHASE RIGHTS") pro rata to the record holders of any class of
Common Stock, whether or not such Convertible Securities or Purchase
Rights are immediately convertible, exercisable or exchangeable,
then the holders of Series C Preferred Stock shall be entitled to
acquire, upon the terms applicable to such Convertible Securities or
Purchase Rights, the aggregate number of Convertible Securities or
Purchase Rights which such holder could have acquired if such holder
had held the number of shares of Common Stock acquirable upon
complete conversion of the Series C Preferred Stock (without giving
effect to the limitations contained in Article IV.D) immediately
before the date on which a record is taken for the grant, issuance
or sale of such Convertible Securities or Purchase Rights, or, if no
such record is taken, the date as of which the record holders of
Common Stock are to be determined for the grant, issue or sale of
such Convertible Securities or Purchase Rights.
B-12
(e) Dilutive Issuances.
(i) If, at any time after the Corporation obtains the Price
Adjustment Approval, the Corporation issues or sells, or in
accordance with subparagraph (ii) of this Article X.E is
deemed to have issued or sold, any shares of Common Stock for
no consideration or for a consideration per share less than
the Conversion Price in effect on the date of issuance or sale
(or deemed issuance or sale) (a "DILUTIVE ISSUANCE"), then
effective immediately upon the Dilutive Issuance, the
Conversion Price shall be adjusted in accordance with the
following formula:
ACP= C x O+P/C
-----
CSDO
where:
ACP = the adjusted Conversion Price;
C = the Conversion Price on (a) for purposes any private offering of
securities under Section 4(2) of the Securities Act, the date that
the Corporation enters into legally binding definitive agreements
for the issuance of such Common Stock and (b) for purposes of any
other such issuance of Common Stock, the date of issuance thereof;
O = the number of shares of Common Stock outstanding immediately prior
to the Dilutive Issuance;
P = the aggregate consideration, calculated as set forth in Article
X.E(ii) hereof, received by the Corporation upon such Dilutive
Issuance; and
CSDO = the total number of shares of Common Stock actually outstanding
(after giving effect to the Dilutive Issuance, and not including
shares of Common Stock held in the treasury of the Corporation),
plus (a) in the case of any adjustment required by this Article
X.E(i) due to the issuance of Purchase Rights, the maximum total
number of shares of Common Stock issuable upon the exercise of the
Purchase Rights for which the adjustment is required (including any
Common Stock issuable upon the conversion of Convertible Securities
issuable upon the exercise of such Purchase Rights), and (y) in the
case of any adjustment required by this Article X.E(i) due to the
issuance of Convertible Securities, the maximum total number of
shares of Common Stock issuable upon the exercise, conversion or
exchange of the Convertible Securities for which the adjustment is
required, as of the date of issuance of such Convertible Securities,
if any.
Notwithstanding the foregoing, no adjustment shall be made pursuant to this
Article X.E(i) if such adjustment would result in an increase in the Conversion
Price.
(ii) Effect on Conversion Price of Certain Events. For purposes of
determining the adjusted Conversion Price under subparagraph
(i) of this Article X.E, the following will be applicable:
(1) Issuance of Purchase Rights. If the Corporation issues or
sells any Purchase Rights, whether or not immediately
exercisable, and the price per share for which Common Stock is
issuable upon the exercise of such Purchase Rights (and the
price of any conversion of Convertible Securities, if
applicable) is less than the Conversion Price in effect on the
date of issuance or sale of such Purchase Rights, then the
maximum total number of shares of Common Stock issuable upon
the exercise of all such Purchase Rights (assuming full
conversion, exercise or exchange of Convertible Securities, if
applicable) shall, as of the date of the issuance or sale of
such Purchase Rights, be deemed to be outstanding and to have
been issued and sold by the Corporation for such price per
share. For purposes of the preceding sentence, the "price per
share for which Common Stock is issuable upon the exercise of
such Purchase Rights" shall be determined by dividing (A) the
total amount, if any, received or receivable by the
Corporation as consideration for the issuance or sale of all
such Purchase Rights, plus the minimum aggregate amount of
additional consideration, if any, payable to the Corporation
upon the exercise of all such Purchase Rights, plus, in the
case of Convertible Securities issuable upon the exercise of
such Purchase Rights, the minimum aggregate amount of
additional consideration payable upon the conversion, exercise
or exchange thereof (determined in accordance with the
calculation method set forth in subparagraph (ii)(b) of this
Article X.E) at the time such Convertible Securities first
become convertible, exercisable or exchangeable, by (B) the
maximum total number of shares of Common Stock issuable upon
the exercise of all such Purchase Rights (assuming full
conversion, exercise or exchange of Convertible Securities, if
applicable). No further adjustment to the Conversion Price
shall be made upon the actual issuance of such Common Stock
upon the exercise of such Purchase Rights or upon the
conversion, exercise or exchange of Convertible Securities
issuable upon exercise of such Purchase Rights.
B-13
(2) Issuance of Convertible Securities.
a. If the Corporation issues or sells any Convertible
Securities, which Convertible Securities do not have a fluctuating conversion or
exercise price or exchange ratio, whether or not immediately convertible,
exercisable or exchangeable, and the price per share for which Common Stock is
issuable upon such conversion, exercise or exchange is less than the Conversion
Price in effect on the date of issuance or sale of such Convertible Securities,
then the maximum total number of shares of Common Stock issuable upon the
conversion, exercise or exchange of all such Convertible Securities shall, as of
the date of the issuance or sale of such Convertible Securities, be deemed to be
outstanding and to have been issued and sold by the Corporation for such price
per share. For the purposes of the preceding sentence, the "price per share for
which Common Stock is issuable upon such conversion, exercise or exchange" shall
be determined by dividing (A) the total amount, if any, received or receivable
by the Corporation as consideration for the issuance or sale of all such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Corporation upon the conversion, exercise
or exchange thereof (determined in accordance with the calculation method set
forth in this subparagraph (ii)(b) of this Article X.E) at the time such
Convertible Securities first become convertible, exercisable or exchangeable, by
(B) the maximum total number of shares of Common Stock issuable upon the
exercise, conversion or exchange of all such Convertible Securities. No further
adjustment to the Conversion Price shall be made upon the actual issuance of
such Common Stock upon conversion, exercise or exchange of such Convertible
Securities.
b. If the Corporation issues or sells any Convertible
Securities with a fluctuating conversion or exercise price or exchange ratio (a
"VARIABLE RATE CONVERTIBLE SECURITY"), then the "price per share for which
Common Stock is issuable upon such conversion, exercise or exchange" for
purposes of the calculation contemplated by subparagraph (b)(ii)(1) of this
Article X.E shall be deemed to be the lowest price per share which would be
applicable (assuming all holding period and other conditions to any discounts
contained in such Variable Rate Convertible Security have been satisfied) if the
Conversion Price on the date of issuance or sale of such Variable Rate
Convertible Security was seventy-five percent (75%) of the Conversion Price on
such date (the "ASSUMED VARIABLE MARKET PRICE"). Further, if the Conversion
Price at any time or times thereafter is less than or equal to the Assumed
Variable Market Price last used for making any adjustment under this Article X.E
with respect to any Variable Rate Convertible Security, the Conversion Price in
effect at such time shall be readjusted to equal the Conversion Price which
would have resulted if the Assumed Variable Market Price at the time of issuance
of the Variable Rate Convertible Security had been seventy-five percent (75%) of
the Conversion Price existing at the time of the adjustment required by this
sentence.
B-14
c. Change in Option Price or Conversion Rate. If there is a
change at any time in (A) the amount of additional consideration payable to the
Corporation upon the exercise of any Purchase Rights; (B) the amount of
additional consideration, if any, payable to the Corporation upon the
conversion, exercise or exchange of any Convertible Securities; or (C) the rate
at which any Convertible Securities are convertible into or exercisable or
exchangeable for Common Stock (in each such case, other than under or by reason
of provisions designed to protect against dilution and except when an adjustment
is made pursuant to subparagraph (ii)(b)(2) of this Article X.E), the Conversion
Price in effect at the time of such change shall be readjusted to the Conversion
Price which would have been in effect at such time had such Purchase Rights or
Convertible Securities still outstanding provided for such changed additional
consideration or changed conversion, exercise or exchange rate, as the case may
be, at the time initially issued or sold.
d. Calculation of Consideration Received. If any Common Stock,
Purchase Rights or Convertible Securities are issued or sold for cash, the
consideration received therefor will be the amount received by the Corporation
therefor, after deduction of all underwriting discounts or allowances in
connection with such issuance, grant or sale. In case any Common Stock, Purchase
Rights or Convertible Securities are issued or sold for a consideration part or
all of which shall be other than cash, including in the case of a strategic or
similar arrangement in which the other entity will provide services to the
Corporation, purchase services from the Corporation or otherwise provide
intangible consideration to the Corporation, the amount of the consideration
other than cash received by the Corporation (including the net present value of
the consideration expected by the Corporation for the provided or purchased
services) shall be the fair market value of such consideration, except where
such consideration consists of securities, in which case the amount of
consideration received by the Corporation will be valued at the Closing Bid
Price thereof as of the date of receipt. In case any Common Stock, Purchase
Rights or Convertible Securities are issued in connection with any merger or
consolidation in which the Corporation is the surviving corporation, the amount
of consideration therefor will be deemed to be the fair market value of such
portion of the net assets and business of the non-surviving corporation as is
attributable to such Common Stock, Purchase Rights or Convertible Securities, as
the case may be. Notwithstanding anything else herein to the contrary, if Common
Stock, Purchase Rights or Convertible Securities are issued or sold in
conjunction with each other as part of a single transaction or in a series of
related transactions, any holder of Series C Preferred Stock may elect to
determine the amount of consideration deemed to be received by the Corporation
therefor by deducting the fair value of any type of securities (the "DISREGARDED
SECURITIES") issued or sold in such transaction or series of transactions. If
the holder makes an election pursuant to the immediately preceding sentence, no
adjustment to the Conversion Price shall be made pursuant to this Article X.E
for the issuance of the Disregarded Securities or upon any conversion, exercise
or exchange thereof. For example, if the Corporation were to issue convertible
notes having a face value of $1,000,000 and warrants to purchase shares of
Common Stock at an exercise price equal to the Closing Bid Price of the Common
Stock on the date of issuance of such warrants in exchange for $1,000,000 of
consideration, the fair value of the warrants would be subtracted from the
$1,000,000 of consideration received by the Corporation for the purposes of
determining whether the shares of Common Stock issuable upon conversion of the
convertible notes shall be deemed to be issued at a price per share below the
Conversion Price and, if so, for purposes of determining any adjustment to the
Conversion Price hereunder as a result of the issuance of the convertible notes.
The Corporation shall calculate, using standard commercial valuation methods
appropriate for valuing such assets, the fair market value of any consideration
other than cash or securities; provided, however, that if the Majority Holders
do not agree to such fair market value calculation within three business days
after receipt thereof from the Corporation, then such fair market value shall be
determined in good faith by an investment banker or other appropriate expert of
national reputation selected by the Corporation and reasonably acceptable to the
Majority Holders, with the costs of such appraisal to be borne by the
Corporation.
e. Issuances Pursuant to Existing Securities. If the
Corporation issues (or becomes obligated to issue) shares of Common Stock
pursuant to any antidilution or similar adjustments (other than as a result of
stock splits, stock dividends and the like) contained in any Convertible
Securities or Purchase Rights outstanding as of the date hereof but not included
in Section 3(c) of the Disclosure Schedule to the Securities Purchase Agreement,
then all shares of Common Stock so issued shall be deemed to have been issued
for no consideration. If the Corporation issues (or becomes obligated to issue)
shares of Common Stock pursuant to any antidilution or similar adjustments
contained in any Convertible Securities or Purchase Rights included in Section
3(c) of the Disclosure Schedule to the Securities Purchase Agreement as a result
of the issuance of the Series C Preferred Stock or Warrants and the number of
shares that the Corporation issues (or is obligated to issue) as a result of
such initial issuance exceeds the amount specified in Section 3(c) of the
Disclosure Schedule to the Securities Purchase Agreement, such excess shares
shall be deemed to have been issued for no consideration.
B-15
(f) Exceptions to Adjustment of Conversion Price. No adjustment to the
Conversion Price shall be made (i) upon the exercise of any
Convertible Securities or Purchase Rights issued and outstanding on
the Issuance Date that are set forth in Section 3(c) of the
Disclosure Schedule to the Securities Purchase Agreement in
accordance with the terms of such Convertible Securities and
Purchase Rights as of such date; (ii) upon the grant or exercise of
any Common Stock, Convertible Securities or Purchase Rights to
employees, officers or directors of, or consultants to, the
Corporation which may hereafter be granted to or exercised by any
employee, officer, director or consultant under any equity
compensation or similar benefit plan of the Corporation now existing
or to be implemented in the future, so long as such plan and the
issuance of such Common Stock, Convertible Securities or Purchase
Rights is approved in accordance with reasonable judgment by a
majority of the Board of Directors of the Corporation or a majority
of the members of a committee of non-employee directors established
for such purpose; (iii) upon conversion of the Series C Preferred
Stock or exercise of the Warrants or upon any adjustment to the
conversion price of the Series C Preferred Stock or the exercise
price of the Warrants, (iv) upon the issuance of securities in
connection with strategic business partnerships or joint ventures,
the primary purpose of which, in the reasonable judgment of the
Board of Directors, is not to raise additional capital, (v) the
issuance of securities pursuant to any equipment financing from a
bank or similar financial or lending institution approved by the
Board of Directors, or (vi) the issuance of any shares of Series C
Preferred Stock or Warrants to additional purchasers in one or more
additional closings consummated prior to the filing of the
Registration Statement, as contemplated by Section 1(b) of the
Securities Purchase Agreement (any such issuance in accordance with
one of the foregoing clauses (i) through (vi), an "EXCLUDED
ISSUANCE").
(g) Other Action Affecting Conversion Price. If, at any time after the
Issuance Date, the Corporation takes any action affecting the Common
Stock that would be covered by Article X.A through E, but for the
manner in which such action is taken or structured, which would in
any way diminish the value of the Series C Preferred Stock, then the
Conversion Price shall be adjusted in such manner as the Board of
Directors of the Corporation shall in good faith determine to be
equitable under the circumstances. Notwithstanding the foregoing, no
adjustment shall be made pursuant to this Article X.G if such
adjustment would result in an increase of the Conversion Price.
(h) Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price pursuant to this Article X
amounting to a more than one percent (1%) change in such Conversion
Price, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment and prepare and furnish to each holder of
Series C Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the
written request at any time of any holder of Series C Preferred
Stock, furnish to such holder a like certificate setting forth (i)
such adjustment or readjustment, (ii) the Conversion Price at the
time in effect and (iii) the number of shares of Common Stock and
the amount, if any, of other securities or property which at the
time would be received upon conversion of a share of Series C
Preferred Stock.
11. VOTING RIGHTS
Except as otherwise expressly provided elsewhere in this Certificate of
Designation or as otherwise required by the Delaware General Corporation Law
(the "DGCL"), (a) each holder of Series C Preferred Stock shall be entitled to
vote on all matters submitted to a vote of the stockholders of the Corporation
and shall be entitled to that number of votes equal to the number of shares of
Common Stock into which such holder's shares of Series C Preferred Stock could
then be converted (subject to the limitations set forth in Article IV.D) at the
record date for the determination of stockholders entitled to vote on such
matters or, if no such record date is established, at the date such vote is
taken or any written consent of stockholders is solicited, and (b) the holders
of shares of Series C Preferred Stock and Common Stock shall vote together (or
tender written consents in lieu of a vote) as a single class on all matters
submitted to the stockholders of the Corporation. Fractional votes shall not,
however, be permitted and any fractional voting rights available on an
as-converted basis (after aggregating all shares of Common Stock into which
shares of Series C Preferred Stock held by each holder could be converted) shall
be rounded to the nearest whole number.
B-16
The Corporation shall provide each holder of Series C Preferred Stock with prior
notification of any meeting of the stockholders (and copies of proxy materials
and other information sent to stockholders). If the Corporation takes a record
of its stockholders for the purpose of determining stockholders entitled to (a)
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or (b) to vote in connection with any proposed sale,
lease or conveyance of all or substantially all of the assets of the
Corporation, or any proposed merger, consolidation, liquidation, dissolution or
winding up of the Corporation, the Corporation shall mail a notice to each
holder of Series C Preferred Stock, at least 15 days prior to the record date
specified therein (or 45 days prior to the consummation of the transaction or
event, whichever is earlier, but in no event earlier than public announcement of
such proposed transaction), of the date on which any such record is to be taken
for the purpose of such vote, dividend, distribution, right or other event, and
a brief statement regarding the amount and character of such vote, dividend,
distribution, right or other event to the extent known at such time.
To the extent that under the DGCL the vote of the holders of the Series C
Preferred Stock, voting separately as a class or series, as applicable, is
required to authorize a given action of the Corporation, the affirmative vote or
consent of the holders of at least a majority of the then outstanding shares of
the Series C Preferred Stock represented at a duly held meeting at which a
quorum is present or by written consent of the Majority Holders (except as
otherwise may be required under the DGCL) shall constitute the approval of such
action by the class.
12. PROTECTION PROVISIONS
So long as any shares of Series C Preferred Stock are outstanding, the
Corporation shall not take any of the following corporate actions (whether by
merger, consolidation or otherwise) without first obtaining the approval (by
vote or written consent, as provided by the DGCL) of the Majority Holders:
(i) alter or change the rights, preferences or privileges of the Series
C Preferred Stock, or increase the authorized number of shares of
Series C Preferred Stock;
(ii) alter or change the rights, preferences or privileges of any capital
stock of the Corporation so as to affect adversely the Series C
Preferred Stock;
(iii) create or issue any Senior Securities or Pari Passu Securities;
(iv) issue any shares of Series C Preferred Stock other than pursuant to
the Securities Purchase Agreement;
(v) redeem, repurchase or otherwise acquire, or declare or pay any cash
dividend or distribution on, any Junior Securities;
(vi) increase the par value of the Common Stock;
(vii) make any Dilutive Issuance; provided, however, that this Article
XII(vii) shall be of no further force and effect from and after the
effective date of the Price Adjustment Approval; provided further,
that this Article XII(vii) shall not in any way limit the
application of the other provisions of this Article XII;
(viii) issue any debt securities that would have any preferences over the
Series C Preferred Stock upon liquidation of the Corporation; or
(ix) except for exclusive or non-exclusive licenses of intellectual
property on arms' length bases, sell or otherwise transfer any
independently-significant asset or intellectual property to any
other person(s) or entity(ies) (including, without limitation, to
any subsidiary(ies) of the Corporation).
B-17
Notwithstanding the foregoing, no change pursuant to this Article XII shall be
effective to the extent that, by its terms, it applies to less than all of the
holders of shares of Series C Preferred Stock then outstanding.
13. PARTICIPATION RIGHT; EXCHANGE RIGHT
Subject to the terms and conditions specified in this Article XIII, the
holders of Series C Preferred Stock shall have a right to participate with
respect to the issuance or possible issuance of (i) equity or equity-linked
securities, or (ii) debt which is convertible into equity or in which there is
an equity component ("ADDITIONAL SECURITIES") on the same terms and conditions
as offered by the Company to the other purchasers of such Additional Securities.
Each time the Company proposes to offer any Additional Securities, the Company
shall make an offering of such Additional Securities to each Purchaser in
accordance with the following provisions:
(i) the Company shall deliver a notice (the "NOTICE") to the
holders of Series C Preferred Stock stating (A) its bona fide
intention to offer such Additional Securities, (B) the number
of such Additional Securities to be offered, (C) the price and
terms, if any, upon which it proposes to offer such Additional
Securities, and (D) the anticipated closing date of the sale
of such Additional Securities;
(ii) until the first anniversary of the Closing Date, by written
notification received by the Company within five (5) trading
days after giving of the Notice, any holder of Series C
Preferred Stock may elect to purchase or obtain, at the price
and on the terms specified in the Notice, up to that portion
of such Additional Securities that have a total purchase price
equal to one half of the Face Amount of the Series C Preferred
Stock held by such holder (including any shares of Series C
Preferred Stock that have been converted into Common Stock).
The Company shall promptly, in writing, inform each holder of
Series C Preferred Stock that elects to purchase all of the
Additional Shares available to it ("FULLY-EXERCISING HOLDER")
of any other holder of Series C Preferred Stock's failure to
do likewise. During the five (5) trading day period commencing
after such information is given, each Fully-Exercising Holder
shall be entitled to obtain that portion of the Additional
Securities for which the holders of Series C Preferred Stock
were entitled to subscribe but that were not subscribed for by
the holders of Series C Preferred Stock that is equal to the
proportion that the Face Amount of the Series C Preferred
Stock held by such Fully-Exercising Holder (including any
shares of Series C Preferred Stock that have been converted
into Common Stock) bears to the total Face Amount of the
Series C Preferred Stock held by all holders of Series C
Preferred Stock (including any shares of Series C Preferred
Stock that have been converted into Common Stock);
(iii) notwithstanding the provisions of Article XIII(ii), at any
time after the Closing Date, by written notification received
by the Company within five (5) trading days after giving of
the Notice, any holder of Series C Preferred Stock may elect
to purchase or obtain, at the price and on the terms specified
in the Notice, up to that portion of such Additional
Securities that have a total purchase price equal to the Face
Amount of the Series C Preferred Stock held by such holder
(including any shares of Series C Preferred Stock that have
been converted into Common Stock); provided, however, that any
holder of Series C Preferred Stock who elects to purchase
Additional Securities pursuant to this Article XIII(iii) shall
be required to surrender to the Company Series C Preferred
Stock (or Common Stock issued on the conversion of such Series
C Preferred Stock) for which the Face Amount (plus all accrued
but unpaid Dividends) equals the total purchase price of the
Additional Securities to be acquired by such holder of Series
C Preferred Stock, and the Company shall accept such Series C
Preferred Stock (or Common Stock issued on the conversion of
such Series C Preferred Stock) as payment in full for such
Additional Securities. The provisions of this Article
XIII(iii) shall be of no further force or effect upon the
consummation of any transaction (other than those transactions
contemplated by the Securities Purchase Agreement entered into
as of the Issuance Date by and among the Company and the
initial holders of the Series C Preferred Stock) resulting in
the issuance of the Company's Common Stock in connection with
a bona fide offering at an offering price per share (prior to
any underwriter's commissions and discounts) of not less than
$0.12 (as adjusted to reflect any stock dividends,
distributions, combinations, reclassifications and other
similar transactions effected by the Company in respect to its
Common Stock) that results in total net proceeds to the
Company of at least $5,000,000;
B-18
(iv) if all Additional Securities which the holders of Series C
Preferred Stock are entitled to obtain pursuant to Article
XIII(ii) or Article XIII(iii) are not elected to be obtained
as provided in subsection Article XIII(ii) or Article
XIII(iii) hereof, the Company may, during the 75-day period
following the expiration of the period provided in subsection
Article XIII(ii) or Article XIII(iii) hereof, offer the
remaining unsubscribed portion of such Additional Securities
to any person or persons at a price not less than, and upon
terms no more favorable to the offeree than, those specified
in the Notice. If the Company does not consummate the sale of
such Additional Securities within such period, the right
provided hereunder shall be deemed to be revived and such
Additional Securities shall not be offered or sold unless
first reoffered to the holders of Series C Preferred Stock in
accordance herewith;
(v) the participation right in this Article XIII shall not be
applicable to (A) the issuance or sale of shares of Common
Stock (or options therefor) to employees, officers, directors,
or consultants of the Company for the primary purpose of
soliciting or retaining their employment or service pursuant
to a stock option plan (or similar equity incentive plan)
approved in good faith by the Board of Directors, (B) the
issuance of Common Stock in connection with a bona fide
underwritten public offering at an offering price per share
(prior to underwriter's commissions and discounts) of not less
than 200% of the Conversion Price (as adjusted to reflect any
stock dividends, distributions, combinations,
reclassifications and other similar transactions effected by
the Company in respect to its Common Stock) that results in
total proceeds to the Company of at least $25,000,000, (C) the
issuance or sale of the Series C Preferred Stock, (D) the
issuance of securities in connection with mergers,
acquisitions, strategic business partnerships or joint
ventures approved by the Board of Directors and the primary
purpose of which, in the reasonable judgment of the Board of
Directors, is not to raise additional capital or (E) any
issuance of securities as to which the Majority Holders shall
have executed a written waiver of the rights contained in this
Article XIII; and
(vi) the participation right set forth in this Article XIII may not
be assigned or transferred, except that such right is
assignable by each holder of Series C Preferred Stock to any
wholly-owned subsidiary or parent of, or to any corporation or
entity that is, within the meaning of the Securities Act,
controlling, controlled by or under common control with, any
such holder of Series C Preferred Stock.
14. MISCELLANEOUS
(a) Cancellation of Series C Preferred Stock. If any shares of Series C
Preferred Stock are converted pursuant to Article IV or redeemed or
repurchased by the Corporation, the shares so converted or redeemed
shall be canceled, shall return to the status of authorized, but
unissued Preferred Stock of no designated series, and shall not be
issuable by the Corporation as Series C Preferred Stock.
(b) Lost or Stolen Certificates. Upon receipt by the Corporation of (i)
evidence of the loss, theft, destruction or mutilation of any
Preferred Stock Certificate(s) and (ii) (y) in the case of loss,
theft or destruction, indemnity (without any bond or other security)
reasonably satisfactory to the Corporation, or (z) in the case of
mutilation, the Preferred Stock Certificate(s) (surrendered for
cancellation), the Corporation shall execute and deliver new
Preferred Stock Certificate(s) of like tenor and date. However, the
Corporation shall not be obligated to reissue such lost or stolen
Preferred Stock Certificate(s) if the holder contemporaneously
requests the Corporation to convert such Series C Preferred Stock.
B-19
(c) Allocation of Cap Amount and Reserved Amount. The initial Cap Amount
and Reserved Amount shall be allocated pro rata among the holders of
Series C Preferred Stock based on the number of shares of Series C
Preferred Stock issued to each holder. Each increase to the Cap
Amount and the Reserved Amount shall be allocated pro rata among the
holders of Series C Preferred Stock based on the number of shares of
Series C Preferred Stock held by each holder at the time of the
increase in the Cap Amount or Reserved Amount. In the event a holder
shall sell or otherwise transfer any of such holder's shares of
Series C Preferred Stock, each transferee shall be allocated a pro
rata portion of such transferor's Cap Amount and Reserved Amount.
Any portion of the Cap Amount or Reserved Amount which remains
allocated to any person or entity which does not hold any Series C
Preferred Stock shall be allocated to the remaining holders of
shares of Series C Preferred Stock, pro rata based on the number of
shares of Series C Preferred Stock then held by such holders.
(d) Quarterly Statements of Available Shares. For each calendar quarter
beginning in the quarter in which the initial registration statement
required to be filed pursuant to Section 2(a) of the Registration
Rights Agreement is declared effective and thereafter for so long as
any shares of Series C Preferred Stock are outstanding, the
Corporation shall deliver (or cause its transfer agent to deliver)
to each holder a written report notifying the holders of any
occurrence that prohibits the Corporation from issuing Common Stock
upon any conversion. The report shall also specify (i) the total
number of shares of Series C Preferred Stock outstanding as of the
end of such quarter, (ii) the total number of shares of Common Stock
issued upon all conversions of Series C Preferred Stock prior to the
end of such quarter, (iii) the total number of shares of Common
Stock which are reserved for issuance upon conversion of the Series
C Preferred Stock as of the end of such quarter and (iv) the total
number of shares of Common Stock which may thereafter be issued by
the Corporation upon conversion of the Series C Preferred Stock
before the Corporation would exceed the Cap Amount and the Reserved
Amount. The Corporation (or its transfer agent) shall use its best
efforts to deliver the report for each quarter to each holder prior
to the tenth day of the calendar month following the quarter to
which such report relates. In addition, the Corporation (or its
transfer agent) shall provide, as promptly as practicable following
delivery to the Corporation of a written request by any holder, any
of the information enumerated in clauses (i) - (iv) of this
Paragraph D as of the date of such request.
(e) Payment of Cash; Defaults. Whenever the Corporation is required to
make any cash payment to a holder under this Certificate of
Designation (as payment of any Dividend, upon redemption or
otherwise), such cash payment shall be made to the holder within
five business days after delivery by such holder of a notice
specifying that the holder elects to receive such payment in cash
and the method (e.g., by check, wire transfer) in which such payment
should be made and any supporting documentation reasonably requested
by the Corporation to substantiate the holder's claim to such cash
payment or the amount thereof. If such payment is not delivered
within such five business day period, such holder shall thereafter
be entitled to interest on the unpaid amount at a per annum rate
equal to the lower of twenty-four percent (24%) and the highest
interest rate permitted by applicable law until such amount is paid
in full to the holder.
(f) Status as Stockholder. Upon submission of a Notice of Conversion by
a holder of Series C Preferred Stock, (i) the shares covered thereby
(other than the shares, if any, which cannot be issued because their
issuance would exceed such holder's allocated portion of the
Reserved Amount or Cap Amount) shall be deemed converted into shares
of Common Stock and (ii) the holder's rights as a holder of such
converted shares of Series C Preferred Stock shall cease and
terminate, excepting only the right to receive certificates for such
shares of Common Stock and to any remedies provided herein or
otherwise available at law or in equity to such holder because of a
failure by the Corporation to comply with the terms of this
Certificate of Designation. In situations where Article VI.B is
applicable, the number of shares of Common Stock referred to in
clauses (i) and (ii) of the immediately preceding sentence shall be
determined on the date on which such shares of Common Stock are
delivered to the holder. Notwithstanding the foregoing, if a holder
has not received certificates for all shares of Common Stock prior
to the sixth business day after the expiration of the Delivery
Period with respect to a conversion of Series C Preferred Stock for
any reason, then (unless the holder otherwise elects to retain its
status as a holder of Common Stock by so notifying the Corporation
within five business days after the expiration of such six business
day period after expiration of the Delivery Period) the holder shall
regain the rights of a holder of Series C Preferred Stock with
respect to such unconverted shares of Series C Preferred Stock and
the Corporation shall, as soon as practicable, return such
unconverted shares to the holder. In all cases, the holder shall
retain all of its rights and remedies for the Corporation's failure
to convert Series C Preferred Stock.
B-20
(g) Remedies Cumulative. The remedies provided in this Certificate of
Designation shall be cumulative and in addition to all other
remedies available under this Certificate of Designation, at law or
in equity (including a decree of specific performance and/or other
injunctive relief), and nothing herein shall limit a holder's right
to pursue actual damages for any failure by the Corporation to
comply with the terms of this Certificate of Designation. The
Corporation acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the holders of Series C
Preferred Stock and that the remedy at law for any such breach may
be inadequate. The Corporation therefore agrees, in the event of any
such breach or threatened breach, that the holders of Series C
Preferred Stock shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach, without
the necessity of showing economic loss and without any bond or other
security being required.
(h) Waiver. Notwithstanding any provision in this Certificate of
Designation to the contrary, any provision contained herein and any
right of the holders of Series C Preferred Stock granted hereunder
may be waived as to all shares of Series C Preferred Stock (and the
holders thereof) upon the written consent of the Majority Holders,
unless a higher percentage is required by applicable law, in which
case the written consent of the holders of not less than such higher
percentage of shares of Series C Preferred Stock shall be required.
(i) Notices. Any notices required or permitted to be given under the
terms hereof shall be sent by certified or registered mail (return
receipt requested) or delivered personally, by responsible overnight
carrier or by confirmed facsimile, and shall be effective five days
after being placed in the mail, if mailed, or upon receipt or
refusal of receipt, if delivered personally or by responsible
overnight carrier or confirmed facsimile, in each case addressed to
a party. The addresses for such communications are (i) if to the
Corporation to P-Com, Inc., 3175 Winchester Blvd., Campbell, CA
95008, Telephone: (408) 866-3666, Facsimile: (408) 874-4461,
Attention: Chief Executive Officer, and (ii) if to any holder to the
address set forth under such holder's name on the execution page to
the Securities Purchase Agreement, or such other address as may be
designated in writing hereafter, in the same manner, by such person.
IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf of the
Corporation this 24th day of September, 2003.
P-COM, INC.
By: /s/ Daniel W. Rumsey
-------------------------------------
Name: Daniel W. Rumsey
Title: Chief Restructuring Officer
B-21
APPENDIX C
CERTIFICATE OF DESIGNATION OF THE RELATIVE RIGHTS AND PREFERENCES
OF THE
SERIES G CONVERTIBLE PREFERRED STOCK
OF
P-COM, INC.
The undersigned officer of P-Com, Inc., a Delaware corporation (the
"Company"), in accordance with the provisions of Section 151(g) of the Delaware
General Corporation Law, does hereby certify that, pursuant to the authority
conferred upon the Board of Directors by the Certificate of Incorporation of the
Company, the following resolution creating a series of preferred stock
designated as "Series G Convertible Preferred Stock" was duly adopted on May 31,
2005:
RESOLVED, that pursuant to the authority expressly granted to and vested
in the Board of Directors of the Company by Article IV of the Company's
Certificate of Incorporation (the "Certificate of Incorporation"), there hereby
is created out of the authorized shares of preferred stock, par value $.0001 per
share (the "Preferred Stock"), of the Company, a series of Preferred Stock
designated as "Series G Convertible Preferred Stock," consisting of Ten Thousand
(10,000) shares, which series shall have the following designations, powers,
preferences and relative and other special rights and the following
qualifications, limitations and restrictions:
15. Designation and Rank. Such series of Preferred Stock shall be designated
as "Series G Convertible Preferred Stock" (the "Series G Preferred
Stock"). The maximum number of shares of Series G Preferred Stock shall be
Ten Thousand (10,000) shares. Upon the liquidation, dissolution or winding
up of the affairs of the Company, the Series G Preferred Stock shall rank
(a) prior to the Company's common stock, par value $.0001 per share (the
"Common Stock"), Series A Junior Participating Preferred Stock, Series F
Convertible Preferred Stock and all other classes and series of the
Company's capital stock hereafter created that, by their terms, rank
junior to the Series G Preferred Stock (the "Junior Stock"); (b) pari
passu with all classes and series of the Company's capital stock hereafter
created that, by their terms, rank on parity with the Series G Preferred
Stock (the "Pari Passu Stock"); and (c) junior to the Company's Series B
Convertible Preferred Stock, Series C Convertible Preferred Stock, Series
D Convertible Preferred Stock, Series E Convertible Preferred Stock and
all other classes and series of the Company's capital stock hereafter
created that, by their terms, rank senior to the Series G Preferred Stock
(the "Senior Stock"). The Series G Preferred Stock shall be subordinate to
and rank junior to all indebtedness of the Company now or hereafter
outstanding.
16. Dividends. Whenever the Board of Directors declares a dividend on the
Common Stock each holder of record of a share of Series G Preferred Stock,
or any fraction of a share of Series G Preferred Stock, on the date set by
the Board of Directors to determine the owners of the Common Stock of
record entitled to receive such dividend (the "Record Date") shall be
entitled to receive, out of any assets at the time legally available
therefor, an amount equal to such dividend declared on one share of Common
Stock multiplied by the number of shares of Common Stock into which such
share, or such fraction of a share, of Series G Preferred Stock could be
converted on the Record Date.
17. Voting Rights
(a) Class Voting Rights. The Series G Preferred Stock shall have the
following class voting rights. So long as any shares of the Series G
Preferred Stock remain outstanding, the Company shall not, without
the affirmative vote or consent of the holders of at least
three-fourths (3/4) of the shares of the Series G Preferred Stock
outstanding at the time, given in person or by proxy, either in
writing or at a meeting, in which the holders of the Series G
Preferred Stock vote separately as a class: (i) amend, alter or
repeal the provisions of the Series G Preferred Stock so as to
adversely affect any right, preference, privilege or voting power of
the Series G Preferred Stock; or (ii) effect any distribution with
respect to Junior Stock except that the Company may effect a
distribution on the Common stock if the Company makes a like kind
distribution on each share, or fraction of a share, of Series G
Preferred Stock in an amount equal to the distribution on one share
of Common Stock multiplied by the number of shares of Common Stock
into which such one share, or such fraction of a share, of Series G
Preferred Stock can be converted at the time of such distribution.
C-1
(b) General Voting Rights. Except with respect to transactions upon
which the Series G Preferred Stock shall be entitled to vote
separately as a class pursuant to Section 3(a) above and except as
otherwise required by the Delaware General Corporation Law, the
Series G Preferred Stock shall have no voting rights. The Common
Stock into which the Series G Preferred Stock is convertible shall,
upon issuance, have all of the same voting rights as other issued
and outstanding Common Stock of the Company.
18. Liquidation Preference
(a) In the event of the liquidation, dissolution or winding up of the
affairs of the Company, whether voluntary or involuntary, after
payment or provision for payment of the debts and other liabilities
of the Company and after payment or provision for payment of all
amounts due to the holders of any Senior Stock, the holders of
shares of the Series G Preferred Stock then outstanding shall be
entitled to receive, out of the assets of the Company, whether such
assets are capital or surplus of any nature, an amount equal to
$1,000.00 per share (the "Liquidation Preference Amount") of the
Series G Preferred Stock before any payment shall be made or any
assets distributed to the holders of the Common Stock or any other
Junior Stock. If the assets of the Company are sufficient to pay in
part, but are not sufficient to pay in full, the Liquidation
Preference Amount payable to the holders of outstanding shares of
the Series G Preferred Stock and any Pari Passu Stock, then all of
said assets available to pay a part of the Liquidation Preference
Amount to the holders of the outstanding shares of Series G
Preferred Stock and any Pari Passu Stock will be distributed among
the holders of the Series G Preferred Stock and the holders of any
Pari Passu Stock, ratably in accordance with the respective amounts
that would be payable on such shares if all amounts payable thereon
were paid in full. The Liquidation Preference Amount to be paid with
respect to any fractional share of Series G Preferred Stock shall be
equal to the Liquidation Preference Amount multiplied by such
fraction. All payments for which this Section 4(a) provides shall be
in cash, property (valued at its fair market value as determined by
an independent appraiser reasonably acceptable to the holders of a
majority of the Series G Preferred Stock), or a combination thereof;
provided, however, that no cash shall be paid to holders of Junior
Stock unless each holder of the outstanding shares of Series G
Preferred Stock has been paid in cash the full Liquidation
Preference Amount to which such holder is entitled as provided
herein. After payment of the full Liquidation Preference Amount to
which each holder is entitled, such holders of shares of Series G
Preferred Stock will not be entitled to any further participation as
such in any distribution of the assets of the Company.
(b) A consolidation or merger of the Company with or into any other
corporation or corporations or any other entity, or a sale of all or
substantially all of the assets of the Company, or the effectuation
by the Company of a transaction or series of transactions in which
more than 50% of the voting shares of the Company is disposed of or
conveyed, shall not be deemed to be a liquidation, dissolution, or
winding up within the meaning of this Section 4. The Company shall
not, without the consent of three-fourths (3/4) of the then
outstanding Series G Preferred Stock, merge or consolidate with or
into another corporation, unless the securities of such other
corporation issued in exchange for the Series G Preferred Stock have
substantially the same relative rights, preferences and privileges
as the Series G Preferred Stock provided for herein.
(c) Written notice of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, stating a
payment date and the place where the distributable amounts shall be
payable, shall be given by mail, postage prepaid, no less than
forty-five (45) days prior to the payment date stated therein, to
the holders of record of the Series G Preferred Stock at their
respective addresses as the same shall appear on the books of the
Company.
C-2
19. Conversion. The holders of Series G Preferred Stock shall have the
following conversion rights (the "Conversion Rights"):
(a) Right to Convert. At any time on or after the date on which shares
of Series G Preferred Stock are first issued (the "Issuance Date"),
the holder of shares of Series G Preferred Stock may, at such
holder's option, subject to the limitations set forth in Section 7
herein, elect to convert (a "Voluntary Conversion") all or any
portion of the shares of Series G Preferred Stock held by such
holder into a number of fully paid and nonassessable shares of
Common Stock equal to the quotient obtained by dividing (i) the
Liquidation Preference Amount of the shares of Series G Preferred
Stock being converted by (ii) the Conversion Price (as defined in
Section 5(d) below) then in effect as of the date of the delivery by
such holder of its notice of election to convert. The Company shall
keep written records of the conversion of the shares of Series G
Preferred Stock converted by each holder. A holder shall be required
to deliver the original certificates representing the shares of
Series G Preferred Stock upon any conversion of the Series G
Preferred Stock as provided in Section 5(b) below.
(b) Mechanics of Voluntary Conversion. The Voluntary Conversion of
Series G Preferred Stock shall be conducted in the following manner:
(i) Holder's Delivery Requirements. To convert Series G Preferred
Stock into full shares of Common Stock on any date (the
"Voluntary Conversion Date"), the holder thereof shall (A)
transmit by facsimile (or otherwise deliver), for receipt on
or prior to 5:00 p.m., New York time on such date, a copy of a
fully executed notice of conversion in the form attached
hereto as Exhibit I (the "Conversion Notice"), to the Company,
and (B) with respect to the conversion of shares of Series G
Preferred Stock held by any holder, such holder shall
surrender to a common carrier for delivery to the Company as
soon as practicable following such Conversion Date, but in no
event later than six (6) business days after such date, the
original certificates representing the shares of Series G
Preferred Stock being converted (or an indemnification
undertaking with respect to such shares in the case of their
loss, theft or destruction) (the "Preferred Stock
Certificates").
(ii) Company's Response. Upon receipt by the Company of a
Conversion Notice (or a facsimile copy thereof), the Company
shall immediately send, via facsimile, a confirmation of
receipt of such Conversion Notice to the holder that sent such
Conversion Notice (the "Converting Holder") and the Company or
its designated transfer agent (the "Transfer Agent"), as
applicable, shall, within three (3) business days following
the date of receipt by the Company of the Converting Holder's
Preferred Stock Certificates, (x) issue and deliver to the
Depository Trust Company ("DTC") account on the Converting
Holder's behalf via the Deposit Withdrawal Agent Commission
System ("DWAC") as specified in the Conversion Notice,
registered in the name of the Converting Holder or its
designee, for the number of shares of Common Stock to which
the Converting Holder shall be entitled, and (y) if the
Preferred Stock Certificates so surrendered represent more
shares of Series G Preferred Stock than those being converted,
issue and deliver to the Converting Holder a new certificate
for such number of shares of Series G Preferred Stock
represented by the surrendered certificate that are not
converted.
(iii) Dispute Resolution. In the case of a dispute as to the
arithmetic calculation of the number of shares of Common Stock
to be issued upon conversion, the Company shall promptly issue
to the holder the number of shares of Common Stock that is not
disputed and shall submit the arithmetic calculations to the
holder via facsimile as soon as possible, but in no event
later than two (2) business days after receipt of such
holder's Conversion Notice. If such holder and the Company are
unable to agree upon the arithmetic calculation of the number
of shares of Common Stock to be issued upon such conversion
within one (1) business day of such disputed arithmetic
calculation being submitted to the holder, then the Company
shall within one (1) business day submit via facsimile the
disputed arithmetic calculation of the number of shares of
Common Stock to be issued upon such conversion to the
Company's independent, outside accountant. The Company shall
cause the accountant to perform the calculations and notify
the Company and the holder of the results no later than
seventy-two (72) hours from the time it receives the disputed
calculations. Such accountant's calculation shall be binding
upon all parties absent manifest error. The reasonable
expenses of such accountant in making such determination shall
be paid by the Company, in the event the holder's calculation
was correct, or by the holder, in the event the Company's
calculation was correct, or equally by the Company and the
holder in the event that neither the Company's or the holder's
calculation was correct. The period of time in which the
Company is required to effect conversions under this
Certificate of Designation shall be tolled with respect to the
subject conversion pending resolution of any dispute by the
Company made in good faith and in accordance with this Section
5(b)(iii).
C-3
(iv) Record Holder. The person or persons entitled to receive the
shares of Common Stock issuable upon a conversion of the
Series G Preferred Stock shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on
the Conversion Date.
(c) Mandatory Conversion
(i) Upon the Company's written request a holder of Series G
Preferred Stock shall advise the Company in writing the number
of shares of Common Stock that are beneficially owned by such
holder, not counting shares of Common Stock issuable upon
conversion of any Series G Preferred Stock held by such
holder. Beneficial ownership shall be determined in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and the rules promulgated thereunder. If the shares
of Common Stock beneficially owned by such holder (excluding
shares of Common Stock issuable upon conversion of the Series
G Preferred Stock) amount to less than 9.99% of the shares of
Common Stock outstanding at such time, the Company may, at its
option, compel such holder, by written notice to such holder
(the "Mandatory Conversion Notice"), to convert such portion
of the Series G Preferred Stock owned by such holder into
shares of Common Stock such that the total number of shares of
Common Stock beneficially owned by such holder after such
conversion shall equal up to 9.99%, but not more, of the
shares of Common Stock outstanding after such conversion.
(ii) As used herein, a "Mandatory Conversion Date" shall be the
date when the Mandatory Conversion Notice shall be deemed
delivered pursuant to Section 5(i). The Mandatory Conversion
Date and the Voluntary Conversion Date collectively are
referred to in this Certificate of Designation as the
"Conversion Date."
(iii) Each share of Series G Preferred Stock outstanding on the
Mandatory Conversion Date shall, automatically and without any
action on the part of the holder thereof, convert into a
number of fully paid and nonassessable shares of Common Stock
equal to the quotient obtained by dividing (x) the Liquidation
Preference Amount of the shares of Series G Preferred Stock
outstanding on the Mandatory Conversion Date by (y) the
Conversion Price in effect on the Mandatory Conversion Date;
provided, however, that the Company shall not be obligated to
issue the shares of Common Stock issuable upon conversion of
any shares of Series G Preferred Stock unless the Preferred
Stock Certificates representing such shares of Series G
Preferred Stock are either delivered to the Company or the
holder notifies the Company that such Preferred Stock
Certificates have been lost, stolen, or destroyed, and
executes an agreement satisfactory to the Company to indemnify
the Company from any loss incurred by it in connection
therewith. Upon the occurrence of any mandatory conversion of
the Series G Preferred Stock pursuant to this Section 5(c),
each affected holder of Series G Preferred Stock shall
surrender the Preferred Stock Certificates representing the
Series G Preferred Stock for which the Mandatory Conversion
Date has occurred to the Company and the Company shall deliver
the shares of Common Stock issuable upon such conversion (in
the same manner set forth in Section 5(b)(ii)) to such holder
within three (3) business days of such holder's delivery of
the applicable Preferred Stock Certificates. If the Preferred
Stock Certificates so surrendered represent more shares of
Series G Preferred Stock than those being converted, the
Company shall issue to such holder a new certificate for such
number of Series G Preferred Stock represented by the
surrendered certificates which were not converted.
C-4
(d) Conversion Price. The term "Conversion Price" shall mean $.50,
subject to adjustment pursuant to Section 5(e) hereof.
(e) Adjustments of Conversion Price
(i) Adjustments for Stock Splits and Combinations. If the Company
shall at any time or from time to time after the Issuance
Date, effect a stock split of the outstanding Common Stock,
the Conversion Price shall be proportionately decreased. If
the Company shall at any time or from time to time after the
Issuance Date, combine the outstanding shares of Common Stock,
the Conversion Price shall be proportionately increased. Any
adjustments under this Section 5(e)(i) shall be effective at
the close of business on the date the stock split or
combination occurs.
(ii) Adjustments for Certain Dividends and Distributions. If the
Company shall at any time or from time to time after the
Issuance Date, make or issue or set a record date for the
determination of holders of Common Stock entitled to receive a
dividend or other distribution payable in shares of Common
Stock, then, and in each such event, the Conversion Price
shall be decreased as of the time of such issuance or, in the
event such record date shall have been fixed, as of the close
of business on such record date, by multiplying the Conversion
Price then in effect by a fraction:
(1) the numerator of which shall be the total number of
shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the
close of business on such record date; and
(2) the denominator of which shall be the total number of
shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the
close of business on such record date plus the number of
shares of Common Stock issuable in payment of such
dividend or distribution.
(iii) Adjustment for Other Dividends and Distributions. If the
Company shall at any time or from time to time after the
Issuance Date, make or issue or set a record date for the
determination of holders of Common Stock entitled to receive a
dividend or other distribution payable in securities of the
Company other than shares of Common Stock, then, and in each
such event, an appropriate adjustment to the Conversion Price
shall be made and provision shall be made (by adjustments of
the Conversion Price or otherwise) so that the holders of
Series G Preferred Stock shall receive upon conversions
thereof, in addition to the number of shares of Common Stock
receivable thereon, the number of securities of the Company
which they would have received had their Series G Preferred
Stock been converted into Common Stock on the date of such
event and had thereafter, during the period from the date of
such event to and including the Conversion Date, retained such
securities (together with any distributions payable thereon
during such period), giving application to all adjustments
called for during such period under this Section 5(e)(iii)
with respect to the rights of the holders of the Series G
Preferred Stock.
C-5
(iv) Adjustments for Reclassification, Exchange or Substitution. If
the Common Stock issuable upon conversion of the Series G
Preferred Stock at any time or from time to time after the
Issuance Date shall be changed to the same or different number
of shares of any class or classes of stock, whether by
reclassification, exchange, substitution or otherwise (other
than by way of a stock split or combination of shares or stock
dividends provided for in Sections 5(e)(i), (ii) and (iii), or
a reorganization, merger, consolidation, or sale of assets
provided for in Section 5(e)(v)), then, and in each such
event, an appropriate adjustment to the Conversion Price shall
be made and provisions shall be made so that the holder of
each share of Series G Preferred Stock shall have the right
thereafter to convert such share of Series G Preferred Stock
into the kind and amount of shares of stock and other
securities receivable upon reclassification, exchange,
substitution or other change, by holders of the number of
shares of Common Stock into which such share of Series G
Preferred Stock might have been converted immediately prior to
such reclassification, exchange, substitution or other change,
all subject to further adjustment as provided herein.
(v) Adjustments for Reorganization, Merger, Consolidation or Sales
of Assets. If at any time or from time to time after the
Issuance Date there shall be a capital reorganization of the
Company (other than by way of a stock split or combination of
shares or stock dividends or distributions provided for in
Section 5(e)(i), (ii) and (iii), or a reclassification,
exchange or substitution of shares provided for in Section
5(e)(iv)), or a merger or consolidation of the Company with or
into another corporation, or the sale of all or substantially
all of the Company's properties or assets to any other person
(an "Organic Change"), then as a part of such Organic Change
an appropriate adjustment to the Conversion Price shall be
made and provision shall be made so that the holder of each
share of Series G Preferred Stock shall have the right
thereafter to convert such share of Series G Preferred Stock
into the kind and amount of shares of stock and other
securities or property of the Company or any successor
corporation resulting from the Organic Change. In any such
case, appropriate adjustment shall be made in the application
of the provisions of this Section 5(e)(v) with respect to the
rights of the holders of the Series G Preferred Stock after
the Organic Change to the end that the provisions of this
Section 5(e)(v) (including any adjustment in the Conversion
Price then in effect and the number of shares of stock or
other securities deliverable upon conversion of the Series G
Preferred Stock) shall be applied after that event in as
nearly an equivalent manner as may be practicable.
(vi) Record Date. In case the Company shall take record of the
holders of its Common Stock or any other Preferred Stock for
the purpose of entitling them to subscribe for or purchase
Common Stock or other securities convertible into Common Stock
("Convertible Securities"), then the date of the issue or sale
of the shares of Common Stock shall be deemed to be such
record date.
(f) No Impairment. The Company shall not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer
of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed hereunder by the Company, but will at all times in good
faith, assist in the carrying out of all the provisions of this
Section 5 and in the taking of all such action as may be necessary
or appropriate in order to protect the conversion rights of the
holders of the Series G Preferred Stock against impairment. In the
event a holder shall elect to convert any shares of Series G
Preferred Stock as provided herein, the Company shall not refuse
conversion based on any claim that such holder or any one associated
or affiliated with such holder has been engaged in any violation of
law, unless, an injunction from a court, on notice, restraining
and/or adjoining conversion of all or of said shares of Series G
Preferred Stock shall have been issued and the Company posts a
surety bond for the benefit of such holder in an amount equal to
130% of the Liquidation Preference Amount of the Series G Preferred
Stock such holder has elected to convert, which bond shall remain in
effect until the completion of arbitration/litigation of the dispute
and the proceeds of which shall be payable to such holder in the
event it obtains judgment.
C-6
(g) Certificates as to Adjustments. Upon occurrence of each adjustment
or readjustment of the Conversion Price or number of shares of
Common Stock issuable upon conversion of the Series G Preferred
Stock pursuant to this Section 5, the Company at its expense shall
promptly compute such adjustment or readjustment in accordance with
the terms hereof and furnish to each holder of Series G Preferred
Stock a certificate setting forth such adjustment and readjustment,
showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, upon written request of
the holder of Series G Preferred Stock, at any time, furnish or
cause to be furnished to such holder a like certificate setting
forth such adjustments and readjustments, the Conversion Price in
effect at the time, and the number of shares of Common Stock and the
amount, if any, of other securities or property which at the time
would be received upon the conversion of a share of such Series G
Preferred Stock. Notwithstanding the foregoing, the Company shall
not be obligated to deliver a certificate unless such certificate
would reflect an increase or decrease of at least one percent of
such adjusted amount.
(h) Issue Taxes. The Company shall pay any and all issue and other
taxes, excluding federal, state or local income taxes, that may be
payable in respect of any issue or delivery of shares of Common
Stock on conversion of shares of Series G Preferred Stock pursuant
thereto; provided, however, that the Company shall not be obligated
to pay any transfer taxes resulting from any transfer requested by
any holder in connection with any such conversion.
(i) Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by
facsimile or three (3) business days following (x) being mailed by
certified or registered mail, postage prepaid, return-receipt
requested, or (y) delivered to an express mail delivery service such
as Federal Express, with written receipt by the addressee required,
in either case addressed to the holder of record at its address
appearing on the books of the Company. The Company will give written
notice to each holder of Series G Preferred Stock at least twenty
(20) days prior to the date on which the Company closes its books or
takes a record (I) with respect to any dividend or distribution upon
the Common Stock, (II) with respect to any pro rata subscription
offer to holders of Common Stock or (III) for determining rights to
vote with respect to any Organic Change, dissolution, liquidation or
winding-up and in no event shall such notice be provided to such
holder prior to such information being made known to the public. The
Company will also give written notice to each holder of Series G
Preferred Stock at least twenty (20) days prior to the date on which
any Organic Change, dissolution, liquidation or winding-up will take
place and in no event shall such notice be provided to such holder
prior to such information being made known to the public.
(j) Fractional Shares. No fractional shares of Common Stock shall be
issued upon conversion of the Series G Preferred Stock. In lieu of
any fractional shares to which the holder would otherwise be
entitled, the Company shall pay cash equal to the product of such
fraction multiplied by the average of the Closing Bid Prices of the
Common Stock for the five (5) consecutive trading days immediately
preceding the Voluntary Conversion Date or Mandatory Conversion
Date, as applicable.
(k) Reservation of Common Stock. The Company shall, so long as any
shares of Series G Preferred Stock are outstanding, reserve and keep
available out of its authorized and unissued Common Stock, solely
for the purpose of effecting the conversion of the Series G
Preferred Stock, such number of shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all of the
Series G Preferred Stock then outstanding.
(l) Retirement of Series G Preferred Stock. Conversion of Series G
Preferred Stock shall be deemed to have been effected on the
applicable Voluntary Conversion Date or Mandatory Conversion Date.
The Company shall keep written records of the conversion of the
shares of Series G Preferred Stock converted by each holder. A
holder shall be required to deliver the original certificates
representing the shares of Series G Preferred Stock upon any
conversion of the Series G Preferred Stock represented by such
certificates.
C-7
(m) Regulatory Compliance. If any shares of Common Stock to be reserved
for the purpose of conversion of Series G Preferred Stock require
registration or listing with or approval of any governmental
authority, stock exchange or other regulatory body under any federal
or state law or regulation or otherwise before such shares may be
validly issued or delivered upon conversion, the Company shall, at
its sole cost and expense, in good faith and as expeditiously as
possible, endeavor to secure such registration, listing or approval,
as the case may be.
20. No Preemptive or Redemption Rights. Except as provided in Section 5 hereof
no holder of the Series G Preferred Stock shall be entitled to rights to
subscribe for, purchase or receive any part of any new or additional
shares of any class, whether now or hereinafter authorized, or of bonds or
debentures, or other evidences of indebtedness convertible into or
exchangeable for shares of any class, but all such new or additional
shares of any class, or any bond, debentures or other evidences of
indebtedness convertible into or exchangeable for shares, may be issued
and disposed of by the Board of Directors on such terms and for such
consideration (to the extent permitted by law), and to such person or
persons as the Board of Directors in its absolute discretion may deem
advisable. Except as provided in Section 5 neither the Company nor the
holder of any Series G Preferred Stock shall have the right to require the
Company to redeem any shares of Series G Preferred Stock.
21. Conversion Restriction. Notwithstanding anything to the contrary set forth
in Section 5 hereof, at no time may a holder of shares of Series G
Preferred Stock convert any shares of the Series G Preferred Stock if the
number of shares of Common Stock to be issued pursuant to such conversion
would exceed, when aggregated with all other shares of Common Stock
beneficially owned by such holder at such time, 9.99% of all of the Common
Stock outstanding at such time; provided, however, that upon a holder of
Series G Preferred Stock providing the Company with sixty-one (61) days
notice (pursuant to Section 5(i) hereof) (the "Waiver Notice") that such
holder desires to waive the application of this Section 7 with regard to
any or all shares of Common Stock issuable upon conversion of the Series G
Preferred Stock held by such holder, this Section 7 shall be of no further
force or effect with regard to those shares of Series G Preferred Stock
referenced in the Waiver Notice.
22. Inability to Fully Convert
(a) Holder's Option if Company Cannot Fully Convert. If, upon the
Company's receipt of a Conversion Notice the Company cannot issue
shares of Common Stock for any reason, including, without
limitation, because the Company (x) does not have a sufficient
number of shares of Common Stock authorized and available for
issuance or (y) is otherwise prohibited by applicable law or by the
rules or regulations of any stock exchange, interdealer quotation
system or other self-regulatory organization with jurisdiction over
the Company or its securities, from issuing all of the Common Stock
which is to be issued to a holder of Series G Preferred Stock
pursuant to a Conversion Notice, then the Company shall issue as
many shares of Common Stock as it is able to issue in accordance
with such holder's Conversion Notice and, with respect to the
unconverted Series G Preferred Stock (the "Unconverted Preferred
Stock"), the holder, solely at such holder's option, may elect, at
any time after receipt of notice from the Company that there is
Unconverted Preferred Stock, to void the holder's Conversion Notice
as to the number of shares of Common Stock the Company is unable to
issue (the "Unissued Shares of Common Stock") and retain or have
returned, as the case may be, the certificates for the shares of the
Unconverted Preferred Stock.
(b) Mechanics of Fulfilling Holder's Election. The Company shall
immediately send via facsimile to a holder of Series G Preferred
Stock, upon receipt of a facsimile copy of a Conversion Notice from
such holder which cannot be fully satisfied as described in Section
8(a) above, a notice of the Company's inability to fully satisfy
such holder's Conversion Notice (the "Inability to Fully Convert
Notice"). Such Inability to Fully Convert Notice shall indicate (i)
the reason why the Company is unable to fully satisfy such holder's
Conversion Notice and (ii) the number of shares of Series G
Preferred Stock which cannot be converted.
C-8
(c) Pro-Rata Conversion. In the event the Company within a period of ten
days receives Conversion Notices from more than one holder of Series
G Preferred Stock and the Company can convert some, but not all, of
the Series G Preferred Stock required to be converted as a result of
such Conversion Notices, the Company shall convert from each holder
of Series G Preferred Stock electing to have Series G Preferred
Stock converted within such ten day period, an amount equal to the
number of shares of Series G Preferred Stock such holder elected to
have converted in such ten day period multiplied by a fraction, the
numerator of which shall be the number of shares of Series G
Preferred Stock such holder elected to have converted in such ten
day period and the denominator of which shall be the total number of
shares of Series G Preferred Stock all holders elected to have
converted in such ten day period. The Company shall not convert any
Series G Preferred Stock pursuant to a Mandatory Conversion Notice
until it shall have converted all Series G Preferred Stock pursuant
to any Conversion Notice.
23. Vote to Change the Terms of or Issue Preferred Stock. The affirmative vote
at a meeting duly called for such purpose, or the written consent without
a meeting, of the holders of not less than three-fourths (3/4) of the then
outstanding shares of Series G Preferred Stock, shall be required to
approve any change to this Certificate of Designation or the Company's
Certificate of Incorporation which would amend, alter, change or repeal
any of the powers, designations, preferences and rights of the Series G
Preferred Stock.
24. Lost or Stolen Certificates. Upon receipt by the Company of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation
of any Preferred Stock Certificates representing the shares of Series G
Preferred Stock, and, in the case of loss, theft or destruction, of an
indemnity satisfactory to the Company and, in the case of mutilation, upon
surrender and cancellation of the Preferred Stock Certificate(s), the
Company shall execute and deliver new preferred stock certificate(s) of
like tenor and date.
25. Remedies, Characterizations, Other Obligations, Breaches and Injunctive
Relief. The remedies provided in this Certificate of Designation shall be
cumulative and in addition to all other remedies available under this
Certificate of Designation, at law or in equity (including a decree of
specific performance and/or other injunctive relief), no remedy contained
herein shall be deemed a waiver of compliance with the provisions giving
rise to such remedy and nothing herein shall limit a holder's right to
pursue actual damages for any failure by the Company to comply with the
terms of this Certificate of Designation. Amounts set forth or provided
for herein with respect to conversion and the like (and the computation
thereof) shall be the amounts to be received by the holder thereof and
shall not, except as expressly provided herein, be subject to any other
obligation of the Company (or the performance thereof). The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the holders of the Series G Preferred Stock and that
the remedy at law for any such breach may be inadequate. The Company
therefore agrees that, in the event of any such breach or threatened
breach, the holders of the Series G Preferred Stock shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach, without the necessity of showing economic loss and without any
bond or other security being required.
26. Specific Shall Not Limit General; Construction. No specific provision
contained in this Certificate of Designation shall limit or modify any
more general provision contained herein. This Certificate of Designation
shall be deemed to be jointly drafted by the Company and all initial
holders of the Series G Preferred Stock and shall not be construed against
any person as the drafter hereof.
27. Failure or Indulgence Not Waiver. No failure or delay on the part of a
holder of Series G Preferred Stock in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such power, right or privilege preclude
other or further exercise thereof or of any other right, power or
privilege.
28. Waiver. Notwithstanding any provision in this Certificate of Designation
to the contrary, any provision contained herein and any right of the
holders of Series G Preferred Stock granted hereunder may be waived as to
all shares of Series G Preferred Stock (and the holders thereof) upon the
written consent of the holders of three-fourths (3/4ths) of the shares of
Series G Preferred Stock then outstanding, unless a higher percentage is
required by applicable law, in which case the written consent of the
holders of not less than such higher percentage of shares of Series G
Preferred Stock shall be required.
C-9
IN WITNESS WHEREOF, the undersigned has executed and subscribed this
Certificate and does affirm the foregoing as true this 31st day of May, 2005.
P-COM, INC.
By: /s/ Daniel W. Rumsey
-------------------------------------
Name: Daniel W. Rumsey
Title: Chief Restructuring Officer
C-10
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission File Number: 0-25356
P-COM, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 77-0289371
-------------------------------- ------------------------------------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
3175 S. WINCHESTER BOULEVARD, CAMPBELL, CALIFORNIA 95008
(408) 866-3666
(Address and Telephone Number of Principal Executive Offices)
Securities registered pursuant to Section 12(b)of the Act:
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.003 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. YES [ ] NO [X]
Indicate by check mark whether the registrant is an accelerated filer as defined
in the Exchange Act Rule 12b-2. YES [ ] NO [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 30, 2004 was approximately $11.2 million.
On March 21, 2005, approximately 11,844,748 shares of the Registrant's Common
Stock, $0.003 par value, were outstanding.
The following information contains forward-looking statements, which involve
risks and uncertainties. Forward-looking statements are characterized by words
such as "plan," "expect," "believe," "intend," "would", "will" and similar
words. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including those
set forth under, "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Certain Risk Factors Affecting the Company," and
elsewhere in this Annual Report on Form 10-K.
PART I
EXPANATORY NOTE - This amendment on Form 10-K/A is being filed by P-Com, Inc.
("we" or "us") as an amendment to our Annual Report on Form 10-K for the period
ended December 31, 2004 solely to correct Exhibits 31.1, 31.2, 32.1 and 32.2 and
does not reflect any events occurring after the date of filing of the original
Form 10-K or otherwise modify or update any information contained therein.
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
P-Com, Inc. was organized on August 23, 1991 as a Delaware Corporation. Our
executive offices are located at 3175 S. Winchester Boulevard, Campbell,
California 95008, and our telephone number is (408) 866-3666.
Since early 2000, we have experienced reduced revenues, incurred substantial
operating losses from continuing operations and used substantial cash in our
operations. For the years ended December 31, 2004, 2003, and 2002, P-Com
recorded net losses from continuing operations of ($3.3) million, ($10.7)
million, and ($44.9) million, respectively, and used ($9.1) million, ($5.9)
million, and ($14.5) million cash, respectively, in its operating activities.
The decline in our business is principally the result of a prolonged downturn in
the telecommunications industry that we believe is related to reduced capital
spending by large carriers and network integrators of telecommunications
systems, and substantial competition from other telecommunications product
suppliers. In addition, we have experienced reduced demand for many of our
product lines as new products are introduced by our competitors at lower average
selling prices.
As a result of our ongoing need to reduce operating costs, and provide working
capital to fund our operating losses, we have continued our restructuring
initiatives, and raised debt and equity capital, during the year ended December
31, 2004, as follows:
o On June 15, 2004, we restructured our Italian operations conducted by P-Com
Italia, S.p.A. Under the restructuring plan, P-Com Italia will continue to focus
on research and development, and the manufacturing of specific component parts,
while outsourcing certain repair operations to NORT S.r.L, an Italian
third-party contract manufacturer staffed by former employees of P-Com Italia.
The restructuring involved the sale of P-Com Italia's 36,000 square foot
facility in Tortona, Italy and a reduction in workforce of approximately ten
employees who were rehired by NORT. We received approximately $732,000 from the
sale of the facility, and our operating expenses are expected to decrease by
approximately $500,000 annually as a result of this strategy.
o On July 19, 2004, we effected a 1-for-30 reverse split of our common stock. At
the effective time of the reverse stock split, each 30 shares of our issued and
outstanding common stock were combined into one share of P-Com common stock.
o For a period of 15 days ending June 25, 2004, we temporarily lowered the
exercise price of our issued and outstanding Series A, B, and C-2 warrants to
$1.50 per share (the "Special Warrant Offer"). The exercise prices of the Series
A, B and C-2 warrants prior to the Special Warrant Offer, and following its
conclusion, are $3.60, $6.00, and $5.40, respectively. In order to exercise the
Series C-2 warrants at the reduced exercise price of $1.50 per share, the
holders of these warrants were required to exercise the same number of Series
C-1 warrants via a cashless exercise provision whereby the holder received one
share of P-Com common stock for every two Series C-1 warrants exercised. The
participating holders of the Series A and B warrants were allowed to exercise up
to one-half of their warrants at the reduced exercise price of $1.50 per share
if they also exercised the remaining half of their warrants via a cashless
exercise provision whereby the holder received one share of P-Com common stock
for every two warrants exercised (the "Special Warrant Offer"). In connection
with the Special Warrant Offer, we raised working capital of approximately $2.6
million.
1
o On September 17, 2004, we renewed our credit facility (the "Credit Facility")
with Silicon Valley Bank (the "Bank") through September 17, 2005. 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 $3.0 million borrowing line based on export
related inventories and receivables. The Credit Facility provides for cash
advances equal to 75% of eligible accounts receivable balances for both the EXIM
program and domestic lines, and up to $750,000 for eligible inventories (limited
to 25% of eligible EXIM accounts receivable), under the EXIM program. Advances
under the Credit Facility bear interest at the Bank's prime rate plus 3.5% per
annum. The Credit Facility is secured by all of our receivables, deposit
accounts, general intangibles, investment properties, inventories, cash,
property, plant and equipment. We also issued a $4.0 million secured promissory
note underlying the Credit Facility to the Bank. No amounts were outstanding
under the Credit Facility as of December 31, 2004.
o On November 3, 2004, we entered into a Note and Warrant Purchase Agreement
(the "Purchase Agreement") with a purchaser ("Purchaser") whereby the Purchaser
agreed to purchase debentures in the aggregate principal amount of up to
$5,000,000 (the "Notes") (the "Debenture Financing"). In addition, the Company
agreed to issue warrants to purchase in the aggregate up to 800,000 shares of
the Company's common stock. The warrants have an initial exercise price of $1.50
and a term of five years. The Purchase Agreement provided that the Notes and
warrants be issued in two closings. The first closing took place on November 26,
2004 and consisted of $3,300,000 principal amount of Notes. The Purchase
Agreement originally contemplated that the second closing would take place no
later than December 30, 2004. While no assurances can be given, the parties are
currently negotiating the conditions necessary to obtain the additional
$1,700,000 under the Purchase Agreement, in light of our deteriorating financial
condition and results from operations.
o On November 30, 2004, Agilent Financial Services ("Agilent") entered into an
agreement with us to restructure the $1,725,000 due Agilent on December 31,
2004. Under the terms of the agreement, we paid Agilent an initial payment of
$250,000 on December 1, 2004; and are required to pay monthly payments of
$92,187 for sixteen months, from January 1, 2005, up to and including April 1,
2006. In addition, we issued Agilent a warrant to purchase 178,571 shares of our
common stock. The warrant has an initial exercise price of $0.56 and a term of
five years.
Because the restructuring initiatives effected in 2004 are inadequate to return
P-Com to profitability given the current level of sales, we are actively engaged
in the development of a formal restructuring plan that will significantly
curtail current spending, and substantially reduce liabilities and operating and
other costs. The plan is anticipated to include the divestiture of certain
unprofitable product lines, which may include certain of our licensed wireless
products. We will, however, continue the sale of refurbished licensed products
in connection with our repair and maintenance business. The plan is subject to
the approval of the Company's Board of Directors, and is expected to be
presented for approval before the end of the first fiscal quarter of 2005.
2
FINANCIAL INFORMATION ABOUT PRODUCTS AND GEOGRAPHIC SEGMENTS
INFORMATION ABOUT OUR PRODUCTS
Our products consist of microwave radios for point - to - point, spread
spectrum, and point - to - multipoint networks. The contribution of each product
line to total sales was as follows:
YEAR ENDED DECEMBER 31,
PRODUCT LINE 2004 2003 2002
------------------------------------------------------------------------------
Point - to - Point 79% 79% 71%
Spread Spectrum 21% 19% 21%
Point - to - Multipoint -- 2% 8%
-------- ------- ---------
Total 100% 100% 100%
-------- ------- ---------
INFORMATION ABOUT OUR GEOGRAPHIC SEGMENTS
Because our products integrate into our customers' network configurations, we
follow a geographic approach to management of our segment information, rather
than a product approach. Information about our Geographic Segments can be found
in Note 9 to the Consolidated Financial Statements included in this Annual
Report.
Our sales by geographic segment for each year ended December 31, 2004 are as
follows (in thousands):
Sales 2004 2004 2003 2002
--------------------------------------------------------------------------------
North America ..................... 11% $ 2,579 $ 3,042 $ 2,949
United Kingdom .................... 23% 5,583 6,349 5,894
Continental Europe ................ 21% 5,178 3,693 4,487
Asia .............................. 14% 3,386 5,831 15,018
Other Geographic Regions .......... 31% 7,449 1,926 1,338
------- ------- ------- -------
100% $24,175 $20,841 $29,686
======= ======= ======= =======
NARRATIVE DESCRIPTION OF OUR BUSINESS
We currently develop, manufacture and market microwave radios for point - to -
point, spread spectrum and point - to - multipoint applications for
telecommunications networks worldwide. Cellular and personal communications
service providers employ our 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 our 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 our 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.
INDUSTRY BACKGROUND
During the 1990s, the demand for additional multimedia infrastructure, due in
particular to 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. Our broadband wireless
products are targeted to add value to the integrated service providers and
wireless telephone operators globally. Our products are designed to be frequency
specific by country, if required.
3
The broadband wireless market developed into two commercially recognized
architectures for voice and data transmission: point - to - point and point - to
- multipoint. We have developed and sold equipment in commercial quantities for
both formats. We do not provide products for wireline sub-sectors of the
telecommunications market, including wireline systems and cable systems. Since
2000, system build-out has suffered a significant slowdown in the United States,
Latin America, and European telecommunications markets. Demand for wireless
broadband products remains deeply depressed relative to the sales levels
experienced prior to 2000. We cannot ensure the proliferation of our products or
guarantee a given market share of the global telecommunications equipment market
in future years. Additionally, there are competing technologies that 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 has 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 users' 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 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 the preferred choice because it is
both 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 have opened their markets to competitive network
service providers. We believe 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.
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 limited by the local access portion
of their end-to-end connection. To overcome such limitations in a quick and
efficient manner, we believe a broadband wireless solution is attractive to
incumbent and competitive carriers alike because the local access speed
restrictions are eliminated with broadband wireless equipment.
4
THE P-COM STRATEGY
Our current strategy is to be a leading worldwide supplier of high-performance
point - to - point licensed band and spread spectrum point - to - point and
point - to - multipoint license - exempt band wireless access equipment. To
accomplish this objective, we intend to:
o Focus on point - to - point licensed and spread spectrum point -to - point and
point-to-multipoint microwave markets. We design products specifically for the
millimeter wave (licensed band) and spread spectrum (unlicensed band) microwave
frequency bands. We have designed its core architecture to optimize the systems
for operation at millimeter and microwave frequencies.
o Continue expansion of our identified global market opportunities. We have met
the standards established by the European Telecommunications Standards Institute
("ETSI") and achieved regulatory approval for 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. We continue to seek approval
in other countries as the markets develop and the need arises. We maintain
international sales and/or support offices in Italy, Brazil, China, Singapore
and the United Kingdom. In addition, we have formed a joint venture with Nanjing
Putian, one of China's largest manufacturers and suppliers of telecom equipment,
to market our licensed and unlicensed products to large mobile carriers and
corporate customers in China.
o Build and sustain manufacturing cost advantage. We design our system
architecture to reduce the number of components incorporated into each system,
thereby allowing for the use of common components and "building blocks" across
the range of our products. This approach reduces our manufacturing costs
enabling us to take advantage of volume purchases and a standardized
manufacturing process.
o Outsource manufacturing to reduce costs. Beginning in January 2004, we
outsourced the manufacture of the SPEEDLAN product to a contract manufacturer.
We also entered into an arrangement to outsource manufacturing of our point - to
- point products. Utilization of turnkey contract manufacturers eliminates
expensive in-house manufacturing assembly, and provides us with the ability to
scale up or down as market conditions dictate.
o Source innovative products from third party providers. During 2004, we
launched Encore S and Encore SX, which were the outcome of a strategic
relationship that we forged with a partner that provides us with state of the
art, high capacity bandwidth delivery technology at the lowest cost in the
industry. We currently intend to continue with this strategy leading up to the
planned introduction of new products beginning in the third quarter of 2005.
o Position our products for the anticipated convergence of carrier class and
unlicensed technology. We believe that our technology and experience in both the
licensed and unlicensed markets will allow us to rapidly develop network
solutions for the anticipated convergence of carrier grade and unlicensed
technology.
o Leverage and maintain software leadership. We differentiate our 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.
Our current strategy may be affected as a result of management's restructuring
plan, which is currently being developed. The plan is anticipated to include the
divestiture of certain unprofitable product lines, which may include certain of
our licensed wireless products. We will, however, continue the sale of
refurbished licensed products in connection with our repair and maintenance
business. This plan may also include the cessation of further development of new
licensed spectrum products. The plan is subject to the approval of the Company's
Board of Directors, and is expected to be presented for approval before the end
of the first fiscal quarter of 2005.
5
RANGE OF PRODUCT CHOICES
Overview. We currently offer access providers around the world a range of
wireless systems that encompass point - to - point wireless broadband, and point
- to - point and point - to - multipoint 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 backhaul.
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 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, neither our competitors' or our point
- to - multipoint products, operating in the high bandwidth licensed spectrum,
have gained sufficient market share in the wireless broadband market, and it is
unclear when sales of these products will materialize, if ever. However, the
unlicensed point - to - multipoint market remains strong, especially with the
recent popularity of wireless Internet products.
The greater the number of frequencies provided for by the wireless broadband
manufacturer, the greater the manufacturer's potential market penetration. Our
systems utilize a common architecture in the millimeter wave and spread spectrum
microwave frequencies, including 2.4 GHz, 5.7 GHz, 6/7 GHz, 13 GHz, 14 GHz, 15
GHz, 18 GHz, 23 GHz, 24 GHz, 26 GHz, 28 GHz, 31 GHz, 38 GHz and 50 GHz.
New Products. We currently intend to introduce two new licensed spectrum
products beginning in the third quarter of 2005 - the Encore CP and XP. The
Encore CP is aimed at the cost sensitive low and medium capacity high volume
emerging markets, including China and India where low cost and robust
performance drive the purchase decisions. The Encore XP is designed as a cost
effective, feature-rich product for applications requiring spectrally efficient
systems with medium to high band width, dynamic band width allocation, and an
Ethernet port.
Management is currently evaluating a restructuring plan that may include the
divestiture of certain unprofitable product lines, which may include certain of
our licensed wireless products. This plan may also include the cessation of
further development of new licensed spectrum products. The plan is subject to
the approval of the Company's Board of Directors, and is expected to be
presented for approval before the end of the first fiscal quarter of 2005.
SPEEDLAN. We offer additional wireless broadband equipment to serve the
enterprise market with our unlicensed spectrum SPEEDLAN product line, which
currently consists of the SPEEDLAN 9100 and 9200. The SPEEDLAN products are high
performance wireless routers that provide the wireless connectivity for local
area networks utilizing mesh, point-to-point and point-to-multipoint topologies.
Introduced in 2002, SPEEDLAN 9100 was the very first mesh product to market. The
mesh topology creates networks that use multi-hop connections to transmit IP
packets between the initiation and termination points. The ability to use
different paths between any two points, based on the detected conditions, allows
path redundancy and, in essence, a self-healing wireless network.
Our SPEEDLAN 9100 utilizes 802.11 standards to communicate at 11 Mbps per second
in the 2.4 GHz band. The SPEEDLAN 9200, released in September 2004, also
utilizes 802.11 standards to communicate at 54 Mbps in both the 5.8 GHz and 2.4
6
GHz bands. The SPEEDLAN 9200 utilizes near line-of-site Orthogonal Frequency
Division Multiplexing (OFDM) technology that, in conjunction with the
self-healing mesh topology, creates a highly reliable and available wireless
network.
Both the SPEEDLAN 9100 and 9200 models are outdoor units designed for the most
severe environmental conditions. Both models offer outstanding security by using
AES encryption for communication between units.
Our targeted markets are security, surveillance, wireless Internet Service
Providers and other private networks for a myriad of IP-based applications. Our
products are sold primarily through systems integrators and value-added
resellers.
We currently intend to broaden the SPEEDLAN product offerings with additional
features and capabilities for new markets, including developing a next
generation of fixed wireless broadband products that will continue to be
standards based.
TECHNOLOGY
Our technological approach to point - to - point and spread spectrum digital
microwave radio systems is different from conventional approaches. Through the
use of proprietary designs, we can quickly produce highly integrated,
feature-rich 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.
Our products are optimized for streamlined components, immunity to noise and
interference, ease of high-volume manufacturing and installation. Yet, our
radios contain superior features. Equally important, because critical components
and building blocks perform common functions across different product lines, our
philosophy is to design sections of each radio in a way that enables the designs
to be reused with little or no modification in a different product line.
Our point - to - point and certain of our 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 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
with the Outdoor Unit via proprietary technology. Our SPEEDLAN product family
consists of an Outdoor Unit only.
Software embedded in our systems allows the user to easily configure and adjust
system settings such as frequency, power, and capacity without manual tuning and
mechanical adjustments. Software provided with our systems includes PC-based
sophisticated diagnostics, maintenance, network management, and system
configuration tools.
Competing systems also employ the Indoor Unit/Outdoor Unit concept but our
products are differentiated by how we implement 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.
We believe that our spread spectrum products are industry leaders, especially
with our latest product release of the SPEEDLAN 9002 in September 2004, which
delivers 54 Mbps per second signaling rate at 5.8 GHz and 2.4 GHz utilizing mesh
networking, non-line of site OFDM modulation, and mobility.
MANUFACTURING AND TESTING
Our Campbell, California facility received its initial ISO 9001 registration in
December 1993, and maintains a current certification. Our ISO 9001 registration
for the United Kingdom sales and customer support facility was received in 1996
and it has current certifications; our ISO 9001 registration for the Tortona
facility in Italy was first received in 1996 and it has current certification.
Our production facility in Melbourne, Florida was ISO 9001 certified in 1999. On
December 15, 2003, we successfully upgraded to ISO 9001:2000.
7
Once a system reaches commercial status we contract with one or more of several
turnkey manufacturers to build radio system units in commercial quantities. For
example, in February 2004, we entered into an agreement with Velocitech to
provide full turnkey production of our SPEEDLAN family of products. In addition,
we entered into an agreement with Able Electronics Corporation to provide full
turnkey production of our Encore product line in the second quarter of 2004.
Utilization of these manufacturers relieves us of costly investments in
manufacturing facilities, equipment, and parts inventories. This strategy
enables us to quickly scale to meet varying customer demands and changes in
technology.
We test and manufacture certain of our systems in our California, Italy and
Florida locations prior to shipment to our customers. Testing includes the
complete Indoor-Outdoor unit assembly, thereby providing customers with a
completely tested end-to-end system.
Our 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 us 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 our
manufacturing facilities.
SALES CHANNELS AND OUR CUSTOMERS
Our wireless access systems are sold internationally and domestically directly
through our own sales force, as well as through strategic partners,
distributors, systems integrators, and original equipment manufacturers.
For the years ended December 31, 2004, 2003, and 2002, our significant
customers, and their respective percent contribution to our sales are as
follows:
Customer 2004 2003 2002
---------------------------------------------------------------------------
MynTahl Corporation -- 13% 14%
Orange Personal Communications System 13% 18% 11%
Vodafone (Mannesmann) 15% 13% 7%
T-Mobile 12% 12% 4%
TelCel 25% 7% --
Total 65% 63% 36%
During 2004, sales to TelCel and Vodafone accounted for 25% and 15% of our total
sales, respectively. We currently anticipate that sales to TelCel will decrease
significantly in 2005 relative to the sales levels achieved in 2004. We also
expect that sales to a relatively small number of customers will continue to
account for a high percentage of our sales in the foreseeable future. Although
the composition of our 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 our
business, financial condition, and results of operations. Our ability to
maintain or increase our sales in the future will depend, in part, upon our
ability to obtain orders from new customers as well as the financial condition
and success of our customers, and the economy in general.
Our primarily operations are located in the United States, with contract
manufacturing and/or sales support operations in Italy, the United Kingdom,
Singapore, and China. We develop, manufacture and/or market network access
systems for use in the worldwide wireless telecommunications market. We are in
the process of developing additional sales channels into the China market,
including the recently formed joint venture with Nanjing Putian.
RESEARCH AND DEVELOPMENT
We have a research and development program to enhance our existing systems and
related software tools and to introduce new systems. We invested approximately
$5.0 million, $6.1 million and $12.7 million in 2004, 2003, and 2002,
respectively, in research and development efforts. We expense research and
development costs as they are incurred. We expect to continue to invest material
resources in research and development to maintain superior features creating
value for its customers.
8
Our research and development efforts can be classified into two distinct
efforts: (1) increasing the functionality of our point - to - point, point - to
-multipoint and spread spectrum radio systems under development by adding
additional frequencies and capacities to our product lineup, our network
management system software offering, and developing other advancements to radio
systems, and (2) integrating new functionality to extend the reach of our
products into the customers' networks, such as access technology that allows the
customer to manage telecommunications services at its site and to integrate
voice, data, video and facsimile into one offering. Our 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.
Our ability to be competitive in this market will depend in significant part
upon our 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. We have 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. Our
Product Qualification / Quality Assurance structure ensures product acceptance
in the marketplace before and after commencement of commercial shipments.
Management is currently evaluating a restructuring plan that may include the
cessation of further development of new licensed spectrum products. The plan is
subject to the approval of the Company's Board of Directors, and is expected to
be presented for approval before the end of the first fiscal quarter of 2005.
SALES AND MARKETING
Our sales and marketing efforts are directed from our corporate offices in
Campbell, California. We have sales operations and customer support facilities
in the United Kingdom and Italy that serve the European market, and in China and
Singapore for the Asian markets. Internationally, we use a variety of sales
channels, including system integrators, original equipment manufacturers,
dealers, and local agents. We also sell directly to our customers. We have
established agent relationships in numerous other countries in the Asia/Pacific
region, the Middle East, Latin America, and Europe.
Typically, our sales process commences with the solicitation of bids by
prospective customers. If selected to proceed further, we may provide systems
for incorporation into system trials, or we may proceed directly to contract
negotiations. We can not record revenue until system trials are successfully
completed, and we then negotiate a contract with the customer to set technical
and commercial terms of sale. These terms of sale govern the purchase orders
issued by the customer as the network is deployed and/or enhanced.
Due to the complexity of our radio systems, a high level of technical
sophistication is required on the part of our sales and marketing personnel. In
addition, we believe that post-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. Our customer service efforts are supplemented by our
system providers.
COMPETITION
The worldwide wireless communications market is extremely competitive. Our
wireless radio systems compete with other wireless telecommunications products
and alternative telecommunications transmission media, including copper and
fiber optic cable. We have experienced competition worldwide from a number of
leading telecommunications companies that offer a variety of competitive
products and services, including Alcatel Network Systems, Alvarion, Stratex
Networks, Ericsson, Fresnel, Harris-Farinon Division, NEC, Nokia, Nortel, Sagem,
SIAE, and Proxim. Many of these companies have substantially greater installed
bases, financial resources and production, marketing, manufacturing, engineering
and other capabilities than P-Com.
9
We may also face competition in the future from new market entrants offering
competing technologies. Our operating results 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 manufacture their own radio
systems. Customers may choose not to rely on, or expand, their reliance on us as
an external source of supply for their radio systems. Recently, some of our
competitors have announced the introduction of competitive products, including
related software tools, and the acquisition of other competitors and competitive
technologies.
Competition is especially intense during the current period of depressed demand
for telecommunications infrastructure equipment relative to the demand
experienced prior to 2000. We expect our competitors to continue to improve the
performance and lower the price of their current products and to introduce new
products or new technologies that provide added functionality and other
features. New product introductions and enhancements by our competitors has
caused a significant decline in our sales or loss of market acceptance of our
systems, and in certain cases, has made our systems or technologies obsolete or
noncompetitive. We have experienced significant price competition and expect
price competition to intensify in view of the continued market downturn. This
has adversely affected our business, financial condition and results of
operations. We believe that our ability to continue to compete successfully is
based on factors both within and outside of our control. Timing of new product
line introductions, performance characteristics of our equipment and the ability
of our customers to be successful all play key roles. In order to remain
competitive, we will be required to continue to expend significant resources on
new product development, cost reduction and enhancements.
The principal elements of competition in our market, and the basis upon which
customers may select our systems, include price, performance, software
functionality, and ability to meet delivery requirements and customer service
and support.
GOVERNMENT REGULATION
Radio telecommunications are subject to extensive regulation by the United
States and foreign governmental agencies and international treaties. Our
products 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 spectra has inhibited growth of wireless
telecommunications networks.
In order for us to operate within a specific country's jurisdiction, we must
obtain regulatory approval for our systems and comply with different regulations
in each jurisdiction. 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 installation of communications systems, which in turn may
have prevented or delayed the recognition of the sale of our systems.
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 us to modify our products and incur substantial costs and delays
to comply with these time-consuming regulations and changes. In addition, we are
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, we could experience delays in orders for our
products. Failure by the regulatory authorities to allocate suitable frequency
spectrum could adversely affect our business, financial condition and results of
operations.
The regulatory environment in which we operate is subject to significant change.
Regulatory changes, which are affected by political, economic and technical
factors, could significantly impact our operations by restricting the
development efforts of our 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 our business and results of operations. We might modify our
systems in order to operate in compliance with applicable regulations. These
modifications could be costly and time consuming to implement.
10
INTELLECTUAL PROPERTY
We rely on our ability to obtain and enforce a combination of patents,
trademarks, trade secrets, copyrights, and a variety of other measures to
protect our intellectual property rights, including patents and copyrights on
our proprietary software. We generally enter into confidentiality and
nondisclosure agreements with service providers, customers and others, and limit
access to and distribution of our proprietary technology. We also enter into
software license agreements with our customers and others. However, these
measures may not provide adequate protection for our trade secrets and other
proprietary information. Disputes over the ownership of our intellectual
property rights may still arise and our trade secrets and proprietary technology
may otherwise become known or be independently developed by competitors. Any
patent we own may be invalidated, circumvented or challenged, the rights granted
thereunder may not provide competitive advantages or any of our pending or
future patent applications may not be issued with the scope of the claims
sought, if at all. Furthermore, others may develop similar products or software,
duplicate our products or software or design around the patents, or third
parties may assert intellectual property infringement claims against us. In
addition, foreign intellectual property laws may not adequately protect our
intellectual property rights abroad. Failure to protect our proprietary rights
could adversely affect our business, financial condition, and results of
operations.
Litigation may be necessary to enforce our patents, copyrights, and other
intellectual property rights, to protect our trade secrets, to determine the
validity of and scope of the proprietary rights of others or to defend against
claims of infringement or invalidity. This litigation could result in
substantial costs and diversion of resources and could adversely affect our
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 our business, financial condition, and results of operations.
If any claims or actions are asserted against us, we 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 we decide
to litigate these claims, the litigation could be extremely expensive and time
consuming and could adversely affect our business, financial condition and
results of operations, regardless of the outcome of the litigation.
EMPLOYEES
As of March 1, 2005, we employed a total of 125 employees, including 47 in
Operations, 28 in Research and Development, 32 in Sales and Marketing and 18 in
Administration. We believe that future success will depend in large part on our
ability to attract and retain highly skilled employees. No employees are
represented by a labor union, and we have not experienced any work stoppages.
ITEM 2. PROPERTIES
Square
Location of Leased Facility Functions Footage Date Lease Expires
------------------------------------------------------------------------------------------------
Headquarters, Campbell, CA Administration/Customer
Support/Sales/Engineering;
Manufacturing 61,000 November 2005
Redditch, England Warehouse/Operations 6,800 September 2007
Melbourne, FL Research/Development/Warehouse 8,697 August 2005
Beijing, China Sales/Customer Support 3,180 July 2005
Sarasota, FL Sales/Customer Support 16,522 November 2015
Shanghai, China Sales/Customer Support 1,115 August 2004(1)
Tortona, Italy Research/Development/Warehouse 7,136 July 2010
(1)This lease currently continues on a month-to-month basis.
11
ITEM 3. LEGAL PROCEEDINGS
On June 20, 2003, Agilent Financial Services, Inc. ("Agilent") filed a complaint
against us 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. On June 27, 2003, the parties
filed a Stipulation for Entry of Judgment and Proposed Order of Dismissal of
Action Without Prejudice, which was amended on November 30, 2004. Pursuant to
the amended Stipulation, we paid Agilent $250,000 on December 1, 2004, and are
required to make monthly payments of $92,187.50 for sixteen months, from January
1, 2005, up to and including April 1, 2006. In addition, on the earlier of (i)
May 1, 2006 or (ii) within thirty (30) days of full payment to Agilent of all
amounts due Agilent under the amended Stipulation, we are required to pay
Agilent any and all interest that has accrued pursuant to the Stipulation to
Amend. Interest shall accrue on the unpaid balance at the rate of 10.25% per
annum from December 1, 2004. We also issued a warrant to purchase 178,571 shares
of Common Stock.
In June 2000, two former consultants to P-Com Italia S.p.A. filed a complaint
against P-Com Italia in the Civil Court of Rome, Italy seeking payment of
certain consulting fees allegedly due the consultants totaling approximately
$615,000. The Civil Court of Rome has appointed a technical consultant in order
to determine the merit of certain claims made by the consultants. We believe
that the claims are without merit and, while no assurances can be given, that
the claims will be rejected.
In the event we are unable to satisfactorily resolve these and other proceedings
that might arise, our financial position and results of operations may be
materially affected.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Stockholders held on October 8, 2004, the following
individuals were elected to the Board of Directors:
VOTES FOR VOTES WITHHELD
---------- --------------
George P. Roberts 11,318,884 267,366
Brian T. Josling 11,320,254 265,747
Messrs. Fred R. Fromm's and R. Craig Roos' term of office as a director
continues until the 2005 Annual Meeting of Stockholders, and Mr. Sam Smookler's
term of office as a director continues until the 2006 Annual Meeting of
Stockholders. Mr. Josling resigned from the Board of Directors on February 28,
2005.
The following proposals were also approved at our Annual Meeting:
Shares Voted Shares Voted Shares Broker
For Against Abstaining Non-Votes
------------ ------------ ---------- ---------
Approve the proposal to amend P-Com's Certificate of
Incorporation to increase the number of shares of authorized
Common Stock from 23,333,333 shares to 35,000,000 shares 11,251,306 316,185 18,758
Approve the proposal to remove certain limitations on the
exercise of P-Com's outstanding warrants 7,684,563 242,517 19,855 3,639,315
Approve the proposal to adopt P-Com's 2004 Equity Incentive Plan
which shall replace P-Com's 1995 Stock Option/Stock Issuance Plan 7,379,162 446,979 123,515 3,636,593
Approve the appointment of Aidman, Piser &Company as independent
accountants for the fiscal year ended December 31, 2004 11,276,130 194,549 115,571
Approve the proposal granting P-Com's management discretionary
authority to adjourn the annual meeting to a date(s) not later
than October 31, 2004, to solicit additional proxies in favor
of the proposals listed above 11,126,536 347,621 66,099
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock was quoted in the Nasdaq SmallCap Market under the symbol PCOM,
until March 10, 2003. Because we did not meet certain listing requirements,
including a minimum bid price of $1.00 per share, our common stock was delisted
from the SmallCap Market and now trades on the OTC Bulletin Board operated by
the National Association of Securities Dealers, Inc. This status change could
result in a less liquid market available for existing and potential stockholders
to trade shares of our stock and could ultimately further depress the trading
price of our common stock. In addition, our common stock is subject to the
Securities Exchange Commission's ("SEC") "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 our 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. Effective July 19, 2004, we effected a thirty for one reverse
stock split. Effective as of July 19, 2004, our common stock trades under the
symbol PCMC on the OTC Bulletin Board.
The following table sets forth the range of high and low sale prices of our
common stock, as reported on the Nasdaq SmallCap Market and OTC Bulletin Board
for each quarter in 2004 and 2003. These quotations reflect inter-dealer prices,
without retail mark-up, markdown or commission and may not necessarily represent
actual transactions. All price numbers have been adjusted to reflect the reverse
stock split effective July 19, 2004.
As of March 4, 2005, there were 824 stockholders of record of P-Com's common
stock.
PRICE RANGE OF COMMON STOCK
---------------------------
HIGH LOW
-------- --------
Year Ended December 31, 2003:
First Quarter $ 9.30 $ 2.70
Second Quarter 3.90 1.80
Third Quarter 10.20 2.70
Fourth Quarter 8.40 4.20
Year Ended December 31, 2004:
First Quarter $ 6.00 $ 1.80
Second Quarter 2.31 1.17
Third Quarter 1.26 0.63
Fourth Quarter 0.66 0.38
RECENT SALES OF UNREGISTERED SECURITIES
In November 2004, we issued warrants to purchase 528,000 shares of our common
stock to SDS Capital SPC Ltd, in connection with the Debenture Financing. Also,
in November 2004, we issued warrants to purchase 178,571 shares of our common
stock to Agilent Financial Services in connection with the restructuring of a
capital lease obligation.
13
No underwriters were involved in the foregoing stock transactions. The
securities issued in connection with each of the above financings were issued
private transactions, in reliance on an exemption from registration under
Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D
promulgated thereunder, because each offering was a non-public offering to
accredited investors.
DIVIDENDS
To date, we have not paid any cash dividends on shares of our common stock or
Series C Preferred Stock. Holders of Series C Preferred Stock are entitled to
receive, out of legally available funds, dividends at the rate of 6% per annum
beginning on the second anniversary of their date of issuance, or November 2004
with respect to the first tranche, and December 2004 with respect to the second
and final tranche. We do not anticipate that funds will be legally available to
make the required dividend payments in the foreseeable future, and such
obligations therefore will accrue in arrears until such time as we have legally
available funds to make the required distributions.
EQUITY COMPENSATION PLANS
The following table sets forth the securities reserved for issuance under equity
compensation plans at December 31, 2004:
Number of securities Number of securities remaining
to be issued upon Weighted-average available for future issuance
exercise of exercise price of under equity compensation
outstanding options, outstanding options plans (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
Equity compensation plans approved by
security holders 1,167,854 $23.30 1,792,929
Equity compensation plans not approved
by security holders 2,702,539 $ 4.44 N/A
Total 3,870,393 $10.13 1,792,929
In December 2004, the Financial Accounting Standards Board (FASB) revised its
Statements on Financial Accounting Standards, SFAS No. 123 ("SFAS No. 123R"),
Accounting for Share Based Payments. The revision establishes standards for the
accounting of transactions in which an entity exchanges its equity instruments
for employee services in share-based payment transactions. The revised statement
will require us to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the
award. We have historically used the intrinsic approach to measurement of
compensation. That fair value cost is to be recognized over the period during
which the employee is required to provide service in exchange for the award. The
provisions of the revised statement are effective for our financial statements
issued for the interim reporting period beginning with September 30, 2005. We
are currently evaluating the methodology for adoption on the impending effective
date and the transition charges, if any. Since we have not issued material
options in recent years, we do not expect this Standard to have a material
impact on our financial condition or results of operation.
ITEM 6. SELECTED FINANCIAL DATA
Our selected financial data for the years ended December 31, 2004, 2003 and 2002
and as of December 31, 2004 and 2003, set forth below, has been derived from our
audited financial statements. This information should be read in conjunction
with the Notes to Selected Financial Data and our "Consolidated Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this report.
14
STATEMENT OF OPERATIONS DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
Sales $ 24,175 $ 20,841 $ 29,686 $ 73,236 $ 183,606
Cost of sales (1) 18,720 20,604 30,777 94,890 160,965
--------- --------- --------- --------- ---------
Gross profit (loss) 5,455 237 (1,091) (21,654) 22,641
Operating expenses:
Research and development 4,976 6,099 12,745 19,800 20,241
Selling and marketing 6,772 3,557 6,621 7,636 11,371
General and administrative (2) 4,552 5,607 10,750 26,070 18,181
Goodwill impairment and amortization (3) -- -- 11,409 8,034 19,550
Restructuring and other charges (4) -- 3,712 -- -- --
--------- --------- --------- --------- ---------
Total operating expenses 16,300 18,975 41,525 61,540 69,343
--------- --------- --------- --------- ---------
Income (loss) from operations (10,845) (18,738) (42,616) (83,194) (46,702)
Interest expense (687) (2,249) (2,457) (1,946) (4,629)
Gain on sale of a subsidiary (5) -- -- -- 9,814 --
Gain on extinguishment of debts -- 6,499 1,393 -- 1,890
Other income (expense), net (6) 8,252 3,739 (1,312) (619) (3,736)
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes,
and cumulative effect of change
in accounting principle (3,280) (10,749) (44,992) (75,945) (53,177)
Provision (benefit) for income
taxes (7) -- -- (470) (618) 10,917
--------- --------- --------- --------- ---------
Loss from continuing
operations before cumulative
effect of change in accounting principle (3,280) (10,749) (44,522) (75,327) (64,094)
Discontinued operations (8:
Loss from operations (40) (581) (4,284) (211) (4,321)
Loss on disposal -- (1,556) -- -- --
--------- --------- --------- --------- ---------
(3,320) (12,886) (48,806) (75,538) (68,415)
Cumulative effect of changes in
accounting principles (9) -- -- (5,500) -- (1,534)
--------- --------- --------- --------- ---------
Net loss (3,320) (12,886) (54,306) (75,538) (69,949)
--------- --------- --------- --------- ---------
Preferred stock accretions (10) (2,392) (1,521) -- -- --
Preferred stock dividends (156) -- -- -- --
--------- --------- --------- --------- ---------
Net loss attributable to common
stockholders $ (5,868) $ (14,407) $ (54,306) $ (75,538) $ (69,949)
========= ========= ========= ========= =========
PER SHARE DATA (11):
Basic and diluted (loss) from continuing
operations per common share $ (0.56) $ (6.80) $ (52.28) $ (136.54) $ (123.15)
Basic and diluted (loss) from discontinued
operations per common share (0.00) (1.18) (5.03) (0.38) (8.30)
Cumulative effect changes in
accounting principles -- -- (6.46) -- (2.95)
--------- --------- --------- --------- ---------
Basic and diluted net loss per
common share $ (0.56) $ (7.98) $ (63.77) $ (136.92) $ (134.40)
15
BALANCE SHEET DATA (AMOUNTS IN THOUSANDS)
2004 2003 2002 2001 2000
----------------------------------------------------------
Cash and cash equivalents $ 2,280 $ 6,185 $ 1,616 $ 7,103 $ 27,541
========= ========= ========= ========= =========
Working capital 1,283 (2,075) (2,356) (10,185) 76,823
========= ========= ========= ========= =========
Total assets 25,423 34,565 35,723 92,234 216,219
========= ========= ========= ========= =========
Long-term debt -- -- 24,488 769 30,290
========= ========= ========= ========= =========
Redeemable preferred stock (10) 6,106 4,231 -- -- --
========= ========= ========= ========= =========
Accumulated deficit (368,885) (363,174) (348,766) (294,460) (218,922)
========= ========= ========= ========= =========
Stockholders' equity (deficit) $ 7,508 $ 9,753 $ (15,350) $ 24,256 $ 95,247
========= ========= ========= ========= =========
NOTES TO SELECTED FINANCIAL DATA
(1) In 2004, this caption reflects charges of approximately $1.1 million for
contractual losses and obsolescence of uncontracted inventory purchases. In
2003, this caption reflects charges of approximately $3.4 million related to
excess and obsolete inventory. In 2002, this caption reflects charges of
approximately $5.8 million related to excess and obsolete inventory. In 2001,
this caption reflects charges of approximately $30 million related to excess
inventory and inventory purchase commitments. In 2000, this caption reflects
charges of $21.7 million related to excess inventory and purchase commitments.
(2) In 2001, this caption reflects a $11.6 million charge for bad debt arising
from the bankruptcy of a customer.
(3) In 2002, 2001 and 2000, this caption reflects impairment and amortization
charges made to our goodwill carrying value of $11.4 million, $8.0 million and
$19.6 million, respectively.
(4) In 2003, this caption reflects restructuring charges that were recorded due
to exiting certain product lines. Restructuring charges were expensed when the
loss was estimable and incurred.
(5) In 2001, this caption reflects a realized gain on the sale of our RT Masts
subsidiary.
(6) In 2004, this caption reflects a restructuring gain of $7.5 million related
to a contract settlement.
(7) In 2000, this caption includes a $9.9 million charge to income tax expense,
representing an increase in the valuation allowance against the carrying value
of deferred tax assets.
(8) We sold our PCNS subsidiary in 2003, which resulted in a loss of $1.5
million and accounted for the transaction as a discontinued operation. In
accordance with applicable accounting standards, we restated our financial
statements for all periods presented to exclude the operations of PCNS from
continuing operations for all periods presented.
(9) In 2002, this caption reflects a $5.5 million charge representing the
cumulative effect of our change in accounting principle for accounting for
goodwill. In 2002, this caption reflects a non-cash charge of approximately $1.5
million for the cumulative effect of the accounting change made to comply with
SEC revenue recognition standards contained in Staff Accounting Bulletin
SAB.101.
(10) The carrying value of our redeemable preferred stock is discounted for the
allocation of proceeds to warrants that were issued concurrent with the sale of
redeemable preferred stock and beneficial conversion features embedded in the
convertible instrument. We are accreting the redeemable preferred stock to its
redemption value through periodic accretions that increase preferred stock and
decrease retained earnings. We are required to display preferred stock
accretions as an increase to loss applicable to common stockholders.
(11) The per share amounts have been restated to give effect to a one-for-30
reverse stock split on July 19, 2004. The numerator for calculation of net loss
per common share from continuing operations is our net loss from continuing
16
operations for the respective period, less preferred stock dividends and
accretions. The numerator for the calculation of net loss per common share from
discontinued operations is our net loss from discontinued operations. The
numerator for calculation of the per common share effect of the cumulative
effects of accounting changes is the charge associated with the change in
accounting principle. In all instances, the denominator, weighted average common
shares outstanding, does not include stock options with an exercise price that
exceeds the average fair market value of the underlying Common Stock or other
dilutive securities because the effect would be anti-dilutive.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations contains forward-looking statements, which involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth in the section entitled "Risk Factors" beginning on page 28 of
this Annual Report on Form 10-K.
OVERVIEW
We currently supply broadband wireless equipment and services for use in
telecommunications networks. We currently ship 2.4 GHz and 5.8 GHz spread
spectrum (unlicensed) radio systems, as well as 7 GHz, 13 GHz, 14 GHz, 15 GHz,
18 GHz, 23 GHz, 26 GHz, and 38 GHz point-to-point radio systems. In the first
quarter of 2003, we decided to exit the services business. Accordingly, this
business is reported as a discontinued operation.
Summary of Operations.
We have incurred substantial losses in recent years. During the years ended
December 31, 2004, 2003, and 2002, we recorded net losses from continuing
operations of ($3.3) million, ($10.7) million, and ($44.9) million,
respectively. While we achieved revenue growth in the year ended December 31,
2004 compared to the year ended December 31, 2003, lower average selling prices
have continued to impact our operating results in 2004 compared to 2003 and
prior periods. As a result, we continued to reduce operating and other costs
throughout 2004. For example, in the second quarter of 2004, we restructured our
Italian operations conducted by P-Com Italia, S.p.A. Under the restructuring
plan, certain refurbishment operations have been outsourced to NORT S.r.L, an
Italian third-party contract manufacturer. The outsourcing arrangement is in
addition to arrangements to outsource manufacturing of our point - to - point
and spread spectrum products entered into in the first quarter of 2004, which
resulted in lower costs of manufacturing those product lines.
The continued curtailments in capital spending among telecommunication carriers
in the United States, Europe, and many parts of Asia and Latin America
countries, together with our customer concentration, and the intense competition
from leading telecommunications equipment and technology suppliers, has resulted
in lower average selling prices. As a result, it is uncertain whether we will be
able to achieve sales volumes for certain of our point - to - point products in
2005 necessary to justify continued development of these products. Because of
this uncertainty, management is currently evaluating whether to continue to
support the development of these products. See Restructuring Activities below.
In the interim, management is focused on increasing sales of our unlicensed
products and certain of our higher margin license products (including
refurbished licensed products), and strengthening our relationship with third
party product providers. In the event that we are unable to materially increase
sales as a result of these efforts, and in the absence of a material
restructuring of our product lines, we will continue to incur substantial net
operating losses.
Summary of Liquidity and Capital Resources.
We used ($9.1) million, ($5.9) million and ($14.5) million cash, respectively,
in supporting our operating activities during the years ended December31, 2004,
2003 and 2002, respectively. Our financing activities generated $4.7 million,
$11.9 million and $8.0 million during the years ended December 31, 2004, 2003
and 2002, respectively. Based upon current internal projections at current
operating levels, and taking account of current working capital, we will have a
cash shortfall of approximately $4.0 million in our operations during the year
ended December 31, 2005. In addition, we estimate that our current cash reserves
will be exhausted by the second quarter of the year ended December 31, 2005.
There are currently no committed funding arrangements to support this projected
cash shortfall. Our projected sources of working capital that were utilized in
our operating model includes the following:
o We have an unused $4.0 million line of credit with Silicon Valley Bank that
expires in September 2005. This Credit Facility has significant terms and
conditions that will limit our ability to draw funds. Available borrowing under
the Credit Facility is based on our accounts receivable. At December 31, 2004,
available borrowings under the Credit Facility were approximately $1.8 million,
and are declining.
18
o We have an outstanding commitment for $1.7 million in debenture financing,
which, according to the original terms was due to us by December 31, 2004. We
are currently negotiating the conditions necessary to obtain the $1.7 million
financing, in light of our deteriorating financial condition and results of
operations. There are no assurances that we will receive these funds.
Our ability to continue as a going concern for a reasonable period at current
operating levels is dependent upon acquiring additional cash through financing
arrangements. While we are actively seeking additional equity and/or debt
financing, there are currently no commitments. There can be no assurances that
any additional financing will be available on acceptable terms, if at all.
Accordingly, we are actively engaged in the development of a formal
restructuring plan that will significantly curtail current spending, and
substantially reduce liabilities and operating and other costs. The plan is
subject to the approval of the Company's Board of Directors, and is expected to
be presented for approval before the end of the first fiscal quarter of 2005.
See Restructuring Activities below.
ESTIMATES AND CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of out financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. We evaluate our estimates frequently. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies are significant in the
preparation of our consolidated financial statements:
Revenue Recognition
Revenue from product sales is recognized upon transfer of title and risk of
loss, which is upon shipment of the product, provided no significant obligations
remain and collection is probable. Revenue from out-of-warranty repair is
recognized upon replacement of the defective unit with a repaired unit to the
customers. Provisions for estimated warranty repairs, returns and other
allowances are recorded at the time revenue is recognized.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses on customer
accounts. We evaluate our allowance for doubtful accounts based on the aging of
our accounts receivable, the financial condition of our customers and their
payment history, our historical write-off experience and other assumptions. In
order to limit our credit exposure, we often require irrevocable letters of
credit and even prepayment from certain of our customers before commencing
production.
Inventory
Our inventory is required to be stated at the lower of our cost or recoverable
value. Demand from our customers is highly unpredictable, and can fluctuate
significantly as a result of factors beyond our control. In addition, our
inventories include parts and components that are specialized and subject to
rapid technological obsolescence. Finally, we may purchase inventories in
advance of a customer's formal order if we believe the risk of loss is not
probable. As a result of these conditions, we maintain an allowance for
inventories. We assess our inventory carrying value and reduce it if necessary,
on a specific identification basis. However, such process requires subjective
estimates.
19
Impairment of Long Lived Assets, Other Than Goodwill
In the event that certain facts and circumstances indicate that the long-lived
assets or goodwill may be impaired, an evaluation of recoverability would be
performed. When an evaluation of long lived assets other than goodwill becomes
necessary, we conduct a probability analysis based on the weighted future
undiscounted cash flows associated with the asset or at the lowest discernable
level of cash flows. The results are then compared to the carrying amounts to
determine if impairment charges require calculation. 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 our product line.
Impairments of Goodwill
Goodwill resulting from the purchase of substantially all the assets of Speedcom
Wireless Corporation will not be amortized into operations. Rather, such amounts
will be tested for impairment at least annually. This impairment test is
calculated at the reporting unit level, which is at the enterprise level. The
annual goodwill impairment test has two steps. The first step identifies
potential impairments by comparing the fair value of the Company, as determined
using its trading market prices, with its carrying value, including goodwill. If
the fair value exceeds the carrying amount, goodwill is not impaired and the
second step is not necessary. If the carrying value exceeds the fair value, the
second step calculates the possible impairment loss by comparing the implied
fair value of goodwill with the carrying amount. If the implied goodwill is less
than the carrying amount, a write-down will be recorded. In the event that we
determine that the value of goodwill has become impaired using this approach, an
accounting charge for the amount of the impairment will be recorded. No
impairment of goodwill resulted from this measurement approach during the
current year.
Accounting For Income Tax Valuation Allowances
We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized in future periods. We consider
historical levels of income, expectations and risks associated with estimates of
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance. In the event that we
determine that we would be able to realize deferred tax assets in the future in
excess of the net recorded amount, an adjustment to the deferred tax asset would
increase income in the period that determination was made.
YEARS ENDED 2004, 2003 AND 2002
Sales
In 2004, 2003 and 2002, our sales were approximately $24.2 million, $20.8
million and $29.7 million, respectively. The 16% increase in sales from 2003 to
2004 was primarily due to increased shipments to one customer, which generated
approximately 25% of our total sales, or $6.2 million. We do not anticipate
generating the same level of sales to this customer in 2005.
Sales of licensed products in 2004, including refurbished radios, was $19.1
million, or 79% of total sales, while sales of unlicensed products was $5.1
million, or 21% of total sales. We currently expect the demand for unlicensed
wireless equipment to increase, as unlicensed equipment is generally less
expensive and the spectrum is free. Demand for licensed wireless equipment has
not significantly increased since 2000, when spending on telecommunications
equipment peaked, and competition has intensified. We are currently evaluating
divesting certain unprofitable product lines, which may include certain of our
licensed wireless products. We will, however, continue the sale of refurbished
licensed products in connection with our repair and maintenance business. See
Restructuring Activities, below. Divesting certain product lines would reduce
our future revenue. Any divestiture activities would be subject to the approval
of our Board of Directors.
Sales of refurbished licensed products in 2004 were $11.2 million, or 46% of
total sales, and 58% of total sales of licensed products. As a percentage of
total sales and total sales of licensed products, sales of refurbished licensed
products are anticipated to increase in 2005 relative to 2004 as a result of the
decrease in sales of new licensed products anticipated in 2005.
20
The 30% decrease in sales from 2002 to 2003 was primarily due to decreased
shipments to China and South East Asia, which decreased to $5.8 million in 2003,
compared to $15.0 million in 2002. The decrease was principally caused by the
increased competition in the region, and economic conditions exacerbated by the
SARS epidemic.
Sales to Orange Personal Communications Services accounted for 13%, 18% and 11%
of total sales in 2004, 2003 and 2002, respectively. Sales to MynTahl
Corporation accounted for 0%, 13% and 14% of total sales in 2004, 2003 and 2002,
respectively. Sales to T-Mobile (previously known as Mercury-One-to-One)
accounted for 12%, 12% and 4% of 2004, 2003 and 2002 sales, respectively.
During 2004, we generated 11% of our sales in the United States, 23% in the
United Kingdom, 21% in continental Europe, 14% in Asia, 25% in Latin America and
6% in other geographical regions. During 2003, we generated 8% of our sales in
the United States, 31% in the United Kingdom, 18% in continental Europe, 32% in
Asia, 7% in Mexico and 4% in other geographical regions. During 2002, we
generated 10% of our sales in the United States, 20% in the United Kingdom, 15%
in continental Europe, 51% in Asia, and 4% in other geographical regions.
Gross Profit
Cost of sales consists primarily of costs related to materials, labor and
overhead, freight and duty. Cost of sales amounted to $18.7 million, $20.6
million and $30.8 million during the years ended December 31, 2004, 2003, and
2002, respectively. In 2004, 2003, and 2002, gross profit (loss) was $5.5
million, $0.2 million, and $(1.1) million, respectively, or 23%, 1%, and (4%),
respectively.
In 2004, 2003 and 2002, cost of sales and gross margins were negatively affected
by inventory and other related charges of $.9 million, $3.7 million, and $5.8
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 26%, 19%, and 15%, in 2004,
2003, and 2002, respectively. The higher gross margin in 2004 was principally
due to higher levels of revenue attributable to sales of higher margin
refurbished licensed product sales and the lower cost of outsourced
manufacturing by NORT in our former Italian operations. The NORT arrangement,
which was executed in June 2004 is expected to have a continuing beneficial
effect on gross margins. The higher gross margin in 2003 over 2002 was
principally due to a higher percentage of revenue attributable to refurbished
licensed product sales, which contributes a higher gross margin than the gross
margin attributable to new product sales.
As further discussed under Restructuring Activities, below, our impending
restructuring plans are expected to include the divestiture of certain licensed
product lines, other than refurbished licensed products, which will have the
effect of further reducing our overall operating costs. Divesting certain
product lines may result in inventories becoming excessive and subject to
markdown. If markdowns are necessary, such amounts will be recorded as a
component of cost of sales when they are estimable.
Research and Development
Research and development expenses consist primarily of costs associated with new
product development. Our research and development activities include the
development of additional radio products, frequencies and upgrading operating
features, and related software tools. Software development costs incurred prior
to the establishment of technological feasibility are expensed as incurred.
Software development costs incurred after the establishment of technological
feasibility and before general release to customers are capitalized, if
material.
In 2004, 2003 and 2002, research and development expenses were approximately
$5.0 million, $6.1 million and $12.7 million, respectively. As a percentage of
product sales, research and development expenses decreased from 29% in 2003 to
20% in 2004, primarily due to increased revenue and decreases in research and
development spending. As a percentage of sales, research and development
expenses decreased from 43% in 2002 to 29% in 2003, primarily due to
discontinuation of research on the point-to-multipoint product line. Research
and development expenses in 2002 were significant due to the substantial final
21
development efforts on the new Encore point - to - point and AirPro Gold spread
spectrum products in preparation for commercial rollout of this product line in
2003.
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 2004, 2003, and 2002, selling and marketing
expenses were $6.8 million, $3.6 million, and $6.6 million, respectively. As a
percentage of sales, selling and marketing expenses increased from 17% in 2003
to 28% in 2004, primarily due to increased payroll, travel and commissions
expenses. As a percentage of sales, selling and marketing expenses decreased
from 22% in 2002 to 17% in 2003, primarily due to headcount reductions and cost
cutting programs that were put in place during the restructuring.
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 2004, 2003, and 2002,
general and administrative expenses, were $4.6 million, $5.6 million, and $10.7
million, respectively. As a percentage of sales, general and administrative
expenses decreased from 27% in 2003 to 19% in 2004 due to reduced consulting,
underwriting fees and other services. As a percentage of sales, general and
administrative expenses decreased from 36% in 2002 to 27% in 2003 due to
headcount reductions, lower levels of external professional fees, and other cost
cutting programs implemented during the year.
On March 10, 2005, the Company's Chief Executive Officer, Samuel Smookler,
resigned as Chief Executive Officer and a director of the Company. The Board of
Directors is currently negotiating the terms of his severance arrangements.
Under the terms of his existing Agreement, Mr. Smookler may be entitled to
receive severance payments totaling $250,000. In addition, his incentive stock
option to acquire 80,000 shares of common stock vests immediately. The Company
will record the negotiated severance expense effective with the date of
termination during the first fiscal quarter in the year ended December 31, 2005.
The acceleration in vesting of Mr. Smookler's incentive stock options is not
considered a modification and, therefore, no expense will be recorded, because
acceleration upon termination was provided for in his original employment
agreement. See also Restructuring Activities, below.
Restructuring Activities
We are actively engaged in the development of a formal restructuring plan that
will significantly curtail current spending, and substantially reduce
liabilities and operating and other costs. The plan is subject to the approval
of our Board of Directors, and is expected to be presented for approval before
the end of the first fiscal quarter of 2005.
The restructuring plan is expected to include significant reductions in costs,
including the suspension or curtailment of certain research and development
efforts, reductions in headcount, restructuring of committed costs, such as
leasing arrangements, and the curtailment of activities in certain foreign
locations. The plan is also expected to include the divestiture of certain
unprofitable product lines, which will have the effect of further reducing
overall costs. Finally, the plan will likely include the designation of
additional preferred stock that will be used to restructure certain liabilities
and existing preferred stock of the Company.
Many of the individual components of the restructuring plan will result in
charges to operations and, in some instances, the use of a portion of the
Company's remaining cash reserves. The associated amounts have not yet been
determined. However, under current accounting standards for restructuring and
exit activities, the Company will generally be required to determine the amounts
and the timing of recognition of the cost components individually. Expenses
associated with employee severance costs will not be recorded before the date
that the Board of Directors approves the formal plan (the "Commitment Date").
Subsequently, severance costs will be recognized when employee groups are
identified and the severance benefits are communicated. Divesting certain
product lines may result in inventories becoming excessive and subject to
markdown evaluation. If markdowns are necessary, such amounts will be recorded
as a component of cost of sales when estimable. Other costs associated with the
22
restructuring plan, such as lease restructuring or other exit costs, generally
will be recognized when the costs are incurred through contract execution or
otherwise.
Certain time sensitive elements of our restructuring plan have been initiated at
the direction or approval of the Board of Directors. As noted in General and
Administrative above, on March 10, 2005, our Chief Executive Officer, Samuel
Smookler, resigned, and our former Acting Chief Financial Officer and General
Counsel, Daniel W. Rumsey, was appointed Chief Restructuring Officer. We have
also commenced efforts to exit or modify certain facilities and operating lease
arrangements, as well restructure certain debts and other obligations of the
Company.
Restructuring and Other Charges
We continually monitor our inventory carrying value in the light of the slowdown
in the global telecommunications market. This has resulted in a $2.0 million
charge to cost of sales for our point - to - multipoint, Tel-Link point - to -
point and Air-link spread spectrum inventories during the second quarter of
2003. In the first quarter of 2003, we 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 a restructurings of accounts payable and
purchase commitment liabilities arising from vendor settlements.
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 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 our product line. An impairment charge is recorded if the net
cash flows derived from the analysis are less than the asset's carrying value.
We deem 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 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.
A summary of inventory reserve activities is as follows:
Inventory
Reserve
---------
Balance at January 1, 2004 $ 27,119
Additions charged to Statement of Operations 916
Deductions from reserves (3,746)
---------
Balance at December 31, 2004 $ 24,289
In the fourth quarter of 2002, we determined that there was a need to reevaluate
our 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 our 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.
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. We adopted SFAS 142 on January 1, 2002, and, as a result,
discontinued recording goodwill amortization; although we 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.
23
Goodwill Amortization and Impairment
We accounted 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 purchase price of approximately $7,514,000 consisted of
2,116,666 shares of our Common Stock, valued using market values for such shares
around the commitment date ($3.42). The acquisition resulted in goodwill of
approximately $12.0 million, because the value of the assumed liabilities
exceeded the value of the tangible assets acquired.
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 we determine that the value of
goodwill has become impaired, an accounting charge for the amount of the
impairment will be recorded. No impairment of goodwill was recorded in 2004 or
2003 because the enterprise value of the combined business units exceeded the
goodwill-carrying amount.
In 2002, we 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.
Loss on Discontinued Business
In the first quarter of 2003, we decided to exit our service business, P-Com
Network Services, Inc. ("PCNS"). Accordingly, this business is reported as a
discontinued operation and we recorded losses from its operations for the year
ended December 31, 2003 and 2002. On April 30, 2003, we entered into an Asset
Purchase Agreement with JKB Global, LLC to sell certain assets of PCNS. P-Com
guaranteed PCNS' obligations under its premises lease, through July 2007. As
part of the sale to JKB Global, LLC, JKB Global, LLC agreed to sublet the
premises from PCNS 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, we 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, we entered into an agreement to terminate the premises lease in
consideration for the payment to the landlord of $240,000.
Interest Expense
In 2004, 2003 and 2002, interest expense was $0.7 million, $2.2 million and $2.5
million, respectively. In 2004 and 2003, interest expense primarily related to
the borrowings on the credit facility with the Bank, the issuance of the
Convertible Notes, amortization of discount on promissory notes, and interest on
equipment leases. In 2002, interest expense primarily related to the borrowings
under the Credit Facility, the 4.25% Convertible Subordinated Notes, the
issuance of the Convertible Notes, note conversion expenses and interest on
equipment leases. Approximately $0.8 million was charged to interest expense in
2002 related to conversion of the 4.25% Convertible Subordinated Notes to Common
Stock, in compliance with SFAS 84.
Other Income (Expense), Net
In 2004, other income, net, related primarily to a gain on the settlement of a
contract of $7.5 million. In 2003, other income, net, related primarily to
exchange gain arising from the depreciation of the United States dollar against
the Euro and British pound of $0.9 million, gain on disposals of property and
equipment of $1.1 million, and gain on vendor settlements of $2.2 million. These
were partially offset by miscellaneous other losses.
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 British pound
denominated receipts when these currencies appreciated against the United States
dollar and other miscellaneous income.
24
Gain (loss) on Debt Extinguishment
In the second quarter of 2003, we repurchased a portion of our 7% Convertible
Subordinated Notes with a face value of $2.3 million, in exchange for property
and equipment valued at $0.8 million, resulting in a gain of $1.5 million. In
the third quarter of 2003, we redeemed the remaining 7% Convertible Notes plus
interest totaling $21.1 million, in exchange for Series B Preferred Stock with a
valuation of $11.6 million. The amount of unamortized deferred financing expense
of $750,000 was also written-off as part of this transaction, which resulted in
a gain of $8.8 million. In the fourth quarter of 2003, we converted Series C
Preferred Stock with a face value of $2.2 million, in exchange for Common Stock
valued at $6.0 million on the commitment date of the transaction, resulting in a
loss of $3.8 million.
In the second quarter of 2002, we repurchased 4.25% Convertible Subordinated
Notes with a face value of $1.75 million for approximately $367,000 in cash.
Provision (Benefit) For Income Taxes
There was no provision for income tax in 2004 and 2003, because the Company
incurred net operating losses during the year and the realization of benefits is
future years does not rise to the more likely than not standard. In 2002, P-Com
recorded a net tax benefit of $(0.5) million, relating to recovery of prior
year's federal income tax, offset by income taxes attributable to foreign
jurisdictions that had local taxable income for the year.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception in August 1991, we have financed our operations and capital
requirements principally through net proceeds of approximately $97.2 million
from its initial and two follow-on public offerings of our Common Stock; $113.1
million from private placements of our Common Stock and the exercise of
Warrants; $44.6 million from five Preferred Stock financings; $97.5 million from
the 4.25% Notes issued in 1997; $3.3 million from the issuance of debentures;
and borrowings under bank lines of credit and equipment lease arrangements.
Cash Used in Operations. In 2004, we used approximately $9.1 million of cash in
operating activities, primarily due to our net loss of $3.3 million, a
non-recurring gain on vendor settlements of approximately $8.5 million, and
reductions in accounts payable and other accrued liabilities of $2.3 million,
offset by depreciation expenses and inventory charges of $2.4 million and lower
receivables, and other assets of $2.4 million.
In 2003, we used approximately $5.9 million of cash in operating activities,
primarily due to our net loss of $14.4 million, and a $6.5 million non-cash gain
arising from the redemption of the Convertible Notes, plus a $2.1 million of
non-cash gain from vendor settlements. These amounts were offset by a $3.7
million non-cash loss related to inventory and related charges, $3.1 million of
property and equipment impairment charges, and depreciation expenses of $3.9
million. Significant contributions to cash flow resulted from a net reduction in
inventories of $2.5 million, a net reduction in prepaid and other current assets
of $1.2 million, offset by a net decrease of other accruals and accounts payable
totaling $2.1 million.
Cash from Investing Activities. During 2004, we received $0.6 million from the
sale of property and equipment of $0.9 million, offset by new acquisitions of
$0.3 million. In 2003, we used approximately $0.7 million of cash from investing
activities, due principally to $1.6 million paid for the acquisition of SPEEDCOM
Wireless Corporation, plus $0.2 million related to the acquisition of property
and equipment, offset by changes in the net assets of discontinued operations of
$0.6 million.
Cash from Financing Activities. In 2004, we received $4.7 million through
financing activities. This was due primarily to $3.3 million of proceeds from
the issuance of debentures and $2.4 million net proceeds from the Special
Warrant Offering, offset by $1.0 million of capital lease payments.
In 2003, we generated $11.9 million of cash flows from financing activities,
primarily through the receipt of $15.1 million from Preferred Stock and bridge
note financings, as more particularly described below, and $0.3 million from the
receipt of proceeds from the sale of Common Stock. These were offset by payments
of $2.6 million to the Bank under the Credit Facility, a
25
payment of $0.8 million to redeem certain promissory notes assumed as a result
of the acquisition of Wave Wireless, and payments of $0.2 million to lessors
under capital leases.
On March 26, May 28, and July 18, 2003, we completed bridge financing
transactions in which it issued $1.5 million, $0.3 million and $0.9 million,
respectively, of 10% convertible promissory notes with a maturity date of one
year from the date of issuance (the "Bridge Notes"). The Bridge Notes were
subordinated to amounts due under the Credit Facility, but senior to the
Convertible Notes. The Bridge Notes were converted into shares of Series C
Convertible Preferred Stock, in connection with the Series C Financing, as
discussed below.
On August 4, 2003, as a result of the restructuring of its Convertible Notes,
the principal amount and accrued interest of $21,138,000 was converted into
approximately 1,000,000 shares of Series B Convertible Preferred Stock with a
stated value of $21.138 per share.
On October 3 and December 18, 2003, we raised approximately $13.8 million from
the issuance and sale of its Series C Convertible Preferred Stock (the "Series C
Financing"), resulting in net proceeds of approximately $9.9 million after
deducting expenses related to the Series C Financing, and payment of certain
claims related to our restructuring.
Contractual Obligations. The following summarizes P-Com's contractual
obligations at December 31, 2004, 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
------------------------------------------------------------------------------------
Non-cancelable operating
lease obligations $ 1,750 $ 638 $ 638 $ 1,599 $ 4,625
Agilent note payable 1,103 300 -- -- 1,403
Siemens note payable 300 100 -- -- 400
Promissory note 1,676 1,441 -- 3,117
Purchase order commitments 2,391 -- -- -- 2,391
------- ------- ------- ------- -------
Total $ 7,220 $ 2,479 $ 638 $ 1,599 $11,936
------- ------- ------- ------- -------
We do not have any material commitments for capital equipment. Additional future
capital requirements will depend on many factors, including our working capital
requirements for our operations and our internal free cash flow from operations.
Available Borrowing. On September 17, 2004, we renewed our Credit Facility with
the Bank for an additional year, until September 17, 2005. 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 $3.0 million borrowing line based on export
related inventories and receivables. The Credit Facility provides for cash
advances equal to 75% of eligible accounts receivable balances for both the EXIM
program and domestic lines, and up to $750,000 for eligible inventories (limited
to 25% of eligible EXIM accounts receivable), under the EXIM program. Advances
under the Credit Facility bear interest at the Bank's prime rate plus 3.5% per
annum. The Credit Facility 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 the Bank. As of December 31, 2004, no
amounts were due the Bank under the Credit Facility.
We have 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 December 31, 2004, there were no amounts drawn
under this facility.
Current Liquidity. At December 31, 2004, we had working capital of approximately
$1.3 million, compared to negative working capital of approximately $2.1 million
at December 31, 2003.
26
Our principal sources of liquidity at December 31, 2004 consisted of available
borrowings under our Credit Facility, and approximately $2.3 million of cash and
cash equivalents, compared to approximately $6.2 million in cash and cash
equivalents at December 31, 2003. Available borrowings under the Credit Facility
as of December 31, 2004 were approximately $1.8 million. The existing cash
balance is principally derived from the issuance of debentures in the principal
amount of $3.3 million in November 2004.
Our cash position is deteriorating. Considering our projected cash requirements
based upon current operating levels, our available cash resources will be
insufficient by approximately $4.0 million to allow us to continue as a going
concern at current operating levels. In addition, at current operating levels,
management estimates that our current cash reserves will be exhausted by the
second quarter of the Company's year ended December 31, 2005. We will be
required to borrow from our existing Credit Facility, which has limitations, as
well as raise additional equity and/or debt financing in order to continue.
There are currently no formal committed financing arrangements to support this
projected cash shortfall. These negative trends and conditions raise substantial
doubt about our ability to continue as a going concern for a reasonable period.
Our ability to continue as a going concern for a reasonable period at current
operating levels is dependent upon acquiring additional cash through financing
arrangements. While we are actively seeking additional equity and/or debt
financing, there are currently no commitments. There can be no assurances that
any additional financing will be available on acceptable terms, if at all.
Accordingly, as discussed under Restructuring Activities, above, we are actively
engaged in the development of a formal restructuring plan that will
significantly curtail current spending, and substantially reduce our liabilities
and operating and other costs. The plan is subject to the approval of the
Company's Board of Directors, and is expected to be presented for approval
before the end of the first fiscal quarter of 2005.
There can be no assurance that our restructuring plan will be successful.
Accordingly, we are also evaluating the merits of a strategic acquisition or
other transaction that would substantially improve our liquidity and capital
resource position, as well as the merits of an outright sale of our business. If
ultimately required, there can also be no assurances that these actions will be
successful.
Our consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or to amounts or
to amounts and classification of liabilities that may be necessary if the
Company is unable to continue as a going concern.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." The statement
amends Accounting Research Bulletin ("ARB") No. 43, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material. ARB No. 43 previously stated that these
costs must be "so abnormal as to require treatment as current-period charges."
SFAS No. 151 requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this statement requires that allocation of fixed production overhead to the
costs of conversion be based on the normal capacity of the production
facilities. The statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005, with earlier application permitted
for fiscal years beginning after the issue date of the statement. The adoption
of SFAS No. 151 is not expected to have any significant impact on the Company's
current financial condition or results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- An Amendment of APB Opinion No. 29." APB Opinion No. 29, "Accounting For
Nonmonetary Transactions," is based on the opinion that exchanges of nonmonetary
assets should be measured based on the fair value of the assets exchanged. SFAS
No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
of nonmonetary assets whose results are not expected to significantly change the
future cash flows of the entity. The adoption of SFAS No. 153 is not expected to
have any impact on the Company's current financial condition or results of
operations.
In December 2004, the FASB revised its SFAS No. 123 ("SFAS No. 123R"),
"Accounting for Stock Based Compensation." The revision establishes standards
27
for the accounting of transactions in which an entity exchanges its equity
instruments for goods or services, particularly transactions in which an entity
obtains employee services in share-based payment transactions. The revised
statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. That cost is to be recognized over the period during
which the employee is required to provide service in exchange for the award. The
provisions of the revised statement are effective for financial statements
issued for the first interim or annual reporting period beginning after June 15,
2005, with early adoption encouraged. The Company is currently evaluating the
methodology for adoption on the impending effective date
CERTAIN RISK FACTORS AFFECTING P-COM
An investment in our 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 Annual Report, including the financial statements and the
related notes, before you decide whether to invest in our Common Stock. Our
business, operating results and financial condition could be harmed by any of
the following risks. The trading price of our Common Stock could decline due to
any of these risks, and you could lose all or part of your investment.
RISKS RELATED TO P-COM'S FINANCIAL CONDITION AND OPERATIONS
WE NEED ADDITIONAL FINANCING.
Our core business product sales are still significantly below levels necessary
to achieve positive cash flow, and have deteriorated. From inception to December
31, 2004, our aggregate net loss is approximately $368 million. Our cash
position has declined to $2.3 million at December 31, 2004, and is
deteriorating. We had positive working capital of $1.3 million as of December
31, 2004. We recently obtained a commitment for an additional $5.0 million in
debt financing (the "Debenture Facility"), and have borrowed $3.3 million as of
December 31, 2004 under the Debenture Facility. The parties are currently
negotiating the conditions necessary to obtain the additional $1.7 million under
the Debenture Facility, in light of our deteriorating financial condition and
results from operations. Even if we are able to borrow the additional $1.7
million under the Debenture Facility, existing borrowing availability under our
credit facility and available cash are anticipated to meet our liquidity
requirements through the end of the first quarter, requiring us to secure
additional debt or equity capital and/or significantly restructure our business
to continue as a going concern beyond such period. To address our liquidity
requirements, we are actively engaged in the development of a formal
restructuring plan that will significantly curtail current spending, and
substantially reduce liabilities and operating and other costs. We also
currently plan to raise additional equity and/or debt capital. No assurances can
be given that we will be successful in our restructuring plans, or in our
attempts to raise additional debt or equity financing.
OUR CURRENT BUSINESS AND FINANCIAL CONDITION RAISE DOUBTS ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN.
Our independent accountants' opinion on our 2004 consolidated financial
statements includes an explanatory paragraph indicating substantial doubt about
our ability to continue as a going concern. The financial statements included in
this annual report have been prepared assuming that the Company will continue as
a going concern. The financial statements do not include adjustments that might
result if the Company were required to cease operations. These adjustments would
include, among other things, a write-down in the value of the Company's assets
from book value to liquidation value.
To continue as a going concern, we will have to significantly increase our
sales, decrease costs and possibly induce creditors to forebear or to convert to
equity, raise additional equity and/or debt financing, or significantly
restructure our business. We may not accomplish these tasks. If we are unable to
raise additional debt or equity financing, or significantly restructure our
business, we will be unable to continue as a going concern.
OUR BUSINESS CANNOT BE SUSTAINED AT THE CURRENTLY DEPRESSED SALES LEVELS.
Our customers, particularly systems operators and integrated system providers,
have not significantly increased their capital spending and orders to suppliers
such as us, and in general are not currently building out any significant
28
additional infrastructure. We do not believe that our core products sales levels
can sufficiently recover unless there is significant improvement in the
worldwide telecommunications equipment industry, which may never happen. Until
product sales levels can sufficiently recover, our business, financial condition
and results of operations will continue to be adversely affected. We must obtain
additional financing and/or significantly restructure our operations to sustain
our business at the currently depressed sales levels.
OUR PROSPECTS FOR OBTAINING ADDITIONAL FINANCING ARE UNCERTAIN AND FAILURE TO
OBTAIN NEEDED FINANCING WILL AFFECT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
In the event we are unable to raise additional debt or equity financing during
the next thirty days, significantly restructure our business, or otherwise
improve our liquidity position, we will not be able to continue as a going
concern. Our future capital requirements will depend upon many factors,
including the general state of the telecommunications equipment industry,
development costs of new products and related software, potential acquisition
opportunities, maintenance of adequate manufacturing facilities and contract
manufacturing agreements, progress of research and development efforts,
expansion of marketing and sales efforts, and status of competitive products.
Additional financing may not be available in the future on acceptable terms or
at all. The Company's history of substantial operating losses could also
severely limit our ability to raise additional financing.
If the Company is unable to increase sales, or obtain additional equity or debt
financing, the Company may be required to close business or product lines,
further restructure or refinance our debt or delay, or further scale back or
eliminate our research and development program, or manufacturing operations. We
may also need to obtain funds through arrangements with partners or others that
may require us to relinquish our rights to certain technologies or potential
products or other assets. Our inability to obtain capital, or our ability to
obtain additional capital only upon onerous terms, could seriously damage our
business, operating results and financial condition.
WE MAY NOT BE ABLE TO REPAY OUR EXISTING DEBT AND ANY REPAYMENT OF OUR DEBT WITH
SHARES OR BY RAISING ADDITIONAL FUNDS MAY RESULT IN SIGNIFICANT DILUTION TO OUR
STOCKHOLDERS.
At March 3, 2005, the Company owed, excluding accrued but unpaid interest, an
aggregate amount of $3.3 million to SDS Capital Group SPC, Ltd ("SDS"), and it
is anticipated that such indebtedness will increase to $5.0 million prior to the
end of the second quarter of 2005. Interest accrues on such debt at an annual
interest rate of 7%, increasing to 8% on July 1, 2005 and 10% on April 1, 2006
through the maturity date of the loan, December 31, 2006. If the Company is
unable to generate sufficient cash flow from its operations, secure funds from
the capital markets or lenders or restructure its debt to SDS, the Company will
not be able to continue as a going concern.
We may make the principal and interest payments under our Debenture Facility in
either shares of the Company's common stock, cash or a combination of both. The
number of shares of common stock that may be used to pay the quarterly
installments is capped at 6,000,000 shares of common stock. We currently do not
have enough cash to make the required payments under the Debenture Facility and
anticipate making the vast majority if not all of the payments in shares of our
common stock. In addition, given the recent price for our common stock, if we
make the required amortization payments on the Debenture Financing using our
common stock, or raise additional funds by issuing equity securities, additional
significant dilution to our stockholders will result.
WE MAY NOT BE ABLE TO REPAY THE DEBENTURE FACILITY INSTALLMENT PAYMENTS IN
SHARES OF OUR COMMON STOCK.
Under our Debenture Facility, we may not issue shares of common stock to make
the quarterly installment payments if the issuance of such shares would result
in SDS beneficially owning (as determined in accordance with Section 13(d) of
the Exchange Act) more than 9.9% of all of the common stock outstanding at such
time. SDS may waive this ownership blocker but it is not obligated to do so. In
the event that we are prevented from making an installment payment in shares of
common stock due to the ownership blocker and SDS does not waive compliance with
this provision, then we may default on our payment obligations under the
Debenture Facility. Also, the terms of the Debenture Facility limit the number
of shares of common stock that we may issue as quarterly installment payments to
6,000,000 shares. If we make the required payments in shares of common stock,
given the Company's current stock price, we will reach the share cap. In such
29
event, if SDS does not waive the share cap, then we may default on our payment
obligations under the Debenture Facility.
WE RELY ON A LIMITED NUMBER OF CUSTOMERS FOR A MATERIAL PORTION OF OUR SALES AND
WITH RESPECT TO MANY OF OUR PRODUCTS, OUR SALES CYCLE IS LENGTHY. THE LOSS OF OR
REDUCTION IN SALES TO ANY OF OUR CUSTOMERS COULD HARM OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATION.
For the year ended December 31, 2004 and December 31, 2003, sales to our top
four customers accounted for 65% and 56% of total sales, respectively. One of
those customers, representing approximately 25% of total sales during the twelve
months ended December 31, 2004, has recently advised the Company of its intent
to purchase products from another provider. We expect that a limited number of
customers will continue to account for a significant portion of our sales for
the foreseeable future. The loss of any one of these customers would have an
immediate and material adverse effect on our sales. Our ability to maintain or
increase our sales in the future will depend, in part on our ability to obtain
orders from new customers as well as the financial condition and success of our
existing customers, the telecommunications equipment industry and the global
economy. The length of time it takes to establish a new customer relationship
with respect to our licensed products typically ranges from two to over twelve
months. If we are unsuccessful in obtaining significant new customers or if one
of our top customers or several small customers cancel or delay their orders for
our products, then our business and prospects could be harmed which may cause
the price of our common stock to decline. Our customer concentration also
results in concentration of credit risk. As of December 31, 2004, five customers
accounted for 56% of our total accounts receivable balances. If any one of these
customers is unable to fulfill its payment obligations to us, our revenue could
decline significantly.
WE ARE INCREASINGLY DEPENDENT ON THE SALE OF REFURBISHED LICENSED PRODUCTS, AND
A REDUCTION IN SUCH SALES WILL MATERIALLY HARM P-COM'S RESULTS OF OPERATIONS.
Sales of refurbished licensed products in 2004 were $11.2 million, or 46% of
total sales, and 58% of total sales of licensed products. As a percentage of
total sales and total sales of licensed products, sales of refurbished licensed
products are anticipated to increase in 2005 relative to 2004 as a result of the
decrease in sales of new licensed products anticipated in 2005. Total sales of
refurbished licensed products may decline over time in the event our customers
determine to replace existing radios with new product, rather than send them to
us for continued repair and maintenance. In addition, our customers may elect to
source refurbished licensed products from third parties rather than us, as was
the case in the fourth quarter of 2004 when one of our customers elected to
contract with a third party for its refurbished licensed product requirements.
Although we were ultimately able to recapture that customer's business, no
assurances can be given that we will not lose customers in the future, or that
customers will not elect to purchase new licensed products rather than send them
to us for repair and maintenance. In the event of a reduction in the sale of
refurbished licensed products, our results of operations will be materially
harmed.
P-COM FACES SUBSTANTIAL COMPETITION AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
We face intense competition worldwide from a number of leading
telecommunications equipment and technology suppliers. These companies offer a
variety of competitive products and services. These companies include Alcatel
Network Systems, Alvarion, Stratex Networks, Ceragon, Ericsson Limited, Harris
Corporation-Farinon Division, NEC, Sagem, Nortel, 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. We face actual and potential competition not only
from these established companies, but also from start-up companies that are
developing and marketing new commercial products and services. Some of our
current and prospective customers and partners have developed, are currently
developing or could manufacture products competitive with our products.
The principal elements of competition in our market and the basis upon which
customers may select our systems include price, performance, software
functionality, perceived ability to continue to be able to meet delivery
requirements, and customer service and support. Recently, certain competitors
30
have announced the introduction of new competitive products, including related
software tools and services, and the acquisition of other competitors and
competitive technologies. We expect competitors to continue to improve the
performance and lower the price of their current products and services and to
introduce new products and services or new technologies that provide added
functionality and other features. New product and service offerings and
enhancements by our competitors could cause a decline in our sales or loss of
market acceptance of our systems. New offerings could also make our systems,
services or technologies obsolete or non-competitive. In addition, we are
experiencing significant price competition and we expect that competition will
intensify.
P-COM'S OPERATING RESULTS HAVE BEEN ADVERSELY AFFECTED BY DETERIORATING GROSS
MARGINS AND SALES VOLUMES.
The intense competition for our licensed products has resulted in a continued
reduction in average selling prices. These reductions have not been offset by a
corresponding decrease in cost of goods sold, resulting in deteriorating gross
margins in some of our product lines. These deteriorating gross margins will
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, the intensification of competition, and the recent decrease in sales
volumes.
If we cannot significantly reduce costs, develop new products in a timely manner
or in the event we fail to achieve increased sales of new products at a higher
average selling price, then we will be unable to offset declining average
selling prices in many of our product lines. If we are unable to offset
declining average selling prices, or achieve corresponding decreases in
manufacturing operating expenses, our gross margins will continue to decline.
OUR OPERATING RESULTS HAVE BEEN ADVERSELY AFFECTED BY CONTINUED DECLINE IN
CAPITAL SPENDING IN THE TELECOMMUNICATIONS EQUIPMENT INDUSTRY.
The telecommunications equipment industry has experienced a decline in capital
spending in recent years, which may continue in the future. Our business has
suffered as a result of this decline and will continue to suffer if there is not
a significant increase in the amount of capital spending by our customers. We
believe that future growth in telecommunications infrastructure will be
generated by the entrance of new service providers. However, these new providers
may not have the financial resources of existing service providers and may be
unable to adequately finance their operations. As a result, these providers may
cancel or delay orders for our services and products. Moreover, we often accept
purchase orders for our services and products far in advance of shipment, and
typically permit orders to be modified or canceled with limited or no penalties.
As a result, we are 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 non-binding orders can also result in
large inventory write-offs, such as what occurred in 2000, 2001, 2003 and 2004.
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.
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
31
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 2004.
WE RELY ON THIRD PARTY MANUFACTURERS AND SUPPLIERS AND ANY FAILURE OF OR
INTERRUPTION IN THE MANUFACTURING, SERVICES OR PRODUCTS PROVIDED BY THESE THIRD
PARTIES COULD HARM OUR BUSINESS.
We rely on third-party manufacturers for the manufacturing of a substantial
portion of our products. We have limited internal manufacturing capacity, which
may not be sufficient to fulfill customers' orders, particularly in times of
high capital spending and rapid system deployment. Our contract manufacturers
may not be able to react to our demands on a timely basis. In addition, certain
components and subassemblies necessary for the manufacture of our 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 in the telecommunications equipment industry.
Our reliance on third-party manufacturers and suppliers involves risks. From
time to time, we have 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 has been due to a variety of factors,
including, in some cases, our financial condition. As a result of our reliance
on these third parties, we have reduced control over the price, timely delivery,
reliability and quality of finished products, components and subassemblies. Any
failure by us, or our contract manufacturers 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 our
business, financial condition and results of operations.
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 U.S. 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.
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's business, financial condition and results of
operations.
DUE TO OUR INTERNATIONAL SALES AND OPERATIONS, WE ARE EXPOSED TO BUSINESS,
POLITICAL, REGULATORY, OPERATIONAL, FINANCIAL AND ECONOMIC RISKS, ANY OF WHICH
COULD INCREASE OUR COSTS AND HINDER OUR GROWTH.
As a result of our current heavy dependence on international markets, especially
in the United Kingdom, the European continent, the Middle East, China, and Latin
32
America, we face business, political, regulatory, operational, financial and
economic risks that are often more volatile than those commonly experienced in
the United States. Approximately 92% and 89% of our sales in the year ended
December 31, 2003 and December 31, 2004, respectively, were made to customers
located outside of the United States.
Risks inherent in our international business activities, include the following:
o availability of suitable export financing, particularly in the case of large
projects which we must ship in short periods;
o multiple, conflicting and changing laws and regulations, including
complications due to unexpected changes in regulatory requirements, foreign
laws, tax schemes, international import and export legislation, trading and
investment policies, foreign currency fluctuations, exchange controls and tariff
and other trade barriers;
o difficulties in enforcing our rights under foreign laws;
o costs and risks of localizing systems (homologation) in foreign countries;
o timing and availability of export licenses, tariffs and other trade barriers;
o difficulties in managing distributors;
o political, economic and social instability, including terrorist activities and
the consequences of future geopolitical events, which may adversely affect the
markets in which we operate and our ability to insure against these risks;
o difficulty in accounts receivable collections;
o challenges caused by distance, language and cultural differences;
o protectionist laws and business practices that favor local businesses in some
countries;
o foreign tax consequences;
o foreign exchange controls that might prevent us from repatriating income
earned in countries outside the United States;
o price controls;
o higher costs associated with doing business internationally; and
o difficulties in staffing and managing international operations.
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 our products.
WE FACE RISKS ASSOCIATED WITH CURRENCY EXCHANGE RATE FLUCTUATIONS.
Approximately 89% and 92% of our sales in the year ended December 31, 2004 and
December 31, 2003 were made to customers located outside of the United States
and a larger portion of our revenues is denominated in foreign currencies.
Historically, our international sales have been denominated in British pounds
sterling, Euros or United States dollars. Conducting business in currencies
other than U.S. dollars subjects us to fluctuations in currency exchange rates
33
that could have a negative impact on our reported operating results.
Fluctuations in the value of the U.S. dollar relative to other currencies impact
our revenues, cost of revenues and operating margins and result in foreign
currency translation gains and losses. For example, a decrease in the value of
British pounds or Euros relative to United States dollars, if not hedged, will
result in an exchange loss for us if we have 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 us on Euro or British
pounds sterling denominated sales as our functional currency is in United States
dollars. For international sales that we would require to be United States
dollar-denominated, such a decrease in the value of foreign currencies could
make our systems less price-competitive if competitors choose to price in other
currencies and could adversely affect our financial condition. We fund our
Italian subsidiary's operating expenses, which are denominated in Euros. The
current strength of the value of the Euro relative to the U.S. dollar results in
more costly funding for our Italian operations, and, as a result, higher cost of
production to it as a whole. Conversely, a decrease in the value of the Euro
will result in cost savings for us.
Historically, we have not engaged in exchange rate hedging activities. Although
we may implement hedging strategies to mitigate this risk, these strategies may
not eliminate our exposure to foreign exchange rate fluctuations and involve
costs and risks of their own, such as ongoing management time and expertise,
external costs to implement the strategy and potential accounting implications.
OUR SUCCESS IN MANY FOREIGN MARKETS WILL DEPEND ON OUR ABILITY TO ESTABLISH
RELATIONSHIPS WITH LOCAL PROVIDERS OF TELECOMMUNICATIONS SERVICES.
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 our international operations in some
markets will depend on our 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 our products in specific
international markets could limit our ability to compete in today's highly
competitive local markets for broadband wireless equipment.
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 spectra.
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 the radio frequency spectra auction process in
the United States could delay P-Com's ability to develop and market equipment to
support new services.
34
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 spectra, 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 operate in
compliance with these regulations. These modifications could be expensive and
time-consuming.
P-COM MAY ENTER INTO AGREEMENTS TO MERGE OR CONSOLIDATE WITH OTHER COMPANIES,
AND IT MAY INCUR SIGNIFICANT COSTS IN THE PROCESS, WHETHER OR NOT THESE
TRANSACTIONS ARE COMPLETED.
P-Com is currently evaluating options to consolidate, seek a strategic partner
or engage in some other corporate transaction intended to increase stockholder
value, any of which could be material to our business, operating results and
financial condition. Corporate transactions, including mergers and acquisitions,
are risky, are subject to a lengthy process to close and could divert
management's time and focus from operating our business. P-Com may not be able
to close any strategic transaction on the timetable it anticipates, if at all.
If P-Com is unable to complete a corporate transaction, P-Com will incur
significant non-recoverable expenses that may have a material adverse effect on
P-Com's financial position. If a transaction is completed, it could result in
unanticipated operating difficulties and expense and the anticipated benefits of
the transaction may not materialize.
OUR BUSINESS AND GROWTH MAY SUFFER IF WE ARE UNABLE TO HIRE AND RETAIN KEY
PERSONNEL WHO ARE IN HIGH DEMAND.
We depend on the continued contributions of our senior management and other key
personnel, including Daniel W. Rumsey, the Chief Restructuring Officer, and Don
Meiners, the Company's President. The loss of the services of any of either of
these executives, or any of our key personnel could harm our business. We do not
maintain key person life insurance policies on any of our executive officers.
Competition for senior management in our industry is intense and we may not be
able to retain our senior management or attract and retain new personnel in the
future. Volatility or lack of performance in our stock price may also affect our
ability to attract and retain our key personnel. Our future success also depends
on our ability to identify, attract and retain highly skilled technical,
managerial, finance and marketing personnel. Qualified individuals are in high
demand, and we may incur significant costs to attract them. If we are unable to
attract or retain the personnel we need to succeed, our business may suffer.
OUR OPERATING RESULTS HAVE FLUCTUATED IN THE PAST AND MAY DO SO IN THE FUTURE,
WHICH COULD MAKE OUR RESULTS OF OPERATIONS DIFFICULT TO PREDICT OR CAUSE THEM TO
FALL SHORT OF EXPECTATIONS.
Our prior operating results have fluctuated due to changes in our business and
our industry. Similarly, our future operating results may vary significantly
from quarter to quarter due to a variety of factors, many of which are beyond
our control and could cause our results to be below investors' expectations,
causing the price of our common stock to fall. Our historical operating results
may not be useful to you in predicting our future operating results. Factors
that may increase the volatility of our operating results include the following:
o the addition of new customers or the loss of existing customers;
o changes in demand and pricing for our products and services;
o changes in the economic prospects of our customers, which could increase the
time it takes us to close sales with customers;
o customer decisions to delay implementation of our products;
o the timing of new product introductions and product enhancements by us and our
competitors;
35
o the publication of opinions concerning us, our products or our services by
industry analysts;
o changes in foreign currency exchange rates; and
o domestic and international economic and political conditions.
One or more of these factors may cause our operating expenses to be
disproportionately high or our gross revenues to be disproportionately low
during any given period, which could cause our net revenue and operating results
to fluctuate significantly.
THIRD PARTIES MAY SUE US FOR INTELLECTUAL PROPERTY INFRINGEMENT THAT, IF
SUCCESSFUL, COULD REQUIRE US TO PAY SIGNIFICANT DAMAGE AWARDS OR LICENSING FEES.
We cannot be certain that we do not and will not infringe the intellectual
property rights of others. We may be subject to legal proceedings and claims in
the ordinary course of our business and third parties may sue us for
intellectual property infringement or initiate proceedings to invalidate our
intellectual property. Any intellectual property claims, whether or not
meritorious, could result in costly litigation and could divert management
resources and attention. Moreover, should we be found liable for infringement,
we may be required to enter into licensing agreements (if available on
acceptable terms or at all), pay damages or limit or curtail our product or
service offerings. Moreover, we may need to redesign some of our products to
avoid future infringement liability. Any of the foregoing could prevent us from
competing effectively and harm our business and results of operations.
IF WE FAIL TO KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGIES, WE COULD LOSE
CUSTOMERS AND OUR SALES MAY DECLINE.
The telecommunications equipment industry is characterized by rapidly changing
technologies, evolving industry standards, frequent new product and service
introductions and changing customer demands. The introduction of new products
and services embodying new technologies and the emergence of new industry
standards and practices can render existing products and services obsolete and
unmarketable or require unanticipated investments in technology. Our future
success will depend on our ability to internally develop, source or license
leading technologies to enhance our existing products and services, to develop
new products and services that address the changing demands of our customers,
and to respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis. We may experience difficulties
that could delay or prevent the successful design, development, introduction or
marketing of new products and services. Any new products, services or
enhancement that we develop will need to meet the requirements of our current
and prospective customers and may not achieve significant market acceptance.
RISK RELATING TO CAPITAL MARKETS AND P-COM COMMON STOCK
THE NASDAQ SMALL CAP MARKET HAS DELISTED OUR STOCK AND OUR COMMON STOCK IS
DEEMED TO BE "PENNY STOCK," WHICH MAY SEVERELY LIMIT THE ABILITY OF STOCKHOLDERS
TO SELL OUR COMMON STOCK.
NASDAQ moved our stock listing from the NASDAQ National Market to the NASDAQ
Small Cap Market effective August 27, 2002 due to our failure to meet certain
listing requirements, including a minimum bid price of $1.00 per share. We
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 our stock would no longer be
listed on the NASDAQ Small Cap Market. Effective March 10, 2003, our 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 our
Common Stock and could ultimately further depress the trading price of our
Common Stock.
Our Common Stock is subject to the Securities Exchange Commission's "penny
stock" regulation. For transactions covered by this regulation, broker-dealers
36
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 the company'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.
OUR STOCK PRICE HAS BEEN VOLATILE AND HAS EXPERIENCED SIGNIFICANT DECLINE, AND
MAY CONTINUE TO BE VOLATILE AND DECLINE.
Our common stock currently trades sporadically on the OTC Bulletin Board. The
market for our common stock may continue to be an inactive market, and the
market price of our common stock may experience significant volatility. 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 ours, and may impact our ability to raise equity capital in
periods of liquidity crunch. Companies with liquidity problems also often
experience downward stock price volatility. We believe that factors such as
announcements of developments related to our business (including any financings
or any resolution of liabilities), announcements of technological innovations or
new products or enhancements by us or our competitors, developments in the
emerging countries' economies, sales by competitors, sales of significant
volumes of our Common Stock into the public market, developments in our
relationships with customers, partners, lenders, distributors and suppliers,
shortfalls or changes in revenues, gross margins, earnings or losses or other
financial results that differ from analysts' expectations, regulatory
developments, fluctuations in results of operations could and have caused the
price of our Common Stock to fluctuate widely and decline over the past two
years. The market price of our Common Stock may continue to decline, or
otherwise continue to experience significant fluctuations in the future,
including fluctuations that are unrelated to our performance, and our
stockholders may not be able to resell shares of our Common Stock at or above
the price paid for those shares.
ISSUING 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 the issuances of Series B Convertible Preferred Stock in
August 2003 and Series C Convertible Preferred Stock in October and December
2003. In addition, as a result of borrowings under the Debenture Facility, P-Com
anticipates issuing up to an additional 6.0 million shares of Common Stock in
connection with the scheduled amortization payments. When the shares of Common
Stock that are issuable upon conversion of our preferred stock, or paid in
connection with required amortization payments, are subsequently sold in the
public market, the trading price of P-Com Common Stock may be negatively
affected. As of December 31, 2004, the last reported sale price of P-Com common
stock was $0.44. Future sales of P-Com's Common Stock or the perception that
future sales will occur could have a significant negative effect on the market
price of P-Com's Common Stock. 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.
THE CONVERSION OR EXERCISE OF P-COM'S OUTSTANDING CONVERTIBLE SECURITIES WILL
HAVE A SIGNIFICANT DILUTIVE EFFECT ON P-COM'S EXISTING STOCKHOLDERS.
In March, May and July 2003, P-Com issued warrants to purchase approximately
293,333 shares of its Common Stock. In August 2003, P-Com's remaining 7%
Convertible Subordinated Notes due 2005 were converted into approximately one
million shares of Series B Convertible Preferred Stock, of which approximately
891,594 shares were converted into approximately 3.1 million shares of Common
Stock in December 2003. The remaining outstanding shares of Series B Convertible
Preferred Stock are convertible into approximately 381,916 shares of P-Com
Common Stock.
In October and December 2003, P-Com issued approximately 10,000 shares of Series
C Convertible Preferred Stock together with warrants to purchase approximately
37
4.64 million shares of Common Stock. These shares of Series C Convertible
Preferred Stock are convertible into approximately 5.8 million shares of Common
Stock. In December 2003, P-Com issued 2,000 shares of Series D Convertible
Preferred Stock, which, in turn, are convertible into approximately 444,444
million shares of Common Stock. The conversion or exercise of these securities
will result in substantial dilution to P-Com's existing stockholders.
In December 2003, P-Com also issued 2,116,667 shares of its Common Stock in
connection with the SPEEDCOM Acquisition. This issuance resulted in substantial
dilution to P-Com's existing stockholders. P-Com may issue additional shares of
common stock in the future, which would further dilute its stockholders.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
We generate international sales, purchases and possess international facilities.
We are, therefore, subject to foreign currency rate exposure. Historically, our
international sales have been denominated in British pounds sterling, Euro and
United States dollars. The functional currencies of our 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 a loss of $165,000 was
recorded for the year ended December 31, 2004, due to the approximately 9%
depreciation of the United States dollar against the Euro and British pound in
the year. Foreign exchange transactions gains and losses were not material to
the results for the year ended December 31, 2003 and December 31, 2002. Based on
our overall currency rate exposure at December 31, 2004, a near-term 10%
appreciation or depreciation of the United States dollar could have an
approximately $130,000 effect on our financial position, results of operations
and cash flows over the next fiscal year. We do not use derivative financial
instruments for speculative or trading purposes.
INTEREST RATE RISK
As of December 31, 2004, we have no indebtedness or other financial instruments
that would expose it to interest rate risk.
38
ITEM 8. FINANCIAL STATEMENTS
P-COM, INC.
Index to Consolidated Financial Statements and Financial Statement Schedule
Page
Financial Statements:
Report of Aidman, Piser & Company P.A.............................. 40
Report of PricewaterhouseCoopers LLP............................... 41
Consolidated Balance Sheets at December 31, 2004 and 2003.......... 42
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003, and 2002.................................. 43
Consolidated Statements of Stockholders' Equity (Deficit) and
Comprehensive Loss for the years ended December 31, 2004,
2003, and 2002...................................................... 44
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003, and 2002.................................. 46
Notes to Consolidated Financial Statements......................... 47
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts.................... 79
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.
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
P-Com, Inc.
We have audited the accompanying consolidated balance sheets of P-Com, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders' equity (deficit) and comprehensive loss,
and cash flows for the years then ended. Our audit also included the financial
statement schedule listed in the Index at Item 8. These consolidated financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of P-Com, Inc. and
subsidiaries as of December 31, 2004 and 2003 and the consolidated results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
The Company has incurred recurring net losses, has used significant cash in
support of its operating activities and, based upon current operating levels,
requires additional capital or significant reconfiguration of its operations to
sustain its operations beyond June 30, 2005. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Further
information and management's plans with regard to this uncertainty, including
management's specific plans for restructuring and exit activities, are discussed
in the footnotes. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The accompanying consolidated financial statements for the year ending 2003 have
been restated to give effect to a one-for-thirty reverse stock split that became
effective on July 19, 2004.
/s/ Aidman, Piser & Company, P.A.
Tampa, Florida
January 26, 2005, except for Note 17, as to which
the date is March 10, 2005
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF P-COM, INC.
In our opinion, the accompanying consolidated statements of operations,
stockholders' deficit and comprehensive loss and cash flows present fairly, in
all material respects, the results of operations and cash flows of P-Com, Inc.
and subsidiaries for the year ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the accompanying financial statement schedule for the
year ended December 31, 2002 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 based on
our audit. We conducted our audit of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards 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
audit provides 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.
The accompanying financial statements for the year ended December 31, 2002 have
been restated to give effect to a one-for-thirty reverse stock split that became
effective July 19, 2004.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 31, 2003, except for Note 1 (Discontinued Operations), as to which the
date is September 3, 2003 and for Note 1 (Restatements), as to which the date is
July 19, 2004
41
P-COM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amount)
DECEMBER 31,
2004 2003
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 2,280 $ 6,185
Accounts receivable, net of allowances
of $430 and $310 respectively 2,828 4,801
Inventory 4,722 5,258
Prepaid expenses and notes receivable 1,519 2,216
Assets of discontinued operations -- 40
--------- ---------
Total current assets 11,349 18,500
Property and equipment, net 1,755 3,807
Goodwill and other assets 12,319 12,258
--------- ---------
Total assets $ 25,423 $ 34,565
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,139 $ 4,035
Other accrued liabilities 3,500 16,226
Loan payable to bank -- 1
Liabilities of discontinued operations 249 313
Notes payable current 3,178 --
--------- ---------
Total current liabilities 10,066 20,575
Other long-term liabilities 1,743 6
--------- ---------
Total liabilities 11,809 20,581
--------- ---------
Commitments and contingencies (notes 13 and 14) Redeemable preferred stock:
Series B preferred stock 1,569 1,361
Series C preferred stock 2,537 870
Series D preferred stock 2,000 2,000
--------- ---------
Total preferred stock 6,106 4,231
--------- ---------
Stockholders' equity:
Common stock, par value $0.003 per share:
35 million shares authorized; 11,877 and 6,820
shares issued; 11,847 and 6,790 shares
outstanding, respectively 35 20
Treasury stock, at cost; 30 shares (74) (74)
Additional paid-in capital 376,430 373,186
Accumulated deficit (368,885) (363,173)
Accumulated other comprehensive loss 2 (206)
--------- ---------
Total stockholders' equity 7,508 9,753
--------- ---------
Total liabilities, redeemable preferred stock
and stockholders' equity $ 25,423 $ 34,565
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
42
P-COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
FOR THE YEARS ENDED DECEMBER 31,
2004 2003 2002
-------- -------- --------
Sales $ 24,175 $ 20,841 $ 29,686
Cost of sales 18,720 20,604 30,777
-------- -------- --------
Gross profit (loss) 5,455 237 (1,091)
-------- -------- --------
Operating expense:
Research and development 4,976 6,099 12,745
Selling and marketing 6,772 3,557 6,621
General and administrative 4,552 5,607 10,750
Goodwill impairment and amortization -- -- 11,409
Restructuring charges -- 3,712 --
-------- -------- --------
Total operating expenses 16,300 18,975 41,525
-------- -------- --------
Loss from operations (10,845) (18,738) (42,616)
Other income (expenses):
Interest expense (687) (2,249) (2,457)
Gain on debt extinguishment, net -- 6,499 1,393
Other income (expense), net 8,252 3,739 (1,312)
-------- -------- --------
Loss before discontinued operations, income taxes,
and cumulative effect of change in accounting principle (3,280) (10,749) (44,992)
Income tax benefit -- -- (470)
-------- -------- --------
Loss before discontinued operations and cumulative
effect of change in accounting principle (3,280) (10,749) (44,522)
Loss from discontinued operations (40) (2,137) (4,284)
-------- -------- --------
Loss from continuing operations before
cumulative effect of accounting change (3,320) (12,886) (48,806)
Cumulative effect of change in accounting principle -- -- (5,500)
-------- -------- --------
Net loss (3,320) (12,886) (54,306)
-------- -------- --------
Preferred stock accretions (2,392) (1,521) --
Preferred stock dividends in arrears (156) -- --
-------- -------- --------
Net loss attributable to common stockholders $ (5,868) $(14,407) $(54,306)
======== ======== ========
Basic and diluted loss per common share:
Loss from continuing operations $ (0.56) $ (6.80) $ (52.28)
Loss from discontinued operations -- (1.18) (5.03)
Cumulative effect of change in accounting principle -- -- (6.46)
-------- -------- --------
Basic and diluted loss per common share $ (0.56) (7.98) $ (63.77)
======== ======== ========
Shares used in basic and diluted per share computation 10,429 1,805 852
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
43
P-COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands)
Accumulated
Other
Common Stock Additional Comprehensive Comprehensive
--------------- Paid-In Accumulated Income Income
Shares Amount Capital Deficit (Loss) (Loss) Total
------ ------ ---------- ----------- ------------ ------------- ------
Balance at December 31, 2001 566 $ 8 $319,994 $(294,460) $(1,286) $ -- $24,256
Issuance of Common Stock for cash,
net of issuance costs of $821 493 7 7,706 -- -- -- 7,713
Issuance of warrants for Common
Stock in conjunction with line of
credit borrowings -- -- 65 -- -- -- 65
Issuance of Common Stock as
part of vendor settlements 42 1 1,273 -- -- -- 1,274
Conversion of notes payable to
Common Stock 46 -- 4,187 -- -- -- 4,187
Issuance of warrants for Common
Stock for services rendered -- -- 480 -- -- -- 480
Issuance of Common Stock under
employee stock purchase plan 1 -- 35 -- -- -- 35
Cumulative translation adjustment -- -- -- -- 946 946 946
Net loss -- -- -- (54,306) (54,306) (54,306)
--------
Comprehensive loss $(53,360)
------ --- -------- --------- ------- ======== --------
Balance at December 31, 2002 1,148 $16 $333,740 $(348,766) $ (340) $(15,350)
====== === ======== ========= ======= ========
44
P-COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE LOSS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands)
Accumulated
Other
Compre- Net
Additional hensive Compre-
Common Stock Paid-in Treasury Accumulated Income hensive
Shares Amount Capital Stock Deficit (Loss) Loss Total
------ -------- -------- -------- ----------- ---------- -------- ---------
Balance at December 31, 2002 1,148 $ 16 $333,740 $(348,766) $ (340) $ -- $(15,350)
Non-monetary exchange of common stock
for equipment (31) $ (74) (74)
Issuance of common stock for cash, 70 307 307
net of expenses
Discount on convertible promissory notes -- 693 693
Issuance of common stock for professional
services rendered 150 450 450
Issuance of common stock for vendor
settlement 159 558 558
Exercise of warrants for common stock 36 1 1
Issuance of common stock to SpeedCom
for business purchase 2,117 6 7,232 7,238
Warrant amortization expenses -- 367 367
Conversion of Series B preferred stock
to common stock 3,141 9 10,909 10,918
Discount on Series C preferred stock,
related to beneficial conversion feature 18,918 18,918
Accretions of preferred stock; $651 related
to Series B, and $870 related to Series C (1,521) (1,521)
Foreign currency translation adjustments 134 134 134
Other changes (11) 11 --
Net loss (12,886) (12,886) (12,886)
--------
Comprehensive loss $(12,752)
====== ======== ======== ======= ========= ========= ======== ========
Balance at December 31, 2003 6,790 $ 20 $373,186 $ (74) $(363,173) $ (206) $ -- $ 9,753
Preferred series C conversion 2,275 6 517 517
Placement warrants converted to common stock 182 1 1
Warrant issuance net of expense of $187K 2,600 8 2,420 2,434
Warrants issued in connection with debentures 307 307
Accretion of preferred stock:
$208 Related to series B and
$2,184 related to series C (2,392) (2,392)
Foreign currency translation adjustments 208 208 208
Net loss (3,320) (3,320) (3,320)
--------
Comprehensive loss $ (3,112)
========
====== ======== ======== ======= ========= ========= ========
Balance at December 31, 2004 11,847 $ 35 $376,430 $ (74) $(368,885) $ 2 $ 7,508
====== ======== ======== ======= ========= ========= ========
The accompanying notes are an integral part of these financial statements.
45
P-COM, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31,
2004 2003 2002
-------- -------- --------
Cash flows from operating activities:
Net loss $ (3,320) $(12,886) $(54,306)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Gain on retirement of convertible notes -- (6,499) (1,393)
Depreciation expense 1,489 3,890 6,602
Inventory valuation and other charges 916 3,734 5,770
Asset impairment and other restructuring charges -- 3,712 --
Loss on discontinued operations 40 2,137 4,284
Goodwill impairment charge -- -- 11,409
Cumulative effect of change in accounting principle -- -- 5,500
Gain on vendor settlements, included in other income
(expenses), net (964) (2,060) --
Gain on settlement of contract (7,500) -- --
Stock compensation expenses for consultants -- 779 --
Amortization of discount on promissory notes -- 731 --
(Gain) loss on disposal of equipment, included in other
income (expenses), net 167 (635) 153
Notes conversion expense -- -- 771
Amortization of stock warrants 138 367 546
Write-off of notes receivable -- 100 159
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net of reserve 2,048 144 979
Inventory (172) 2,487 12,664
Prepaid expenses and other assets 349 846 3,874
Accounts payable (1,011) (1,181) 440
Other accrued liabilities (1,327) (1,539) (11,963)
-------- -------- --------
Net cash flows from operating activities (9,147) (5,873) (14,511)
-------- -------- --------
Cash flows from investing activities:
Acquisition of property and equipment (321) (182) (596)
Proceeds from sale of property and equipment 829 -- 251
Proceeds from sales of Speedcom common stock 100 --
Change in restricted cash -- 415 2,496
Cash paid for Speedcom business purchase -- (1,580) --
Net asset of discontinued operation -- 635 2,900
-------- -------- --------
Net cash flows from investing activities 608 (712) 5,051
-------- -------- --------
Cash flows from financing activities:
Payments of notes payable -- (750) (2,111)
Proceeds from issuance of common stock, net of expenses -- 307 7,713
Proceeds from issuance of preferred stock, net of expenses -- 15,108 --
Proceeds from Employee Stock Purchase Plan -- -- 35
Proceeds from (repayment of) loan payable to bank (1) (2,603) 2,604
Proceeds from exercise of warrant offers, net of expenses 2,434 -- --
Proceeds from debentures 3,300 -- --
Payments under capital lease obligations (1,052) (186) (497)
-------- -------- --------
Net cash flows from financing activities 4,681 11,876 7,744
-------- -------- --------
Effect of exchange rate changes on cash (47) 33 52
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (3,905) 5,324 (1,664)
Cash and cash equivalents at beginning of the year 6,185 861 2,525
-------- -------- --------
Cash and cash equivalents at end of the year $ 2,280 $ 6,185 $ 861
-------- -------- --------
The accompanying notes are an integral part of these financial statements.
46
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. THE COMPANY, LIQUIDITY AND MANAGEMENT'S PLANS, AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
THE COMPANY. P-Com, Inc. ("P-Com" or the "Company") was incorporated in Delaware
on August 23, 1991 to engage in the design, manufacture and marketing of
millimeter network access wave radio systems for use in the worldwide wireless
telecommunications market. See Note 9 for sales and other information by
geographic area.
BUSINESS ACQUISITION. As more fully discussed in Note 12, on December 10, 2003,
P-Com acquired substantially all of the operating assets and certain liabilities
of the Wave Wireless Division of SPEEDCOM Wireless Corporation ("Wave Wireless")
in a transaction accounted for using the purchase method. Wave Wireless is
engaged in the design, manufacture, configuration and delivery of a variety of
broadband fixed-wireless products that are intended to complement the Company's
current product line and geographic presence. Under the purchase method of
accounting, the results of operations are included in the Company's results
commencing on the date of acquisition.
DISCONTINUED OPERATIONS. Prior to March 31, 2003, P-Com's services business unit
provided network services including system and program planning and management,
path design, and installation for the wireless communication market through its
service sales segment. As disclosed in Note 8, the services business was sold
and, accordingly, the consolidated financial statements for December 31, 2003,
2002 and 2001 have been reclassified to reflect P-Com's services business unit
as a discontinued operation.
LIQUIDITY AND MANAGEMENT'S PLANS
The Company has been experiencing challenging operating conditions in recent
years as a result of the continuing depressed telecommunications equipment
market; such conditions have persisted since approximately 2000. These
conditions, coupled with a significant continuing legacy cost structure, which
includes, among other costs, higher than market occupancy costs, have resulted
in substantial losses and the use of substantial amounts of cash in operations.
Notwithstanding significant liability restructuring activities in recent years,
during the years ended December 31, 2004, 2003, and 2002, the Company recorded
losses from continuing operations of ($3.3) million, ($10.7) million, and
($44.5) million, respectively, and used ($9.1) million, ($5.9) million, and
($14.5) million cash, respectively, in supporting its operating activities at
their current levels. As of December 31, 2004, the Company had cash and cash
equivalents of $2.3 million and working capital of $1.3 million. At current
operating levels, internal projections reflect an aggregate cash shortfall of
approximately $4.0 million for the year ended December 31, 2005. In addition, at
current operating levels, management estimates that its cash reserves will be
exhausted by or near the end of the first quarter of the year ended December 31,
2005. There are currently no formal, committed financing arrangements available
to the Company, other than a highly-restricted bank line of credit, to balance
this projected cash shortfall. These negative trends and conditions raise
substantial doubt about the Company's ability to continue as a going concern for
a reasonable period.
The Company's ability to continue as a going concern for a reasonable period at
current operating levels is dependent upon acquiring additional cash through
financing arrangements. While management is actively seeking additional equity
and/or debt financing, there are currently no commitments. There can be no
assurances that any additional financing will be available on acceptable terms,
if at all. Accordingly, management is actively engaged in the development of a
formal restructuring plan that will significantly curtail current spending, and
substantially reduce liabilities and operating and other costs. The plan is
subject to the approval of the Company's Board of Directors, and is expected to
be presented for approval before the end of the first fiscal quarter of 2005.
The restructuring plan is expected to include significant reductions in costs,
including the suspension or curtailment of certain research and development
efforts, reductions in headcount, restructuring of committed costs, such as
leasing arrangements, and the curtailment of activities in certain foreign
locations. The plan is also expected to include the divestiture of certain
unprofitable product lines, which will have the effect of further reducing
overall costs. Finally, the plan will likely include the designation of
additional preferred stock that will be used to restructure certain liabilities
and existing preferred stock of the Company.
47
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. THE COMPANY, LIQUIDITY AND MANAGEMENT'S PLANS, AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Many of the individual components of the restructuring plan will result in
charges to operations and, in some instances, the use of a portion of the
Company's remaining cash reserves. The associated amounts have not yet been
determined. However, under current accounting standards for restructuring and
exit activities, the Company will generally be required to determine the amounts
and the timing of recognition of the cost components individually. Expenses
associated with employee severance costs will not be recorded before the date
that the Board of Directors approves the formal plan (the "Commitment Date").
Subsequently, severance costs will be recognized when employee groups are
identified and the severance benefits are communicated. Divesting certain
product lines may result in inventories becoming excessive and subject to
markdown evaluation. If markdowns are necessary, such amounts will be recorded
as a component of cost of sales when estimable. Other costs associated with the
restructuring plan, such as lease restructuring or other exit costs, generally
will be recognized when the costs are incurred through contract execution or
otherwise.
There can be no assurance that the aforementioned restructuring plan will be
successful. Accordingly, management is also evaluating the merits of a strategic
acquisition or other transaction that would substantially improve its liquidity
and capital resource position and the merits of an outright sale of the
Company's operation. If ultimately required, there can also be no assurances
that these actions will be successful.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or to amounts
and classification of liabilities that may be necessary if the Company is unable
to continue as a going concern.
48
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. THE COMPANY, LIQUIDITY AND MANAGEMENT'S PLANS, AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
RESTATEMENTS
All share and per share information in the accompanying consolidated financial
statements for the years ended December 31, 2003 and 2002 have been restated to
give effect to a one-for-thirty reverse stock split that became effective on
July 19, 2004.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT'S USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of P-Com and its
wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated.
FOREIGN CURRENCY
The value of the United States dollar rises and falls day-to-day on foreign
currency exchanges. Since the Company does business in foreign countries, these
fluctuations affect the Company's financial position and results of operations.
Assets and liabilities of our foreign subsidiaries are translated from their
local currencies into United States dollars at exchange rates in effect at the
respective balance sheet date. Income and expense accounts are translated from
their local currencies into United States dollars at average exchange rates for
the respective period.
Accumulated net translation adjustments are recorded as a component of
comprehensive income (loss) in stockholders' equity (deficit). 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. The Company
does not enter into any contracts to hedge the effects of foreign currency
exchange fluctuations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of cash, accounts receivable and payable, debt and
accrued liabilities at December 31, 2004 and 2003 approximated their respective
historical cost due to the short maturities.
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.
49
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. THE COMPANY, LIQUIDITY AND MANAGEMENT'S PLANS, AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE
P-Com records an allowance for doubtful accounts receivable based on our general
collection history and specifically identified amounts that management believed
to be uncollectible. P-Com has a limited number of customers with individually
large amounts due at any given balance sheet date. However, any unanticipated
change in one of those customer's credit worthiness could have a material
adverse effect on P-Com's results of operations in the period in which such
changes or events occur and losses become estimable. After all attempts to
collect a receivable have failed, the receivable is written off against the
allowance.
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. Shipping and handling costs related to our
product sales are included as a component of cost of sales. The Company has not
experienced material returns of products. The Company warrants its products and
provides parts and labor to repair any manufacturing defects on its equipment
for a period of one year to three years. Provisions for estimated warranty
repairs, returns and other allowances are recorded at the time revenue is
recognized. (See Note 3)
INVENTORY
Inventory is stated at the lower of cost or market; cost is determined on a
first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method based upon the useful lives of the assets ranging from
three to seven years. Leasehold improvements are amortized using the
straight-line method based upon the shorter of the estimated useful lives of the
respective improvements or the lease term.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
GOODWILL
Goodwill at December 31, 2004 and 2003 represents the excess of the purchase
price over the fair values of net assets acquired in connection with the Wave
Wireless acquisition. In accordance with Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), goodwill
resulting from the purchase will not be amortized into operations. Rather, such
amounts will be tested for impairment at least annually. This impairment test is
calculated at the reporting unit level, which, for P-Com is at the enterprise
level. The annual goodwill impairment test has two steps. The first identifies
potential impairments by comparing the fair value of P-Com, as determined using
its trading market prices, with its carrying value, including goodwill. If the
fair value exceeds the carrying amount, goodwill is not impaired and the second
step is not necessary. If the carrying value exceeds the fair value, the second
step calculates the possible impairment loss by comparing the implied fair value
of goodwill with the carrying amount. If the implied goodwill is less than the
carrying amount, a write-down will be recorded. In the event that P-Com's
management determines that the value of goodwill has become impaired using this
approach, P-Com will record a charge for the amount of the impairment. No
impairment of goodwill resulted from this measurement approach immediately
following the Wave Wireless acquisition. P-Com will perform this test annually,
on the first day of the fourth quarter of each year. No impairments arose during
2004.
50
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. THE COMPANY, LIQUIDITY AND MANAGEMENT'S PLANS, AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
During the year ended December 31, 2002, 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 a ($11.4) million
impairment charge in the fourth quarter of 2002. In addition, effective upon the
adoption of SFAS 142, the Company recorded ($5.5) million of transitional
impairment charges in the first quarter of the year ended December 31, 2002,
which represented the difference between the fair value of expected cash flows
from the services business unit, and its book value on the effective date of the
then newly-issued pronouncement.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that the long-lived assets,
other than goodwill, may be impaired, an evaluation of recoverability would be
performed to determine whether impairments were present by comparing the net
book value of long-lived assets, other than goodwill, to projected undiscounted
cash flows at the lowest discernable level for which cash flow information can
be projected. In the event that undiscounted cash flows are insufficient to
recover the net carrying value over the remaining useful lives, impairment
charges are calculated and recorded in the period first estimable using
discounted cash flows or other fair value information, whichever is more
appropriate. During the year ended December 31, 2003, an impairment charge of
($3.7) million was reflected in the caption, "Restructuring charges on the
consolidated statement of operations."
COMPREHENSIVE INCOME (LOSS)
Under Statements on Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130"), P-Com is required to display comprehensive
income and its components as part of our full set of financial statements.
Comprehensive income comprises net income (loss) and other comprehensive income
(loss) items Other comprehensive income (loss) includes certain changes in
equity of P-Com that are excluded from net income (loss). Specifically, SFAS 130
requires adjustments arising from P-Com's foreign currency translation, which
were reported separately in stockholders' equity, to be included in accumulated
other comprehensive income (loss). Comprehensive income (loss) in 2004, 2003 and
2002 has been reflected in the Consolidated Statement of Stockholders' Equity
(Deficit) and Comprehensive Loss.
ACCOUNTING FOR STOCK-BASED COMPENSATION
P-Com accounts for and reports its 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"), Financial Accounting Standards Board Interpretation No. 44, Accounting
for Certain Transactions Involving Stock Compensation ("FIN 44"), and Statement
of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure ("SFAS 148"). 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 123"). Under SFAS 123, stock awards issued to non-employees
are accounted for at their fair value on the date issued.
51
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. THE COMPANY, LIQUIDITY AND MANAGEMENT'S PLANS, AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
The following table reflects supplemental financial information related to
stock-based employee compensation, as required by SFAS 148 for each year ending
December 31:
2004 2003 2002
---------------------------
Stock-based employee compensation costs used in the
determination of net income (loss) attributable to
common stockholders, as reported $ -- $ -- $ --
===========================
Loss attributable to common stockholders, as reported $ 5,868 $14,407 $54,306
Stock-based employee compensation costs that would have
been included in the determination of net loss if the
fair value method (SFAS 123) had been applied
to all awards $ 1,940 $ 1,967 $ 2,747
---------------------------
Unaudited pro forma net loss attributable to common
stockholders, if the fair value method had been
applied to all awards $ 7,808 $16,374 $57,053
===========================
Net loss attributable to common stockholders per
common share, as reported $ 0.56 $ 7.98 $ 63.77
===========================
Unaudited pro forma net loss attributable to common
Stockholders per common share, if the fair value
method had been applied to all awards $ 0.75 $ 9.07 $ 67.00
===========================
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMER INFORMATION
Financial instruments that potentially subject P-Com to significant
concentrations of credit risk consist principally of cash equivalents and trade
accounts receivable. As of December 31, 2003, P-Com had in excess of $2.0
million on deposit in Silicon Valley Bank. The failure of this bank may result
in a substantial loss of these deposits.
P-Com has sold most of its products in international markets. Sales to several
customers have been denominated in British Pounds Sterling and Euro. At December
31, 2004, 2003 and 2002, accounts receivable from these customers represented
40%, 30%, and 29%, respectively, of total accounts receivable. Any gains or
losses that arise in the translation of foreign denominated financial
instruments are included in operations each period when measurable.
P-Com performs 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 pursuant to letters of credit. P-Com
extends payment terms to international customers of up to 90 days, which is
consistent with prevailing business practices.
At December 31, 2004 and 2003, approximately 44% and 50%, respectively, of trade
accounts receivable represent amounts due from three customers, respectively.
For the year ended December 31, 2004, 2003 and 2002, five, four, and two
customers accounted for 56%, 54%, and 26% of total sales, respectively.
52
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. THE COMPANY, LIQUIDITY AND MANAGEMENT'S PLANS, AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." The statement
amends Accounting Research Bulletin ("ARB") No. 43, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material. ARB No. 43 previously stated that these
costs must be "so abnormal as to require treatment as current-period charges."
SFAS No. 151 requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this statement requires that allocation of fixed production overhead to the
costs of conversion be based on the normal capacity of the production
facilities. The statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005, with earlier application permitted
for fiscal years beginning after the issue date of the statement. The adoption
of SFAS No. 151 is not expected to have any significant impact on the Company's
current financial condition or results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- An Amendment of APB Opinion No. 29." APB Opinion No. 29, "Accounting For
Nonmonetary Transactions," is based on the opinion that exchanges of nonmonetary
assets should be measured based on the fair value of the assets exchanged. SFAS
No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
of nonmonetary assets whose results are not expected to significantly change the
future cash flows of the entity. The adoption of SFAS No. 153 is not expected to
have any impact on the Company's current financial condition or results of
operations.
In December 2004, the FASB revised its SFAS No. 123 ("SFAS No. 123R"),
"Accounting for Stock Based Compensation." The revision establishes standards
for the accounting of transactions in which an entity exchanges its equity
instruments for goods or services, particularly transactions in which an entity
obtains employee services in share-based payment transactions. The revised
statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. That cost is to be recognized over the period during
which the employee is required to provide service in exchange for the award. The
provisions of the revised statement are effective for financial statements
issued for the first interim or annual reporting period beginning after June 15,
2005, with early adoption encouraged. The Company is currently evaluating the
methodology for adoption on the impending effective date.
53
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. CHANGE IN ACCOUNTING PRINCIPLE
GOODWILL
Effective January 1, 2002, P-Com adopted Statements of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). 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.
The following table sets forth a reconciliation of net loss and loss per share
information for the year ended December 31, 2002, as adjusted for the
non-amortization provisions of SFAS 142 (in thousands, except per share
amounts):
FOR THE YEAR
ENDED DECEMBER 31,
2002
------------------
Reported net loss attributable to common stockholders ... $(54,306)
Add back: Goodwill amortization ....................... --
--------
Adjusted net loss ....................................... (54,306)
--------
Basic and diluted loss per share attributable to common
stockholders:
Reported net loss ....................................... $ (63.77)
Add back: Goodwill amortization ....................... --
--------
Adjusted net loss ....................................... $ (63.77)
========
Weighted average number of shares ....................... 852
========
Changes in the carrying amount of goodwill for the year ended December 31, 2004,
2003 and 2002 are as follows (in $000):
2004 2003 2002
-------- -------- --------
Balance at January 1, ........................ $ 11,981 $ -- $ 16,909
Purchased goodwill during the year ........... -- 11,981 --
Goodwill amortization expense ................ -- -- --
Transition impairment ........................ -- -- (5,500)
Impairment charge ............................ -- -- (11,409)
-------- -------- --------
Balance at December 31, ...................... $ 11,981 $ 11,981 $ --
======== ======== ========
54
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. SELECTED BALANCE SHEET AND STATEMENT OF OPERATIONS COMPONENTS
Inventory consists of the following (in thousands of dollars):
As of December 31,
2004 2003
------ ------
Raw materials .............................. $ 475 $3,219
Work-in-process ............................ 299 1,682
Finished goods ............................. 3,948 277
Inventory at customer sites ................ -- 80
------ ------
$4,722 5,258
====== ======
Property and equipment consists of the following (in thousands of dollars):
As of December 31,
--------------------
Useful life 2004 2003
----------- -------- --------
Tooling and test equipment ..................... 3 - 5 years $ 27,188 $ 27,196
Computer equipment ............................. 3 years 6,065 6,480
Furniture and fixtures ......................... 5 years 2,307 2,360
Land and buildings and leasehold improvements... 5 to 7, and 33 years 642 1,736
Construction in process ........................ 147 14
-------- --------
36,349 37,786
Less: Accumulated depreciation and amortization (34,594) (33,979)
-------- --------
$ 1,755 $ 3,807
======== ========
Depreciation expense for the years ended December 31, 2004, 2003 and 2002
amounted to $1,489 thousand, $3,890 thousand, and $6,602 thousand, respectively.
The above amounts include leasehold improvements under capital leases and
related accumulated amortization of $6,994 thousand and $6,021 thousand at
December 31, 2004, $6,994 thousand and $4,889 thousand at December 31, 2003, and
$6,990 thousand and $3,370 thousand at December 31, 2002, respectively. In 2003,
P-Com recorded a provision for impairment of equipment relating to the point -
to - multipoint product lines, of which $5,550 thousand was financed on capital
leases as of December 31, 2003 and this equipment was secured with the lessor.
Other accrued liabilities consist of the following (in thousands):
As of December 31,
-------------------
2004 2003
------- -------
Purchase commitment ............................. $ 278 $ 1,238
Deferred contract obligations (a) ............... -- 8,000
Deferred revenue ................................ 112 243
Accrued employee benefits ....................... 987 1,092
Accrued warranty (b) ............................ 491 1,110
Lease obligations ............................... -- 2,335
Accrued rent .................................... 308 497
Customer advance ................................ 298 468
Other ........................................... 1,026 1,243
------- -------
$ 3,500 $16,226
======= =======
(a) Deferred contract obligations
55
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. SELECTED BALANCE SHEET AND STATEMENT OF OPERATIONS COMPONENTS (CONTINUED)
Under a joint license and development contract, P-Com determined that an
Original Equipment Manufacturer agreement with a vendor provided for payments of
$8.0 million, specifically earmarked for marketing our products under a joint
license and development contract. Accordingly, beginning in 1998, the Company
had recorded a liability of $3.0 million, and this was increased to $8.0 million
in 1999. As of December 31, 2003 and 2002, the liability of $8.0 million under
this arrangement remained. The Company entered into a settlement agreement with
the vendor in July 2004 whereby the Company was obligated to pay the vendor
$500,000. As of December 31, 2004, the liability of $400,000 under this
arrangement remained, with a payment of $100,000 due January 1, 2005, and twelve
monthly installments of $25,000 per month beginning on January 31, 2005.
(b) A summary of product warranty reserve activity is as follows (in thousands):
2004 2003 2002
------- ------- -------
Balance at January 1, $ 1,110 $ 936 $ 2,843
Additions relating to product sold 367 729 430
Payments (984) (555) (2,337)
------- ------- -------
Balance at December 31, $ 493 $ 1,110 $ 936
======= ======= =======
c) Other long-term liabilities consist of the following (in thousands):
December 31,
-------------------
2004 2003
------- ------
Capital lease obligations ............. $ 1,743 6
------- ------
$ 1,743 6
======= ======
Other income (expense), net consists of the following for each year ended
December 31:
2004 2003 2002
------- ------- -------
Gains (losses) on settlements of accounts payable and liabilities $ 8,300 $ 2,194 $(1,254)
Gains (losses) on disposals of property and equipment (30) 1,061 (217)
Gains (losses) on transactions denominated in foreign currencies (143) 852 148
Write-off advance to an ex-employee -- (100) (159)
Write-off notes receivable from Spectrasite -- -- (791)
Accruals write-back -- -- 416
Other income (expenses), net 125 (268) 545
------- ------- -------
Total other income (expenses), net $ 8,252 $ 3,739 $(1,312)
======= ======= =======
56
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. BORROWING ARRANGEMENTS
NOTES PAYABLE
On November 3, 2004, we entered into a Note and Warrant Purchase Agreement (the
"Purchase Agreement") with a purchaser ("Purchaser") whereby the Purchaser
agreed to purchase debentures in the aggregate principal amount of up to
$5,000,000 (the "Notes") (the "Debenture Financing"). From the date of issuance,
the outstanding principal balance of the Notes bear interest, in arrears, at a
rate per annum equal to seven percent (7%), increasing to eight percent (8%) on
July 1, 2005 and ten percent (10%) on April 1, 2006 through the maturity date of
December 31, 2006. Interest shall be payable on a quarterly basis commencing on
March 31, 2005.
In addition, the Company agreed to issue warrants to purchase in the aggregate
up to 800,000 shares of the Company's common stock (the "Warrants"). The
Warrants will have an initial exercise price of $1.50 and a term of five years.
The Purchase Agreement provided that the Notes and Warrants be issued in two
closings. The first closing took place on November 26, 2004 and consisted of
$3,300,000 principal amount of Notes. The Purchase Agreement originally
contemplated that the second closing would take place no later than December 30,
2004. While no assurances can be given, the parties are currently negotiating
the conditions necessary to obtain the additional $1,700,000 under the Purchase
Agreement, in light of our deteriorating financial condition and results from
operations.
On November 30, 2004, Agilent Financial Services ("Agilent") entered into an
agreement with us to restructure the $1.725 million due Agilent on December 31,
2004. Under the terms of the agreement, we paid Agilent an initial payment of
$250,000 on December 1, 2004. Interest shall accrue on the $1.725 million at a
rate of 10.25% per annum from December 1, 2004 through April 1, 2006. We are
required to pay monthly payments equal to $92,187, for sixteen months, from
January 1, 2005, up to and including April 1, 2006. On the earlier of May 1,
2006 or within thirty (30) days of full repayment of the $1.725 million, we
shall pay any and all interest accrued. In addition, we issued Agilent a warrant
to purchase 178,571 shares of our common stock. The warrant has an initial
exercise price of $0.56 and a term of five years.
On September 17, 2004, the Company renewed its Credit Facility with Silicon
Valley Bank (the "Bank") until September 17, 2005. 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 $3.0 million borrowing line based on export related
inventories and receivables. The Credit Facility provides for cash advances
equal to 75% of eligible accounts receivable balances for both the EXIM program
and domestic lines, and up to $750,000 for eligible inventories (limited to 25%
of eligible EXIM accounts receivable), under the EXIM program. Advances under
the Credit Facility bear interest at the Bank's prime rate plus 3.5% per annum.
The Credit Facility is secured by all receivables, deposit accounts, general
intangibles, investment properties, inventories, cash, property, plant and
equipment of the Company. The Company has also issued a $4.0 million secured
promissory note underlying the Credit Facility to the Bank. As of December 31,
2004, there was no balance outstanding under this Credit Facility. The Company
has however issued Letter of Credits totaling $ 294 thousand with maturity to
April 2005 to certain vendors under this Credit Facility. The Letter of Credits
have not been drawn upon yet, as of December 31, 2004.
The Company has an unsecured overdraft line with a bank in Italy, for borrowings
of up to $83,000, based on domestic trade receivables. Borrowings under this
line bear interest at 4.5% per annum. At December 31, 2004, there were no
amounts drawn under this facility.
CONVERTIBLE SUBORDINATED NOTES
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 into shares of P-Com Common Stock. Interest on the 4.25% Convertible
Subordinated Notes was due semi-annually on May 1 and November 1 of each year.
During the period following issuance, through November 1, 2002, holders
exercised conversion options reducing the carrying amount to $22.4 million.
During the year ended December 31, 2002, certain conversions resulted in a gain
on debt extinguishment of $1.3 million.
57
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. BORROWING ARRANGEMENTS (CONTINUED)
On November 1, 2002, P-Com issued $22.4 million aggregate face value of 7%
Convertible Subordinated Notes due November 1, 2005, in exchange for the 4.25%
Convertible Subordinated Notes. The 7% Convertible Subordinated Notes were
originally convertible into P-Com's Common Stock at $63.00 per share. On May 28,
2003, $2.3 million of the Convertible Subordinated Notes were redeemed through
an exchange for property and equipment that resulted in a gain of $1.5 million,
included in the caption, "Gain on Debt Extinguishments, net," in the
Consolidated Statements of Operations for the year ended December 31, 2003. On
August 4, 2003, the remaining principal and accrued interest of the Convertible
Subordinated Notes totaling $21.1 million was converted into approximately
1,000,000 shares of Series B Convertible Preferred Stock that resulted in a gain
of $8.8 million included in the caption, "Gain on Debt Extinguishments, net" in
the Consolidated Statements of Operations for the year ended December 31, 2003.
BRIDGE NOTES
The Company received $2.7 million in bridge note financings during the year
ended December 31, 2003 in advance of the sale of Series C Preferred Stock,
discussed in Note 5. The bridge notes were convertible into Series C Preferred
Stock, and included detachable Series A Warrants to purchase 2.5 million shares
of Common Stock and Series B Warrants to acquire 3.5 million shares of the
Company's Common Stock. The proceeds from the bridge notes was allocated between
the notes and warrants based upon their relative fair values on the commitment
date, resulting in a debt carrying value of $2.0 million. Neither the original
conversion rate nor the adjusted conversion rate, giving effect to the
allocation of proceeds to warrant equity, resulted in a beneficial conversion
charge. During the year ended December 31, 2003, the discounted bridge notes
were accreted to a balance of $2.2 million, through periodic charges to interest
expense. During the fourth quarter, the holders of the bridge notes converted
their balances into Series C Preferred stock at an induced, beneficial
conversion rate, that resulted in a charge of $3.8 million included in the
caption, "Gain on Debt Extinguishments, net," in the Consolidated Statements of
Operations for the year ended December 31, 2003.
5. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
The authorized capital stock of P-Com is 35 million shares of Common Stock,
$0.003 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),
1,000,000 shares as Series B Convertible Preferred Stock (the "Series B
Preferred Stock"), 10,000 shares as Series C Convertible Preferred Stock (the
"Series C Preferred Stock"), and 2,000 shares as Series D Convertible Preferred
Stock (the "Series D Preferred Stock"). Effective July 19, 2004, P-Com effected
a one for thirty reverse stock split. All numbers have been restated to reflect
the stock split.
PREFERRED STOCK
The Board of Directors is authorized to issue 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, without further action by the holders of Common
Stock.
58
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
SERIES B CONVERTIBLE PREFERRED STOCK
On August 4, 2003, as a result of the restructuring of its Convertible Notes,
the principal amount and accrued interest of $21,138,000 was converted into
approximately 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 the Company's Common Stock equal to
the stated value divided by $6.00. Certain holders of Series B Convertible
Preferred Stock 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 the Company's Common Stock to allow for conversion of the
Series B Preferred Stock. The Company received the stockholder approval on
December 2, 2003 and these holders converted their Series B Convertible
Preferred Stock into Common Stock. If declared, the holders of the Series B
Preferred Stock shall be entitled to receive dividends payable out of funds
legally available therefore. Holders of Series B Preferred Stock shall share pro
rata in all dividends and other declared distributions. The basis of
distribution shall be the number of shares of Common Stock that the holders
would hold if all of the outstanding shares of Series B Preferred Stock had
converted into Common Stock.
Any time after January 31, 2004 and subject to certain limitations, the Company
may require the holders of Series B Preferred Stock to convert all outstanding
shares of Series B Preferred Stock into shares of Common Stock, in accordance
with the optional conversion formula, and all of the following conditions are
met:
o Closing bid price of the Common Stock for 10 consecutive trading days prior to
delivery of the mandatory conversion Notice equals or exceeds $12.00;
o Company shall have filed a registration statement covering all shares of
Common Stock issuable upon conversion of the Series B Preferred Stock, declared
effective by the SEC, and continuing effectiveness through and including the
date of the mandatory conversion;
o All shares of Common Stock issuable upon conversion of Series B Preferred
Stock are authorized and reserved for issuance; registered for resale under the
1933 Act; and listed on the Bulletin Board or other national exchange; and
o All amounts, if any, accrued or payable under the Certificate of Designation,
Rights and Preferences of the Series B Preferred Stock ("Certificate of
Designation") shall have been paid.
Upon the occurrence of the following events, the holders of Series B Preferred
Stock may require the Company to purchase their shares of Series B Preferred
Stock for cash:
o Company fails to remove any restrictive legend on any Common Stock certificate
issued to Series B Preferred stockholders upon conversion as required by the
Certificate of Designation;
o Company makes an assignment for creditors or applies for appointment of a
receiver for a substantial part of its business/property or such receiver is
appointed;
o Bankruptcy, insolvency, reorganization or liquidation proceedings shall be
instituted by or against the Company;
o Company sells substantially all of its assets;
59
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
SERIES B CONVERTIBLE PREFERRED STOCK (CONTINUED)
o Company merges, consolidates or engages in a business combination with another
entity that is required to be reported pursuant to Item 1 of Form 8-K (unless
the Company is the surviving entity and its capital stock is unchanged);
o Company engages in transaction(s) resulting in the sale of securities whereby
such person or entity would own greater than 50% of the outstanding shares of
Common Stock of the Company (on a fully-diluted basis);
o Company fails to pay any indebtedness of more than $250,000 to a third party,
or cause any other default which would have a material adverse effect on the
business or its operations.
The Series B Preferred Stock ranks senior to the Common Stock and the Series A
Preferred Stock. The consent of the majority holders of the Series B Preferred
Stock is required to create any securities that rank senior or pari passu to the
Series B Preferred Stock. Upon a liquidation event, any securities senior to the
Series B Preferred Stock shall receive a distribution prior to the Series B
Preferred Stock and pursuant to the rights, preferences and privileges thereof,
and the Series B Preferred Stock shall receive the liquidation preference with
respect to each share. If the assets and funds for distribution are insufficient
to permit the holders of Series B Preferred Stock and any pari passu securities
to receive their preferential amounts, then the assets shall be distributed
ratably among such holders in proportion to the ratio that the liquidation
preference payable on each share bears to the aggregate liquidation preference
payable on all such shares. If the outstanding shares of Common Stock are
increased/decreased by any stock splits, stock dividends, combination,
reclassification, reverse stock split, etc., the conversion price shall be
adjusted accordingly. Upon certain reclassifications, the holders of Series B
Preferred Stock shall be entitled to receive such shares that they would have
received with respect to the number of shares of Common Stock into which the
Series B Preferred Stock would have converted. If the Company issues any
securities convertible for Common Stock or options, warrants or other rights to
purchase Common Stock or convertible securities pro rata to the holders of any
class of Common Stock, the holders of Series B Preferred Stock shall have the
right to acquire those shares to which they would have been entitled upon the
conversion of their shares of Series B Preferred Stock into Common Stock. The
Series B Preferred Stock does not have voting rights.
60
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
SERIES B CONVERTIBLE PREFERRED STOCK (CONTINUED)
A summary of Series B Preferred Stock activity is as follows (in thousands):
Shares Amount
------ --------
Activity during the year ended December 31, 2003:
Issuance of Series B preferred stock 1,000 $ 11,619
Preferred stock accretions to accrete the
Fair value to the stated value (b) 651
Conversion of Series B preferred stock for 3,141
Shares of common stock (892) (10,909)
------ --------
Balances as of December 31, 2003 (c) (d) 108 $ 1,361
Activity during the year ended December 31, 2004:
Preferred stock accretions to accrete the fair
value to the stated value (b) 208
------ --------
Balances as of December 31, 2004 (c) (d) 108 $ 1,569
====== ========
(a) The Company, after consideration of several valuation models, determined the
fair value of the Preferred Stock as an amount equals to the fair value of the
number of common shares into which the Series C Preferred Stock is convertible
into using the trading market price on the date the Series C Preferred Stock was
issued.
(b) The Company accretes its Series B Preferred Stock to redemption value
through periodic charges to retained earnings.
(c) The Series B Preferred Stock is classified as a mezzanine security, outside
of stockholders equity in the accompanying consolidated balance sheets due to
the cash redemption provisions noted above. Under Statements of Financial
Accounting Standards No. 150, this security would have been classified as equity
in a non-public filing context.
(d) As of December 31, 2004, outstanding Series B Preferred Stock is convertible
into 381,916 shares of common stock.
SERIES C CONVERTIBLE PREFERRED STOCK AND WARRANTS
In October and December 2003, P-Com issued approximately 10,000 shares of Series
C Convertible Preferred Stock with a stated value of $1,750 per share, together
with warrants to purchase approximately 4.64 million shares of Common Stock.
Each share of Series C Convertible Preferred Stock converts into a number of
shares of the Company's Common Stock equal to the stated value divided by $3.00.
These shares of Series C Convertible Preferred Stock outstanding on December 31,
2004 are convertible into approximately 3.5 million shares of Common Stock.
Holders of Series C Convertible Preferred Stock are entitled to receive, out of
legally available funds, dividends at the rate of 6% per annum beginning on the
first anniversary of their date of issuance and 8% per annum beginning on the
second anniversary of their date of issuance. Dividends are payable
semi-annually, either in cash or shares of P-Com Common Stock.
61
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
SERIES C CONVERTIBLE PREFERRED STOCK (CONTINUED)
Each share of Series C Convertible Preferred Stock is convertible into a number
of shares of Common Stock equal to the stated value, plus any accrued and unpaid
dividends, divided by an initial conversion price of $3.00. This conversion
price is subject to adjustment for any stock splits, stock dividends or similar
transactions. The conversion price is also subject to adjustment in the event
that P-Com makes a dilutive issuance of Common Stock or other securities that
are convertible into or exercisable for Common Stock at an effective per share
purchase price that is less than the conversion price of the Series C Preferred
Stock in effect at the time of the dilutive issuance. The holders of Series C
Preferred Stock may convert their shares into shares of Common Stock at any
time. However, no holder of Series C Preferred Stock may convert its shares into
shares of Common Stock if the conversion would result in the holder or any of
its affiliates, individually or in the aggregate, beneficially owning more than
9.999% of P-Com's outstanding Common Stock. In the event a holder is prohibited
from converting into Common Stock under this provision due to the 9.999%
ownership limitation discussed above, the excess portion of the Series C shall
remain outstanding, but shall cease to accrue a dividend.
Subject to limitations above, the Series C Convertible Preferred Stock is also
mandatorily convertible at the option of P-Com 180 days after the effective date
of a registration statement covering the shares of Common Stock issuable upon
the conversion of the Series C Convertible 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 $6.00; (ii) the
continued effectiveness of the registration statement; (iii) all shares of
Common Stock issuable upon conversion of the Series C Convertible 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 OTC Bulletin Board or other national exchange; (iv)
there are no uncured redemption events; and (v) all amounts accrued or payable
under the Series C Convertible Preferred Stock Certificate of Designation or
registration rights agreement have been paid. As of February 21, 2005,
approximately 3933 shares of Series C Convertible Preferred Stock had been
converted into approximately 2.29 million shares of Common Stock and
approximately 6,009 shares of Series C Convertible Preferred Stock remained
outstanding. As of February 21, 2005, 3,933 shares of the Series C Warrants have
been exercised.
The shares of Series C Convertible Preferred Stock that remain outstanding are
convertible into approximately 3.5 million shares of Common Stock, subject to
the limitation on conversion described above. The number of shares of Common
Stock issuable upon conversion of the Series C Convertible Preferred Stock and
exercise of the Series C-1 and Series C-2 Warrants are subject to adjustment for
stock splits, stock dividends and similar transactions and for certain dilutive
issuances.
The investors of Series C were issued 233 Series C-1 Warrants and 233 Series C-2
Warrants for every share of Series C purchased. The C-1 Warrant has a term of
five years and an initial exercise price of $4.50 per warrant, increasing to
$5.40 per warrant beginning February 6, 2005. The Series C-2 Warrant has a term
of five years and an initial exercise price of $5.40 per warrant, increasing to
$6.60 per warrant beginning August 6, 2005. Subject to an effective registration
statement, beginning twenty-four (24) months after the Effective Date, the
Company may redeem the Series C-1 Warrants for $0.03 per Warrant if the Closing
Bid Price of the Company's Common Stock is equal to or greater than $10.80 for
ten (10) consecutive trading days. Beginning February 6, 2007, the Company may
redeem the Series C-2 Warrants for $0.03 per Warrant if the Closing Bid Price of
the Company's Common Stock is equal to or greater than $13.20 for ten (10)
consecutive trading days. The Conversion Price of the Series C and the Exercise
Price of the C-1 and C-2 Warrants shall be subject to adjustment for issuances
of Common Stock at a purchase price less than the then-effective Conversion
Price or Exercise Price, based on weighted average anti-dilution protection,
subject to customary carve-outs (See Common Stock Warrants, below).
62
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
SERIES C CONVERTIBLE PREFERRED STOCK (CONTINUED)
If P-Com completes a private equity or equity-linked financing (the "New
Financing"), the Series C holders may exchange any outstanding Series C at 100%
of face value for the securities issued in the New Financing. Such right shall
be voided in the event the Company raises $5.0 million of additional equity
capital at a price of not less than $3.60 per share.
For any equity or equity-linked private financing consummated within 12 months
after the closing of the Series C Financing, the investors in the Series C shall
have a right to co-invest in any private financing up to fifty percent (50%) of
the dollar amount invested in the Series C Financing. The investors shall have
five (5) trading days to respond. This co-investment provision shall not apply
to the issuance of stock in situations involving bona-fide strategic
partnerships, acquisition candidates and public offerings.
Upon the occurrence of the following events, (each a "Redemptive Event"), the
holders of Series C Preferred Stock may require the Company to purchase their
shares of Series C Preferred Stock for cash:
o the Company fails to remove any restrictive legend on any Common Stock
certificate issued to Series C Preferred Stock holders upon conversion as
required by the Certificate of Designation and such failure continues uncured
for five business days after receipt of written notice;
o the Company makes an assignment for the benefit of creditors or applies for
appointment of a receiver for a substantial part of its business/property or
such receiver is appointed;
o bankruptcy, insolvency, reorganization or liquidation proceedings shall be
instituted by or against the Company and shall not be dismissed within 60 days
of their initiation;
o the Company sells substantially all of its assets;
o the Company merges, consolidates or engages in a business combination with
another entity that is required to be reported pursuant to Item 1 of Form 8-K
(unless the Company is the surviving entity and its capital stock is unchanged);
o the Company engages in transaction(s) resulting in the sale of securities to a
person or entity whereby such person or entity would own greater than fifty
percent (50%) of the outstanding shares of Common Stock of the Company
(calculated on a fully-diluted basis);
o the Company fails to pay any indebtedness of more than $250,000 to a third
party, or cause any other default which would have a material adverse effect on
the business or its operations.
The Series C Preferred Stock ranks senior to the Common Stock, the Series A
Preferred Stock, the Series B Preferred Stock and ranks pari passu with the
Series D Preferred Stock. The consent of the majority holders of the Series C
Preferred Stock is required to create any securities that rank senior or pari
passu to the Series C Preferred Stock. If P-Com liquidates, dissolves or winds
up, the holders of Series C Preferred Stock and Series D Preferred Stock are
entitled to receive the stated value of their shares plus all accrued and unpaid
dividends prior to any amounts being paid to the holders of Series B Preferred
Stock and P-Com Common Stock. In addition, the holders of Series C Preferred
Stock are entitled to share ratably together with the holders of the Series D
Preferred Stock, the Series B Convertible Preferred Stock and P-Com Common Stock
in all remaining assets after the satisfaction of all other liquidation
preferences. If the assets and funds for distribution are insufficient to permit
the holders of Series C
63
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
SERIES C CONVERTIBLE PREFERRED STOCK (CONTINUED)
Preferred Stock and any pari passu securities to receive their preferential
amounts, then the assets shall be distributed ratably among such holders in
proportion to the ratio that the liquidation preference payable on each share
bears to the aggregate liquidation preference payable on all such shares. If the
outstanding shares of Common Stock are increased/decreased by any stock splits,
stock dividends, combination, reclassification, reverse stock split, etc., the
conversion price shall be adjusted accordingly.
Upon certain reclassifications, the holders of Series C Preferred Stock shall be
entitled to receive such shares that they would have received with respect to
the number of shares of Common Stock into which the Series C Preferred Stock
would have converted. If the Company issues any securities convertible for
Common Stock or options, warrants or other rights to purchase Common Stock or
convertible securities pro rata to the holders of any class of Common Stock, the
holders of Series C Preferred Stock shall have the right to acquire those shares
to which they would have been entitled upon the conversion of their shares of
Series C Preferred Stock into Common Stock.
The holders of Series C Preferred Stock are entitled to vote together with the
holders of the Series D Preferred Stock and Common Stock, as a single class, on
all matters submitted to a vote of P-Com's stockholders. The holders of the
Series C Preferred Stock are entitled to a number of votes equal to the number
of shares of P-Com Common Stock that would be issued upon conversion of their
shares of Series C Preferred Stock.
A summary of Series C Preferred Stock activities is as follows (in thousands):
Shares Amount
------- --------
Activity during the year ended December 31, 2003:
Sale of Series C preferred stock for cash, net of
issuance expenses 9.4 $ 15,108
Issuance of Series C preferred stock for services and
settlements .6 905
Allocation of cash proceeds to warrants (8,136)
Beneficial conversion feature (7,877)
Preferred stock accretions to accrete the fair value
to the stated value 870
------- --------
Balance as of December 31, 2003 10.0 870
Activity during the year ended December 31, 2004
Preferred stock accretions to accrete the fair value
to the stated value 2,184
Conversion of Series C preferred stock for 2,275
shares of common stock (4.0) (517)
------- --------
Balances as of December 31, 2004 (e) (f) 6.0 $ 2,537
======= ========
64
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
SERIES C CONVERTIBLE PREFERRED STOCK (CONTINUED)
(a) The Company, after consideration of several valuation models, determined the
fair value of the Preferred Stock as an amount equal to the fair value of the
number of common shares into which the Series C Preferred Stock is convertible
into using the trading market price on the date the Series C Preferred Stock was
issued.
(b) The Company allocated proceeds between the Series C Preferred Stock and the
Warrants based upon their relative fair values.
(c) The beneficial conversion feature was calculated using the adjusted
conversion rate, following the allocation of proceeds to warrants discussed in
item (b) above.
(d) The Company accretes its Series C Preferred Stock to redemption value
through periodic charges to retained earnings.
(e) The Series C Preferred Stock is classified as a mezzanine security, outside
of stockholders equity in the accompanying balance sheet due to the cash
redemption provisions noted above. Under Statements of Financial Accounting
Standards No. 150, this security would have been classified as equity in a
non-public filing context.
(f) As of December 31, 2004, outstanding Series C Preferred Stock are
convertible into approximately 3.5 million shares of Common Stock.
Beneficial conversion feature represents the excess of the aggregate fair value
of the of the Common Stock, using the market price at around the Series C
commitment date, that the Preferred Stockholders would receive at conversion
over the proceeds received, and it is accreted over a five-year period.
SERIES D CONVERTIBLE PREFERRED STOCK
P-Com has designated 2,000 shares of its Preferred Stock as Series D Convertible
Preferred Stock. In December 2003, P-Com issued the 2,000 shares of Series D
Convertible Preferred Stock to redeem $2 million of notes payable assumed from
the SPEEDCOM asset acquisition. The Series D Preferred Stock has a stated value
of $1,000 per share. Each share of Series D Preferred Stock is convertible into
a number of shares of Common Stock equal to the stated value divided by an
initial conversion price of $4.50. This conversion price is subject to
adjustment for any stock splits, stock dividends or similar transactions. The
holders of Series D Preferred Stock may convert their shares into shares of
Common Stock at any time. However, no holder of Series D Preferred Stock may
convert its shares into shares of Common Stock if the conversion would result in
the holder or any of its affiliates, individually or in the aggregate,
beneficially owning more than 9.999% of P-Com's outstanding Common Stock. The
Series D Preferred Stock are convertible into approximately 444,444 shares of
Common Stock.
Holders of Series D Preferred Stock are entitled to share pro-rata, on an
as-converted basis, in any dividends or other distributions that may be declared
by the board of directors of P-Com with respect to the Common Stock. If P-Com
liquidates, dissolves or winds up, the holders of Series D Preferred Stock and
the holders of Series C Preferred Stock are entitled to receive the stated value
of their respective shares plus all accrued and unpaid dividends, pari passu,
and prior to any amounts being paid to the holders of Series B Preferred Stock
and P-Com Common Stock. In addition, the holders of Series D Preferred Stock are
entitled to share ratably together with the holders of Series C Preferred Stock,
Series B Preferred Stock and P-Com Common Stock in all remaining assets after
the satisfaction of all other liquidation preferences.
65
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
SERIES D CONVERTIBLE PREFERRED STOCK (CONTINUED)
The holders of Series D Preferred Stock are entitled to certain rights and
preferences with respect to the holders of P-Com Common Stock. The holders of
Series D Preferred Stock are entitled to vote together with the holders of P-Com
Common Stock and holders of Series C Preferred Stock, as a single class, on all
matters submitted to a vote of P-Com's stockholders. The holders of Series D
Preferred Stock are entitled to a number of votes equal to the number of shares
of P-Com Common Stock that would be issued upon conversion of their shares of
Series D Preferred Stock.
Upon the occurrence of the following events, (each a "Redemptive Event"), the
holders of Series D Preferred Stock may require the Company to purchase their
shares of Series D Preferred Stock for cash:
o the Company fails to remove any restrictive legend from certificates
representing shares of P-Com Common Stock that are issued to holders who convert
their shares of Series D Preferred Stock;
o the Company makes an assignment for the benefit of creditors, or applies for
or consents to the appointment of a receiver or trustee;
o Any bankruptcy, insolvency, reorganization or other proceeding for the relief
of debtors is instituted by or against P-Com and is not dismissed within 60
days;
o the Company sells substantially all of its assets, merges or consolidates with
any other entity or engages in a transaction that results in any person or
entity acquiring more than 50% of P-Com's outstanding Common Stock on a fully
diluted basis;
o the Company fails to pay when due any payment with respect to any of its
indebtedness in excess of $250,000;
o the Company breaches any agreement for monies owed or owing in an amount in
excess of $250,000 and the breach permits the other party to declare a default
or otherwise accelerate the amounts due under that agreement; and
o the Company permits a default under any agreement to remain uncured and the
default would or is likely to have a material adverse effect on the business,
operations, properties or financial condition of P-Com.
A summary of Series D Preferred Stock activities is as follows (in thousands):
Activity during the year ended December 31, 2004:
Shares Amount
------- --------
Issuance of Series D Preferred Stock, at
fair value, to redeem $2 million face
value of notes (a) 2,000 $ 2,000
------- --------
Balances as of December 31, 2004 (b) (c) 2,000 $ 2,000
======= ========
(a) The Company, after consideration of several valuation models, determined the
fair value of the Preferred Stock as an amount equal to the fair value of the
number of common shares into which the Series D Preferred Stock is convertible
into using the trading market price on the date the Series D Preferred Stock was
issued.
66
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
SERIES D CONVERTIBLE PREFERRED STOCK (CONTINUED)
(b) The Series D Preferred Stock is classified as a mezzanine security, outside
of stockholders equity in the accompanying balance sheet due to the cash
redemption provisions noted above. Under Statements of Financial Accounting
Standards No. 150, this security would have been classified as equity in a
non-public filing context.
(c) As of December 31, 2004, outstanding Series D Preferred Stock is convertible
into 444,444 shares of Common Stock.
COMMON STOCK
In January 2003, the Company sold 70,000 shares of Common Stock to an existing
stockholder for aggregate net proceeds of $307,000. In December 2003, P-Com
issued 2.1 million shares of its Common Stock in connection with the SPEEDCOM
asset acquisition. In accordance with Statements of Financial Accounting
Standards No. 141, Business Combinations, these common shares were valued based
upon trading market prices around the commitment date of the purchase
transaction, or $7.2 million. In December 2003, holders of Series B Preferred
Stock converted the Preferred Stock into 3.14 million shares of Common Stock.
During the year ended December 31, 2003, the Company also issued 3.43 million
shares of Common Stock in exchange for services and to settle indebtedness. In
all instances where Common Stock was issued in exchange for services, the Common
Stock was valued using the trading market prices on the commitment date or issue
date, whichever is appropriate for the respective transaction.
In June 2002, P-Com sold approximately 3.82 million shares of unregistered
Common Stock at a per share price of $21.00, for an aggregate net proceeds of
approximately $7.3 million. In December 2002, P-Com sold approximately 111,111
shares of unregistered Common Stock at a per share price of $4.50, for an
aggregate net proceeds of approximately $0.4 million. The shares have
subsequently been registered for resale.
At December 31, 2004, P-Com had 3,870,393 shares of Common Stock reserved for
issuance upon exercise of outstanding warrants and options.
67
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
COMMON STOCK WARRANTS
Three Year Warrant Summary. The following table summarizes our Common Stock
warrant activity for each of each year ended December 31, (in thousands, except
per share amounts):
2004 2003 2002
----------------------------------------------------------------
Shares Price Range Shares Price Range Shares Price Range
Outstanding at beginning of year 5,900 $9.00-$1,275.00 102 $15.00-$42.50 22 $450.00-$1,275.00
Issued 707 $0.56-$1.50 5,748 $0.30-$1.02 55 $9.00-$30.60
Adjustments (a) (525) 71 $4.38-$12.44 25 $131.40-$373.20
Exercised (3,255) $0.00-$0.05 (36) $0.03-$0.03
Cancelled (124) $0.24-$0.24 (625) $6.12-$255.00
-------------- ------ ------
Outstanding at end of year 2,703 5,900 102
======= ====== ======
Warrants exercisable at end of year 2,703 5,801 102
------- ------ ------
Weighted-average exercise price of
warrants issued during the year $ 1.26 $4.80 $19.20
(a) Adjustments to Common Stock warrants arise from anti-dilution terms. The
issuance of the Agilent Warrant and the SDS Warrant triggered the antidilution
provisions of the Series C-1 Warrants, the Series C-2 Warrants and the Series C
Convertible Preferred Stock.
2004 WARRANT ACTIVITIES
In November 2004, P-Com issued a warrant to purchase 528,000 shares of the
Company's common stock, in connection with the issuance of the $3.3 million
promissory note to SDS Capital SPC Ltd. (the "SDS Warrant"). The SDS Warrant has
an initial exercise price of $1.50 and a term of five years. The Company
allocated the proceeds between the carrying value of the promissory note and the
warrants based on the fair value of the transaction, resulting in an effective
interest rate for the promissory note of 13.4%.
In November 2004, P-Com issued a warrant to purchase 178,571 shares of the
Company's common stock to Agilent Financial Services, in connection with the
restructuring of the $1.725 million obligation owed to Agilent Financial
Services (the "Agilent Warrant"). The Agilent Warrant has an initial exercise
price of $0.56 and a term of five years. The Company allocated the proceeds
between the carrying value of the note and the warrants based on the fair value
of the transaction, resulting in an effective interest rate for the note of
17.8%.
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.
68
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
STOCKHOLDER RIGHTS AGREEMENT (CONTINUED)
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
of Directors, in its sole discretion, may redeem the Rights for $0.003 per
Right.
6. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS
On October 8, 2004, P-Com's stockholders approved the adoption of the 2004
Equity Incentive Plan (the "2004 Plan") as a successor to P-Com's 1995 Stock
Option/Stock Issuance Plan (the "1995 Plan").
The 2004 Plan authorizes the issuance of up to 3,000,000 shares of Common Stock
as of December 31, 2004.
The 2004 Plan provides four different types of equity incentive awards: (i)
stock options, (ii) stock appreciation rights, (iii) restricted stock, and (iv)
stock units.
The exercise price per share for incentive stock options granted under the 2004
Plan may not be less than 100% of the fair market value per share of common
stock on the option grant date. The exercise price for non-statutory stock
options granted under the 2004 Plan may not be less that 85% 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.
STOCK APPRECIATION RIGHTS
The Plan Administrator has complete discretion under the 2004 Plan to determine
which eligible individuals are to receive stock appreciation rights, the time or
times when such grants are to be made, the number of shares subject to each
stock appreciation right, the vesting schedule (if any) to be in effect for the
stock appreciation right and the maximum term for which any stock appreciation
right is to remain outstanding. Under the 2004 Plan, an individual may not
receive stock appreciation rights that pertain to more than 833,333 shares of
common stock in any given year.
RESTRICTED STOCK
The Plan Administrator has complete discretion under the 2004 Plan to determine
which eligible individuals are to receive shares of restricted stock, the time
or times when such grants are to be made, the number of shares granted and the
vesting schedule (if any) to be in effect for the restricted stock. In any given
year, the number of shares of restricted stock that are subject to
performance-based vesting conditions granted to a participant in the 2004 Plan
may not exceed 833,333 shares.
69
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
STOCK UNITS
The Plan Administrator has complete discretion under the 2004 Plan to determine
which eligible individuals are to receive stock units, the time or times when
such grants are to be made, the number of stock units granted and the vesting
schedule (if any) to be in effect for the stock units. In any given year, the
number of stock units that are subject to performance-based vesting conditions
granted to a participant in the 2004 Plan may not exceed 833,333 shares.
The following table summarizes stock option activity under P-Com's 2004 Plan (in
thousands, except per share amounts):
2004 2003 2002
------------------------------------------------------
Shares Price Shares Price Shares Price
------ ------- ----- -------- ------ -------
Outstanding at beginning of year 1,104 $ 26.40 102 $ 361.50 48 $876.30
Granted 335 2.41 1,034 $ 3.90 68 30.30
Exercised 1 4.17 -- -- --
Canceled (272) 10.42 (32) 355.80 (14) 504.60
------ ----- ------
Outstanding at end of year 1,168 23.30 1,104 26.40 102 361.50
====== ===== ======
Options exercisable at year-end 451 54.83 151 162.00 40 735.90
====== ===== ======
Weighted-average fair value of
options granted during the year $23.30 $3.60 $23.10
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2004 (in thousands, except per share amounts):
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 its Board of Directors prior to its
expiration in January 2005. Under the Plan, P-Com sold approximately 900, 2,633,
and 2,600, shares in 2002, 2001, and 2000, respectively. The Board of Directors
suspended the plan in January 2002.
70
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
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:
2004 2003 2002
------- -------- --------
Net loss attributable to common stockholders
As reported .............................. $(5,868) $(14,407) $(54,306)
Pro forma ................................ $(7,808) $(16,374) $(57,054)
Net loss per share
As reported --Basic and Diluted .......... $ (0.56) $ (7.98) $ (63.77)
Pro forma --Basic and Diluted ............ $ (0.75) $ (9.07) $ (67.00)
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 2004, 2003, and 2002, respectively: expected volatility of 128%, 158%,
and 158%; weighted-average risk-free interest rates of 2.8%, 2.1%, and 3.1% ;
weighted-average expected lives of 4.0, 4.0, and 4.0; 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: expected volatility
of 197% weighted-average risk-free interest rates of 1.7% weighted-average
expected lives of 0.5 years and a dividend yield of zero. The weighted-average
fair value of those purchase rights granted in 2002 was $24.90. The employee
stock purchase plan was suspended in 2002.
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 60% 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.
7. RESTRUCTURING AND OTHER CHARGES
The Company continually monitors its inventory carrying value in the light of
the slowdown in the global telecommunications market, especially with regard to
an assessment of future demand for its point - to - multipoint, and its other
legacy product line. This has 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 second quarter of 2003. In the first quarter of
2003, the Company 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 a write-back of accounts payable and purchase commitment
liabilities arising from vendor settlements.
71
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. RESTRUCTURING AND OTHER CHARGES (CONTINUED)
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 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 our product line. An impairment charge is recorded if the net
cash flows derived from the analysis are less than the asset's carrying value.
We deem 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, the Company 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.
A summary of inventory reserve and provision for impairment of property and
equipment activities is as follows (in thousands):
Inventory Reserve
Additions
Balance at Charged to Deductions
Beginning Statement From Balance at
of Year of Operations Reserves End of Year
---------- ------------- ---------- -----------
Year ended December 31, 2002 $ 38,597 $ 5,770 $( 4,800) $ 39,567
Year ended December 31, 2003 $ 39,567 $ 5,460 $(17,908) $ 27,119
Year ended December 31, 2004 $ 27,119 $ 916 $ (3,746) $ 24,289
In connection with a workforce reduction in May 2003, the Company 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.
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.
72
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. GAIN (LOSS) ON DISCONTINUED OPERATIONS
In the first quarter of 2003, the Company committed to a plan to sell its
services business, P-Com Network Services, Inc. ("PCNS"). 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, entitled, "Discontinued Operations," in the
Consolidated Statements of Operations. On April 30, 2003, the Company entered
into an Asset Purchase Agreement with JKB Global, LLC ("JKB") to sell certain
assets of PCNS. The total cash consideration was approximately $105,000, plus
the assumption of certain liabilities. The Company guaranteed PCNS' obligations
under its premises lease, through July 2007. As part of the sale to JKB, JKB
agreed to sublet the premises from PCNS for one year beginning May 1, 2003. The
terms of the sublease required JKB to pay less than the total amount of rent due
under the terms of the master lease. As a result, the Company remained 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. In the third quarter of 2003, the
Company reached an agreement with the landlord to settle the lease guarantee for
$0.3 million, and therefore wrote-back the excess $1.2 million accrual as a gain
in discontinued operations in the third quarter of 2003.
Summarized results of PCNS are as follows (in thousands):
Year Ended December 31,
2004 2003 2002
------- ------- -------
Sales $ -- $ 1,065 $ 3,337
------- ------- -------
Loss from operations $ (40) $ (581) $(4,284)
Provision for income taxes -- -- --
------- ------- -------
Net loss $ (40) $ (581) $(4,284)
------- ------- -------
The loss from the sale of the discontinued services unit was $1.6 million for
the year ended December 31, 2003, and this was principally due to the write-off
of assets upon the discontinuation of the services business unit.
The assets and liabilities of the discontinued operations consisted of the
following (in thousands):
December 31,
-------------
2004 2003
---- ----
Total assets related to discontinued operations
Cash $ -- $ --
Accounts receivable -- --
Inventory -- --
Prepaid expenses and other assets -- --
Property plant and equipment -- --
Other assets -- 40
---- ----
$ -- $ 40
---- ----
Total liabilities related to discontinued operations
Accounts payable $183 $183
Other accrued liabilities 66 130
---- ----
$249 $313
73
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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
Sales for 2004 2004 2003 2002
---------- ------- ------- -------
North America ............... 11% $ 2,579 $ 3,042 $ 2,949
United Kingdom .............. 23% 5,583 6,349 5,894
Continental Europe .......... 21% 5,178 3,693 4,487
Asia ........................ 14% 3,386 5,831 15,018
Other Geographic Regions .... 31% 7,449 1,926 1,338
------- ------- ------- -------
100% $24,175 $20,841 $29,686
======= ======= ======= =======
2004 2003
------ ------
Property, plant and equipment, net
United States .............................. $1,467 $2,324
United Kingdom ............................. 26 36
Italy ...................................... 253 1,439
Other geographic regions ................... 9 8
------ ------
Total ...................................... $1,755 $3,807
====== ======
10. NET LOSS PER SHARE
The numerator for calculation of net loss per common share is the Company's net
loss for the period, less preferred stock dividends and accretions. The
denominator, weighted average common shares outstanding, does not include stock
options with an exercise price that exceeds the average fair market value of the
underlying Common Stock or other dilutive securities because the effect would be
anti-dilutive.
11. INCOME TAXES
Loss before discontinued operations, income taxes, cumulative effect of change
in accounting principle and Preferred Stock accretions consists of the following
(in thousands):
Year Ended December 31,
----------------------------------
2004 2003 2002
-------- -------- --------
Domestic ........... $ (2,574) $(10,669) $(44,694)
Foreign ............ (706) (80) (298)
-------- -------- --------
$ (3,280) $(10,749) $(44,992)
======== ======== ========
74
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes consists of the following (in
thousands):
2004 2003 2002
------ ----- -----
Current:
Federal ......................... $ -- $ -- $(503)
State ........................... -- -- --
Foreign ......................... -- -- 33
------ ----- -----
-- -- (470)
------ ----- -----
Deferred:
Federal ......................... -- -- --
State ........................... -- -- --
------ ----- -----
-- --
------ ----- -----
Total ........................... $ -- $ -- $(470)
====== ===== =====
Deferred tax assets consist of the following (in thousands):
December 31,
------------------------
2004 2003
--------- ---------
Net operating loss carryforwards ..... $ 98,594 $ 92,133
Credit carryforwards ................. 4,143 4,352
Intangible assets .................... 16,126 18,868
Reserves and other ................... 11,417 15,549
--------- ---------
Total deferred tax assets ............ $ 130,280 $ 130,902
Valuation allowance .................. (130,280) (130,902)
--------- ---------
Net deferred tax asset ............... $ -- $ --
========= =========
For federal and state tax purposes, a portion of P-Com's net operating loss
carryforwards may be subject to certain limitations on utilization in case of
change in ownership as defined by federal and state tax law.
Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their bases for
financial reporting purposes. In addition, future tax benefits, such as net
operating loss carryforwards, are recognized to the extent that realization of
such benefits is more likely than not. 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, 2004, P-Com had a federal net operating loss carry forward of
approximately $271,970,000. If not utilized, the losses will begin to expire in
2017.
75
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. INCOME TAXES (CONTINUED)
Reconciliation of the statutory federal income tax rate to its effective tax
rate is as follows:
2004 2003 2002
------ ------ ------
Income tax benefit at federal statutory rate -35.0% -35.0% -35.0%
State income taxes net of federal benefit -5.8% -5.8% -5.8%
Foreign income taxes at different rate 0.0% 0.0% 0.5%
Change in valuation allowance 40.8% 40.8% 40.8%
Other Net 0.0% 0.0% -1.4%
--------------------------
Total 0.0% 0.0% -0.9%
==========================
12. ACQUISITION
WAVE WIRELESS DIVISION OF SPEEDCOM WIRELESS CORPORATION
On December 10, 2003, P-Com acquired substantially all of the operating assets
and liabilities of Wave Wireless ("Wave Wireless"), a division of SPEEDCOM
Wireless Corporation, a Sarasota, Florida-based company, through the issuance of
2,116,667 shares of P-Com Common Stock valued at $7,238,000, using market values
for such shares around the commitment date ($3.42). Wave Wireless 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 Wave
Wireless division were included from the date of acquisition.
The Company accounted for the Wave Wireless acquisition as a purchase under
Statements of Financial Accounting Standards No. 141, Business Combinations
("SFAS 141"). As a result, the purchase price was allocated to the fair values
of assets acquired and liabilities assumed based upon their fair values. The
excess of the purchase price over the fair values of assets and liabilities
resulted in the recognition of $11.9 million of goodwill. The following tabular
presentation reflects the purchase allocation:
Fair value of 63.5 million shares of Common Stock $ 7,238
Cash advances to Speedcom 1,580
Liabilities assumed:
Operating liabilities 1,483
Notes payable 3,000
-------
13,301
Assets acquired:
Current assets, at fair values 1,094
Property and equipment and other assets 226
-------
$11,981
=======
76
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. ACQUISITION (CONTINUED)
WAVE WIRELESS DIVISION OF SPEEDCOM WIRELESS CORPORATION (CONTINUED)
The following unaudited pro forma financial information gives effect to the Wave
Wireless acquisition, as if it had occurred at the beginning of the respective
period. Unaudited pro forma financial information is not necessarily indicative
of the results of operations that would have occurred had the acquisition taken
place at the beginning of those periods:
December 31,
2003 2002
----------- --------
Sales $ 25,222 $ 37,362
========================
Loss from continuing operations applicable to
common shareholders $ 15,559 $(48,971)
========================
Loss from continuing operations per common share $ (3.90) $ (15.90)
========================
Shares used to compute loss from continuing
operations per common share 3,905 3,102
========================
13 COMMITMENTS
OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES
In 2000, P-Com entered into several capital leases for equipment in the amount
of $1,869 thousand with interest accruing at 11%. These leases expired in 2002.
In 2001, P-Com entered into several capital leases for equipment in the amount
of $3,212 thousand with interest accruing at 11%. These leases expired in 2004.
In 2002, P-Com entered into several capital leases for equipment in the amount
of $459 thousand with interest accruing at 7.25%. These leases expired in 2003.
P-Com did not enter into any new capital lease arrangement in 2003. The capital
lease obligations are secured on all the leased equipment. Future minimum lease
payments required under these leases are as follows (in thousands):
The present value of net minimum lease payments are reflected in the December
31, 2004 and 2003 balance sheets as a component of other accrued liabilities and
other long-term liabilities of $0.0 and $2,317 thousand, respectively.
77
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. COMMITMENTS (CONTINUED)
OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES (CONTINUED)
P-Com leases its facilities under non-cancelable operating leases, which expire
at various times through 2015. 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, 2004 are as follows (in
thousands):
Year Ending December 31,
------------------------
2005 ................................ $1,671
2006 ................................ 319
2007 ................................ 319
2008 ................................ 319
2009 ................................ 319
Thereafter........................... 1,678
------
$4,625
======
During 2004, 2003, and 2002, the amount of rent expense incurred by P-Com under
non-cancelable operating leases was $1,718 thousand, $1,446 thousand, and $3,230
thousand respectively.
14. CONTINGENCIES
In June 2000, two former consultants to P-Com Italia S.p.A. filed a complaint
against P-Com Italia in the Civil Court of Rome, Italy seeking payment of
certain consulting fees allegedly due the consultants totaling approximately
$615,000. The Civil Court of Rome has appointed a technical consultant in order
to determine the merit of certain claims made by the consultants. P-Com believes
that the claims are wholly without merit and, while no assurances can be given,
that the claims will be rejected.
15. SUPPLEMENTAL CASH FLOW INFORMATION
The following provides additional information concerning supplemental disclosure
of cash flow activities.
YEAR ENDED DECEMBER 31,
2004 2003 2002
------- ------- ------
Cash paid for income taxes ...... $ -- $ -- $ --
======= ======= ======
Cash paid for interest .......... $ 682 $ 204 $1,829
======= ======= ======
78
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
NON-CASH TRANSACTIONS
During 2003, P-Com redeemed $20,090,000 of 7% Convertible Notes through an
issuance of approximately 1,000,000 shares of Series B Preferred Stock. P-Com
also redeemed $2.37 million of the Convertible Notes and repurchased 30,667
shares of Common Stock through an exchange for property and equipment.
During 2003, P-Com issued shares of Common Stock, valued at approximately $0.5
million (2002: $1.27 million), to pay vendors for outstanding liabilities, and
issued shares of Common Stock, valued at approximately $0.4 million, to pay a
consultant in lieu of services rendered.
During 2003, P-Com issued 2.1 million shares of Common Stock as consideration
for the asset acquisition from SPEEDCOM.
During 2003, P-Com issued shares of Series D Convertible Preferred Stock valued
at approximately $2 million, to redeem $2 million of promissory notes assumed
from SPEEDCOM.
During 2002, $459,000 of property and equipment were acquired through the
assumption of capital lease liabilities, respectively. In 2004 and 2003, no such
transactions transpired.
During 2002, 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 thousand for the year
ended December 31, 2002, in accordance with FAS 84, a non-operating gain of $1.4
million for the year ended December 31, 2002. See Note 4 for additional
information.
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, brokers, investment bankers and other service providers in
conjunction with the Common Stock and Preferred Stock issuances, and certain
warrant holders for anti-dilution adjustments.
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth the Company's condensed consolidated financial
information for the quarterly periods during the years ended December 31, 2004
and 2003. The amounts are in thousands, except income (loss) per common share.
Income (loss) per common share for periods prior to July 19, 2004 has been
restated to give effect to a one-for-thirty reverse stock split.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
YEAR ENDED DECEMBER 31, 2004
Net sales $ 6,837 $ 6,917 $ 6,143 $ 4,278
Gross Profit 1,738 1,992 1,157 568
Income (loss) from continuing
operations (2,341) 6,253 (3,438) (3,754)
Discontinued operations (40) -- -- --
Preferred stock accretions (776) (673) (683) (260)
Net income (loss) applicable to
common shareholders (3,157) 5,580 (4,121) (4,170)
Income (loss) per common share (0.39) 10.83 (0.27) (0.35)
79
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
YEAR ENDED DECEMBER 31, 2003
Net sales $ 4,617 $ 4,965 $ 5,569 $ 5,690
Gross profit (3,608) 841 1,138 1,866
Income (loss) from continuing
operations (8,516) (4,258) 8,033 (6,008)
Discontinued operations (1,858) (1,767) 1,367 121
Preferred stock accretions -- -- -- (1,522)
Net income (loss) applicable to
common shareholders (10,374) (6,025) 9,400 (7,409)
Income (loss) per share (8.52) (133.10) 1.88 (2.29)
17. SUBSEQUENT EVENT
On March 10, 2005, the Company's Chief Executive Officer, Samuel Smookler,
resigned as Chief Executive Officer and a director of the Company. The Board of
Directors is currently negotiating the terms of his severance arrangements.
Under the terms of his existing Agreement, Mr. Smookler may be entitled to
receive severance payments totaling $250,000. In addition, his incentive stock
option to acquire 80,000 shares of common stock vests immediately. The Company
will record the negotiated severance expense effective with the date of
termination during the first fiscal quarter in the year ended December 31, 2005.
The acceleration in vesting of Mr. Smookler's incentive stock options is not
considered a modification and, therefore, no expense will be recorded, because
acceleration upon termination was provided for in his original employment
agreement.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 2002, 2003, AND 2004
(IN THOUSANDS)
Additions
Balance a Charged to Deductions
Beginning Statement From Balance at
of Year of Operations Reserves End of Year
--------- ------------- ---------- -----------
Allowance for doubtful accounts:
Year ended December 31, 2002 $ 1,080 $ 258 $ (959) $ 379
Year ended December 31, 2003 379 -- (69) 310
Year ended December 31, 2004 310 202 (82) 430
Inventory related reserves:
Year ended December 31, 2002 $ 38,597 $ 5,770 $ (4,800) $ 39,567
Year ended December 31, 2003 39,567 5,459 (17,907) 27,119
Year ended December 31, 2004 27,119 916 (3,746) 24,289
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On August 7, 2003, PricewaterhouseCoopers LLP, ("PricewaterhouseCoopers"), was
dismissed as our independent registered public accounting firm. On August 7,
2003, our Audit Committee approved Aidman Piser & Company ("Aidman Piser") as
our new independent auditors.
The reports of PricewaterhouseCoopers on our financial statements for the
preceding two fiscal years contained no adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principle. However, the reports of PricewaterhouseCoopers contained an
explanatory paragraph indicating that there was substantial doubt about our
ability to continue as a going concern.
In connection with the audits for the two most recent fiscal years in the period
ended December 31, 2002 and through August 7, 2003, there were no disagreements
with PricewaterhouseCoopers, on any matter of accounting principles or
80
practices, financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers
would have caused them to make reference in their audit report.
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer, the Company
conducted an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
of the end of the period covered by this report (the "Evaluation Date"). Based
upon the evaluation, the Chief Executive Officer and Chief Financial Officer
have concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures were effective to ensure that information required to be
disclosed by the Company in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
There were no changes in our internal control over financial reporting during
2004.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
P-Com's board of directors is authorized to have seven directors. The executive
officers and directors of P-Com, their ages as of March 20, 2005, their
positions and their backgrounds are as follows:
Name Age Position
----------------- --- ------------------------------------------
George P. Roberts 72 Chairman of the Board
Daniel W. Rumsey 43 Chief Restructuring Officer
Don Meiners 43 President
Carlos Belfiore 60 Vice President and Chief Technical Officer
Elsbeth B. Kahn 48 Vice President of Sales and Marketing
Richard Reiss 48 Director
Frederick Fromm 55 Director
R. Craig Roos 59 Director
BACKGROUND
The principal occupations of each executive officer and director of P-Com for at
least the last five years are as follows:
George P. Roberts
Mr. Roberts 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. Mr. Roberts' term as a director of P-Com
ends upon the 2007 Annual Meeting of Stockholders.
81
Daniel W. Rumsey
Mr. Rumsey was appointed Chief Restructuring Officer on March 10, 2005. Prior to
his appointment, since March 2003, Mr. Rumsey served as P-Com's Vice President,
Acting Chief Financial Officer and General Counsel. Prior to joining P-Com, Mr.
Rumsey was Vice President and General Counsel of Knowledge Kids Network, Inc., a
multi-media education company. Knowledge Kids Network is part of the Knowledge
Universe family of companies. Prior to joining Knowledge Kids Network, Mr.
Rumsey was the President and General Counsel of Aspen Learning Systems and
NextSchool, Inc., which he joined in February 1997. Mr. Rumsey sold Aspen
Learning Systems and NextSchool to Knowledge Kids Network in 1999. Mr. Rumsey
has an extensive restructuring, legal and finance background, dating back to
1987 when he served as a staff attorney in the U.S. Securities and Exchange
Commission's Division of Corporation Finance. He has also served as Assistant
General Counsel for Terra Industries, Inc. and Associate General Counsel and
Corporate Secretary of EchoStar Communications Corporation. Mr. Rumsey also
serves as the Chairman of the Board of Directors of Prescient Applied
Intelligence. Mr. Rumsey received his J.D. from the University of Denver College
of Law in 1985, and his B.S. from the University of Denver in 1983.
Don Meiners
Mr. Meiners was appointed President on March 10, 2005. Prior to his appointment,
he was Vice President - Operations of P-Com, and has held a variety of
management roles since he joined P-Com in 1992. These include Vice President of
Operations, Vice President Engineering, Vice President Manufacturing and Vice
President of Engineering Program Management. Prior to P-Com, Mr. Meiners served
in design engineering roles and project management for Digital Microwave
Corporation and Equitorial Inc. Mr. Meiners graduated from the Missouri
Institute Of Technology in 1983.
Carlos Belfiore
Dr. Belfiore is currently Vice President - Engineering, and Chief Technical
Officer of P-Com. Prior to joining P-Com in November 2003, he was an independent
engineering consultant. Prior to that, Dr. Belfiore held various management and
technical leadership positions at Stratex Networks, which he joined in 1988,
including Senior Director IDU Development, Director of New Technology
Development, Director of Modem Development, and Senior Scientist. Prior to
joining Stratex, Dr. Belfiore was with the Microwave Communication Division of
Harris Corporation, serving as Manager of Advanced Development and Principal
Development Engineer. Dr. Belfiore received a Ph.D. in electrical engineering
from University of Minnesota in 1976.
Elsbeth B. Kahn
Elsbeth B. Kahn. Beth Kahn is currently Vice President - Sales and Marketing, a
position she has held since she joined P-Com in April 2004. Prior to joining
P-Com, Ms. Kahn was Chief Operating Officer at Advanced Network Information, a
data networking technical and sales skills training company. Prior to joining
Advanced Network Information in 2003, Ms. Kahn was Vice President and General
Manager at DMC Stratex Networks, where she managed the profitability of three
different product lines. Prior to joining DMC Stratex Networks in 2000, she held
several director positions in manufacturing, marketing, development and business
operations at Lucent Technologies/AT&T. Earlier in her career, Ms. Kahn spent
six years at Bell Laboratories in the Microelectronics Business supporting
digital radio, secure telephony and multi-chip module products. Ms. Kahn
received a Master's of Science degree in Mechanical Engineering from the
Massachusetts Institute of Technology in 1983, and a Bachelor's of Science
degree in Mechanical Engineering from the University of Idaho in 1981, where she
graduated Summa cum Laude.
Richard Reiss
Mr. Reiss has served as director of P-Com since March 2005. Mr. Reiss is
currently the Chairman of the Board of Directors of Glowpoint, Inc., where he
has served since May 2000. He served as the Chief Executive Officer of Glowpoint
from May 2000 to April 2002, and as President from May 2000 to April 2002. Mr.
Reiss served as Chairman of the Board of Directors, President and Chief
Executive Officer of All Communications Corporation from its formation in 1991
until the formation of Glowpoint's predecessor pursuant to a merger of All
Communications Corporation and View Tech, Inc. in May 2000.
82
Frederick Fromm
Mr. Fromm has served as a director of P-Com since June 2001. Since February
2004, Mr. Fromm has served as a consultant to several telecommunications
companies. From May 2003 to February 2004, Mr. Fromm was 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, 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.
R. Craig Roos
Mr. Roos joined P-Com's Board of Directors in December 2003. Mr. Roos is founder
and sole owner of Roos Capital Planners, Inc., which he formed in 1979 and which
specializes in advisory services to the communications industry, primarily in
the fixed and mobile wireless area. Mr. Roos has served on the boards of several
companies in the wireless, communications, software, media, and
telecommunications industries. He served as chairman of MobileMedia Corporation
from 1993 until 1995. Mr. Roos also was a co-founder of Locate, a digital local
access carrier specializing in high-speed T-1 level radio carrier technologies.
Mr. Roos has testified before the United States Congress on telecommunications
issues and is a former chairman of the Alternative Local Telecommunications
Trade Association. Mr. Roos currently serves on the Board of Directors of
SPEEDCOM Wireless Corporation.
BOARD COMMITTEES AND MEETINGS
The board of directors has an Audit Committee and a Compensation Committee.
Audit Committee. The Audit Committee currently consists of two directors, Mr.
Fromm, and Mr. Roos. The committee is primarily responsible for approving the
services performed by P-Com's independent registerd public accounting firm and
reviewing their reports regarding P-Com's accounting practices and systems of
internal accounting controls. The Board of Directors has determined that Mr.
Roos is a financial expert in that Mr. Roos has (i) an understanding of
generally accepted accounting principles and financial statements; (ii) has the
ability to assess the general application of such principles in connection with
the accounting for estimates, accruals and reserves; (iii) has experience
preparing, auditing, analyzing or evaluating financial statements that present a
breadth and level of complexity of accounting issues that are generally
comparable to the breadth and complexity of issues that can reasonably be
expected to be raised by P-Com's financial statements, or experience actively
supervising one or more persons engaged in such activities; and (iv) an
understanding of internal control over financial reporting; and an understanding
of audit committee functions.
Compensation Committee. The Compensation Committee currently consists of one
director, Mr. Fromm. The Compensation Committee 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
2004 Equity Incentive Plan and to make option grants thereunder.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of P-Com's Compensation Committee has at any time been an
officer or employee of P-Com. None of P-Com's executive officers currently
serves, or in the past year has served, as a member of the board of directors or
Compensation Committee of any entity that has one or more executive officers
serving on P-Com's board of directors or Compensation Committee.
DIRECTOR COMPENSATION
Non-employee directors do not receive cash compensation for their services as
directors.
83
CODE OF ETHICS
The Company has adopted a Code of Ethics that applies to the Company's Chief
Executive Officer, Chief Financial Officer, Controller, Treasurer, and Financial
Reporting Officer, or persons performing similar functions. A copy of the
Company's Code of Ethics is filed as Exhibit 14.1 hereto. P-Com will provide to
the public, free of charge, a copy of the code of ethics upon request in writing
to P-Com's Chief Restructuring Officer at P-Com at 3175 S. Winchester Blvd.,
Campbell, CA 95008.
ITEM 11. EXECUTIVE COMPENSATION AND RELATED INFORMATION
The following table provides certain information summarizing the compensation
earned for services rendered in all capacities to P-Com 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, 2004 and whose salary and bonus for the fiscal year ended December 31, 2004
was in excess of $100,000.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
-------------
AWARDS
ANNUAL COMPENSATION -------------
------------------------------------------------------ SECURITIES
SALARY BONUS OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)
------------------------------------ ------ ------- -------- ---------------- ------------ ----------------
Samuel Smookler 2004 252,100 125,000 -- --
Former CEO and Director 2003 139,569 -- 53,083(2) 80,000(3) --
2002 -- -- -- -- --
Daniel W. Rumsey 2004 158,269 -- -- -- --
Chief Restructuring Officer 2003 104,369 -- -- 73,333 8,000(4)
2002 -- -- -- -- --
Don Meiners 2004 130,046 -- -- -- --
President 2003 103,699 -- -- 73,333 --
2002 115,617 -- -- 983 --
Randall L. Carl(5) 2004 144,054 15,048 -- -- --
Former Senior Vice President, 2003 136,800 36,252 -- 73,600 --
Sales and Marketing 2002 158,650 11,400 -- 1,500 --
Carlos A. Belfiore 2004 138,000 -- -- -- --
Vice President of Engineering and 2003 18,577 -- -- 80,000 --
Chief Technical Officer 2002 -- -- -- -- --
(1) Includes amounts deferred under P-Com's 401(k) Plan.
(2) On October 8, 2003, Messrs. Roberts and Smookler each acquired 23.33 shares
of Series C Preferred Stock of P-Com convertible into 13,611 shares of Common
Stock, resulting in an effective purchase price of $3.00 per share of Common
Stock. The closing price per share of Common Stock as reported on the OTC
Bulletin Board on October 8, 2003 was $6.90 per share.
(3) Mr. Smookler was also granted a warrant to purchase 120,000 shares of P-Com
Common Stock on the same terms and conditions as this option. Mr. Smookler
resigned as Chief Executive Officer and a director of P-Com on March 10, 2005.
The Board of Directors is currently negotiating the terms of Mr. Smookler's
severance arrangements. Under the terms of his existing Agreement, Mr. Smookler
may be entitled to receive severance payments totaling $250,000.
(4) Prior to joining P-Com full time in April 2003, Mr. Rumsey was paid $8,000
as a consultant to P-Com.
(5) Mr. Carl's employment with P-Com was terminated effective March 18, 2005.
Mr. Carl's employment agreement requires the payment to him of six months
severance, totaling approximately $72,000.
84
OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted to the named executive officers during the 2004
fiscal year. No stock appreciation rights were granted to these individuals
during such fiscal year.
85
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The table below sets forth certain information with respect to P-Com's named
executive officers concerning the exercise of options during 2004 and
unexercised options held by such individuals as of the end of such fiscal year.
No SARs were exercised during 2004 nor were any SARs outstanding at the end of
such fiscal year.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT FISCAL
SHARES VALUE YEAR END(3) YEAR END ($) (1)
ACQUIRED ON REALIZED ------------------------------ --------------------------
NAME EXERCISE (#) ($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------- ------------ -------- ----------- ------------- ----------- -------------
Sam Smookler -- -- 43,333 36,667 -- --
Don Meiners -- -- 26,881 48,891 -- --
Daniel W. Rumsey -- -- 24,444 48,889 -- --
Randall L. Carl -- -- 26,669 49,264 -- --
Carlos A. Belfiore -- -- 25,867 54,133 -- --
(1) Based on the fair market value of the option shares at the 2004 fiscal
year-end ($0.44 per share based on the closing selling price on the OTC Bulletin
Board as of December 31, 2004) 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.
86
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT ARRANGEMENTS AND CHANGE OF
CONTROL AGREEMENTS
The Compensation Committee of the Board of Directors, as Plan Administrator of
the 2004 Equity Incentive 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 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 provided for an employment period
commencing May 31, 2001 through May 30, 2002. Throughout the employment period,
Mr. Roberts was eligible to participate in all benefit plans that are made
available to P-Com's executives and for which Mr. Roberts qualified.
P-Com entered into a letter agreement with George P. Roberts, dated April 28,
2003, 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 is entitled to compensation equal
to half his salary prior to recent reductions, with one half of his total salary
of $188,000 paid in cash, and the other half paid in Common Stock of P-Com.
P-Com entered into an agreement with Sam Smookler, P-Com's former President and
Chief Executive Officer, dated July 25, 2003, providing for the employment of
Mr. Smookler as President and Chief Executive Officer for a period of two years.
The agreement further provided for the payment to Mr. Smookler of a salary of
$36,000 per month beginning September 1 and continuing through December 31,
2003. Beginning January 1, 2004, Mr. Smookler was paid a base salary of $250,000
per year. On September 2, 2004, Mr. Smookler was paid a cash bonus equal to 50%
of his base salary. The agreement also provided for the grant of an option to
purchase 2% of P-Com's total number of shares of Common Stock issued and
outstanding as of September 2, 2003. By agreement with the Board of Directors,
this number was fixed at 166,666 shares, which amount was reduced to 80,000 due
to limitations in P-Com's 1995 Stock Option/Stock Issuance Plan. P-Com granted
Mr. Smookler a warrant to purchase 86,666 shares of Common Stock, thereby making
up the difference between the 166,666 shares granted by the Board of Directors,
and the 80,000 actually issued under the Plan. Mr. Smookler resigned as Chief
Executive Officer and a director of P-Com on March 10, 2005. The Board of
Directors is currently negotiating the terms of Mr. Smookler's severance
arrangements. Under the terms of his existing Agreement, Mr. Smookler may be
entitled to receive severance payments of $250,000. In addition, his incentive
stock option to acquire 80,000 shares of common stock vests immediately.
P-Com entered into an agreement with Daniel Rumsey, its Chief Restructuring
Officer, and former Vice President, General Counsel and Acting Chief Financial
Officer, on April 4, 2003. Under the terms of the agreement, in the event Mr.
Rumsey's employment with P-Com terminates at any time by reason of an
involuntary termination, P-Com is obligated to pay him severance equal to the
higher of his base salary on the date of the agreement, or his base salary on
the date of his involuntary termination, which amount is obligated to be paid in
a series of successive biweekly installments over the twelve month period
measured from the date of his involuntary termination. At the time of his
involuntary termination, each unvested option granted to Mr. Rumsey shall
continue to vest, and such options plus options already vested but unexercised
as of the date of his involuntary termination shall continue to be exercisable
in accordance with the 1995 Stock Option/Stock Issuance Plan from the date of
involuntary termination to the first anniversary date thereof. For purposes of
the agreement, an involuntary termination shall mean the termination of his
employment with P-Com (i) involuntarily upon his discharge or dismissal; or (ii)
voluntarily following his resignation following (a) a change in level of
management to which he reports, (b) a decrease or material change in his
responsibilities, or (c) a reduction in his base salary. Effective March 10,
2005, Mr. Rumsey's annual salary was increased to $240,000.
P-Com entered into an agreement with Dr. Carlos Belfiore, its Vice President of
Engineering and Chief Technical Officer, on October 20, 2003. Under the terms of
the agreement, Dr. Belfiore is paid a base salary of $138,000 per
87
year. Dr. Belfiore was also paid a cash bonus equal to 30% of his base salary on
January 15, 2005. The agreement also provided for the grant of an option to
purchase 91,666 shares of Common Stock of P-Com, which amount was reduced to
80,000 due to limitations in P-Com's 1995 Stock Option/Stock Issuance Plan.
P-Com granted Dr. Belfiore a warrant to purchase 11,666 shares of Common Stock,
thereby making up the difference between the 91,666 shares granted by the Board
of Directors, and the 80,000 actually issued under the Plan. In the event Dr.
Belfiore's employment is terminated at any time without cause, P-Com is
obligated to pay Dr. Belfiore his salary for six months following such
termination, and all options previously granted to Dr. Belfiore continue to vest
in accordance with their terms and conditions for a period of two years
following the date of such termination. Following a change in control of P-Com,
P-Com is obligated to pay Dr. Belfiore his base salary for a period of one year,
and his options shall automatically accelerate so that each option becomes fully
vested and immediately exercisable for the total number of shares subject to the
option. A change in control will be deemed to occur under the agreements upon:
(a) a merger or consolidation in which P-Com is not the surviving entity; (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 reverse
merger in which P-Com is the surviving entity but in which securities
representing fifty percent (50%) or more of the total combined voting power of
P-Com's outstanding securities are transferred to persons different from the
persons holding those securities immediately prior to such merger; and the
acquisition, directly or indirectly by any person or related group of persons of
beneficial ownership of securities possessing more than thirty percent (30%) of
P-Com's outstanding voting securities pursuant to a tender or exchange offer
made directly to P-Com's stockholders.
On November 3, 2004, P-Com, Inc. entered into retention agreements with two of
its senior executives, Don Meiners, its current President and former Vice
President of Operations, and Randall L. Carl, its former Vice President of Sales
and Marketing - Licensed Products. Under the terms of the agreements, in the
event that either Messrs. Meiners or Carl are terminated without cause, P-Com is
obligated to pay their base salary for a period of six months, and all options
previously granted shall vest in accordance with their terms for a period of two
years following the date of such termination. Mr. Carl's employment with the
Company was terminated on March 17, 2005. The Company is currently negotiating
the terms of Mr. Carl's severance payments.
In the event that Mr. Meiners is terminated within twelve months of a change in
control, P-Com is obligated to pay his salary for a period of one year following
such termination and all options granted shall automatically accelerate so that
each option will become fully vested and immediately exercisable for the total
number of shares of Common Stock subject to those options ("Severance
Benefits"). For purposes of the agreement, a Change of Control shall mean any of
the following transactions effecting a change in ownership or control of the
Company: (a) a merger or consolidation in which P-Com is not the surviving
entity; (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) any
reverse merger in which P-Com is the surviving entity but in which securities
representing 50% or more of the total combined voting power of P-Com's
outstanding securities are transferred to a person(s) different from the
person(s) holding those securities immediately prior to such merger; or (d) the
acquisition, directly or indirectly by a person or related group of persons of
beneficial ownership of securities possessing more than 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.
Mr. Meiners shall be entitled to receive his Severance Benefits if, at any time
within twelve months of a Change of Control: (a) his level of responsibility at
P-Com is materially reduced; (b) his place of employment is moved to a location
that is more than 50 miles from his place of employment immediately prior to a
Change in Control; or (c) his salary or bonus plan is reduced without his prior
written consent. Effective March 10, 2005, Mr. Meiners annual salary was
increased to $150,000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of our Board of Directors currently consists of Mr.
Fromm. Mr. Fromm was not an officer or employee of the Company at any time
during the 2003 Fiscal Year or at any other time, nor did he have a business
relationship with the Company.
No executive officer of the Company has ever served as a member of the board of
directors or compensation committee of any other entity that has or has had one
or more executive officers serving as a member of our Board of Directors or
Compensation Committee.
88
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
The Compensation Committee of the Board of Directors is responsible for
establishing the base salary and incentive cash bonus programs for our executive
officers. The Committee also has the exclusive responsibility for the
administration of our 2004 Equity Incentive Plan, under which grants may be made
to executive officers and other key employees of the Company.
The Compensation Committee is comprised of one non-employee director, who has no
interlocking or other type of relationship that would call into question his
independence as a committee member. The sole member of the Company's
Compensation Committee is Mr. Frederick Fromm. On issues related to executive
compensation, the Compensation Committee consults with the Chief Executive
Officer. The following report of the Compensation Committee describes the
Company's compensation policies during the fiscal year ended December 31, 2004
as they affected the Company's Chief Executive Officer and other executive
officers.
The Committee's objective in determining executive compensation is to provide
our executive officers and other key employees with competitive compensation
opportunities based upon their contribution to the financial success of the
Company, the market levels of compensation in effect at companies with which the
Company competes for executive talent, the personal performance of such
individuals and, most importantly in 2004, the financial resources of the
Company. The Committee may, however, in its discretion, apply different factors
in setting executive compensation for future fiscal years.
The compensation package for each executive officer is comprised of cash
compensation and long-term equity incentive awards. Cash compensation consists
of base salary and annual performance awards.
CASH COMPENSATION
A key objective of our current executive compensation program is to position its
key executives to earn cash compensation reflective of peer groups in the
current industry climate. During 2004, the Committee increased the base salaries
of certain of its key executive officers to more closely align their salary with
their peers, in order to ensure retention of such executives. As a percentage,
the base salaries paid to the Company's executive officers in 2004 were less
than the 30% reduction in base salaries taken in 2002, when each executive
officer's salary was reduced along with all exempt employees of the Company.
These reductions were necessary in order for the Company to retain cash and
consummate the restructuring of the Company, which was completed in the first
quarter of 2004. As a result of the Company's failure to achieve its cash and
other objectives in 2004, no performance awards were paid to executive officers
in 2004 - other than to the Company's former sales executive, Randall L. Carl,
who was paid sales performance awards totaling $15,048 in 2004.
LONG-TERM INCENTIVE AWARDS
Equity incentives are provided primarily through stock option grants under the
2004 Plan. The grants are designed to align the interests of each executive
officer with those of the stockholders and provide each individual with a
significant incentive to manage the Company from the perspective of an owner
with an equity stake in the business. Each grant allows the individual to
acquire shares of our Common Stock at a fixed price per share (the market price
on the grant date) over a specified period of time (up to 10 years). The shares
subject to each option generally vest in installments over a two-to-four-year
period, contingent upon the executive officer's continued employment with the
Company. Accordingly, the option will provide a return to the executive officer
only if the executive officer remains employed by the Company during the
applicable vesting period, and then only if the market price of the underlying
shares appreciates over the option term.
The number of shares subject to each option grant is set at a level intended to
create a meaningful opportunity for stock ownership based on the officer's
current position with the Company, the base salary associated with that
position, the individual's potential for increased responsibility and promotion
over the option term, the individual's personal performance in recent periods,
and other factors determined important by the Committee. The Committee also
takes into account the recommendations of the Chief Executive Officer of the
Company, in determining the recipients and size of each grant.
89
No stock option or other grants were issued to the Company's continuing
executive officers in 2004, in light of the grant to the executive officers in
2003. Stock options were, however, granted to Elsbeth Kahn, the Company's former
Vice President, Sales and Marketing. Ms. Kahn was granted an option to purchase
60,000 shares upon joining the Company in April 2004.
CHIEF EXECUTIVE OFFICER'S COMPENSATION
Mr. Samuel Smookler joined the Company as President and Chief Executive Officer
on September 1, 2003. Mr. Smookler resigned from the Company on March 10, 2005.
In setting Mr. Smooker's compensation, including his bonus for 2003-2004, the
Compensation Committee considered Mr. Smookler's industry experience, the scope
of his responsibilities, the Board's confidence in Mr. Smookler to lead the
Company beyond the restructuring and to return the Company to profitability, and
the recommendation of the Chairman and then interim Chief Executive Officer. Mr.
Smookler's compensation in 2003 reflects amounts paid to Mr. Smookler designed
to replace the income Mr. Smookler lost from his former employer to join the
Company. This payment was required to successfully recruit Mr. Smookler to the
Company. In determining Mr. Smookler's stock option grant, the Committee
considered the percentage ownership interest typically offered chief executive
officers of similarly situated companies, the anticipated impact of the
restructuring on the issued and outstanding capital of the Company, and the
relative number of options granted to other executive officers of the Company.
Mr. Smookler's base compensation was not changed in 2004. In the Committee's
view, the total compensation package provided to Mr. Smookler for the 2004
fiscal year is appropriate in the markets the industry served, in light of
P-Com's current performance.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)
Section 162(m) of the Internal Revenue Code, enacted in 1993, generally
disallows a tax deduction to publicly held companies for compensation exceeding
$1.0 million paid to certain of the corporation's executive officers. The
limitation applies only to compensation that is not considered to be
performance-based. The non-performance based compensation to be paid to our
executive officers for the 2004 fiscal year did not exceed the $1.0 million
limit per officer, nor is it expected that the non-performance based
compensation to be paid to our executive officers for fiscal 2005 will exceed
that limit. Options granted under our 1995 and 2004 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 $1.0 million limitation. Because it is very unlikely
that the cash compensation payable to any of our executive officers in the
foreseeable future will approach the $1.0 million limit, the Compensation
Committee has decided at this time not to take any other action to limit or
restructure the elements of cash compensation payable to our executive officers.
The Compensation Committee will reconsider this decision should the individual
compensation of any executive officer ever approach the $1.0 million level.
It is the opinion of the Compensation Committee that the executive compensation
policies and programs in effect for our executive officers provide an
appropriate level of total remuneration which properly aligns our performance
and the interests of our stockholders with competitive and equitable executive
compensation in a balanced and reasonable manner, for both the short and
long-term.
Frederick Fromm
Member, Compensation Committee
STOCK PERFORMANCE GRAPH
The graph depicted below shows a comparison of cumulative total stockholder
returns for the Company, the Standard & Poor's 500 Index and the Standard &
Poor's Communications Equipment Manufacturers Index.
90
[TABLE BELOW REPRESENTS A LINE CHART IN THE ORIGINAL DOCUMENT.]
S&P
COMMUNICATIONS
EQUIPMENT
QUARTER ENDING S&P 500 INDEX P-COM
-------------- ------- -------------- -------
Dec-99 100.00 100.00 100.00
Mar-00 102.00 97.25 209.19
Jun-00 99.00 88.33 64.31
Sep-00 97.77 70.70 74.91
Dec-00 89.86 43.68 34.63
Mar-01 78.97 24.66 14.49
Jun-01 83.34 20.08 6.22
Sep-01 70.85 14.24 3.05
Dec-01 78.14 16.04 3.73
Mar-02 78.09 12.28 2.26
Jun-02 67.37 8.32 0.81
Sep-02 55.49 6.16 0.46
Dec-02 59.88 7.32 0.43
Mar-03 57.73 7.53 0.34
Jun-03 66.33 8.41 0.21
Sep-03 67.79 9.94 0.50
Dec-03 75.68 12.12 0.33
Mar-04 76.65 12.93 0.14
Jun-04 77.65 13.27 0.09
Sep-04 75.86 11.46 0.05
Dec-04 82.49 12.45 0.04
(1) The graph assumes that $100 was invested on January 1, 1999, in our Common
Stock and in each index, and that all dividends were reinvested. No cash
dividends have been declared on our Common Stock. (2) Stockholder returns over
the indicated period should not be considered indicative of future stockholder
returns.
Notwithstanding anything to the contrary set forth in any of our previous
filings made under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings made by
the Company under those statutes, neither the preceding Stock Performance Graph
nor the Compensation Committee Report is to be incorporated by reference into
any such prior filings, nor shall such graph or report be incorporated by
reference into any future filings made by the Company under those statutes.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and executive
officers, and persons who beneficially own more than 10% of the Common Stock, to
file with the SEC initial reports of beneficial ownership ("Form 3") and reports
of changes in beneficial ownership of Common Stock and other equity securities
of the Company ("Form 4"). Officers, directors and greater than 10% stockholders
of the Company are required by SEC rules to furnish to the Company copies of all
Section 16(a) reports that they file. To the Company's knowledge, based solely
on a review of the copies of such reports furnished to the Company and written
representations that no other reports were required, all Section 16(a) filing
requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with for fiscal 2004, except that one Form 4 was
not timely filed for Mr. Josling and one Form 3 was not timely filed for Ms.
Kahn.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information concerning the beneficial ownership of
P-Com's Common Stock, Series C Convertible Preferred Stock and Series D
Convertible Preferred Stock as of February 21, 2005 by each of the following:
o each person known by P-Com to be the beneficial owner of 5% of more of its
outstanding shares of Common Stock, Series C Convertible Preferred Stock or
Series D Convertible Preferred Stock;
91
o each of P-Com's named executive officers;
o each of P-Com's directors; and
o all of P-Com's executive officers and directors as a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power over
securities. Except in cases where community property laws apply or as indicated
in the footnotes to this table, P-Com believes that each stockholder identified
in the table possesses sole voting and investment power over all shares of
Common Stock, Series C Convertible Preferred Stock and Series D Convertible
Preferred Stock shown as beneficially owned by that stockholder. Percentage of
beneficial ownership is based on 11,844,748 shares of Common Stock, 6,009 shares
of Series C Convertible Preferred Stock and 2,000 shares of Series D Convertible
Preferred Stock outstanding as of February 21, 2005. Shares of Common Stock
subject to warrants and options that are currently exercisable or exercisable
within 60 days of February 21, 2005, are considered outstanding and beneficially
owned by the stockholder who holds those warrants or options for the purpose of
computing the percentage ownership of that stockholder but are not treated as
outstanding for the purpose of computing the percentage ownership of any other
stockholder. Unless otherwise indicated below, the address of each stockholder
listed below is 3175 S. Winchester Boulevard, Campbell, California 95008.
92
SERIES C CONVERTIBLE SERIES D CONVERTIBLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
----------------------------------------- -------------------------- ---------------------------
SHARES
ISSUABLE
PURSUANT NUMBER OF
TO SHARES
WARRANTS BENEFICIALLY
AND OWNED
OPTIONS (INCLUDING
EXERCISABLE THE NUMBER
WITHIN 60 OF SHARES NUMBER OF NUMBER OF
DAYS OF SHOWN IN PERCENTAGE SHARES PERCENTAGE SHARES PERCENTAGE
NAME AND ADDRESS FEBRUARY THE FIRST OF SHARES BENEFICIALLY OF SHARES BENEFICIALLY OF SHARES
OF BENEFICIAL OWNER 21, 2005 COLUMN) OUTSTANDING OWNED (1) OUTSTANDING OWNED(2) OUTSTANDING
---------------------------- ------------ ------------ ------------- ------------ ------------ ------------- ------------
North Sound Legacy Fund LLC
1209 Orange Street
Wilmington, DE 19801 (3) 1,621,028 1,621,028 13.7% 2,332 38.8% 142.00 7.1%
North Sound Legacy
Institutional Fund LLC
1209 Orange Street
Wilmington, DE 19801 (3) 1,621,028 1,621,028 13.7% 2,332 38.8% 877.33 43.9%
North Sound Legacy
International Fund Ltd.
Bison Court, Roadtown
Tortola, BVI
Wilmington, DE 19801 (3) 1,621,028 1,621,028 13.7% 2,332 38.8% 980.67 49.0%
SDS Capital Group SPC, Ltd.
113 Church Street
PO Box 134GT
Grand Canyon, Cayman Islands 528,000 874,044 7.4% 266 4.4% -- --
Frederick R. Fromm 9,351 16,275 * 9.32 * -- --
R. Craig Roos 0 17,333 * 23.33 * -- --
George P. Roberts 48,911 68,239 * 23.33 * -- --
Daniel W. Rumsey 30,556 30,556 * -- -- -- --
Don Meiners 32,498 32,570 * -- -- -- --
Sam Smookler (4) 70,519 79,685 * 23.33 * -- --
Carlos A. Belfiore 33,333 33,333 * -- -- -- --
Randall L. Carl (5) 32,867 32,867 * -- -- -- --
Brian T. Josling (6)(7) 13,866 23,177 * -- -- -- --
All current directors and
executive officers as a
group (9 persons) 271,901 334,215 2.82% 79.31 1.3% -- --
* Less than 1%.
(1) There are no outstanding warrants or options to purchase shares of Series C
Convertible Preferred Stock.
(2) There are no outstanding warrants or options to purchase shares of Series D
Convertible Preferred Stock.
(3) Includes shares beneficially owned by North Sound Legacy Fund LLC, North
Sound Legacy Institutional Fund LLC, and North Sound International Fund Ltd.
(4) Mr. Smookler resigned as President, Chief Executive Officer and Director of
the Company effective March 10, 2005.
(5) Mr. Carl's employment with the Company was terminated effective March 18,
2005.
(6) For purposes of determining beneficial ownership in accordance with Rule
13d-3 of the Securities Exchange Act of 1934, as amended, the total shares of
Common Stock includes shares beneficially owned by Margaret Josling and TKB
Ventures Ltd.
(7) Mr. Josling resigned as a Director of the Company effective March 1, 2005.
93
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTONS
Not applicable.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
Effective August 17, 2003, P-Com retained Aidman, Piser & Company ("Aidman
Piser") as the independent registered public accounting firm to audit our
financial statements for the fiscal year ending December 31, 2004. The aggregate
fees Aidman Piser billed us in 2004 for audit services, including for review of
our interim financial statements was $133,210.
AUDIT-RELATED FEES
The aggregate fees Aidman Piser billed us in 2004 for audit related services
that are reasonably associated to the performance of the audit or review of the
Company's financial statements and are not reported above under the caption
"Audit Fees" were $36,840, and were principally related to post-report review
procedures to update their reports and issue consents in connection with our
filing of Registration Statements.
TAX FEES
Aidman Piser does not provide tax compliance, tax advisory or any other tax
planning services to P-Com.
ALL OTHER FEES
Aidman Piser does not provide any other services to P-Com.
AUDIT COMMITTEE PRE-APPROVAL POLICIES
The Audit Committee has adopted an Audit Committee Charter, which sets forth the
procedures and policies pursuant to which services to be performed by the
independent auditor are to be pre-approved. Under the Charter, proposed services
either may be pre-approved by agreeing to a framework with descriptions of
allowable services with the Audit Committee ("general pre-approval"), or require
the specific pre-approval of the Audit Committee. Unless a type of service has
received general pre-approval, it requires specific pre-approval by the Audit
Committee if it is to be provided by the independent registered public
accounting firm.
The Audit Committee will annually review and pre-approve the services that may
be provided by the independent auditor that are subject to general pre-approval.
Under the Charter, the Audit Committee may delegate pre-approval authority one
or more designated members of the Audit Committee the authority to pre-approve
audit and permissible non-audit services, provided such pre-approval decision is
presented to the full Audit Committee at its scheduled meetings. The member to
whom such authority is delegated must report, for informational purposes only,
any pre-approval decisions to the Audit Committee at its next meeting.
94
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are included as part of this Annual Report on Form
10-K.
1. Index to Financial Statements Financial Statements of the Registrant are
listed in the Index to Consolidated Financial Statements and filed under Item 8,
"Financial Statements" in this Annual Report on Form 10-K.
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
3. Exhibits
Exhibit
Number Description of Document
------ -----------------------
3.1(1) Restated Certificate of Incorporation filed with the Delaware
Secretary of State on March 9, 1995
3.1A(2) Certificate of Amendment of Restated Certificate of Incorporation
filed with the Delaware Secretary of State on June 16, 1997
3.1B(3) Certificate of Designation for the Series A Junior Participating
Preferred Stock, as filed with the Delaware Secretary of State on
October 8, 1997
3.1C(4) Amended and Restated Certificate of Designation of the Series A
Junior Participating Preferred Stock, as filed with the Delaware
Secretary of State on December 21, 1998
3.1D(5) Certificate of Designation for the Series B Convertible
Participating Preferred Stock, as filed with the Delaware
Secretary of State on December 21, 1998
3.1E(6) Certificate of Correction of Certificate of Designations for the
Series B Convertible Participating Preferred Stock, as filed with
the Delaware Secretary of State on December 23, 1998
3.1F(7) Certificate of Elimination of Series B Convertible Participating
Preferred Stock as filed with the Delaware Secretary of State on
June 15, 1999
3.1G(8) Certificate of Amendment of Restated Certificate of Incorporation
filed with the Delaware Secretary of State on October 20, 2000
3.1H(9) Certificate of Amendment of Restated Certificate of Incorporation
filed with the Delaware Secretary of State on June 24, 2002
3.1I(10) Certificate of Designation, Preferences and Rights of Series B
Convertible Preferred Stock of P-Com, Inc., as filed with the
Delaware Secretary of State on July 29, 2003.
3.1J(11) Certificate of Designation, Preferences and Rights of Series C
Convertible Preferred Stock of P-Com, Inc., as filed with the
Delaware Secretary of State on September 24, 2003.
3.1I(12) Certificate of Amendment of Restated Certificate of Incorporation
filed with the Delaware Secretary of State on December 3, 2003.
3.1J(12) Certificate of Designation, Preferences and Rights of Series D
Convertible Preferred Stock of P-Com, Inc., as filed with the
Delaware Secretary of State on December 15, 2003.
3.1K(13) Certificate of Amendment of Restated Certificate of Incorporation
of P-Com, Inc., as filed with the Delaware Secretary of State on
July 15, 2004.
3.1L(14) Restated Certificate of Incorporation of P-Com, Inc. 3.1M(15)
Certificate of Amendment of Restated Certificate of Incorporation
of P-Com, Inc., as filed with the Delaware Secretary of State on
October 12, 2004.
3.2(16) Bylaws
3.2A(12) Amendment to Bylaws, effective as of December 3, 2003. 4.1(17)
Form of Common Stock Certificate 4.2(18) Amended and Restated
Rights Agreement dated as of January 24, 2001 between Registrant
and BankBoston, N.A.
95
4.3*(19) 1995 Stock Option/Stock Issuance Plan (as amended and restated
through July 17, 2002), including forms of Notices of Grant of
Automatic Stock Option for initial grant and annual grants and
Automatic Stock Option Agreements.
4.4*(20) Amendment to 1995 Stock Option/Stock Issuance Plan, effective as
of December 3, 2003.
4.5*(21) Employee Stock Purchase Plan, as amended. 4.6*(22) 2004 Equity
Incentive Plan.
10.18(23) Form of Indemnification Agreement by and between the Company and
each of its officers and directors and a list of signatories.
10.90*(24) Employment and Continuity of Benefits Agreement by and between
George Roberts and P-Com, Inc., dated May 31, 2001.
10.95*#(25) Severance Letter Agreement by and between P-Com, Inc. and Alan T.
Wright dated April 8, 2002.
10.96*#(25) Form of Amendment to Change in Control Severance Agreement by and
between P-Com, Inc. and the officers P-Com listed as signatories
thereto.
10.98#(25) Engagement Letter Agreement by and between P-Com, Inc. and Cagan
McAfee Capital Partners dated December 10, 2001 and Addendum dated
June 13, 2002.
10.99(25) Warrant Issuance Agreement by and between P-Com, Inc. and Cagan
McAfee Capital Partners dated December 1, 2001.
10.100(25) Accounts Receivable Purchase Agreement by and between P-Com, Inc.
and Silicon Valley Bank dated June 26, 2002.
10.101#(25) OEM Agreement by and between P-Com, Inc. and Shanghai Datang
Mobile Communications dated July 1, 2002.
10.107(26) Loan and Security Agreement between P-Com, Inc. and Silicon Valley
Bank dated September 20, 2002
10.108(26) Loan and Security Agreement (Exim Program) between P-Com, Inc. and
Silicon Valley Bank dated September 20, 2002.
10.109(26) Secured Promissory Notes issued to Silicon Valley Bank dated
September 20, 2002.
10.110(26) Warrant to Purchase Stock Agreement between P-Com, Inc. and
Silicon Valley Bank dated September 20, 2002.
10.111(26) Amendment to OEM Agreement between P-Com, Inc. and Shanghai Datang
Mobile Communication effective July 1, 2002.
10.113(27) Addendum II to Engagement Letter, dated December 10, 2001, between
P-Com, Inc. and Cagan McAfee Capital Partners, effective as of
January 9, 2003.
10.117(10) Securities Purchase Agreement, dated May 28, 2003, by and among P-
Com, Inc., North Sound Legacy Fund LLC, North Sound Legacy
Institutional Fund LLC and North Sound Legacy International Ltd.
10.118(10) Registration Rights Agreement, dated May 28, 2003, by and among P-
Com, Inc., North Sound Legacy Fund LLC, North Sound Legacy
Institutional Fund LLC and North Sound Legacy International Ltd.
10.119(10) Security Agreement, dated May 28, 2003, by P-Com, Inc. and North
Sound Legacy Institutional Fund LLC, as collateral agent for North
Sound Legacy Fund LLC, North Sound Legacy Institutional Fund LLC
and North Sound Legacy International Ltd.
10.120(11) Form of Securities Purchase Agreement, dated October 3, 2003, by
and among P-Com, Inc. and certain investors signatory thereto.
10.121(11) Form of Registration Rights Agreement, dated October 3, 2003, by
and among P-Com, Inc. and certain investors signatory thereto.
10.122(11) Form of Series C-1 Warrant 10.123(11) Form of Series C-2 Warrant
10.124(12) Form of Registration Rights Agreement, dated as of
October 3,
2003, by and among P-Com, Inc., P Investors LLC, Woodmont
Investments Ltd. and Newberg Family Trust.
10.125(12) Form of Joinder Agreement, dated December 16, 2003, by and among
P-Com, Inc. and certain investors signatory thereto.
10.126(12) Closing Memorandum, dated as of December 10, 2003, by and between
P-Com, Inc. and SPEEDCOM Wireless Corporation.
10.127(12) Debt Conversion Agreement, dated as of December 10, 2003, by and
among P-Com, Inc., SPEEDCOM Wireless Corporation, North Sound
Legacy Fund LLC, North Sound Legacy Institutional Fund LLC and
North Sound Legacy International Ltd.
10.128(28) Form of Convertible Promissory Note, issued by P-Com to each of
North Sound Legacy Fund LLC, North Sound Legacy Institutional Fund
LLC and North Sound Legacy International Ltd.
10.129(12) Note Repurchase Agreement, dated as of December 18, 2003, by and
among P-Com, Inc., North Sound Legacy Fund LLC, North Sound Legacy
Institutional Fund LLC and North Sound Legacy International Ltd.
10.130(12) Form of Registration Rights Agreement, dated as of December 18,
2003, by and among P-Com, Inc., North Sound Legacy Fund LLC, North
Sound Legacy Institutional Fund LLC and North Sound Legacy
International Ltd.
96
10.131(28) Engagement Letter Agreement, dated as of August 25, 2003, between
P-Com, Inc. and Burnham Hill Partners, a division of Pali Capital,
Inc.
10.132*(28) Severance Agreement, dated April 4, 2003, between P-Com, Inc. and
Daniel W. Rumsey.
10.133*(28) Employment Letter Agreement, dated July 25, 2003, between P-Com,
Inc. and Samuel Smookler.
10.134*(28) Employment Letter Agreement, dated October 20, 2003, between
P-Com, Inc. and Carlos Belfiore
10.135*(29) Employment Letter Agreement, dated April 7, 2004, between P-Com,
Inc. and Elsbeth Kahn.
10.136*(30) Employment Letter Agreement, dated November 3, 2004, between
P-Com, Inc. and Don Meiners.
10.137*(31) Employment Letter Agreement, dated November 3, 2004, between
P-Com, Inc. and Randall L. Carl.
10.138(32) Note and Warrant Purchase Agreement, dated November 3, 2004,
between P-Com, Inc. and Purchasers.
10.139(33) Registration Rights Agreement, dated November 3, 2004, between
P-Com, Inc. and Purchasers.
10.140(34) Form of Promissory Note.
10.141(35) Form of Warrant.
14.1(36) Code of Ethics
21.1 Subsidiaries of the Registrant
23.1(37) Consent of Aidman, Piser & Company, P.A.
23.2(37) Consent of PricewaterhouseCoopers LLP
31.1 Rule 13a-14(a)/ 15d-14(a) Certification
31.2 Rule 13a-14(a)/15d-14(a) Certification
32.1 Section 1350 Certification
32.2 Section 1350 Certification
* Compensatory benefit arrangement. # Confidential treatment has been granted as
to certain portions of these exhibits. + Previously filed.
(1) Incorporated by reference to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 (File No. 33-95392) declared effective with the Securities
and Exchange Commission on August 17, 1995.
(2) Incorporated by reference to Exhibit 3.3 to the Registrant's Quarterly
Report on Form 10-Q (File No. 000-25356) for the quarterly period ended June 30,
1997, filed with the Securities and Exchange Commission on August 18, 1997.
(3) Incorporated by reference to Exhibit 3 to the Registrant's Current Report on
From 8-K (File No. 000-25356) filed with the Securities and Exchange Commission
on October 2, 1997.
(4) Incorporated by reference to Exhibit 3.2C of the Registrant's Form 8-A/A
filed with the Securities and Exchange Commission on December 22, 1998.
(5) Incorporated by reference to Exhibit 3.2D of the Registrant's Current Report
on Form 8-K filed with the Securities and Exchange Commission on December 24,
1998.
(6) Incorporated by reference to Exhibit 3.2E of the Registrant's Current Report
on Form 8-K filed with the Securities and Exchange Commission on December 24,
1998.
(7) Incorporated by reference to Exhibit 3.2F to the Registrant's Annual
Report on Form 10-K, for the fiscal year ended December 31, 2000, filed with the
Securities and Exchange Commission on April 2, 2001.
(8) Incorporated by
reference to Exhibit 3.2A to the Registrant's Annual Report on Form 10-K, for
the fiscal year ended December 31, 2001, filed with the Securities and Exchange
Commission on April 1, 2002.
(9) Incorporated by reference to Exhibit 3.2G to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2002, filed with the
Securities and Exchange Commission on August 14, 2002.
(10) Incorporated by reference to the exhibits filed as part of the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003,
filed with the Securities and Exchange Commission on August 14, 2003.
(11) Incorporated by reference to the exhibits filed as part of the Registrant's
Current Report on Form 8-K, filed with the Securities and Exchange Commission on
October 7, 2003.
(12) Incorporated by reference to the identically numbered exhibit to the
Registrant's Registration Statement on Form S-1 (File No. 333-111405) declared
effective with the Securities and Exchange Commission on February 6, 2004.
97
(13) Incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2004, filed with the
Securities and Exchange Commission on August 16, 2004.
(14) Incorporated by reference to Exhibit 3.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2004, filed with the
Securities and Exchange Commission on August 16, 2004.
(15) Incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2004, filed
with the Securities and Exchange Commission on November 12, 2004.
(16) Incorporated by reference to Exhibit 3.3A to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended on September 30, 2002, filed
with the Securities and Exchange Commission on November 14, 2002.
(17) Incorporated by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-1 (File No. 33-88492) declared effective with the Securities
and Exchange Commission on March 2, 1995.
(18) Incorporated by reference to Exhibit 4.10 to the Registrant's Form 8-A/A
filed with the Securities and Exchange Commission on May 7, 2001.
(19) Incorporated by reference to Exhibit 99.1 to the Registrant's Registration
Statement on Form S-8 (File No. 333-55604)filed with the Securities and Exchange
Commission on February 14, 2001.
(20) Incorporated by reference to Exhibit 4.4 to the Registrant's Registration
Statement on Form S-8 (File No. 111511) filed with the Securities and Exchange
Commission on December 23, 2003.
(21) Incorporated by reference to Exhibit 99.1 to the Registrant's Registration
Statement on Form S-8 (File No. 333-63762)filed with the Securities and Exchange
Commission on June 25, 2001.
(22) Incorporated by reference to Exhibit 99.1 to the Registrant's Registration
Statement on Form S-8 (File No. 333-120455) filed with the Securities and
Exchange Commission on November 12, 2004.
(23) Incorporated by reference to the identically numbered exhibit to the
Registrant's Registration Statement on Form S-1 (File No. 33-88492) declared
effective with the Securities and Exchange Commission on March 2, 1995.
(24) Incorporated by reference to the identically numbered exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2001, filed with the Securities and Exchange on December 24, 2001.
(25) Incorporated by reference to the identically numbered exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2002, filed with the Securities and Exchange Commission on August 14, 2002.
(26) Incorporated by reference to the identically numbered exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2002, filed with the Securities and Exchange Commission on
November 14, 2002.
(27) Incorporated by reference to the identically numbered exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
2002, filed with the Securities and Exchange Commission on March 31, 2003.
(28) Incorporated by reference to the identically numbered exhibit to the
Registrant's Amendment No. 1 to the Registration Statement on Form S-1 filed
with the Securities and Exchange Commission on January 30, 2004.
(29) Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004, filed with
the Securities and Exchange Commission on May 17, 2004.
(30) Incorporated by reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K, filed with the Securities and Exchange Commission on ovember
9, 2004.
(31) Incorporated by reference to Exhibit 10.2 to the Registrant's Current
Report on Form 8-K, filed with the Securities and Exchange Commission on
November 9, 2004.
(32) Incorporated by reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K, filed with the Securities and Exchange Commission on
November 8, 2004.
(33) Incorporated by reference to Exhibit 10.2 to the Registrant's Current
Report on Form 8-K, filed with the Securities and Exchange Commission on
November 8, 2004.
(34) Incorporated by reference to Exhibit 10.3 to the Registrant's Current
Report on Form 8-K, filed with the Securities and Exchange Commission on
November 8, 2004.
(35) Incorporated by reference to Exhibit 10.4 to the Registrant's Current
Report on Form 8-K, filed with the Securities and Exchange Commission on
November 8, 2004.
(36) Incorporated by reference to Exhibit 99.3 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 2002, filed with the
Securities and Exchange Commission on March 31, 2003.
(37) Previously filed with the Form 10-K for the year ended December 31, 2004.
(b) During the three months ended December 31, 2004, we furnished the following
Current Reports on Form 8-K:
o Current report furnished October 4, 2004 reporting Item 2.02, Item
2.03 and Item 9.01
o Current report furnished October 14, 2004 reporting Item 5.03, Item
8.01 and Item 9.01
o Current report furnished November 1, 2004 reporting Item 2.02 and
Item 9.01
o Current report furnished November 8, 2004 reporting Item 1.01, Item
2.03 and Item 9.01
o Current report furnished November 9, 2004 reporting Item 1.01 and
Item 9.01
o Current report furnished December 1, 2004 reporting Item 1.01, Item
2.03, Item 3.02, Item 8.01 and Item 9.01
98
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: May 13, 2005 By: /s/ Daniel W. Rumsey
-------------------------------
Daniel W. Rumsey
Chief Restructuring Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
99
Signature Title Date
--------- ----- ----
Chief Restructuring Officer
/s/ Daniel W. Rumsey (Principal Executive Officer) May 13, 2005
-------------------------
Daniel W. Rumsey
(Principal Financial Officer and
/s/ Daniel W. Rumsey Principal Accounting Officer) May 13, 2005
-------------------------
Daniel W. Rumsey
/s/ George P. Roberts Chairman of the Board of Directors May 13, 2005
-------------------------
George P. Roberts
/s/ Richard Reiss Director of the Company May 13, 2005
-------------------------
Richard Reiss
/s/ Frederick R. Fromm Director of the Company May 13, 2005
-------------------------
Frederick R. Fromm
/s/ R. Craig Roos Director of the Company May 13, 2005
-------------------------
R. Craig Roos
/s/ Daniel W. Rumsey Director of the Company May 13, 2005
-------------------------
Daniel W. Rumsey
100
Exhibit 31.1
CERTIFICATIONS
I, Daniel W. Rumsey, certify that:
1. I have reviewed this annual report on Form 10-K/A of P-Com, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)), for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: May 13, 2005 /s/ Daniel W. Rumsey
-----------------------------
Daniel W. Rumsey
Chief Restructuring Officer
and Chief Financial Officer
(Principal Executive Officer)
Exhibit 31.2
I, Daniel W. Rumsey, certify that:
1. I have reviewed this annual report on Form 10-K/A of P-Com, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e), for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: May 13, 2005 /s/ Daniel W. Rumsey
----------------------------
Daniel W. Rumsey
Chief Restructuring Officer
and Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARANES-OXLEY ACT OF 2002
In connection with the filing of the Annual Report on Form 10-K/A for the year
ended December 31, 2004 (the "Report") by P-Com, Inc. ("Registrant"), and the
undersigned hereby certifies that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of Registrant as of and for the periods presented in the Report.
Date: May 13, 2005 By: /s/ Daniel W. Rumsey
--------------------
Daniel W. Rumsey
Chief Restructuring Officer
and Chief Financial Officer
(Principal Executive Officer)
A signed original of this written statement required by 18 U.S.C. Section 1350
has been provided to P-com, Inc. and will be furnished to the Securities and
Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARANES-OXLEY ACT OF 2002
In connection with the filing of the Annual Report on Form 10-K/A for the year
ended December 31, 2004 (the "Report") by P-Com, Inc. ("Registrant"), and the
undersigned hereby certifies that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of Registrant as of and for the periods presented in the Report.
Date: May 13, 2005 By: /s/ Daniel W. Rumsey
----------------------------
Daniel W. Rumsey
Chief Restructuring Officer
and Chief Financial Officer
(Principal Financial Officer)
A signed original of this written statement required by 18 U.S.C. Section 1350
has been provided to P-com, Inc. and will be furnished to the Securities and
Exchange Commission or its staff upon request.