================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003March 31, 2004
[ ] 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 000-27115
PCTEL, INC.
(Exact Name of Business Issuer as Specified in Its Charter)
Delaware 77-0364943
(State or Other Jurisdiction of (I.R.S. Employer Identification
Number)
Incorporation or Organization) Number)
8725 W. Higgins Road, Suite 400, Chicago IL 60631
(Address of Principal Executive Office) (Zip Code)
(773) 243-3000
(Registrant's Telephone Number, Including Area Code)
-------------------------
Indicate by checkmarkcheck mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Indicate by checkmarka check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act)Act of 1934). Yes [X] No [ ]
As of October 24, 2003,May 3, 2004, there were 20,539,41120,937,359 shares of the Registrant's Common Stock
outstanding.
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PCTEL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003MARCH 31, 2004
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
as of September 30, 2003March 31, 2004 and December 31, 20022003 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
for the three and nine months ended September 30,March 31, 2004 and 2003 and 2002 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
for the three and nine months ended September 30,March 31, 2004 and 2003 and 2002 5
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 1613
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 3331
ITEM 4 CONTROLS AND PROCEDURES 3432
PART II. OTHER INFORMATION 33
ITEM 1 LEGAL PROCEEDINGS 3533
ITEM 2 CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES 34
ITEM 5 OTHER INFORMATION 3634
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 3634
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PCTEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE INFORMATION)
SEPTEMBER 30,MARCH 31, DECEMBER 31,
2004 2003
2002
------------ ------------------------ -------------
ASSETS
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 89,58795,996 $ 52,986106,007
Restricted cash 278 347278
Short-term investments 19,037 58,40511,156 19,177
Accounts receivable, net of allowance for doubtful accounts of 5,792 3,630
$153 and $50, and $368
at September 30, 2003 and December 31, 2002 respectively 2,631 5,379
Inventories, net 1,281 1,115
Non-trade receivable (see Note 4) 4,000 -3,082 1,267
Prepaid expenses and other assets 2,225 5,144
--------- ---------3,207 1,929
------------- -------------
Total current assets 119,039 123,376119,511 132,288
PROPERTY AND EQUIPMENT, net 1,013 1,5324,572 1,197
GOODWILL 4,261 1,25511,335 5,561
OTHER INTANGIBLE ASSETS, net (see Note 5) 4,483 36510,329 4,140
OTHER ASSETS 378 2,898
--------- ---------60 55
------------- -------------
TOTAL ASSETS $ 129,174145,807 $ 129,426
========= =========143,241
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 894859 $ 1,498333
Accrued royalties 3,213 3,208 3,658
Income taxes payable 5,621 6,2895,456 7,359
Deferred revenue 2,370 2,960
Accrued liabilities 4,983 5,313
--------- ---------6,507 5,739
------------- -------------
Total current liabilities 14,706 16,75818,405 19,599
Long-term liabilities 784 115
--------- ---------736 736
------------- -------------
Total liabilities 15,490 16,873
--------- ---------19,141 20,335
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 100,000,000 shares authorized,
20,116,56520,816,095 and 19,927,61620,145,824 issued and outstanding at September 30, 2003March 31,
2004 and December 31, 20022003, respectively 2021 20
Additional paid-in capital 154,515 152,272162,146 155,548
Deferred stock compensation (2,722) (3,958)(4,910) (2,552)
Accumulated deficit (38,223) (36,079)(30,669) (30,201)
Accumulated other comprehensive income 94 298
--------- ---------78 91
------------- -------------
Total stockholders' equity 113,684 112,553
--------- ---------126,666 122,906
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 129,174145,807 $ 129,426
========= =========143,241
============= =============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
PCTEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------MARCH 31,
2004 2003
2002 2003 2002
----------- ----------- ----------- --------------------- ----------
REVENUES $ 4,03010,690 $ 12,548 $ 27,288 $ 32,44713,082
COST OF REVENUES 755 7,481 12,871 18,275
--------- --------- --------- ---------3,769 7,907
INVENTORY RECOVERY (see Note 6) - (3,795) (1,800) (5,348)
--------- --------- --------- ----------- (1,348)
---------- ----------
GROSS PROFIT 3,275 8,862 16,217 19,520
--------- --------- --------- ---------6,921 6,523
---------- ----------
OPERATING EXPENSES:
Research and development 1,792 2,477 6,093 7,6342,030 2,118
Sales and marketing 1,501 1,904 5,655 5,3952,934 2,261
General and administrative 2,644 1,248 7,295 3,8563,176 1,852
Amortization of other intangible assets (see Note 5) 343 50 781 50711 99
Acquired in-process research and development (see Note 3) - --- 1,100 -
Restructuring charges (see Note 7) 288 88 2,940 735(51) 155
Gain on sale of assets and related royalties (see Note 4) (644) - (4,976) -(500) --
Amortization of deferred compensation (see Note 9) 208 170 748 528
--------- --------- --------- ---------310 299
---------- ----------
Total operating expenses 6,132 5,937 19,636 18,198
--------- --------- --------- ---------
INCOME (LOSS)8,610 7,884
---------- ----------
LOSS FROM OPERATIONS (2,857) 2,925 (3,419) 1,322(1,689) (1,361)
OTHER INCOME, NET 291 641 1,120 2,631
--------- --------- --------- ---------
INCOME (LOSS)239 495
---------- ----------
LOSS BEFORE PROVISION FOR INCOME TAXES (2,566) 3,566 (2,299) 3,953 PROVISION (BENEFIT) FOR INCOME TAXES (248) 352 (155) 415
--------- --------- --------- ---------(1,450) (866)
PROVISION (BENEFIT) FOR INCOME TAXES (982) 64
---------- ----------
NET INCOME (LOSS)LOSS $ (2,318)(468) $ 3,214 $ (2,144) $ 3,538
========= ========= ========= =========(930)
========== ==========
Basic earnings (loss) per share $ (0.12)(0.02) $ 0.16 $ (0.11) $ 0.18(0.05)
Shares used in computing basic earnings (loss) per share 19,663 19,972 19,913 19,87619,901 19,238
Diluted earnings (loss) per share $ (0.12)(0.02) $ 0.16 $ (0.11) $ 0.18(0.05)
Shares used in computing diluted earnings (loss) per share 19,663 20,139 19,913 20,10119,901 19,238
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
PCTEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
NINETHREE MONTHS ENDED
SEPTEMBER 30,
--------------------MARCH 31,
------------------------------
2004 2003
2002
-------- ----------------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)loss $ (2,144)(468) $ 3,538(930)
Adjustments to reconcile net income (loss)loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,498 1,487939 400
In-process research and development -- 1,100
-
LossGain (loss) on disposal/sale of fixed assets 670 83
Gain on sale of assets and related royalties (4,976) -
Extended vesting of stock options 182 --- (12)
Recovery of allowance for doubtful accounts (368) (431)
Recovery of excess and obsolete inventories 1,800 (184)
Decrease in deferred tax asset - 400
Tax benefit from stock options exercises - 853-- (127)
Amortization of deferred compensation 748 533310 299
Changes in operating assets and liabilities:
Decrease in accounts receivable 519 (953)
Decrease (increase)322 1,092
(Increase) decrease in inventories (1,317) 1,511
Decrease (increase)33 (772)
(Increase) decrease in prepaid expenses and other assets 5,539 (4,617)
Decrease(1,147) 744
Increase (decrease) in accounts payable (604) (3,938)
Decrease(182) 996
(Decrease) in accrued royalties (450) (8,835)
Increase (decrease)(4) (128)
(Decrease) in income taxes payable (668) 1,279
Decrease(1,924) (120)
Increase (decrease) in deferred revenue (590) 4
(Decrease) in accrued liabilities (265) (3,571)(1,022) (73)
Increase (decrease) in long-term liabilities 669 (92)
-------- ---------- 273
Tax benefit from stock option exercises 433 --
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,933 (12,937)
-------- --------(3,300) 2,746
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (768) (394)(443) (120)
Proceeds on sale of property and equipment 153 19
Proceeds on sale of assets and related royalties 6,743 -3 113
Sales (purchases) of available-for-sale investments 36,734 18,6468,006 15,049
Purchase of assets/business, net of cash acquired (17,777) (10,762)
(1,598)
-------- ------------------ ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 32,100 16,673
-------- --------(10,211) 4,280
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principle payments of notes payable - (20)
Proceeds from the exerciseissuance of common stock options 8,773 2,6593,498 865
Payments for repurchase of common stock (6,224) (741)
-------- ---------- (3,361)
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,549 1,898
-------- --------3,498 (2,496)
---------- ----------
Net increase (decrease) in cash and cash equivalents 36,582 5,634(10,013) 4,530
Cumulative translation adjustment 19 222 (3)
Cash and cash equivalents, beginning of period 106,007 52,986
38,393
-------- ------------------ ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 89,58795,996 $ 44,049
======== ========57,513
========== ==========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
PCTEL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003MARCH 31, 2004
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by PCTEL, Inc. (unless otherwise noted, "PCTEL", the "Company", "we",
"us" or "our" refers to PCTEL, Inc.), pursuant to the laws and regulations of
the Securities and Exchange Commission for the requirements of Form 10-Q.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the disclosures are adequate to make the information not
misleading. The condensed balance sheet as of December 31, 20022003 has been derived
from the audited financial statements as of that date, but does not include all
disclosures required by generally accepted accounting principles. These
financial statements and notes should be read in conjunction with the audited
financial statements and notes thereto included in our Annual Report on Form
10-K filed with the Securities and Exchange Commission.
The unaudited condensed financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of financial position, results of operations and cash flows for the
periods indicated. The results of operations for the three and nine months ended September 30, 2003March
31, 2004 are not necessarily indicative of the results that may be expected for
future periods or the year ending December 31, 2003.2004.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the periods
reported. Actual results could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of cost or market and include material,
labor and overhead costs.costs using the FIFO method of costing. Inventories as of September 30, 2003at March
31, 2004 and December 31, 2002 were composed of raw materials, sub assemblies, finished goods and
work-in-process. We regularly monitor inventory quantities on hand and, based on
our current estimated requirements, it was determined that there was no excess
inventory, not reserved, as of September 30, 2003 and December 31, 2002. Due to
competitive pressures and technological innovation, we may have excess inventory
in the future. As of September 30, 2003 and December 31, 2002, the allowance for
inventory losses was $0 million and $2.1 million, respectively. We sold partconsist of the written-down inventories and recovered $0 and $1.8 million of the former
write-downs during the three and nine months ended September 30, 2003,
respectively. Write-downs of inventories would have a negative impact on gross
margin.following (in thousands):
MARCH 31, DECEMBER 31,
2004 2003
------------- -------------
Raw Materials $ 572 $ 780
Work in process 64 5
Sub assemblies 578 527
Finished Goods 2,033 10
------------- -------------
Sub-total $ 3,247 $ 1,322
------------- -------------
Allowance (165) (55)
------------- -------------
Total inventories $ 3,082 $ 1,267
------------- -------------
EARNINGS PER SHARE
We compute earnings per share in accordance with SFAS No. 128, "Earnings
Per Share". SFAS No. 128 requires companies to compute net income per share
under two different methods, basic and diluted, and present per share data for
all periods in which statements of operations are presented. Basic earnings per
share is computed by dividing net income by the weighted average number of
shares of common stock outstanding, less shares subject to repurchase. Diluted
earnings per share are computed by dividing net income by the weighted average
number of shares of common stock and common stock equivalents outstanding. Common stock
equivalents consist of stock options and warrants using the treasury stock method. Common
stock options and warrants are excluded from the computation of diluted earnings per share if
their effect is not dilutive (where
the price exceeds the fair market value of the underlying securities).anti-dilutive.
6
The following table provides a reconciliation of the numerators and
denominators used in calculating basic and diluted earnings per share for the
three and nine months ended September 30,March 31, 2004 and 2003, and 2002, respectively (in thousands, except
per share data):
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------MARCH 31,
----------------------------
2004 2003 2002 2003 2002
----------- -----------
----------- -----------
(UNAUDITED)Numerator: (UNAUDITED)
Net income (loss)loss $ (2,318)(468) $ 3,214 $ (2,144) $ 3,538
========= ========= ========= =========(930)
=========== ===========
Denominator:
Basic earnings (loss) per share:
Weighted average common shares outstanding 20,113 20,123 20,363 20,02220,532 19,833
Less: Weighted average shares subject to repurchase (450) (151) (450) (146)
--------- --------- --------- ---------(631) (595)
----------- -----------
Weighted average common shares outstanding 19,663 19,972 19,913 19,876
--------- --------- --------- ---------19,901 19,238
----------- -----------
Basic earnings (loss) per share $ (0.12)(0.02) $ 0.16 $ (0.11) $ 0.18
========= ========= ========= =========(0.05)
=========== ===========
Diluted earnings (loss) per share:
Weighted average common shares outstanding 19,663 19,972 19,913 19,87619,901 19,238
Weighted average shares subject to repurchase -* 151 -* 146
Weighted average common stock option grants and
outstanding warrants -* 16 -*
79
--------- --------- --------- -------------------- -----------
Weighted average common shares and common stock equivalents outstanding 19,663 20,139 19,913 20,101
--------- --------- --------- ---------19,901 19,238
----------- -----------
Diluted earnings (loss) per share $ (0.12)(0.02) $ 0.16 $ (0.11) $ 0.18
========= ========= ========= =========(0.05)
=========== ===========
* These amounts have been excluded since the effect is not dilutive.anti-dilutive.
STOCK-BASED COMPENSATION
We use the intrinsic value method ofThe Company accounts for its stock option plans using Accounting Principles
Board Opinion No. 25, ("APB 25"), "Accounting for Stock Issued to Employees,"Employees", whereby
compensation cost for stock options is measured as the excess, if any, of the
fair market value of a share of the Company's stock at the date of the grant
over the amount that must be paid to acquire the Stock. SFAS No. 123,
"Accounting for Stock-Based Compensation", issued subsequent to APB No. 25 - and
its
interpretations inamended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure", defines a fair value based method of accounting for our employee
stock options. Prooptions, but allows companies to continue to measure compensation cost for
employees using the intrinsic value method of APB No. 25. The following table
illustrates the pro forma information regarding net income (loss) and net income
(loss) per share as if we recorded compensation expense based on the fair value
of stock-based awards has
been presented in accordance with Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" and is as follows for the three and nine months ended September 30,March 31, 2004 and 2003 and
2002 (in thousands,
except per share data):
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------MARCH 31,
--------------------------
2004 2003
2002 2003 2002
---------- ---------- --------- ----------
Net (loss) income--asloss -- as reported ............................... $ (2,318)(468) $ 3,214 $(2,144) $ 3,538(930)
Add: Stock-based employee compensation expense................ 310 299
Expense included in reported net income 208 170 748 528
Add (deduct):loss
Deduct: Stock-based employee compensation income (expense)............. 1,489 782
expense determined under fair value based method
for all awards (72) (1,974) 170 (2,751)
-------- -------- ------- --------........................................
Net (loss) income--asloss --as adjusted ................................ $ (2,182)(1,647) $ 1,410 $(1,226) $ 1,315
======== ======== ======= ========(1,413)
Net (loss) income per share--basic as reported ........ $ (0.12)(0.02) $ 0.16 $ (0.11) $ 0.18
======== ======== ======= ========(0.05)
Net (loss) income per share--basic as adjusted ........ $ (0.11)(0.08) $ 0.07 $ (0.06) $ 0.07
======== ======== ======= ========(0.07)
Net (loss) income per share--diluted as reported ...... $ (0.12)(0.02) $ 0.16 $ (0.11) $ 0.18
======== ======== ======= ========(0.05)
Net (loss) income per share--diluted as adjusted ...... $ (0.11)(0.08) $ 0.07 $ (0.06) $ 0.07
======== ======== ======= ========(0.07)
WeThese costs may not be representative of the total effects on pro forma reported
income (loss) for future years. Factors that may also impact disclosures in
future years include the attribution of the awards to the service period, the
vesting period of stock awards, timing of additional grants of stock option
awards and the number of shares granted for future awards.
7
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes option pricingoption-pricing model as prescribed by SFAS 123
using the following assumptions:
STOCK OPTIONS ESPP
----------------- -----------------EMPLOYEE STOCK PURCHASE PLAN
---------------------- ----------------------------
2004 2003 20022004 2003
2002
------- ------- --------------- -------- -------- --------
Dividend yield None None None None
Expected volatility 60% 71% 60% 71%46% 55% 46% 55%
Risk-free interest rate 1.8% 1.9%2.1% 2.4% 1.0% 1.5%1.1%
Expected life (in years) 2.753.07 2.75 0.5 0.5
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions
7
including the expected stock price volatility and
expected option life. Because our employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate the
existing models may not necessarily provide a reliable single measure of the
fair value of our employee stock options. Restricted stock awards are recorded
at the fair market value of the stock on the date of grant and are expensed over
the vesting period.
INDUSTRY SEGMENT, CUSTOMER AND GEOGRAPHIC INFORMATION
We operateIn 2003 the company operated as a single segment. In January 2004, with the
acquisition of MAXRAD and revenue traction in oneour Segue product line, the
company began operating in four distinct segments. They are the Software
segment, represented by the Segue product line, the Test segment, represented by
the DTI product line, the Antenna segment, represented by the MAXRAD product
line, and the Licensing segment. In 2003, the company also had a modem product
line which it sold to Conexant in May of that year.
The results of operations by segment being solutions that enable
connectivity. We market our products worldwide through our sales personnel,
independent sales representativesare as follows:
Software Test Antenna Licensing Modems Elimination Consolidated
-------- ------- ------- --------- ------ ----------- ------------
Revenue, three months ended March 31, 2004 $ 1,118 $ 2,367 $ 5,112 $ 2,103 $ (10) $ 10,690
Gross Profit $ 1,085 $ 1,616 $ 2,137 $ 2,086 $ (3) $ 6,921
Operating Expenses $ 8,610
Operating (Loss) $ (1,689)
($ in thousands)
Software Test Antenna Licensing Modems Elimination Consolidated
-------- ------- ------- --------- ------ ----------- ------------
Revenue, three months ended March 31, 2003 $ 122 $ 567 $ 1,913 $ 10,480 $ 13,082
Gross Profit $ 109 $ 437 $ 1,913 $ 4,064 $ 6,523
Operating Expenses $ 7,884
Operating (Loss) $ (1,361)
The Company's chief operating decision maker (CEO) uses only the above
measures in deciding how to allocate resources and distributors.assess performance among the
segments.
Our sales to customers outside of the United States, as a percent of total
revenues, are as follows:
8
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------MARCH 31,
------------------------
2004 2003
2002 2003 2002
------ ------ ------ ------
(UNAUDITED)---------- ----------
(UNAUDITED)
Taiwan 2% 63%
China -% 55% 42% 65%
China (Hong Kong) 1 31 15 1721%
Japan 1% 2%
Rest of Asia 2 1 4 2
Japan 2 - 2 -2% 2%
Europe 13 - 5 1
-- -- -- --10% -%
Central and Latin America 6% -%
Canada 5% -%
---------- -----------
Total 18% 87% 68% 85%
== == == ==26% 88%
========== ===========
Sales to our major customers representing greater than 10% of total revenues
are as follows:
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------MARCH 31,
CUSTOMER 2004 2003
2002 2003 2002- ------------------------ -------- ------- -------- ------- --------
(UNAUDITED)
(UNAUDITED)
Askey -% 21%
12% 26%
Prewell - 31 14 16
Lite-OnLite-on Technology (GVC) - 24 13 27
Creative Marketing Associates 19 - - -
Cingular 11 - - -
Silicon Laboratories 12 - - -
Ericsson 12 - - -
-- -- -- ---% 22%
Prewell -% 21%
------- --------
Total 54% 76% 39% 69%
== == == ==-% 64%
======= ========
COMPREHENSIVE INCOME
The following table provides the calculation of other comprehensive income
for the three and nine months ended September 30,March 31, 2004 and 2003 and 2002 (in thousands):
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,MARCH 31,
------------------------
------------------------2004 2003
2002 2003 2002
----------- --------- ---------- ---------
(UNAUDITED)----------
(UNAUDITED)
Net income (loss)loss $ (2,318)(468) $ 3,214 $(2,144) $ 3,538
======== ======= ======= =======(930)
Other comprehensive income:
Unrealized gains (loss) on available-for-sale securities (54) (9) (223) (430)(15) (121)
Cumulative translation adjustment 22 (9) 19 22
-------- ------- ------- -------2 (3)
---------- ----------
Comprehensive income (loss) $ (2,350)(481) $ 3,196 $(2,348) $ 3,130
======== ======= ======= =======(1,054)
========== ==========
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002,January 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, "Accounting for Exit or Disposal Activities". SFAS No. 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for under EITF No. 94-3,
8
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
scope of SFAS No. 146 also includes costs related to terminating a contract that
is not a capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 became effective for exit or
disposal activities initiated after December 31, 2002. We adopted SFAS No. 146
on January 1, 2003. The provisions of EITF No. 94-3 shall continue to apply for
an exit activity initiated under an exit plan that met the criteria of EITF No.
94-3 prior to the adoption of SFAS No. 146. The effect of adopting SFAS No. 146
changed the time of when restructuring charges are recorded from a commitment
date approach to when the liability is incurred.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosures about the guarantees that an entity has
issued, including a reconciliation of changes in the entity's product warranty
liabilities. The initial recognition and initial measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. Adoption of this
standard did not have a material impact on the Company's financial position,
results of operations, or cash flows.
In January 2003, the FASB issued
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51." FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46 is effective immediately for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after December
15, 2003. The company believes
that there will be no impactIn December 2003, the Financial Accounting Standards Board issued
Interpretation 46R (FIN 46R), a revision to Interpretation 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46R clarifies some of the
provisions of FIN 46 on our consolidated financial statements.
In November 2002,and exempts certain entities from its requirements. FIN 46R
is effective at the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables."
EITF Issue No. 00-21 provides guidance on how to account for arrangements that
involveend of the delivery or performance of multiple products, services and/or rights
to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginningfirst interim period ending after JuneMarch 15, 2003.2004.
Adoption of this standard did not have a material impact on the Company's
financial position, results of operations, or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure ("SFAS 148")." SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation" to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of Statement No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. Generally the provisions of SFAS 148 became
effective for financial statements for fiscal years ending after December 15,
2002. The Company continues to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." The disclosures of SFAS 148 are
included in Note 2.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149")." SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities under
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 149 is generally effective for
derivative instruments, including derivative instruments embedded in certain
contracts, entered into or modified after September 30, 2003 and for hedging
relationships designated after September 30, 2003. The Company does not expect
the adoption of SFAS 149 to have a material impact on its operating results or
financial condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS 150")."
SFAS 150 requires that certain financial instruments, which under previous
guidance were accounted for as equity, must now be accounted for as liabilities.
The financial instruments affected include mandatorily redeemable stock, certain
financial instruments that require or may require the issuer to buy back some of
its shares in exchange for cash or other assets and certain obligations that can
be settled with shares of stock. SFAS 150 is effective for all financial
instruments entered into or modified after May 31, 2003 and must be applied to
the Company's existing financial instruments effective July 1, 2003, the
9
beginning of the first fiscal period after June 15, 2003. Adoption of this
standard did not have a material impact on the Company's financial position,
results of operations, or cash flows.
3. ACQUISITION
On March 12, 2003, PCTEL, Inc.,January 2, 2004, we completed its assetour acquisition of Dynamic
Telecommunications,MAXRAD, Inc., ("DTI") through MAXRAD is
a newly wholly owned subsidiary PCTEL
Maryland, Inc. DTI was a suppliermanufacturer of software-definedwireless communications antennas for broadband wireless,
in-building wireless and land mobile radio technology deployed
in high-speed wireless scanning receivers, multi-protocol collection and
analysis systems, interference measurement systems and radio frequency command
and control software solutions.applications. In connection with the
asset acquisition, PCTEL
Maryland, a wholly-owned subsidiarywe, MAXRAD, and the shareholders of PCTEL,MAXRAD and DTI Holdings, Inc., the sole
shareholder of DTI,certain other
parties entered into an Asseta Securities Purchase Agreement, dated as of March
12, 2003 underJanuary 2,
2004, pursuant to which our wholly-owned subsidiarywe acquired substantially all of the assetsoutstanding capital stock of
DTI, including intellectual property, receivables, property and
equipment and other tangible and intangible assets used in DTI's business.MAXRAD.
In exchange for the outstanding capital stock of MAXRAD, we paid $18.2
million, net of cash acquired net assets, PCTEL paid DTI $11.0of $2.4 million, in
cash out of itsour available working
capital. In addition, DTI may be entitled to earn-out
payments if PCTEL Maryland, Inc. meets specified financial targets in fiscal
years 2003 and 2004.
The purchase price of $11.0$18.2 million in cash, of which $0.4 million was paid
in April 2004, was allocated to the assets acquired and
liabilities assumed at their estimated fair values on the date of acquisition as
determined by an independent valuation firm. We attributed $2.3$5.5 million to net assets acquired, $1.1$0.9 million to acquired in-process research and development,
$200,000
to the covenant not to compete, $1.3 million to core technology, $3.2 million to
customer lists, $1.4 million to trademarks and $4.4$0.1 million to other intangible
assets, net, in the accompanying consolidated balance sheets. The $3.0$5.8 million
excess of the purchase price over the fair value of the net tangible and
intangible assets was allocated to goodwill.goodwill, which is deductible for tax
purposes. We expensed in-process research and
development and amortizedwill amortize the covenant not to compete over two years and other
intangible assets over an estimated useful life of foursix and eight years.
An additional payment of $168,189 was made in July 2003 to DTI after they
delivered a final balance sheet as agreed upon in the Asset Purchase Agreement.
The additional payment was based on the assets and liabilities of DTI as
reported on its final balance sheet as of March 31, 2003.
The unaudited pro forma affect oneffect of the financial results of PCTEL as if the
acquisition had taken place on January 1, 2003 and 2002 is as follows:
NINETHREE MONTHS ENDED
SEPTEMBER 30,
-----------------------MARCH 31, 2003
2002
---------- ----------------------------
REVENUES $ 33,334 $ 38,746
INCOME (LOSS)17,187
LOSS FROM OPERATIONS (1,417) 3,526(464)
NET INCOME (LOSS)LOSS $ (137) $ 4,805
========= =========(535)
==================
Basic earnings (loss) per share $ (0.01) $ 0.24(0.03)
Shares used in computing basic earnings (loss) per share 19,913 19,87619,238
Diluted earnings (loss) per share $ (0.01) $ 0.24(0.03)
Shares used in computing diluted earnings (loss) per share 19,913 20,10119,238
4. DISPOSITION
In May 2003, PCTEL, Inc., completed the sale of certain of its assets to
Conexant Systems, Inc., ("Conexant"). Conexant is a supplier of semiconductor
system solutions for communications applications. In connection with the
transaction, PCTEL and Conexant entered into an Asset Purchase Agreement dated
as of May 8, 2003 (the "Purchase Agreement") under which Conexant acquired
specified assets of PCTEL relating to a component of PCTEL's HSP modem
operations and consisting of inventory, fixed assets from PCTEL's offices in
Taiwan, contracts with customers and distributors related to the soft modem
products, and limited intellectual property. PCTEL did not transfer any of its
patent portfolio in connection with this transaction, and PCTEL retained all
operating contracts and intellectual property assets associated with our
hardware modem and wireless products.
In exchange for the assets acquired from PCTEL, Conexant delivered
approximately $6.75 million in cash to PCTEL, which represents $4.25 million
plus the book value of the acquired inventory and fixed assets being transferred
to Conexant. Conexant has also agreed to assume certain liabilities of PCTEL and
agreed to pay an additional $4.0 million in cash to PCTEL in two equal
10
installments due on November 1, 2003 and December 31, 2003. The total proceeds
of $10.7 million netted a gain on sale of assets of $4.3 million. In connection
with the Purchase Agreement, Conexant agreed to license PCTEL's Segue Wi-Fi
software for use with certain of its products. Conexant will pay to PCTEL an
aggregate of $1 million, payable in quarterly installments of $250,000 as
consideration for this license beginning in the quarter ended September 30,
2003.
Concurrently with the completion of the transaction with Conexant, PCTEL and
Conexant also completed an Intellectual Property Assignment Agreement and
Cross-License Agreement ("IPA"). PCTEL provided Conexant with a non-exclusive,
worldwide license to certain of PCTEL's soft modem patents, including technology
essential to the implementation of the V.90 standard (soft modems). In addition,
Conexant assigned 46 U.S. patents and patent applications relating to modem and
other access technologies to PCTEL as part of the transaction. In consideration
for the rights obtained by Conexant from PCTEL under this agreement, and taking
into account the value of rights obtained by PCTEL from Conexant under this
agreement, during the four-year period beginning on July 1, 2003 and ending on
September 30, 2007, Conexant agreed to pay to PCTEL, on a quarterly basis,
royalties in the amount of ten percent (10%) of the revenue received during the
royalty period, up to a maximum amount of $500,000 per quarter with respect to
each calendar quarter during the royalty period, contingent upon sales by
Conexant during the period. Any such future payments by Conexant to PCTEL in
connection with the IPA will be recorded as part of the gain on sale of assets
and related royalties in the statement of operations, pursuant to Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."
5. GOODWILL AND OTHER INTANGIBLE ASSETS DISCLOSURE
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No.'s 141 and 142, "Business Combinations" and "Goodwill and Other Intangible
Assets", respectively. SFAS No. 141 requires all business combinations initiated
after SeptemberJune 30, 2001 to be accounted for using the purchase method. SFAS No. 142
supersedes Accounting Principles Board Opinion ("APB") No. 17 and addresses the
financial accounting and reporting standards for goodwill and intangible assets
subsequent to their initial recognition. SFAS No. 142 requires that goodwill no
longer be amortized. It also requires that goodwill and other intangible assets
be tested for impairment at least annually and whenever events or circumstances
occur indicating that goodwill might be impaired. Additionally, an acquired
intangible asset should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented, or exchanged,
regardless of the acquirer's intent to do so. WeThe Company adopted SFAS No. 142
on January 1, 2002 at which time wethe Company ceased amortization of goodwill.
The provisions of SFAS No. 142 are effective for fiscal years beginning after
December 15, 2001 and must be applied to all goodwill and other intangible
assets that are recognized in an entity's balance sheet at the beginning of that
fiscal year.
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2003 was increased $3.0 million due to the DTI acquisition.and other intangible assets
as of March 31, 2004 were as follows (in thousands):
GOODWILL, --------NET
-------------
Balance at December 31, 2002 1,2552003 $ 5,561
Goodwill from the acquisition of DTI 3,006
--------MAXRAD 5,774
-------------
Balance at September 30, 2003March 31, 2004 $ 4,261
========11,335
=============
10
OTHER OTHER
INTANGIBLE ACCUMULATED INTANGIBLE
ASSETS AMORTIZATION ASSETS, NET
------------ -------------- -------------
(IN THOUSANDS)Intangible Assets MARCH 31, 2004 DECEMBER 31, 2003
- ----------------- ------------------ ------------------
Balance at December 31, 2002Developed technology-cyberPIXIE $ 452 $ (87)452
Other intangible assets-DTI 4,600 4,600
Patents 300 300
Other intangible assets-MAXRAD 5,500 --
Trademark-MAXRAD 1,400 --
------------------ ------------------
$ 365
======== ======= ========
Amortization of December 31, 2002 other12,252 $ 5,352
================== ==================
Less: Accumulated amortization $ (1,923) $ (1,212)
================== ==================
Net intangible assets 452 (201) 251
Other intangible assets from the acquisition of DTI 4,600 (661) 3,939
Purchase of patents 300 (7) 293
-------- ------- --------
Balance at September 30, 2003 $ 5,35210,329 $ (869) $ 4,483
======== ======= ========4,140
================== ==================
6. INVENTORY LOSSES AND RECOVERY
Due to the changing market conditions, economic downturn and estimated
future requirements, inventory write-downs of $10.9 million were recorded in the
second half of 2001. Of the $10.9 million, $2.3 million related to firm purchase
order commitments with our major suppliers and the remaining $8.6 million
related to excess inventory on hand or disposed. During the nine months ended
September 30, 2003, we did not record any additional inventory write-downs
having either sold or disposed of all the written down inventories and recovered
$1.8 million of the former write-downs. As of September 30, 2003 and December
31, 2002, the cumulative write down for excess inventory on hand was $0 and $2.1
million, respectively.
11
7.5. RESTRUCTURING CHARGES
2003 Restructuring
In May 2003, PCTEL, Inc.,the Company completed the sale of certain of its assets to
Conexant relating to a component of PCTEL's HSP modem operations.product line. As a result
of the disposition, 29 employees were transferred to Conexant. An additional 26
employees, both foreign and domestic, were terminated along with the related
facilities closures, which will occur over the next two quarters.closures. The total restructuring may aggregate $2.9aggregated $3.3 million consisting
of severance and employment related costs of $1.6$1.7 million and costs related to
closure of excess facilities as a result of the reduction in force of $1.3$1.6
million. For the three months
ended September 30, 2003, $0.3 million was expensed. The remaining balance of
$0.1 million would be expensed during the fourth quarter 2003.
As of September 30, 2003,March 31, 2004, approximately $929,000$1.5 million of termination compensation
and related benefits had been paid to terminated employees and approximately
$451,000$0.5 million of lease payments and related costs had been paid to the landlord
for the excess facilities. As of September 30, 2003,March 31, 2004, the remaining accrual balance
of $1.4$1.3 million restructuring will be paid monthly through January 2006. The
following analysis sets forth the rollforward of this charge:
ACCRUAL ACCRUAL
BALANCE AT BALANCE AT
JUNE 30,DECEMBER 31, RESTRUCTURING SEPTEMBER 30,MARCH 31,
2003 CHARGES PAYMENTS 2003
----------- ------------- -------- ------------2004
--------------- --------------- --------------- ---------------
Severance and employment related costs $ 516633 $ 325(101) $ 354291 $ 487241
Costs for closure of excess facilities 940 (37) 18 885
------- --------- -------- --------977 50 1 1,026
--------------- --------------- --------------- ---------------
$ 1,4561,610 $ 288(51) $ 372292 $ 1,372
======= ========= ======== ========1,267
=============== =============== =============== ===============
Amount included in long-term liabilities $ 689
========648
===============
Amount included in short-term liabilities $ 683
========619
===============
2002 Restructuring
In the quarter ended June 30, 2002, we eliminated 20 positions (consisting
of 13 research and development, 5 sales and marketing and 2 general and
administrative positions). In September 2002, we announced our intention to
relocate our headquarters and finance functions to Chicago, Illinois. As a
result of the move, 5 general and administrative positions were replaced in
December 2002 and we further eliminated 7 research and development positions. In
the aggregate, 27 positions were eliminated during the year ended December 31,
2002. The restructuring resulted in $928,000 of charges for the year ended
December 31, 2002, consisting of severance and employment related costs of
$688,000 and costs related to closure of excess facilities as a result of the
reduction in force of $240,000.
As of September 30, 2003, approximately $671,000 of termination compensation
and related benefits had been paid to terminated employees in connection with
the 2002 restructuring. As of September 30, 2003, approximately $329,000 of
lease payments and related costs had been paid to the landlord for the excess
facilities. As of September 30, 2003, the entire 2002 restructuring has been
completed.
2001 Restructuring
On February 8, 2001, we announced a series of actions to streamline support
for our voiceband operations and sharpen our focus on emerging growth sectors.
These measures were part of a restructuring program and included a reduction in
worldwide headcount of a total of 22 employees (consisting of 7 research and
development employees, 9 sales and marketing employees and 6 general and
administrative employees), a hiring freeze and cost containment programs. On May
1, 2001, we announced a new business structure to provide for greater focus on
our activities with a significantly reduced workforce. A total of 42 positions
were eliminated as part of this reorganization (consisting of 13 research and
development, 12 sales and marketing and 17 general and administrative
positions). In the fourth quarter of 2001, a total of 26 positions (consisting
of 7 research and development, 8 sales and marketing and 11 general and
administrative positions) were eliminated to further focus our business. In the
aggregate, 90 positions were eliminated during the year ended December 31, 2001.
The restructuring resulted in $3.8 million of charges for the year ended
December 31, 2001,
12
consisting of severance and employment related costs of $2.5 million and costs
related to closure of excess facilities as a result of the reduction in force of
$1.3 million.
As of December 31, 2002, approximately $2.4 million of termination
compensation and related benefits had been paid to terminated employees. As of
December 31, 2002, approximately $1.2 million of lease payments and related
costs had been paid to the landlord for the excess facilities. As of March 31,
2003, the entire 2001 restructuring has been completed, with cash payments of
$141,000 in the three months ended March 31, 2003.
8.6. CONTINGENCIES:
We record an accrual for estimated future royalty payments for relevant
technology of others used in our product offerings in accordance with SFAS No.
5, "Accounting for Contingencies." The estimated royalties accrual reflects
management's broader litigation and cost containment strategies, which may
include alternatives such as entering into cross-licensing agreements, cash
settlements and/or ongoing royalties based upon our judgment that such
negotiated settlements would allow management to focus more time and financial
resources on the ongoing business. We have accrued our estimate of the amount of
royalties payable for royalty agreements already signed, agreements that are in
negotiation and unasserted but probable claims of others using advice from third
party technology advisors and historical settlements. Should the final license
agreements result in royalty rates significantly greater than our current
estimates, our business, operating results and financial condition could be
materially and adversely affected.
As of September 30, 2003March 31, 2004 and December 31, 2002,2003, we had accrued royalties of
approximately $3.2 million and $3.7 million, respectively. Of these amounts,
approximately $0 and $450,000 represent amounts accrued based upon signed
royalty agreements as of September 30, 2003 and December 31, 2002, respectively.million. While management is unable to estimate the maximum
amount of the range of possible settlements, it is possible that actual
settlements could exceed the amounts accrued as of each date presented.
As part of the acquisition of DTI there is an earn-out over two years if
certain milestones are achieved. At PCTEL's option, DTI could be paid in PCTEL
stock or cash. For the year ended December 31, 2003, DTI earned $1.5 million
cash payout that was paid on May 4, 2004. The Company is estimating the 2004 DTI
earn-out to be $1.5 to $2.2 million.
We have from time to time in the past received correspondence from third
parties, and may receive communications from additional third parties in the
future, asserting that our products infringe on their intellectual property
rights, that our patents are unenforceable or that we have inappropriately
licensed our intellectual property to third parties. We
11
expect these claims to increase as our intellectual property portfolio becomes
larger. These claims could affect our relationships with existing customers and
may prevent potential future customers from purchasing our products or licensing
our technology. Intellectual property claims against us, and any resulting
lawsuit, may result in our incurring significant expenses and could subject us
to significant liability for damages and invalidate what we currently believe
are our proprietary rights. These lawsuits, regardless of their success, would
likely be time-consuming and expensive to resolve and could divert management's
time and attention. In addition, any claims of this kind, whether they are with
or without merit, could cause product shipment delays or require us to enter
into royalty or licensing agreements. In the event that we do not prevail in
litigation, we could be prevented from selling our products or be required to
enter into royalty or licensing agreements on terms, which may not be acceptable
to us. We could also be prevented from selling our products or be required to
pay substantial monetary damages. Should we cross license our intellectual
property in order to obtain licenses, we may no longer be able to offer a unique
product. To date, we have not obtained any licenses from 3Com and the other
companies from whom we have received communication.communications.
Ronald H. Fraser v. PC-Tel, Inc., Wells Fargo Shareowner Services, Wells Fargo
Bank Minnesota, N.A.
InOn March 19, 2002, plaintiff Ronald H. Fraser ("Fraser") filed a Verified
Complaint (the "Complaint") in Santa Clara County (California) Superior Court
for breach of contract and declaratory relief against PCTEL,the Company, and for
breach of contract, conversion, negligence and declaratory relief against PCTEL'sthe
Company's transfer agent, Wells Fargo Bank Minnesota, N.A ("Wells Fargo"). The
Complaint seeks compensatory damages allegedly suffered by Fraser as a result of
the sale of certain stock by Fraser during a secondary offering on April 14,
2000. Wells Fargo filed a Verified Answer to the Complaint inon June 12, 2002. On
July 10, 2002, and in July 2002,
PCTELthe Company filed a Verified Answer to the Complaint, denying
Fraser's claims and asserting numerous affirmative defenses. Wells Fargo and PCTELthe
Company have each filed Cross-complaints against the other for indemnity. Wells FargoOn
November 18, 2002, the parties conducted mediation but were unable to reach a
settlement.
Trial of this matter had been set for January 12, 2004, however, the trial
date was vacated in light of the amended complaint filed aby Fraser following his
motion for summary judgment, or alternatively for summary
adjudication, which wasleave to amend heard on July 29,December 9, 2003. On July 30, the Court granted
Wells Fargo's motion for summary adjudication on Fraser's Third and Fourth
Causes of action for Breach of Fiduciary Duty and Declaratory Relief, but denied
Wells Fargo's motion for summary judgment and summary adjudication of Fraser's
First and Second Causes of Action for Breach of Contract and Conversion. PCTEL
has filed aThe Company intends to
re-file its Motion for Summary Judgment or, Alternatively,alternatively, Summary Adjudication,
against Fraser. The MotionTrial is now scheduled for December 9, 2003. Trial of this
matter has been set for January 12,September 20, 2004.
13
We believe that
we have meritorious defenses and intend to vigorously defend the action. Because
the action is still in its early stages, we cannotare not able to predict the outcome
at this time
provide an estimate of the range of potential loss, or the probability of a
favorable or unfavorable outcome.
Licensing Program. In addition to our wireless product line and software-defined
radio technology, PCTEL offers our intellectual property through licensing and
product royalty arrangements. We have over 120time.
Litigation with U.S. patents granted or pending
addressing technology essential to International Telecommunications Union
communication standards as well as other communications technology related
areas. We will continue to explore other opportunities to acquire relevant
technology and to incorporate new assets into our licensing program. For
example, as part of our transaction with Conexant that was completed in May
2003, we expanded our intellectual property portfolio by acquiring 46 patents.
As part of our licensing efforts, we are pursuing opportunities through
litigation in parallel with business discussions with those parties using our
intellectual property. As part of these efforts, in May 2003, we filed three
separate lawsuits asserting infringement of our intellectual property rights.
Below is a description of the claims and status of those lawsuits:
- U.S. Robotics Corporation.
On May 23, 2003, we filed in the U.S. District Court for the Northern
District of California (C03-2471 MJJ) a patent infringement lawsuit against U.S. Robotics
Corporation claiming that U.S. Robotics has infringed one of our patents (U.S. Patent No. 4,841,561 ('561)).patents. U.S.
Robotics filed its answer and counterclaim to our complaint in June 2003 asking for a declaratory judgment
that the claims of the '561 patent are invalid and not infringed by U.S. Robotics.infringed. This case has been
consolidated for claims construction discovery with the litigation against 3Com
Corporation, and Agere Systems and Lucent Technologies. Claims construction
discovery under the Patent Local Rules is underway, and a status conference is
set for May 11, 2004. No trial date has been set. We filed our replybelieve we have meritorious
claims and defenses. However, because the action is still in its early stages,
we are not able to U.S. Robotics'
counterclaim on July 2, 2003.
- PCTEL v.predict the outcome at this time.
Litigation with Broadcom Corporation.
On May 23, 2003, we filed in the U.S. District Court for the Northern
District of California (C03-2475 MJJ) a patent infringement lawsuit against Broadcom
Corporation claiming that Broadcom has infringed four of our patents ('561; and U.S. Patent Numbers 5,787,305 ('305);
5,931,950 ('950); and 6,493,780 ('780)).patents. Broadcom
filed its answer and counterclaim to our complaint in July 2003 asking for a declaratory judgment that the
claims of the four patents are invalid and/or unenforceable, and not infringed
by Broadcom. We filed our replyIn December 2003, the parties entered into a settlement agreement
which was favorable to Broadcom's counterclaimthe Company, and on August
4, 2003.
-January 6, 2004, the Court granted
the parties' stipulated request that all claims and counterclaims in the
Broadcom action be dismissed with prejudice.
Litigation with Agere Systems and Lucent Technologies.
On May 23, 2003, we filed in the U.S. District Court for the Northern
District of California (C03-2474 MJJ) a patent infringement lawsuit against Agere Systems and
Lucent Technologies claiming that Agere has infringed four of our patents ('561, '305, '950 and
'780) and
that Lucent was infringing three of our patents ('561, '305 and '950).patents. Agere and Lucent filed their
answers to our complaint in July 2003.complaint. Agere filed a counterclaim asking for a declaratory
judgment that the claims of the four patents are invalid, unenforceable and not
infringed by Agere. We filed our reply to Agere's counterclaim onin August 4, 2003.
In additionThis case has been consolidated for claims
12
construction discovery with the litigation against U.S. Robotics Corporation and
3Com Corporation. Claims construction discovery under the Patent Local Rules is
underway, and a status conference is set for May 11, 2004. No trial date has
been set. We believe we have meritorious claims and defenses. However, because
the action is still in its early stages, we are not able to predict the three lawsuits described above, we also have continuing
litigationoutcome
at this time.
Litigation with 3Com
In March 2003, each of 3Com Corporation related to intellectual property infringement
and related matters. Both 3Com and we have pendingthe Company filed a patent
infringement lawsuitslawsuit against one anotherthe other. The suits are pending in the U.S.
District Court for the Northern District of California. Both suits were filed in March 2003. 3Com initially filed their suit
against us in the Northern DistrictOur lawsuit alleges
infringement of Illinois, but that case was subsequently
remanded to the Northern California District Court. We are claiming that 3Com is
infringing one of our patents ('561) and are seekingasks for a declaratory judgment that
certain 3Com patents are invalid and not infringed by PCTEL.the Company. 3Com is
alleging that our HSP modem products infringed certain 3Com patents and is seekingasks for
a declaratory judgment that our '561 patent is invalid and not infringed by 3Com. In addition,No
trial date has been set. The case has been consolidated for claims construction
discovery with the litigation against U.S. Robotics Corporation, Agere Systems
and Lucent Technologies. Claims construction discovery under the Patent Local
Rules is underway, and a status conference is set for May 11, 2004. We believe
we have meritorious claims and defenses. However, because the action is still in
its early stages, we are not able to predict the outcome at this time.
Further, in May 2003, wethe Company filed a complaint against 3Com in the
Superior Court of the State of California for the County of Santa Clara under
California's Unfair Competition Act. Subsequently,In December 2003, the Company voluntarily
dismissed the action without prejudice. On December 15, 2003, 3Com filed an
action against the Company seeking a notice of
removal, removingdeclaratory judgment that 3Com has not
violated the caseCalifornia Unfair Competition Act. On January 7, 2004, the parties
filed a stipulation dismissing 3Com's declaratory judgment action without
prejudice. No related claims with respect to the U.S. District Court forCalifornia Unfair Competition
Act are currently pending between the Northern District
of California (C03-3124 SBA). We have moved to remand the case to the Santa
Clara Superior Court. The hearing on our motion to remand is set for December 9,
2003.
In June 2003, we filed a motion to consolidate our pending patent
infringement cases with 3Com, U.S. Robotics, Broadcom, Agere and Lucent
described above. The court granted our motion to consolidate in part. On October
28, 2003, a case management conference in the consolidated actions was held. No
trial date has been set.
We believe we have meritorious claims and defenses in our disputes with
3Com, Broadcom, U.S. Robotics, Agere and Lucent. However, because of the
inherent uncertainties of litigation in general, we cannot assure you that we
will ultimately prevail or receive the judgments that we seek. In addition, we
may be required to pay substantial monetary damages. Litigation such as our
suits with 3Com, Broadcom, U.S. Robotics, Agere and Lucent can take years to
resolve and can be expensive to pursue and/or defend. The court's decisions on
current, pending and future motions could have the effect of determining the
ultimate outcome of the litigation prior to a trial on the merits, or strengthen
or weaken our ability to assert claims and defenses. Accordingly, an adverse
judgment
14
could seriously harm our business, financial position and results of operations
and cause our stock price to decline substantially. In addition, the allegations
and claims involved in these lawsuits, even if ultimately resolved in our favor,
could be time consuming to litigate, result in costly litigation and divert
management attention. These lawsuits could significantly harm our business,
financial position and results of operations and cause our stock price to
decline substantially.
Due to the nature of litigation generally, we cannot ascertain the final
resolution of the lawsuits, or estimate the total expenses, possible damages or
settlement value, if any, that we may ultimately receive or incur in connection
with these lawsuits.
9. AMORTIZATION OF DEFERRED COMPENSATION:
For the three and nine months ended September 30, 2003 and 2002,
amortization of deferred compensation (in thousands) relates to the following
functional categories:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
------------ ------------- ------------ ------------
Research and development $ 0 $ 39 $ 75 $ 112
Sales and marketing $ 39 $ 41 $ 188 $ 112
General and administrative $ 169 $ 90 $ 485 $ 304
------ ------ ------ ------
$ 208 $ 170 $ 748 $ 528
====== ====== ====== ======
The amount of deferred stock compensation expense to be recorded in future
periods could decrease if options for which accrued but unvested compensation
has been recorded are forfeited. In the event that options are issued in the
future, the deferred stock compensation expense could increase.
10. STOCK REPURCHASES:
In August 2002, the Board of Directors authorized the repurchase of up to
one million shares of our common stock, which was completed in February 2003. In
February 2003, PCTEL extended its stock repurchase program and announced its
intention to repurchase up to one million additional shares on the open market
from time to time. PCTEL's repurchase activities will be at management's
discretion based on market conditions and the price of PCTEL's common stock.
During the three and nine months ended September 30, 2003, we repurchased
257,400 and 762,800 shares, respectively, of our outstanding common stock for
approximately $2.7 and $6.2 million, respectively. Since the inception of the
stock repurchase program we have repurchased 1,538,600 shares of our outstanding
common stock for approximately $11.5 million.
15
parties.
PCTEL, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the condensed
interim financial statements and the notes thereto included in Item 1 of this
Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in our Annual Report on Form 10-K
filed with the Securities and Exchange Commission on September 30, 2003.March 12, 2004. Except for
historical information, the following discussion contains forward looking
statements that involve risks and uncertainties, including statements regarding
our anticipated revenues, profits, costs and expenses and revenue mix. These
forward looking statements include, among others, those statements including the
words, "may," "will," "plans," "seeks," "expects," "anticipates," "outlook," "intends,"
"believes" and words of similar import, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. You
should not place undue reliance on these forward-looking statements. Our actual
results could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks faced by us described below and
elsewhere in this Quarterly Report, and in other documents we file with the SEC.
Factors that might cause future results to differ materially from those
discussed in the forward looking statements include, but are not limited to,
those discussed in "Factors Affecting Operating Results" and elsewhere in this
Quarterly Report.
OVERVIEWINTRODUCTION
PCTEL, Inc. isprovides wireless connectivity products and test tools to
cellular carriers, wireless Internet providers (WISP's), PC OEM's, and wireless
equipment manufacturers. The Company brings together expertise in RF platform
design, mobility software, and hardware to ensure wireless excellence. We
simplify mobility, provide wireless intelligence, and enhance wireless
performance. Additionally, the Company licenses both patented and proprietary
access technology, principally related to analog modems, to modem solution
providers.
The Company completed a providertwo-year transition from an analog modem Company to
a wireless Company during 2003. There were five significant events in that
transition, presented here in chronological order. The first was the acquisition
of cost-effective wireless networking solutions,
includingcyberPIXIE, Inc. in May 2002, which was the genesis of the Company's Segue
product line of Wi-Fi and cellular mobility software, software-defined radio products,
accesssoftware. The second was the exiting
of the DSP based embedded modem product line in June 2002, and conversion of
that technology and intellectual property licensing. Over the past 24 months,
the Company restructured from a provider of soft analog and hard analog modems to a provider of wireless data access solutions, with the acquisition of
cyberPIXIE, Inc., a wireless access provider,licensing program. The third was the acquisition of Dynamic
Telecommunications, Inc., (DTI) a supplierin March 2003. The DTI product line of software
defined radio products,radios measure and monitor cellular networks. The fourth event was the
sale of itsthe Company's HSP soft modem product line to Conexant. As a resultConexant in May of these transactions, PCTEL obtained2003. The
Company sold the product line but retained operating agreements and its modem
patent portfolio for licensing purposes. The fifth event was the
13
acquisition of MAXRAD, Inc. in January 2004. The MAXRAD product line consists of
wireless communications antennas for broadband wireless, in-building wireless
and land mobile radio applications. During our management discussion and
analysis, the Segue, DTI and MAXRAD products are collectively referred to as
wireless products, and technology that enabled the Company to develop an innovative wireless product portfolio consisting of both
PC clientHSP modem and network infrastructureembedded modem products primarily for the rapidly growing
mobile data consumer market, and products and technology to measure and monitor
wireless networks.
Our products provide both client and infrastructure solutions for public
wireless local area network ("WLAN") environments. Client products enable public
WLAN access and ease of use across a wide range of Microsoft operating systems.
The infrastructure products enable cost effective "hot spot" deployments within
the constraints of widely recognized networking and security standards.
Customers for our WLAN products are not typically individual end-users, but
Internet access service providers such as WISPs (Wireless ISPs), cellular
carriers, or other service aggregators. The products are offered as custom
branded offerings associated with a particular carrier and typically include
carrier specific 'service finder' location databases. PCTEL receives an
established fee, plus annual maintenance for software.modem
products.
PCTEL has a strongan intellectual property portfolio consisting of over 120145 U.S.
patents and applications, primarily in areas of Internet client softwareanalog modem technology and wireless
LAN/WAN roaming technologies. Many of the Company's patents are integralalso has
proprietary DSP based embedded modem technology. The Company has an active
licensing program designed to the
development and use of commercially viable soft modems of any kind. PCTEL is
constantly looking to expand and strengthenmonetize its intellectual property portfolio
in these areas through additional acquisitions. The company has an aggressive
licensing program through which it has licensed its intellectual property to
many industry leaders including Motorola,property. Companies
under license as of March 31, 2004, include Intel, Conexant, Broadcom, Silicon
Laboratories, Texas Instruments, Smartlink and ESS Technologies,
U.S. Robotics, and SmartLink.Technologies. The companyCompany has
also asserted its patents and is currently litigating against several other manufacturers3Com, Agere,
Lucent and U.S. Robotics, who are unlicensed and the Company believes are using
PCTEL's intellectual property. On March 12, 2003, PCTEL, Inc., completedThe Company collectively refers to revenue from
its asset acquisition of Dynamic
Telecommunications, Inc., ("DTI") through a newly wholly owned subsidiary PCTEL
Maryland, Inc. DTI was a supplier of software-defined radio technology deployed
in high-speed wireless scanning receivers, multi-protocol collectionlicensing program as royalty and analysis systems, interference measurement systems and radio frequency command
and control software solutions. In connectionlicensing revenue, with the asset acquisition, PCTEL
Maryland, a wholly-owned subsidiaryexception of
PCTEL,Conexant. The sale of the HSP modem product line to Conexant and DTI Holdings, Inc., the sole
shareholdersigning of
DTI, entered intoits licensing agreement occurred simultaneously. Royalty payments received from
Conexant are recorded as an Asset Purchase Agreement datedoffset to operating expenses as Gain on Sale of March
12,HSP
Modem Products and Related Royalties.
The Company is focused on growing revenue from its wireless products and
maximizing the monetary value of its intellectual property. These are two key
priorities for the Company in 2004. Growth in wireless product revenue is
dependent both on gaining further revenue traction in our existing products as
well as further acquisitions to support our wireless initiatives starting in the
third quarter 2003 under which our wholly-owned subsidiary acquired substantially all of the assets of DTI, including intellectual property, receivables, property and
equipment and other tangible and intangible assets used in DTI's business.
On May 12, 2003, PCTEL, Inc., completed the sale of certain ofCompany's product revenue has been from its assets to
Conexant Systems, Inc., ("Conexant"). Conexant is a supplier of semiconductor
system solutions for communications applications. In connection with the
transaction, PCTEL and Conexant entered into an Asset Purchase Agreement dated
as of May 8, 2003 (the "Purchase Agreement") under which Conexant acquired
specified assets of PCTEL relating to a component of PCTEL's HSP modem
operations and consisting of inventory, fixed
16
assets from PCTEL's offices in Taiwan, contracts with customers and distributors
related to the soft modem products, and limited intellectual property. PCTEL did
not transfer any of its patent portfolio in connection with this transaction,
and PCTEL retained all operating contracts and intellectual property assets
associated with our hardware modem and
wireless products. AsThere has not been enough history to evaluate whether there
is significant seasonality in revenue between fiscal quarters for the wireless
product portfolio taken as a whole. Licensing revenue is dependent on signing
new license agreements and the success of September 30, 2003, we have $108.9 millionour licensees in cash and cash
equivalents and short-term investments, respectively, that potentially subjects
usthe marketplace. New
licenses often contain up front payments pertaining to credit and market risks. To mitigate credit risk related to short-term
investments, we have an investment policy to preservepast royalty liability,
or one time payments if the value of capital and
generate interest income from these investments without undue exposure to risk
fluctuations. Our policylicense is to invest in financial instruments with short
durations, limiting interest rate exposure, and to benchmark performance against
comparable benchmarks. We maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including both government and
corporate obligations with ratings of A or better and money market funds.perpetual. That can make license revenue
uneven between fiscal years as well as fiscal quarters.
CRITICAL ACCOUNTING POLICIES
We have prepared the financial information in this report in accordance with
generally accepted accounting principles in the United States of America. The preparation of our condensed consolidated financial statements in accordance with
generally accepted accounting principles requiresrequire us to make estimates and
judgments that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the periodsperiod
reported. By their nature, these estimates and judgments are subject to an
inherent degree of uncertainty. Management bases its estimates and judgments on
historical experience, market trends, and other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. Management believes the
following critical accounting policies affect itsreflects the more significant judgments
and estimates used in the preparation of its consolidated financial statements.
Management has discussed the critical accounting policies with the Audit
Committee.
REVENUE RECOGNITION
The Company sells Wi-Fi and cellular mobility software, software designed
radio products, antenna products, and licenses its modem technology through its
licensing program. The Company records the sale of these products, including
related maintenance, and the licensing of its intellectual property as revenue.
The Company accounts for revenue from its Wi-Fi and cellular mobility
software, including related maintenance rights, under SOP 97-2 Software Revenue
Recognition
Revenues consist primarilyRecognition. Where the software license is perpetual and vendor specific
objective evidence can be established between the software license and any
related maintenance rights, the software license revenue is recognized upon
delivery of the software and the maintenance is recorded pro-rata over the life
of the maintenance rights. Where part of the licensing agreement requires
engineering services to customize software for the customer needs, the revenue
for these services are recognized when the initial software license is
delivered. Where the vendor specific objective evidence cannot be established,
and the only undelivered item is maintenance, the software license revenue and
related maintenance rights are combined and recognized pro-rata over the
expected term of the maintenance rights. Where the software is sold on a fixed
term license, the software license and maintenance revenue is recorded pro-rata
over the fixed term.
The Company records revenue for sales of its software defined radio products to carriers, OEMs and
distributors. Revenues from sales to customers are recognized upon shipment
when title and risktransfers, persuasive evidence of loss passes to the customers, when thean arrangement exists, price is
fixed and determinable and when therecollectibility is evidence of an arrangement, unless we have future
obligations or have to obtain customer acceptance, in which case revenue is not
recorded until such obligations have been satisfied or customer acceptance has
been achieved. Revenues fromreasonably assured. The Company
sells these products into both commercial and secure application government
markets. Title for sales to distributors are made under agreements
allowing price protection and rights of return on unsold products. We record
revenue relating to sales to distributors only wheninto the distributors have sold
the product to end-users. Customer payment termscommercial market generally range from letters of
credit collectibletransfers upon
shipment from the Company's factory. Products that are sold into the secure
application government market are generally designed to open accounts payable 60 days after
shipment.
We also generate revenuesa unique specification.
Title generally does not transfer until acceptance for the first units and then
upon shipment thereafter.
14
The Company records revenue for sales of its antenna products when title
transfers, which is generally upon shipment from engineering contractsthe Company's factory.
The Company records intellectual property licensing revenue when it has a
licensing agreement, the amount of related royalties is known for the accounting
period reported and collectibility is reasonably certain. Knowledge of the
royalty amount specific to an accounting period is either in the form of a
royalty report specific to a quarter, a contractual fixed payment in the license
agreement specific to a quarter, or the pro-rata amortization of a fixed payment
related to multiple quarters over those quarters using the operating lease
method. Where a license agreement provides for a fixed payment related to
periods prior to the license effective date (the past) and volume-based
royalties on
technology licenses. Revenues from engineering contractsgoing forward, the fixed payment is recognized at the license
effective date and the volume based royalties are recognized as contract milestonesroyalty reports
are received. Where the license provides for a fixed payment for the past and
customer acceptance are achieved. Royaltyfor a finite future period, to be followed by volume based royalties thereafter,
the fixed payment is recorded under the operating lease method and recognized
pro-rata from the effective date through the end of the period covered by the
fixed payment. When a one-time license payment is made for a perpetual license,
with no future obligations on behalf of the Company, revenue is recognized when confirmation of royalties due to us is received from licensees
or for non-refundable minimum royalty agreements overunder
the period that that
Company provides support to the customers and where we offer extended payment
terms, as payments are received. Furthermore, revenues from technology licenses
are recognized after delivery has occurred and the amount is fixed and
determinable, generally basedcapitalized lease method upon the contract's nonrefundable payment terms,
and collection is reasonably assured. To the extent there are extended payment
terms on these contracts; revenue is recognized as the payments become due and
the cancellation privilege lapses.
Inventory Write-downs and Recoverieseffective date.
INVENTORY WRITE-DOWNS AND RECOVERIES
Inventories are stated at the lower of cost or market and include material,
labor and overhead costs. Inventories as of September 30, 2003March 31, 2004 and December 31, 20022003
were composed of raw materials, sub assemblies,subassemblies, and finished goods and
work-in-process. We regularly monitor inventory quantities on hand and, based on
our current estimated requirements, it was determined that there was no excess
inventory, not reserved, as of September 30, 2003March 31, 2004 and December 31, 2002.2003. Due to
competitive pressures and technological innovation, we may have excess inventory
in the future. Write-downs of inventories would have a negative impact on gross
margin.
Accrued RoyaltiesACCRUED ROYALTIES
We record an accrual for estimated future royalty payments for relevant
technology of others used in our product offerings in accordance with SFAS No.
5, "Accounting for Contingencies." The estimated royalties accrual reflects
management's broader litigation and cost containment strategies, which may
include alternatives such as entering into cross-licensing agreements, cash
settlements, or both, based upon our judgment that such negotiated settlements
would allow management to focus more time and financial resources on the ongoing
business. Accordingly, the royalties accrual reflects estimated costs of
settling claims rather than continuing to defend our legal positions and is not
intended to be, nor should it be interpreted as, an admission of infringement of
intellectual property, valuation of damages suffered by any third parties or any
specific terms that management has predetermined to agree to in 17
the event of a
settlement offer. We have accrued our best estimate of the amount of royalties payable for royalty
agreements, already signed, agreements that are in negotiation and unasserted but probable
claims of others using advice from third party technology advisors and
historical settlement rates.
As of September 30, 2003March 31, 2004 and December 31, 2002,2003 we had accrued royalties of
approximately $3.2 million and $3.7 million, respectively.million. However, the amounts accrued may be inadequate and
we willmay be required to take a chargerecord additional expense if royalty payments are settled
at a higher rate than expected. In addition, settlement arrangements may require
royalties for past sales of the associated products.
Income TaxesSTOCK-BASED COMPENSATION
The Company accounts for its stock option plans using Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees", whereby
compensation cost for stock options is measured as the excess, if any, of the
fair market value of a share of the Company's stock at the date of the grant
over the amount that must be paid to acquire the Stock. SFAS No. 123,
"Accounting for Stock-Based Compensation", issued subsequent to APB No. 25 --
and amended by SFAS No. 148, "Accounting for Stock-Based Compensation --
Transition and Disclosure", defines a fair value based method of accounting for
employee stock options, but allows companies to continue to measure compensation
cost for employees using the intrinsic value method of APB No. 25. The Company
does not expense stock options, but expenses restricted stock grants. We record
the issuance of restricted stock grants based on the fair value on the date of
the grant and amortize the value over the life of the restriction using the
straight-line method. As required by SFAS No. 123, we disclose the summary pro
forma effects to reported income as if we had elected to recognize compensation
expense based on the fair value of the stock based awards to our employees. The
calculation of the fair value of these awards is determined using the Black-
Scholes option pricing model. The highly subjective assumptions include the
expected stock price volatility and expected option life.
15
GOODWILL AND IMPAIRMENT OF LONG LIVED ASSETS
Effective January 1, 2002, we adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangibles," under which goodwill is no longer being
amortized. Through a third party valuation firm we assess the need to record
impairment losses on goodwill and long-lived assets used in operations when
indicators of impairment are present such as a significant industry downturn,
significant decline in the market value of the Company or significant reductions
in projected future cash flows. At least annually, we review the value and
period of amortization or depreciation of long-lived assets. During this review,
the significant assumptions used in determining the original cost of long-lived
assets are reevaluated. We then determine whether there has been a permanent
impairment of the value of long-lived assets by comparing future estimated
undiscounted cash flows to the asset's carrying value. If the carrying value of
the asset exceeds the estimated future undiscounted cash flows, a loss is
recorded as the excess of the asset's carrying value over fair value. Long-lived
assets to be disposed of are reported at the lower of carrying amount or fair
value less costs to sell.
INCOME TAXES
We provide for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes".Taxes." SFAS No. 109 requires an asset and liability
based approach in accounting for income taxes. Deferred income tax assets and
liabilities are recorded based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates.
Valuation allowances are provided against tax assets, which are not likely to be
realized.
We currently have a subsidiaryinternational subsidiaries located in Japan, China and
Israel as well as international branch offices located in Hong Kong, Taiwan France and
Yugoslavia. YugoslaviaFrance. Our branch office in France is presently in the liquidation process. The
complexities brought on by operating in several different tax jurisdictions
inevitably lead to an increased exposure to worldwide taxes. Should review of
our tax filings result in unfavorable adjustments to our tax returns, our
operating results and financial position could be materially and adversely
affected.
As part of the process of preparing our consolidated financial statements,
we are required to estimate our income taxes, which involves estimating our
actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities. Significant
management judgment is required to assess the likelihood that our deferred tax
assets will be recovered from future taxable income. We maintain a full
valuation allowance against our deferred tax assets. In the event we were to
determine that we would be able to realize our deferred tax assets in the future
in excess of itsthe net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2004 AND 2003 AND 2002
(All amounts in tables, other than percentages, are in thousands)
Revenues
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
---------------- ---------------- --------------- --------------Software Test Antenna Licensing Modems Elimination Consolidated
------------ ------------ ------------ ------------ ------------ ------------ ------------
Revenues..........................
Revenue, three months ended
March 31, 2004 $ 4,0301,118 $ 12,5482,367 $ 27,2885,112 $ 32,4472,103 $ -- $ (10) $ 10,690
% change from year ago period..... (67.9)period 816.4% 317.5% 9.9% (18.3)%
(15.9)%Revenue, three months ended
March 31, 2003 $ 122 $ 567 $ 1,913 $ 10,480 $ 13,082
Our revenues consist of product sales of Wi-Fi and cellular mobility
software, software-defined radio products, access technology licensing and hard
and soft modems. RevenuesRevenue decreased $8.5 million for18.3% in the three months ended September 30, 2003March 31, 2004 compared to
the same period in 2002. Revenues forfiscal 2003. The increase in the nineSoftware segment is
attributed to it being in early stage development in the first quarter 2003. The
increase
16
in the Test segment is due to the company not acquiring DTI until March 2003,
and owning the operations a full quarter in 2004. The increase in the Antenna
segment is due to the MAXRAD acquisition in January 2004. The increase in the
Licensing segment reflects the addition of the Broadcom license announced in the
fourth quarter of last year, partially offset by reductions in older licensing
contracts. The decrease in the Modem segment is attributed to the sale of the
modem product line to Conexant in May 2003.
Gross Profit
Software Test Antenna Licensing Modems Elimination Consolidated
-------- ------- ------- --------- ------ ----------- ------------
Gross Profit, three months ended March 31, 2004 $ 1,085 $ 1,616 $ 2,137 $2,086 $ - $ (3) $ 6,921
Percentage Of Revenue 97.0% 68.3% 41.8% 99.2% 64.7%
% change from year ago period 895.4% 269.8% 9.0% 6.1%
Gross Profit, three months ended March 31, 2003 $ 109 $ 437 $ 1,913 $4,064 $ 6,523
Percentage Of Revenue 89.3% 77.1% 100.0% 38.8% 49.9%
Gross profit increased $0.4 million in the three months ended September 30, 2003 decreased $5.2 millionMarch 31, 2004
compared to the same period in 2002.fiscal 2003. The revenue decrease was primarilyincrease in the Software segment
is attributed to the increase in revenue. The increase in the Test segment is
due to our dispositionthe company not acquiring DTI until March 2003, and owning the operations
a full quarter in 2004. The increase in the Antenna segment is due to the MAXRAD
acquisition in January 2004. The increase in the Licensing segment reflects the
increase in revenue. The decrease in the Modem segment is attributed to the sale
of our
HSP analogthe modem product line to Conexant in May 2003.
Gross profit as a percentage of revenue increased to 64.7% in the three
months ended March 31, 2004 compared to 49.9% for the same period in fiscal
2003. The increase in the Software segment is attributable to the 2003 revenue
including sales of Wi-Fi base stations, since discontinued. The decrease in the
Test segment is due to the mix of OEM component products to Conexant. Going forward, revenueversus systems level
products was higher. Licensing is comparable in both periods. Management
believes that the long-term gross profit percentage trend for each of its
segments will be primarily
relatedsimilar to wireless solutions and our access technology licensing efforts.
Gross Profit
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
---------------- ---------------- --------------- --------------
Gross profit...................... $ 3,275 $ 8,862 $ 16,217 $ 19,520
Percentage of revenues............ 81.3% 70.6% 59.4% 60.2%
% change from year ago period..... (63.0)% (16.9)%
18
the first quarter 2004 results.
Cost of revenues for the Software and Licensing segments includes royalty
payments for third party software. Cost of revenues for the Test, Antenna, and
Modem segments consists primarily of cost of operations and components we
purchase from third party manufacturers. Gross profit decreased $5.6 millionProvision for inventory losses and
recoveries are also included in the three months ended September 30,
2003 compared to the same period in 2002 was primarily due to our dispositiondetermination of our HSP analog modem products to Conexant. Gross profit as a percentage of
revenues increased from 70.6% for the three months ended September 30, 2002 to
81.3% for the three months ended September 30, 2003 due to higher margins. For
the nine months ended September 30, 2003 compared to the same period last year,
gross profit remained approximately the same.profit.
Research and Development
THREE MONTHS THREE MONTHS
NINE MONTHS NINE MONTHS
ENDED MARCH 31, 2004 ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,MARCH 31, 2003
2002 2003 2002
---------------- ---------------- --------------- ------------------------------------ ----------------------
Research and development..........development .......... $ 1,7922,030 $ 2,477 $ 6,093 $ 7,6342,118
Percentage of revenues............ 44.5% 19.7% 22.3% 23.5%revenues ............ 19.0% 16.2%
% change from year ago period..... (27.7)period ..... (4.2)% (20.2)(11.6)%
Research and development expenses include costs for software and hardware
development, prototyping certification and pre-production costs. We expense all research and
development costs as incurred. We account for software development costs in
accordance with SFAS No. 86,"Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed." Our products include a software component.
To date, we have expensed all software development costs because costs incurred
subsequent to the products reaching technological feasibility were not
significant.
17
Research and development expenses decreased by $0.7 and $1.5$0.1 million for the
three and nine months ended September 30, 2003 compared to the same periods in
2002 primarily due to our disposition of our HSP analog modem products to
Conexant. As a percentage of revenues, research and development costs increased for the three
months ended September 30, 2003 due to reduced revenues for the
same period. For the nine months ended September 30, 2003March 31, 2004 compared to the same period last year,in fiscal 2003. The
decrease is attributable to lower research and development remained approximatelyexpenses related to
the same.MAXRAD product line as compared to the research and development expenses
related to our disposed modem product line and a full quarter of expenses from
the DTI product line in the three months ended March 31, 2004 compared to three
weeks in the same period in fiscal 2003.
Research and development expenses as a percentage of revenues, increased
from 16.2% for the three months ended March 31, 2003 to 19.0% for the same
period in fiscal 2004 due to lower revenues in the three months ended March 31,
2004.
Sales and Marketing
THREE MONTHS THREE MONTHS
NINE MONTHS NINE MONTHS
ENDED MARCH 31, 2004 ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,MARCH 31, 2003
2002 2003 2002
---------------- ---------------- --------------- -------------------------------------- ------------------------
Sales and marketing...............marketing ............... $ 1,5012,934 $ 1,904 $ 5,655 $ 5,3952,261
Percentage of revenues............ 37.2% 15.2% 20.7% 16.6%revenues ............ 27.4% 17.3%
% change from year ago period..... (21.2)% 4.8%period ..... 29.8% 38.0%
Sales and marketing expenses consist primarily of personnel costs, sales
commissions and marketing costs. Marketing costs include promotional costs,
public relations and trade shows.
Sales and marketing expenses decreased $0.04 andhave increased $0.3by $0.7 million for the three
and nine months ended September 30, 2003, respectively,March 31, 2004 compared to the same period in 2002 duefiscal 2003. The
increase is attributable to timinghigher sales and marketing expenses related to the
MAXRAD product line as compared to the sales and marketing expenses related to
our disposed modem product line and a full quarter of expenses from the trade shows.DTI
product line in the three months ended March 31, 2004 compared to three weeks in
the same period in fiscal 2003.
Sales and marketing expenses as a percentage of revenues, changedincreased from
17.3% for the three and nine months ended September 30,March 31, 2003 compared to the same period in 2002 due to reduced revenues27.4% for the same period.fiscal
period in 2004.
General and Administrative
THREE MONTHS THREE MONTHS
NINE MONTHS NINE MONTHS
ENDED MARCH 31, 2004 ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,MARCH 31, 2003
2002 2003 2002
---------------- ---------------- --------------- -------------------------------------- ------------------------
General and administrative........administrative ........ $ 2,6443,176 $ 1,248 $ 7,295 $ 3,8561,852
Percentage of revenues............ 65.6% 9.9% 26.7% 11.9%revenues ............ 29.7% 14.2%
% change from year ago period..... 111.9% 89.2%period ..... 71.5% 26.3%
General and administrative expenses include costs associated with our
general management and finance functions as well as professional service
charges, such as legal, tax audit and accounting fees. Other general expenses include
rent, insurance, utilities, travel, and other operating expenses to the extent
not otherwise allocated to other functions.
19
General and administrative expenses increased $1.4 and $3.4$1.3 million for the three
and nine months ended September 30, 2003, respectively,March 31, 2004 compared to the same period in 2002.fiscal 2003. The
increase was due to inclusionhigher general and administrative expenses related to the
MAXRAD product line as compared to the disposed modem product line, a full
quarter of DTI's expenses increased insurancefrom the DTI product line in the three months ended March
31, 2004 compared to three weeks in the same period in fiscal 2003 and general
and administrative expenses and legalrelated to compliance with new regulations under the
Sarbanes-Oxley Act of 2002. We currently expect our intellectual property
litigation costs associated with our patent
infringement litigation against 3Com, U.S. Robotics, Broadcom, Agere Systems and
Lucent Technologies.to be approximately $3.5 million on an annual basis. General
and administrative expenses as a percentage of revenues, increased from 14.2%
for the three and nine months ended September 30,March 31, 2003 compared to 29.7% for the same period in 2002 for the same reasons as above. We anticipate
spending between $3.0 and $4.0 million per year in legal expenses related to
these lawsuits.fiscal
2004.
Amortization of Other Intangible Assets
THREE MONTHS THREE MONTHS
NINE MONTHS NINE MONTHS
ENDED MARCH 31, 2004 ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,MARCH 31, 2003
2002 2003 2002
---------------- ---------------- --------------- -------------------------------------- ------------------------
Amortization of other intangible assets..assets ..... $ 343711 $ 50 $ 781 $ 5099
Percentage of revenues................... 8.5% 0.4% 2.9% 0.2%revenues ...................... 6.7% 0.8%
18
On January 2, 2004, we completed our acquisition of MAXRAD for a total of
$18.2 million in cash, net of cash acquired of $2.4 million. The results of
operations of MAXRAD were included in our financial statements from the date of
acquisition. Since the purchase price exceeds the net tangible assets acquired,
the difference is recorded as excess purchase price and allocated to goodwill
and other intangible assets. The purchase price was allocated to the assets
acquired and liabilities assumed at their estimated fair values on the date of
acquisition as determined by an independent valuation firm. We attributed $5.5
million to net assets acquired, $0.9 million to the covenant not to compete and
$6.0 million to other intangible assets, net, in the accompanying consolidated
balance sheets. The $5.8 million excess of the purchase price over the fair
value of the net tangible and intangible assets was allocated to goodwill. We
will amortize the covenant not to compete over two years and other intangible
assets over an estimated useful life of six to eight years.
In March 2003, we acquired the assets of DTI for a total of $11.0 million in
cash. The acquisition was accounted for under the purchase method of accounting
and the results of operations of DTI were included in our financial statements
from the date of acquisition. Under the purchase method of accounting, ifSince the purchase price exceeds the net tangible
assets acquired, the difference is recorded as excess purchase price and
allocated to in-process research and development, goodwill and other intangible
assets. The purchase price of $11.0
million was allocated to the assets acquired and liabilities
assumed at their estimated fair values on the date of acquisition as determined
by an independent valuation firm. We attributed $2.3 million (an additional $0.5 million
capitalized in the quarter) to net assets
acquired, $1.1 million to acquired in-process research and development, $200,000$0.2
million to the covenant not to compete and $4.4 million to other intangible
assets, net, in the accompanying consolidated balance sheets. The $3.0 million
excess of the purchase price over the fair value of the net tangible and
intangible assets was allocated to goodwill. We expensed in-process research and
development and amortize the covenant not to compete over two years and other
intangible assets over an estimated useful life of four years.
In May 2002, we acquired the assets of cyberPIXIE, Inc. for a total of $1.6
million in cash. The purchase price of $1.6 million was allocated to the assets
acquired and liabilities assumed at their estimated fair values on the date of
acquisition. The acquisition was accounted for under the purchase method of
accounting. Under the purchase method of accounting, if the purchase price
exceeds the net tangible assets acquired, the difference is recorded as excess
purchase price and allocated to in-process research and development, goodwill
and other intangible assets. In this circumstance, the difference was $1.4
million. We attributed $102,000 of the excess purchase price to in-process
research and development and the balance of $1.3 million to goodwill ($863,000)
and developed technology ($452,000). We have classified this balance of $1.3
million as goodwill and other intangible assets, net, in the accompanying
consolidated balance sheets and are amortizing the developed technology over a
useful life of three years.
Effective January 1, 2002, we have adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangibles," under which goodwill is no longer being
amortized and will be tested for impairment at least annually. An independent
valuation firm conducted the annual impairment test, the result of which was
that there was no impairment of goodwill or other intangibles. As a result of
the acquisitions discussed above, amortization of intangible assets increased
to
$781,000from $0.1 million for the ninethree months ended September 30, 2003.March 31, 2003, to $0.7 million for
the same period in fiscal 2004.
Restructuring Charges
THREE MONTHS THREE MONTHS
NINE MONTHS NINE MONTHS
ENDED MARCH 31, 2004 ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,MARCH 31, 2003
2002 2003 2002
---------------- ---------------- --------------- -------------------------------------- ------------------------
Restructuring charges....charges ... $ 288(51) $ 88 $ 2,940 $ 735155
Percentage of revenues... 7.1% 0.7% 10.8% 2.3%revenues .. (0.5)% 1.2%
Restructuring expenses increaseddecreased $0.2 and $2.2 million for the three and
nine months ended
September 30, 2003, respectively,March 31, 2004 compared to the same periodsperiod in 2002. These increases are fromfiscal 2003. In May 2003, the
2003 restructuring dueCompany completed the sale of certain of its assets to ourConexant relating to a
component of PCTEL's HSP modem product line. As a result of the disposition, of our HSP analog modem products29
employees were transferred to Conexant. An additional 26 employees, both foreign
and domestic, were terminated subsequent to the sale of the soft modem product line
to Conexant in May 2003 along with the related facilities closures, which will
occur over the remainder of the calendar year.closures. The
total restructuring may
aggregate $2.9aggregated $3.3 million consistedconsisting of severance and
employment related costs of $1.6$1.7 million and costs related to closure of excess
facilities as a result of the reduction in force of $1.6 million.
As of March 31, 2004, approximately $1.5 million of termination compensation
and related benefits had been paid to terminated employees and approximately
$0.5 million of lease payments and related costs had been paid to the landlord
for the excess facilities. As of March 31, 2004, the remaining accrual balance
of $1.3 million. Formillion restructuring will be paid monthly through January 2006.
Gain on sale of assets and related royalties
THREE MONTHS THREE MONTHS
ENDED MARCH 31, 2004 ENDED MARCH 31, 2003
------------------------ ------------------------
Gain on sale of assets and related
royalties ............................ $ 500 $ --
Percentage of revenues ............... 4.7% --%
In May 2003, PCTEL and Conexant completed an Intellectual Property
Assignment Agreement ("IPA") and Cross-License Agreement concurrently with the
sale of certain of its assets relating to a component of PCTEL's HSP modem
product line. PCTEL provided Conexant with a non-exclusive, worldwide license to
certain of PCTEL's soft modem
19
patents. In consideration for the rights obtained by Conexant from PCTEL under
this agreement, and taking into account the value of patent rights obtained by
PCTEL from Conexant under this agreement, during the period beginning on July 1,
2003 and ending on June 30, 2007, Conexant agreed to pay to PCTEL, on a
quarterly basis, royalties in the amount of ten percent (10%) of the revenue
received during the royalty period, up to a maximum amount of $0.5 million per
quarter with respect to each calendar quarter during the royalty period,
contingent upon sales by Conexant during the period. Any such future payments by
Conexant to PCTEL in connection with the IPA will be recorded as part of the
gain on sale of assets and related royalties in the statement of operations.
The Company received $0.5 million royalty payment during the three and nine months
ended September 30,
20
2003, $0.3 and $2.9 million was expensed, respectively. The remaining 2003
restructuring balance of $0.1 million would be expensed during the fourth
quarter 2003.March 31, 2004.
Amortization of Deferred Compensation
THREE MONTHS THREE MONTHS
NINE MONTHS NINE MONTHS
ENDED MARCH 31, 2004 ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,MARCH 31, 2003
2002 2003 2002
---------------- ---------------- --------------- -------------------------------------- ------------------------
Amortization of deferred compensation.....compensation ....... $ 208310 $ 170 $ 748 $ 528299
Percentage of revenues.................... 5.2% 1.4% 2.7% 1.6%revenues ...................... 2.9% 2.3%
% change from year ago period............. 22.4% 41.7%period ............... 3.7% 70.9%
In connection with the grant of restricted stock to employees in Q1 2004,
2003, 2002 and 2001, we recorded deferred stock compensation of $2.7, $0.8, $3.7
and $1.8 million, respectively;respectively, representing the fair value of our common stock
on the date the restricted stock was granted. Such amounts are presented as a
reduction of stockholders' equity and are amortized ratably over the vesting
period of the applicable shares.
In connection with the grant of stock options to employees prior to our
initial public offering in 1999, we recorded deferred stock compensation of $5.4
million representing the difference between the exercise price and deemed fair
value of our common stock on the date these stock options were granted. Such
amount is presented as a reduction of stockholders' equity and is amortized
ratably over the vesting period of the applicable options.
The amortization of deferred stock compensation increased $0.04 and $0.2
million for the three and nine months ended September 30, 2003, respectively,
compared to the same period in 2002 primarily due to the grant of restricted
stock to employees in 2003. We expect the amortization of deferred stock compensation to be
approximately $197,000 for fourth$0.3 million per quarter 2003,through fiscal 2005 and decreasing
thereafter, based on restricted stock grants and stock option grants through
September 30, 2003.March 31, 2004. The amount of deferred stock compensation expense to be recorded
in future periods could decrease if options for which accrued but unvested
compensation has been recorded are forfeited. If we grant additional restricted
stock, the amortization of deferred compensation will increase.
Other Income, Net
THREE MONTHS THREE MONTHS
NINE MONTHS NINE MONTHS
ENDED MARCH 31, 2004 ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,MARCH 31, 2003
2002 2003 2002
---------------- ---------------- --------------- -------------------------------------- ------------------------
Other income, net.................net ...... $ 291239 $ 641 $ 1,120 $ 2,631495
Percentage of revenues............ 7.2% 5.1% 4.1% 8.1%
% change from year ago period..... (54.6)% (57.4)%revenues . 2.2% 3.8%
Other income, net, consists of interest income, net of interest expense.
Interest income is expected to fluctuate over time. Other income, net, decreased
$0.4 and $1.5$0.3 million for the three and nine months ended September 30, 2003,
respectively,March 31, 2004 compared to the same
period in 2002 primarilyfiscal 2003 due to the decreasedecline in interest rates and change in cash and investment balances due to net cash
outflow of the stock repurchase program offset by the stock options exercised
and the net cash outflow for the asset acquisition of DTI offset by the proceeds
received1.4% from the disposition of assets to Conexant.1.9%.
Provision for Income Taxes
THREE MONTHS THREE MONTHS
NINE MONTHS NINE MONTHS
ENDED MARCH 31, 2004 ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,MARCH 31, 2003
2002 2003 2002
---------------- ---------------- --------------- -------------------------------------- ------------------------
Provision (Benefit) for income taxes $(248)... $ 352 $(155)(982) $ 41564
The realization of deferred tax assets is dependent on future profitability.
During the third quarter of 2001, we recorded $5.3 million of provision for
income taxes to establish valuation allowances against deferred tax assets in
accordance with the provisions of FASB No. 109, "Accounting for Income Taxes" as
a result of uncertainties regarding realizability.
For the three and nine months ended September 30, 2003,March 31, 2004, we recorded a net tax benefit of
$248,000 and $155,000,
respectively, tax benefit primarily for a$1.0 million as the Company will carryback in accordance with APB
No. 28, "Interim Financial Reporting" calculated tax provision for 2003 net of
foreign income taxes paid.
21the federal current period loss to
prior years.
20
LIQUIDITY AND CAPITAL RESOURCES
NINETHREE MONTHS NINETHREE MONTHS
ENDED MARCH 31, 2004 ENDED SEPTEMBER 30, SEPTEMBER 30,MARCH 31, 2003
2002
--------------- --------------------------------------- ------------------------
Net cash provided by (used in) operating activities.......................activities ....................... $ 1,933(3,300) $ (12,937)2,746
Net cash provided by (used in) investing activities................................. 32,100 16,673activities ....................... (10,211) 4,280
Net cash provided by (used in) financing activities................................. 2,549 1,898activities ....................... 3,498 (2,496)
Cash, cash equivalents and short-term investments at the end of period.... 108,902 112,206period .... 107,152 100,748
Working capital at the end of period...................................... 104,333 107,636period ...................................... 101,106 95,832
The increasedecrease in net cash provided by operating activities for the ninethree
months ended September 30, 2003March 31, 2004 compared to the same period in 2002 was
primarily due to decrease in accounts receivable and the litigation settlement
paid to Dr. Brent Townsend of $14.3 million in 2002 which negatively impacted
cash last year. Accounts receivable, as measured in days sales outstanding, was
40 days at September 30, 2003 compared to 30 days at September 30, 2002. The
increase in days sales outstanding from September 30, 2002 to 2003 was primarily
due to the change fromdecreases in income taxes payable, deferred revenue and accrued
liabilities of $1.9, $0.6, $1.0 million, respectively, and an increase in
prepaid expenses of $1.1 million. The increase in net cash used in investing
activities for the HSP soft modem product linethree months ended March 31, 2004 compared to the DTIsame fiscal
period in 2003 consists primarily of the acquisition of MAXRAD for $17.8
million, net of cash collection cycle. We anticipate spending between $3.0acquired of $2.4 million, and $4.0reduced cash provided by the
sales and maturities of short-term investments of $8.0 million per yearcompared to $15
million in legal expenses associated with our patent infringement litigation against
3Com, U.S. Robotics, Broadcom, Agere Systems and Lucent Technologies.
Netfiscal 2003. The increase in net cash provided by investing
activities for the ninethree months ended September 30, 2003 consists primarily of proceeds fromMarch 31, 2004 compared to the sales and maturities
of the short-term investments, net of purchases of short-term investments, net
cash outflow for the asset acquisition of Dynamic Telecommunications, Inc.
against the proceeds received from the disposition to Conexant.
The increasesame fiscal
period in net cash provided by financing activities for the nine
months ended September 30, 2003 consists of proceeds from the issuance of common stock on exerciseassociated
with stock option exercises and from share purchases through the employee stock
purchase plan of stock options net of$3.5 million compared to payments for the repurchase of common
stock associated with the shares repurchased by PCTEL.of $3.4 million in fiscal 2003.
In August 2002, the Board of Directors authorized the repurchase of up to
one million1,000,000 shares of our common stock, which was completed in February 2003. In
February and November 2003, PCTEL extended its stock repurchase program and
announced its intention to repurchase up to one million1,000,000 and 500,000 additional
shares, respectively, on the open market from time to time. PCTEL's repurchase activities will be at management's
discretion based on market conditions and the price of PCTEL's common stock.
During the three and nine monthsyear
ended September 30,December 31, 2003, we repurchased 257,400 and 762,800 shares respectively, of our outstanding common
stock for approximately $2.7 and $6.2 million, respectively.million. Since the inception of the stock
repurchase program we have repurchased 1,538,600 shares of our outstanding
common stock for approximately $11.5 million. No shares were repurchased during
the current quarter ended March 31, 2004.
In January 2004, we completed the acquisition of MAXRAD. In exchange for
the outstanding capital stock of MAXRAD, we paid $17.8 million, net of cash
acquired of $2.4 million, out of our available working capital. In April 2004,
we made an additional payment of $0.4 million based on the final balance sheet
delivered to us.
As of September 30, 2003,March 31, 2004, we had $108.9$107.4 million in cash and cash equivalents,
restricted cash and short-term investments and working capital of $104.3$101.1
million. Accounts receivable, as measured in days sales outstanding, was 49 and
37 days at March 31, 2004 and 2003, respectively.
We believe that our existing sources of liquidity, consisting of cash,
short-term investments and cash from operations, will be sufficient to meet our
working capital needs for the foreseeable future. We will continue to evaluate
opportunities for development of new products and potential acquisitions of
technologies or businesses that could complement our business. We may use
available cash or other sources of funding for such purposes. However, possible
investments in or acquisitions of complementary businesses, products or
technologies, or cash settlements resulting from new litigation, may require us
to use our existing working capital or to seek additional financing.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following summarizes our contractual obligations (non-cancelable
operating leases) for office facilities and the 2003 restructuring as of September 30, 2003March
31, 2004 and the effect such obligations are expected to have on our liquidity
and cash flows in future periods (in thousands):
LESS THAN AFTER
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
-------- --------- ---------- ---------- --------------------- ------------ ------------ ------------ ------------
Contractual obligations
Operating leases $ 1,4701,854 $ 399562 $ 7361,292 $ 335-- $ -
------- ------ ------- ----- -----
------------ ------------ ------------ ------------ ------------
2003 Restructuring 1,372 683 689 - -
------- ------ ------- ----- ---1,267 619 648 -- --
------------ ------------ ------------ ------------ ------------
Total obligations $ 2,842 $1,0823,121 $ 1,4251,181 $ 3351,940 $ -
======= ====== ======= ===== ===-- $ --
============ ============ ============ ============ ============
2221
If the current economic downturn prolongs, we will need to continue to
expend our cash reserves to fund our operations.
As of September 30, 2003,March 31, 2004, we have non-cancelable operating leases for office
facilities of $1.5$1.9 million through July 2007, unpaid restructuring (severance
and employment related costs and costs related to closure of excess facilities)
of $1.4$1.3 million through December
2004January 2006 and no outstanding firm inventory purchase
contract commitments with our major suppliers.
As part of the acquisition of DTI there is an earn out potential of $7.5
millionearn-out over two years if
certain milestones are achieved. At PCTEL's option, DTI could be paid in PCTEL
stock or cash. For the year ended December 31, 2003, DTI earned $1.5 million
cash payout that was paid on May 4, 2004. The Company is estimating the 2004 DTI
earn-out to be $1.5 to $2.2 million.
FACTORS AFFECTING OPERATING RESULTS
This quarterly report on Form 10-Q contains forward-looking statements which
involve risks and uncertainties. Our actual results could differ materially from
those anticipated by such forward-looking statements as a result of certain
factors including those set forth below.
RISKS RELATED TO OUR BUSINESS
COMPETITION WITHIN THE WIRELESS CONNECTIVITY AND WIRELESS NETWORKINGPRODUCTS INDUSTRIES IS INTENSE AND
IS EXPECTED TO INCREASE SIGNIFICANTLY. OUR FAILURE TO COMPETE SUCCESSFULLY COULD
MATERIALLY HARM OUR PROSPECTS AND FINANCIAL RESULTS.
The wireless products connectivity device and wireless markets are intensely competitive. We may
not be able to compete successfully against current or potential competitors. We
expect competition to increase in the future as current competitors enhance
their product offerings, new suppliers enter the wireless connectivity device and wirelessproducts
markets, new communication technologies are introduced and additional networks
are deployed. In addition, ourOur client software competes with software developed internally by
Network Interface Card (NIC) vendors, service providers for local 802.11 networks, and
with software developed by large systems integrators. Increased competition
could materially and adversely affect our business and operating results through
pricing pressures, the loss of market share and other factors. The principal competitive
factors affecting wireless markets include the following:
- maintaining effective data throughput and coverage area, interference
immunity and network security and scalability,
- keeping product costs low while, at the same time, increasing roaming
capability, decreasing power consumption and the size of products and
improving product reliability, ease of use, brand recognition and
product features and applications,
- integration with existing technology,
- maintaining industry standards and obtaining product certifications as
wireless networks continue to become more sophisticated,
- decreasing product time to market,
- complying with changes to government regulations with respect to each
country served and related to the use of radio spectrum, and
- obtaining favorable carrier and OEM relationships, marketing alliances
and effective distribution channels.
Competitors in the market for products and technology that enable roaming
between and among 802.11 wireless and cellular networks include Aptilo, Boingo,
BVRP, Cisco, Colubris, Funk, GRIC, IBM, iPass, ipUnplugged, Microsoft, NetnearU,
Nokia, Nomadix, Pronto Networks, Sierra Wireless and Starfish. We could also
face future competition from companies that offer alternative communications
solutions, or from large computer companies, PC peripheral companies and other
large networking equipment companies. Competitors in the software radio product
space and specifically for OEM receiver products include Agilent, Berkeley
Varitronics, Comarco, Allen Telecom, and Rohde & Schwarz. Furthermore, we could
face competition from certain of our customers, which have, or could acquire,
wireless engineering and product development capabilities, or might elect to
offer competing technologies. We can offer no assurance that we will be able to
compete successfully against these competitors or that the competitive pressures
we face will not adversely affect our business or operating results.
23
Many of our present and potential competitors have substantially greater
financial, marketing, technical and other resources with which to pursue
engineering, manufacturing, marketing, and distribution of their products. These
competitors may succeed in establishing technology standards or strategic
alliances in the connectivity device and wirelessproducts markets, obtain more rapid market
acceptance for their products, or otherwise gain a competitive advantage. We can
offer no assurance that we will succeed in developing products or technologies
that are more effective than those developed by our competitors. We can offer no
assurance that we will be able to compete successfully against existing and new
competitors as the connectivity wireless markets evolve and the level of
competition increases.
OUR ABILITY TO GROW OUR BUSINESS MAY BE THREATENED IF THE DEMAND FOR WIRELESS
DATA SERVICES IN GENERAL AND WLANWI-FI PRODUCTS IN PARTICULAR DOES NOT CONTINUE TO
GROW.
Our ability to computecompete successfully in the wireless market is dependent on
the continued trend toward wireless telecommunications and data communications
services. If the rate of growth slows and service providers reduce their capital
investments in wireless infrastructure or fail to expand into new geographic
markets, our revenue may decline. Wireless accessdata solutions are relatively
unproven in the marketplace and some of the wireless technologies have only been
commercially introduced in the last few years. We only began offering wireless
products in the second quarter of fiscal 2002. If wireless data access
technology turns out to be unsuitable for widespread commercial deployment, we
may not be able to generate enough sales to achieve and grow our business. We
have listed below some of the factors that we believe are key to the success or
failure of wireless access technology:
-o reliability and security of wireless access technology and the
perception by end-users of its reliability and security,
-o capacity to handle growing demands for faster transmission of
increasing amounts of data, voice and video,
-o the availability of sufficient frequencies for network service
providers to deploy products at commercially reasonable rates,
-22
o cost-effectiveness and performance compared to wire line or other high
speed access solutions, whose prices and performance continue to
improve,
-o suitability for a sufficient number of geographic regions, and
-o availability of sufficient site locations for wireless access.
The factors listed above influence our customers' purchase decisions when
selecting wireless versus other high-speed data access technology. For example,
because of the frequency with which individuals using cellular phones experience
fading or a loss of signal, customers often have the perception that all
wireless technologies will have the same reliability constraints even though the
wireless technology underlying wireless access products does not have the same
problems as cellular phones. In some geographic areas, because of adverse
weather conditions that affect wireless transmissions, but not wire line
technologies, wireless products are not as successful as wire line technology.
In addition, futureFuture
legislation, legal decisions and regulation relating to the wireless
telecommunications industry may slow or delay the deployment of wireless
networks.
Wireless access solutions, including WLANs,Wi-Fi, compete with other high-speed
access solutions such as digital subscriber lines, cable modem technology, fiber
optic cable and other high-speed wire line and satellite technologies. If the
market for our wireless solutions fails to develop or develops more slowly than
we expect due to this competition, our sales opportunities will be harmed. Many
of these alternative technologies can take advantage of existing installed
infrastructure and are generally perceived to be reliable and secure. As a
result, they have already achieved significantly greater market acceptance and
penetration than wireless data access technologies. Moreover, current wireless
data access technologies have inherent technical limitations that may inhibit
their widespread adoption in many areas.
We expect wireless data access technologies to face increasing competitive
pressures from both current and future alternative technologies. In light of
these factors, many service providers may be reluctant to invest heavily in
wireless data access solutions, including WLANs.Wi-Fi. If service providers do not
continue to establish WLANWi-Fi "hot spots," we may not be able to generate sales
for our WLANWi-Fi products and our revenue may decline.
OUR WIRELESS BUSINESSOPERATION IS DEPENDENT UPON THE CONTINUED GROWTH OF EVOLVING
TELECOMMUNICATIONS AND INTERNET INDUSTRIES.
24
Our future success is dependent upon the continued growth of the data
communications and wireless industries, particularly with regard to Internet
usage. The global data communications and Internet industries are relatively new
and evolving rapidly and it is difficult to predict potential growth rates or
future trends in technology development for this industry. We cannot assure you
that theThe deregulation,
privatization and economic globalization of the worldwide telecommunications
market that hashave resulted in increased competition and escalating demand for new
technologies and services willmay not continue in a manner favorable to us or our
business strategies. In addition, there can be no
assurance that the growth in demand for wireless and Internet
services, and the resulting need for high speed or enhanced data communications
products and wireless systems, willmay not continue at its current rate or at all.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND SUCCESSFULLY INTRODUCE
NEW AND ENHANCED PRODUCTS FOR THE WIRELESS MARKET, WHICH MEET THE NEEDS OF
OUR
EXISTING AND PROSPECTIVE CUSTOMERS AND ACHIEVE BROAD MARKET ACCEPTANCE.CUSTOMERS.
Our revenue depends on our ability to anticipate our existing and
prospective customers' needs and develop products that address those needs. Our
future success will depend on our ability to introduce new products for the
wireless market, anticipate improvements and enhancements in wireless technology
and in WLANwireless standards, and to develop products that are competitive in the
rapidly changing wireless industry. Introduction of new products and product
enhancements will require coordination of our efforts with those of our
customers, suppliers, and manufacturers to rapidly achieve volume production. If
we fail to coordinate these efforts, develop product enhancements or introduce
new products that meet the needs of our customers as scheduled, our operating
results will be materially and adversely affected and our business and prospects
will be harmed. We cannot assure you that product introductions will meet the
anticipated release schedules or that our wireless products will be competitive
in the market. Furthermore, given the emerging nature of the wireless market,
there can be no assurance our products and technology will not be rendered
obsolete by alternative or competing technologies.
WE MAY EXPERIENCE INTEGRATION OR OTHER PROBLEMS WITH POTENTIAL ACQUISITIONS,
WHICH COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS OR RESULTS OF OPERATIONS. NEW
ACQUISITIONS COULD DILUTE THE INTERESTS OF EXISTING STOCKHOLDERS, AND THE
ANNOUNCEMENT OF NEW ACQUISITIONS COULD RESULT IN A DECLINE IN THE PRICE OF OUR
COMMON STOCK.
23
We may in the future make acquisitions of, or large investments in,
businesses that offer products, services, and technologies that we believe would
complement our products or services, including wireless products and technology.
We may also make acquisitions of, or investments in, businesses that we believe
could expand our distribution channels. Even if we were to announce an
acquisition, we may not be able to complete it. Additionally, any future
acquisition or substantial investment would present numerous risks, including:
-o difficulty in integrating the technology, operations or work force of
the acquired business with our existing business,
-o disruption of our on-going business,
-o difficulty in realizing the potential financial or strategic benefits of
the transaction,
-o difficulty in maintaining uniform standards, controls, procedures and
policies,
-o possible impairment of relationships with employees and customers as a
result of integration of new businesses and management personnel, and
-o impairment of assets related to resulting goodwill, and reductions in
our future operating results from amortization of intangible assets.
We expect that future acquisitions could provide for consideration to be
paid in cash, shares of our common stock, or a combination of cash and our
common stock. If consideration for a transaction is paid in common stock, this
would further dilute our existing stockholders.
WE MAY NEVER ACHIEVE THE ANTICIPATED BENEFITS FROM OUR ACQUISITIONRECENT ACQUISITIONS OF
DYNAMIC TELECOMMUNICATIONS, INC. 25
AND MAXRAD, INC.
We acquired Dynamic Telecommunications, Inc. in March 2003 and MAXRAD, Inc.
in January of 2004 as part of our continuing efforts to expand our wireless businessline
and product offerings. We may experience difficulties in achieving the
anticipated benefits of our acquisition
of Dynamic Telecommunications.these acquisitions. Dynamic Telecommunication's businessproduct
line utilizes software-defined radio technology to optimize and plan wireless
networks. This
acquisition representsnetworks and MAXRAD's business is the design and manufacture of antenna products
and accessories used in wireless systems. These acquisitions represent a
significant expansion of and new direction for our wireless connectivity
business. Potential risks with this acquisitionthese acquisitions include:
-o successfully developing and marketing security-related applications for
the software-defined radio technology of Dynamic Telecommunications;
-Telecommunications,
o the loss or decrease in orders of one or more of the major customers of
MAXRAD or Dynamic Telecommunications,
o reduction or delay of capital expenditures by wireless operationsoperators for
network deployments (extensions of existing wireless networks and
network technologies as well as 3G and 4G technologies);
-,
o decrease in demand for wireless devices that use MAXRAD or Dynamic
Telecommunications products,
o failure to develop a productive Governments producteffective distribution capability;
-capability for products
purchased by the government,
o problems related to the operation of MAXRAD's assembly facilities in
China,
o difficulties in assimilation of acquired personnel, operations,
technologies or products;products, and
-o migration of network test and measurement functions into wireless
infrastructure as a standard part of product offerings..offerings.
Furthermore, under the asset purchase agreement with Dynamic
Telecommunications, PCTEL has an earn-out obligation to pay additional
consideration to Dynamic Telecommunications if the business of
Dynamic TelecommunicationsDTI product line meets
specified earnings targets. Any such earn-out payments may be paid, at our
option, in cash or a combination of cash and our common stock. If the earn-out
payments are paid in common stock, this would dilute our existing stockholders.
24
OUR GROSS MARGINS MAY VARY BASED ON THE MIX OF SALES OF OUR PRODUCTS AND
LICENSES OF OUR INTELLECTUAL PROPERTY, AND THESE VARIATIONS MAY CAUSE OUR NET
INCOME TO DECLINE.
We derive a significant portion of our sales from our software-based
connectivity products.
We expect gross margins on newly introduced products generally to be higher
than our existing products. However, due in part to the competitive pricing
pressures that affect our products and in part to increasing component and
manufacturing costs, we expect gross margins from both existing and future
products to decrease over time. In addition, licensing revenues from our
intellectual property historically have provided higher margins than our product
sales. Changes in the mix of products sold and the percentage of our sales in
any quarter attributable to products as compared to licensing revenues could
cause our quarterly results to vary and could result in a decrease in gross
margins and net income.
ANY DELAYS IN OUR NORMALLY LENGTHY SALES CYCLES COULD RESULT IN CUSTOMERS
CANCELING PURCHASES OF OUR PRODUCTS.
Sales cycles for our products with major customers are lengthy, often
lasting nine months or longer. In addition, it can take an additional nine
months or more before a customer commences volume production of equipment that
incorporates our products. Sales cycles with our major customers are lengthy for
a number of reasons, including:
-o our original equipment manufacturer customers and carriers usually
complete a lengthy technical evaluation of our products, over which we
have no control, before placing a purchase order,
-o the commercial integrationintroduction of our products by an original equipment
manufacturer and carriers is typically limited during the initial
release to evaluate product performance, -and
o the development and commercial introduction of products incorporating
new technologies frequently are delayed.
A significant portion of our operating expenses is relatively fixed and is
based in large part on our forecasts of volume and timing of orders. The lengthy
sales cycles make forecasting the volume and timing of product orders difficult.
In addition, the delays inherent in lengthy sales cycles raise additional risks
of customer decisions to cancel or change product phases. If customer
cancellations or product changes were to occur, this could result in the loss of
anticipated sales without sufficient time for us to reduce our operating
expenses.
26
OUR REVENUES MAY FLUCTUATE EACH QUARTER DUE TO BOTH DOMESTIC AND INTERNATIONAL
SEASONAL TRENDS.
Wi-FiThe connectivity products market is too new for us to be able to predict
seasonal revenue patterns. We do anticipate seasonal demand for the Segue(TM)
SoftAP product as volumes tend to ramp up to support year end customer sales.
Such patterns are also true for wireless test and measurements products, such as
DTI's, where capital spending is involved.
We are currently expanding our sales in international markets, particularly
in Europe and Asia. To the extent that our revenues in Europe and Asia or other
parts of the world increase in future periods, we expect our period-to-period
revenues to reflect seasonal buying patterns in these markets.
WE REQUIRE TECHNICAL COOPERATION WITH 802.11 CHIPSET MANUFACTURERS IN ORDER TO
REALIZE OUR SOFT ACCESS POINT PRODUCT. FAILURE TO SUCCESSFULLY SECURE THIS
COOPERATION WOULD IMPAIR OUR REVENUE FROM THIS PRODUCT.
We rely on our ability to forge relationships with 802.11 chipset
manufacturers, in order to ensure that our Segue Soft AP (SAM)Segue(TM) SoftAP software is
compatible with their chipsets. This relationship requires that source code be
given to PCTEL or that 802.11 chipset manufacturers undertake development
activities to enable our Soft APSoftAP capability. There are many risks associated with
this:
-o Chipset manufacturers general unwillingness to partner with PCTEL,
-o Chipset manufacturers internally developing their own Soft APSoftAP
capabilities,
-o Chipset manufacturers not seeing the value provided by Soft AP;SoftAP, and
-25
o Chipset manufacturers viewing Soft APSoftAP as a threat to the hardware AP side
of the business.
WE GENERALLY RELY ON INDEPENDENT COMPANIES TO MANUFACTURE, ASSEMBLE AND TEST OUR
PRODUCTS. IF THESE COMPANIES DO NOT MEET THEIR COMMITMENTS TO US, OUR ABILITY TO
SELL PRODUCTS TO OUR CUSTOMERS WOULD BE IMPAIRED.
We do not have anylimited manufacturing capability and limited assembly capacity.capability. For some product lines we
outsource the manufacturing, assembly, and testing of printed circuit board
subsystems. For other product lines, we purchase completed hardware platforms
and add our proprietary software. While there is no unique capability with these
suppliers, any failure by these suppliers to meet delivery commitments would
cause us to delay shipments and potentially be unable to accept new orders for
product.
In addition, in the event that these suppliers discontinued the manufacture
of materials used in our products, we would be forced to incur the time and
expense of finding a new supplier or to modify our products in such a way that
such materials were not necessary. Either of these alternatives could result in
increased manufacturing costs and increased prices of our products.
We assemble our MAXRAD products in our MAXRAD facilities located in Illinois
and China. We may experience delays, disruptions, capacity constraints or
quality control problems at our assembly facilities, which could result in lower
yields or delays of product shipments to our customers. In addition, we are
having an increasing number of our MAXRAD products manufactured in China via
contract manufacturers. Any disruption of our own or contract manufacturers'
operations could cause us to delay product shipments, which would negatively
impact our sales, competitive reputation and position. In addition, if we do not
accurately forecast demand for our products, we will have excess or insufficient
parts to build our product, either of which could seriously affect our operating
results.
IN ORDER FOR US TO OPERATE AT A PROFITABLE LEVEL AND CONTINUE TO INTRODUCE AND
DEVELOP NEW PRODUCTS FOR EMERGING MARKETS, WE MUST ATTRACT AND RETAIN OUR
EXECUTIVE OFFICERS AND QUALIFIED TECHNICAL, SALES, SUPPORT AND OTHER
ADMINISTRATIVE PERSONNEL.
Our past performance has been and our future performance is substantially dependent on the performance of our current
executive officers and certain key engineering, sales, marketing, financial,
technical and customer support personnel. If we lose the services of our
executives or key employees, replacements could be difficult to recruit and, as
a result, we may not be able to grow our business.
Competition for personnel, especially qualified engineering personnel, is
intense. We are particularly dependent on our ability to identify, attract,
motivate and retain qualified engineers with the requisite education, background
and industry experience. As of September 30, 2003,March 31, 2004, we employed a total of 3548 people
in our engineering department. If we lose the services of one or more of our key
engineering personnel, our ability to continue to develop products and
technologies responsive to our markets willmay be impaired.
FAILURE TO MANAGE OUR TECHNOLOGICAL AND PRODUCT GROWTH COULD STRAIN OUR
MANAGEMENT, FINANCIAL AND ADMINISTRATIVE RESOURCES.
Our ability to successfully sell our products and implement our business
plan in rapidly evolving markets requires an effective management planning
process. Future product expansion efforts could be expensive and put a strain on
our management by significantly increasing the scope of their responsibilities
and by increasing the demands on their management abilities. To effectively
manage our growth in these new technologies, we must enhance our marketing,
sales, research and development areas.
27
WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY RIGHTS WITH RESPECT TO OUR WIRELESS
BUSINESS AND THESE RIGHTS OFFER ONLY LIMITED PROTECTION AGAINST COMPANIES WHO
MAY INFRINGE UPON OUR INTELLECTUAL PROPERTY.
Our wireless products are dependent on trademarks and know how and other
intellectual property rights. Despite precautions that we take, it may be
possible for unauthorized third parties to copy aspects of our current or future
products or to obtain and use information that we regard as proprietary.
Unauthorized use of our wireless technology may result in development of
products that compete with our products, which could impair our ability to grow
or sustain our wireless business and our related revenues. As a result our
business, financial condition, results of operations, and prospects may be
materially and adversely affected. Policing unauthorized use of proprietary
technology is difficult, and some foreign laws do not protect our proprietary
rights to the same extent as United States laws. Litigation may be necessary in
the future to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others. Litigation could result in substantial costs and diversion of resources,
including management attention. We rely primarily on a combination of patent,
copyright and trademark laws, trade secrets, confidentiality procedures and
contractual provisions to protect our proprietary rights. These means of
protecting our proprietary rights may not be adequate. For example, pending
patents may never be issued and current patents may be invalidated. As a result,
these patents, both issued and pending, may not prove enforceable in actions
against companies using technology we believe to be proprietary.
WE MAY BE SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY ASSOCIATED WITH
OUR WIRELESS BUSINESS AND THIS COULD BE COSTLY TO DEFEND AND COULD PREVENT US
FROM USING OR SELLING THE CHALLENGED TECHNOLOGY.
In recent years, there has been significant litigation in the United States
involving intellectual property rights. We have from time to time in the
past-received correspondence from third parties alleging that we infringe the
third party's intellectual property rights. We expect potential claims to
increase in the future, including with respect to our wireless business.
Intellectual property claims against us, and any resulting lawsuit, may result
in our incurring significant expenses and could subject us to significant
liability for damages and invalidate what we currently believe are our
proprietary rights. These lawsuits, regardless of their merits or success, would
likely be time-consuming and expensive to
26
resolve and could divert management's time and attention. This could have a
material and adverse effect on our business, results of operation, financial
condition and prospects. Any potential intellectual property litigation against
us related to our wireless business could also force us to do one or more of the
following:
-o cease selling, incorporating or using technology, products or services
that incorporate the infringed intellectual property,
-o obtain from the holder of the infringed intellectual property a license
to sell or use the relevant technology, which license may not be
available on acceptable terms, if at all, or
-o redesign those products or services that incorporate the disputed
intellectual property, which could result in substantial unanticipated
development expenses.
If we are subject to a successful claim of infringement related to our
wireless intellectual property and we fail to develop non-infringing
intellectual property or license the infringed intellectual property on
acceptable terms and on a timely basis, operating results could decline and our
ability to grow and sustain our wireless business could be materially and
adversely affected. As a result, our business, financial condition, results of
operation and prospects could be impaired.
We may in the future initiate claims or litigation against third parties for
infringement of our intellectual property rights or to determine the scope and
validity of our proprietary rights or the proprietary rights of our competitors.
These claims could also result in significant expense and the diversion of
technical and management personnel's attention.
UNDETECTED SOFTWARE ERRORS OR FAILURES FOUND IN NEW PRODUCTS MAY RESULT IN A
LOSS OF CUSTOMERS OR A DELAY IN MARKET ACCEPTANCE OF OUR PRODUCTS.
Our products may contain undetected software errors or failures when first
introduced or as new versions are released. To date, we have not been made aware
of any significant software errors or failures in our products. However, despite
testing by us and by current and potential customers, errors may be found in new
products after commencement of commercial shipments, resulting in loss of
customers or delay in market acceptance.
28
OUR FINANCIAL POSITION AND RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED IF
TAX AUTHORITIES CHALLENGE US AND THE TAX CHALLENGES RESULT IN UNFAVORABLE
OUTCOMES.
We currently have a subsidiaryinternational subsidiaries located in Japan, China and
Israel as well as international branch offices located in Taiwan France and Yugoslavia. YugoslaviaFrance. Our
branch office in France is presently in the liquidation process. The
complexities resulting from by operating in several different tax jurisdictions
inevitably leads to an increasedincreases our exposure to worldwide tax challenges.
RISKS RELATED TO OUR INDUSTRY
IF THE WIRELESS MARKET DOES NOT GROW AS WE ANTICIPATE, OR IF OUR WIRELESS
PRODUCTS ARE NOT ACCEPTED IN THESE MARKETS, OUR REVENUES MAY BE ADVERSELY
AFFECTED.
Our future success depends on market demand and growth patterns for products
using wireless technology. Our wireless products may not be successful as a
result of the following reasons:
- intense competition in the wireless market, -or our relative
inexperience in developing, marketing, selling and supporting these products, and
- inability of these products to complement our legacy business.products.
If these new wireless products are not accepted in the markets as they are
introduced, our revenues and profitability will be negatively affected.
OUR INDUSTRY IS CHARACTERIZED BY RAPIDLY CHANGING TECHNOLOGIES. IF WE ARE NOT
SUCCESSFUL IN RESPONSE TO RAPIDLY CHANGING TECHNOLOGIES, OUR PRODUCTS MAY BECOME
OBSOLETE AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
The Internetwireless data access business is characterized by rapidly changing
technologies, short product life cycles and frequent new product introductions.
To remain competitive, we have successfully introduced several new products.
27
Both the cellular (2.5G)(2.5G and WLAN3G) and Wi-Fi (802.11) space isspaces are rapidly
changing and prone to standardization. We will continue to evaluate, develop and
introduce technologically advanced products that will position us for possible
growth in the wireless Internetdata access market. If we are not successful in response
to rapidly changing technologies, our products may becamebecome obsolete and we may
not be able to compete effectively.
CHANGES IN LAWS OR REGULATIONS, IN PARTICULAR, FUTURE FCC REGULATIONS AFFECTING
THE BROADBAND MARKET, INTERNET SERVICE PROVIDERS, OR THE COMMUNICATIONS
INDUSTRY, COULD NEGATIVELY AFFECT OUR ABILITY TO DEVELOP NEW TECHNOLOGIES OR
SELL NEW PRODUCTS AND THEREFORE, REDUCE OUR PROFITABILITY.
The jurisdiction of the Federal Communications Commission, or FCC, extends
to the entire communications industry, including our customers and their
products and services that incorporate our products. Future FCC regulations
affecting the broadband access services industry, our customers or our products
may harm our business. For example, future FCC regulatory policies that affect
the availability of data and Internet services may impede our customers'
penetration into their markets or affect the prices that they are able to
charge. In addition, FCC regulatory policies that affect the specifications of
wireless data devices may impede certain of our customers' ability to
manufacture their products profitably, which could, in turn, reduce demand for
our products. Furthermore, international regulatory bodies are beginning to
adopt standards for the communications industry. Although our business has not
been hurt by any regulations to date, in the future, delays caused by our
compliance with regulatory requirements may result in order cancellations or
postponements of product purchases by our customers, which would reduce our
profitability.
RISKS RELATED TO OUR LICENSING PROGRAM
OUR ABILITY TO SUSTAIN OR GROW OUR REVENUE FROM THE LICENSING OF OUR
INTELLECTUAL PROPERTY IS SUBJECT TO MANY RISKS, AND ANY INABILITY TO
SUCCESSFULLY LICENSE OUR INTELLECTUAL PROPERTY COULD MATERIALLY AND ADVERSELY
AFFECT OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS.
29
We may not be able to sustain or grow our revenue from the licensing of our
intellectual property. In addition to our wireless product line and
software-defined radio technology,lines, we offer our
intellectual property through licensing and product royalty arrangements. We
have over 120145 U.S. patents granted or pending addressing both essential
International Telecommunications Union and non-essential technologies. In
connection with our intellectual property licensing efforts, we have filed
several patent infringement lawsuits and are aggressively pursuing unlicensed
companies to license their unauthorized use of our intellectual property. We
have pending patent infringement litigation claims with 3Com, U.S. Robotics, Broadcom,
Agere and Lucent. We expect litigation to continue to be necessary to enforce
our intellectual property rights and to determine the validity and scope of the
proprietary rights of others. Because of the high degree of complexity of the
intellectual property at issue, the inherent uncertainties of litigation in
general and the preliminary nature of these litigation matters, we cannot assure
you that we will ultimately prevail or receive the judgments that we seek. We
may not be able to obtain licensing agreements from these companies on terms
favorable to us, if at all. In addition, we may be required to pay substantial
monetary damages as a result of claims these companies have brought against us
which could materially and adversely affect our business, financial condition
and operating results.
LITIGATION EFFORTS RELATED TO OUR LICENSING PROGRAM ARE EXPECTED TO BE COSTLY
AND MAY NOT ACHIEVE OUR OBJECTIVESOBJECTIVES.
Litigation such as our suits with 3Com, Broadcom, U.S. Robotics, Agere and Lucent can
take years to resolve and can be expensive to pursue or defend. We currently
expect our intellectual property litigation costs to be approximately $3.0 to $4.0$3.5
million on an annual basis. In addition, the allegations and claims involved in
these lawsuits, even if ultimately resolved in our favor, could be time
consuming to litigate and divert management attention. We may not ultimately
prevail in these matters or receive the judgments that we seek. We could also
face substantial monetary damages as a result of claims others bring against us.
In addition, courts' decisions on current pending and future motions could have
the effect of determining the ultimate outcome of the litigation prior to a
trial on the merits, or strengthen or weaken our ability to assert claims and
defenses in the future. Accordingly, an adverse judgment could seriously harm
our business, financial position and operating results and cause our stock price
to decline substantially.
WE EXPECT TO CONTINUE TO BE SUBJECT TO LITIGATION REGARDING INTELLECTUAL
PROPERTY CLAIMS RELATED TO OUR LICENSING PROGRAM WHICH COULD IMPAIR OUR ABILITY
TO GROW OR SUSTAIN REVENUES FROM OUR LICENSING EFFORTS.
28
As we continue to aggressively pursue licensing arrangements with companies
that are using our intellectual property without our authorization, we expect to
continue to be subject to lawsuits that challenge the validity of our
intellectual property or that allege that we have infringed third party
intellectual property rights. Any of these claims could results in substantial
damages against us and could impair our ability to grow and sustain our
licensing business. This could materially and adversely affect our business,
financial condition, operating results and prospects. As a result, at least in
part, of our licensing efforts to date, we are currently subject to claims from
3Com, U.S. Robotics, Broadcom, Agere and Lucent regarding patent infringement matters of the nature
described above. We have also been subject to claims from others in the past
regarding similar matters. In addition, in recent years, there has been
significant litigation in the United States involving intellectual property
rights. We expect these claims to increase as our intellectual property
portfolio becomes larger. Intellectual property claims against us, and any
resulting lawsuit, may result in our incurring significant expenses and could
subject us to significant liability for damages and invalidate what we currently
believe are our proprietary rights. These lawsuits, regardless of their merits
or success, would likely be time-consuming and expensive to resolve and could
divert management's time and attention.
OUR ABILITY TO ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS MAY BE LIMITED, AND ANY
LIMITATION COULD ADVERSELY AFFECT OUR ABILITY TO SUSTAIN OR INCREASE REVENUE
FROM OUR LICENSING PROGRAM.
Our ability to sustain and grow revenue from the licensing of our
intellectual property is dependantdependent on our ability to enforce our intellectual
property rights. Our ability to enforce these rights is subject to many
challenges and may be limited. For example, one or more of our pending patents
may never be issued. In addition, our patents, both issued and pending, may not
prove enforceable in actions against alleged infringers. 3Com, U.S. Robotics,
Broadcom, Agere and Lucent have currently pending claims seeking to invalidate onone or more
of our patents. If a court were to invalidate one or more of our patents, this
could materially and adversely affect our licensing program. Furthermore, some
foreign laws, including those of various countries in Asia, do not protect our
proprietary rights to the same extent as United States laws.
30
WE HAVE ACCRUED FOR NEGOTIATED LICENSE FEES AND ESTIMATED ROYALTY SETTLEMENTS
RELATED TO EXISTING AND PROBABLE CLAIMS OF PATENT INFRINGEMENT. IF THE ACTUAL
SETTLEMENTS EXCEED THE AMOUNTS ACCRUED, ADDITIONAL LOSSES COULD BE SIGNIFICANT,
WHICH WOULD ADVERSELY AFFECT FUTURE OPERATING RESULTS.
We recorded an accrual for estimated future royalty payments for relevant
technology of others used in our product offerings in accordance with SFAS No.
5, "Accounting for Contingencies." The estimated royalties accrual reflects
management's broader litigation and cost containment strategies, which may
include alternatives such as entering into cross-licensing agreements, cash
settlements and/or ongoing royalties based upon our judgment that such
negotiated settlements would allow management to focus more time and financial
resources on the ongoing business. Accordingly, the royalties accrual reflects
estimated costs of settling claims rather than continuing to defend our legal
positions, and is not intended to be, nor should it be interpreted as, an
admission of infringement of intellectual property, valuation of damages
suffered by any third parties or any specific terms that management has
predetermined to agree to in the event of a settlement offer. We have accrued
our best estimate of the amount of royalties payable for royalty agreements
already signed andas well as unasserted, but probable, claims of others using
advice from third party technology advisors and historical settlements. Should
the final license agreements result in royalty rates significantly higher than
our current estimates, our business, operating results and financial condition
couldwould be
materially and adversely affected.
RISKS RELATED TO OUR COMMON STOCK
THE TRADING PRICE OF OUR STOCK PRICE MAY BE VOLATILE BASED ON A NUMBER OF
FACTORS, SOME OF WHICH ARE NOT IN OUR CONTROL.
The trading price of our common stock has been highly volatile. The common
stock price has fluctuated from a low of $4.58$8.15 to a high of $13.60$14.22 over the last
twelve months. Our stock price could be subject to wide fluctuations in response
to a variety of factors, many of which are out of our control, including:
-o actual or anticipated variations in quarterly operating results,
-o outcome of on goingongoing intellectual property related litigations,
-o announcements of technological innovations,
-29
o new products or services offered by us or our competitors,
-o changes in financial estimates by securities analysts,
-o conditions or trends in our industry,
-o our announcement of significant acquisitions, strategic partnerships,
joint ventures or capital commitments,
-o additions or departures of key personnel,
-o mergers and acquisitions, and
-o sales of common stock by our stockholders or us.
In addition, the NASDAQ National Market, where many publicly held
telecommunications companies, including PCTEL, are traded, often experiences
extreme price and volume fluctuations. These fluctuations often have been
unrelated or disproportionate to the operating performance of these companies.
In the past, following periods of volatility in the market price of an
individual 31
company'sCompany's securities, securities class action litigation often has
been instituted against that company.Company. This type of litigation, if instituted,
could result in substantial costs and a diversion of management's attention and
resources.
PROVISIONS IN OUR CHARTER DOCUMENTS MAY INHIBIT A CHANGE OF CONTROL OR A CHANGE
OF MANAGEMENT WHICH MAY CAUSE THE MARKET PRICE FOR OUR COMMON STOCK TO FALL AND
MAY INHIBIT A TAKEOVER OR CHANGE IN OUR CONTROL THAT A STOCKHOLDER MAY CONSIDER
FAVORABLE.
Provisions in our charter documents could discourage potential acquisition
proposals and could delay or prevent a change in control transaction that our
stockholders may favor. These provisions could have the effect of discouraging
others from making tender offers for our shares, and as a result, these
provisions may prevent the market price of our common stock from reflecting the
effects of actual or rumored takeover attempts and may prevent stockholders from
reselling their shares at or above the price at which they purchased their
shares. These provisions may also prevent changes in our management that our
stockholders may favor. Our charter documents do not permit stockholders to act
by written consent, do not permit stockholders to call a stockholders meeting,
and provide for a classified board of directors, which means stockholders can
only elect, or remove, a limited number of our directors in any given year.
Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock in one or more series. The board of directors can fix the price,
rights, preferences, privileges and restrictions of this preferred stock without
any further vote or action by our stockholders. The rights of the holders of our
common stock will be affected by, and may be adversely affected by, the rights
of the holders of any preferred stock that may be issued in the future. Further,
the issuance of shares of preferred stock may delay or prevent a change in
control transaction without further action by our stockholders. As a result, the
market price of our common stock may drop.
3230
PCTEL, INC.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks. We manage the sensitivity of our results of
operations to credit risks and interest rate risk by maintaining a conservative
investment portfolio, which is comprised solely of, highly rated, short-term
investments. We have investments in both fixed rate and floating rate interest
earning instruments. Fixed rate securities may have their fair market value
adversely impacted based on the duration of such investments if interest rates
rise, while floating rate securities and the reinvestment of funds from matured
fixed rate securities may produce less income than expected if interest rates
fall. Due in part to these factors, our future investment income may fall short
of expectations. The primary objective of our investment activities is to
preserve principal while at the same time maximizing yields without
significantly increasing risk. To achieve this objective, we maintain our
portfolio of cash equivalents, short-term and long-term investments in a variety
of securities, including both government and corporate obligations with ratings
of A or better, and money market funds. We have accumulated a $40,638$11,000 and
$263,000$26,000 unrealized holding gain as of September 30, 2003March 31, 2004 and December 31, 2002,2003,
respectively. A hypothetical decrease of 10% in market interest rates would not
result in a material decrease in interest income earned through maturity on
investments held at September 30, 2003.March 31, 2004.
We do not hold or issue derivative, derivative commodity instruments or
other financial instruments for trading purposes. We are exposed to currency
fluctuations, as we sell our products internationally. We manage the sensitivity
of our international sales by denominating all transactions in U.S. dollars. If
the United States dollar uniformly increased or decreased in strength by 10%
relative to the currencies in which areour sales were denominated, our net loss
would not have changed by a material amount for the ninethree months ended September
30, 2003.March 31,
2004. For purposes of this calculation, we have assumed that the exchange rates
would change in the same direction relative to the United States dollar. Our
exposure to foreign exchange rate fluctuations, however, arises in part from
translation of the financial statements of foreign subsidiaries into U.S.
dollars in consolidation. As exchange rates vary, these results, when
translated, may vary from expectations and adversely impact overall expected
profitability. The effect of foreign exchange rate fluctuation gains for the
ninethree months ended September 30, 2003March 31, 2004 and year ended December 31, 20022003 was $53,518$67,000
and $35,000,$65,000, respectively.
3331
PCTEL, INC.
ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our management carried out an evaluation, with the participation of our
Chief Executive Officer and our Chief Financial Officer, of the effectiveness of
our disclosure controls and procedures. Based upon that evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that as of the end
of the period covered by this Quarterly Report on Form 10-Q our disclosure
controls and procedures, as such term is defined under Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), are effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission rules and forms.
(b) Changes in internal controls.
There was no change in our internal controls over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting, or in other factors that could
significantly affect these controls subsequent to the date of their last
evaluation.
3432
PCTEL, INC.
PART II. OTHER INFORMATION FOR THE THREE AND NINE MONTHS ENDED: SEPTEMBER 30,
2003ENDED MARCH 31, 2004
ITEM 1 LEGAL PROCEEDINGS:PROCEEDINGS
Ronald H. Fraser v. PC-Tel, Inc., Wells Fargo Shareowner Services, Wells Fargo
Bank Minnesota, N.A.
InOn March 19, 2002, plaintiff Ronald H. Fraser ("Fraser") filed a Verified
Complaint (the "Complaint") in Santa Clara County (California) Superior Court
for breach of contract and declaratory relief against PCTEL,the Company, and for
breach of contract, conversion, negligence and declaratory relief against PCTEL'sthe
Company's transfer agent, Wells Fargo Bank Minnesota, N.A ("Wells Fargo"). The
Complaint seeks compensatory damages allegedly suffered by Fraser as a result of
the sale of certain stock by Fraser during a secondary offering on April 14,
2000. Wells Fargo filed a Verified Answer to the Complaint inon June 12, 2002. On
July 10, 2002, and in July 2002,
PCTELthe Company filed a Verified Answer to the Complaint, denying
Fraser's claims and asserting numerous affirmative defenses. Wells Fargo and PCTELthe
Company have each filed Cross-complaints against the other for indemnity. Wells FargoOn
November 18, 2002, the parties conducted mediation but were unable to reach a
settlement.
Trial of this matter had been set for January 12, 2004, however, the trial
date was vacated in light of the amended complaint filed aby Fraser following his
motion for summary judgment, or alternatively for summary
adjudication, which wasleave to amend heard on July 29,December 9, 2003. On July 30, the Court granted
Wells Fargo's motion for summary adjudication on Fraser's Third and Fourth
Causes of action for Breach of Fiduciary Duty and Declaratory Relief, but denied
Wells Fargo's motion for summary judgment and summary adjudication of Fraser's
First and Second Causes of Action for Breach of Contract and Conversion. PCTEL
has filed aThe Company intends to
re-file its Motion for Summary Judgment or, Alternatively,alternatively, Summary Adjudication,
against Fraser. The MotionTrial is now scheduled for December 9, 2003. Trial of this
matter has been set for January 12,September 20, 2004. We believe that
we have meritorious defenses and intend to vigorously defend the action. Because
the action is still in its early stages, we cannotare not able to predict the outcome
at this time
provide an estimate of the range of potential loss, or the probability of a
favorable or unfavorable outcome.
Licensing Program. In addition to our wireless product line and software-defined
radio technology, PCTEL offers our intellectual property through licensing and
product royalty arrangements. We have over 120time.
Litigation with U.S. patents granted or pending
addressing technology essential to International Telecommunications Union
communication standards as well as other communications technology related
areas. We will continue to explore other opportunities to acquire relevant
technology and to incorporate new assets into our licensing program. For
example, as part of our transaction with Conexant that was completed in May
2003, we expanded our intellectual property portfolio by acquiring 46 patents.
As part of our licensing efforts, we are pursuing opportunities through
litigation in parallel with business discussions with those parties using our
intellectual property. As part of these efforts, in May 2003, we filed three
separate lawsuits asserting infringement of our intellectual property rights.
Below is a description of the claims and status of those lawsuits:
- U.S. Robotics Corporation.
On May 23, 2003, we filed in the U.S. District Court for the Northern
District of California (C03-2471 MJJ) a patent infringement lawsuit against U.S. Robotics
Corporation claiming that U.S. Robotics has infringed one of our patents (U.S. Patent No. 4,841,561 ('561)).patents. U.S.
Robotics filed its answer and counterclaim to our complaint in June 2003 asking for a declaratory judgment
that the claims of the '561 patent are invalid and not infringed by U.S. Robotics.infringed. This case has been
consolidated for claims construction discovery with the litigation against 3Com
Corporation, and Agere Systems and Lucent Technologies. Claims construction
discovery under the Patent Local Rules is underway, and a status conference is
set for May 11, 2004. No trial date has been set. We filed our replybelieve we have meritorious
claims and defenses. However, because the action is still in its early stages,
we are not able to U.S. Robotics'
counterclaim on July 2, 2003.
- PCTEL v.predict the outcome at this time.
Litigation with Broadcom Corporation.
On May 23, 2003, we filed in the U.S. District Court for the Northern
District of California (C03-2475 MJJ) a patent infringement lawsuit against Broadcom
Corporation claiming that Broadcom has infringed four of our patents ('561; and U.S. Patent Numbers 5,787,305 ('305);
5,931,950 ('950); and 6,493,780 ('780)).patents. Broadcom
filed its answer and counterclaim to our complaint in July 2003 asking for a declaratory judgment that the
claims of the four patents are invalid and/or unenforceable, and not infringed
by Broadcom. We filed our replyIn December 2003, the parties entered into a settlement agreement
which was favorable to Broadcom's counterclaimthe Company, and on August
4, 2003.
-January 6, 2004, the Court granted
the parties' stipulated request that all claims and counterclaims in the
Broadcom action be dismissed with prejudice.
Litigation with Agere Systems and Lucent Technologies.
On May 23, 2003, we filed in the U.S. District Court for the Northern
District of California (C03-2474 MJJ) a patent infringement lawsuit against Agere Systems and
Lucent Technologies claiming that Agere has infringed four of our patents ('561, '305, '950 and
'780) and
that Lucent was infringing three of our patents ('561, '305 and '950).patents. Agere and Lucent filed their
answers to our complaint in July 2003.complaint. Agere filed a counterclaim asking for a declaratory
judgment that the claims of the four patents are invalid, unenforceable and not
infringed by Agere. We filed our reply to Agere's counterclaim onin August 4, 2003.
35This case has been consolidated for claims construction discovery with the
litigation against U.S. Robotics Corporation and 3Com Corporation. Claims
construction discovery under the Patent Local Rules is underway, and a status
conference is set for May 11, 2004. No trial date has been set. We believe we
have meritorious claims and defenses. However, because the action is still in
its early stages, we are not able to predict the outcome at this time.
33
In addition to the three lawsuits described above, we also have continuing
litigationLitigation with 3Com
In March 2003, each of 3Com Corporation related to intellectual property infringement
and related matters. Both 3Com and we have pendingthe Company filed a patent
infringement lawsuitslawsuit against one anotherthe other. The suits are pending in the U.S.
District Court for the Northern District of California. Both suits were filed in March 2003. 3Com initially filed their suit
against us in the Northern DistrictOur lawsuit alleges
infringement of Illinois, but that case was subsequently
remanded to the Northern California District Court. We are claiming that 3Com is
infringing one of our patents ('561) and are seekingasks for a declaratory judgment that
certain 3Com patents are invalid and not infringed by PCTEL.the Company. 3Com is
alleging that our HSP modem products infringed certain 3Com patents and is seekingasks for
a declaratory judgment that our '561 patent is invalid and not infringed by 3Com. In addition,No
trial date has been set. The case has been consolidated for claims construction
discovery with the litigation against U.S. Robotics Corporation, Agere Systems
and Lucent Technologies. Claims construction discovery under the Patent Local
Rules is underway, and a status conference is set for May 11, 2004. We believe
we have meritorious claims and defenses. However, because the action is still in
its early stages, we are not able to predict the outcome at this time.
Further, in May 2003, wethe Company filed a complaint against 3Com in the
Superior Court of the State of California for the County of Santa Clara under
California's Unfair Competition Act. Subsequently,In December 2003, the Company voluntarily
dismissed the action without prejudice. On December 15, 2003, 3Com filed an
action against the Company seeking a notice of
removal, removingdeclaratory judgment that 3Com has not
violated the caseCalifornia Unfair Competition Act. On January 7, 2004, the parties
filed a stipulation dismissing 3Com's declaratory judgment action without
prejudice. No related claims with respect to the U.S. District Court forCalifornia Unfair Competition
Act are currently pending between the Northern Districtparties.
ITEM 2 CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The following table provides the activity of California (C03-3124 SBA). We have moved to remandour repurchase program during
the case to the Santa
Clara Superior Court. The hearing on our motion to remand is set for December 9,
2003.
In June 2003, we filed a motion to consolidate our pending patent
infringement cases with 3Com, U.S. Robotics, Broadcom, Agere and Lucent
described above. The court granted our motion to consolidate in part. On October
28, 2003, a case management conference in the consolidated actions was held. No
trial date has been set.
We believe we have meritorious claims and defenses in our disputes with
3Com, Broadcom, U.S. Robotics, Agere and Lucent. However, because of the
inherent uncertainties of litigation in general, we cannot assure you that we
will ultimately prevail or receive the judgments that we seek. In addition, we
may be required to pay substantial monetary damages. Litigation such as our
suits with 3Com, Broadcom, U.S. Robotics, Agere and Lucent can take years to
resolve and can be expensive to pursue and/or defend. The court's decisions on
current, pending and future motions could have the effect of determining the
ultimate outcome of the litigation prior to a trial on the merits, or strengthen
or weaken our ability to assert claims and defenses. Accordingly, an adverse
judgment could seriously harm our business, financial position and results of
operations and cause our stock price to decline substantially. In addition, the
allegations and claims involved in these lawsuits, even if ultimately resolved
in our favor, could be time consuming to litigate, result in costly litigation
and divert management attention. These lawsuits could significantly harm our
business, financial position and results of operations and cause our stock price
to decline substantially.
Due to the nature of litigation generally, we cannot ascertain the final
resolution of the lawsuits, or estimate the total expenses, possible damages or
settlement value, if any, that we may ultimately receive or incur in connection
with these lawsuits.three months ended March 31, 2004:
TOTAL NUMBER MAXIMUM NUMBER OF
AVERAGE OF SHARES PURCHASED SHARES THAT MAY
TOTAL NUMBER OF PRICE PAID AS PART OF PUBLICLY YET BE PURCHASED
SHARES PURCHASED PER SHARE ANNOUNCED PROGRAM UNDER THE PROGRAM
---------------- --------------- ------------------- -----------------
JANUARY 1, 2004 -- JANUARY 31, 2004 -- -- -- 961,400
FEBRUARY 1, 2004 -- FEBRUARY 29, 2004 -- -- -- 961,400
MARCH 1, 2004 -- MARCH 31, 2004 -- -- -- 961,400
---------------- --------------- ------------------- ----------------
-- -- --
================ =============== ===================
ITEM 5 OTHER INFORMATION
(a) Other information.
In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934,
as added by Section 202 of the Sarbanes-Oxley Act of 2002 (Act), we are required
to disclose the non-audit services approved by our audit committee to be
performed by PricewaterhouseCoopers LLP (PwC), our external auditor. Non-audit
services are defined as services other than those provided in connection with an
audit or a review of the financial statements of a company.Company. Our audit committee
has approved the engagement of PwC for non-audit services in 20032004 relating to,
among other things,
acquisition due diligence, liquidation of subsidiaries, tax consultation, and
testing of our internal controls.
(b) Changes to nomination procedures.
There have been no material changes to the procedure by which security
holders may recommend nominees to our board of directors since we last disclosed
such procedures.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ ------------ ------- ---------------------------------------------------------------------------------------------------------------
10.41a Martin H. Singer Amended and Restated Employment Agreement
10.41b Addendum to Martin H. Singer Amended and Restated Employment
Agreement
31.1 Certification of Principal Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32 Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
34
(b) Reports on Form 8-K:
36
We furnished a report on Form 8-K dated October 28, 2003February 5, 2004 announcing our
financial results for thefourth fiscal quarter and its fiscal year ended September 30,December 31,
2003. Such report was "furnished" but not "filed" with the SEC.
We furnishedfiled a report on Form 8-K dated July 11, 2003 announcing additional
information on sale of HSP modem product line. Such report was "furnished" but
not "filed" with the SEC.
We furnished a report on Form 8-K dated July 29, 2003January 2, 2004 announcing our financial
results for the fiscal quarter ended June 30, 2003. Such report was "furnished"
but not "filed" with the SEC.
37acquisition
of MAXRAD, Inc.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, this Report has been signed below by the
following persons on behalf of the Registrant has duly caused this report to be signedand in the capacities and on its behalf by the
undersigned thereunto duly authorized.dates indicated:
PCTEL, Inc.
A Delaware Corporation
October 31, 2003 By:(Registrant)
/s/ JOHN SCHOEN
---------------------------------------------------
John Schoen
Chief Operating OfficerMARTIN H. SINGER
------------------------------------
Martin H. Singer
Chairman of the Board and
Chief FinancialExecutive Officer
(Principal Financial and Accounting Officer)
38Date: May 10, 2004
36