-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GSDyn//LkrMQafMI55Ljx3u9vxIZnZFqXlnO3X3aqVpFZw8hxjAW0Ko5iU3WGwKQ TLDh+GOLF/8/yKmVRChV/Q== 0000898430-01-501796.txt : 20010814 0000898430-01-501796.hdr.sgml : 20010814 ACCESSION NUMBER: 0000898430-01-501796 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: P COM INC CENTRAL INDEX KEY: 0000935493 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 770289371 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25356 FILM NUMBER: 1707579 BUSINESS ADDRESS: STREET 1: 3175 S WINCHESTER BLVD CITY: CAMPBELL STATE: CA ZIP: 95008 BUSINESS PHONE: 4088663666 MAIL ADDRESS: STREET 1: 3175 S WINCHESTER BLVD STREET 2: P-COM INC CITY: CAMPBELL STATE: CA ZIP: 95008 10-Q 1 d10q.txt FORM 10-Q FOR PERIOD ENDED JUNE 30, 2001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _______. COMMISSION FILE NUMBER: 0-25356 --------------- P-COM, INC. (Exact name of Registrant as specified in its charter) --------------- DELAWARE 77-0289371 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 3175 S. WINCHESTER BOULEVARD, CAMPBELL, CALIFORNIA 95008 (Address of principal executive offices) (zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 866-3666 --------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of August 7, 2001, there were 84,818,204 shares of the Registrant's Common Stock outstanding, par value $0.0001 per share. This quarterly report on Form 10-Q consists of 29 pages of which this is page 1. The Exhibit Index appears on page 29. 1 P-COM, INC. TABLE OF CONTENTS
Page PART I. FINANCIAL INFORMATION Number --------------------- ------ Item 1 Condensed Consolidated Financial Statements (unaudited) Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000................................................................. 3 Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2001 and 2000.................................... 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000.......................................................... 5 Notes to Condensed Consolidated Financial Statements.................................. 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... 11 Item 3 Quantitative and Qualitative Disclosure about Market Risk............................. 26 PART II. OTHER INFORMATION ----------------- Item 1 Legal Proceedings..................................................................... 27 Item 2 Changes in Securities................................................................. 27 Item 3 Defaults Upon Senior Securities....................................................... 27 Item 4 Submission of Matters to a Vote of Security Holders................................... 27 Item 5 Other Information..................................................................... 27 Item 6 Exhibits and Reports on Form 8-K...................................................... 27 Signatures............................................................................................ 28
2 PART I - FINANCIAL INFORMATION ITEM 1. P-COM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
JUNE 30, 2001 DECEMBER 31, (unaudited) 2000 ----------- ------------ ASSETS Current assets: Cash and cash equivalents $ 22,241 $ 27,541 Accounts receivable, net 24,910 63,458 Inventory 52,580 62,838 Prepaid expenses and other assets 9,001 13,668 --------- --------- Total current assets 108,732 167,505 Property and equipment, net 21,373 23,166 Goodwill and other assets 24,015 25,548 --------- --------- $ 154,120 $ 216,219 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 11,740 $ 36,093 Other accrued liabilities 26,918 35,678 Deferred contract obligations 8,000 8,000 Notes payable - 10,911 --------- --------- Total current liabilities 46,658 90,682 --------- --------- Other long-term liabilities 1,032 991 Convertible Subordinated Notes 29,299 29,299 --------- --------- Total liabilities 76,989 120,972 --------- --------- Stockholders' equity: Common Stock 8 8 Additional paid-in capital 316,878 316,515 Accumulated deficit (239,262) (218,922) Accumulated other comprehensive loss (493) (2,354) --------- --------- Total stockholders' equity 77,131 95,247 --------- --------- $ 154,120 $ 216,219 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 P-COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data, unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 2001 2000 2001 2000 Sales: Product $ 15,231 $ 37,936 $ 58,841 $ 86,980 Service 12,014 11,994 27,578 23,409 -------- -------- -------- -------- Total sales 27,245 49,930 86,419 110,389 -------- -------- -------- -------- Cost of sales: Product 14,978 50,468 55,381 89,536 Service 8,542 8,844 20,393 17,130 -------- -------- -------- -------- Total cost of sales 23,520 59,312 75,774 106,666 -------- -------- -------- -------- Gross profit 3,725 (9,382) 10,645 3,723 Gross margin 14% -19% 12% 3% Operating expenses: Research and development/engineering 5,372 5,168 10,674 11,566 Selling and marketing 2,262 3,580 4,608 6,680 General and administrative 4,657 6,997 11,588 15,699 Receivable valuation charge - - 11,600 - Goodwill amortization 711 16,564 1,422 18,176 -------- -------- -------- -------- Total operating expenses 13,002 32,309 39,892 52,121 -------- -------- -------- -------- Operating expenses as a percentage of sales 47.7% 64.7% 46.2% 47.2% Loss from continuing operations (9,277) (41,691) (29,247) (48,398) Interest expense (402) (1,208) (1,050) (2,780) Gain on sale of subsidiary - - 9,814 - Other income (expense), net (100) 1,467 751 (3,371) -------- -------- -------- -------- Loss from continuing operations before income taxes, extraordinary item and cumulative effect of accounting change (9,779) (41,432) (19,732) (54,549) Provision for income taxes 374 10,809 608 11,092 -------- -------- -------- -------- Loss from continuing operations before extraordinary item and cumulative effect of accounting change (10,153) (52,241) (20,340) (65,641) Loss on discontinued operations - - - (4,000) Extraordinary gain on retirement of Notes - - - 1,890 Cumulative effect of change in method of accounting - - - (1,534) -------- -------- -------- -------- Net loss $(10,153) $(52,241) $(20,340) $(69,285) ======== ======== ======== ======== Basic and diluted loss per share: Loss from continuing operations $(0.13) $(0.68) $(0.25) $ (0.86) Loss on discontinued operations - - - (0.05) Extraordinary gain on retirement of Notes - - - 0.02 Cumulative effect of change in method of accounting - - - (0.02) -------- -------- -------- -------- Basic and diluted net loss per share applicable to Common Stockholders $(0.13) $(0.68) $(0.25) $ (0.91) ======== ======== ======== ======== Shares used in Basic and Diluted per share computation 80,740 77,086 80,685 76,279 ======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 P-COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, unaudited)
SIX MONTHS ENDED JUNE 30, 2001 2000 ------ ------ Cash flows from operating activities: Net loss $(20,340) $(69,285) Adjustments to reconcile net loss to net cash used in operating activities: (Gain) Loss on sale of subsidiaries (9,814) 1,260 Depreciation 6,042 6,011 (Gain) Loss on disposal of property and equipment (36) 2,924 Amortization of goodwill and other intangible assets 1,451 3,230 Amortization of stock warrants 159 952 Valuation adjustment to deferred income taxes - 9,858 Gain on exchange of convertible notes - (1,890) Loss on disposal of discontinued operations - 4,000 Cumulative effect of change in method of accounting - 1,534 Inventory valuation and other charge 10,000 17,053 Accounts receivable valuation charge 11,600 - Accrued liability charges - 4,318 Write-off of goodwill - 15,000 Changes in assets and liabilities: Accounts receivable 21,921 (8,928) Inventory 4,821 (28,767) Prepaid expenses and other assets 4,662 3,528 Goodwill and other assets 84 1,455 Accounts payable (24,312) 11,141 Other accrued liabilities (9,772) (76) -------- -------- Net cash used in operating activities (3,534) (26,682) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment (2,497) (5,127) Proceeds from disposal of property and equipment - 700 Cash paid on disposal of discontinued operations - (2,000) Proceeds from sale of subsidiary 12,088 2,485 -------- -------- Net cash provided by (used in) investing activities 9,591 (3,942) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on note payable (11,070) (13,017) Proceeds from the issuance of common stock, net of expenses - 43,776 Proceeds from Employee Stock Purchase Plan 440 - Proceeds from exercise of stock options and warrants - 7,125 Repayment from (issuance of) notes receivable 137 (250) (Payments) Borrowings under capital lease obligations (1,053) 338 -------- -------- Net cash provided by (used in) financing activities (11,546) 37,972 -------- --------
5 P-COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED (In thousands, unaudited)
SIX MONTHS ENDED JUNE 30, 2001 2000 -------- -------- Effect of exchange rate changes on cash 189 (695) ------- ------- Net increase (decrease) in cash and cash equivalents (5,300) 6,653 Cash and cash equivalents at the beginning of the period 27,541 11,629 ------- ------- Cash and cash equivalents at the end of the period $22,241 $18,282 ======= ======= Supplemental cash flow information: Cash paid for income taxes $ 62 $ 385 ------- ------- Cash paid for interest $ 861 $ 1,327 ------- ------- Non-cash investing and financing activities: Exchange of Convertible Subordinated Notes for Common Stock $ - $ 7,017 ------- ------- Notes receivable from sale of subsidiary $ 1,500 $ - ------- ------- Equipment purchased under capital leases $ 1,815 $ - ------- -------
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 P-COM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of P- COM, Inc.'s (referred to herein, together with its wholly-owned subsidiaries, as "P-Com" or the "Company") financial condition as of June 30, 2001, and the results of their operations and their cash flows for the three and six months ended June 30, 2001 and 2000. These consolidated financial statements should be read in conjunction with the Company's audited 2000 consolidated financial statements, including the notes thereto, and the other information set forth therein, included in the Company's Annual Report on Form 10-K. Operating results for the three- and six-month periods ended June 30, 2001 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2001. 2. NET LOSS PER SHARE For purpose of computing diluted net loss per share, weighted average common share equivalents do not include stock options with an exercise price that exceeds the average fair market value of the Company's Common Stock for the period because the effect would be antidilutive. Because losses were incurred for the three and six months ended June 30, 2001 and 2000, all options, warrants, and convertible notes are excluded from the computations of diluted net loss per share because they are antidilutive. 3. RECENT ACCOUNTING PRONOUNCEMENTS Effective January 1, 2000, the Company revised its method of accounting associated with revenue recognition for sales of equipment as a result of the adoption of Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial Statements." The Company previously recognized revenue upon shipment of product, provided no significant obligations remained and collection was reasonably assured. This policy was changed to recognition upon transfer of title and risk of loss, which is generally upon shipment of the product provided no significant obligations remain and collection is reasonably assured. In accordance with SAB No. 101, the Company recorded a non-cash charge of approximately $1.5 million, after tax, on January 1, 2000 to account for the cumulative effect of this change in method of accounting. The cumulative effect of this change in method of accounting primarily resulted from one contract where revenue had historically been recognized upon shipment, however, under the terms of the underlying contract, title did not transfer until subsequent receipt of payment. Under the Company's revised revenue recognition method, revenue relating to such sales is deferred until title transfers. As a result of this, approximately $12.0 million in revenue and $10.5 million in related costs originally recognized in 1999 were deferred and re-recognized in 2000. Such revenue included for the three and six-month period ended June 30, 2001 was approximately $1.1 million and $10.5 million, respectively. Related cost of sales included for the three and six-month period ended June 30, 2000 was $1.1 million and $10.1 million, respectively. In July 2001, the Financial Accounting Standards Board (FASB) issued FASB Statements Nos. 141 and 142 (FAS 141 and FAS 142), "Business Combinations" and "Goodwill and Other Intangible Assets." FAS 141 replaces APB 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. FAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under FAS 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. FAS 141 and FAS 142 are effective for all business combinations completed after June 30, 2001. Upon adoption of FAS 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under FAS 141 will be 7 reclassified to goodwill. Companies are required to adopt FAS 142 for fiscal years beginning after December 15, 2001, but early adoption is permitted. The Company will adopt FAS 142 on January 1, 2002. In connection with the adoption of FAS 142, the Company will be required to perform a transitional goodwill impairment assessment. The Company has not yet determined the impact these standards will have on its results of operations and financial position. 4. SALE OF SUBSIDIARY On February 7, 2001, the Company sold RT Masts Limited, its U.K. services subsidiary, to SpectraSite Transco, for approximately $12 million in cash, an additional $750,000 in a 6-month escrow account which was received on August 7, 2001, and a $750,000 note receivable due in 2008 with interest due annually at LIBOR. RT Masts was primarily engaged in providing site preparation, installation, and maintenance of wireless broadband radio systems for cell phone services providers in the UK. RT Masts provided approximately $20 million in revenues to P-Com's consolidated operations in 2000 and approximately $1.8 million in revenue in the first quarter of 2001 up to the date of sale, and has historically been included as a component of the Company's Service sales segment. 5. BORROWING ARRANGEMENTS On March 29, 2001, we entered into a Loan and Security Agreement with a borrowing capacity of up to $25 million with Foothill Capital Corporation. The Loan and Security Agreement matures in March 2004. Borrowings under the Loan and Security Agreement bear interest at LIBOR plus 3.5% to 4.5% per annum or Prime (Reference) Rate plus 0.5% to 1.0%, and are secured by our cash deposits, receivables, inventories, equipment, and intangibles. Maximum borrowings under the Loan and Security Agreement are limited to 85% of eligible accounts receivable. At June 30, 2001, there were no outstanding borrowings under the Loan and Security Agreement. 6. CUSTOMER BANKRUPTCY On April 18, 2001, Winstar Communications Inc., the Company's then largest customer, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. The total impact on the Company's pre-tax earnings for the six months ended June 30, 2001 was $21.6 million in charges to operations, which consists of $11.6 million for establishing reserves against accounts receivables and $10 million for reducing the customer specific inventories to their estimated net realizable value and expense related to non-cancelable purchased commitments for work in progress related to Winstar. These charges were recorded in the three months ended March 31, 2001. On the condensed consolidated statement of operations, the $10 million charge is included in product cost of sales and the $11.6 million charge is reflected under "Receivable valuation charge". 7. BALANCE SHEET COMPONENTS Inventory consists of the following (in thousands of dollars): JUNE 30, 2001 DECEMBER 31, (UNAUDITED) 2000 ------------------------- Raw materials $ 44,252 $ 36,366 Work-in-process 12,641 20,757 Finished goods 24,693 25,155 Inventory at customer sites 1,072 6,550 -------------------------- 82,658 88,828 Less: Inventory reserves (30,078) (25,990) -------------------------- $ 52,580 $ 62,838 ========================== 8 Other accrued liabilities consist of the following (in thousands): JUNE 30, 2001 DECEMBER 31, (UNAUDITED) 2000 ----------- ------------ Deferred revenue $ 4,527 $11,920 Purchase commitment 7,038 6,687 Accrued warranty 3,942 6,323 Lease obligations 2,095 1,428 Interest payable 208 208 Accrued employee benefits 2,072 2,440 Other 7,036 6,672 ------- ------- $26,918 $35,678 ======= ======= 8. SEGMENT REPORTING For purposes of segment reporting, the Company aggregates operating segments that have similar economic characteristics and meet the aggregation criteria of SFAS No. 131. The Company has determined that there are two reportable segments: Product Sales and Service Sales. The Product Sales segment consists of organizations with offices located primarily in the United States, the United Kingdom, and Italy, which develop, manufacture, and/or market broadband access systems for use in the worldwide wireless telecommunications market. The Service Sales segment consists of an organization primarily located in the United States (and, until February 7, 2001, in the United Kingdom), which provides program management, engineering, procurement, and maintenance elements of path design, and system installation for the wireless telecommunications network between central office and customer premise locations over wireline and wireless facilities. The accounting policies of the operating segments are the same as those described in the "Summary of Significant Accounting Policies" included in the Company's Annual Report on Form 10-K. The Company evaluates performance based on operating income. Capital expenditures for long-lived assets are not reported to management by segment and are excluded from presentation, as such information is not significant. The following tables in condensed form show the results of the operations of the Company's operating segments (in $000):
FOR THREE MONTHS ENDED FOR SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------- ------------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Sales Product $ 15,231 $ 37,936 $ 58,841 $ 86,980 Service 12,014 11,994 27,578 23,409 -------- -------- -------- -------- Total $ 27,245 $ 49,930 $ 86,419 $110,389 ======== ======== ======== ======== Income (loss) from continuing operations: Product $(10,544) $(42,461) $(31,100) $(49,778) Service 1,267 770 1,853 1,380 -------- -------- -------- -------- Total $ (9,277) $(41,691) $(29,247) $(48,398) ======== ======== ======== ========
9 The breakdown of sales by geographic customer destination is (in $000):
FOR THREE MONTHS ENDED FOR SIX MONTHS ENDED JUNE 30 JUNE 30 --------------------------- --------------------------- 2001 2000 2001 2000 ------- ------- ------- -------- North America $13,737 $32,627 $41,943 $ 60,053 United Kingdom 5,582 11,474 26,573 33,335 Europe 95 1,564 1,016 4,938 Asia 5,046 2,800 13,235 6,055 Other Geographic Regions 2,785 1,465 3,652 6,008 ------- ------- ------- -------- $27,245 $49,930 $86,419 $110,389 ======= ======= ======= ========
9. COMPREHENSIVE LOSS Comprehensive loss is comprised of net income and the currency translation adjustment. Comprehensive loss was $8.2 million and $52.5 million for the three months ended June 30, 2001 and 2000, respectively. Comprehensive loss was $18.5 million and $70.0 million for the six months ended June 30, 2001 and 2000, respectively. 10. CONTINGENCIES The Company is a defendant in a consolidated state-court class action lawsuit in which the plaintiffs are alleging various securities laws violations by the Company and certain of its officers and directors. The plaintiffs are seeking unspecified damages based upon the decrease in market value of shares of the Company's Common Stock. The Company is unable to speculate on the ultimate outcome. However, the ultimate result could have a material adverse effect on the Company's results of operations or financial position either through the defense or results of such litigation. 11. SUBSEQUENT EVENTS On July 31, 2001, the Company issued 3,797,468 new shares of Common Stock to an existing stockholder for $3 million. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward-looking statements, which involve numerous risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, including without limitation, statements regarding the 10-Q expectations, beliefs, intentions or strategies regarding the future. 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 "Certain Factors Affecting the Company" contained in this Item 2 and elsewhere in this Quarterly Report on Form 10-Q. Additional factors that could cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K, our Form S-3 Registration Statements declared effective by the Securities and Exchange Commission in 2000, and other documents filed by us with the Securities and Exchange Commission. OVERVIEW We supply equipment and services to access worldwide telecommunications networks. Currently, we ship 2.4 GHz and 5.7 GHz spread spectrum radio systems, as well as 7 GHz, 13 GHz, 14 GHz, 15 GHz, 18 GHz, 23 GHz, 26 GHz, 38 GHz and 50 GHz radio systems. We also provide software and related services for these products. Additionally, we offer program management, engineering, procurement, installation and maintenance elements of telecommunications networks between central office and customer premise locations over wireline and wireless facilities. The telecommunications equipment and services industry is experiencing a significant worldwide slowdown. Our largest customer, Winstar Communications Inc., declared bankruptcy on April 18, 2001. Other customers have deferred or cancelled orders. We are actively reducing our expenses to respond to our lowered expectation of revenues. Among other things, we are reducing our product business personnel by approximately 45%, lowering salaries, reducing contract personnel, reducing business travel levels, and consolidating the number of offices. On February 7, 2001, we completed the divestiture of RT Masts, Ltd. for approximately $12 million cash, an additional $750,000 in a six-month escrow deposit plus a long-term note receivable from the purchaser of $750,000. We realized a book gain of $9.8 million from the sale of the stock of RT Masts. On March 29, 2001, we entered into a Loan and Security Agreement with a borrowing capacity of up to $25 million with Foothill Capital Corporation. The Loan and Security Agreement matures in March 2004. Borrowings under the Loan and Security Agreement bear interest at LIBOR plus 3.5% to 4.5% per annum or Prime (Reference) Rate plus 0.5% to 1.0%, and are secured by our cash deposits, receivables, inventories, equipment, and intangibles. Maximum borrowings under the Loan and Security Agreement are limited to 85% of eligible accounts receivable. On July 31, 2001, we issued 3,797,468 new shares of Common Stock to an existing stockholder for $3 million. RESULTS OF OPERATIONS Sales. For the three months ended June 30, 2001, total sales were approximately $27.2 million as compared to $49.9 million for the same period in the prior year. The 45.5% decrease in total sales was primarily due to decreased product sales to domestic CLEC (Competitive Local Exchange Carriers) customers. The worldwide market for telecommunications equipment has contracted substantially in the first six months of 2001, significantly affecting the Company and its direct competitors. This was offset by increased contract work received by our United States based service unit. For the six months ended June 30, 2001, total sales were approximately $86.4 million, compared to $110.4 million for the same period in the prior year. Product sales for the second quarter 2001 decreased approximately $22.7 million or 59.9% compared to the second quarter 2000. Excluding the effects of SAB 101 adjustment in 2000, Point-to-Point product sales decreased by approximately $18.4 million, or 77%, from approximately $23.9 in the second quarter of 2000 to approximately $7.3 million in the second quarter of 2001 due to a decrease in domestic Point-to-Point unit shipments, primarily to CLEC's, and the overall current decline in global spending for telecommunications equipment. 11 Product sales from the Tel-Link Point-to-Multipoint (PMP) product for the second quarter of 2001 were approximately $4.9 million, a decrease of $0.6 million compared to the second quarter of 2000. The PMP market for the second quarter was almost entirely non-U.S. based. Point-to-Multipoint sales have not increased at a rate which we anticipated, primarily due to the slow adoption rate of the product by large system integrators and global telecommunications services sector operators. Sales for the Spread Spectrum product line for the three months ended June 30, 2001 and 2000 were approximately $2.5 million and $2.8 million, respectively. Product sales for the six months ended June 30, 2001 decreased approximately $28.1 million or 32.4% compared to the same period in 2000. The primary reason for the decrease was a reduction in United States CLECs' demand for Point-to- Point products. Product sales from the PMP product for the six months ended June 30, 2001 were approximately $8.4 million, compared to $9.5 million for the six months ended June 30, 2000. Sales of PMP were to non-domestic customers, primarily Pacific Rim areas. Sales for the Spread Spectrum product line for the six months ended June 30, 2001 and 2000 were approximately $6.6 million and $7.8 million, respectively. The lower level in 2001 follows the overall softness seen in telecommunications equipment markets globally. Service sales for the three months ended June 30, 2001 were $12.0 million, virtually the same as in the comparable period in the prior year. Services sales represented 44% and 24% of total sales in the second quarter 2001 and 2000, respectively. Service sales for the six months ended June 30, 2001 increased approximately $4.2 million or 17.8% from the comparable period in the prior year. The increased sales levels were primarily due to expanding markets for our United States based service group for installation of radio units and system design and engineering/maintenance programs for wireline telephone service providers in an expanded geographical area. 2001 service sales included only a partial period of sales from RT Masts Limited, our United Kingdom service unit, which we sold on February 7, 2001. During the three-month period ended June 30, 2001 and 2000, two and four customers, respectively, accounted for a total of 47.9% and 61.9% of our sales, respectively. During the six-month period ended June 30, 2001 and 2000, three customers accounted for a total of 46.6% and 44.8% of our sales, respectively. A major customer in the first quarter of 2001, Winstar, is bankrupt and is not expected to resume its orders. During the three months ended June 30, 2001, we generated approximately 50.4% of our sales in the United States. During the same period in 2000, we generated 65.3% of our sales in the United States. The services business comprised 87.5% of the current quarter's sales in the United States. This reflects both the weakness of United States product sales in 2001 and the relatively better acceptance of our PMP products in Asia. Many of our largest customers use our product and services to build telecommunications network infrastructures. These purchases represent significant investments in capital equipment and are required for a phase of the rollout in a geographic area or a market. Consequently, the customer may have different requirements from year to year and may vary its purchase levels from us accordingly. As noted, the worldwide slowdown in the telecommunications equipment buildout levels significantly affected our operating results in the second quarter and first half of 2001. Gross Profit. For the six months ended June 30, 2001, gross profit excluding the effect of a $10 million charge related to Winstar was $20.6 million or 23.9% of sales. For the six months ended June 30, 2000, gross profit was $3.7 million or 3.4% of sales, primarily due to additional provisions for inventory-related issues of approximately $21.3 million. Gross profit for the three months ended June 30, 2001 was $3.7 million compared to a gross loss of $9.4 million during the same period in 2000, or 13.7% and -18.8% of sales, respectively. The 2000 periods were penalized by charges for $21.3 million, primarily for inventory write-downs. As a percentage of sales, service sales gross profit was approximately 29% and 24% for the three months ended June 30, 2001 and 2000, respectively. This improved gross margin is due primarily to a movement away from lower margin radio system installation work in 2001. After the effect of the charge related to Winstar Communications Inc., gross profit for the six months ended June 30, 2001 was $10.6 million or 12.3% of sales. For the three-month period ended June 30, 2001, product gross profit as a percent of product sales was 2%. Service gross profit as a percentage of service sales was not diminished by the effects of the Winstar bankruptcy filing. 12 Research and Development. For the three months ended June 30, 2001 and 2000, research and development/engineering (R&D) expenses were approximately $5.4 million and $5.2 million, respectively. As a percentage of sales, research and development expenses increased from 10.4% for the three months ended June 30, 2000 to 19.7% for the three months ended June 30, 2001. For the six months ended June 30, 2001 and 2000, research and development expenses were approximately $10.7 million and $11.6 million, respectively. As a percentage of sales, research and development expenses increased from 10.5% for the six months ended June 30, 2000 to 12.4% for the six months ended June 30, 2001. The percentage increase is primarily caused by the lower dollar level of sales in the second quarter of 2001. Research and development expense as a percentage of sales continued to be significant due to a substantial level of final development effort on the new Encore Point-to-Point radios in preparation for commercial rollout later in 2001. Selling and Marketing. For the three months ended June 30, 2001 and 2000, selling and marketing expenses were $2.3 million and $3.6 million, respectively. As a percentage of sales, selling and marketing expenses increased from 7.2% for the three months ended June 30, 2000 to 8.3% for the three months ended June 30, 2001. For the six months ended June 30, 2001 and 2000, selling and marketing expenses were $4.6 million and $6.7 million, respectively. As a percentage of sales, selling and marketing expenses decreased from 6.1% for the six months ended June 30, 2000 to 5.3% for the six months ended June 30, 2001. The decrease in expenses is due to reduced travel costs and lower relative sales commissions in the United States and European markets. General and Administrative. For the three months ended June 30, 2001 and 2000, general and administrative expenses were $4.7 million and $7.0 million, respectively. As a percentage of sales, general and administrative expenses increased to 17% from 14%, due to the decline in sales levels when comparing the two periods. For the six months ended June 30, 2001 and 2000, including the $11.6 million receivable valuation charge, general and administrative expenses were $23.2 million and $15.7 million, respectively. As a percentage of sales, general and administrative expenses increased to 26.8% from 14.2% for the six months ended June 30, 2001 and 2000, respectively. The increase is due to an $11.6 million receivable valuation reserve related to the Winstar Communications Inc. bankruptcy filing, plus the effect of 2001's decline in sales levels. General and administrative expenses, not including the Winstar reserve charges, showed a decline of $4.1 million from the comparative period in 2000. The decrease is due to lower legal and accounting expenses in 2001, a 45% reduction in the headcount of the equipment business and lower traveling expenses. Goodwill Amortization. Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired companies accounted for as purchase business combinations. Goodwill currently recorded arose from the acquisition of our service business in 1997 ($17.4 million) and the acquisition of the Spread Spectrum product line in 1998 ($6.1 million). Goodwill is amortized on a straight-line basis over the period of expected benefit, ranging from 5 to 20 years. For the three months ended June 30, 2001 and 2000, goodwill amortization was approximately $0.7 and $16.6 million, respectively. For the six months ended June 30, 2001 and 2000, goodwill amortization was approximately $1.4 and $18.2 million, respectively. The reduction relates to lower intangible asset levels carried on the Company's balance sheets following the sale of non- core subsidiary businesses in early 2000, and write-offs of $15 million of excess goodwill taken in the second quarter of 2000. With the impending adoption of FAS 142 on January 1, 2002, the Company will be required to perform a goodwill impairment assessment. The Company has not yet determined the impact these standards will have on its results of operations and financial position. Interest Expense. For the three months ended June 30, 2001 and 2000, interest expense was $0.4 million and $1.2 million, respectively. For the six months ended June 30, 2001 and 2000, interest expense was $1.0 million and $2.8 million, respectively. The reduction of interest expense was due to the expiration and payoff of a bank line of credit in January of 2001. Interest expense for the 2001 second quarter consisted primarily of fees incurred on borrowings under our bank line of credit and interest on the principal amount of our subordinated 4- 1/4% convertible promissory Notes due November 2002. There was no significant change in our underlying interest rates between periods. Other Income (Expense), Net. For the three-month period ended June 30, 2001, other expense, net, totaled $0.1 million compared to $1.5 million other income in the comparable three-month period in 2000. Other expense in the second quarter of 2001 comprised primarily of foreign currency translation effects of $447,000 arising from the increased strength of the U.S dollar against the Euro and the British pound, offset by the investment income earned from cash deposits. For the six-month period ended June 30, 2001, other income, net, totaled $0.7 million compared to a net expense of $3.4 million in the comparable six-month period in 2000. Other income for the six-month period ended 13 June 30, 2001 was comprised primarily of an earn out royalty payment related to the sale of the Control Resources Corporation subsidiary in early 2000 and investment income from higher available cash balances, offset by foreign currency translation loss. The other expense in 2000 consisted of a net loss on the sale the Cemetel and Control Resources Corporation subsidiaries, and net losses related to the disposition and write-down of property and equipment. Gain on Sale of Subsidiary. On February 7, 2001, we completed the divestiture of RT Masts, Ltd. for approximately $12 million in cash, an additional $750,000 in a six-month escrow deposit plus a long-term note receivable from the purchaser of $750,000. We realized a book gain of $9.8 million from the sale of the stock of RT Masts Ltd. Discontinued Operations. In August of 1999, we decided to divest our broadcast equipment business, Technosystem S.p.A. Accordingly, beginning in the third quarter of 1999, this business was reported as a discontinued operation. In February 2000, we completed the disposal of Technosystem and recorded an additional loss of $4 million. Extraordinary Item. In January 2000, we exchanged an aggregate of 677,000 new shares of our Common Stock with a fair market value of $5.1 million for an aggregate of $7.0 million principal amount of our outstanding 4- 1/4% convertible promissory Notes. This transaction resulted in an extraordinary gain of $1.9 million. Provision (Benefit) for Income Taxes. The Company's provision for income tax for the three months ended June 30, 2001 and 2000 was $0.4 million and $10.8 million, respectively. The Company's provision for income tax for the six months ended June 30, 2001 and 2000 was $0.6 million and $11.1 million, respectively. The provisions were primarily related to state and foreign taxes payable and a $9.8 million valuation reserve taken in the second quarter of 2000 against deferred tax assets such as net operating loss carryforwards in 2000. In 2000, the expense related primarily to a change in the valuation allowance of $9.8 million. LIQUIDITY AND CAPITAL RESOURCES During the six-month period ended June 30, 2001, we used approximately $3.5 million of cash in operating activities, primarily due to the net loss of $20.3 million and non-cash gain on sale of a subsidiary of $9.8 million, offset by $21.6 million non-cash write-off for receivables and inventories and the accrual of other liabilities related to the Winstar bankruptcy. In addition, there was an increase in cash flow resulting from net reduction of inventory at customer sites and finished good inventories totalling approximately $5.9 million, primarily in Point-to-Point products, and non-cash depreciation and amortization totaling $7.5 million, reduction of prepaid expenses and other assets of $4.6 million, and receivable reduction net of the effect of the Winstar issue of $21.9 million offset by a net reduction in payables and other accrued liabilities of approximately $34.1 million, which resulted from our ability to maintain key vendor payments within terms, and a slowdown of new payable balances occurring in the period as a result of reduced orders from domestic CLEC customers. During the six-month period ended June 30, 2001, a net $9.6 million was provided from investing activities. We received $12 million for the sale of the RT Masts business in February 2001 and invested approximately $2.5 million in capital equipment in the same period. During the six-month period ended June 30, 2001, approximately $11.5 million was used for financing activities. We paid off a bank loan in the amount of $11.0 million. We also made capital lease payments of $1 million in the period. As of June 30, 2001, our principal sources of liquidity consisted of approximately $22.2 million of cash and cash equivalents, and borrowings available under our line of credit. We have not drawn on the line of credit at this time. At December 31, 2000, we had approximately $27.5 million in cash and cash equivalents. The primary reasons for the lower cash position are Winstar's bankruptcy and our significantly lower sales levels. We were not able to curtail operating expenses in a similar ratio. It is possible that the cash position may continue to deteriorate not withstanding cost-cutting measures taken if the sales levels continue to fall near term. The Company does not have any material commitments for purchases of capital equipment. Additional future capital requirements will depend on many factors, including our plans to increase or decrease manufacturing capacity, working capital requirements for our operations, and our internal free cash flow from operations. Several recent quarters have resulted in large losses. We are taking measures to enhance our liquidity position during the worldwide telecommunications industry slowdown by reducing expenses. Current cost reduction 14 initiatives include reducing our equipment business personnel by approximately 45%, implementing across the board salary reductions, and combining physical facilities. Preservation of liquidity during the slowdown is a higher priority than market share gains. We are evaluating various additional alternatives to improve liquidity and working capital. These alternatives include the sale of additional stock and the divestiture of certain business assets. On July 31, 2001, we received $3 million from the sale of 3,797,468 shares of newly issued Common Stock to an existing shareholder group at a premium to market price. There can be no assurance, however, that any additional financing will be available to us on acceptable terms, or at all, when required. Our ability to obtain additional financing on acceptable terms could seriously change the Company's business, operating results and financial condition. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board (FASB) issued FASB Statements Nos. 141 and 142 (FAS 141 and FAS 142), "Business Combinations" and "Goodwill and Other Intangible Assets." FAS 141 replaces APB 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. FAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under FAS 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. FAS 141 and FAS 142 are effective for all business combinations completed after June 30, 2001. Upon adoption of FAS 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under FAS 141 will be reclassified to goodwill. Companies are required to adopt FAS 142 for fiscal years beginning after December 15, 2001, but early adoption is permitted. The Company will adopt FAS 142 on January 1, 2002. In connection with the adoption of FAS 142, the Company will be required to perform a transitional goodwill impairment assessment. The Company has not yet determined the impact these standards will have on its results of operations and financial position. 15 CERTAIN FACTORS AFFECTING THE COMPANY WORLDWIDE INDUSTRY SLOWDOWN A worldwide slowdown in the telecommunications equipment and services sector is affecting us. Customers, specifically systems operators and integrated system providers, are deferring, calling back, or canceling orders, and, in general, not building out additional infrastructure at this time. In addition, our accounts receivable and inventory levels and stability can be jeopardized if our customers experience financial distress. In the second quarter, many large telecommunications equipment manufacturers reduced or eliminated their estimates of product sales levels for the remainder of 2001. We took large valuation charges and other write-offs in the first quarter of 2001 because our largest customer, Winstar Communications Inc., declared bankruptcy on April 18, 2001. 10% of our sales in the first quarter of 2001 were to Winstar. Our services business' largest customer began a slowdown and deferment of previously committed work orders as of the end of the second quarter. We do not think our own product sales levels can likely recover while an industry-wide slowdown persists. SMALL PLAYER IN LARGE MARKET We do not have the customer base or other resources of more established companies, which makes it more difficult for us to address the liquidity and other challenges we face, especially during an industry-wide slowdown. Although we have installed and have in operation over 105,000 radio units globally, we have not developed the kind of large strategic supplier relationships with a broad base of customers of a type enjoyed by other worldwide suppliers of comparable products, which would provide a base for optimal financial performance from which to launch strategic initiatives and withstand business downturns such as the current one. In addition, we have not built up the level of working capital often enjoyed by more established companies, so from time to time we may face serious challenges in financing our continued operation. We may not be able to successfully address these risks. NASDAQ DELISTING NOTICE The Company received a letter of notice dated June 20, 2001 from the Nasdaq National Market stating that due to our bid price levels remaining under the $1 level for thirty consecutive trading days, the Company is therefore on notice that it could be subject to a delisting procedure should the bid price continue to remain under the $1 level for an additional 90-day period, unless our stock attains a bid price of $1 or more for a period of ten consecutive days during such 90-day period. This period would culminate on September 18, 2001. Management has instituted a solicitation of shareholders for approval of a reverse stock split calling for one share of newly issued Common Stock to be issued in place of each five shares of existing stock as of the date at which the reverse stock split is effected. It is expected that a reverse stock split would result in us attaining the $1 bid price objective. Under existing Nasdaq rules, the passage of the previously noted 90-day period does not automatically revoke the Company's current listing status. Further appeal, involving management presentation of facts, business issues, and plans to a Nasdaq- designated review board are additional steps which may be taken to further delay or stop the delisting process. Should the Company's stock at some point be delisted from the Nasdaq National Market, the Company's stock could still be traded electronically on the OTC Bulletin Board. However, this alternative could result in a less liquid market available for existing and potential shareholders to exchange shares of the Company's stock and could ultimately further depress the trading price of the Company's Common Stock. ADDITIONAL CAPITAL REQUIREMENTS Our future capital requirements will depend upon many factors, including the timing of the end of the industry-wide slowdown, development costs of competitive new products and related software, potential acquisition opportunities, maintenance of adequate manufacturing facilities and contract manufacturing relationships, progress of research and development efforts, expansion of marketing and sales efforts, and status of competitive products. Additional financing may not be available in the future on acceptable terms or at all. The continued existence of a substantial amount of debt (including $29.9 million of principal amount of Notes which come due November 1, 2002) could also severely limit our ability to raise additional financing. In addition, given the recent price for our Common Stock, if we raise additional funds by issuing equity securities, significant dilution to our stockholders will result. If adequate funds are not available, we may be required to attempt to restructure or refinance our debt or delay, scale back or eliminate our research and development or manufacturing programs. We may also need to attempt to obtain funds through arrangements with partners or others that may require us to sell off or relinquish rights to 16 certain of our technologies or potential products or other assets. Our inability to obtain capital, or our ability to obtain additional capital only upon onerous terms, could very seriously damage our business, operating results and financial condition and depress or further erode our stock price. RAPID TECHNOLOGICAL CHANGE Rapid technological change, frequency of new product introductions and enhancements, product obsolescence, changes in end-user requirements and interperiod demand, and evolving industry standards characterize the communications market. Our ability to compete in this market will depend upon successful development, introduction and sale of new systems and enhancements and related software tools, on a timely and cost-effective basis, in response to changing customer requirements. We are marketing a new generation of more efficient Point-to-Point systems in the third quarter of 2001, and are completing market testing of a new Spread Spectrum line of radios. Any success in developing additional new and enhanced systems and related software tools will depend upon a variety of factors. Such factors include: . ability of such products to meet market demand; . integration of various elements of complex technology; . timely and efficient implementation and oversight of manufacturing and assembly processes at turnkey suppliers and manufacturing cost reduction programs for existing product lines; . development and completion of related system tools, performance, quality and reliability; and . timely and efficient completion of system design. Moreover, we may not be successful in selecting, developing, manufacturing and creating adequate levels of market demand for new systems or enhancements. For example, to date, revenue generated through the sales of Point-to-Multipoint systems has not met original expectations and the introduction of the new Point- to-Point product line encountered several market rollout plan delays. Also, errors and system failures could be found in our products after commencement of commercial quantity shipments. Such errors could result in the loss of or delay in market acceptance, as well as expenses associated with re- work of previously delivered equipment under warranty programs offered. HISTORY OF LOSSES From inception to June 30, 2001, we generated an accumulated deficit of approximately $239.2 million. The decrease in retained earnings from $18.4 million at December 31, 1997 to an accumulated deficit of $239.2 million at June 30, 2001 resulted from net losses of $62.5 million in 1998, $103.0 million in 1999, $70.0 million in 2000, and $20.3 million for the six-month period ended June 30, 2001. The decline in product prices, as product lines mature and are subjected to technical obsolescence in a competitive market, has had a significant downward impact on our gross margin over the past three years, particularly the Tel-Link Point-to-Point radio systems line. Additionally, slow sales in the Point-to- Multipoint product line in the second half of 2000 and early 2001 resulted in lower margins on this line than had been forecasted for higher sales unit levels. We expect low demand and pricing pressures to continue for the next several quarters and also expect pricing pressures from the slowing U.S. economy in 2001 to affect gross margins. Our ability to drive down cost of producing radio units will be a key issue for the remainder of this year. CUSTOMER CONCENTRATION For the quarter ended June 30, 2001, approximately 150 customers accounted for substantially all of our sales. Two customers accounted for 47.9% of sales in the period. Our largest single customer accounted for 35.8% of our sales in the period. Our ability to maintain or increase our sales in the future will depend, in part, upon our ability to obtain orders from new customers as well as the financial condition and success of our customers, the telecommunications industry and the economy in general. The bankruptcy filing by Winstar will have a significant impact on sales for the remainder of 2001 in relation to comparable periods in 2000. The relatively small number of potential customers for broadband wireless radio products can mean that the loss of such a significant customer suddenly will have at least a short run depressing effect on results of operations. Many of our major customers, except those from our services business, are located outside the United States, primarily in the United Kingdom and the 17 Pacific Rim. Some of these customers are implementing new networks and are themselves in the early stages of development. They may require additional capital to fully implement their planned networks and the lack of such financing in 2001 has curtailed buildouts in 2001. The Company does not possess the resources to provide such long-term financing. If our customers cannot finance their purchases of our products or services, this may materially adversely affect our business, operations and financial condition. Financial difficulties of existing or potential customers may also limit the overall demand for our products and services. Both current customers and potential future customers in the telecommunications industry have, from time to time, undergone financial difficulties and may therefore limit their future orders or find it difficult to pay our billings to them. Any cancellation, reduction or delay in orders or shipments, for example, as a result of manufacturing or supply difficulties or a customer's inability to finance its purchases of our products or services, may materially adversely affect our business. Some difficulties of this nature, such as the recent Winstar bankruptcy filing, have occurred in the past and we believe they can occur in the future. During a slowdown, with many suppliers pursuing relatively few active customers, there is likely to be pressure on the pricing of products and services such as ours. This could put pressure on our gross margins and further deteriorate our profitability. Finally, acquisitions in the telecommunications industry are common, which further concentrates the customer base and may cause some orders to be delayed or cancelled. FLUCTUATIONS IN OPERATING RESULTS We have experienced and will continue to experience significant fluctuations in sales, gross margins and operating results. The procurement process for most of our current and potential customers is complex and lengthy. As a result, the timing and amount of sales is often difficult to predict reliably. The sale and implementation of our products and services generally involve a significant commitment of senior management, as well as our sales force and other resources. The sales cycle for our products and services typically involve technical evaluation and commitment of cash and other resources and delays often occur. Delays are frequently associated with, among other things: . customers' seasonal purchasing and budgetary cycles, as well as their own buildout schedules; . compliance with customers' internal procedures for approving large expenditures and evaluating and accepting new technologies; . compliance with governmental or other regulatory standards, including frequency allocation processes; . difficulties associated with customers' ability to secure financing; . negotiation of purchase and service terms for each sale; . price negotiations required to secure purchase orders; and . education of customers as to the potential applications of our products and services, as well as related product-life cost savings. SHIPMENT DELAYS Due to logistics of production and inventory, a delay in a shipment near the end of a particular quarter for any reason may cause sales in a particular quarter to fall significantly below our and stock market analysts' expectations. A single customer's order scheduled for shipment in a quarter can represent a large portion of our potential sales for the quarter. Delays have occurred in the past due to, for example, unanticipated shipment rescheduling, cancellations or deferrals by customers, competitive and economic factors, unexpected manufacturing or other difficulties, delays in deliveries of components, subassemblies or services by suppliers and failure to receive anticipated orders. We cannot determine whether similar or other delays might occur in the future, but expect that some or all of such problems might recur. UNCERTAINTY IN TELECOMMUNICATIONS INDUSTRY In light of the recent severe downturn in the telecommunications markets and the related pullback in many cases of previously available vendor financing funds, many newer or startup service providers have limited financial resources to complete major infrastructure projects. If these new service providers are unable to adequately finance 18 their operations, they may cancel or delay orders for products and services such as ours. In certain situations such service providers may be forced to cease operations or operate under bankruptcy law protection. Moreover, purchase orders are often received and accepted far in advance of shipment and, as a result, we typically permit orders to be modified or canceled with limited or no penalties. Any failure to reduce actual costs to the extent anticipated when an order is received (or anticipated) substantially in advance of shipment or an increase in anticipated costs before shipment could materially adversely affect our gross margin for such orders. Ordering materials and building inventory based on customer forecasts or non-binding orders can also result in large inventory write-offs or valuation charges, such as occurred in 1999, 2000 and again in the first quarter of 2001. Global economic conditions have had a depressing effect on prior years' sales levels, particularly in 1998. A slowdown in global telecommunications capital spending in the first half of 2001 has again had a depressing effect on our sales levels. INVENTORY Our customers have increasingly been requiring product shipment upon ordering rather than submitting purchase orders far in advance of expected shipment dates. This practice requires us to keep inventory on hand for immediate shipment. Given the variability of customer need and purchasing power, it is difficult to predict the amount of inventory needed to satisfy customer demand. If we over or under-estimate inventory requirements to fulfill customer needs, our results of operations could continue to be adversely affected. In particular, increases in inventory could materially adversely affect operations if such inventory is ultimately not used or becomes obsolete. This risk was realized in the large inventory write-downs in the second quarter of 1999 and 2000, as well as the inventory-related write-off in the first fiscal quarter of 2001. We will be required to continuously evaluate the ultimate realization of existing inventory lines, particularly during the current downturn, and a combination of market conditions and accounting rules covering such carrying values could result in additional valuation reserves applied to existing inventories. EXPENSES Magnifying the effects of any sales shortfall, a material portion of the Company's operating expenses is fixed and difficult to reduce quickly enough to offset rapid sales decline levels. Although we are reducing our operating expenses during the current business downturn, there is no assurance that such steps may be significant enough or timely enough to prevent further deterioration of our business. VOLATILITY OF OPERATING RESULTS If we or our competitors announce new products, services and technologies, it could cause customers to defer or cancel purchases of our existing systems and services. Additional factors have caused and will continue to cause the Company's performance to vary significantly from period to period. These factors include: . new product introductions and enhancements and related costs; . weakness in emerging-country markets, resulting in overcapacity; . weakness in United States CLEC markets; . ability to manufacture and produce sufficient volumes of systems and meet customer requirements; . manufacturing efficiencies and costs; . customer holds on placing orders due to the impact of actions of competitors; . significant customers filing for bankruptcy protection under bankruptcy laws; . variations in the mix of sales through direct efforts or through distributors or other third parties; . variations in the mix of systems sold and services provided, as margins from service revenues are typically lower than margins from product sales; . operating and new product development expense levels incurred; . product sales discounts; 19 . accounts receivable collection issues; . changes in its pricing or customers' or its suppliers' pricing; . inventory write-downs and obsolescence; . market acceptance by customers and timing of availability of new products and services provided by us or our competitors; . acquisitions, including costs and expenses thereof; . use of different distribution and sales channels; . fluctuations in foreign currency exchange rates; . delays or changes in regulatory approval of systems and services; . warranty and customer support expenses; . severance costs; . consolidation and other restructuring costs; . the pending stockholder class action lawsuit; . the need for additional financing; . customization of systems; . general economic and political conditions; and . natural disasters. All of the above factors are difficult for us to forecast, and any of them could materially adversely affect our business, financial condition and results of operations. Because of all of the foregoing factors, in some future quarter or quarters, our operating results may be below those projected by public market analysts, and the price of our common stock may continue to be materially adversely affected. Because of lack of order visibility and the current trend of order delays, deferrals and cancellations, we cannot assure that we will be able to achieve or maintain our current or recent historical sales levels. CONTRACT MANUFACTURERS AND LIMITED SOURCES OF SUPPLY Our internal manufacturing capacity is very limited. We employ a strategy of using contract manufacturers in large part to produce our systems, components and subassemblies and expect to rely increasingly on these manufacturers in the future. We also rely on outside vendors to manufacture certain other components and subassemblies. Our internal manufacturing capacity and that of our contract manufacturers may not be sufficient to fulfill its orders. Our failure to manufacture, assemble and ship systems and meet customer demands on a timely and cost-effective basis could damage relationships with customers and have a material adverse effect on our business and its reputation, financial condition and results of operations. In addition, certain components, subassemblies and services necessary for the manufacture of our systems are obtained from a sole supplier or a limited group of suppliers. Our reliance on contract manufacturers and on sole suppliers or a limited group of suppliers involves risks. We have experienced an inability to obtain an adequate supply of finished products and required components and subassemblies. As a result, we have reduced control over the price, timely delivery, reliability and quality of finished products, components and subassemblies. We do not have long-term supply agreements with most of our manufacturers or suppliers. We have experienced problems in the timely delivery and quality of products and certain components and subassemblies from vendors. Some suppliers have relatively limited financial and other resources, particularly in distressed market periods. Any inability to obtain timely deliveries of components and subassemblies of acceptable quality or any other circumstance would require us to seek alternative sources of supply, or to manufacture finished products or components and subassemblies internally. As manufacture of our products and 20 certain of our components and subassemblies is an extremely complex process, finding and educating new vendors could delay our ability to ship its systems. MANAGEMENT OF GROWTH To maintain a competitive market position, we are required to continue to invest resources for growth. Currently, we are devoting significant resources to the development of new products and technologies and continuously conducting evaluations of these products. We will continue to invest resources in plant and equipment, inventory, personnel and other items, to begin production of these products and to provide any necessary marketing and administration to service and support bringing these products to commercial production stage. Accordingly, in addition to the effect our recent performance has had on gross profit margin and inventory levels, our gross profit margin and inventory management may be further adversely impacted in the future by start-up costs associated with the initial production and installation of these new products. Start-up costs may include additional manufacturing overhead, additional allowance for doubtful accounts, inventory and warranty reserve requirements and the creation of service and support organizations. Additional inventory on hand for new product development and customer service requirements also increases the risk of further inventory write-downs if such products do not gain reasonable market acceptance at normal gross profit margin. Although we, through monitoring our operating expense levels relative to business plan revenue levels, try to maintain a given level of operating results, there are many market condition changes which have challenged and may continue to challenge our ability to maintain comparative levels of operating expenses to revenue ratios period to period. Expansion of our operations and acquisitions in prior periods, coupled with more recent contractions, has caused and continues to impose a significant strain on our management, financial, manufacturing and other resources and has, from time to time, disrupted our normal business operations. Our ability to manage any possible future growth may depend upon significant expansion of our executive, manufacturing, accounting and other internal management systems and the implementation of a variety of systems, procedures and controls, including improvements or replacements to inventory and management systems designed to help control and monitor inventory levels and other operating decision criteria. In particular, we must successfully manage and control overhead expenses and inventories, the development, introduction, marketing and sales of new products, the management and training of our employee base, the integration and coordination of a geographically and ethnically diverse group of employees and the monitoring of third party manufacturers and suppliers. We cannot be certain that attempts to manage or expand our marketing, sales, manufacturing and customer support efforts will be successful or result in future additional sales or profitability. We must efficiently coordinate activities in our companies and facilities in Italy, the United Kingdom, the Pacific Rim, California, Florida, Virginia, and elsewhere. Any failure to coordinate and improve systems, procedures and controls, including improvements relating to inventory control and coordination with our subsidiaries, at a pace consistent with the our business, could cause continued inefficiencies, additional operational expenses and inherent risks, greater risk of billing delays, inventory write-downs and financial reporting difficulties. A significant ramp-up of production of products and services could require us to make substantial capital investments in equipment and inventory, in recruitment and training additional personnel and possibly in investment in additional manufacturing facilities. If undertaken, we anticipate these expenditures would be made in advance of increased sales. In such event, gross margins would be adversely affected from time-to-time due to short-term inefficiencies associated with the addition of equipment and inventory, personnel or facilities. DECLINE IN SELLING PRICES We believe that average selling prices and possibly gross margins for our systems and services will tend to decline in both the near and the long term relative to the point at which a product is initially marketed and priced. Reasons for such decline may include the maturation of such systems, the effect of volume price discounts in existing and future contracts and the intensification of competition, particularly during an industry-wide slowdown. To offset declining average selling prices, we believe we must continue initiatives such as: . successfully introducing and selling new systems on a timely basis; . developing new products that incorporate advanced software and other differentiated features that can be sold at higher average selling prices; and 21 . reducing the costs of our systems through contract manufacturing, design improvements and component cost reduction, among other actions. If we cannot develop new products in a timely manner or fail to achieve increase sales of new products at a higher average selling price, then we would be unable to offset declining average selling prices. If we are unable to offset declining average selling prices, our gross margins will decline. ACCOUNTS RECEIVABLE We are subject to credit risk in the form of trade accounts receivable. We sometimes are unable to enforce a policy of receiving payment within a limited number of days of issuing bills, especially for customers in the early phases of business development. Our current credit policy on customers both domestically and internationally requires letters of credit and/or significant advance payments for those customers deemed to be a high risk and open credit levels for customers which are deemed creditworthy and have a history of timely payments with us. Our current credit policy typically allows payment terms between 30 and 120 days depending upon the customer and the economic norms of the region. We could have difficulties in receiving payment in accordance with our policies, particularly from customers awaiting financing to fund their expansion and from customers outside of the United States. In the first quarter of 2001, we recorded an $11.6 million charge related to the receivable from Winstar. Similar write-offs may occur in the future, which could have a further material adverse effect on our business, financial condition and results of operations. PRODUCT QUALITY, PERFORMANCE AND RELIABILITY Customers require very demanding specifications for quality, performance and reliability. As a consequence, problems may occur with respect to the quality, performance and reliability of our systems or related software tools. If such problems occur, we could experience increased costs, delays or cancellations or rescheduling of orders or shipments, delays in collecting accounts receivable and product returns and discounts. MARKET ACCEPTANCE Our future operating results depend upon the continued growth and increased availability and acceptance of microcellular, Personal Communication Networks (PCN)/ Personal Communication Systems (PCS) and wireless local loop access telecommunications services in the United States and internationally. The volume and variety of wireless telecommunications services or the markets for and acceptance of such services may not continue to grow as expected. The growth of such services may also fail to create anticipated demand for our systems. Because these markets are relatively new, predicting which segments of these markets will develop and at what rate these markets will grow is difficult. In addition to our other products, we have recently invested significant time and resources in the development of Point-to-Multipoint radio systems. As noted, an industry-wide slowdown has occurred, and Point-to- Multipoint sales have not met our original expectations. Certain sectors of the communications market will require the development and deployment of an extensive and expensive communications infrastructure. In particular, the establishment of PCN/PCS networks will require very large capital expenditure levels. Communications providers may not make the necessary investment in such infrastructure, and the creation of this infrastructure may not occur in a timely manner whether due to general economic downturns or issues within specific organizations. Moreover, one potential application of our technology is the use of our systems in conjunction with the provision of alternative wireless access in competition with the existing wireline local exchange providers. Rates for wireless access must become competitive with rates charged by wireline companies for this approach to be successful. If wireless access rates are not competitive, consumer demand for wireless access will be materially adversely affected. If we allocate resources to any market segment that does not grow, we may be unable to reallocate resources to other market segments in a timely manner, ultimately curtailing or eliminating our ability to enter such other segments. Certain current and prospective customers are delivering services and features that use competing transmission media such as fiber optic and copper cable, particularly in the local loop access market. To successfully compete with existing products and technologies, we must offer systems with superior price/performance characteristics and extensive customer service and support. Additionally, we must supply such systems on a timely and cost-effective basis, in sufficient volume to satisfy such prospective customers' requirements and otherwise overcome any reluctance on the part of such customers to transition to new technologies. Any delay in the adoption of our systems may result in prospective customers using alternative technologies in their next generation of systems and networks. 22 Prospective customers may not design their systems or networks to include our systems. Existing customers may not continue to include our equipment in their products, systems or networks in the future. Our technology may not replace existing technologies and achieve widespread acceptance in the wireless telecommunications market. Failure to achieve or sustain commercial acceptance of our currently available radio systems or to develop other commercially acceptable radio systems would materially adversely affect us. Also, industry technical standards may change or, if emerging standards become established, we may not be able to conform to these new standards in a timely and cost-effective manner. INTENSELY COMPETITIVE INDUSTRY The wireless communications market is intensely competitive. Our wireless- based radio systems compete with other wireless telecommunications products and alternative telecommunications transmission media, including copper and fiber optic cable. We are experiencing intense competition worldwide from a number of leading telecommunications companies. Such companies offer a variety of competitive products and services and some offer broader telecommunications product lines, and include Alcatel Network Systems, Marconi, DMC Stratex Networks, Cerragon, Ericsson Limited, Harris Corporation-Farinon Division, SIAE, Siemens, and Western Multiplex Corporation. Many of these companies have greater installed bases, financial resources and production, marketing, manufacturing, engineering and other capabilities than we do. 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. We may also compete in the future with other market entrants offering competing technologies. Some of our current and prospective customers have developed, are currently developing or could manufacture products competitive with our products. Nokia and Ericsson have developed new competitive radio systems, and new technology featuring laser-based millimeter-wave delivery is now on the marketplace. The principal elements of competition in our market and the basis upon which customers may select our systems include price, performance, software functionality, ability to meet delivery requirements, and customer service and support. Recently, certain competitors have announced the introduction of new competitive products, including related software tools and services, and the acquisition of other competitors and competitive technologies. 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 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 expect such competition to intensify, especially during the industry-wide downturn. We believe that to be competitive, we will need to expend significant resources on, among other items, new product development and enhancements, as well as incurring startup costs in our services business for expanded market coverage. In marketing our systems and services, we will compete with vendors employing other technologies and services that may extend the capabilities of their competitive products beyond their current limits, increase their productivity or add other features. We may not be able to compete successfully in the future. UNCERTAINTY IN INTERNATIONAL OPERATIONS In doing business in international markets, we face economic, political and foreign currency fluctuations that are more volatile than those commonly experienced in the United States. The majority of the Company's sales in 2001 have been made to customers located outside of the United States. Historically, our international sales have been denominated in British pounds sterling or United States dollars. Certain of our international sales are denominated in other foreign currencies, including Italian lira (P-Com Italia). A decrease in the value of foreign currencies relative to the United States dollar could result in decreased margins from those transactions if such decreases are not hedged. For international sales that are United States dollar-denominated, such a decrease could make our systems less price- competitive if competitors choose to price in other currencies. 23 Additional risks are inherent in our international business activities. Such risks include: . changes in regulatory requirements; . costs and risks of localizing systems (homologation) in foreign countries; . delays in receiving and processing components and materials; . availability of suitable export financing; . timing and availability of export licenses, tariffs and other trade barriers; . difficulties in staffing and managing foreign operations, branches and subsidiaries; . difficulties in managing distributors; . potentially adverse tax consequences; . non-hedged foreign currency exchange fluctuations; . the burden of complying with a wide variety of complex foreign laws and treaties; . difficulty in accounts receivable collections; and . political and economic instability. In addition, many of our customer purchase and other agreements are governed by foreign laws, which may differ significantly from U.S. laws. Therefore, we may be limited in its ability to enforce our rights under such agreements and to collect damages, if awarded. In many cases, local regulatory authorities own or strictly regulate international telephone companies. Established relationships between government-owned or government-controlled telephone companies and their traditional indigenous suppliers of telecommunications often limit access to such markets. The successful expansion of our international operations in certain markets will depend on our ability to locate, form and maintain strong relationships with established companies providing communication services and equipment in targeted regions. The failure to establish regional or local relationships or to successfully market or sell our products in international markets could limit our ability to expand operations. Our inability to identify suitable parties for such relationships, or even if such parties are identified to form and maintain strong relationships with them, could prevent us from generating sales of products and services in targeted markets or industries. Moreover, even if such relationships are established, we may be unable to increase sales of products and services through such relationships. Some of our potential markets include developing countries that may deploy wireless communications networks as an alternative to the construction of a limited wired infrastructure. These countries may decline to construct wireless telecommunications systems or construction of such systems may be delayed for a variety of reasons. If such events occur, any demand for our systems in these countries will be similarly limited or delayed. Also, in developing markets, economic, political and foreign currency fluctuations may be even more volatile than conditions in developed areas. Such volatility could have a material adverse effect on our ability to develop or continue to do business in such countries. Countries in the Asia/Pacific, African, and Latin American regions have recently experienced weaknesses in their currency, banking and equity markets. These weaknesses have adversely affected and could continue to adversely affect demand for products, the availability and supply of product components to us and, ultimately, our consolidated results of operations. EXTENSIVE GOVERNMENT REGULATION Radio communications are extensively regulated by the United States and foreign governments as well as by international treaties. Our 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, we must obtain regulatory approval for 24 our systems and comply with differing regulations. Regulatory bodies worldwide continue to adopt new standards for wireless communications products. The delays inherent in this governmental approval process may cause the cancellation, postponement or rescheduling of the installation of communications systems by us and our customers. The failure to comply with current or future regulations or changes in the interpretation of existing regulations could result in the suspension or cessation of operations. Such regulations or such changes in interpretation could require us to modify our products and services and incur substantial costs to comply with such regulations and changes. In addition, we are also affected by domestic and international authorities' regulation of the allocation and auction of the radio frequency spectrum. Equipment to support new systems and services can be marketed only if permitted by governmental regulations and if suitable frequency allocations are auctioned to service providers. Establishing new regulations and obtaining frequency allocation at auction is a complex and lengthy process. If PCS operators and others are delayed in deploying new systems and services, we could experience delays in orders. Similarly, failure by regulatory authorities to allocate suitable frequency spectrum could have a material adverse effect on our results. In addition, delays in the radio frequency spectrum auction process in the United States could delay our ability to develop and market equipment to support new services. We operate in a regulatory environment subject to significant change. Regulatory changes, which are affected by political, economic and technical factors, could significantly impact our operations by restricting our development efforts and those of our customers, making current systems obsolete or increasing competition. Any such regulatory changes, including changes in the allocation of or delays in the allocation of available spectrum, could have a material adverse effect on our business, financial condition and results of operations. We may also find it necessary or advisable to modify our systems and services to operate in compliance with such regulations. Such modifications could be expensive and time-consuming. CLASS ACTION LITIGATION In September and October 1998, several class action complaints were filed in the Superior Court of California, County of Santa Clara, on behalf of P-Com stockholders who purchased or otherwise acquired our Common Stock between April 1997 and September 11, 1998. The plaintiffs allege various state securities laws violations by P-Com and certain of our officers and directors. The complaints seek unquantified compensatory, punitive and other damages, attorneys' fees and injunctive and/or equitable relief. On December 3, 1998, the Court entered an order consolidating all of the above complaints. On June 30, 2000 the Court certified this matter as a class action. The litigation is being conducted actively and we are unable to speculate as to ultimate outcomes. An unfavorable outcome could have a material adverse effect on our business, prospects, financial condition and results of operations. Even if all of the litigation is resolved in our favor, the defense of such litigation may entail considerable cost and the significant diversion of efforts of management. PROTECTION OF PROPRIETARY RIGHTS We rely on a combination of patents, trademarks, trade secrets, copyrights and other measures to protect our intellectual property rights. We generally enter into confidentiality and nondisclosure agreements with service providers, customers and others to limit access to and distribution of proprietary rights. We also enter into software license agreements with customers and others. However, such measures may not provide adequate protection for our trade secrets or other proprietary information for a number of reasons. Any of our patents could be invalidated, circumvented or challenged, or the rights granted thereunder may not provide competitive advantages to us. Any of our pending or future patent applications might not be issued within the scope of the claims sought, if at all. Furthermore, others may develop similar products or software or duplicate our products or software. Similarly, others might design around the patents owned by us, 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. A failure or inability to protect proprietary rights could have a material adverse effect on our business, financial condition, and results of operations. Even if our intellectual property rights are adequately protected, litigation may be necessary to enforce patents, copyrights and other intellectual property rights, to protect our trade secrets, to determine the validity of and scope of proprietary rights of others or to defend against claims of infringement or invalidity. Litigation could result in substantial costs and diversion of resources, regardless of the outcome. Infringement, invalidity, right to use or 25 ownership claims by third parties or claims for indemnification resulting from infringement claims could be asserted in the future and such assertions may materially adversely affect the Company. If any claims or actions are asserted against us, we may need to or choose to seek a license under a third party's intellectual property rights. However, such a license may not be available under reasonable terms or at all. PERSONNEL TURNOVER We have experienced and may continue to experience employee turnover due to several factors, including layoffs in response to the decline in product sales. Such turnover could adversely impact our business. Periodic downturns in our industry result in recurring layoffs. The loss of any key employee, the failure of any key employee to perform in his or her position, our inability to attract and retain skilled employees as needed or the inability of our officers and key employees to expand, train and manage our employee base could all materially adversely affect our business, either immediately or when and if we face the challenges of renewed growth. VOLATILITY OF STOCK PRICE In recent years, the stock market in general, and the market for shares of small capitalization, technology stocks in particular, have experienced extreme price fluctuations. Such fluctuations have often been unrelated to the operating performance of individual affected companies. We believe that factors such as announcements of developments related to our business, announcements of technological innovations or new products or enhancements by us or our competitors, developments in the emerging countries' economies, sales by competitors, including sales to our customers, sales 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 and general conditions in our market or markets served by our customers or the economy, could cause the price of our Common Stock to fluctuate, sometimes reaching extreme and unexpected lows. 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. We also recognize that our financial performance has caused our recent price decline. DEBT As of June 30, 2001, our total indebtedness including current liabilities was approximately $77.0 million and our stockholders' equity was approximately $77.1 million. Our $29 million outstanding principal amount of convertible subordinated notes matures on November 1, 2002. Our ability to make scheduled payments of the principal and interest on indebtedness will depend on future performance, which is subject in part to economic, financial, competitive and other factors beyond our control. DIVIDENDS We have never declared or paid cash dividends on our common stock, and we anticipate that any future earnings will be retained for investment in the business. CHANGE OF CONTROL INHIBITION Our stockholder rights ("poison pill") plan, certificate of incorporation, equity incentive plans, bylaws and Delaware law may have a significant effect in delaying, deferring or preventing a change in control of us and may adversely affect the voting and other rights of holders of Common Stock. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of any preferred stock that may be issued in the future, including the Series A junior participating preferred stock that may be issued pursuant to the stockholder rights ("poison pill") plan, upon the occurrence of certain triggering events. In general, the stockholder rights plan provides a mechanism by which the share position of anyone that acquires 15% or more (20% or more in the case of the State of Wisconsin Investment Board and Firsthand Capital Management) of the Common Stock, without the approval of our Board of Directors, will be substantially diluted. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK For financial risk related to changes in interest rates and foreign currency exchange rates, reference is made to Part II, item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended December 31, 2000 as well as the risks detailed above in the present document. 26 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. No material developments in previously reported proceedings. ITEM 2. CHANGES IN SECURITIES. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On May 31, 2001 the Company held its 2001 Annual Meeting of Stockholders, where three matters were put to a vote of stockholders. The first matter was the election of one director to serve for a "three-year" term ending upon the 2004 annual meeting of stockholders or until a successor is duly elected. M. Bernard Puckett was elected. There were 60,186,389 votes FOR and 451,696 votes WITHHELD. The continuing directors were John A. Hawkins, James J. Sobczak, George P. Roberts, and Brian T. Josling. The second proposal was to approve an amendment to the Company's Employee Stock Purchase Plan (the "Purchase Plan") to increase the number of shares of Common Stock authorized for issuance over the term of the Purchase Plan by an additional 350,000 shares, to a total of 1,500,000 shares. The proposal was approved with 59,184,563 votes FOR, 1,271,919 votes AGAINST, and 183,103 votes ABSTAINED. The third proposal was to ratify the appointment of PricewaterhouseCoopers LLP as independent auditors of the Company for the fiscal year ending December 31, 2001. The proposal was approved with 60,349,587 votes FOR, 184,563 votes AGAINST, and 103,915 votes ABSTAINED. ITEM 5. OTHER INFORMATION. Effective May 31, 2001, George Roberts retired as our Chief Executive Officer; he remains Chairman. James Sobczak, our President, was elected Chief Executive Officer. In June 2001, we appointed Frederick Fromm and Gen. H.R. Johnson (Ret.) to fill vacancies on our Board of Directors. ITEM 6. EXHIBITS AND REPORTS ON FORM 10-Q. (a) Exhibits. 10.89 Purchase Agreement dated May 25, 2001 by and between P-Com, Inc. and MynTahl Corporation. 10.90 Employment and Continuity of Benefits Agreement by and between George Roberts and P-Com, Inc., dated May 31, 2001.* * Compensatory benefit arrangement. (b) Reports on Form 8-K. None. 27 SIGNATURES Pursuant to the requirements 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. P-COM, INC. Date: August 13, 2001 By: /s/ James J. Sobczak -------------------------- James J. Sobczak President and Chief Executive Officer (Duly Authorized Officer) Date: August 13, 2001 By: /s/ Leighton J. Stephenson -------------------------- Leighton J. Stephenson Chief Financial Officer and Vice President, Finance and Administration (Principal Financial Officer) 28 EXHIBIT INDEX 10.89 Purchase Agreement dated May 25, 2001 by and between P-Com, Inc. and MynTahl Corporation. 10.90 Employment and Continuity of Benefits Agreement by and between George Roberts and P-Com, Inc., dated May 31, 2001.* * Compensatory benefit arrangement. 29 EX-10.89 3 dex1089.txt PURCHASE AGREEMENT DATED MAY 25, 2001 EXHIBIT 10.89 PURCHASE AGREEMENT Party A: P-COM, Inc. (hereinafter referred to as Party A). Party A is recognized to be an industry leader and premier supplier of state-of- the-art wireless access Point-to-Point PDH/SDH, Point-to-Multipoint LMDS/MMDS and Spread Spectrum systems (hereinafter referred to as the "P-COM SYSTEMS"). Party B: MynTahl Corporation (hereinafter referred to as Party B). Party B is recognized to have time-proven established sales and marketing channels in Asia and Latin America (hereinafter referred to as "THE TERRITORIES"). In order to promote the P-Com Systems in The Territories, with the principle of cooperation, Party A and Party B reach the following Purchase Agreement: I. RESPONSIBILITIES OF PARTY A 1. Party A shall grant Party B the non-exclusive right to sell the P-Com Systems in the Territories for a period of two years from the date of the signing of this Purchase Agreement. 2. Party A shall assist Party B's efforts to sell the P-Com Systems in the Territories by providing pre and post sales support to Party B. This support will be provided from P-Com's California and Florida locations as well as in the local markets, wherever possible. 3. Party A, whenever possible and economically feasible, provide localized repair services to Party B or Party B's customer for the P-Com Systems, for both in-warranty and out-of-warranty repairs. 4. Unless otherwise mutually agreed in writing, for a period of two years from the date of the signing of this Purchase Agreement, Party A shall honor the price level for the purchases of Party B as detailed in Attachment A. Party A /s/ JJS Page 1 of 4 Party B /s/ MBH II. RESPONSIBILITIES OF PARTY B 1. Party B shall purchase the P-Com Systems for a total minimum value of US$20.0 million that may be shipped, at the option of Party A, to Party B on or before June 30, 2002. This purchase may include one or more purchase orders detailing exact configurations, frequencies, capacities and other terms and conditions; however, all shipments totaling a minimum value of US$20.0 million may ship on or before June 30, 2002. Party B plans to purchase the first P-Com Systems under this Purchase Agreement for shipment on or before September 30, 2001. 2. Party B shall purchase additional P-Com Systems for a total minimum value of US$32.0 million that may be shipped, at the option of Party A, to Party B between July 1, 2002 and June 30, 2003. This purchase may include one or more purchase orders detailing exact configurations, frequencies, capacities and other terms and conditions; however, all shipments totaling a minimum value of US$32.0 million may ship between July 1, 2002 and June 30, 2003. 3. Payment Terms for the purchases of Party B shall be irrevocable Letter of Credit or Prepaid by Wire Transfer or, if mutually agreed in writing, a combination of irrevocable Letter of Credit and Wire Transfer. 4. Party B shall provide Party A a forecast of purchases a minimum of 90 days prior to the required ship date. 5. Party B shall prior coordinate all sales efforts in the Territories with Party A's head of sales for the particular territory involved. III. Any unsettled issues shall be resolved through friendly negotiation by the two parties. IV. The Agreement is written in English. Fax signatures shall have the same effect as original signatures. Party A /s/ JJS Page 2 of 4 Party B /s/ MBH Party A: P-COM, Inc. Party B: MynTahl Corporation /s/ James J. Sobczak /s/ Ming Bo Huang ------------------------- ---------------------------- Name: James J. Sobczak Name: Ming Bo Huang Title: President & COO Title: Chief Executive Officer Date: 5/25/01 Date: 5/28/2001 Party A /s/ JJS Page 3 of 4 Party B /s/ MBH ATTACHMENT A- PRICING MynTahl discount level to be negotiated and mutually agreed. Party A /s/ JJS Page 4 of 4 Party B /s/ MBH EX-10.90 4 dex1090.txt EMPLOYMENT AND CONTINUITY OF BENEFITS AGREEMENT EXHIBIT 10.90 EMPLOYMENT AND CONTINUITY OF BENEFITS AGREEMENT EMPLOYMENT AND CONTINUITY OF BENEFITS AGREEMENT made as of the 31st day of May 2001 by and between P-Com, Inc., a Delaware corporation (the "Company"), and George Roberts ("Executive"). All capitalized terms in this Agreement shall have the meaning assigned to them in this Agreement or in the attached Appendix unless otherwise indicated herein. WHEREAS, Executive currently serves as the Company's Chief Executive Officer and the Chairman of the Board. WHEREAS, Executive desires to resign from his position as the Company's Chief Executive Officer and appoint, subject to the approval of the Board, James Sobczak (the "Designated Successor") as his successor to such position, effective as of May 31, 2001 (the "Resignation Effective Date"). WHEREAS, Company and Executive desire that Executive continue in the Company's employ in his capacity as Chairman of the Board following the Resignation Effective Date. WHEREAS, the Company and Executive have previously entered into a change in control severance agreement dated December 15, 1997 (the "Change in Control Severance Agreement") pursuant to which Executive may become entitled to certain severance benefits in the event his employment with the Company were to terminate within a specified period following a Change in Control, as such term is defined in that agreement. WHEREAS, the Company and Executive wish to enter into a formal agreement which will govern the terms and conditions of Executive's continued employment with the Company as Chairman of the Board following the Resignation Effective Date and which will provide the Executive with severance benefits under circumstances which would not otherwise entitle him to such benefits under the existing provisions of the Change in Control Severance Agreement. NOW, THEREFORE, the parties hereto agree as follows: PART ONE -- TERMS AND CONDITIONS OF EMPLOYMENT 1. DUTIES AND RESPONSIBILITIES; EMPLOYMENT PERIOD. (a) DUTIES AND RESPONSIBILITIES. Executive shall serve as the Chairman of the Board during the Employment Period and shall perform in good faith and to the best of his ability all services which may be required of Executive hereunder and to be available to render services at all reasonable times and places in accordance with reasonable directions and requests made by the Company acting by majority vote of the Board. Executive shall, during the Employment Period, devote his full time, ability, energy and skill to the performance of his duties and responsibilities hereunder. (b) PRINCIPAL PLACE OF EMPLOYMENT. Executive shall perform his duties hereunder either at the Company's principal headquarters in Campbell, CA or at his remote office in Benson AZ or any successor location which provides ready remote access to the Company's network. (c) EMPLOYMENT PERIOD. Executive's employment with the Company shall be governed by the provisions of this Agreement for the period commencing May 31, 2001 and continuing through May 30, 2002 or the sooner termination of this Agreement in accordance with the provisions of Section 2. Should this Agreement remain in effect through May 30, 2002, then Executive's employment under this Agreement shall automatically be renewed for another one year term commencing May 31, 2002 and continuing through May 30, 2003, unless Executive provides written notice of non-renewal to the Company on or before May 1, 2002. The period during which Executive's employment continues in effect pursuant to this Agreement shall be hereafter referred to as the "Employment Period." 2. TERMINATION OF EMPLOYMENT. (a) RESIGNATION BY EXECUTIVE. Executive may terminate his employment under this Agreement at any time by giving the Company at least sixty (60) days prior written notice of such termination. (b) TERMINATION FOR CAUSE. The Company acting by majority vote of the Board may, upon written notice, terminate the Executive's employment hereunder for Cause. Such termination for Cause shall be effective immediately upon such notice. (c) RE-ELECTION BY STOCKHOLDERS. The Company shall use its best efforts to nominate Executive for re-election to the Board at each annual stockholders meeting held during the Employment Period. The failure of the Company's stockholders to re-elect Executive to the Board shall constitute an Involuntary Termination which shall entitle Executive to the severance benefits provided under Part Two of this Agreement. (d) DEATH OR DISABILITY. Upon Executive's death or Disability during the Employment Period, the employment relationship created pursuant to this Agreement shall immediately terminate, and no further compensation shall become payable to Executive pursuant to Paragraph 3. In connection with such termination, the Company shall pay Executive or his estate (i) any unpaid Base Salary earned under Paragraph 3 for services rendered through the date of his death or Disability, (ii) the dollar value of all accrued and unused vacation benefits based upon Executive's most recent level of Base Salary and (iii) any Incentive Compensation which becomes due and payable for the fiscal year in which the Executive's death or Disability occurs, pro-rated in amount on the basis of the portion of that year completed prior to Executive's death or Disability. In addition to the benefits provided under this Section 2(d), Executive and his spouse and other eligible dependents shall be entitled to continued health care coverage pursuant to the provisions of Part Three of this Agreement, but Executive shall not be entitled to any severance benefits under Part Two of this Agreement should his employment terminate during the Employment Period by reason of his death or Disability. 2 3. CASH COMPENSATION. (a) BASE SALARY. Executive shall be paid a base salary during the Employment Period at an annual rate not less than [***] (the "Base Salary"). The Base Salary shall be paid at periodic intervals in accordance with the Company's payroll practices for salaried employees. The Base Salary is equal to [***] of Executive's previously authorized annual salary of up to Three Hundred Seventy Six Thousand Dollars ($376,000) which Executive and the Company previously agreed to reduce to the rate of Base Salary provided in this Agreement due to the Company's business and financial condition. (b) INCENTIVE COMPENSATION. For each fiscal year of the Company coincidental in whole or in part with the Employment Period, the Executive shall have the opportunity to earn incentive compensation ("Incentive Compensation") based on a target bonus equal to [***] of his Base Salary in accordance with the terms of the Company's Management Incentive Program, a copy of which is attached hereto as Exhibit A. The actual amount of Incentive Compensation which is to be paid to Executive for each such fiscal year shall be determined by the Board on the basis of the Company's success in attaining the financial objectives and performance milestones established by the Board for that fiscal year within the first ninety (90) days of such year. Should the Employment Period terminate prior to the completion of the Company's fiscal year, then Executive shall be entitled to a pro-rated bonus for that fiscal year, based on the portion of such year in which he continued in employment hereunder, if the financial objectives and performance milestones for that year are attained. For the fiscal year ending December 31, 2001, Executive shall be eligible to receive Incentive Compensation based on a target bonus of [***] of Base Salary to be payable upon the Company's achievement of the financial milestones specified in the business plan approved by the Board for the 2001 fiscal year. (c) TAX WITHHOLDING. The Company shall deduct and withhold from the compensation payable to Executive hereunder any and all applicable Federal, State and local income and employment withholding taxes and any other amounts required to be deducted or withheld by the Company under applicable statutes, regulations, ordinances or orders governing or requiring the withholding or deduction of amounts otherwise payable as compensation or wages to employees. 4. FRINGE BENEFITS. (a) GENERAL EXECUTIVE BENEFITS. Executive shall, throughout the Employment Period, be eligible to participate in all group term life insurance plans, accidental death and dismemberment plans and short-term disability programs and other executive benefits which are made available to the Company's executives and for which Executive qualifies. Executive shall accrue paid vacation benefits during the Employment Period in accordance with the Company's standard vacation policy for executives. [***] 3 5. PROPRIETARY INFORMATION. (a) PROPRIETARY INFORMATION. Executive hereby acknowledges that the Company may, from time to time during the Employment Period, disclose to Executive confidential information pertaining to the Company's business and affairs, technology, research and development projects and customer base, including (without limitation) financial information concerning customers and prospective business opportunities. All information and data, whether or not in writing, of a private or confidential nature concerning the business, technology or financial affairs of the Company and its clients (collectively, "Proprietary Information") is and shall remain the sole and exclusive property of the Company. By way of illustration, but not limitation, Proprietary Information shall include all trade secrets, research and development projects, financial records, business plans, personnel data, computer programs and customer lists and accounts relating to the business operations, technology or financial affairs of the Company, other similar items indicating the source of the Company's revenue, all information pertaining to the salaries, duties and performance ratings of the Company's employees and all financial information relating to the Company's clients and their proposed or contemplated business transactions. 4 (b) NON-DISCLOSURE OF PROPRIETARY INFORMATION. Executive shall not, at any time during or after such Employment Period, disclose to any third party or directly or indirectly make use of any such Proprietary Information, other than in connection with the Company's business and affairs. (c) USES OF PROPRIETARY INFORMATION. All files, letters, memoranda, reports, records, data or other written, reproduced or other tangible manifestations of the Proprietary Information, whether created by Executive or others, to which the Executive has access during the Employment Period shall be used by Executive only in the performance of his duties hereunder. All such materials (whether written, printed or otherwise reproduced or recorded) shall be returned by Executive to the Company immediately upon the termination of the Employment Period or upon any earlier request by the Company, without Executive retaining any copies, notes or excerpts thereof. (d) EXTENT OF EXECUTIVE'S OBLIGATIONS. Executive's obligation not to disclose or use Proprietary Information shall also extend to any and all information, records, trade secrets, data and other tangible property of the Company clients or any other third parties who may have disclosed or entrusted the same to the Company or Executive in connection with the Company's business operations. Executive's obligations under this Section 5 shall continue in effect after the Termination of his employment with the Company, whatever the reason or reasons for such Termination. PART TWO - SEVERANCE BENEFITS 6. SEVERANCE BENEFITS. Executive shall become entitled to receive the following severance benefits if (i) Executive's employment with the Company terminates by reason of an Involuntary Termination during the Employment Period and (ii) the circumstances under which that Involuntary Termination occurs do NOT otherwise entitle Executive to receive the severance benefits provided pursuant to Section II of the Change in Control Severance Agreement: (a) SALARY/BONUS CONTINUATION PAYMENTS. Executive shall be entitled to salary/bonus continuation payments in an aggregate amount equal to two (2) times the sum of (i) Executive's annual rate of Base Salary and (ii) the Executive's target bonus for the fiscal year of the Company in which such Involuntary Termination occurs, whether or not the financial objectives or performance milestones applicable to that target bonus are in fact attained. Such salary/bonus continuation payments shall be paid in a series of successive equal biweekly installments over the twenty-four (24)-month period measured from the date of Executive's Involuntary Termination and shall be subject to the Company's collection of all applicable Federal, State and local income and employment withholding taxes. (b) ACCELERATION OF OPTIONS. Each of Executive's outstanding Options shall (to the extent not then otherwise fully exercisable) automatically accelerate so that each such Option will immediately vest in full and become exercisable for the total number of shares of Common Stock at the time subject to that Option and may be exercised for any or all of those shares as fully- vested shares. Each such accelerated Option, together with all Executive's 5 other vested Options, shall remain so exercisable until the EARLIER of (i) the expiration date of the ten (10)-year option term or (ii) the end of two (2)-year period measured from the date of Executive's Involuntary Termination or such longer period as may be specified in the agreement evidencing such Option. (c) Unpaid Benefits. Executive will receive a lump sum payment of all --------------- unpaid vacation days which Executive has accrued through the date of Executive's Involuntary Termination. Such payment shall be made to Executive within fifteen (15) days after the date of such Involuntary Termination, subject to the Company's collection of all applicable Federal, State and local income and employment withholding taxes. PART FOUR - ADDITIONAL COVENANTS 8. Restrictive Covenants. For the twenty-four (24)-month period --------------------- following Executive's Termination, Executive shall not: (i) directly or indirectly, whether for his own account or as an employee, director, consultant or advisor, provide services to any business enterprise which is at the time in competition with any of the Company's then-existing or formally planned product lines and which is located geographically in an area where the Company maintains substantial business activities; (ii) directly or indirectly encourage or solicit any individual to leave the Company's employ for any reason or interfere in any other manner with the employment relationships at the time existing between the Company and its current or prospective employees; or (iii) induce or attempt to induce any customer, supplier, distributor, licensee or other business affiliate of the Company to cease doing business with the Company or in any way interfere with the existing business relationship between 6 any such customer, supplier, distributor, licensee or other business affiliate and the Company. Executive hereby acknowledges that monetary damages may not be sufficient to compensate the Company for any economic loss which may be incurred by reason of Executive's breach of the foregoing restrictive covenants. Accordingly, in the event of any such breach, the Company shall have the right to cease all further salary/bonus continuation payments under Part Two of this Agreement and shall, in addition to the cessation of those payments and any remedies available to the Company at law, be entitled to obtain equitable relief in the form of an injunction precluding Executive from continuing to engage in such breach. PART FIVE -- MISCELLANEOUS 9. LIMITATION OF SEVERANCE BENEFITS. (a) SOURCE OF BENEFIT. The severance benefits to which Executive may become entitled under Part Two of this Agreement or the provisions of the Change in Control Severance Agreement are the only severance benefits to which Executive is entitled upon the termination of his employment with the Company, and no other severance benefits shall be provided to Executive by the Company pursuant to any other severance plan or program of the Company. (b) TERMINATION FOR CAUSE. In the event Executive's employment hereunder is terminated for Cause, no severance benefits shall be provided to Executive under Part Two of this Agreement. 10. INDEMNIFICATION. The indemnification provisions for officers and directors under the Company certificate of incorporation, indemnification agreement, Bylaws and insurance policies will (to the maximum extent permitted by law) be extended to Executive with respect to any and all matters, events or transactions occurring or effected during Executive's employment with the Company. 11. GENERAL CREDITOR STATUS. The payments and benefits to which Executive becomes entitled hereunder will be paid, when due, from the general assets of the Company, and no trust fund, escrow arrangement or other segregated account will be established as a funding vehicle for such payment. Accordingly, Executive's right (or the right of the personal representatives or beneficiaries of Executive's estate) to receive any payments or benefits hereunder will at all times be that of a general creditor of the Company and will have no priority over the claims of other general creditors. 12. DEATH. In the event of Executive's death, any unpaid benefits due the Executive under this Agreement shall be paid, on the specified due date or dates hereunder, to the executors or administrators of Executive's estate. Should Executive die before he exercises all of his outstanding Options, then such Options, to extent exercisable for vested shares at the time of Executive's death, may be exercised, within twelve (12) months after the date of Executive's death, by the executors or administrators of Executive's estate or by persons to whom the Options are transferred pursuant to the Executive's will or in accordance with the laws 7 of inheritance. In no event, however, may any such Option be exercised after the specified expiration date of the option term. 13. ATTORNEY'S FEES. In the event legal proceeding should be initiated by Executive or by the Company with respect to any controversy, claim or dispute relating to the interpretation or application of the provisions of this Agreement or any benefits payable hereunder, the prevailing party in such proceedings will be entitled to recover from the losing party reasonable attorney fees and costs incurred in connection with such proceedings or in the enforcement or collection of any judgment or award rendered in such proceedings. For purposes of this provision, the prevailing party means the party determined by the court to have most nearly prevailed in the proceedings, even if that party does not prevail in all matters, and does not necessarily mean the party in whose favor the judgment is actually rendered. If the Company materially breaches any of its obligations under this Agreement and fails to cure that breach within thirty (30) days after written notice from Executive, then Executive shall be entitled to reimbursement from the Company for any reasonable expenses and attorney fees Executive incurs in having the Company subsequently cure that breach, whether or not legal proceedings are actually commenced in connection with such breach. 14. MISCELLANEOUS (a) GOVERNING DOCUMENT. This Agreement, including the exhibits attached hereto, the Change in Control Severance Agreement and the Health Care Resolution constitute the entire agreement and understanding of the Company and Executive with respect to the terms and conditions of Executive's employment with the Company and the payment of severance and other benefits and supersede all prior and contemporaneous written or verbal agreements and understandings between Executive and the Company relating to such subject matter. This Agreement may only be amended by written instrument signed by Executive and an authorized officer of the Company. NOTHING IN THIS AGREEMENT SHALL ADVERSELY AFFECT OR MODIFY THE EXECUTIVE'S RIGHTS AND BENEFITS UNDER THE CHANGE IN CONTROL SEVERANCE AGREEMENT, AND THAT LATTER AGREEMENT SHALL CONTINUE IN FULL FORCE AND EFFECT, BUT IN NO EVENT SHALL THERE BE ANY DUPLICATION OF THE BENEFITS PAID TO EXECUTIVE PURSUANT TO THE PROVISIONS OF THE CHANGE IN CONTROL SEVERANCE AGREEMENT AND THIS AGREEMENT. (b) GOVERNING LAW. The provisions of this Agreement shall be construed and interpreted under the laws of the State of California applicable to agreements executed and to be wholly performed within the State of California. If any provision of this Agreement as applied to any party or to any circumstance should be adjudged by a court of competent jurisdiction to be void or unenforceable for any reason, the invalidity of that provision shall in no way affect (to the maximum extent permissible by law) the application of such provision under circumstances different from those adjudicated by the court, the application of any other provision of this Agreement, or the enforceability or invalidity of this Agreement as a whole. Should any provision of this Agreement become or be deemed invalid, illegal or unenforceable in any jurisdiction by reason of the scope, extent or duration of its coverage, then such provision shall be deemed amended to the extent necessary to conform to applicable law so as to be valid and enforceable or, if such provision cannot be so amended without materially altering the intention of the parties, then such provision will be stricken and the remainder of this Agreement shall continue in full force and effect. 8 (c) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Company and its successors and assigns (including, without limitation, the surviving entity in any change in control or ownership of the Company). (d) COUNTERPARTS. This Agreement may be executed in more than one counterpart, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument. 15. INDEPENDENT LEGAL COUNSEL. By executing this Agreement, Executive acknowledges that (i) this Agreement has been prepared by Brobeck, Phleger & Harrison LLP ("Brobeck") acting it its capacity as legal counsel to the Company and (ii) Executive has an opportunity to seek advice from his own legal counsel with respect to the matters contained herein and such individual counsel is not Brobeck. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year written above. P-COM, INC. By: /s/ James J.Sobczak ------------------------- Title: Director /s/ George Roberts ---------------------------- GEORGE ROBERTS, EXECUTIVE 9 APPENDIX For purposes of this Agreement, the following definitions shall be in effect: AGREEMENT shall mean this Employment and Continuity of Benefits Agreement. BOARD means the Company's Board of Directors. CAUSE means the termination of the Executive's employment for any of the following reasons: (i) Executive's commission of a felony or his embezzlement of the Company's funds, (ii) a material breach by Executive of his obligations under Section 5 of this Agreement (or any other proprietary information agreement in effect between the Company and Executive) which has a material adverse effect upon the Company, (iii) any intentional misconduct by Executive which has a materially adverse effect upon the Company's business or reputation, (iv) Executive's continued and willful failure to perform substantially the duties, functions and responsibilities of his executive position (other than by reason of physical or mental illness or injury) after (A) written notice from the Board to the Executive in which there is specifically identified the manner in which the Board believes that Executive has not substantially performed his duties and (B) the Executive is provided with a reasonable cure period of not less than thirty (30) days or (v) a material breach by Executive of any of Executive's fiduciary obligations as an officer of the Company which has a material adverse effect upon the Company's business or reputation. CHANGE IN BOARD CONTROL means a change in the composition of the Board effected through a change in the composition of the Board over a period of twenty-four (24) consecutive months or less such that a majority of the Board members cease, for any reason, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination. COMMON STOCK means the Company's common stock. COMPENSATION COMMITTEE means the Compensation Committee of the Board DISABILITY means the Executive's inability, by reason of any physical or mental injury or illness, to substantially perform the services required of him under this Agreement for a period in excess of one hundred twenty (120) consecutive days. In such event, Executive shall be deemed to have terminated employment by reason of such Disability on the last day of such one hundred twenty (120)-day period. EMPLOYMENT PERIOD means Executive's period of employment as set forth in Section 1(b) of this Agreement. INVOLUNTARY TERMINATION means the termination of the Executive's employment which occurs by reason of: (i) the Company's termination of Executive's employment for any reason other than Cause, (ii) Executive's voluntary resignation within six (6) months following (a) the subsequent appointment of any individual other than the Designated Successor to the position of Chief Executive Officer or (II) a Change in Board Control, (iii) Executive's voluntary resignation following a material breach of this Agreement by the Company and the failure of the Company to cure such breach within thirty (30) days after receipt of written notice from Executive identifying such breach, or (iv) the failure of the Company's stockholders to re-elect Executive to the Board during the Employment Period. OPTION means any option granted to the Executive under any of the Company's Plans which is outstanding at the time of his Involuntary Termination. PLANS means (i) the Company's 1992 Stock Option Plan, (ii) the Company's 1995 Stock Option/Stock Issuance Plan, as amended or restated from time to time, and (iii) any successor stock incentive plan subsequently implemented by the Company. TERMINATION means a Voluntary Resignation or an Involuntary Termination of Executive's employment. VOLUNTARY RESIGNATION means a resignation by Executive other than a resignation effected under circumstances which is deemed to constitute an Involuntary Termination hereunder. 2 EXHIBIT A MANAGEMENT INCENTIVE PROGRAM OUTLINE OF MANAGEMENT INCENTIVE PROGRAM PURPOSE The program is designed to reward members of the management team with a cash bonus based on company performance. EXHIBIT B Lifetime Medical Insurance Coverage Resolution CORPORATE RESOLUTION /s/ Warren T. Lazarow --------------------- (Secretary) EXHIBIT C Compensation Plan Resolutions MINUTES OF A REGULAR MEETING OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF P-COM, INC. DATE: October 19, 1995 TIME: 11:30 a.m. (P.D.S.T.) PLACE: Office of P-Com, Inc. 3175 S. Winchester Boulevard Campbell, California MEMBERS PRESENT: Michael C. Brooks (via telephone) John A. Hawkins MEMBERS ABSENT: None OTHERS PRESENT: Gill Cogan M. Bernard Puckett Warren T. Lazarow Aarti C. Gurnani 1. Call to Order. Mr. Hawkins opened the meeting by confirming that each person present could hear each other person clearly and stating that a quorum of Committee members was present and that the meeting had been duly noticed and convened. Mr. Lazarow acted as Secretary to the meeting. Mr. Hawkins reviewed the agenda for the meeting. 3. ADJOURNMENT. There being no further business before the Compensation Committee, the meeting was adjourned. /s/ Warren T. Lazarow ------------------------- Warren T. Lazarow Secretary to the Meeting Approved: /s/ John A. Hawkins - ------------------------------------------- John A. Hawkins, on behalf of the Committee EXHIBIT D WATSON LETTER October 2, 1995 CONFIDENTIAL Mr. George Roberts Chief Executive Officer P-Com, Inc. 3175 S. Winchester Boulevard Campbell, CA 95008 Subject: Executive Perquisites Dear George: We trust you find this information helpful and responsive to your needs. Please let me know if we can be of further assistance. Sincerely, /s/ Carl Schmitt Carl Schmitt Consultant EXHIBIT E PERQUISITE REIMBURSEMENT APPROVAL LETTER [P-COM LOGO] TO: Bob Collins cc: George Roberts, Warren Lazarow FROM: Mike Sophie /s/ Mike Sophie DATE: May 11, 1999 SUBJECT: CEO Compensation As these expense are incurred I have authorized payments. If you have any questions please ask either Warren or myself who were present at the meeting. -----END PRIVACY-ENHANCED MESSAGE-----