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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, 2005
[ ] 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
Incorporation or Organization) Identification Number)
8725 W. HIGGINS ROAD, SUITE 400, 60631
CHICAGO IL (Zip Code)
(Address of Principal Executive Office)
(773) 243-3000
(Registrant's Telephone Number, Including Area Code)
_______________
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Indicate by a check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]
As of May 2, 2005, the number of shares of the Registrant's common stock
outstanding was 20,790,908.
================================================================================
PCTEL, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2005
PAGE
----
PART I
Item 1 Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to the Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition 17
And Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk 30
Item 4 Controls and Procedures 31
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 33
Item 5 Other Information 34
Item 6 Exhibits 35
Signature
2
PCTEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS)
MARCH 31, DECEMBER 31,
2005 2004
---------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 83,769 $ 83,887
Restricted cash............................................................. 208 208
Accounts receivable, net of allowance for doubtful
accounts of $408 and $456, respectively.................................. 10,713 10,819
Inventories, net............................................................ 8,842 8,554
Prepaid expenses and other assets........................................... 2,939 2,969
---------- ------------
Total current assets................................................ 106,471 106,437
PROPERTY AND EQUIPMENT, net................................................... 10,293 9,746
GOODWILL...................................................................... 14,114 14,114
OTHER INTANGIBLE ASSETS, net.................................................. 10,745 11,628
OTHER ASSETS.................................................................. 167 180
---------- ------------
TOTAL ASSETS.................................................................. $ 141,790 $ 142,105
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................ $ 2,247 $ 1,085
Income taxes payable........................................................ 5,635 5,692
Deferred revenue............................................................ 1,839 1,738
Other accrued liabilities................................................... 9,747 10,151
---------- ------------
Total current liabilities........................................... 19,468 18,666
Long-term accrued liabilities............................................... 693 516
---------- ------------
Total liabilities................................................... 20,161 19,182
---------- ------------
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 100,000,000 shares
authorized, 21,191,708 and 20,620,145 shares issued and
outstanding at March 31, 2005 and December 31, 2004, respectively........
21 21
Additional paid-in capital.................................................. 164,613 160,180
Deferred stock compensation................................................. (7,814) (4,422)
Accumulated deficit......................................................... (35,256) (32,939)
Accumulated other comprehensive income...................................... 65 83
---------- ------------
Total stockholders' equity.......................................... 121,629 122,923
---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $ 141,790 $ 142,105
========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
PCTEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
2005 2004
---------- ----------
REVENUES.................................................................... $ 15,008 $ 10,690
COST OF REVENUES (includes non-cash compensation of $2 and $0, respectively) 7,570 3,769
---------- ----------
GROSS PROFIT................................................................ 7,438 6,921
OPERATING EXPENSES:
Research and development (includes non-cash compensation of $50 and $25, 2,470 2,056
respectively.............................................................
Sales and marketing (includes non-cash compensation of $133 and $67, 3,115 3,001
respectively)............................................................
General and administrative (includes non-cash compensation of $477 and 4,167 3,393
$218, respectively)......................................................
Amortization of intangible assets........................................ 883 711
Restructuring charges.................................................... -- (51)
Gain on sale of assets and related royalties............................. (500) (500)
---------- ----------
Total operating expenses................................................. 10,135 8,610
---------- ----------
LOSS FROM OPERATIONS........................................................ (2,697) (1,689)
---------- ----------
OTHER INCOME, NET........................................................... 541 239
---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES............................. (2,156) (1,450)
PROVISION (BENEFIT) FOR INCOME TAXES........................................ 161 (982)
---------- ----------
NET LOSS.................................................................... $ (2,317) $ (468)
========== ==========
Basic loss per share........................................................ $ (0.12) $ (0.02)
Shares used in computing basic loss per share............................... 19,554 19,901
Diluted loss per share...................................................... $ (0.12) $ (0.02)
Shares used in computing diluted loss per share............................. 19,554 19,901
The accompanying notes are an integral part of these consolidated financial
statements.
4
PCTEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
2005 2004
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $ (2,317) $ (468)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization............................ 1,231 939
Amortization of stock-based compensation................. 662 310
Gain on sale of assets and related royalties............. (500) (500)
Provision for allowance for doubtful accounts............ 29 --
Changes in operating assets and liabilities, net of
acquisitions:
Decrease in accounts receivable.......................... 77 322
(Increase) decrease in inventories....................... (288) 33
(Increase) decrease in prepaid expenses, other current
assets, and other assets................................. 43 (1,147)
Increase (decrease) in accounts payable.................. 1,162 (182)
Decrease in income taxes payable......................... (57) (1,924)
Tax benefit from stock option exercises.................. -- 433
Decrease in other accrued liabilities.................... (687) (1,026)
Increase (decrease) in deferred revenue.................. 560 (590)
-------- ---------
Net cash used in operating activities.................. (85) (3,800)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment............ (895) (443)
Proceeds from disposal of property and equipment........... -- 3
Proceeds on sale of assets and related royalties........... 500 500
Proceeds of available-for-sale investments................. -- 8,006
Purchase of assets/businesses, net of cash acquired........ -- (17,777)
-------- ---------
Net cash used in investing activities.................... (395) (9,711)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock..................... 380 3,498
-------- ---------
Net cash provided by financing activities................ 380 3,498
-------- ---------
Net decrease in cash and cash equivalents.................... (100) (10,013)
Cumulative translation adjustment............................ (18) 2
Cash and cash equivalents, beginning of period............... 83,887 106,007
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................... $ 83,769 $ 95,996
======== =========
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:
Increases to deferred stock compensation, net.............. $ 3,392 $ 2,358
Issuance of restricted common stock, net of
cancellations............................................ $ 3,852 $ 2,668
The accompanying notes are an integral part of these consolidated financial
statements.
5
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED: MARCH 31, 2005
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
PCTEL was incorporated in California in 1994 and reincorporated in
Delaware in 1998. PCTEL provides wireless connectivity products and technology
to wireless carriers, aggregators of Internet connectivity, wireless Internet
service providers (WISP's), PC OEM's, and wireless equipment manufacturers. The
company brings together expertise in RF platform design, mobility software, and
hardware. PCTEL simplifies mobility, provides wireless intelligence, and
enhances wireless performance. Additionally, the company licenses both patented
and proprietary access technology, principally related to analog modems, to
modem solution providers.
The company principally operates in four business segments.
Antenna Products Group
The Antenna Products Group (APG) product line consists of wireless
communication antennas designed to enhance the performance of broadband
wireless, in-building wireless, wireless Internet service providers and Land
Mobile Radio (LMR) applications. The Antenna Products Group was formed around
the business of MAXRAD, Inc, which was acquired in January 2004. As a result of
the October 2004 acquisition of certain antenna product lines from Andrew
Corporation ("Andrew Corporation"), APG expanded the product line to include GPS
(Global Positioning Systems), satellite communications (Mobile SATCOM) and
on-glass mobile antennas.
RF Solutions Group
The RF Solutions Group (RFSG) product line consists of software-defined
radio products designed to measure and monitor cellular networks. The RF
Solutions Group was formed around the business of Dynamic Telecommunications,
Inc. ("DTI"), which was acquired in March 2003. The technology is sold in three
forms; as OEM radio frequency receivers, as integrated systems solutions, and as
components and systems to integrators for U.S. government agencies.
Mobility Solutions Group
The Mobility Solutions Group (MSG) produces Wi-Fi and Cellular Mobility
Software products. This family of solutions simplifies access to both wired and
wireless data networks.
Licensing
PCTEL has an intellectual property portfolio consisting of over 130 U.S.
patents and applications, primarily in analog modem technology. It also has
proprietary DSP based embedded modem technology. Independent of the three
product lines, the company has an active licensing program designed to monetize
its intellectual property.
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.
BASIS OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION
The company uses the United States dollar as the functional currency for
the financial statements, including the financial statements of the subsidiaries
in foreign countries, with the exception of the Japanese subsidiary for which
the functional currency is the Japanese Yen. Assets and liabilities of the
Japanese operations are translated to U.S. dollars at the exchange rate in
effect at the applicable balance sheet date, and revenues and expenses are
translated using average exchange rates prevailing during that period.
Translation gains (losses) of the Japanese subsidiary are recorded in
accumulated other comprehensive income as a component of stockholders' equity.
All gains and losses resulting from other transactions originally in foreign
currencies and then
6
translated into U.S. dollars are included in net income. At March 31, 2005 the
cumulative translation adjustment was negative $18,000. As of March 31, 2005,
the company had subsidiaries in China, Japan and Israel as well as branch
offices in Hong Kong and Taiwan. The branch office in Taiwan is in the process
of being liquidated. These consolidated financial statements include the
accounts of PCTEL and its subsidiaries after eliminating intercompany accounts
and transactions.
INVENTORIES
Inventories are stated at the lower of cost or market and include
material, labor and overhead costs using the FIFO method of costing. Inventories
as of March 31, 2005 were composed of raw materials, sub assemblies, finished
goods and work-in-process. Sub assemblies are included within raw materials. The
company regularly monitors inventory quantities on hand and, based on the
current estimated requirements, it was determined that any excess inventory was
reserved as of March 31, 2005. Due to competitive pressures and technological
innovation, there may be excess inventory in the future. As of March 31, 2005
and December 31, 2004, the allowance for inventory losses was $0.4 million
Inventories consist of the following (in thousands):
MARCH 31, DECEMBER 31
2005 2004
--------- -----------
Raw materials................ $ 6,864 $ 6,868
Work in process.............. 305 131
Finished goods............... 1,673 1,555
--------- -----------
Inventories, net........... $ 8,842 $ 8,554
========= ===========
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets. The company
depreciates computers over three years, office equipment and manufacturing
equipment over five years, furniture and fixtures over seven years, and
buildings over 30 years. Leasehold improvements are amortized over the shorter
of the corresponding lease term or useful life.
Property and equipment consists of the following (in thousands):
MARCH 31, DECEMBER 31
2005 2004
--------- -----------
Building............................................. $ 4,365 $ 4,365
Land................................................. 2,820 2,820
Computer and office equipment........................ 1,988 1,953
Manufacturing Equipment.............................. 2,216 1,847
Furniture and fixtures............................... 252 242
Leasehold improvements............................... 19 18
Construction in progress............................. 597 119
--------- -----------
Total property and equipment....................... 12,257 11,364
Less: Accumulated depreciation and amortization...... (1,964) (1,618)
--------- -----------
Property and equipment, net........................ $ 10,293 $ 9,746
========= ===========
Construction in progress relates to the building improvements for the APG
facility in Bloomingdale, Illinois purchased in November 2004. On April 8, 2005,
the company entered into a purchase agreement to sell its manufacturing facility
in Hanover Park, Illinois. See subsequent event footnote 11.
REVENUE RECOGNITION
The company sells antenna products, software defined radio products, and
licenses the modem technology through the licensing program. The company records
the sale of these products, including related maintenance, and the licensing of
the intellectual property as revenue.
In accordance with SAB No. 104, the company recognizes revenue when the
following criteria are met: persuasive evidence of
7
an arrangement exists, delivery has occurred or services have been rendered,
price is fixed and determinable, and collectibility is reasonably assured. The
company recognizes revenue for sales of the antenna products and software
defined radio products, when title transfers, which is generally upon shipment
from the factory. PCTEL sells these products into both commercial and secure
application government markets. Title for sales into the commercial markets
generally transfer upon shipment from the factory. Products that are sold into
the secure application government market are generally designed to a unique
specification. Title for sales into the government markets generally does not
transfer until acceptance for the first units and then upon shipment thereafter.
Revenue is recognized for antenna products sold to major distributors upon
shipment from the factory. The company allows its major antenna product
distributors to return product under specified terms and conditions. The company
accrues for product returns in accordance with FAS 48, "Revenue Recognition When
Right of Return Exists".
The company recognizes revenue from the Wi-Fi and cellular mobility
software, including related maintenance rights, under SOP 97-2 Software Revenue
Recognition. If the software license is perpetual and vendor specific objective
evidence can be established for the software license and any related maintenance
rights, the software license revenue is recognized upon delivery of the software
and the maintenance is recorded pro-rata over the life of the maintenance
rights. If part of the licensing agreement requires engineering services to
customize software for the customer needs, the revenue for these services is
recognized when the initial software license is delivered. If vendor specific
objective evidence cannot be established, and the only undelivered item is
maintenance, the software license revenue, the revenue associated with
engineering services, if applicable, and the related maintenance rights are
combined and recognized pro-rata over the expected term of the maintenance
rights. If vendor specific evidence cannot be established on any of the
non-maintenance elements, the revenue is recorded pro-rata over the life of the
contractual obligation.
The company records intellectual property licensing revenue when; it has a
licensing agreement, the amount of related royalties is known for the accounting
period reported, and collectibility is reasonably assured. Knowledge of the
royalty amount specific to an accounting period is either in the form of a
royalty report specific to a quarter, a contractual fixed payment in the license
agreement specific to a quarter, or the pro-rata amortization of a fixed payment
related to multiple quarters over those quarters using the operating lease
method. If a license agreement provides for a fixed payment related to periods
prior to the license effective date (the past) and volume-based royalties going
forward, the fixed payment is recognized at the license effective date and the
volume based royalties are recognized as royalty reports are received. If the
license provides for a fixed payment for the past and for a finite future
period, to be followed by volume based royalties thereafter, the fixed payment
is recorded under the operating lease method and recognized pro-rata from the
effective date through the end of the period covered by the fixed payment. If a
one-time license payment is made for a perpetual license, with no future
obligations on behalf of us, revenue is recognized under the capitalized lease
method upon the effective date.
There is one exception to the recognition of intellectual property
licensing as revenue. The company signed a licensing agreement with Conexant
Systems, Inc. ("Conexant") simultaneously with the sale of its HSP modem product
line to Conexant in 2003. Because the HSP modem product line also requires a
license to the company's patent portfolio, the gain on sale of the product line
and the licensing stream are not separable for accounting purposes. Ongoing
royalties from Conexant are presented in the income statement as Gain on Sale of
Assets and Related Royalties.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The company maintains an allowance for doubtful accounts for estimated
uncollectible accounts receivable. The allowance is based on the company's
assessment of known delinquent accounts, historical experience, and other
currently available evidence of the collectability and the aging of accounts
receivable. The company's total allowance for doubtful accounts was $0.4 and
$0.5 million at March 31, 2005 and December 31, 2004, respectively. The
provision for doubtful accounts is included in sales and marketing expense.
WARRANTIES AND SALES RETURNS
The company's Antenna Products segment allows its major distributors and
certain other customers to return unused product under specified terms and
conditions. In accordance with FAS 48, the company accrues for product returns
based on historical sales and return trends.
The company offers repair and replacement warranties of primarily two
years for Antenna products and one year for RF Solution products. At March 31,
2005 the company carried a warranty reserve of $92,000 for these products based
on historical sales and costs of repair and replacement trends.
8
INCOME TAXES
The company provides 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 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 deferred tax assets, which are not
likely to be realized.
STOCK-BASED COMPENSATION
The company accounts for its stock option plans using Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees",
whereby compensation cost for stock options is measured as the excess, if any,
of the fair market value of a share of the company's stock at the date of the
grant over the amount that must be paid to acquire the Stock. SFAS No. 123,
"Accounting for Stock-Based Compensation", issued subsequent to APB No. 25 --
and amended by SFAS No. 148, "Accounting for Stock-Based Compensation --
Transition and Disclosure", defines a fair value based method of accounting for
employee stock options, but allows companies to continue to measure compensation
cost for employees using the intrinsic value method of APB No. 25. The following
table illustrates the pro forma information regarding net loss and net loss per
share as if the company recorded compensation expense based on the fair value of
stock-based awards in accordance with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock- Based Compensation -- Transition and
Disclosure" for the three months ended March 31, 2005 and 2004 (in thousands,
except per share data):
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
-------- --------
(UNAUDITED)
Net loss -- as reported....................................... $ (2,317) $ (468)
Add: Stock-based employee compensation expense included
in reported net loss ....................................... 662 310
Deduct: Stock-based employee compensation expense
determined under fair value based method for all
awards...................................................... 4,393 1,489
-------- -------
Net loss -- proforma.......................................... $ (6,048) $(1,647)
======== =======
Net loss per share -- basic as reported....................... $ (0.12) $ (0.02)
Net loss per share -- basic proforma.......................... $ (0.31) $ (0.08)
Net loss per share -- diluted as reported..................... $ (0.12) $ (0.02)
Net loss per share -- diluted proforma........................ $ (0.31) $ (0.08)
These costs may not be representative of the total effects on pro forma
reported income (loss) for future years. Factors that may also impact
disclosures in future years include the attribution of the awards to the service
period, the vesting period of stock awards, timing of additional grants of stock
option awards and the number of shares granted for future awards.
On January 28, 2005, the Compensation Committee of the Board of Directors
of PCTEL, Inc. approved the acceleration of vesting of all unvested options to
purchase shares of common stock of PCTEL that are held by current employees,
including executive officers, and which have an exercise price per share equal
to or greater than $10.00. The stock based compensation expense for all awards
includes approximately $3.8 million in compensation expense related to the
acceleration of the underwater options. See footnote 2 on acceleration of
underwater options.
The company 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:
EMPLOYEE STOCK
STOCK OPTIONS PURCHASE PLAN
------------- -------------
2005 2004 2005 2004
---- ---- ---- ----
Dividend yield................... None None None None
Expected volatility.............. 36% 46% 36% 46%
Risk-free interest rate.......... 3.6% 2.1% 3.4% 1.0%
Expected life (in years)......... 2.23 3.07 0.5 0.5
9
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 the company's 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 the employee stock options.
EARNINGS PER SHARE
The company computes 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/(net loss) 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 common stock and common stock equivalents outstanding. Common
stock equivalents consist of stock options using the treasury stock method.
Common stock options are excluded from the computation of diluted earnings per
share if their effect is anti-dilutive. The weighted average common stock option
grants excluded from the calculations of diluted net loss per share were 337,000
and 1,043,000 for the quarters ended March 31, 2005 and March 31, 2004,
respectively.
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, 2005 and 2004, respectively (in thousands, except
per share data):
THREE MONTHS ENDED
MARCH 31,
--------------------
Numerator: 2005 2004
-------- --------
Net loss................................................... $ (2,317) $ (468)
======== ========
Denominator:
Basic loss per share:
Weighted average common shares outstanding............... 20,646 20,532
Less: Weighted average shares subject to repurchase...... (1,092) (631)
-------- --------
Weighted average common shares outstanding............... 19,554 19,901
-------- --------
Basic loss per share....................................... $ (0.02) $ (0.12)
======== ========
Diluted loss per share:
Weighted average common shares outstanding............... 19,554 19,901
Weighted average shares subject to repurchase............ * *
Weighted average common stock option grants.............. * *
Weighted average common shares and common stock
Equivalents outstanding............................... 19,554 19,901
-------- --------
Diluted loss per share..................................... $ (0.12) $ (0.02)
======== ========
* These amounts have been excluded since the effect is anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued FAS No. 123R, "Share-Based Payment". The
statement addresses the accounting for transactions in which an enterprise
receives employee services in exchange for (a) equity instruments of the
enterprise or (b) liabilities that are based on the fair value of the
enterprises equity instruments or that may be settled by the issuance of such
equity instruments. FAS No. 123R is effective no later than annual reporting
periods after June 15, 2005. The company will adopt FAS No. 123R on a
prospective basis starting in the first quarter of 2006. See footnote 2 on
acceleration of underwater options.
In December 2004, the FASB issued Staff Positions in relation to FAS No.
109, "Accounting for Income Taxes". FASB issued FSP FAS 109-1, "Application of
FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004". FASB issued FSP FAS 109-2, "Accounting and Disclosure Guidance for the
Foreign Repatriation Provision within the American Jobs Creation Act of 2004.
The
10
company has not yet completed the assessment of earnings of foreign subsidiaries
that might be repatriated. At this time the company does not expect to
repatriate the earnings of our foreign subsidiaries as dividends to take
advantage of this tax credit.
In November 2004, FASB issued FAS No. 151, "An Amendment of ARB No. 43,
Chapter 4". The statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). FAS
No. 151 is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The company will adopt FAS 151 in fiscal 2006. Adoption of
FAS No. 151 is not expected to have a material effect on the ongoing operations
of the company.
2. ACCELERATION OF UNDERWATER OPTIONS
On January 28, 2005, the Compensation Committee of the Board of Directors
of PCTEL, Inc. approved the acceleration of vesting of all unvested options to
purchase shares of common stock of PCTEL that are held by current employees,
including executive officers, and which have an exercise price per share equal
to or greater than $10.00.
Options to purchase 1,606,805 shares of common stock were accelerated
under this plan. Option holders of 40,981 shares did not request acceleration of
their shares. The company accelerated these options because the options have
exercise prices at or in excess of current market value, and are not fully
achieving their original objectives of incentive compensation and employee
retention. The Company expects the acceleration may have a positive effect on
employee morale, retention, and perception of value. The acceleration also
eliminates any future compensation expense the Company would otherwise recognize
in its income statement with respect to these options with the implementation of
FAS 123R, which becomes effective for annual reporting periods after June 15,
2005. The future expense eliminated as a result of the acceleration of the
vesting of these options is approximately $3.8 million.
See footnote 1 related to stock-based compensation. The pro-forma net loss
and pro-forma net loss per share for the quarter ended March 31, 2005 includes
the $3.8 million impact of the acceleration of the underwater options. There was
no income statement impact related to the acceleration of options for the
quarter ended March 31, 2005.
3. STOCK-BASED COMPENSATION EXPENSE
The company records the amortization of deferred compensation and stock
bonuses within the functional expense lines of the income statement. In
connection with the grant of restricted stock to employees, the company records
deferred stock compensation representing the fair value of the common stock on
the date the restricted stock is granted. Such amount is presented as a
reduction of stockholders' equity and is amortized ratably over the vesting
period of the applicable shares. In the quarter ending March 31, 2005, the
company recorded deferred compensation of $3.9 million and amortization of
deferred compensation of $0.4 million.
The bonuses for the company's 2005 Short-Term Bonus Incentive Plan will be
paid in shares of the company's common stock. The shares will be issued in the
first quarter of 2006. The company recorded stock-based compensation expense of
$0.2 million for the executive incentive plan in the quarter ended March 31,
2005.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board 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
September 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. The company adopted SFAS No. 142
on January 1, 2002 at which time the company ceased amortization of goodwill.
The provisions of SFAS No. 142 are effective for fiscal years beginning after
December 15, 2001 and must be applied to all goodwill and other intangible
assets that are recognized in an entity's balance sheet at the beginning of that
fiscal year. An independent valuation firm conducted the annual impairment test
as of October 31, 2004, the result of which was that there was no impairment of
goodwill or other intangibles.
11
There was no goodwill impairment during the three months ended March 31,
2005. The changes in the carrying amount of other intangible assets as of March
31, 2005 were as follows (in thousands):
INTANGIBLE ASSETS MARCH 31, 2005 DECEMBER 31, 2004 ASSIGNED LIFE
- ------------------------------------------------------------------- -------------- ----------------- -------------
Developed technology- cyberPIXIE $ 301 $ 301 3 years
Other intangible assets- DTI 4,600 4,600 2 to 4 years
Patents 75 75 15 years
Other intangible assets- MAXRAD 5,500 5,500 1 to 6 years
Trademark- MAXRAD 1,400 1,400 8 years
Other Intangible Assets - Andrew Corporation acquired product lines 3,500 3,500 1 to 6 years
Trademarks - Andrew Corporation acquired product lines 300 300 8 years
---------- -----------------
$ 15,676 $ 15,676
---------- -----------------
Less: Accumulated amortization $ (4,931) $ (4,048)
---------- -----------------
Net intangible assets $ 10,745 $ 11,628
---------- -----------------
COMPREHENSIVE INCOME
The following table provides the calculation of other comprehensive income
for the three months ended March 31, 2005 and 2004 (in thousands):
THREE MONTHS ENDED
MARCH 31,
--------------------
2005 2004
------- --------
(UNAUDITED)
Net loss $(2,317) $ (468)
Other comprehensive income:
Unrealized gains (loss) on available-for-sale securities -- (15)
Cumulative translation adjustment (18) 2
------- --------
Comprehensive loss $(2,335) $ (481)
======= ========
5. RESTRUCTURING CHARGES
2004 Restructuring
In October 2004, the company closed several offices related to its Soft AP
product line. The amount charged to restructuring for severance costs in
California and Taiwan as well as costs associated with the closure of the Taiwan
branch office was $0.1 million. The company paid most of these expenses in 2004.
The company expects to pay all remaining costs by the end of the third quarter
of 2005.
2003 Restructuring
In May 2003, the company completed the sale of certain of its assets to
Conexant relating to a component of PCTEL's HSP modem product line. As a result
of the disposition, 29 employees were transferred to Conexant. An additional 26
employees, both foreign and domestic, were terminated along with the related
facilities closures. The total restructuring aggregated $3.3 million consisting
of severance and employment related costs of $1.8 million and costs related to
closure of excess facilities as a result of the reduction in force of $1.5
million. The company expects to pay the remaining costs by the end of the first
quarter of 2006.
During the quarter ended March 31, 2005, there were no expenses recorded
in the income statement related to the restructuring plans established in 2003
and 2004. The company paid $0.2 million for primarily facility related costs in
the quarter ended March 31, 2005. The credit to restructuring in the quarter
ended March 2004 related to an adjustment of the restructuring reserve taken in
2003.
12
The following analysis sets forth the rollforward of this charge:
ACCRUAL ACCRUAL
BALANCE AT BALANCE AT
DECEMBER 31, RESTRUCTURING MARCH 31,
2004 CHARGES, NET PAYMENTS 2005
------------ ------------- -------- ----------
Severance and employment related costs $ 47 $ $ 44 $ 3
Costs for closure of excess facilities 575 8 110 473
------------ ------------- -------- ----------
$ 622 $ 8 $ 154 $ 476
============ ============= ======== ==========
Amount included in long-term liabilities $ 0
----------
Amount included in short-term liabilities $ 476
==========
6. CONTINGENCIES
In the past the company has, from time to time, received correspondence from
third parties, and may in the future receive communications from third parties
asserting that the company's products infringe on their intellectual property
rights, that the patents are unenforceable, or that the company has
inappropriately licensed the intellectual property to third parties. These
claims may increase as the company's intellectual property portfolio becomes
larger. These claims could affect the company's relationships with existing
customers and may prevent potential future customers from purchasing the
company's products or licensing its technology. Intellectual property claims
against the company and any follow-on lawsuit may result in the company
incurring significant expenses and could subject the company to liability for
damages and invalidate the company's 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 the company to enter into royalty or licensing
agreements on terms which may not be acceptable to the company. In the event
that PCTEL does not prevail in such litigation, the company could be prevented
from selling or licensing the company's products. PCTEL could also be required
to pay substantial monetary damages.
Ronald H. Fraser v. PC-Tel, Inc., Wells Fargo Shareowner Services, Wells Fargo
Bank Minnesota, N.A
In March, 2002, plaintiff Ronald H. Fraser ("Fraser") filed a complaint in the
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.
The Complaint seeks compensatory damages allegedly suffered by Fraser as a
result of the sale of certain stock by Fraser during a secondary offering in
April, 2000. At a mandatory settlement conference held in September, 2004,
Fraser stipulated to judgment in favor of the company. In November, 2004 Fraser
appealed the judgment entered against him. The company believes that this appeal
is without merit and intends to defend the appeal vigorously.
Litigation with U.S. Robotics
In May, 2003, the company filed in the U.S. District Court for the Northern
District of California a patent infringement lawsuit against U.S. Robotics
Corporation ("USR") claiming that USR has infringed one of the company's
patents. USR counterclaimed asking for a declaratory judgment that the claims of
the patent are invalid and not infringed. This case was consolidated for claims
construction discovery with the lawsuit against Agere Systems and Lucent
Technologies, (and the now-concluded litigation with 3Com Corporation and
Broadcom Corporation). Claims construction discovery under the Patent Local
Rules has been taken and the claims construction issues have been briefed to the
Court. A hearing on the construction of the claims of the patent will be held
later this year. No trial date has been set. Although the company believes it
has meritorious claims and defenses, the company cannot predict or determine the
outcome or resolution of this proceeding or the potential range of loss, if any.
13
Litigation with Agere and Lucent
In May, 2003, the company filed in the U.S. District Court for the Northern
District of California a patent infringement lawsuit against Agere Systems and
Lucent Technologies claiming that Agere has infringed four of the company's
patents and that Lucent has infringed three of the company's patents. Agere
counterclaimed asking for a declaratory judgment that the claims of the patents
are invalid, unenforceable and not infringed by Agere. This case was
consolidated for claims construction discovery with the lawsuit against U.S.
Robotics Corporation (and the now-concluded litigation with 3Com Corporation and
Broadcom Corporation). Claims construction discovery under the Patent Local
Rules has been taken and the claims construction issues have been briefed to the
Court. A hearing on the construction of the claims of patents will be held later
this year. No trial date has been set. Although the company believes that it has
meritorious claims and defenses, the company cannot predict or determine the
outcome or resolution of this proceeding or the potential range of loss if any.
7. INCOME TAXES
For the quarter ending March 31, 2005, the company recorded tax expense of
$0.2 million, representing an effective tax rate of 7.5%. While the company
reported a net book loss before taxes of $2.2 million in the quarter ending
March 31, 2005, the company recorded tax expense because the company provides a
full valuation reserve on its deferred tax assets and has limited remaining tax
loss carry back available. In the first quarter 2004, the effective tax rate
differed from the statutory rate of 35% as the company recorded a benefit
because of the availability of loss carrybacks.
Significant management judgment is required to assess the likelihood that
the company's deferred tax assets will be recovered from future taxable income.
The company maintains a full valuation allowance against all the deferred tax
assets since 2001, as a result of uncertainties regarding realizability.
8. INDUSTRY SEGMENT, CUSTOMER AND GEOGRAPHIC INFORMATION
In January 2004 PCTEL began operating in four distinct segments. They are
Mobility Solutions (software), RF Solutions (test), Antenna Product (antenna),
and the Licensing segment. In May 2003, the company sold its modem product line
to Conexant. Intercompany sales and profits from Antenna Products to RF
Solutions are eliminated.
PCTEL's chief operating decision maker (CEO) uses only the below measures
in deciding how to allocate resources and assess performance among the segments.
The results of operations by segment are as follows:
(UNAUDITED) APG RFSG MSG LICENSING ELIMINATION CONSOLIDATED
- --------------------------------- ------- ------- ------- --------- ----------- ------------
THREE MONTHS ENDED MARCH 31, 2005
Revenue $10,321 $ 3,083 $ 1,122 $ 492 $ (10) $ 15,008
============
Gross Profit $ 3,546 $ 2,328 $ 1,080 $ 487 $ (3) $ 7,438
Operating Expenses $ 10,135
------------
Operating Loss $ (2,697)
============
(UNAUDITED) APG RFSG MSG LICENSING ELIMINATION CONSOLIDATED
- --------------------------------- ------- ------- ------- --------- ----------- ------------
THREE MONTHS ENDED MARCH 31, 2004
Revenue $ 5,112 $ 2,367 $ 1,118 $ 2,103 $ (10) $ 10,690
============
Gross Profit $ 2,137 $ 1,616 $ 1,085 $ 2,086 $ (3) $ 6,921
Operating Expenses $ 8,610
------------
Operating Loss $ (1,689)
============
14
The company's revenue to customers outside of the United States, as a percent of
total revenues, is as follows:
THREE MONTHS ENDED
MARCH 31,
------------------
(UNAUDITED)
2005 2004
---- ----
Europe....................... 9% 10%
Canada....................... 4% 5%
South & Central America...... 2% 6%
China & Hong Kong............ 2% 0%
Taiwan....................... 1% 2%
Other ....................... 3% 3%
---- ----
21% 26%
==== ====
Revenue to the company's major customers representing greater than 10% of total
revenues by segment for the three months ended March 31, 2005 and 2004 are as
follows:
APG
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------
CUSTOMER 2005 2004
- ----------- ---- ----
Tessco 19% 21%
Hutton 8% 10%
Cisco 6% 15%
---- ----
Total 33% 46%
RFSG
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------
CUSTOMER 2005 2004
- ------------------ ---- ----
Nemo Technologies 15% 4%
Ericcson Sweden 9% 35%
Andrew Corporation 9% 13%
Creative Marketing 4% 14%
---- ----
Total 37% 66%
MSG
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------
CUSTOMER 2005 2004
- --------------------- ---- ----
GoRemote 51% 0%
Cingular & Affiliates 22% 27%
Conexant 0% 22%
Broadcom 0% 20%
---- ----
Total 73% 69%
LICENSING
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------
CUSTOMER 2005 2004
- ------------ ---- ----
Silicon Labs 50% 37%
Smartlink 20% 12%
Ericsson 18% 0%
Broadcom 0% 37%
---- ----
Total 88% 86%
15
9. BENEFIT PLANS
401(k) Plan
The 401(k) plan covers all of the employees beginning the first of the
month following the month of their employment. Under this plan, employees may
elect to contribute up to 15% of their current compensation to the 401(k) plan
up to the statutorily prescribed annual limit. The company may make
discretionary contributions to the 401(k). The company made $145,000 and
$104,000 in employer contributions to the 401(k) plan for the quarters ended
March 31, 2005 and 2004, respectively.
Post-retirement health insurance
Effective July 2003, the company started a plan to cover post-retirement
health insurance for Martin H. Singer, Chairman of the Board and Chief Executive
Officer. Based on an actuarial valuation prepared by RSM McGladrey in accordance
with FAS 106, the company's accumulated post retirement benefit obligation for
this plan was $116,000 at March 31, 2005.
10. SUBSEQUENT EVENT
The company entered into a purchase agreement with Quintessence Publishing
Company, Inc. for the sale of the APG building in Hanover Park, Illinois in
exchange for cash payment of approximately $2.3 million. The company expects the
sale of the property to close in June 2005.
16
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. 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.
Such statements 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.
INTRODUCTION
PCTEL is focused on growing wireless revenue and maximizing the monetary
value of its intellectual property. The company reports revenue and gross profit
for the Antenna Products Group (APG), RF Solutions Group (RFSG), Mobility
Solutions Group (MSG), and Licensing as separate product segments.
Growth in wireless product revenue is dependent both on gaining further
revenue traction in the existing product profile as well as further acquisitions
to support the wireless initiatives. Revenue growth in the APG segment is tied
to emerging wireless applications in broadband wireless, in-building wireless,
wireless Internet service providers, GPS and Mobile SATCOM. The LMR and on-glass
mobile antenna applications represent mature markets. A critical factor for 2005
revenue growth is the successful absorption of the product lines purchased from
Andrew Corporation in October 2004 into APG. Revenue in the RFSG segment is tied
to the deployment of new wireless technology, such as 2.5G and 3G, and the need
for existing wireless networks to be tuned and reconfigured on a regular basis.
Revenue growth in the MSG segment is correlated to the success of data services
offered by the customer base. The company describes the roll out of such data
services to be in the early stage of market development.
Licensing revenue is dependent on the signing of new license agreements and the
success of the licensees in the marketplace. The company has found it necessary
to enter into litigation from time to time as a means to bring companies under
license. The company is currently in litigation with Agere, Lucent and U.S.
Robotics over the use of PCTEL's intellectual property. This litigation is the
single largest opportunity to maximize the monetary value of the company's
intellectual property. Licensing revenue is expected to decline due to the
expiration of existing licensing arrangements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(ALL AMOUNTS IN TABLES, OTHER THAN PERCENTAGES, ARE IN THOUSANDS)
REVENUES
APG RFSG MSG LICENSING ELIMINATION CONSOLIDATED
-------- ------- ------- --------- ----------- ------------
Three months ended March 31, 2005
Revenue $ 10,321 $ 3,083 $ 1,122 $ 492 $ 10) $ 15,008%
%change from year ago period 101.9% 30.2% 0.4% 76.6%) NA 40.4%
Three months ended March 31, 2004
Revenue $ 5,112 $ 2,367 $ 1,118 $ 2,103 $ (10) $ 10,690
% change from year ago period NA 317.5% 816.4% 9.9% NA (6.5%)
APG began operations with the purchase of MAXRAD in January 2004. Revenues
were supplemented in the fourth quarter of fiscal 2004 with the acquisition of
several product lines from Andrew Corporation in October 2004. Organic revenue
growth for
17
the non-Andrew acquired products was 14 % over last year. The organic growth was
largely driven by wireless broadband applications.
RFSG revenue was approximately $3.1 million in the quarter ended March 31,
2005, up approximately 30% from the comparable period in fiscal 2004. The
company expects the revenue in this segment to grow in fiscal 2005 from the roll
out of 2.5G and 3G technologies by wireless network operators, increased market
acceptance of its CLARIFY (TM) product line, and penetration of secure
government applications for its receiver technology. In the first quarter 2005,
the company benefited from a large order through one of its OEM customers that
is destined for the US Navy.
MSG revenue was about the same in the quarter ended March 31, 2005
compared to same period in 2004. The roll out of data services in the customer
base in fiscal 2005 is characterized as early stage market development. The
company expects revenue growth in fiscal 2005 commensurate with the success of
its customer base.
Licensing revenue declined approximately 77% in the quarter ended March
31, 2005 compared to the comparable period in fiscal 2004. Licensing revenue is
historically uneven, as licensing agreements often contain one-time settlements
for past infringement or perpetual licenses. This segment continues to be
affected by older licensing agreements related to modem technology. Absent
resolution to the litigations with Agere, Lucent, and U.S. Robotics, licensing
revenue is expected to be lower in fiscal 2005 compared to fiscal 2004 due to
the expiration of existing licensing arrangements.
Intercompany sales from APG to RFSG are eliminated in consolidation.
GROSS PROFIT
APG RFSG MSG LICENSING ELIMINATION CONSOLIDATED
-------- ------- ------- --------- ----------- ------------
THREE MONTHS ENDED MARCH 31, 2005
2005
Gross Profit $ 3,546 $ 2,328 $ 1,080 $ 487 $ (3) $ 7,438
Percentage of revenue 34.4% 75.5% 96.2% 99.0% NA 49.6%
% change from year ago period 65.9% 44.1% 0.5)% (76.7%) NA 7.5%
THREE MONTHS ENDED MARCH 31, 2004
Gross Profit $ 2,137 $ 1,616 $ 1,085 $ 2,086 $ (3) $ 6,921
Percentage of revenue 41.8% 68.3% 97.0% 99.2% NA 64.7%
% change from year ago period NA 269.8% 895.4% 9.0% NA 6.1%
Percentage of revenue
The company's product segments vary significantly from each other in gross
profit percent. The change in mix in the quarter ended March 31, 2005 reflects
the company's operation of the antenna product lines purchased from Andrew
Corporation since October 2004 and due to the decline in licensing revenue.
Gross profit as a percentage of revenue for APG was 34.4% in the fiscal
first quarter ended March 31, 2005, 7.4% lower than the comparable period in
fiscal 2004. Approximately 4.5% of this decline in gross profit percentage is
attributed to duplicative manufacturing costs related to the transfer of
manufacturing activities from Andrew Corporation to the PCTEL factory. This
transition was completed in March 2005. The remaining margin decline is due to
lower margins on the Andrew Corporation products versus the PCTEL historical
mix. Long-term gross profit is expected to be in the 38% to 39% range.
Gross profit as a percentage of revenue for RFSG was 75.5% in the first
quarter ended March 31, 2005. The favorable margin in the quarter is
attributable to higher OEM receiver and software option content compared to the
comparable period in fiscal 2004. The company expects long-term gross profit in
this segment to be between 67% and 72%.
Gross profit as a percentage of revenue for MSG was 96.2% in the quarter.
The cost of goods sold in the segment relates primarily to third party licenses
included in the Roaming Client product. The company expects long-term gross
profit in this segment to be between 96% and 98%.
Gross profit as a percentage of revenue for Licensing was 99.0% in the
quarter ended March 31, 2005.
18
RESEARCH AND DEVELOPMENT
THREE MONTHS THREE MONTHS
ENDED MARCH 31, 2005 ENDED MARCH 31, 2004
-------------------- --------------------
Research and development.......... $ 2,470 $ 2,056
Percentage of revenues............ 16.5% 19.2%
% change from year ago period..... 20.1% (5.3)%
Research and development expenses include costs for software and hardware
development, prototyping, certification and pre-production costs. All costs
incurred prior to establishing the technological feasibility of computer
software products to be sold are research and development costs and expensed as
incurred in accordance with FAS 86. No significant costs have been incurred
subsequent to determining the technological feasibility.
Research and development expenses increased approximately $0.4 million for
the quarter ended March 31, 2005 compared to the same period in fiscal 2004.
Engineering costs related to the integration of the product lines from Andrew
Corporation and increased investment for antenna and RFSG products were greater
than the reductions taken in the fourth quarter fiscal 2004 related to the Soft
AP and products within MSG.
SALES AND MARKETING
THREE MONTHS THREE MONTHS
ENDED MARCH 31, 2005 ENDED MARCH 31, 2004
-------------------- --------------------
Sales and Marketing............... $ 3,115 3,001
Percentage of revenues............ 20.8% 28.1%
% change from year ago period..... 3.8% 27.9%
Sales and marketing expenses include costs associated with the sales and
marketing employees, sales representatives, product line management, and trade
show expenses.
Sales and marketing expenses were slightly higher for the quarter ended
March 31,2005 compared to the same period in fiscal 2004. Increases in APG due
to the acquisition of the Andrew Corporation product line and year over year
antenna revenue growth offset decreases in trade show and other corporate
marketing expenses.
GENERAL AND ADMINISTRATIVE
THREE MONTHS THREE MONTHS
ENDED MARCH 31, 2005 ENDED MARCH 31, 2004
-------------------- --------------------
General and Administrative........ $ 4,167 3,393
Percentage of revenues............ 27.8% 31.7%
% change from year ago period..... 22.8% 68.6%
General and administrative expenses include costs associated with the
general management, finance, human resources, information technology, legal,
insurance, public company costs, and other operating expenses to the extent not
otherwise allocated to other functions.
General and administrative expenses increased approximately $0.8 million
for the quarter ended March 31, 2005 compared to the same period in fiscal 2004.
The increase is due to transition costs related to the Andrew products lines and
higher amortization of non-cash based stock compensation. The increase in stock
based compensation is driven by the company's decision to issue restricted
shares in fiscal 2005 in lieu of cash bonuses and stock options.
19
AMORTIZATION OF OTHER INTANGIBLE ASSETS
THREE MONTHS THREE MONTHS
ENDED MARCH 31, 2005 ENDED MARCH 31, 2004
-------------------- --------------------
Amortization of other intangible
assets............................ $ 883 711
Percentage of revenues............ 5.9% 6.7%
The amortization of intangible assets relates to the acquisition of
cyberPIXIE in 2002, DTI in 2003, MAXRAD in January 2004, and the antenna product
lines from Andrew Corporation in October 2004. The approximately $0.2 million
increase in amortization in the quarter ended March 31, 2005 is due to the full
quarter impact of the fourth quarter fiscal 2004 acquisition of the antenna
product lines from Andrew Corporation.
RESTRUCTURING CHARGES
THREE MONTHS THREE MONTHS
ENDED MARCH 31, 2005 ENDED MARCH 31, 2004
-------------------- --------------------
Restructuring Charges............. $ 0 $ (51)
Percentage of revenues............ 0.0% (0.5)%
During the quarter ended March 31, 2005, there were no expenses recorded
in the income statement related to the restructuring plans established in 2003
and fiscal 2004. The company paid $0.2 million for primarily facility related
costs in the quarter ending March 31, 2005. The credit to restructuring in the
quarter ended March 31, 2004 related to an adjustment of the restructuring
reserve taken in fiscal 2003.
GAIN ON SALE OF ASSETS AND RELATED ROYALTIES
THREE MONTHS THREE MONTHS
ENDED MARCH 31, 2005 ENDED MARCH 31, 2004
-------------------- --------------------
Gain on sale of assets and related
royalties......................... $ 500 $ 500
Percentage of revenues............ 3.3% 4.7%
The company received $0.5 million of royalty payments from Conexant during
the quarter ended March 31, 2005 and March 31, 2004, respectively.
OTHER INCOME, NET
THREE MONTHS THREE MONTHS
ENDED MARCH 31, 2005 ENDED MARCH 31, 2004
-------------------- --------------------
Other income, net................. $ 541 $ 239
Percentage of revenues............ 3.6% 2.2%
Other income, net, consists primarily of interest income. Other income,
net, increased for the quarter ended March 31, 2005 compared to the same period
in fiscal 2004 due to higher interest rates.
20
PROVISION (BENEFIT) FOR INCOME TAXES
THREE MONTHS THREE MONTHS
ENDED MARCH 31, 2005 ENDED MARCH 31, 2004
-------------------- --------------------
Provision (benefit) for income
taxes............................. $ 161 $ (982)
Effective tax rate................ 7.5% (67.7)%
The effective tax rate in the quarter ended March 31, 2005 differs from
the statutory rate of 35% because the company provides a full valuation reserve
on its deferred tax assets and has limited remaining tax loss carry back
available. In the quarter ended March 31, 2004, the effective tax rate differed
from the statutory rate of 35% as the company recorded a benefit because of the
availability of loss carrybacks.
LIQUIDITY AND CAPITAL RESOURCES
THREE MONTHS THREE MONTHS
ENDED MARCH 31, 2005 ENDED MARCH 31, 2004
-------------------- --------------------
Net cash used in operating activities...................................... $ (85) $ (3,800)
Net cash used in investing activities...................................... (395) (9,711)
Net cash provided by financing activities.................................. 380 3,498
Cash, cash equivalents and short-term investments at the end of period..... 83,977 107,152
Working capital at the end of period....................................... 87,003 101,106
The company used approximately $0.1 million of net cash in its operating
activities in the quarter ended March 31, 2005. The lower use of cash in the
quarter ended March 31, 2005 compared to the quarter ended March 31, 2004 is due
to an increase in accounts payable at March 31, 2005, and also because the
quarter ended March 31, 2004 included uses of cash related to prepaids, income
taxes payable, and accrued liabilities. The company used approximately $0.4
million of net cash in its investing activities, primarily related to capital
expenditures. The use of cash for investing activities was significantly lower
than the prior year as the MAXRAD acquisition occurred in the quarter ended
March 31, 2004. Financing activities includes approximately $0.4 million of
proceeds from issuance of common stock related to stock option exercises. Fewer
stock options were exercised in the quarter ended March 31, 2005 compared to the
quarter ended March 31, 2004.
As of March 31, 2005, the company had approximately $83.8 million in cash
and cash equivalents and working capital of approximately $87.0 million. The
decline in the cash balance compared to quarter ended March 31, 2004 is due to
the acquisition of the Andrew Corporation product lines, stock repurchases, and
capital expenditures
The company believes that the existing sources of liquidity, consisting of
cash and cash from operations, will be sufficient to meet the working capital
needs for the foreseeable future. The company will continue to evaluate
opportunities for development of new products and potential acquisitions of
technologies or businesses that could complement the business. The company may
use available cash or other sources of funding for such purposes.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following summarizes the contractual obligations (non-cancelable
operating leases) for office and product assembly facilities and the effect such
obligations are expected to have on the liquidity and cash flows in future
periods (in thousands):
LESS THAN
TOTAL 1 YEAR 1-3 YEARS
------- ---------- ---------
Contractual obligations
Operating leases......... $ 1,814 $ 1,042 $ 772
------- --------- ---------
Included in the obligation summary is a lease commitment of $0.5 million
for excess facilities. The total amount was accrued as part of previously
recorded restructuring expense. The company has no outstanding firm inventory
purchase contract commitments with major suppliers beyond near term needs.
21
The acquisition of DTI included an earn-out arrangement covering the
fiscal years 2003 and 2004. PCTEL had the option to settle any earnings under
the arrangement in either cash, shares of its common stock, or a combination of
both. For the year ended December 31, 2003, DTI earned a $1.5 million payment
under the arrangement that was paid in cash in May 2004. For the year ended
December 31, 2004, DTI earned a $0.6 million payment under the arrangement,
which the company paid in cash during April 2005.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
FAS No. 123R, "Share-Based Payment". The statement addresses the accounting for
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprises equity instruments or that may be settled by
the issuance of such equity instruments. FAS No. 123R is effective no later than
annual reporting periods ending after June 15, 2005. The company will adopt FAS
No. 123R on a prospective basis starting in the first quarter of fiscal 2006.
During January 2005 and in advance of the adoption of FAS No. 123R, the company
accelerated the vesting of "out of the money" options with a share price equal
to or greater than $10.00. Under FAS 123R, the acceleration of these options
will result in PCTEL not being required to recognize share-based compensation
expense of approximately $3.8 million beginning in the company's quarter ended
March 31, 2006 and ending in the company's quarter ending March 31, 2008. See
footnote 2 in the Notes to the Financial Statements.
In December 2004, the FASB issued Staff Positions in relation to FAS No.
109, "Accounting for Income Taxes". FASB issued FSP FAS 109-1, "Application of
FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004". FASB issued FSP FAS 109-2, "Accounting and Disclosure Guidance for the
Foreign Repatriation Provision within the American Jobs Creation Act of 2004.
The company has not yet completed the assessment of earnings of foreign
subsidiaries that might be repatriated. At this time the company does not expect
to repatriate the earnings of our foreign subsidiaries as dividends to take
advantage of this tax credit.
In November 2004, the FASB issued FAS No. 151, "An Amendment of ARB No.
43, Chapter 4". The statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). FAS
No. 151 is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The company will adopt FAS 151 in fiscal 2006. Adoption of
FAS No. 151 is not expected to have a material effect on the ongoing operations
of the company.
FACTORS THAT MAY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND FUTURE OPERATING
RESULTS
This quarterly report on Form 10-Q, including this Management's Discussion
and Analysis, contains forward-looking statements. These forward-looking
statements are subject to substantial risks and uncertainties that could cause
our future business, financial condition or results of operations to differ
materially from our historical results or currently anticipated results,
including those set forth below.
RISKS RELATED TO OUR BUSINESS
COMPETITION WITHIN THE WIRELESS CONNECTIVITY PRODUCTS INDUSTRIES IS INTENSE AND
IS EXPECTED TO INCREASE SIGNIFICANTLY. OUR FAILURE TO COMPETE SUCCESSFULLY COULD
MATERIALLY HARM OUR PROSPECTS AND FINANCIAL RESULTS.
The wireless products connectivity markets are intensely competitive. We
may not be able to compete successfully against current or potential
competitors. We expect competition to increase in the future as current
competitors enhance their product
22
offerings, new suppliers enter the wireless connectivity products markets, new
communication technologies are introduced and additional networks are deployed.
Our client software competes with software developed internally by Network
Interface Card (NIC) vendors, service providers for 802.11 networks, and with
software developed by large systems integrators. Increased competition could
materially and adversely affect our business and operating results through
pricing pressures, the loss of market share and other factors.
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 products markets, obtain more rapid market
acceptance for their products, or otherwise gain a competitive advantage. We can
offer no assurance that we will succeed in developing products or technologies
that are more effective than those developed by our competitors. We can offer no
assurance that we will be able to compete successfully against existing and new
competitors as the connectivity wireless markets evolve and the level of
competition increases.
OUR ABILITY TO GROW OUR BUSINESS MAY BE THREATENED IF THE DEMAND FOR WIRELESS
DATA SERVICES DOES NOT CONTINUE TO GROW.
Our ability to compete successfully in the wireless market is dependent on
the continued trend toward wireless telecommunications and data communications
services. If the rate of growth slows and service providers reduce their capital
investments in wireless infrastructure or fail to expand into new geographic
markets, our revenue may decline. Wireless data solutions are relatively
unproven in the marketplace and some of the wireless technologies have only been
commercially introduced in the last few years. We began offering wireless
products in the second quarter of fiscal 2002. If wireless data access
technology turns out to be unsuitable for widespread commercial deployment, we
may not be able to generate enough sales to achieve and grow our business. We
have listed below some of the factors that we believe are key to the success or
failure of wireless access technology:
- 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.
The factors listed above influence our customers' purchase decisions when
selecting wireless versus other high-speed data access technology. Future
legislation, legal decisions and regulation relating to the wireless
telecommunications industry may slow or delay the deployment of wireless
networks.
Wireless access solutions compete with other high-speed access solutions
such as digital subscriber lines, cable modem technology, fiber optic cable and
other high-speed wire line and satellite technologies. If the market for our
wireless solutions fails to develop or develops more slowly than we expect due
to this competition, our sales opportunities will be harmed. Many of these
alternative technologies can take advantage of existing installed infrastructure
and are generally perceived to be reliable and secure. As a result, they have
already achieved significantly greater market acceptance and penetration than
wireless data access technologies. Moreover, current wireless data access
technologies have inherent technical limitations that may inhibit their
widespread adoption in many areas.
We expect wireless data access technologies to face increasing competitive
pressures from both current and future alternative technologies. In light of
these factors, many service providers may be reluctant to invest heavily in
wireless data access solutions, including Wi-Fi. If service providers do not
continue to establish Wi-Fi "hot spots," we may not be able to generate sales
for our Wi-Fi products and our revenue may decline.
OUR WIRELESS BUSINESS IS DEPENDENT UPON THE CONTINUED GROWTH OF EVOLVING
TELECOMMUNICATIONS AND INTERNET INDUSTRIES.
23
Our future success is dependent upon the continued growth of the data
communications and wireless industries, particularly with regard to Internet
usage. The global data communications and Internet industries are relatively new
and evolving rapidly and it is difficult to predict potential growth rates or
future trends in technology development for this industry. The deregulation,
privatization and economic globalization of the worldwide telecommunications
market that have resulted in increased competition and escalating demand for new
technologies and services may not continue in a manner favorable to us or our
business strategies. In addition, the growth in demand for wireless and Internet
services, and the resulting need for high speed or enhanced data communications
products and wireless systems, may not continue at its current rate or at all.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND SUCCESSFULLY INTRODUCE
NEW AND ENHANCED PRODUCTS FOR THE WIRELESS MARKET, WHICH MEET THE NEEDS OF
CUSTOMERS.
Our revenue depends on our ability to anticipate our existing and
prospective customers' needs and develop products that address those needs. Our
future success will depend on our ability to introduce new products for the
wireless market, anticipate improvements and enhancements in wireless technology
and wireless standards, and to develop products that are competitive in the
rapidly changing wireless industry. Introduction of new products and product
enhancements will require coordination of our efforts with those of our
customers, suppliers, and manufacturers to rapidly achieve volume production. If
we fail to coordinate these efforts, develop product enhancements or introduce
new products that meet the needs of our customers as scheduled, our operating
results will be materially and adversely affected and our business and prospects
will be harmed. We cannot assure you that product introductions will meet the
anticipated release schedules or that our wireless products will be competitive
in the market. Furthermore, given the emerging nature of the wireless market,
there can be no assurance our products and technology will not be rendered
obsolete by alternative or competing technologies.
WE MAY EXPERIENCE INTEGRATION OR OTHER PROBLEMS WITH POTENTIAL ACQUISITIONS,
WHICH COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS OR RESULTS OF OPERATIONS. NEW
ACQUISITIONS COULD DILUTE THE INTERESTS OF EXISTING STOCKHOLDERS, AND THE
ANNOUNCEMENT OF NEW ACQUISITIONS COULD RESULT IN A DECLINE IN THE PRICE OF OUR
COMMON STOCK.
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, internal
accounting controls 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.
WE MAY NEVER ACHIEVE THE ANTICIPATED BENEFITS FROM OUR RECENT ACQUISITIONS OF
CERTAIN ASSETS OF ANDREW CORPORATION.
We acquired Andrew Corporation in October 2004 as part of our continuing
efforts to expand our wireless line and product offerings. We may experience
difficulties in achieving the anticipated benefits of this acquisition. This
acquisition represents a significant expansion for our Antenna Products Group.
Potential risks with this acquisition include:
24
- the loss or decrease in orders of one or more of the major
customers,
- decrease in demand for wireless devices that use these products,
- difficulties in assimilation of related personnel, operations,
technologies or products, and
- challenges in integrating internal accounting and financial controls
for financial reporting purposes.
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 portion of our sales from our software-based connectivity
products. We expect gross margins on newly introduced products generally to be
higher than our existing products. However, due in part to the competitive
pricing pressures that affect our products and in part to increasing component
and manufacturing costs, we expect gross margins from both existing and future
products to decrease over time. In addition, licensing revenues from our
intellectual property historically have provided higher margins than our product
sales. Changes in the mix of products sold and the percentage of our sales in
any quarter attributable to products as compared to licensing revenues could
cause our quarterly results to vary and could result in a decrease in gross
margins and net income.
ANY DELAYS IN OUR NORMALLY LENGTHY SALES CYCLES COULD RESULT IN CUSTOMERS
CANCELING PURCHASES OF OUR PRODUCTS.
Sales cycles for our products with major customers are lengthy, often
lasting nine months or longer. In addition, it can take an additional nine
months or more before a customer commences volume production of equipment that
incorporates our products. Sales cycles with our major customers are lengthy for
a number of reasons, including:
- our original equipment manufacturer customers and carriers usually
complete a lengthy technical evaluation of our products, over which
we have no control, before placing a purchase order,
- the commercial introduction of our products by an original equipment
manufacturer and carriers 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.
OUR REVENUES MAY FLUCTUATE EACH QUARTER DUE TO BOTH DOMESTIC AND INTERNATIONAL
SEASONAL TRENDS.
The connectivity products market is too new for us to be able to predict
seasonal revenue patterns. Such patterns are also true for wireless test and
measurements products, such as those produced by our RF Solutions Group, where
capital spending is involved.
We are currently expanding our sales in international markets,
particularly in Europe and Asia. To the extent that our revenues in Europe and
Asia or other parts of the world increase in future periods, we expect our
period-to-period revenues to reflect seasonal buying patterns in these markets.
WE 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 have limited manufacturing capability. For some product lines we
outsource the manufacturing, assembly, and testing of printed circuit board
subsystems. For other product lines, we purchase completed hardware platforms
and add our proprietary software. While there is no unique capability with these
suppliers, any failure by these suppliers to meet delivery commitments
25
would cause us to delay shipments and potentially be unable to accept new orders
for product.
In addition, in the event that these suppliers discontinued the
manufacture of materials used in our products, we would be forced to incur the
time and expense of finding a new supplier or to modify our products in such a
way that such materials were not necessary. Either of these alternatives could
result in increased manufacturing costs and increased prices of our products.
We assemble our APG products in our APG facilities located in Illinois and
China. We may experience delays, disruptions, capacity constraints or quality
control problems at our assembly facilities, which could result in lower yields
or delays of product shipments to our customers. In addition, we are having an
increasing number of our APG products manufactured in China via contract
manufacturers. Any disruption of our own or contract manufacturers' operations
could cause us to delay product shipments, which would negatively impact our
sales, competitive reputation and position. In addition, if we do not accurately
forecast demand for our products, we will have excess or insufficient parts to
build our product, either of which could seriously affect our operating results.
IN ORDER FOR US TO OPERATE AT A PROFITABLE LEVEL AND CONTINUE TO INTRODUCE AND
DEVELOP NEW PRODUCTS FOR EMERGING MARKETS, WE MUST ATTRACT AND RETAIN OUR
EXECUTIVE OFFICERS AND QUALIFIED TECHNICAL, SALES, SUPPORT AND OTHER
ADMINISTRATIVE PERSONNEL.
Our 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, 2005, we employed a total of 60 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 may be impaired.
FAILURE TO MANAGE OUR TECHNOLOGICAL AND PRODUCT GROWTH COULD STRAIN OUR
MANAGEMENT, FINANCIAL AND ADMINISTRATIVE RESOURCES.
Our ability to successfully sell our products and implement our business
plan in rapidly evolving markets requires an effective management planning
process. Future product expansion efforts could be expensive and put a strain on
our management by significantly increasing the scope of their responsibilities
and by increasing the demands on their management abilities. To effectively
manage our growth in these new technologies, we must enhance our marketing,
sales, research and development areas.
WE MAY BE SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY ASSOCIATED WITH
OUR WIRELESS BUSINESS AND THIS COULD BE COSTLY TO DEFEND AND COULD PREVENT US
FROM USING OR SELLING THE CHALLENGED TECHNOLOGY.
In recent years, there has been significant litigation in the United
States involving intellectual property rights. We have from time to time in the
past-received correspondence from third parties alleging that we infringe the
third party's intellectual property rights. We expect potential claims to
increase in the future, including with respect to our wireless business.
Intellectual property claims against us, and any resulting lawsuit, may result
in our incurring significant expenses and could subject us to significant
liability for damages and invalidate what we currently believe are our
proprietary rights. These lawsuits, regardless of their merits or success, would
likely be time-consuming and expensive to resolve and could divert management's
time and attention. This could have a material and adverse effect on our
business, results of operation, financial condition and prospects. Any potential
intellectual property litigation against us related to our wireless business
could also force us to do one or more of the following:
- cease selling, incorporating or using technology, 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, or
- redesign those products or services that incorporate the disputed
intellectual property, which could result in substantial
unanticipated development expenses.
If we are subject to a successful claim of infringement related to our
wireless intellectual property and we fail to develop non-infringing
intellectual property or license the infringed intellectual property on
acceptable terms and on a timely basis, operating
26
results could decline and our ability to grow and sustain our wireless business
could be materially and adversely affected. As a result, our business, financial
condition, results of operation and prospects could be impaired.
We may in the future initiate claims or litigation against third parties
for infringement of our intellectual property rights or to determine the scope
and validity of our proprietary rights or the proprietary rights of our
competitors. These claims could also result in significant expense and the
diversion of technical and management personnel's attention.
UNDETECTED SOFTWARE ERRORS OR FAILURES FOUND IN NEW PRODUCTS MAY RESULT IN A
LOSS OF CUSTOMERS OR A DELAY IN MARKET ACCEPTANCE OF OUR PRODUCTS.
Our products may contain undetected software errors or failures when first
introduced or as new versions are released. To date, we have not been made aware
of any significant software errors or failures in our products. However, despite
testing by us and by current and potential customers, errors may be found in new
products after commencement of commercial shipments, resulting in loss of
customers or delay in market acceptance.
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 international subsidiaries located in Japan, China and
Israel as well as international branch offices located in Hong Kong and Taiwan.
Our branch office in Taiwan is presently in the liquidation process. The
complexities resulting from operating in several different tax jurisdictions
increases our exposure to worldwide tax challenges.
RISKS RELATED TO OUR INDUSTRY
IF THE WIRELESS MARKET DOES NOT GROW AS WE ANTICIPATE, OR IF OUR WIRELESS
PRODUCTS ARE NOT ACCEPTED IN THESE MARKETS, OUR REVENUES MAY BE ADVERSELY
AFFECTED.
Our future success depends on market demand and growth patterns for
products using wireless technology. Our wireless products may not be successful
as a result of the intense competition in the wireless market.
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 wireless data access business is characterized by rapidly changing
technologies, short product life cycles and frequent new product introductions.
To remain competitive, we have successfully introduced several new products.
Both the cellular (2.5G and 3G) and Wi-Fi (802.11) spaces are rapidly
changing and prone to standardization. We will continue to evaluate, develop and
introduce technologically advanced products that will position us for possible
growth in the wireless data access market. If we are not successful in response
to rapidly changing technologies, our products may became obsolete and we may
not be able to compete effectively.
CHANGES IN LAWS OR REGULATIONS, IN PARTICULAR, FUTURE FCC REGULATIONS AFFECTING
THE BROADBAND MARKET, INTERNET SERVICE PROVIDERS, OR THE COMMUNICATIONS
INDUSTRY, COULD NEGATIVELY AFFECT OUR ABILITY TO DEVELOP NEW TECHNOLOGIES OR
SELL NEW PRODUCTS AND THEREFORE, REDUCE OUR PROFITABILITY.
The jurisdiction of the Federal Communications Commission, or FCC, extends
to the entire communications industry, including our customers and their
products and services that incorporate our products. Future FCC regulations
affecting the broadband access services industry, our customers or our products
may harm our business. For example, future FCC regulatory policies that affect
the availability of data and Internet services may impede our customers'
penetration into their markets or affect the prices that they are able to
charge. In addition, FCC regulatory policies that affect the specifications of
wireless data devices may impede certain of our customers' ability to
manufacture their products profitably, which could, in turn, reduce demand for
our products. Furthermore, international regulatory bodies are beginning to
adopt standards for the communications industry. Although our business has not
been hurt by any regulations to date, in the future, delays caused by our
compliance with regulatory
27
requirements may result in order cancellations or postponements of product
purchases by our customers, which would reduce our profitability.
RISKS RELATED TO OUR LICENSING PROGRAM
OUR ABILITY TO SUSTAIN OR GROW OUR REVENUE FROM THE LICENSING OF OUR
INTELLECTUAL PROPERTY IS SUBJECT TO MANY RISKS, AND ANY INABILITY TO
SUCCESSFULLY LICENSE OUR INTELLECTUAL PROPERTY COULD MATERIALLY AND ADVERSELY
AFFECT OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS.
We may not be able to sustain our revenue from the licensing of our
intellectual property. In addition to our wireless product lines, we offer our
intellectual property through licensing and product royalty arrangements. We
have over 130 U.S. patents granted or pending addressing both essential
International Telecommunications Union and non-essential technologies. In
connection with our intellectual property licensing efforts, we have filed
several patent infringement lawsuits and are aggressively pursuing unlicensed
companies to license their unauthorized use of our intellectual property. We
have pending patent infringement litigation claims with U.S. Robotics, Agere and
Lucent. We expect litigation to continue to be necessary to enforce our
intellectual property rights and to determine the validity and scope of the
proprietary rights of others. Because of the high degree of complexity of the
intellectual property at issue, the inherent uncertainties of litigation in
general and the preliminary nature of these litigation matters, we cannot assure
you that we will ultimately prevail or receive the judgments that we seek. We
may not be able to obtain licensing agreements from these companies on terms
favorable to us, if at all. In addition, we may be required to pay substantial
monetary damages as a result of claims these companies have brought against us
which could materially and adversely affect our business, financial condition
and operating results.
LITIGATION EFFORTS RELATED TO OUR LICENSING PROGRAM ARE EXPECTED TO BE COSTLY
AND MAY NOT ACHIEVE OUR OBJECTIVES.
Litigation such as our suits with U.S. Robotics, Agere and Lucent can take
years to resolve and can be expensive to pursue or defend. We currently expect
our intellectual property litigation costs to be within a range of $3.0 to $3.5
million in 2005, in the absence of any settlement. In addition, the allegations
and claims involved in these lawsuits, even if ultimately resolved in our favor,
could be time consuming to litigate and divert management attention. We may not
ultimately prevail in these matters or receive the judgments that we seek. We
could also face substantial monetary damages as a result of claims others bring
against us. In addition, courts' decisions on current pending and future motions
could have the effect of determining the ultimate outcome of the litigation
prior to a trial on the merits, or strengthen or weaken our ability to assert
claims and defenses in the future. Accordingly, an adverse judgment could
seriously harm our business, financial position and operating results and cause
our stock price to decline substantially.
WE EXPECT TO CONTINUE TO BE SUBJECT TO LITIGATION REGARDING INTELLECTUAL
PROPERTY CLAIMS RELATED TO OUR LICENSING PROGRAM WHICH COULD IMPAIR OUR ABILITY
TO GROW OR SUSTAIN REVENUES FROM OUR LICENSING EFFORTS.
As we continue to aggressively pursue licensing arrangements with
companies that are using our intellectual property without our authorization, we
expect to continue to be subject to lawsuits that challenge the validity of our
intellectual property or that allege that we have infringed third party
intellectual property rights. Any of these claims could results in substantial
damages against us and could impair our ability to grow and sustain our
licensing business. This could materially and adversely affect our business,
financial condition, operating results and prospects. As a result, at least in
part, of our licensing efforts to date, we are currently subject to claims from
Agere and Lucent regarding patent infringement matters of the nature described
above. We have also been subject to claims from others in the past regarding
similar matters. In addition, in recent years, there has been significant
litigation in the United States involving intellectual property rights. We
expect these claims to increase as our intellectual property portfolio becomes
larger. Intellectual property claims against us, and any resulting lawsuit, may
result in our incurring significant expenses and could subject us to significant
liability for damages and invalidate what we currently believe are our
proprietary rights. These lawsuits, regardless of their merits or success, would
likely be time-consuming and expensive to resolve and could divert management's
time and attention.
OUR ABILITY TO ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS MAY BE LIMITED, AND ANY
LIMITATION COULD ADVERSELY AFFECT OUR ABILITY TO SUSTAIN OR INCREASE REVENUE
FROM OUR LICENSING PROGRAM.
Our ability to sustain and grow revenue from the licensing of our
intellectual property is dependent on our ability to enforce
28
our intellectual property rights. Our ability to enforce these rights is subject
to many challenges and may be limited. For example, one or more of our pending
patents may never be issued. In addition, our patents, both issued and pending,
may not prove enforceable in actions against alleged infringers. U.S. Robotics,
Agere and Lucent have currently pending claims seeking to invalidate one or more
of our patents. If a court were to invalidate one or more of our patents, this
could materially and adversely affect our licensing program. Furthermore, some
foreign laws, including those of various countries in Asia, do not protect our
proprietary rights to the same extent as United States laws.
RISKS RELATED TO OUR COMMON STOCK
THE TRADING PRICE OF OUR STOCK PRICE MAY BE VOLATILE BASED ON A NUMBER OF
FACTORS, SOME OF WHICH ARE NOT IN OUR CONTROL.
The trading price of our common stock has been highly volatile. The common
stock price has fluctuated from a low of $6.70 to a high of $13.20 during the
past twelve months. Our stock price could be subject to wide fluctuations in
response to a variety of factors, many of which are out of our control,
including:
- announcements of technological innovations,
- new products or services offered by us or our competitors,
- actual or anticipated variations in quarterly operating results,
- outcome of ongoing intellectual property related litigations,
- 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 our stockholders or us.
In addition, the NASDAQ National Market, where many publicly held
telecommunications companies, including PCTEL, are traded, often experiences
extreme price and volume fluctuations. These fluctuations often have been
unrelated or disproportionate to the operating performance of these companies.
In the past, following periods of volatility in the market price of an
individual 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.
29
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.
UNDER NEW REGULATIONS REQUIRED BY THE SARBANES-OXLEY ACT OF 2002, IF WE ARE
UNABLE TO SUCCESSFULLY IMPLEMENT PROCESSES AND PROCEDURES TO ACHIEVE AND
MAINTAIN EFFECTIVE INTERNAL CONTROL OVER OUR FINANCIAL REPORTING, OUR ABILITY TO
PROVIDE RELIABLE AND TIMELY FINANCIAL REPORTS COULD BE HARMED.
We must comply with the rules promulgated under section 404 of the
Sarbanes-Oxley Act of 2002. Section 404 requires an annual management report
assessing the effectiveness of our internal control over financial reporting, a
report by our independent registered public accountants addressing this
assessment, and a report by our independent auditors addressing the
effectiveness of our internal control.
In connection with reporting our financial results for the quarter and
year ended December 31, 2004, we identified and described a "material weakness"
(as defined by the relevant accounting standards) in our internal control
related to our accounting for income taxes in the fourth quarter of 2004.
Specifically, we did not have effective controls over determining net operating
loss carrybacks, applicable state tax rates applied, and the tax effect of stock
option exercises. In addition, we did not have effective controls to monitor the
difference between the income tax basis and the financial reporting basis of
assets and liabilities and reconcile the difference to deferred income tax
assets and liabilities. This control deficiency resulted in audit adjustments to
the fourth quarter 2004 financial statements. To address the material weakness
described above, PCTEL has engaged an outside tax consultant and has implemented
an internal training program to enhance the capabilities of its internal tax
personnel. There were no audit adjustments for the quarter ended March 31, 2005,
but the remediation program to address the previously identified material
weakness and remediation testing for other internal control deficiencies
identified in 2004 are still in process. The occurrence of control deficiencies
in our internal control, and material weaknesses in particular, adversely affect
our ability to report our financial results on a timely and accurate basis.
While we have expended significant resources in developing the necessary
documentation and testing procedures required by Section 404, we cannot be
certain that the actions we are taking to improve, achieve and maintain our
internal control over financial reporting will be adequate or that we will be
able to implement our planned processes and procedures. If we do not comply with
our requirements under Section 404 in a timely manner, or the processes and
procedures that we implement for our internal control over financial reporting
are inadequate, our ability to provide reliable and timely financial reports,
and consequently our business and operating results, could be harmed. This in
turn could result in an adverse reaction in the financial markets due to a loss
of confidence in the reliability of our financial reports, which could cause the
market price of our Common Stock to decline. See also Item 4 for discussion on
Controls and Procedures.
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 and short-term investments in a variety of
securities, which can include both government and corporate obligations with
ratings of A or better, and money market funds. We did not have any unrealized
holding gains in the quarter ended March 31, 2005 or March 31, 2004. A
hypothetical increase or decrease of 10% in market interest rates would not
result in a material decrease in interest income earned through maturity on
investments held at March 31, 2005.
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 substantially all transactions in
U.S. dollars. If the United States dollar uniformly increased or decreased in
30
strength by 10% relative to the currencies in which our sales were denominated,
our net loss would not have changed by a material amount for the year ended
March 31, 2005. For purposes of this calculation, we have assumed that the
exchange rates would change in the same direction relative to the United States
dollar. Our exposure to foreign exchange rate fluctuations, however, arises in
part from translation of the financial statements of foreign subsidiaries into
U.S. dollars in consolidation. As exchange rates vary, these results, when
translated, may vary from expectations and adversely impact overall expected
profitability. The effect of foreign exchange rate fluctuations for the quarter
ended March 31, 2005 and 2004 was negative $18,000 and $2,000, respectively.
ITEM 4: CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, under the supervision
and with the participation of PCTEL management, including the Company's Chairman
and Chief Executive Officer and its Chief Financial Officer, management
evaluated the effectiveness of the Company's disclosure controls and procedures,
as such term is defined under Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended. Based on that evaluation, the Company's
Chairman and Chief Executive Officer and its Chief Financial Officer concluded
that the Company's disclosure controls and procedures were ineffective as of
March 31, 2005 because of the material weakness discussed below. In light of the
material weakness described below, the Company performed additional analysis and
other post-closing procedures to ensure our financial statements are prepared in
accordance with generally accepted accounting principles. Accordingly,
management believes that the financial statements included in this report fairly
present in all material respects our financial condition, results of operations
and cash flows for the periods presented.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. As of December 31, 2004, the Company did not maintain effective
controls over the accounting for income taxes, including the determination of
income taxes payable, deferred income tax assets and liabilities and the related
income tax provision. Specifically, the Company did not have effective controls
over determining net operating loss carrybacks, applicable state tax rates
applied, and the tax effect of stock option exercises. In addition, the Company
did not have effective controls to monitor the difference between the income tax
basis and the financial reporting basis of assets and liabilities and reconcile
the difference to deferred income tax assets and liabilities. This control
deficiency resulted in audit adjustments to the fourth quarter 2004 financial
statements. Additionally, this control deficiency could result in a misstatement
of income taxes payable, deferred income tax assets and liabilities and the
related income tax provision, that would result in a material misstatement to
annual or interim financial statements that would not be prevented or detected.
Accordingly, management has determined that this control
31
deficiency constituted a material weakness. The remediation plan for the
material weakness at December 31, 2004 is described below. Because the
remediation of this material weakness is still in process, we have concluded
that the Company did not maintain effective internal control over financial
reporting as of March 31, 2005, based on criteria in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
(b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
For the quarter ended March 31, 2005, to address the material weakness
described above, the Company's management took the following actions, which are
material changes to our internal control over financial reporting:
- Engaged an outside tax consultant to prepare the tax
provision, provide tax expertise and expertise in the
application of Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes".
- Implemented an internal training program to enhance the
capabilities of its internal tax personnel.
- Acquired software to automate and better control the tax
provision preparation process.
- Improved its internal controls over the review of the
consolidated benefit (provisions) for income taxes.
The Company accurately recorded the tax provision and related income tax entries
for the quarter ended March 31, 2005. However, the Company's plan to remediate
the material weakness is in process. While the Company did purchase software for
the tax provision process, the Company did not utilize the software for the
March 2005 quarter. The Company will use this software for the quarter ended
June 30, 2005. In addition, the Company continues its internal training program.
The Company will be required to demonstrate, among other things, a sufficient
period of operating effectiveness for its remediated controls related to
accounting for income taxes before it may conclude that the material weakness
has been effectively remediated.
32
PART II OTHER INFORMATION
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 each filed Cross-complaints against the other for indemnity.
Wells Fargo filed a motion for summary judgment, or alternatively for
summary adjudication, which was heard on July 29, 2003. On July 30, the Court
granted Wells Fargo's motion for summary adjudication on Fraser's Third and
Fourth Causes of action for Breach of Fiduciary Duty and Declaratory Relief, but
denied Wells Fargo's motion for summary judgment and summary adjudication of
Fraser's First and Second Causes of Action for Breach of Contract and
Conversion. The company filed a Motion for Summary Judgment or, Alternatively,
Summary Adjudication, against Fraser. The Motion was scheduled for December 9,
2003. Fraser filed a motion for leave to amend his complaint, which was also
heard on December 9, 2003. The Court granted Fraser's motion and denied the
company's motion as moot. Trial of this matter had been set for January 12,
2004, but the trial date was vacated in light of the amended complaint. The
company re-filed its Motion for Summary Judgment or, Alternatively, Summary
Adjudication, against Fraser. Trial was scheduled for September 20, 2004.
On August 16, 2004, the Court signed an Order denying PCTEL's motion for
summary judgment but granting in part and denying in part PCTEL's alternative
motion for summary adjudication of Fraser's first cause of action for breach of
contract, and granting PCTEL's motion for summary adjudication of Fraser's fifth
cause of action for declaratory relief. Shortly thereafter, Wells Fargo and the
company dismissed the Cross-complaints against one another. At the Mandatory
Settlement Conference on September 15, 2004, Fraser stipulated to judgment in
favor of the company.
On November 15, 2004 Fraser filed a notice of appeal. The company believes
that this appeal is without merit and intends to defend the appeal vigorously.
Litigation with U.S. Robotics
On May 23, 2003, the company filed in the U.S. District Court for the
Northern District of California a patent infringement lawsuit against U.S.
Robotics Corporation claiming that U.S. Robotics has infringed one of the
company's patents. U.S. Robotics counterclaimed asking for a declaratory
judgment that the claims of the patent are invalid and not infringed. This case
was consolidated for claims construction discovery with the lawsuit against
Agere Systems and Lucent Technologies, and the now-concluded litigation with
3Com Corporation and Broadcom Corporation. Claims construction discovery under
the Patent Local Rules has been taken and the claims construction issues have
been briefed to the Court. A hearing on the construction of the claims of the
patent, originally scheduled for January 12, 2005, was continued by the Court
and is now scheduled for May 16, 2005. No trial date has been set. Although the
company believes it has meritorious claims and defenses, the company cannot now
predict or determine the outcome or resolution of this proceeding or the
potential range of loss if any.
Litigation with Agere and Lucent
On May 23, 2003, the company filed in the U.S. District Court for the
Northern District of California a patent infringement lawsuit against Agere
Systems and Lucent Technologies claiming that Agere has infringed four of the
company's patents and that Lucent has infringed three of the company's patents.
Agere counterclaimed asking for a declaratory judgment that the claims of the
four patents are invalid, unenforceable and not infringed by Agere. This case
was consolidated for claims construction discovery with the lawsuit against U.S.
Robotics Corporation and the now-concluded litigation with 3Com Corporation and
Broadcom Corporation.
Because of a then-pending reexamination proceeding for PCTEL's U.S. Patent
No. 5,787,305 (the `305 patent), on December
33
4, 2003, the claims against Agere and Lucent relating to the `305 patent were
stayed by stipulation of the parties. Claims construction discovery under the
Patent Local Rules has been taken with respect to the three patents as to which
the litigation was not stayed, and the claims construction issues relating to
those patents have been briefed to the Court. A hearing on the construction of
the claims of those patents, originally scheduled for January 12, 2005, was
continued by the Court and is now scheduled for May 16, 2005.
On July 28, 2004, the company received from the U.S. Patent Office a
Notice of Intent to Issue Ex Parte Reexamination Certificate for the `305
patent, and on January 11, 2005, the U.S. Patent Office issued the Reexamination
Certificate. The stay regarding the `305 patent has now been lifted by
stipulation of the parties.
No trial date has been set. Although the company believes that it has
meritorious claims and defenses, the company cannot predict or determine the
outcome or resolution of this proceeding or the potential range of loss if any.
ITEM 5: OTHER INFORMATION
None.
34
ITEM 6: EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------------------------------------------------------------
10.45 Letter Agreement dated May 4, 2005 with Martin H. Singer relating to an amendment to Dr. Singer's employment
agreement
10.46 PCTEL, Inc. 2005 CEO "Stretch" Plan
10.47 PCTEL, Inc. 2005 Short-Term Bonus Incentive Plan
10.48 Purchase Agreement dated April 14, 2005 between PCTEL Antenna Products Group, a wholly owned subsidiary of PCTEL,
Inc. and Quintessence Publishing Company, Inc.
31.1 Certification of Principal Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32 Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuan to Section 906 of Sarbanes-Oxley Act of 2002.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, this Report has been signed below by the
following person on behalf of the Registrant and in the capacity and on the date
indicated:
PCTEL, Inc.
A Delaware Corporation
(Registrant)
/s/ MARTIN H. SINGER
-----------------------------------
Martin H. Singer
Chairman of the Board and
Chief Executive Officer
Date: May 10, 2005
36