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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 March 31, 2003
[ ] 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
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 checkmark 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 [ ]
As of April 28, 2003, there were 19,643,539 shares of the Registrant's Common
Stock outstanding.
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PCTEL, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
as of March 31, 2003 and December 31, 2002 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
for the three months ended March 31, 2003 and 2002 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
for the three months ended March 31, 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 15
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 34
ITEM 4 CONTROLS AND PROCEDURES 35
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 36
ITEM 5 OTHER INFORMATION 36
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 37
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PCTEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE INFORMATION)
March 31, December 31,
2003 2002
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 57,513 $ 52,986
Restricted cash 347 347
Short-term investments 43,235 58,405
Accounts receivable, net 5,282 5,379
Inventories, net 2,536 1,115
Prepaid expenses and other assets 4,400 5,144
--------- ----------
Total current assets 113,313 123,376
PROPERTY AND EQUIPMENT, net 1,518 1,532
GOODWILL, net 4,546 1,255
OTHER INTANGIBLE ASSETS, net 4,865 365
OTHER ASSETS 2,929 2,898
--------- ----------
TOTAL ASSETS $ 127,171 $ 129,426
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,494 $ 1,498
Accrued royalties 3,530 3,658
Income taxes payable 6,169 6,289
Accrued liabilities 5,288 5,313
--------- ----------
Total current liabilities 17,481 16,758
Long-term liabilities 388 115
--------- ----------
Total liabilities 17,869 16,873
--------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 100,000,000 shares authorized,
19,579,683 and 19,927,616 issued and outstanding at March 31, 2003
and December 31, 2002 20 20
Additional paid-in capital 149,773 152,272
Deferred stock compensation (3,656) (3,958)
Accumulated deficit (37,009) (36,079)
Accumulated other comprehensive income 174 298
--------- ----------
Total stockholders' equity 109,302 112,553
--------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 127,171 $ 129,426
========= ==========
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
March 31,
2003 2002
--------------------
REVENUES $ 13,082 $ 10,342
COST OF REVENUES 7,907 5,226
INVENTORY LOSSES (RECOVERY) (1,348) 0
--------------------
GROSS PROFIT 6,523 5,116
--------------------
OPERATING EXPENSES:
Research and development 2,118 2,396
Sales and marketing 2,261 1,638
General and administrative 1,852 1,466
Amortization of other intangible assets 99 0
Acquired in-process research and development 1,100 0
Restructuring charges 155 0
Amortization of deferred compensation 299 175
--------------------
Total operating expenses 7,884 5,675
--------------------
LOSS FROM OPERATIONS (1,361) (559)
OTHER INCOME, NET 495 1,053
--------------------
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (866) 494
PROVISION FOR INCOME TAXES 64 32
--------------------
NET INCOME (LOSS) $ (930) $ 462
====================
Basic earnings (loss) per share $ (0.05) $ 0.02
Shares used in computing basic earnings (loss) per share 19,238 19,720
Diluted earnings (loss) per share $ (0.05) $ 0.02
Shares used in computing diluted earnings (loss) per share 19,238 19,997
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)
Three Months Ended
March 31,
2003 2002
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (930) $ 462
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 400 401
In-process research and development 1,100 0
Gain (loss) on disposal/sale of fixed assets (12) 21
Recovery of allowance for doubtful accounts (127) (549)
Recovery of excess and obsolete inventories 0 (30)
Amortization of deferred compensation 299 175
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,092 1,142
Decrease (increase) in inventories (772) 1,604
Decrease (increase) in prepaid expenses and other assets 744 (3,235)
Increase (decrease) in accounts payable 996 (3,362)
Decrease in accrued royalties (128) (9,141)
Decrease in income taxes payable (120) 0
Decrease in accrued liabilities (69) (2,094)
Increase (decrease) in long-term liabilities 273 (141)
--------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,746 (14,747)
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (120) (28)
Proceeds on sale of property and equipment 113 8
Proceeds from sales and maturities of available-for-sale investments 0 18,592
Sales (purchases) of available-for-sale investments 15,049 (21,980)
Purchase of assets/business, net of cash acquired (10,762) 0
--------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 4,280 (3,408)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 865 1,431
Payments for repurchase of common stock (3,361) 0
--------------------
NET CASH PROVIDED (USED IN) BY FINANCING ACTIVITIES (2,496) 1,431
--------------------
Net increase in cash and cash equivalents 4,530 (16,724)
Cumulative translation adjustment (3) (4)
Cash and cash equivalents, beginning of period 52,986 38,393
--------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 57,513 $ 21,665
====================
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 MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have
been prepared by PCTEL, Inc. (unless otherwise noted, "PCTEL", "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, 2002 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 months ended March
31, 2003 are not necessarily indicative of the results that may be expected for
future periods or the year ending December 31, 2003.
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. Inventories as of March 31, 2003 and
December 31, 2002 were composed of finished goods and work-in-process only. We
regularly monitor inventory quantities on hand and, based on our current
estimated requirements, it was determined that there was excess inventory and
those excess amounts were fully reserved as of March 31, 2003 and December 31,
2002. Due to competitive pressures and technological innovation, it is possible
that these estimates could change in the near term. As of March 31, 2003 and
December 31, 2002, the allowance for inventory losses was $0.8 million and $2.1
million, respectively. We sold part of the written-down inventories and
recovered $1.3 million of the former write-downs for the three months ended
March 31, 2003.
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 anti-dilutive.
The following table provides a reconciliation of the numerators and
denominators used in calculating basic and diluted earnings per share for the
three months ended March 31, 2003 and 2002, respectively (in thousands, except
per share data):
6
THREE MONTHS ENDED
MARCH 31,
--------------------------
2003 2002
---------- ----------
(Unaudited)
Net income (loss) $ (930) $ 462
========== ==========
Basic earnings (loss) per share:
Weighted average common shares outstanding 19,833 19,849
Less: Weighted average shares subject to repurchase (595) (129)
---------- ----------
Weighted average common shares outstanding 19,238 19,720
---------- ----------
Basic earnings (loss) per share $ (0.05) $ 0.02
========== ==========
Diluted earnings (loss) per share:
Weighted average common shares outstanding 19,238 19,849
Weighted average shares subject to repurchase -* 0
Weighted average common stock option grants and outstanding warrants -* 148
---------- ----------
Weighted average common shares and common stock equivalents outstanding 19,238 19,997
---------- ----------
Diluted earnings (loss) per share $ (0.05) $ 0.02
========== ==========
* These amounts have been excluded since the effect is anti-dilutive.
STOCK-BASED COMPENSATION
We use the intrinsic value method of Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and its
interpretations in accounting for our employee stock options. 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 months ended March 31, 2003 and 2002 (in
thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
--------------------
2003 2002
---- ----
Net (loss) income--as reported................. $ (930) $ 462
Add: Stock-based employee compensation 299 175
expense included in reported net income
Deduct: Stock-based employee compensation 782 861
expense determined under fair value based method
for all awards.
Net (loss) income--as adjusted................. $ (1,413) $ (224)
Net (loss) income per share--basic as reported. $ (0.05) $ 0.02
Net (loss) income per share--basic as adjusted. $ (0.07) $ (0.01)
Net (loss) income per share--diluted as reported. $ (0.05) $ 0.02
Net (loss) income per share--diluted as adjusted. $ (0.07) $ (0.01)
7
We calculated the fair value of each option grant on the date of grant
using the Black-Scholes option pricing model as prescribed by SFAS 123 using the
following assumptions:
Stock Options ESPP
------------- ----
2003 2002 2003 2002
---- ---- ---- ----
Dividend yield None None None None
Expected volatility 55% 55% 55% 55%
Risk-free interest rate 2.4% 2.4% 1.1% 1.2%
Expected life (in years) 2.75 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 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 operate in one segment, that segment being solutions that enable
connectivity. We market our products worldwide through our sales personnel,
independent sales representatives and distributors.
Our sales to customers outside of the United States, as a percent of
total revenues, are as follows:
THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
-------- --------
(unaudited)
Taiwan 63% 69%
China (Hong Kong) 21% -%
Rest of Asia 2% 2%
Europe -% 2%
Japan 2% -%
------ -------
Total 88% 73%
====== =======
Sales to our major customers representing greater than 10% of total
revenues are as follows:
THREE MONTHS ENDED
MARCH 31,
------------------
Customer 2003 2002
-------- --------
(unaudited)
A - Askey 21% 32%
B - Lite-on Technology (GVC) 22% 29%
C - Prewell 21% -%
D - ESS Technology -% 19%
8
COMPREHENSIVE INCOME
The following table provides the calculation of other comprehensive
income for the three months ended March 31, 2003 and 2002 (in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
-------- -------
(Unaudited)
Net income (loss) $ (930) $ 462
Other comprehensive income:
Unrealized gains (loss) on available-for-sale securities (121) (456)
Cumulative translation adjustment (3) (4)
--------- -------
Comprehensive income (loss) $ (1,054) $ 2
========= =======
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, 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, "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 on adoption of SFAS No.
146 will change, on a prospective basis, the timing 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 June 15, 2003. The company believes
that there will be no impact of Fin 46 on our consolidated financial statements.
In November 2002, 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
involve 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 beginning after June 15, 2003. The
Company believes that the adoption of this standard will not have a material
impact on its financial position, results of operations, or cash flows.
9
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 No. 148
are included in Note 2.
3. ACQUISITION
On March 12, 2003, PCTEL, Inc, completed its asset acquisition of
Dynamic Telecommunications, Inc., ("DTI"). DTI was a supplier of
software-defined 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.
In connection with the asset acquisition, PCTEL, DTI, PCTEL Maryland, Inc., a
wholly-owned subsidiary of PCTEL, and DTI Holdings, Inc., the sole shareholder
of DTI, entered into an Asset Purchase Agreement dated as of March 12, 2003
under which PCTEL Maryland 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. PCTEL intends to use the
acquired assets to continue to operate and grow the business of DTI and to
expand its presence in the wireless access markets.
In exchange for the acquired assets, PCTEL paid DTI $10.8 million in
cash out of its working capital. In addition, DTI may be entitled to earn-out
payments if PCTEL Maryland meets specified financial targets in fiscal years
2003 and 2004.
The unaudited pro forma affect of the financial results of PCTEL as if
the acquisition had taken place on January 1, 2003 and 2002 as follows:
Three Months Ended
March 31,
2003 2002
------------------------
REVENUES $ 14,539 $ 11,356
INCOME (LOSS) FROM OPERATIONS 93 (458)
NET INCOME $ 526 $ 562
========================
Basic earnings (loss) per share $ 0.03 $ 0.03
Shares used in computing basic earnings (loss) per share 19,238 19,720
Diluted earnings (loss) per share $ 0.03 $ 0.03
Shares used in computing diluted earnings (loss) per share 19,921 19,997
10
4. 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 June 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. We adopted SFAS No. 142 on January 1, 2002 at which time we 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 and other intangible
assets as of March 31, 2003 were as follows:
Goodwill, Net
-------------
Balance at December 31, 2002 1,255
Goodwill from the acquisition of DTI 3,291
-----
Balance at March 31, 2003 4,546
=====
OTHER OTHER
INTANGIBLE ACCUMULATED INTANGIBLE
ASSETS AMORTIZATION ASSETS, NET
---------- ------------ -------------
(in thousands)
Balance at December 31, 2002 452 (87) 365
Other intangible assets from
the acquisition of DTI 4,600 (100) 4,500
--------- -------- --------
Balance at March 31, 2003 $ 5,052 $ (187) $ 4,865
========= ======== ========
11
5. 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. For the three months ended
March 31, 2003, we did not record any additional inventory write-downs having
sold part of the written down inventories and recovered $1.3 million of the
former write-downs. As of March 31, 2003 and December 31, 2002, the cumulative
write down for excess inventory on hand was $0.8 million and $2.1 million,
respectively.
6. RESTRUCTURING CHARGES
2001 Restructuring
On February 8, 2001, we announced a series of actions to streamline
support for our voiceband business 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 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, 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 for the three months ended March 31, 2003.
2002 Restructuring
In the quarter ended June 30, 2002, we further 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 March 31, 2003, approximately $671,000 of termination
compensation and related benefits had been paid to terminated employees in
connection with the 2002 restructuring. The remaining accrual balance of $17,000
will be paid on various dates extending through June 2003. As of March 31, 2003,
approximately $297,000 of lease payments and related costs had been paid to the
landlord for the excess facilities.
Additional restructuring charges of $155,000 were charged during the
three months ended March 31, 2003. These charges related to severance and
employment related costs of $69,000 and costs related to closure of excess
facilities as a result of the reduction in force of $86,000.
12
The remaining accrual balance of $84,000 will be paid monthly through May 2004.
The combined effect of the two restructurings is:
ACCRUAL ACCRUAL
BALANCE AT BALANCE AT
DECEMBER 31, RESTRUCTURING MARCH 31,
2002 CHARGES PAYMENTS 2003
------------ ------------- -------- ----------
Severance and employment related costs $ 106 $ 69 $ 158 $ 17
Costs for closure of excess facilities 262 86 264 84
------ ----- ----- -----
$ 368 $ 155 $ 422 $ 101
====== ===== ===== =====
Amount included in long-term liabilities $ 89
=====
Amount included in short-term liabilities $ 12
=====
7. 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 March 31, 2003 and December 31, 2002, we had accrued royalties of
approximately $3.5 million and $3.7 million, respectively. Of these amounts,
approximately $322,000 and $450,000 represent amounts accrued based upon signed
royalty agreements as of March 31, 2003 and December 31, 2002, respectively. The
remainder of accrued royalties represents management's best estimate within a
range of possible settlements as of each date presented. 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.
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 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.
13
Ronald H. Fraser v. PC-Tel, Inc., Wells Fargo Shareowner Services, Wells Fargo
Bank Minnesota, N.A.
On 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 the Company, and for
breach of contract, conversion, negligence and declaratory relief against the
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 on June 12, 2002. On
July 10, 2002, the Company filed a Verified Answer to the Complaint, denying
Fraser's claims and asserting numerous affirmative defenses. Wells Fargo and the
Company have each filed Cross-complaints against the other for indemnity. Wells
Fargo also filed a Cross-complaint against Fraser for indemnity and Fraser has
filed a demurrer to the Cross-Complaint. On November 18, 2002, the parties
conducted mediation but were unable to reach a settlement. A hearing on the
demurrer as well as a Case Management Conference occurred on May 6, 2003. The
judge took Fraser's motion under submission. Trial setting conference has been
scheduled for June 26, 2003.
We believe that we have meritorious defenses and intend to vigorously
defend the action. Because the action is still in its early stages, we cannot at
this time provide an estimate of the range of potential gain or loss, or the
probability of a favorable or unfavorable outcome.
Litigation with 3Com
On March 5, 2003, we filed in the U.S. District Court for the
Northern District of California a patent infringement lawsuit against 3Com
Corporation. Our lawsuit against 3Com Corporation alleges infringement by 3Com
Corporation of one of our patents and asks for a declaratory judgment that
certain 3Com patents are invalid and not infringed. On April 7, 2003, 3Com filed
a motion to dismiss our lawsuit, or in the alternative, to transfer venue to the
Northern District of Illinois. 3Com's motion is scheduled for hearing on June
10, 2003.
On March 4, 2003, 3Com filed in the U.S. District Court for the
Northern District of Illinois a patent infringement lawsuit against us claiming
that our HSP modem products infringe certain 3Com patents, and amended its
complaint to ask for a declaratory judgment that one of our patents is invalid
and not infringed. The patents that are the subject of 3Com's amended complaint
and our complaint are the same patents. On April 11, 2003, we filed a motion to
transfer venue to the Northern District of California. On April 16, 2003, we
answered 3Com's amended complaint. The court has ruled that it will issue its
decision by mail on the motion to transfer after May 6, 2003, on which date we
filed our motion to transfer venue reply brief.
We believe that we have meritorious claims and defenses in our dispute
with 3Com. 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 this lawsuit.
8. AMORTIZATION OF DEFERRED COMPENSATION:
For the three months ended March 31, 2003 and 2002, amortization of
deferred compensation (in thousands) relates to the following functional
categories:
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
---- ----
Research and development $ 54 $ 38
Sales and marketing 85 28
General and administrative 160 109
---- ----
$299 $175
==== ====
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.
9. STOCK REPURCHASES:
In August 2002, the Board of Directors authorized the repurchase of up to
1,000,000 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. The Company's repurchase activities will be at management's
discretion based on market conditions and the price of the Company's common
stock. During the three months ended March 31, 2003, we repurchased 485,400
shares of our outstanding common stock for approximately $3.4 million. Since the
inception of the stock repurchase program we have repurchased 1,261,200 shares
of our outstanding common stock for approximately $8.6 million.
14
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 March 31, 2003.
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,"
"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.
OVERVIEW
We provide cost-effective software-based communications solutions that
address high-speed Internet connectivity requirements for existing and emerging
technologies. Our communications products enable Internet access through PCs and
alternative Internet access devices. Our soft modem products consist of a
hardware chipset containing a proprietary host signal processing software
architecture which allows for the utilization of the computational and
processing resources of a host central processor, effectively replacing
special-purpose hardware required in conventional hardware-based modems.
Together, the combination of the chipset and software drivers are a component
part within a computer which allows for telecommunications connectivity. By
replacing hardware with a software solution, our host signal processing
technology lowers costs while enhancing capabilities.
We acquired Dynamic Telecommunications, Inc. in March 2003 as part of
our continuing efforts to expand our wireless business and product offerings.
Dynamic Telecommunication's business utilizes software-defined radio technology
to optimize and plan wireless networks. This acquisition's represents a
significant expansion of and new direction for our wireless business.
Our strategy is to broaden product offerings that enable cost-effective
access in both wired and wireless environments. In May 2002, we acquired the
assets of cyberPIXIE, Inc. ("cyberPIXIE"), a wireless access provider. The
acquisition of cyberPIXIE is consistent with our strategy and permits us to
participate in a new emerging market. As a result of the acquisition, we
obtained products and technology that will enable roaming between and among
802.11 wireless and cellular networks.
Our wireless product portfolio consists of both PC client and network
infrastructure products. Our wireless client product is a PC based software
solution that facilitates roaming and connection to wireless networks. These
networks may be public wireless local area network ("WLAN") hotspots, and
cellular data networks (wireless wide area networks), as well as private
enterprise and home WLANs. Our client products are offered as custom branded
offerings associated with a particular carrier and typically include carrier
specific 'service finder' location databases. Our client product offers a
superior end user experience while simultaneously reducing the costs associated
with typical end user support problems that our product addresses.
Our infrastructure products consist of software programs and third
party computing platforms (embedded or PC servers) that enable the deployment of
public WLANs. Our gateway product aggregates WLAN traffic from multiple access
points, supports proprietary end user features, provides location specific
content, and supports industry standard radius compliant end user authentication
and accounting. Our WLAN controller further aggregates gateway traffic and
provides storage for end user databases, subscription plans, and central control
of gateway management functions.
We sell soft modems to manufacturers and distributors principally in
Asia through our sales personnel, independent sales representatives and
distributors. Our sales to manufacturers and distributors in Asia were 86%, 91%
and 91% of our total sales for the years ended 2002, 2001 and 2000,
respectively, and 86% and 71% for the three months ended March 31, 2003 and
2002, respectively. The predominance of our sales is in Asia because our
customers are primarily motherboard and modem manufacturers, and the majority of
these manufacturers are located in Asia. In many cases, our indirect original
equipment manufacturer customers specify that our products be included
15
on the modem boards or motherboards that they purchase from the board
manufacturers, and we sell our products directly to the board manufacturers for
resale to our indirect original equipment manufacturer customers, both in the
United States and internationally.
The economic downturn that began in 2000 and has continued throughout
the first quarter of 2003 has adversely affected our business and operating
results. In particular, since the fourth quarter of 2000, our customers,
primarily our PC motherboard and distribution manufacturers, have been adversely
impacted by significantly lower PC demand which has, in turn, lowered demand for
our products. As a result, our revenues decreased from $97.2 million in 2000 to
$41.0 million in 2001 and $48.8 million in 2002. Revenues for the three months
ended March 31, 2003 were $13.1 million. Partly as a consequence of the economic
slowdown, during 2001, we reduced our headcount from 198 personnel at the end of
2000 to 108 at the end of 2001. We further reduced our headcount in 2002 by an
additional 27 persons.
Our sales are concentrated among a limited number of customers and the
loss of one or more of these customers could cause our revenues to decrease.
Continuing decreases in the average selling prices of our products will result
in decreased revenue as well.
As of March 31, 2003, we have $57.5 million in cash and cash
equivalents and $43.2 million in short-term investments, that potentially
subjects us to credit and market risks. To mitigate credit risk related to
short-term investments, we have an investment policy to preserve the value of
capital and generate interest income from these investments without undue
exposure to risk fluctuations. Market risk is the potential loss due to the
change in value of a financial instrument due to interest rates or equity
prices. Our investment policy is to stipulate 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.
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 requires 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 period
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 its more significant judgments and
estimates used in the preparation of its consolidated financial statements.
Revenue Recognition
Revenues consist primarily of sales of products to OEMs and
distributors. Revenues from sales to customers are recognized upon shipment when
title and risk of loss passes to the customers, 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. We provide for estimated sales returns and customer rebates
related to sales to OEMs at the time of shipment. Customer rebates are recorded
against receivables to the extent that the gross amount has not been collected
by the end customer. Once the gross amount has been collected, the accrued
customer rebate is then reclassified as accrued liabilities. As of March 31,
2003 and December 31, 2002, we had an allowance for customer rebates against
accounts receivable of $117,000 and $95,000, respectively, and accrued customer
rebates of $2.7 million and $1.7 million, respectively, presented as current
liabilities on the balance sheet. Accrued customer rebates will be paid to the
customers, upon request, in the future unless they are forfeited by the
customer. Revenues from 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 when the distributors have sold the
product to end-users. Customer payment terms generally range from letters of
credit collectible upon shipment to open accounts payable 60 days after
shipment.
We also generate revenues from engineering contracts and royalties on
technology licenses. Revenues from engineering contracts are recognized as
contract milestones and customer acceptance are achieved. Royalty revenue is
recognized when confirmation of royalties due to us is received from licensees.
Furthermore, revenues from
16
technology licenses are recognized after delivery has occurred and the amount is
fixed and determinable, generally based upon the contract's nonrefundable
payment terms. To the extent there are extended payment terms on these
contracts; revenue is recognized as the payments become due and the cancellation
privilege lapses. To date, we have not offered post-contract customer support.
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 March 31, 2003 and 2002
were composed of finished goods and work-in-process only. We regularly monitor
inventory quantities on hand. Based on our current estimated requirements, it
was determined that there was excess inventory and those excess amounts were
fully reserved as of March 31, 2003 and 2002. Due to competitive pressures and
technological innovation, it is possible that these estimates could increase in
the near term.
Due to the changing market conditions, recent economic downturn and
technological innovation, inventory write-downs of $10.9 million were recorded
in the second half of 2001. Given the volatility of the market, the age of the
inventories on hand and the expected introduction of new products in 2002, we
wrote down excess inventories to net realizable value based on forecasted demand
and firm purchase order commitments from our major suppliers. Actual demand may
differ from forecasted demand and such difference may have a material effect on
our financial position and results of operations.
For the three months ended March 31, 2003, we did not record any
additional inventory write-downs. We sold part of the written down inventories
and recovered $1.3 million of the former write-downs for the three months ended
March 31, 2003. As of March 31, 2003, the cumulative write-down for excess
inventory on hand was $0.8 million.
Our products may attract static electricity charges over time and have
a limited shelf life. Accordingly, in addition to the write-down of excess
inventory, we also provide a reserve against obsolete inventory.
Accrued 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 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, 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 March 31, 2003 and December 31, 2002, we had accrued royalties of
approximately $3.5 million and $3.7 million, respectively. However, the amounts
accrued may be inadequate and we will be required to take a charge if royalty
payments are settled at a higher rate than expected. In addition, settlement
arrangements may require royalties for both past and future sales of the
associated products. If this is the case, in addition to a charge if our accrual
is inadequate, our gross margins will decrease on these future product sales. As
a result of the litigation settlement with Dr. Brent Townshend in March 2002, we
made a cash royalty payment of $14.3 million related to past liability and
prepayment of future liabilities to Dr. Townshend. As of March 31, 2003, we have
classified the prepayment as other assets, of which $1.1 million represents the
current portion and $2.0 million represents the long-term portion.
Income Taxes
We provide for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 requires an asset and liability
based approach in accounting for income taxes. Deferred income tax assets
17
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 assets which are not likely to be
realized.
We currently have subsidiaries in Japan, France, and Yugoslavia
as well as branch offices in Taiwan and Korea. The complexities brought on by
operating in several different tax jurisdictions inevitably lead to an increased
exposure to worldwide taxes. Should our tax fillings be reviewed and such
reviews 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 its net recorded amount, an adjustment to the deferred tax
asset would increase income in the period such determination was made.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(All amounts in tables, other than percentages, are in thousands)
Revenues
THREE MONTHS THREE MONTHS
ENDED MARCH ENDED MARCH
31, 2003 31, 2002
------------ ------------
Revenues.................................................... $ 13,082 $ 10,342
% change from year ago period............................... 26.5% (37.1)%
Our revenues primarily consist of product sales of soft modems to board
manufacturers and distributors in Asia. Revenues increased $2.7 million for the
three months ended March 31, 2003 compared to the same period in 2002. The
revenue increase was primarily due to stronger modem sales.
Gross Profit
THREE MONTHS THREE MONTHS
ENDED MARCH ENDED MARCH
31, 2003 31, 2002
------------ ------------
Gross profit................................................ $ 6,523 $ 5,116
Percentage of revenues...................................... 49.9% 49.5%
% change from year ago period............................... 27.5% 0.0%
Cost of revenues consists primarily of chipsets we purchase from third
party manufacturers and also includes accrued intellectual property royalties,
cost of operations, provision for inventory obsolescence and distribution costs.
Provision for inventory losses are also included in the determination of gross
profit.
Gross profit increased $1.4 million for the three months ended March
31, 2003 compared to the same period in 2002 primarily as a result of the
inventory recovery of $1.3 million. Gross profit as a percentage of revenues
increased from 49.5 % for the three months ended March 31, 2002 to 49.9% for the
three months ended March 31, 2003. Gross profit as a percentage of revenues was
favorably impacted due to the $1.3 million in inventory recovery. As a
percentage of revenues, we expect gross profit to remain about the same for the
remainder of the year.
18
Research and Development
THREE MONTHS THREE MONTHS
ENDED MARCH ENDED MARCH
31, 2003 31, 2002
------------ ------------
Research and development................................... $ 2,118 $ 2,396
Percentage of revenues..................................... 16.2% 23.2%
% change from year ago period.............................. (11.6)% (30.9)%
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.
Research and development expenses decreased by $0.3 million for the
three months ended March 31, 2003 compared to the same period in 2002 primarily
because of the closure of the Connecticut engineering center in June 2002. In
2002, we expanded our research and development efforts to include wireless
products and software and continued our research and development on the
introduction of next generation analog modems. As a percentage of revenues,
research and development costs decreased for the three months ended March 31,
2003 for the same reasons as above as well as due to higher revenues for the
three months ended March 31, 2003. As a percentage of revenues, we expect
research and development costs to remain about the same for the remainder of the
year as the savings from the closure of the Connecticut engineering center in
the second quarter of 2002 are offset by additional research and development
costs associated with wireless products and software.
Sales and Marketing
THREE MONTHS THREE MONTHS
ENDED MARCH ENDED MARCH
31, 2003 31, 2002
------------ ------------
Sales and marketing........................................ $ 2,261 $ 1,638
Percentage of revenues..................................... 17.3% 15.8%
% change from year ago period.............................. 38.0% (52.9)%
Sales and marketing expenses consist primarily of personnel costs,
sales commissions and marketing costs. Sales commissions payable to our
distributors are recognized as expenses when our products are "sold through"
from the distributors to end-users so that the commission expense is matched
with related recognition of revenues. Marketing costs include promotional costs,
public relations and trade shows.
Sales and marketing expenses increased $0.6 million for the three
months ended March 31, 2003 compared to the same period in 2002. Sales and
marketing expenses as a percentage of revenues also increased for the three
months ended March 31, 2003 compared to the same period in 2002. The increase in
spending is primarily due to increased marketing expenses. As a percentage of
revenues, we expect sales and marketing costs to remain about the same for the
remainder of the year.
General and Administrative
THREE MONTHS THREE MONTHS
ENDED MARCH ENDED MARCH
31, 2003 31, 2002
------------ ------------
General and administrative................................. $ 1,852 $ 1,466
Percentage of revenues..................................... 14.2% 14.2%
% change from year ago period.............................. 26.3% (32.3)%
General and administrative expenses include costs associated with our
general management and finance functions as well as professional service
charges, such as legal, tax and accounting fees. Other general expenses include
rent, insurance, utilities, travel and other operating expenses to the extent
not otherwise allocated to other functions.
General and administrative expenses increased $0.4 million for the
three months ended March 31, 2003
19
compared to the same period in 2002. The increase was primarily due to increased
legal costs associated with our patent infringement litigation against 3Com. As
a percentage of revenues, we expect general and administrative costs to remain
about the same for the remainder of the year.
Amortization of Other Intangible Assets
THREE MONTHS THREE MONTHS
ENDED MARCH ENDED MARCH
31, 2003 31, 2002
------------ ------------
Amortization of other intangible assets.................... $ 99 $ -
Percentage of revenues..................................... 0.8% -%
In March 2003, we acquired the assets of Dynamic Telecommunications,
Inc., ("DTI") for a total of $10.8 million in cash. The purchase price of $10.8
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. The acquisition was accounted for under the purchase method of
accounting. The results of operations of DTI were included in our financial
statements from March 12, 2003, the date of acquisition. 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. We
attributed $1.8 million to net assets acquired, $1.1 million to acquired
in-process research and development, $200,000 to the covenant not to compete and
$4.4 million to other intangible assets, net, in the accompanying consolidated
balance sheets. The $3.3 million excess of the purchase price over the face
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 a estimated useful life
of four years.
In May 2002, we acquired the assets of Chicago-based 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. As a result of
the acquisition discussed above, amortization of intangible assets increased to
$99,000 for the three months ended March 31, 2003.
Restructuring Charges
THREE MONTHS THREE MONTHS
ENDED MARCH ENDED MARCH
31, 2003 31, 2002
------------ ------------
Restructuring charges ..................................... $ 155 $ -
Percentage of revenues..................................... 1.2 % -%
Restructuring expenses increased $155,000 for the three months ended
March 31, 2003 compared to the same periods in 2002. These charges related to
severance and employment related costs of $69,000 and costs related to closure
of excess facilities as a result of the reduction in force of $86,000.
Amortization of Deferred Compensation
THREE MONTHS THREE MONTHS
ENDED MARCH ENDED MARCH
31, 2003 31, 2002
------------ ------------
Amortization of deferred compensation ...................... $ 299 $ 175
Percentage of revenues...................................... 2.3% 1.7%
% change from year ago period............................... 70.9% (40.3)%
20
In connection with the grant of restricted stock to employees in 2002
and 2001, we recorded deferred stock compensation of $3.7 million and $1.8
million, 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 $124,000 for
the three months ended March 31, 2003 compared to the same period in 2002
primarily due to the termination of employees in 2002, offset by additional
expenses related to the restricted stock grants in 2001 and 2002. We expect the
amortization of deferred stock compensation to be approximately $300,000 per
quarter through 2003, based on restricted stock grants and stock option grants
through December 31, 2002. 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
ENDED MARCH ENDED MARCH
31, 2003 31, 2002
------------ ------------
Other income, net.................................... $ 495 $ 1,053
Percentage of revenues............................... 3.8% 10.2%
Other income, net, consists of interest income, net of interest
expense. Interest income is expected to fluctuate over time. Other income, net,
decreased $558,000 for the three months ended March 31, 2003 compared to the
same period in 2002 primarily due to the decrease in interest rates and lower
average cash balances in 2003.
Provision for Income Taxes
THREE MONTHS THREE MONTHS
ENDED MARCH ENDED MARCH
31, 2003 31, 2002
------------ ------------
Provision for income taxes.......................... $ 64 $ 32
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 months ended March 31, 2003, we recorded $64,000 of provision for income
taxes for foreign taxes.
LIQUIDITY AND CAPITAL RESOURCES
THREE MONTHS THREE MONTHS
ENDED MARCH ENDED MARCH
31, 2003 31, 2002
----------- -----------
Net cash provided by (used in) operating activities............................ $ 2,746 $ (14,747)
Net cash provided by (used in) investing activities............................ 4,280 (3,408)
Net cash provided by (used in) financing activities........................... (2,496) 1,431
Cash, cash equivalents and short-term investments at the end of period......... 100,748 111,831
Working capital at the end of period........................................... 95,832 103,534
The increase in net cash provided by operating activities for the three
months ended March 31, 2003 compared to the same period in 2002 was primarily
due to the decrease in accounts receivable and increase in accounts payable. Net
cash provided by investing activities for the three months ended March 31, 2003
consists primarily of proceeds from the sales and maturities of the short-term
21
investments, net of purchases of short-term investments offset by cash used in
the acquisition of DTI. The decrease in net cash provided by financing
activities for the three months ended March 31, 2003 consists of payments for
the repurchase of common stock associated with the shares repurchased by PCTEL.
In August 2002, the Board of Directors authorized the repurchase of up
to 1,000,000 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. The Company's repurchase activities will be at management's
discretion based on market conditions and the price of the Company's common
stock. During the three months ended March 31, 2003, we repurchased 485,400
shares of our outstanding common stock for approximately $3.4 million. Since
the inception of the stock repurchase program we have repurchased 1,261,200
shares of our outstanding common stock for approximately $8.6 million.
As of March 31, 2003, we had $101.1 million in cash, cash equivalents
and short-term investments and working capital of $95.8 million. Accounts
receivable, as measured in days sales outstanding, was 37 days at March 31, 2003
compared to 20 days in March 31, 2002. The increase in days sales outstanding
from March 31, 2002 to 2003 was primarily due to the decreased cash collections
throughout the first quarter of 2003.
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. In
addition, if the current economic downturn prolongs, we will need to continue to
expend our cash reserves to fund our operations. As of March 31, 2003, we have
non-cancelable operating leases for office facilities of $3.1 million through
2007, unpaid restructuring (termination compensation) of $101,000 through May
2004 and no outstanding firm inventory purchase contract commitments with our
major suppliers.
22
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
CONTINUING DECREASES IN THE AVERAGE SELLING PRICES OF OUR PRODUCTS COULD RESULT
IN DECREASED REVENUES.
Product sales in the connectivity industry have been characterized by
continuing erosion of average selling prices. Price erosion experienced by any
company can cause revenues and gross margins to decline. We believe that the
average selling price of our products is likely to continue to decline in the
future due principally to competitive pressure. This pricing pressure will
likely reduce our gross margins, adversely affect our operating results and may
result in the decrease in the price of our stock.
In addition, we believe that the widespread adoption of industry
standards in the soft modem industry is likely to further erode average selling
prices, particularly for analog modems. Adoption of industry standards is driven
by the market requirement to have interoperable modems. End-users need this
interoperability to ensure modems from different manufacturers communicate with
each other without problems. Historically, users have deferred purchasing modems
until these industry standards are adopted. However, once these standards are
accepted, it lowers the barriers to entry and price erosion results. Decreasing
average selling prices in our products could result in decreased revenues even
if the number of units that we sell increases. Therefore, we must continue to
develop and introduce next generation products with enhanced functionalities
that can be sold at higher gross margins. Our failure to do this could cause our
revenues and gross margins to decline.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND SUCCESSFULLY INTRODUCE
NEW AND ENHANCED PRODUCTS, PARTICULARLY WIRELESS PRODUCTS AND TECHNOLOGY, THAT
MEET THE NEEDS OF OUR CUSTOMERS AND ACHIEVE BROAD MARKET ACCEPTANCE.
Our revenue depends on our ability to anticipate our customers' needs
and develop products that address those needs. In particular, 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 WLAN
standards, and to develop products that are competitive in the rapidly changing
wireless market. Introduction of new products and product enhancements will
require coordination of our efforts with those of our 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 revenues may be reduced and our
business may be harmed. We may not be successful in timely introducing new
wireless products as a result of our relative inexperience in developing,
marketing, selling and supporting these products. 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. If we are unable to successfully compete in a particular market
with internally developed products, we may have to license technology from other
businesses or acquire other businesses as an alternative to internal research
and development.
OUR BUSINESS AND OUR ABILITY TO GROW REVENUES HAVE BEEN ADVERSELY IMPACTED BY
THE ECONOMIC SLOWDOWN AND RELATED UNCERTAINTIES AFFECTING MARKETS IN WHICH WE
OPERATE.
Since the fourth quarter of 2000, our customers, primarily our PC
motherboard and distribution manufacturers, have been and the first quarter of
2003 impacted by significantly lower PC demand. As a result, our revenues and
earnings in fiscal year 2001 and 2002 were negatively affected. Because we
expect PC demand to continue to be weak for the foreseeable term, we expect our
revenues and earnings to remain at the same level in 2003 as a result of the
adverse economic environment.
Adverse economic conditions worldwide have contributed to a technology
industry slowdown, particularly a rapid deterioration in the demand for PCs, and
have impacted our business, resulting in:
- reduced demand for most of our products,
- increased price competition for our products,
- increased risk of excess and obsolete inventories,
- excess facilities and manufacturing capacity, and
- higher overhead costs, as a percentage of revenues.
23
Recent political and social turmoil in many parts of the world,
including actual incidents and potential future acts of terrorism and the
current war in Iraq, may continue to put pressure on global economic conditions.
These political, social and economic conditions and uncertainties make it
extremely difficult for PCTEL and for our customers to accurately forecast and
plan future business activities and for us to forecast customer demand for our
products. We must forecast and place purchase orders for specialized
semiconductor chips several months before we receive purchase orders for our
products from our own customers. This forecasting and order lead time
requirement limits our ability to react to fluctuations in demand for our
products. These fluctuations can be unexpected and may cause us to have excess
inventory or a shortage of a particular product. This reduced predictability
challenges our ability to operate profitably and to increase revenues. In
particular, it is difficult to develop and implement strategies, sustainable
business models and efficient operations, and it is difficult for us to
effectively manage outsourced relationships. If the current economic or market
conditions continue or further deteriorate, there could be additional material
adverse impact on our financial position, revenues, results of operations and
cash flow.
During the second half of 2001, due to the changing market conditions,
recent economic downturn and technological innovation, a provision for inventory
losses of $10.9 million was charged against operations. Given the volatility of
the market, the age of the inventories on hand and the expected introduction of
new products later in 2002, we wrote down inventories to net realizable value
based on forecasted demand and firm purchase order commitments from our major
suppliers in 2001. Actual demand may differ from forecasted demand and such
difference may have a material effect on our financial position and result of
operations. For the three months ended March 31, 2003, we did not record any
additional inventory write-downs. We sold part of the written down inventories
and recovered $1.3 million of the former write-downs for the three months ended
March 31, 2003. As of March 31, 2003, the cumulative write-down for excess
inventory on hand was $0.8 million.
OUR SALES ARE CONCENTRATED AMONG A LIMITED NUMBER OF CUSTOMERS AND THE LOSS OF
ONE OR MORE OF THESE CUSTOMERS COULD CAUSE OUR REVENUES TO DECREASE.
Our sales are concentrated among a limited number of customers. If we
were to lose one or more of these customers, or if one or more of these
customers were to delay or reduce purchases of our products, our sales revenues
may decrease. For the three months ended March 31, 2003, approximately 64% of
our revenues were generated by three of our customers, representing 21%, 22% and
21% of revenues, respectively. All of these customers may in the future decide
not to purchase our products at all, purchase fewer products than they did in
the past or alter their purchasing patterns, because, among other reasons:
- we do not currently have any long-term purchase arrangements
or contracts with these or any of our other customers,
- our product sales to date have been made primarily on a
purchase order basis, which permits our customers to cancel,
change or delay product purchase commitments with little or no
notice and without penalty, and
- many of our customers also have pre-existing relationships
with current or potential competitors which may affect our
customers' purchasing decisions.
We expect that a small number of customers will continue to account for
a substantial portion of our revenues for at least the next 12 to 18 months and
that a significant portion of our sales will continue to be made on the basis of
purchase orders.
WE HAVE SIGNIFICANT SALES CONCENTRATED IN ASIA. CONTINUED POLITICAL AND ECONOMIC
INSTABILITY IN ASIA AND DIFFICULTY IN COLLECTING ACCOUNTS RECEIVABLE MAY MAKE IT
DIFFICULT FOR US TO MAINTAIN OR INCREASE MARKET DEMAND FOR OUR PRODUCTS.
Our sales to customers located in Asia accounted for 86% of our total
revenues for the three months ended March 31, 2003. The predominance of our
sales is in Asia, mostly in Taiwan and China, because our customers are
primarily motherboard or modem manufacturers that are located there. In many
cases, our indirect original equipment manufacturer customers specify that our
products be included on the modem boards or motherboards, the
24
main printed circuit board containing the central processing unit of a computer
system, that they purchase from board manufacturers, and we sell our products
directly to the board manufacturers for resale to our indirect original
equipment manufacturer customers, both in the United States and internationally.
Due to the industry-wide concentration of modem manufacturers in Asia, we
believe that a high percentage of our future sales will continue to be
concentrated with Asian customers. As a result, our future operating results
could be uniquely affected by a variety of factors outside of our control,
including:
- delays in collecting accounts receivable, which we have
experienced from time to time,
- fluctuations in the value of Asian currencies relative to the
U.S. dollar, which may make it more costly for us to do
business in Asia and which may in turn make it difficult for
us to maintain or increase our revenues,
- changes in tariffs, quotas, import restrictions and other
trade barriers which may make our products more expensive
compared to our competitors' products,
- political and economic instability and
- the severe acute respiratory syndrome (SARS) which is a
respiratory illness that has recently been reported in Asia,
North America and Europe. Due to the uncertainty with the
illness to date and our high concentration in these areas,
SARS could have an adverse effect on our business.
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
during periods of constrained spending. We are focusing on the wireless areas as
well as placing substantial effort on sustaining our leadership position in the
analog modem space. To effectively manage our growth in these new technologies,
we must enhance our marketing, sales, research and development areas. With
revenues either stabilizing or declining, these efforts will have to be
accomplished with limited resources. This will require management to effectively
manage significant technological advancement within reduced budgets.
COMPETITION WITHIN THE CONNECTIVITY AND WIRELESS NETWORKING INDUSTRIES IS
INTENSE AND IS EXPECTED TO INCREASE SIGNIFICANTLY. OUR FAILURE TO COMPETE
SUCCESSFULLY COULD MATERIALLY HARM OUR PROSPECTS AND FINANCIAL RESULTS.
The connectivity device and wireless markets are intensely competitive.
We may not be able to compete successfully against current or potential
competitors. Our current competitors include Agere Systems, Broadcom, Conexant,
ESS Technology and Smart Link. We expect competition to increase in the future
as current competitors enhance their product offerings, new suppliers enter the
connectivity device and wireless markets, new communication technologies are
introduced and as additional networks are deployed. In addition, our 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 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 OEM relationships, marketing alliances,
effective distribution channels.
25
We could, in the future, be at a disadvantage to competitors in both
the wireless and broadband markets that have broader distribution channels,
brand recognition, extensive patent portfolios and more diversified product
lines, particularly 3Com, Alcatel, Analog Devices, GlobespanVirata, Intersil and
Proxim. Additionally, numerous companies have announced their intention to
develop competing products in the connectivity products market, including
several companies offering low-price WLAN products. 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. 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.
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 wireless 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.
Furthermore, we compete with companies that have high volume manufacturing and
extensive marketing and distribution capabilities that we do not possess. 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 BUSINESS WILL DEPEND ON RAPIDLY EVOLVING TELECOMMUNICATIONS AND INTERNET
INDUSTRIES.
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 evolving
rapidly and it is difficult to predict potential growth rates or future trends
in technology development. We cannot assure you that the deregulation,
privatization and economic globalization of the worldwide telecommunications
market that has resulted in increased competition and escalating demand for new
technologies and services will 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, will continue at
its current rate or at all.
OUR REVENUE MAY DECLINE AND OUR ABILITY TO GROW OUR BUSINESS MAY BE THREATENED
IF THE DEMAND FOR WIRELESS SERVICES IN GENERAL AND WLAN PRODUCTS IN PARTICULAR
DOES NOT CONTINUE TO GROW.
Our success 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 access solutions are 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 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:
- reliability and security of wireless access technology and the
perception by end-users of its reliability and security,
- capacity to handle growing demands for faster transmission of
increasing amounts of data, voice and video,
- the availability of sufficient frequencies for network service
providers to deploy products at commercially reasonable rates,
- cost-effectiveness and performance compared to wire line or
other high speed access solutions, whose prices and
performance continue to improve,
- suitability for a sufficient number of geographic regions, and
- availability of sufficient site locations for wireless access.
26
The factors listed above influence our customers' purchase decisions
when selecting wireless versus other high speed 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, future 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, 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 access technologies.
Moreover, current wireless access technologies have inherent technical
limitations that may inhibit their widespread adoption in many areas.
We expect wireless 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 access solutions, including WLANs. If service providers do not continue
to establish WLAN "hot spots," we may not be able to generate sales for our WLAN
products and our revenue may decline.
CONNECTIVITY DEVICES GENERALLY REQUIRE INDIVIDUAL GOVERNMENT APPROVALS
THROUGHOUT THE WORLD TO OPERATE ON LOCAL TELEPHONE NETWORKS. THESE
CERTIFICATIONS, COLLECTIVELY REFERRED TO AS HOMOLOGATION, CAN DELAY OR IMPEDE
THE ACCEPTANCE OF OUR PRODUCTS ON A WORLDWIDE BASIS.
Connectivity products require extensive testing prior to receiving
certification by each government to be authorized to connect to their telephone
systems. This testing can delay the introduction of or, in extreme cases,
prohibit product usage in a particular country. International Telecommunications
Union standards seek to provide a worldwide standard to avoid these issues, but
they do not eliminate the need for testing in each country. In addition to
government certifications, individual Internet service providers can also have
unique line conditions that must be addressed. Since most large PC manufacturers
want to be able to release their products on a worldwide basis, this entire
process can significantly slow the introduction of new products.
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.
WE MAY NEVER ACHIEVE THE ANTICIPATED BENEFITS FROM OUR ACQUISITION OF DYNAMIC
TELECOMMUNICATIONS, INC.
We acquired Dynamic Telecommunications, Inc. in March 2003 as part of
our continuing efforts to expand our wireless business and product offerings. We
may experience difficulties in achieving the anticipated benefits of our
acquisition of Dynamic Telecommunications. Dynamic Telecommunication's business
utilizes software-defined radio technology to optimize and plan wireless
networks. This acquisition represents a significant expansion of and new
direction for our wireless business. Potential risks with this acquisition
include:
27
- possible impairment of relationships with employees and
customers as a result of the acquisition of Dynamic
Telecommunications;
- successfully developing and marketing security-related
applications for the software-defined radio technology of
Dynamic Telecommunications;
- reduction or delay of capital expenditures by wireless
operations for network deployments;
- inability to retain key employees of Dynamic
Telecommunications;
- diversion of management's attention from other business
concerns;
- impairment of assets related to resulting goodwill, and
reductions in our future operating results from amortization
of intangible assets; and
- difficulties in assimilation of acquired personnel,
operations, technologies or products.
Furthermore, under the asset purchase agreement, PCTEL has an
obligation to pay additional consideration to Dynamic Telecommunications if the
business of Dynamic Telecommunications meets specified revenue 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.
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.
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:
- difficulty in integrating the technology, operations or work
force of the acquired business with our existing business,
- disruption of our on-going business,
- difficulty in realizing the potential financial or strategic
benefits of the transaction,
- difficulty in maintaining uniform standards, controls,
procedures and policies,
- possible impairment of relationships with employees and
customers as a result of integration of new businesses and
management personnel, and
- 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.
OUR REVENUES MAY FLUCTUATE EACH QUARTER DUE TO BOTH DOMESTIC AND INTERNATIONAL
SEASONAL TRENDS.
We have experienced and expect to continue to experience seasonality in
sales of our connectivity products. These seasonal trends materially affect our
quarter-to-quarter operating results. Our revenues are typically higher in the
third and fourth quarters due to back-to-school and holiday purchases as well as
purchase decisions made based on the calendar year-end budgeting requirements of
purchasers of our products.
We are currently expanding our sales in international markets,
particularly in Asia. To the extent that our revenues in 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.
28
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. We expect sales cycles for our wireless products to
be lengthy as well. Sales cycles with our major customers are lengthy for a
number of reasons, including:
- our original equipment manufacturer customers usually complete
a lengthy technical evaluation of our products, over which we
have no control, before placing a purchase order,
- the commercial integration of our products by an original
equipment manufacturer is typically limited during the initial
release to evaluate product performance, and
- 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.
WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY RIGHTS, WHICH OFFER ONLY LIMITED
PROTECTION AGAINST COMPANIES WHO MAY INFRINGE UPON OUR INTELLECTUAL PROPERTY.
UNAUTHORIZED USE OF OUR TECHNOLOGY MAY RESULT IN DEVELOPMENT OF PRODUCTS THAT
COMPETE WITH OUR PRODUCTS, WHICH COULD CAUSE OUR MARKET SHARE AND OUR REVENUES
TO BE REDUCED.
Our success is heavily dependent upon our proprietary technology. 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. We have over 80 patents granted or pending addressing both essential
International Telecommunications Union and non-essential technologies. Pending
patents may never be issued. These patents, both issued and pending, may not
provide sufficiently broad protection against third party infringement lawsuits
or they may not prove enforceable in actions against alleged infringers.
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. We may provide our licensees with
access to the proprietary information underlying our licensed applications.
Additionally, our competitors may independently develop similar or superior
technology. Finally, policing unauthorized use of software is difficult, and
some foreign laws, including those of various countries in Asia, 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.
WE ARE SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY, WHICH HAS DIVERTED
MANAGEMENT ATTENTION, IS 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, including rights of companies in
our industry. 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 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. Any potential intellectual property
litigation against us could also force us to do one or more of the following:
- cease selling, incorporating or using products or services
that incorporate the infringed intellectual property,
- 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,
- redesign those products or services that incorporate the
disputed intellectual property, which could result in
substantial unanticipated development expenses, or
- the recent patent lawsuit with 3Com.
29
If we are subject to a successful claim of infringement and we fail to
develop non-infringing intellectual property or license the infringed
intellectual property on acceptable terms and on a timely basis, our revenues
could decline or our expenses could increase.
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.
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 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 higher than our current
estimates, our business, operating results and financial condition could be
materially and adversely affected.
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 March 31, 2003, we employed a total of 38 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 will be impaired.
WE MAY HAVE TO CONTINUE TO REDUCE OUR HEADCOUNT, WHICH MAY HINDER OUR ABILITY TO
DEVELOP AND GROW OUR BUSINESS, WHICH MAY ULTIMATELY AFFECT OUR ABILITY TO BE
PROFITABLE.
In 2001, we reduced our workforce by 90 employees. In 2002, we further
reduced our workforce by 27 employees. If economic conditions and the PC market
do not improve, or if we decide to pursue new business structures or focus on
different sectors, we may need to reduce our workforce further. This may result
in, as it has in the past, additional charges and costs relating to severance
and employment costs, as well as the closure of excess facilities. If such an
action is taken, it may temporarily inhibit our ability to develop new products,
our profitability and our ability to attract and retain other employees.
30
WE HAVE PUT IN PLACE COST REDUCTION PROGRAMS TO REDUCE OUR EXPENSES FOR THE HOST
SIGNAL PROCESSING BUSINESSES. WE MAY HAVE TO CONTINUE TO REDUCE OUR EXPENSES IN
THIS BUSINESS, WHICH MAY HINDER OUR ABILITY TO BECOME PROFITABLE.
As part of the cost reduction programs put in place on the HSP business
in 2001 and 2002, we reduced our workforce by 90 employees in 2001 and an
additional 27 employees in 2002. If economic conditions and the PC market do not
improve, we may need to continue to reduce expenses relating to the host signal
processing business. This may result in, as it has in the past, additional
charges and costs relating to severance and employment costs, as well as the
closure of excess facilities. If such an action is taken, it may temporarily
inhibit our ability to become profitable.
WE 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 our own manufacturing, assembly or testing operations.
Instead, we rely on independent companies to manufacture, assemble and test the
semiconductor chips that are integral components of our products. Most of these
companies are located outside of the United States. There are many risks
associated with our relationships with these independent companies, including
reduced control over:
- delivery schedules,
- quality assurance,
- manufacturing costs,
- capacity during periods of excess demand, and
- access to process technologies.
In addition, the location of these independent parties outside of the
United States creates additional risks resulting from the foreign regulatory,
political and economic environments in which each of these companies exists.
Further, some of these companies are located near earthquake fault lines. While
we have not experienced any material problems to date, failures or delays by our
manufacturers to provide the semiconductor chips that we require for our
products, or any material change in the financial arrangements we have with
these companies, could have an adverse impact on our ability to meet our
customer product requirements.
We design, market and sell application-specific integrated circuits and
outsource the manufacturing and assembly of the integrated circuits to third
party fabricators. The majority of our products and related components are
manufactured by three principal companies: Taiwan Semiconductor Manufacturing
Corporation, ADMTek and Silicon Laboratories Inc. We expect to continue to rely
upon these third parties for these services. Currently, the data access
arrangement chips used in our soft modem products are provided by a sole source,
Silicon Laboratories, on a purchase order basis, and we have only a limited
guaranteed supply of data access arrangement chips through a long-term business
arrangement with Silicon Laboratories. We have no guaranteed supply or long-term
contract agreements with any of our other suppliers. Although we believe that we
would be able to qualify an alternative manufacturing source for data access
arrangement chips within a relatively short period of time, this transition, if
necessary, could result in loss of purchase orders or customer relationships,
which could result in decreased revenues. In addition, many of the potential
alternative sources of components for our products that could potentially
provide us with components have existing relationships with our competitors or
potential competitors and may be unwilling to enter into agreements with us. If
our relationship with Silicon Laboratories, or any relationship we enter in the
future with other manufacturers, is impaired for competitive reasons or
otherwise, this could prevent us from being able to deliver our products, damage
our customer relationships and materially adversely affect our operating results
and financial condition.
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.
31
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 subsidiaries in Japan, France, Taiwan and Yugoslavia
as well as branch offices in Taiwan and Korea. The complexities resulting from
by operating in several different tax jurisdictions inevitably leads to an
increased exposure to worldwide tax challenges
OUR CALIFORNIA FACILITIES AND THE FACILITIES OF SOME OF THE INDEPENDENT
COMPANIES UPON WHICH WE RELY TO MANUFACTURE, ASSEMBLE AND TEST OUR PRODUCTS ARE
LOCATED IN REGIONS THAT ARE SUBJECT TO EARTHQUAKES AND OTHER NATURAL DISASTERS.
Our California facilities are located near major earthquake fault
lines. If there is a major earthquake or any other natural disaster in a region
where one of our facilities is located, it could significantly disrupt our
operations in that region. In addition, some of the independent companies upon
which we rely to manufacture substantially all of our products are located
outside of the United States in places that have experienced significant
earthquakes in the past and could be subject to additional earthquakes. Any
earthquake or other natural disaster in regions where the companies that
manufacture, assemble and test our products are located could materially disrupt
production capabilities and could result in our experiencing a significant delay
in delivery, or substantial shortage, of our products.
RISKS RELATED TO OUR INDUSTRY
IF THE MARKET FOR PRODUCTS USING OUR HOST SIGNAL PROCESSING TECHNOLOGY DOES NOT
GROW AS WE PLAN, OR IF OUR PRODUCTS ARE NOT ACCEPTED IN THESE MARKETS, OUR
REVENUES MAY BE ADVERSELY AFFECTED.
Our success depends on market demand and growth patterns for products
using our host signal processing, or HSP, technology in soft analog modems.
Market success for our products depends primarily on cost and performance
benefits relative to competing solutions. Although we have shipped a significant
number of soft modems since we began commercial sales of these products, the
current level of demand for soft modems may not continue or increase. Further,
our success in the soft modem market is dependent on developing, selling and
supporting next generation products and applications. If these new products are
not accepted in the markets as they are introduced, our revenues and
profitability will be negatively affected.
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,
- our relative inexperience in developing, marketing, selling
and supporting these products, and
- inability of these products to complement our legacy business.
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 Internet 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 with
advanced technologies since PCTEL was founded. We continue to develop and sell
advanced analog modem products in order to remain competitive in our core
business.
The market for high speed Internet connectivity is also characterized
by rapidly changing technologies and strong competition, such as broadband and
wireless solutions, which provide higher modem speeds and faster Internet
access. While these alternative technologies offer much faster data rates, they
are comparatively more costly than analog modems. They are also not as widely
available in the world markets. We will continue to evaluate, develop and
introduce technologically advanced products that will position us for possible
growth in the Internet access market. 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.
32
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, 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 COMMON STOCK
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. 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:
- actual or anticipated variations in quarterly operating
results,
- announcements of technological innovations,
- new products or services offered by us or our competitors,
- changes in financial estimates by securities analysts,
- conditions or trends in our industry,
- our announcement of significant acquisitions, strategic
partnerships, joint ventures or capital commitments,
- additions or departures of key personnel,
- mergers and acquisitions, and
- sales of common stock by us or our stockholders.
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 company's securities, securities class action litigation often has
been instituted against that 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.
33
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 $142,131 and
$263,000 unrealized holding gain as of March 31, 2003 and December 31, 2002,
respectively. 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. Our exposure to foreign exchange rate fluctuations 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 fluctuations for the three
months ended March 31, 2003 and year ended December 31, 2002 was $32,000 and
$35,000, respectively.
34
PCTEL, INC.
ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Within 90 days prior to the filing of this Quarterly Report on Form
10-Q (the "Evaluation Date"), we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based upon that
evaluation, our Chief Executive Officer and our Chief Financial Officer
concluded that our disclosure controls and procedures are effective to ensure
that material 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. It should be noted, however, that the design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
(b) Changes in internal controls.
Subsequent to the Evaluation Date, there have been no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of their last evaluation.
35
PCTEL, INC.
PART II. OTHER INFORMATION
FOR THE THREE AND THREE MONTHS ENDED: MARCH 31, 2003
ITEM 1 LEGAL PROCEEDINGS:
Ronald H. Fraser v. PC-Tel, Inc., Wells Fargo Shareowner Services,
Wells Fargo Bank Minnesota, N.A.
On 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
the Company, and for breach of contract, conversion, negligence and
declaratory relief against the 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 on June 12, 2002. On
July 10, 2002, the Company filed a Verified Answer to the Complaint,
denying Fraser's claims and asserting numerous affirmative defenses.
Wells Fargo and the Company have each filed Cross-complaints against
the other for indemnity. Wells Fargo also filed a Cross-complaint
against Fraser for indemnity and Fraser has filed a demurrer to the
Cross-Complaint. On November 18, 2002, the parties conducted mediation
but were unable to reach a settlement. A hearing on the demurrer as
well as a Case Management Conference occurred on May 6, 2003. The
judge took Fraser's motion under submission. Trial setting conference
has been scheduled for June 26, 2003.
We believe that we have meritorious defenses and intend to vigorously
defend the action. Because the action is still in its early stages, we
cannot at this time provide an estimate of the range of potential gain
or loss, or the probability of a favorable or unfavorable outcome.
Litigation with 3Com
On March 5, 2003, we filed in the U.S. District Court for the Northern
District of California a patent infringement lawsuit against 3Com
Corporation. Our lawsuit against 3Com Corporation alleges infringement
by 3Com Corporation of one of our patents and asks for a declaratory
judgment that certain 3Com patents are invalid and not infringed. On
April 7, 2003, 3Com filed a motion to dismiss our lawsuit, or in the
alternative, to transfer venue to the Northern District of Illinois.
3Com's motion is scheduled for hearing on June 10, 2003.
On March 4, 2003, 3Com filed in the U.S. District Court for the
Northern District of Illinois a patent infringement lawsuit against us
claiming that our HSP modem products infringe certain 3Com patents, and
amended its complaint to ask for a declaratory judgment that one of our
patents is invalid and not infringed. The patents that are the subject
of 3Com's amended complaint and our complaint are the same patents. On
April 11, 2003, we filed a motion to transfer venue to the Northern
District of California. On April 16, 2003, we answered 3Com's amended
complaint. The court has ruled that it will issue its decision by mail
on the motion to transfer after May 6, 2003, on which date we filed our
motion to transfer venue reply brief.
We believe that we have meritorious claims and defenses in our dispute
with 3Com. 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 this lawsuit.
ITEM 5 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
36
services are defined as services other than those provided in
connection with an audit or a review of the financial statements of a
company. Our audit committee has approved the engagement of PwC for
non-audit services in 2003 relating to, among other things, acquisition
due diligence, liquidation of subsidiaries, tax consultation, and our
internal controls.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation
S-K)
Exhibit
Number Description
------- -----------
99.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- --------------
(b) Reports on Form 8-K:
Form 8-K was filed on March 20, 2003 to the Securities and
Exchange Commission related to our acquisition of the assets
of Dynamic Telecommunications, Inc. on March 12, 2003.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PCTEL, Inc.
Delaware Corporation
May 8, 2003 By: /s/ JOHN SCHOEN
-----------------------------------------
John Schoen
Chief Operating Officer and Chief Financial Officer
(Principal Financial and Accounting Officer)
38
I, Martin H. Singer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PCTEL, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 8, 2003
/s/ MARTIN H. SINGER
--------------------------
Martin H. Singer
Chief Executive Officer
39
I, John Schoen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PCTEL, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 8, 2003
/s/ JOHN SCHOEN
---------------------------------
John Schoen
Chief Operating Officer and Chief Financial Officer
40