-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MPnm2NcrgdIplKGgNa6CbI9OJfxvxgJtVUAKcw3oUR2BBlGz5+/GZPB2xnbzaxGj 99mQQDDJrO9ZkyRS4/mjYg== 0000950137-03-004351.txt : 20030814 0000950137-03-004351.hdr.sgml : 20030814 20030814143157 ACCESSION NUMBER: 0000950137-03-004351 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PC TEL INC CENTRAL INDEX KEY: 0001057083 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 770364943 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27115 FILM NUMBER: 03846357 BUSINESS ADDRESS: STREET 1: 8725 W. HIGGINS RD. STREET 2: SUITE 400 CITY: CHICAGO STATE: IL ZIP: 60631 BUSINESS PHONE: 773-243-3000 MAIL ADDRESS: STREET 1: 8725 W. HIGGINS RD STREET 2: SUITE 400 CITY: CHICAGO STATE: IL ZIP: 60631 10-Q 1 c78775e10vq.txt QUARTERLY REPORT ================================================================================ 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 June 30, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number 000-27115 PCTEL, INC. (Exact Name of Business Issuer as Specified in Its Charter) Delaware 77-0364943 (State or Other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) 8725 W. Higgins Road, Suite 400, Chicago IL 60631 (Address of Principal Executive Office) (Zip Code) (773) 243-3000 (Registrant's Telephone Number, Including Area Code) ------------- Indicate by checkmark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] As of August 8, 2003, there were 20,297,250 shares of the Registrant's Common Stock outstanding. ================================================================================ PCTEL, INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2003
Page ------ PART I. FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) as of June 30, 2003 and December 31, 2002 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) for the three and six months ended June 30, 2003 and 2002 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) for the three and six months ended June 30, 2003 and 2002 5 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 6 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 37 ITEM 4 CONTROLS AND PROCEDURES 38 PART II. OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS 39 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 40 ITEM 5 OTHER INFORMATION 41 ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 41
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PCTEL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED, IN THOUSANDS, EXCEPT SHARE INFORMATION)
June 30, December 31, 2003 2002 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 91,195 $ 52,986 Restricted cash 347 347 Short-term investments 20,228 58,405 Accounts receivable, net of allowance of $50 and $368 at June 30, 2003 and December 31, 2002 respectively 1,068 5,379 Inventories, net 1,032 1,115 Non-trade receivable (see Note 4) 4,000 - Prepaid expenses and other assets 3,051 5,144 --------- --------- Total current assets 120,921 123,376 PROPERTY AND EQUIPMENT, net 1,012 1,532 GOODWILL 4,261 1,255 OTHER INTANGIBLE ASSETS, net (see Note 5) 4,826 365 OTHER ASSETS 635 2,898 --------- --------- TOTAL ASSETS $ 131,655 $ 129,426 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 557 $ 1,498 Accrued royalties 3,282 3,658 Income taxes payable 6,181 6,289 Accrued liabilities 5,356 5,313 --------- --------- Total current liabilities 15,379 16,758 Long-term liabilities 889 115 --------- --------- Total liabilities 16,268 16,873 --------- --------- STOCKHOLDERS' EQUITY: Common stock, $0.001 par value, 100,000,000 shares authorized, 19,919,070 and 19,927,616 issued and outstanding at June 30, 2003 and December 31, 2002 respectively 20 20 Additional paid-in capital 153,323 152,272 Deferred stock compensation (2,177) (3,958) Accumulated deficit (35,905) (36,079) Accumulated other comprehensive income 126 298 --------- --------- Total stockholders' equity 115,387 112,553 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 131,655 $ 129,426 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 PCTEL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 2003 2002 2003 2002 -------- -------- -------- -------- REVENUES $ 10,176 $ 9,557 $ 23,258 $ 19,899 COST OF REVENUES 4,210 5,568 12,117 10,794 -------- -------- -------- -------- INVENTORY RECOVERY (see Note 6) (452) (1,553) (1,800) (1,553) -------- -------- -------- -------- GROSS PROFIT 6,418 5,542 12,941 10,658 -------- -------- -------- -------- OPERATING EXPENSES: Research and development 2,183 2,761 4,301 5,157 Sales and marketing 1,892 1,853 4,154 3,491 General and administrative 2,800 1,142 4,651 2,608 Amortization of other intangible assets (see Note 5) 339 - 438 - Acquired in-process research and development (see Note 3) - - 1,100 - Restructuring charges (see Note 7) 2,496 647 2,651 647 Gain on sale of assets and related royalties (see Note 4) (4,332) - (4,332) - Amortization of deferred compensation (see Note 9) 241 183 540 358 -------- -------- -------- -------- Total operating expenses 5,619 6,586 13,503 12,261 -------- -------- -------- -------- INCOME (LOSS) FROM OPERATIONS 799 (1,044) (562) (1,603) OTHER INCOME, NET 334 937 829 1,990 -------- -------- -------- -------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 1,133 (107) 267 387 PROVISION FOR INCOME TAXES 29 31 93 63 -------- -------- -------- -------- NET INCOME (LOSS) $ 1,104 $ (138) $ 174 $ 324 ======== ======== ======== ======== Basic earnings (loss) per share $ 0.06 $ (0.01) $ 0.01 $ 0.02 Shares used in computing basic earnings (loss) per share 19,469 19,933 19,733 19,827 Diluted earnings (loss) per share $ 0.05 $ (0.01) $ 0.01 $ 0.02 Shares used in computing diluted earnings (loss) per share 20,807 19,933 20,635 20,042
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 PCTEL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
Six Months Ended June 30, 2003 2002 ------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 174 $ 324 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 967 807 In-process research and development 1,100 - Loss on disposal/sale of fixed assets 616 77 Gain on sale of assets and related royalties (4,332) - Extended vesting of stock options 93 - Recovery of allowance for doubtful accounts (368) (551) Recovery of excess and obsolete inventories 1,800 (184) Amortization of deferred compensation 540 358 Changes in operating assets and liabilities: Decrease in accounts receivable 1,547 720 Decrease (increase) in inventories (1,068) 1,473 Decrease (increase) in prepaid expenses and other assets 4,388 (2,986) Decrease in accounts payable (941) (3,728) Decrease in accrued royalties (376) (9,044) Decrease in income taxes payable (108) (14) Decrease in accrued liabilities (180) (2,161) Increase (decrease) in long-term liabilities 956 (78) ------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 4,808 (14,987) ------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for property and equipment (525) (38) Proceeds on sale of property and equipment 153 8 Proceeds on sale of assets and related royalties 6,743 - Sales (purchases) of available-for-sale investments 35,597 16,293 Purchase of assets/business, net of cash acquired (10,762) (1,574) ------------------------- NET CASH PROVIDED BY INVESTING ACTIVITIES 31,206 14,689 ------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principle payments of notes payable - (8) Proceeds from the exercise of stock options 5,749 2,411 Payments for repurchase of common stock (3,551) - ------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 2,198 2,403 ------------------------- Net increase in cash and cash equivalents 38,212 2,105 Cumulative translation adjustment (3) 31 Cash and cash equivalents, beginning of period 52,986 38,393 ------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 91,195 $ 40,529 =========================
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 PCTEL, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 (UNAUDITED) 1. BASIS OF PRESENTATION The condensed consolidated financial statements included herein have been prepared by PCTEL, Inc. (unless otherwise noted, "PCTEL", "we", "us" or "our" refers to PCTEL, Inc.), pursuant to the laws and regulations of the Securities and Exchange Commission for the requirements of form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the disclosures are adequate to make the information not misleading. The condensed balance sheet as of December 31, 2002 has been derived from the audited financial statements as of that date, but does not include all disclosures required by generally accepted accounting principles. These financial statements and notes should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. The unaudited condensed financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows for the periods indicated. The results of operations for the three and six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for future periods or the year ending December 31, 2003. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods reported. Actual results could differ from those estimates. INVENTORIES Inventories are stated at the lower of cost or market and include material, labor and overhead costs. Inventories as of June 30, 2003 and December 31, 2002 were composed of raw materials, sub assemblies, finished goods and work-in-process. We regularly monitor inventory quantities on hand and, based on our current estimated requirements, it was determined that there was no excess inventory, not reserved, as of June 30, 2003 and December 31, 2002. Due to competitive pressures and technological innovation, it is possible that these estimates could change in the near term. As of June 30, 2003 and December 31, 2002, the allowance for inventory losses was $0 million and $2.1 million, respectively. We sold part of the written-down inventories and recovered $0.5 and $1.3 million of the former write-downs during the three and six months ended June 30, 2003, respectively. EARNINGS PER SHARE We compute earnings per share in accordance with SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires companies to compute net income per share under two different methods, basic and diluted, and present per share data for all periods in which statements of operations are presented. Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding, less shares subject to repurchase. Diluted earnings per share are computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding. Common stock equivalents consist of stock options and warrants using the treasury stock method. Common stock options and warrants are excluded from the computation of diluted earnings per share if their effect is anti-dilutive. The following table provides a reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share for the three and six months ended June 30, 2003 and 2002, respectively (in thousands, except per share data): 6
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2003 2002 2003 2002 -------- -------- -------- -------- (Unaudited) (Unaudited) Net income (loss) $ 1,104 $ (138) $ 174 $ 324 ======== ======== ======== ======== Basic earnings (loss) per share: Weighted average common shares outstanding 19,854 20,100 20,118 19,975 Less: Weighted average shares subject to repurchase (385) (167) (385) (148) -------- -------- -------- -------- Weighted average common shares outstanding 19,469 19,933 19,733 19,827 -------- -------- -------- -------- Basic earnings (loss) per share $ 0.06 $ (0.01) $ 0.01 $ 0.02 ======== ======== ======== ======== Diluted earnings (loss) per share: Weighted average common shares outstanding 19,469 19,933 19,733 19,827 Weighted average shares subject to repurchase 385 -* 385 148 Weighted average common stock option grants and outstanding warrants 953 -* 517 67 -------- -------- -------- -------- Weighted average common shares and common stock equivalents outstanding 20,807 19,933 20,635 20,042 -------- -------- -------- -------- Diluted earnings (loss) per share $ 0.05 $ (0.01) $ 0.01 $ 0.02 ======== ======== ======== ========
* These amounts have been excluded since the effect is anti-dilutive. STOCK-BASED COMPENSATION We use the intrinsic value method of Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and its interpretations in accounting for our employee stock options. Pro forma information regarding net income (loss) and net income (loss) per share as if we recorded compensation expense based on the fair value of stock-based awards has been presented in accordance with Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" and is as follows for the three and six months ended June 30, 2003 and 2002 (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ --------------------- 2003 2002 2003 2002 --------- --------- -------- ------- Net (loss) income--as reported $ 1,104 $ (138) $ 174 $ 324 Add: Stock-based employee compensation expense included in reported net income 241 183 540 358 Add (deduct): Stock-based employee compensation income (expense) determined under fair value based method for all awards 963 79 181 (782) --------- --------- -------- ------- Net (loss) income--as adjusted $ 2,308 $ 124 $ 895 $ (100) ========= ========= ======== ======= Net (loss) income per share--basic as reported $ 0.06 $ (0.01) $ 0.01 $ 0.02 ========= ========= ======== ======= Net (loss) income per share--basic as adjusted $ 0.12 $ 0.01 $ 0.05 $ (0.01) ========= ========= ======== ======= Net (loss) income per share--diluted as reported $ 0.05 $ (0.01) $ 0.01 $ 0.02 ========= ========= ======== ======= Net (loss) income per share--diluted as adjusted $ 0.11 $ 0.01 $ 0.04 $ (0.01) ========= ========= ======== =======
7 We calculated the fair value of each option grant on the date of grant using the Black-Scholes option pricing model as prescribed by SFAS 123 using the following assumptions: Stock Options ESPP ------------- ---- 2003 2002 2003 2002 ---- ---- ---- ---- Dividend yield None None None None Expected volatility 60% 46% 60% 46% Risk-free interest rate 1.5% 3.1% 1.0% 1.8% Expected life (in years) 2.75 2.75 0.5 0.5 The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility and expected option life. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models may not necessarily provide a reliable single measure of the fair value of our employee stock options. Restricted stock awards are recorded at the fair market value of the stock on the date of grant and are expensed over the vesting period. INDUSTRY SEGMENT, CUSTOMER AND GEOGRAPHIC INFORMATION We operate in one segment, that segment being solutions that enable connectivity. We market our products worldwide through our sales personnel, independent sales representatives and distributors. Our sales to customers outside of the United States, as a percent of total revenues, are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 2003 2002 2003 2002 ------- ------- ------- -------- (Unaudited) (Unaudited) Taiwan 43% 74% 55% 71% China (Hong Kong) 18 15 21 8 Rest of Asia 5 4 3 2 Japan 4 - 3 - Europe 4 - 5 1 ------- ------- ------- -------- Total 74% 93% 87% 82% ======= ======= ======= ========
Sales to our major customers representing greater than 10% of total revenues are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- Customer 2003 2002 2003 2002 ------- ------- ------- -------- (Unaudited) (Unaudited) Askey 8% 26% 17% 29% Prewell 16 15 20 7 ASEC 11 16 9 10 Lite-On Technology (GVC) 11 28 18 29 ESS Technology - 3 - 11 ------- ------- ------- -------- Total 46% 88% 64% 86% ======= ======= ======= ========
8 COMPREHENSIVE INCOME The following table provides the calculation of other comprehensive income for the three and six months ended June 30, 2003 and 2002 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- ----------------------- 2003 2002 2003 2002 -------- -------- -------- -------- (Unaudited) (Unaudited) Net income (loss) $ 1,104 $ (138) $ 174 $ 324 ======= ======= ======= ======= Other comprehensive income: Unrealized gains (loss) on available-for-sale securities (47) 35 (168) (421) Cumulative translation adjustment - 34 (3) 30 ------- ------- ------- ------- Comprehensive income (loss) $ 1,057 $ (69) $ 3 $ (67) ======= ======= ======= =======
RECENT ACCOUNTING PRONOUNCEMENTS In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, "Accounting for Exit or Disposal Activities". SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS No. 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 became effective for exit or disposal activities initiated after December 31, 2002. We adopted SFAS No. 146 on January 1, 2003. The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS No. 146. The effect of adopting SFAS No. 146 changed the time of when restructuring charges are recorded from a commitment date approach to when the liability is incurred. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability be recorded in the guarantor's balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity's product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. Adoption of this standard did not have a material impact on the Company's financial position, results of operations, or cash flows. In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The company believes that there will be no impact of FIN 46 on our consolidated financial statements. In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company believes that the adoption of this standard will not have a material impact on its financial position, results of operations, or cash flows. 9 In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure ("SFAS 148")." SFAS 148 amends FASB Statement No. 123, "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Generally the provisions of SFAS 148 became effective for financial statements for fiscal years ending after December 15, 2002. The Company continues to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The disclosures of SFAS 148 are included in Note 2. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149")." SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is generally effective for derivative instruments, including derivative instruments embedded in certain contracts, entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company does not expect the adoption of SFAS 149 to have a material impact on its operating results or financial condition. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS 150")." SFAS 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to the Company's existing financial instruments effective July 1, 2003, the beginning of the first fiscal period after June 15, 2003. The Company does not expect the adoption of SFAS 150 to have a material effect on its results of operations or financial condition. 3. ACQUISITION On March 12, 2003, PCTEL, Inc., completed its asset acquisition of Dynamic Telecommunications, Inc., ("DTI") through a newly wholly owned subsidiary PCTEL Maryland, Inc. DTI was a supplier of software-defined radio technology deployed in high-speed wireless scanning receivers, multi-protocol collection and analysis systems, interference measurement systems and radio frequency command and control software solutions. In connection with the asset acquisition, PCTEL Maryland, a wholly-owned subsidiary of PCTEL, and DTI Holdings, Inc., the sole shareholder of DTI, entered into an Asset Purchase Agreement dated as of March 12, 2003 under which our wholly-owned subsidiary acquired substantially all of the assets of DTI, including intellectual property, receivables, property and equipment and other tangible and intangible assets used in DTI's business. In exchange for the acquired net assets, PCTEL paid DTI $11.0 million in cash out of its working capital. In addition, DTI may be entitled to earn-out payments if PCTEL Maryland, Inc. meets specified financial targets in fiscal years 2003 and 2004. The purchase price of $11.0 million was allocated to the assets acquired and liabilities assumed at their estimated fair values on the date of acquisition as determined by an independent valuation firm. We attributed $2.3 million (an additional $0.5 million capitalized in the quarter) to net assets acquired, $1.1 million to acquired in-process research and development, $200,000 to the covenant not to compete and $4.4 million to other intangible assets, net, in the accompanying consolidated balance sheets. The $3.0 million excess of the purchase price over the fair value of the net tangible and intangible assets was allocated to goodwill. We expensed in-process research and development and amortize the covenant not to compete over two years and other intangible assets over an estimated useful life of four years. An additional payment of $168,189 was made in July 2003 to DTI after they delivered a final balance sheet as agreed upon in the Asset Purchase Agreement. The additional payment was based on the assets and liabilities of DTI as reported on its balance sheet as of March 31, 2003. 10 The unaudited pro forma affect on the financial results of PCTEL as if the acquisition had taken place on January 1, 2003 and 2002 is as follows:
Six Months Ended June 30, 2003 2002 --------------------- REVENUES $ 24,715 $ 24,510 INCOME FROM OPERATIONS 892 177 NET INCOME $ 1,630 $ 1,448 ===================== Basic earnings per share $ 0.08 $ 0.07 Shares used in computing basic earnings per share 19,733 19,827 Diluted earnings per share $ 0.08 $ 0.07 Shares used in computing diluted earnings per share 20,635 20,042
4. DISPOSITION On May 12, 2003, PCTEL, Inc., completed the sale of certain of its assets to Conexant Systems, Inc., ("Conexant"). Conexant is a supplier of semiconductor system solutions for communications applications. In connection with the transaction, PCTEL and Conexant entered into an Asset Purchase Agreement dated as of May 8, 2003 (the "Purchase Agreement") under which Conexant acquired specified assets of PCTEL relating to a component of PCTEL's HSP modem operations and consisting of inventory, fixed assets from PCTEL's offices in Taiwan, contracts with customers and distributors related to the soft modem products, and limited intellectual property. PCTEL did not transfer any of its patent portfolio in connection with this transaction, and PCTEL retained all operating contracts and intellectual property assets associated with our hardware modem and wireless products. In exchange for the assets acquired from PCTEL, Conexant delivered approximately $6.75 million in cash to PCTEL, which represents $4.25 million plus the book value of the acquired inventory and fixed assets being transferred to Conexant. Conexant has also agreed to assume certain liabilities of PCTEL and agreed to pay an additional $4 million in cash to PCTEL in two equal installments due on November 1, 2003 and December 31, 2003. The total proceeds of $10.7 million netted a gain on sale of assets of $4.3 million. In connection with the Purchase Agreement, Conexant agreed to license PCTEL's Segue Wi-Fi software for use with certain of its products. Conexant will pay to PCTEL an aggregate of $1 million, payable in quarterly installments of $250,000 as consideration for this license beginning in the quarter ending September 30, 2003. Concurrently with the completion of the transaction with Conexant, PCTEL and Conexant also completed an Intellectual Property Assignment Agreement and Cross-License Agreement ("IPA"). PCTEL provided Conexant with a non-exclusive, worldwide license to certain of PCTEL's soft modem patents, including technology essential to the implementation of the V.90 standard (soft modems). In addition, Conexant assigned 46 U.S. patents and patent applications relating to modem and other access technologies to PCTEL as part of the transaction. In consideration for the rights obtained by Conexant from PCTEL under this agreement, and taking into account the value of rights obtained by PCTEL from Conexant under this agreement, during the four-year period beginning on July 1, 2003 and ending on June 30, 2007, Conexant agreed to pay to PCTEL, on a quarterly basis, royalties in the amount of ten percent (10%) of the revenue received during the royalty period, up to a maximum amount of $500,000 per quarter with respect to each calendar quarter during the royalty period, contingent upon sales by Conexant during the period. Any such future payments by Conexant to PCTEL in connection with the IPA will be recorded as part of the gain on sale of assets and related royalties in the statement of operations, pursuant to Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." 11 5. GOODWILL AND OTHER INTANGIBLE ASSETS DISCLOSURE In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.'s 141 and 142, "Business Combinations" and "Goodwill and Other Intangible Assets", respectively. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. SFAS No. 142 supersedes Accounting Principles Board Opinion ("APB") No. 17 and addresses the financial accounting and reporting standards for goodwill and intangible assets subsequent to their initial recognition. SFAS No. 142 requires that goodwill no longer be amortized. It also requires that goodwill and other intangible assets be tested for impairment at least annually and whenever events or circumstances occur indicating that goodwill might be impaired. Additionally, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. We adopted SFAS No. 142 on January 1, 2002 at which time we ceased amortization of goodwill. The provisions of SFAS No. 142 are effective for fiscal years beginning after December 15, 2001 and must be applied to all goodwill and other intangible assets that are recognized in an entity's balance sheet at the beginning of that fiscal year. The changes in the carrying amount of goodwill and other intangible assets for the six months ended June 30, 2003 was an increase of $3.0 million. Goodwill decreased $0.3 million in the three months ended June 30, 2003 due to adjustments related to the DTI acquisition. GOODWILL, NET ------------- Balance at December 31, 2002 1,255 Goodwill from the acquisition of DTI 3,006 ------------- Balance at June 30, 2003 $ 4,261 =============
OTHER OTHER INTANGIBLE ACCUMULATED INTANGIBLE ASSETS AMORTIZATION ASSETS, NET ----------------- ----------------- ----------------- (in thousands) Balance at December 31, 2002 $ 452 $ (87) $ 365 ================= ================= ================= Amortization of December 31, 2002 other intangible assets 452 (162) 290 Other intangible assets from the acquisition of DTI 4,600 (361) 4,239 Purchase of patents 299 (2) 297 ----------------- ----------------- ----------------- Balance at June 30, 2003 $ 5,351 $ (525) $ 4,826 ================= ================= =================
6. INVENTORY LOSSES AND RECOVERY Due to the changing market conditions, economic downturn and estimated future requirements, inventory write-downs of $10.9 million were recorded in the second half of 2001. Of the $10.9 million, $2.3 million related to firm purchase order commitments with our major suppliers and the remaining $8.6 million related to excess inventory on hand or disposed. During the six months ended June 30, 2003, we did not record any additional inventory write-downs having either sold or disposed of all the written down inventories and recovered $1.8 million of the former write-downs. As of June 30, 2003 and December 31, 2002, the cumulative write down for excess inventory on hand was $0 million and $2.1 million, respectively. 12 7. RESTRUCTURING CHARGES 2003 Restructuring On May 12, 2003, PCTEL, Inc., completed the sale of certain of its assets to Conexant Systems, Inc., ("Conexant"). Conexant is a supplier of semiconductor system solutions for communications applications. In connection with the transaction, PCTEL and Conexant entered into an Asset Purchase Agreement dated as of May 8, 2003 (the "Purchase Agreement") under which Conexant acquired specified assets of PCTEL relating to a component of PCTEL's HSP modem operations and consisting of inventory, fixed assets from PCTEL's offices in Taiwan, contracts with customers and distributors related to the soft modem products, and limited intellectual property. PCTEL did not transfer any of its patent portfolio in connection with this transaction, and PCTEL retained all operating contracts and intellectual property assets associated with our hardware modem and wireless products. As a result of the disposition, 29 employees were transferred to Conexant. An additional 26 employees, both foreign and domestic, were terminated along with the related facilities closures, which will occur over the next two quarters. The total restructuring may aggregate $2.8 million consisting of severance and employment related costs of $1.5 million and costs related to closure of excess facilities as a result of the reduction in force of $1.3 million. For the three months ended June 30, 2003, $2.5 million was expensed. The remaining balance of $0.3 million would be expensed during the remainder of the year. As of June 30, 2003, approximately $575,000 of termination compensation and related benefits had been paid to terminated employees and approximately $433,000 of lease payments and related costs had been paid to the landlord for the excess facilities. As of June 30, 2003, the remaining accrual balance of $1.5 million restructuring will be paid monthly through January 2006. 2002 Restructuring In the quarter ended June 30, 2002, we eliminated 20 positions (consisting of 13 research and development, 5 sales and marketing and 2 general and administrative positions). In September 2002, we announced our intention to relocate our headquarters and finance functions to Chicago, Illinois. As a result of the move, 5 general and administrative positions were replaced in December 2002 and we further eliminated 7 research and development positions. In the aggregate, 27 positions were eliminated during the year ended December 31, 2002. The restructuring resulted in $928,000 of charges for the year ended December 31, 2002, consisting of severance and employment related costs of $688,000 and costs related to closure of excess facilities as a result of the reduction in force of $240,000. As of June 30, 2003, approximately $671,000 of termination compensation and related benefits had been paid to terminated employees in connection with the 2002 restructuring. As of June 30, 2003, approximately $329,000 of lease payments and related costs had been paid to the landlord for the excess facilities. As of June 30, 2003, the entire 2002 restructuring has been completed, with cash payments of $133,000 in the three months ended June 30, 2003. The combined effect of the 2003 and 2002 restructurings is:
ACCRUAL ACCRUAL BALANCE AT BALANCE AT MARCH 31, RESTRUCTURING JUNE 30, 2003 CHARGES PAYMENTS 2003 ---------------- ---------------- ---------------- ---------------- Severance and employment related costs $ 17 $ 1,092 $ 593 $ 516 Costs for closure of excess facilities 84 1,404 548 940 ---------------- ---------------- ---------------- ---------------- $ 101 $ 2,496 $ 1,141 $ 1,456 ================ ================ ================ ================ Amount included in long-term liabilities $ 751 ================ Amount included in short-term liabilities $ 705 ================
13 2001 Restructuring On February 8, 2001, we announced a series of actions to streamline support for our voiceband business and sharpen our focus on emerging growth sectors. These measures were part of a restructuring program and included a reduction in worldwide headcount of a total of 22 employees (consisting of 7 research and development employees, 9 sales and marketing employees and 6 general and administrative employees), a hiring freeze and cost containment programs. On May 1, 2001, we announced a new business structure to provide for greater focus on our activities with a significantly reduced workforce. A total of 42 positions were eliminated as part of this reorganization (consisting of 13 research and development, 12 sales and marketing and 17 general and administrative positions). In the fourth quarter of 2001, a total of 26 positions (consisting of 7 research and development, 8 sales and marketing and 11 general and administrative positions) were eliminated to further focus our business. In the aggregate, 90 positions were eliminated during the year ended December 31, 2001. The restructuring resulted in $3.8 million of charges for the year ended December 31, 2001, consisting of severance and employment related costs of $2.5 million and costs related to closure of excess facilities as a result of the reduction in force of $1.3 million. As of December 31, 2002, approximately $2.4 million of termination compensation and related benefits had been paid to terminated employees. As of December 31, 2002, approximately $1.2 million of lease payments and related costs had been paid to the landlord for the excess facilities. As of March 31, 2003, the entire 2001 restructuring has been completed, with cash payments of $141,000 in the three months ended March 31, 2003. 8. CONTINGENCIES: We record an accrual for estimated future royalty payments for relevant technology of others used in our product offerings in accordance with SFAS No. 5, "Accounting for Contingencies." The estimated royalties accrual reflects management's broader litigation and cost containment strategies, which may include alternatives such as entering into cross-licensing agreements, cash settlements and/or ongoing royalties based upon our judgment that such negotiated settlements would allow management to focus more time and financial resources on the ongoing business. We have accrued our estimate of the amount of royalties payable for royalty agreements already signed, agreements that are in negotiation and unasserted but probable claims of others using advice from third party technology advisors and historical settlements. Should the final license agreements result in royalty rates significantly greater than our current estimates, our business, operating results and financial condition could be materially and adversely affected. As of June 30, 2003 and December 31, 2002, we had accrued royalties of approximately $3.3 million and $3.7 million, respectively. Of these amounts, approximately $74,000 and $450,000 represent amounts accrued based upon signed royalty agreements as of June 30, 2003 and December 31, 2002, respectively. While management is unable to estimate the maximum amount of the range of possible settlements, it is possible that actual settlements could exceed the amounts accrued as of each date presented. We have from time to time in the past received correspondence from third parties, and may receive communications from additional third parties in the future, asserting that our products infringe on their intellectual property rights, that our patents are unenforceable or that we have inappropriately licensed our intellectual property to third parties. We expect these claims to increase as our intellectual property portfolio becomes larger. These claims could affect our relationships with existing customers and may prevent potential future customers from purchasing our products or licensing our technology. Intellectual property claims against us, and any resulting lawsuit, may result in our incurring significant expenses and could subject us to significant liability for damages and invalidate what we currently believe are our proprietary rights. These lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and could divert management's time and attention. In addition, any claims of this kind, whether they are with or without merit, could cause product shipment delays or require us to enter into royalty or licensing agreements. In the event that we do not prevail in litigation, we could be prevented from selling our products or be required to enter into royalty or licensing agreements on terms which may not be acceptable to us. We could also be prevented from selling our products or be required to pay substantial monetary damages. Should we cross license our intellectual property in order to obtain licenses, we may no longer be able to offer a unique product. To date, we have not obtained any licenses from 3Com and the other companies from whom we have received communication. 14 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 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 in June 2002 and in July 2002, the Company filed a Verified Answer to the Complaint, denying Fraser's claims and asserting numerous affirmative defenses. Wells Fargo and the Company have each filed Cross-complaints against the other for indemnity. Wells Fargo filed a motion for summary judgment, or alternatively for summary adjudication, which was heard on July 29, 2003. The Court has not issued its ruling on Wells Fargo's motion. A trial setting conference has been scheduled for August 19, 2003. We believe that we have meritorious defenses and intend to vigorously defend the action. Because the action is still in its early stages, we cannot at this time provide an estimate of the range of potential loss, or the probability of a favorable or unfavorable outcome. In May 2003, we filed three separate lawsuits asserting infringement of our intellectual property rights. Below is a description of the claims and status of those lawsuits: - U.S. Robotics Corporation. On May 23, 2003, we filed in the U.S. District Court for the Northern District of California (C03-2471 MJJ) a patent infringement lawsuit against U.S. Robotics Corporation claiming that U.S. Robotics has infringed one of our patents (U.S. Patent No. 4,841,561 (`561)). U.S. Robotics filed its answer and counterclaim to our complaint in June 2003 asking for a declaratory judgment that the claims of the `561 patent are invalid and not infringed by U.S. Robotics. We filed our reply to U.S. Robotics' counterclaim on July 2, 2003. - PCTEL v. Broadcom Corporation. On May 23, 2003, we filed in the U.S. District Court for the Northern District of California (C03-2475 MJJ) a patent infringement lawsuit against Broadcom Corporation claiming that Broadcom has infringed four of our patents (`561; and U.S. patent numbers 5,787,305 (`305); 5,931,950 (`950); and 6,493,780 (`780)). Broadcom filed its answer and counterclaim to our complaint in July 2003 asking for a declaratory judgment that the claims of the four patents are invalid and/or unenforceable, and not infringed by Broadcom. - Agere Systems and Lucent Technologies. On May 23, 2003, we filed in the U.S. District Court for the Northern District of California (C03-2474 MJJ) a patent infringement lawsuit against Agere Systems and Lucent Technologies claiming that Agere has infringed four of our patents (`561, `305, `950 and `780) and that Lucent was infringing three of our patents (`561, `305 and `950). Agere and Lucent filed their answers to our complaint in July 2003. Agere filed a counterclaim asking for a declaratory judgment that the claims of the four patents are invalid, unenforceable and not infringed by Agere. In addition to the three lawsuits described above, we also have continuing litigation with 3Com related to intellectual property infringement and related matters. Both we and 3Com having pending patent infringement lawsuit against one another in the U.S. District Court for the Northern District of California. Both suits were initially filed in March 2003. 3Com initially filed their suit against us in the Northern District of Illinois, but that case was subsequently remanded to the Northern California District Court. We are claiming that 3Com is infringing one of our patents (`561) and are seeking a declaratory judgment that certain 3Com patents are invalid and not infringed by PCTEL. 3Com is alleging that our HSP modem products infringed certain 3Com patents and is seeking a 15 declaratory judgment that our `561 patent is invalid and not infringed by 3Com. In addition, in May 2003, we filed a complaint against 3Com in the Santa Clara Superior Court of the State of California in the County of Santa Clara (C03-3124 SI) under California's Unfair Competition Act. Subsequently, 3Com filed a notice of removal, removing the case to the Northern District of California and we have filed a notice of motion and motion to remand the case to the Santa Clara Superior Court. In June 2003, we filed a motion to consolidate our pending patent infringement cases with 3Com filed as well as our pending patent infringement lawsuits with U.S. Robotics, Broadcom, Agere and Lucent described above. The hearing on our motion to consolidate is set for August 19, 2003 and the court has issued an order relating all of the cases to the same judge. We believe we have meritorious claims and defenses in our disputes with 3Com, Broadcom, U.S. Robotics, Agere and Lucent. However, because of the inherent uncertainties of litigation in general, we are not assured that we will ultimately prevail or receive the judgments that we seek. In addition, we may be required to pay substantial monetary damages. Litigation such as our suits with 3Com, Broadcom, U.S. Robotics, Agere and Lucent can take years to resolve and can be expensive to pursue and/or defend. The court's decisions on current, pending and future motions could have the effect of determining the ultimate outcome of the litigation prior to a trial on the merits, or strengthen or weaken our ability to assert claims and defenses. Accordingly, an adverse judgment could seriously harm our business, financial position and results of operations and cause our stock price to decline substantially. In addition, the allegations and claims involved in these lawsuits, even if ultimately resolved in our favor, could be time consuming to litigate, result in costly litigation and divert management attention. These lawsuits could significantly harm our business, financial position and results of operations and cause our stock price to decline substantially. Due to the nature of litigation generally, we cannot ascertain the final resolution of the lawsuits, or estimate the total expenses, possible damages or settlement value, if any, that we may ultimately receive or incur in connection with these lawsuits. 9. AMORTIZATION OF DEFERRED COMPENSATION: For the three and six months ended June 30, 2003 and 2002, amortization of deferred compensation (in thousands) relates to the following functional categories:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------------------- ------------------------------------ 2003 2002 2003 2002 --------------- --------------- ---------------- --------------- Research and development $ 21 $ 44 $ 75 $ 73 Sales and marketing $ 63 $ 34 $ 149 $ 71 General and administrative $ 157 $ 105 $ 316 $ 214 --------------- --------------- ---------------- --------------- $ 241 $ 183 $ 540 $ 358 =============== =============== ================ ===============
The amount of deferred stock compensation expense to be recorded in future periods could decrease if options for which accrued but unvested compensation has been recorded are forfeited. In the event that options are issued in the future, the deferred stock compensation expense could increase. 10. STOCK REPURCHASES: In August 2002, the Board of Directors authorized the repurchase of up to 1,000,000 shares of our common stock, which was completed in February 2003. In February 2003, PCTEL extended its stock repurchase program and announced its intention to repurchase up to one million additional shares on the open market from time to time. The Company's repurchase activities will be at management's discretion based on market conditions and the price of the Company's common stock. During the three and six months ended June 30, 2003, we repurchased 20,000 and 505,400 shares, respectively, of our outstanding common stock for approximately $3.6 million. Since the inception of the stock repurchase program we have repurchased 1,281,200 shares of our outstanding common stock for approximately $8.8 million. 16 PCTEL, INC. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the condensed interim financial statements and the notes thereto included in Item 1 of this Quarterly Report and with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 30, 2003. Except for historical information, the following discussion contains forward looking statements that involve risks and uncertainties, including statements regarding our anticipated revenues, profits, costs and expenses and revenue mix. These forward looking statements include, among others, those statements including the words, "may," "will," "plans," "seeks," "expects," "anticipates," "outlook," "intends," "believes" and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described below and elsewhere in this Quarterly Report, and in other documents we file with the SEC. Factors that might cause future results to differ materially from those discussed in the forward looking statements include, but are not limited to, those discussed in "Factors Affecting Operating Results" and elsewhere in this Quarterly Report. OVERVIEW PCTEL, Inc. is a leading provider of cost-effective wireless networking solutions, including Wi-Fi and cellular mobility software, software-defined radio products and access technology. Over the past 24 months, the Company restructured from a provider of soft and hard modems to a provider of wireless data access solutions, with the acquisition of cyberPIXIE, Inc., a wireless access provider, the acquisition of Dynamic Telecommunications, Inc., (DTI) a supplier of software defined radio products, and the sale of its HSP soft modem product line to Conexant. As a result of these acquisitions, PCTEL obtained products and technology that enabled the Company to develop an innovative wireless product portfolio consisting of both PC client and network infrastructure products, primarily for the rapidly growing mobile data consumer market, and products and technology to measure and monitor wireless networks. The Company's products provide both client and infrastructure solutions for public wireless local area network ("WLAN") environments. Client products enable public WLAN access and ease of use across a wide range of Microsoft operating systems. The infrastructure products enable cost effective "hot spot" deployments within the constraints of widely recognized networking and security standards. Customers for our WLAN products are not typically individual end-users, but Internet access service providers such as WISPs (Wireless ISPs), cellular carriers, or other service aggregators. The products are offered as custom branded offerings associated with a particular carrier and typically include carrier specific `service finder' location databases. PCTEL receives an established fee, plus annual maintenance for software. The market for Wireless Fidelity (commonly referred to as 802.11 or "Wi-Fi") data connectivity is undergoing rapid growth and change. What began as a grass roots means of broadband connectivity using unlicensed RF spectrum is now being embraced by "hot spot" locations, wireless carriers and enterprise users. In order to become widely accepted, Wi-Fi must resolve issues related to ease-of-use, security and breadth of coverage. PCTEL's solutions make it possible to enjoy a "carrier grade" Wi-Fi connection that resolves many of the issues that have hindered broad adoption by consumers and enterprise users. PCTEL's wireless product line, Segue, is a PC-based software solution that facilitates roaming and connection to wireless networks and readily addresses the expanding hotspot market. The Segue solution consists of: o the Segue Roaming Client software, o the Segue SAM Soft Access point Module for Wi-Fi networks, o the Segue Network Gateway and o the Segue Controller. 17 Our Segue Roaming Client permits wireless subscribers to install wireless network access cards and to roam from WLAN to WLAN and from cellular networks to WLANs. Our client makes wireless access to the Internet easy and seamless by providing: o a consistent look and feel regardless of operating system platform; o automatic presentation of user credentials dependent on the network being accessed; o user prioritization of network connection choices (between multiple available WLANs and cellular networks); o network specific user profiles for automatically launching VPN clients, modifying proxy settings, or automatically launching other applications; and o easy location of WLAN networks utilizing an integrated database. The Segue Roaming Client enables users to access the highest bandwidth, lowest cost source of connectivity at any location, including their enterprise WLAN, Wi-Fi hot spots or cellular data networks using CDMA, GPRS or other standards. The Segue Roaming Client enables wireless carriers, enterprises and aggregators to manage the complexities of billing and authentication with a fully branded and intuitive client software. The Segue SAM Soft Access point Module for Wi-Fi networks permits Wi-Fi enabled notebook or desktop PC's to function as a Wi-Fi access point and router without the need for external devices such as routers and access points. Segue helps reduce the costs associated with network deployments by solving problems associated with network footprint, roaming, ease of use, and billing. The Segue Network Gateway performs several critical functions for both the mobile subscriber and the service provider. It acts as a router, verifies that users are authorized to be on the network, assigns IP addresses to those users and enforces location specific policies. The Segue Network Gateway connects the Segue Controller. The Segue Controller maintains subscriber information, provides support for billing operations, and also provides central management functions for the Segue Network Gateways within its span of control. The Company's line of Segue products are sold or licensed to PC manufacturers, PC card and board manufacturers, wireless carriers, wireless ISPs, software distributors, wireless test and measurement companies, and system integrators. To further expand the Company's wireless product offerings, PCTEL acquired Dynamic Telecommunications, Inc. (DTI) in March 2003. DTI supplies software-defined radio technology to measure and monitor cellular networks. The technology is sold in three forms: o as OEM receivers to wireless test and measurement system manufacturers and carriers, o as integrated systems solutions, o and as components and systems to U.S. government agencies through prime contractors. The Company's scanning receiver collects and measures RF data, such as signal strength and base station identification in order to analyze wireless signals. The Company supplies wireless network operators, wireless infrastructure suppliers, and wireless test & measurement solution providers with receivers for their network optimization equipment. OEM Receivers The Company's initial scanning receiver platform, released in March of 1997, is marketed under tile trade name `SeeGull' and supports such wireless protocols as AMPS, ETACS, iDEN and NAMPS (first generation wireless technologies). By employing the Company's proprietary software, all of its products have the capability to support multiple wireless protocols. As such, the Company is able to "customize" its receivers and penetrate multiple markets simply by adding software to the existing receiver platform. 18 The SeeGull family of scanning receivers provide high-quality, reliable radio propagation measurements, demodulated protocol information and statistical data for cellular, PCS, 3G and other wireless networks. These products can acquire and report control channel and signal strength statistics such as average, maximum, minimum, percentile and standard deviation. The Company has extended the original SeeGull product through technology advances to support second generation (or 2G) radio technologies that make up the bulk of deployed wireless networks today. This line is called the SeeGull-DX line. In addition to supporting single band solutions, the Company has created receiver products that also support multiple bands within the same physical package. This is important for customers, for example, that own spectrum in both the cellular and PCS bands. The Company has produced a new version of the SeeGull receiver to support third generation (or 3G) technologies. This product, the SeeGull-LX, provides the capabilities of the SeeGull-DX but has a hardware platform with more memory and processing power to handle the more complex 3G-radio air interface. Like the SeeGull-DX, the SeeGull-LX is available in single and dual band configurations. System Level Solutions The Company's system products leverage the soft receiver technology used in the SeeGull family of OEM scanning receivers. In order to deliver a system solution, the Company integrates and delivers the following components to direct customers: - From one to eight SeeGull receivers and appropriate mechanical packaging - InSite PC-based data collection software (developed by the Company) - 3rd party GPS or navigation subsystem - Laptop Computer - Cables (data & power) - Antennae The Company's Multi-Mode Receiver System is designed to enhance the productivity and efficiency of customers interested in either (a) making simultaneous RF coverage measurements for Multiple wireless protocols or (b) spectrum management Supporting an Automatic Frequency Planning (AFP) process or (c) interference detection and maintenance. The Company developed this cost effective and portable solution to meet the needs of service providers, tower companies and telecommunications consultants focused on building and optimizing wireless networks. The system is based on the measurement performance of the SeeGull family of scanning receivers and is capable of capturing measurement data for up to eight wireless protocols simultaneously or providing scanning rates of up to 1,600 channels per second in a single protocol. A highly accurate internal GPS receiver communicates timing and location information during data collection. Data files stored on the computer hard drive can be exported and used in a variety of applications including mapping software, spreadsheets and other post-processing applications. In addition to the features noted above, the Multi-Mode Receiver Systems provide the user with the following features and benefits: - Simultaneous scanning of up to eight protocols; - Possible scanning rates of 1600 channels per second and 400 channels per second with base station demodulation capability; - Automatic channel list assignment based on the Multi-Mode System's analysis of external environment without operator input; - Compact size with single cable solution; Integrated database; - Very competitive price (up to one-fifth the cost of competitive products on the market); - Sophisticated software package called INSITE that includes an "auto-detect" feature that automatically configures the systems to the requirements of the external environment without technician input, providing a major innovation for the marketplace. Government Products The Company has expanded beyond our product focus on the drive-test market and has secured commercial contracts for several new applications of our core software radio technology that have grown and diversified our revenue base. The Company has developed an integrated, cost effective and portable solution to meet the needs of 19 service providers, tower companies and telecommunications consultants, who identify and manage interference within their network service areas. As the differences between traditional, purpose-built receivers for government markets and commercial drive test receiver technology have narrowed, the Company's technology has found application in the government market developing RF surveying systems, narrowband jamming systems and wide tuning range receivers. In addition to the wireless product line and software-defined radio technology, PCTEL offers our intellectual property through licensing and product royalty arrangements. The Company has over 130 patents granted or pending addressing technology essential to International Telecommunications Union (ITU) communication standards as well as other communications technology related areas (DSL, wireless, LAN). We are constantly looking to expand and strengthen our intellectual property portfolio in these areas through additional acquisitions of intellectual property. Many companies in the communications industry, such as Conexant, ESS Technology, Smart Link and others, license our technology directly or indirectly. We have filed various patent infringement lawsuits and are aggressively pursuing large and small unlicensed companies to acknowledge and license the use of applicable intellectual property from us. The company's cost of litigation on an annual basis is expected to be $3.0 to $4.0 million, all litigation is inherently risky and there is no assurance that we will prevail. The license will become fully paid in 2007. In addition, Conexant assigned 46 U.S. patents and patent applications relating to modem and other access technologies to PCTEL as part of the transaction. On March 12, 2003, PCTEL, Inc., completed its asset acquisition of Dynamic Telecommunications, Inc., ("DTI") through a newly wholly owned subsidiary PCTEL Maryland, Inc. DTI was a supplier of software-defined radio technology deployed in high-speed wireless scanning receivers, multi-protocol collection and analysis systems, interference measurement systems and radio frequency command and control software solutions. In connection with the asset acquisition, PCTEL Maryland, a wholly-owned subsidiary of PCTEL, and DTI Holdings, Inc., the sole shareholder of DTI, entered into an Asset Purchase Agreement dated as of March 12, 2003 under which our wholly-owned subsidiary acquired substantially all of the assets of DTI, including intellectual property, receivables, property and equipment and other tangible and intangible assets used in DTI's business. On May 12, 2003, PCTEL, Inc., completed the sale of certain of its assets to Conexant Systems, Inc., ("Conexant"). Conexant is a supplier of semiconductor system solutions for communications applications. In connection with the transaction, PCTEL and Conexant entered into an Asset Purchase Agreement dated as of May 8, 2003 (the "Purchase Agreement") under which Conexant acquired specified assets of PCTEL relating to a component of PCTEL's HSP modem operations and consisting of inventory, fixed assets from PCTEL's offices in Taiwan, contracts with customers and distributors related to the soft modem products, and limited intellectual property. PCTEL did not transfer any of its patent portfolio in connection with this transaction, and PCTEL retained all operating contracts and intellectual property assets associated with our hardware modem and wireless products. As of June 30, 2003, we have $91.2 million and $20.2 million in cash and cash equivalents and short-term investments, respectively, that potentially subjects us to credit and market risks. To mitigate credit risk related to short-term investments, we have an investment policy to preserve the value of capital and generate interest income from these investments without undue exposure to risk fluctuations. Market risk is the potential loss due to the change in value of a financial instrument due to interest rates or bond prices. Our policy is to invest in financial instruments with short durations, limiting interest rate exposure, and to benchmark performance against comparable benchmarks. We maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including both government and corporate obligations with ratings of A or better and money market funds. CRITICAL ACCOUNTING POLICIES We have prepared the financial information in this report in accordance with generally accepted accounting principles in the United States of America. The preparation of our condensed consolidated financial statements in accordance with generally accepted accounting principles requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the periods reported. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. Management bases its estimates and judgments on historical experience, market trends, and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Revenue Recognition Revenues consist primarily of sales of products to carriers, OEMs and distributors. Revenues from sales to customers are recognized upon shipment when title and risk of loss passes to the customers, unless we have future obligations or have to obtain customer acceptance, in which case revenue is not recorded until such obligations have been satisfied or customer acceptance has been achieved. We provide for estimated sales returns and customer rebates related to sales to carriers and OEMs at the time of shipment. Customer rebates are recorded against receivables to the extent that the gross amount has not been collected by the end customer. Once the gross amount 20 has been collected, the accrued customer rebate is then reclassified as accrued liabilities. As of June 30, 2003 and December 31, 2002, we had an allowance for customer rebates against accounts receivable of $0 and $95,000, respectively, and accrued customer rebates, presented as current liabilities on the balance sheet, of $1.1 million and $1.7 million, respectively. Revenues from sales to distributors are made under agreements allowing price protection and rights of return on unsold products. We record revenue relating to sales to distributors only when the distributors have sold the product to end-users. Customer payment terms generally range from letters of credit collectible upon shipment to open accounts payable 60 days after shipment. We also generate revenues from engineering contracts and royalties on technology licenses. Revenues from engineering contracts are recognized as contract milestones and customer acceptance are achieved. Royalty revenue is recognized when confirmation of royalties due to us is received from licensees. Furthermore, revenues from technology licenses are recognized after delivery has occurred and the amount is fixed and determinable, generally based upon the contract's nonrefundable payment terms. To the extent there are extended payment terms on these contracts; revenue is recognized as the payments become due and the cancellation privilege lapses. To date, we have not offered post-contract customer support. Inventory Write-downs and Recoveries Inventories are stated at the lower of cost or market and include material, labor and overhead costs. Inventories as of June 30, 2003 and December 31, 2002 were composed of raw materials, sub assemblies, finished goods and work-in-process. We regularly monitor inventory quantities on hand and, based on our current estimated requirements, it was determined that there was no excess inventory, not reserved, as of June 30, 2003 and December 31, 2002. Due to competitive pressures and technological innovation, it is possible that these estimates could change in the near term. For the six months ended June 30, 2003, we did not record any additional inventory write-downs. We sold most of the written down inventories and recovered $1.8 million of the former write-downs for the six months ended June 30, 2003. As of June 30, 2003, the cumulative write-down for excess inventory on hand was $0 million. Accrued Royalties We record an accrual for estimated future royalty payments for relevant technology of others used in our product offerings in accordance with SFAS No. 5, "Accounting for Contingencies." The estimated royalties accrual reflects management's broader litigation and cost containment strategies, which may include alternatives such as entering into cross-licensing agreements, cash settlements based upon our judgment that such negotiated settlements would allow management to focus more time and financial resources on the ongoing business. Accordingly, the royalties accrual reflects estimated costs of settling claims rather than continuing to defend our legal positions and is not intended to be, nor should it be interpreted as, an admission of infringement of intellectual property, valuation of damages suffered by any third parties or any specific terms that management has predetermined to agree to in the event of a settlement offer. We have accrued our best estimate of the amount of royalties payable for royalty agreements already signed, agreements that are in negotiation and unasserted but probable claims of others using advice from third party technology advisors and historical settlement rates. As of June 30, 2003 and December 31, 2002, we had accrued royalties of approximately $3.3 million and $3.7 million, respectively. However, the amounts accrued may be inadequate and we will be required to take a charge if royalty payments are settled at a higher rate than expected. In addition, settlement arrangements may require royalties for past sales of the associated products. As a result of the litigation settlement with Dr. Brent Townshend in March 2002, we made cash royalty payment of $14.3 million related to past liability and prepayment of future liabilities to Dr. Townshend. The settlement did not have a material adverse impact on the results of operations. As of June 30, 2003, the balance of the prepayments of $3.0 million was written-off due to the disposition of certain assets to Conexant. Income Taxes We provide for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 requires an asset and liability based approach in accounting for income taxes. Deferred income tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. Valuation allowances are provided against assets which are not likely to be realized. 21 We currently have a subsidiary in Japan as well as branch offices in Taiwan, France, Yugoslavia and Korea. Yugoslavia and Korea are presently in the liquidation process. The complexities brought on by operating in several different tax jurisdictions inevitably lead to an increased exposure to worldwide taxes. Should review of our tax fillings and such reviews result in unfavorable adjustments to our tax returns, our operating results and financial position could be materially and adversely affected. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes, which involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Significant management judgment is required to assess the likelihood that our deferred tax assets will be recovered from future taxable income. We maintain a full valuation allowance against our deferred tax assets. In the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. RESULTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (All amounts in tables, other than percentages, are in thousands) Revenues
----------------------------------------------------------------------------------------------------------------------- THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED JUNE ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, 30, 2003 2002 2003 2002 Revenues.................................... $ 10,176 $ 9,557 $ 23,258 $ 19,899 % change from year ago period............... 6.5% 16.9% -----------------------------------------------------------------------------------------------------------------------
Our revenues consist of product sales of Wi-Fi and cellular mobility software, software-defined radio products, access technology licensing and hard and soft modems. Revenues increased $0.6 million for the three months ended June 30, 2003 compared to the same period in 2002. Revenues for the six months ended June 30, 2003 increased $3.4 million compared to the same period in 2002. The revenue increase was primarily due to our acquisition of DTI, new wireless products sales and a one-time adjustment of $2.0 million related to adjustments to final accounts receivable reserves and customer rebate programs for the soft modem product line. Going forward, revenue will be primarily related to wireless solutions and our access technology licensing efforts. Gross Profit
----------------------------------------------------------------------------------------------------------------------- THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED JUNE ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, 30, 2003 2002 2003 2002 Gross profit................................ $ 6,418 $ 5,542 $ 12,941 $ 10,658 Percentage of revenues...................... 63.1% 58.0% 55.6% 53.6% % change from year ago period............... 15.8% 21.4% -----------------------------------------------------------------------------------------------------------------------
Cost of revenues consists primarily of cost of operations, components we purchase from third party manufacturers and also includes accrued intellectual property royalties. Gross profit increased $0.9 million for the three months ended June 30, 2003 compared to the same period in 2002 primarily as a result of wireless products higher gross profit and a one-time adjustment of $2.0 million related to adjustments to final accounts receivable reserves and customer rebate programs for the soft modem product line. Gross profit as a percentage of revenues increased from 58.0% for the three months ended June 30, 2002 to 63.1% for the three months ended June 30, 2003 and increased from 53.6% for the six months ended June 30, 2002 to 55.6% for the six months ended June 30, 2002 for the same reasons. Gross profit as a percentage of revenues was also favorably impacted due to the $0.5 million in inventory recovery. 22 Research and Development
----------------------------------------------------------------------------------------------------------------------- THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED JUNE ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, 30, 2003 2002 2003 2002 Research and development.................... $ 2,183 $ 2,761 $ 4,301 $ 5,157 Percentage of revenues...................... 21.5% 28.9% 18.5% 25.9% % change from year ago period............... (20.9)% (16.6)% -----------------------------------------------------------------------------------------------------------------------
Research and development expenses include costs for software and hardware development, prototyping, certification and pre-production costs. We expense all research and development costs as incurred. Research and development expenses decreased by $0.6 and $0.9 million for the three and six months ended June 30, 2003 compared to the same periods in 2002 primarily because of the reduction in work force in May 2003. As a percentage of revenues, research and development costs decreased for the three and six months ended June 30, 2003 for the same reasons as above. Sales and Marketing
----------------------------------------------------------------------------------------------------------------------- THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED JUNE ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, 30, 2003 2002 2003 2002 Sales and marketing......................... $ 1,892 $ 1,853 $ 4,154 $ 3,491 Percentage of revenues...................... 18.6% 19.4% 17.9% 17.5% % change from year ago period............... 2.1% 19.0% -----------------------------------------------------------------------------------------------------------------------
Sales and marketing expenses consist primarily of personnel costs, sales commissions and marketing costs. Marketing costs include promotional costs, public relations and trade shows. Sales and marketing expenses increased $0.04 and $0.7 million for the three and six months ended June 30, 2003 compared to the same period in 2002 due to higher trade shows costs. Sales and marketing expenses as a percentage of revenues changed slightly for the three and six months ended June 30, 2003 compared to the same period in 2002. General and Administrative
----------------------------------------------------------------------------------------------------------------------- THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED JUNE ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, 30, 2003 2002 2003 2002 General and administrative.................. $ 2,800 $ 1,142 $ 4,651 $ 2,608 Percentage of revenues...................... 27.5% 11.9% 20.0% 13.1% % change from year ago period............... 145.2% 78.3% -----------------------------------------------------------------------------------------------------------------------
General and administrative expenses include costs associated with our general management and finance functions as well as professional service charges, such as legal, tax, audit and accounting fees. Other general expenses include rent, insurance, utilities, travel and other operating expenses to the extent not otherwise allocated to other functions. General and administrative expenses increased $1.7 and $2.0 million for the three and six months ended June 30, 2003 compared to the same period in 2002. The increase was due to inclusion of DTI's expenses and legal costs associated with our patent infringement litigation against 3Com, U.S. Robotics, Broadcom, Agere Systems and Lucent Technologies. We anticipate spending between $3.0 and $4.0 million per year in legal expenses related to these lawsuits. 23 Amortization of Other Intangible Assets
----------------------------------------------------------------------------------------------------------------------- THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED JUNE ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, 30, 2003 2002 2003 2002 Amortization of other intangible assets..... $ 339 $ -- $ 438 $ -- Percentage of revenues...................... 3.3% 1.9% -----------------------------------------------------------------------------------------------------------------------
In March 2003, we acquired the assets of DTI for a total of $11.0 million in cash. The acquisition was accounted for under the purchase method of accounting and the results of operations of DTI were included in our financial statements from March 12, 2003, the date of acquisition. Under the purchase method of accounting, if the purchase price exceeds the net tangible assets acquired, the difference is recorded as excess purchase price and allocated to in-process research and development, goodwill and other intangible assets. The purchase price of $11.0 million was allocated to the assets acquired and liabilities assumed at their estimated fair values on the date of acquisition as determined by an independent valuation firm. We attributed $2.3 million (an additional $0.5 million capitalized in the quarter) to net assets acquired, $1.1 million to acquired in-process research and development, $200,000 to the covenant not to compete and $4.4 million to other intangible assets, net, in the accompanying consolidated balance sheets. The $3.0 million excess of the purchase price over the fair value of the net tangible and intangible assets was allocated to goodwill. We expensed in-process research and development and amortize the covenant not to compete over two years and other intangible assets over an estimated useful life of four years. In May 2002, we acquired the assets of cyberPIXIE, Inc. for a total of $1.6 million in cash. The purchase price of $1.6 million was allocated to the assets acquired and liabilities assumed at their estimated fair values on the date of acquisition. The acquisition was accounted for under the purchase method of accounting. Under the purchase method of accounting, if the purchase price exceeds the net tangible assets acquired, the difference is recorded as excess purchase price and allocated to in-process research and development, goodwill and other intangible assets. In this circumstance, the difference was $1.4 million. We attributed $102,000 of the excess purchase price to in-process research and development and the balance of $1.3 million to goodwill ($863,000) and developed technology ($452,000). We have classified this balance of $1.3 million as goodwill and other intangible assets, net, in the accompanying consolidated balance sheets and are amortizing the developed technology over a useful life of three years. Effective January 1, 2002, we have adopted the provisions of SFAS No. 142, "Goodwill and Other Intangibles," under which goodwill is no longer being amortized and will be tested for impairment at least annually. As a result of the acquisitions discussed above, amortization of intangible assets increased to $438,000 for the six months ended June 30, 2003. Restructuring Charges
----------------------------------------------------------------------------------------------------------------------- THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED JUNE ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, 30, 2003 2002 2003 2002 Restructuring charges....................... $ 2,496 $ 647 $ 2,651 $ 647 Percentage of revenues...................... 24.5% 6.8% 11.4% 3.3% -----------------------------------------------------------------------------------------------------------------------
Restructuring expenses increased $1.8 and $2.0 million for the three and six months ended June 30, 2003 compared to the same periods in 2002. These increases are related to 2003 restructuring. 24 26 employees, both foreign and domestic, were terminated subsequent to the sale of the soft modem product line to Conexant in May 2003 along with the related facilities closures, which will occur over the next two quarters. The total restructuring may aggregate $2.8 million consisted of severance and employment related costs of $1.5 million and costs related to closure of excess facilities as a result of the reduction in force of $1.3 million. For the three months ended June 30, 2003, $2.5 million was expensed. The remaining balance of $0.3 million would be expensed during the remainder of the year. Amortization of Deferred Compensation
----------------------------------------------------------------------------------------------------------------------- THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED JUNE ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, 30, 2003 2002 2003 2002 Amortization of deferred compensation ...... $ 241 $ 183 $ 540 $ 358 Percentage of revenues...................... 2.4% 1.9% 2.3% 1.8% % change from year ago period............... 31.7% 50.8% -----------------------------------------------------------------------------------------------------------------------
In connection with the grant of restricted stock to employees in 2002 and 2001, we recorded deferred stock compensation of $3.7 million and $1.8 million, respectively; representing the fair value of our common stock on the date the restricted stock was granted. Such amounts are presented as a reduction of stockholders' equity and are amortized ratably over the vesting period of the applicable shares. In connection with the grant of stock options to employees prior to our initial public offering in 1999, we recorded deferred stock compensation of $5.4 million representing the difference between the exercise price and deemed fair value of our common stock on the date these stock options were granted. Such amount is presented as a reduction of stockholders' equity and is amortized ratably over the vesting period of the applicable options. The amortization of deferred stock compensation increased $0.06 and $0.2 million for the three and six months ended June 30, 2003 compared to the same period in 2002 primarily due to the grant of restricted stock to employees in 2002. We expect the amortization of deferred stock compensation to be approximately $200,000 for each of the two remaining quarters in 2003, based on restricted stock option grants through December 31, 2002. The amount of deferred stock compensation expense to be recorded in future periods could decrease if options for which accrued but unvested compensation has been recorded are forfeited. If we grant additional restricted stock, the amortization of deferred compensation will increase. Other Income, Net
----------------------------------------------------------------------------------------------------------------------- THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED JUNE ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, 30, 2003 2002 2003 2002 Other income, net........................... $ 334 $ 937 $ 829 $ 1,990 Percentage of revenues...................... 3.3% 9.8% 3.6% 10.0% % change from year ago period............... (64.4)% (58.3)% -----------------------------------------------------------------------------------------------------------------------
Other income, net, consists of interest income, net of interest expense. Interest income is expected to fluctuate over time. Other income, net, decreased $0.6 and $1.1 million for the three and six months ended June 30, 2003 compared to the same period in 2002 primarily due to the decrease in interest rates and change in cash and investment balances due to net cash outflow of the stock repurchase program offset by the stock options exercised and the net cash outflow for the asset acquisition of Dynamic Telecommunications, Inc. offset by the proceeds received from the disposition of assets to Conexant. 25 Provision for Income Taxes
----------------------------------------------------------------------------------------------------------------------- THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED JUNE ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, 30, 2003 2002 2003 2002 Provision for income taxes.................. $ 29 $ 31 $ 93 $ 63 -----------------------------------------------------------------------------------------------------------------------
The realization of deferred tax assets is dependent on future profitability. During the third quarter of 2001, we recorded $5.3 million of provision for income taxes to establish valuation allowances against deferred tax assets in accordance with the provisions of FASB No. 109, "Accounting for Income Taxes" as a result of uncertainties regarding realizability. For the three and six months ended June 30, 2003, we recorded $29,000 and $93,000 of provision primarily for foreign income taxes. LIQUIDITY AND CAPITAL RESOURCES
----------------------------------------------------------------------------------------------------------------------- SIX MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 2003 2002 Net cash provided by (used in) operating activities............................ $ 4,808 $ (14,987) Net cash provided by investing activities...................................... 31,206 14,689 Net cash provided by financing activities...................................... 2,198 2,403 Cash, cash equivalents and short-term investments at the end of period......... 111,423 111,049 Working capital at the end of period........................................... 105,542 103,305 -----------------------------------------------------------------------------------------------------------------------
The increase in net cash provided by operating activities for the six months ended June 30, 2003 compared to the same period in 2002 was primarily due to decrease in accounts receivable and the litigation settlement paid to Dr. Brent Townsend of $14.3 million in 2002 which negatively impacted cash last year. We anticipate spending between $3.0 and $4.0 million per year in legal expenses related to these lawsuits. Net cash provided by investing activities for the six months ended June 30, 2003 consists primarily of proceeds from the sales and maturities of the short-term investments, net of purchases of short-term investments, net cash outflow for the asset acquisition of Dynamic Telecommunications, Inc. against the proceeds received from the disposition to Conexant. The decrease in net cash provided by financing activities for the six months ended June 30, 2003 consists of payments for the repurchase of common stock associated with the shares repurchased by PCTEL net of proceeds from the issuance of common stock on exercise of stock options. In August 2002, the Board of Directors authorized the repurchase of up to 1,000,000 shares of our common stock, which was completed in February 2003. In February 2003, PCTEL extended its stock repurchase program and announced its intention to repurchase up to one million additional shares on the open market from time to time. The Company's repurchase activities will be at management's discretion based on market conditions and the price of the Company's common stock. During the three and six months ended June 30, 2003, we repurchased 20,000 and 505,400 shares, respectively, of our outstanding common stock for approximately $3.6 million. As of June 30, 2003, we had $111.8 million in cash, cash equivalents and short-term investments and working capital of $104.9 million. Accounts receivable, as measured in days sales outstanding, was 43 days at June 30, 2003 compared to 25 days at June 30, 2002. The increase in days sales outstanding from June 30, 2002 to 2003 was primarily due to the change from the HSP soft modem product line to the DTI cash collection cycle. We believe that our existing sources of liquidity, consisting of cash, short-term investments and cash from operations, will be sufficient to meet our working capital needs for the foreseeable future. We will continue to evaluate opportunities for development of new products and potential acquisitions of technologies or businesses that could complement our business. We may use available cash or other sources of funding for such purposes. However, possible investments in or acquisitions of complementary businesses, products or technologies, or cash settlements resulting from new litigation, may require us to use our existing working capital or to seek additional financing. In addition, if the current economic downturn prolongs, we will need to continue to expend our cash reserves to fund our operations. As of June 30, 2003, we have non-cancelable operating leases for office facilities of $1.6 million through 2007, unpaid restructuring (severance and employment related costs and costs related to closure of excess facilities) of $1.5 million through December 2004 and no outstanding firm inventory purchase contract commitments with our major suppliers. 26 The following summaries our contractual obligations (non-cancelable operating leases) for office facilities and the 2003 restructuring as of June 30, 2003 and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):
Less than After Total 1 year 1-3 years 4-5 years 5 years -------------------------------------------------------------- Contractual obligations Operating leases $ 1,609 $ 217 $ 1,148 $ 244 $ - -------------------------------------------------------------- 2003 Restructuring 1,456 705 751 - - -------------------------------------------------------------- -------------------------------------------------------------- Total obligations $ 3,065 $ 922 $ 1,899 $ 244 $ - ==============================================================
As part of the acquisition of DTI there is an earn out potential of $7.5 million over two years if certain milestones are achieved. FACTORS AFFECTING OPERATING RESULTS This quarterly report on Form 10-Q contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking statements as a result of certain factors including those set forth below. RISKS RELATED TO OUR BUSINESS OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND SUCCESSFULLY INTRODUCE NEW AND ENHANCED PRODUCTS, WHICH MEET THE NEEDS OF OUR CUSTOMERS AND ACHIEVE BROAD MARKET ACCEPTANCE. Our revenue depends on our ability to anticipate our customers' needs and develop products that address those needs. Our future success will depend on our ability to introduce new products for the wireless market, anticipate improvements and enhancements in wireless technology and in WLAN standards, and to develop products that are competitive in the rapidly changing wireless market. Introduction of new products and product enhancements will require coordination of our efforts with those of our suppliers and manufacturers to rapidly achieve volume production. If we fail to coordinate these efforts, develop product enhancements or introduce new products that meet the needs of our customers as scheduled, our revenues may be reduced and our business may be harmed. We cannot assure you that product introductions will meet the anticipated release schedules or that our wireless products will be competitive in the market. Furthermore, given the emerging nature of the wireless market, there can be no assurance our products and technology will not be rendered obsolete by alternative or competing technologies. If we are unable to successfully compete in a particular market with internally developed products, we may have to license technology from other businesses or acquire other businesses as an alternative to internal research and development. FAILURE TO MANAGE OUR TECHNOLOGICAL AND PRODUCT GROWTH COULD STRAIN OUR MANAGEMENT, FINANCIAL AND ADMINISTRATIVE RESOURCES. Our ability to successfully sell our products and implement our business plan in rapidly evolving markets requires an effective management planning process. Future product expansion efforts could be expensive and put a strain on our management by significantly increasing the scope of their responsibilities and by increasing the demands on their management abilities during periods of constrained spending. To effectively manage our growth in 27 these new technologies, we must enhance our marketing, sales, research and development areas. This will require management to effectively manage significant technological advancement within reduced budgets. COMPETITION WITHIN THE CONNECTIVITY AND WIRELESS NETWORKING INDUSTRIES IS INTENSE AND IS EXPECTED TO INCREASE SIGNIFICANTLY. OUR FAILURE TO COMPETE SUCCESSFULLY COULD MATERIALLY HARM OUR PROSPECTS AND FINANCIAL RESULTS. The connectivity device and wireless markets are intensely competitive. We may not be able to compete successfully against current or potential competitors. We expect competition to increase in the future as current competitors enhance their product offerings, new suppliers enter the connectivity device and wireless markets, new communication technologies are introduced and additional networks are deployed. In addition, our client software competes with software developed internally by Network Interface Card (NIC) vendors, service providers for local 802.11 networks, and with software developed by large systems integrators. Increased competition could adversely affect our business and operating results through pricing pressures, the loss of market share and other factors. The principal competitive factors affecting wireless markets include the following: - maintaining effective data throughput and coverage area, interference immunity and network security and scalability, - keeping product costs low while, at the same time, increasing roaming capability, decreasing power consumption and the size of products and improving product reliability, ease of use, brand recognition and product features and applications, - integration with existing technology, - maintaining industry standards and obtaining product certifications as wireless networks continue to become more sophisticated, - decreasing product time to market, - complying with changes to government regulations with respect to each country served and related to the use of radio spectrum, and - obtaining favorable carrier and OEM relationships, marketing alliances and effective distribution channels. Competitors in the market for products and technology that enable roaming between and among 802.11 wireless and cellular networks include Aptilo, Boingo, BVRP, Cisco, Colubris, Funk, GRIC, IBM, iPass, ipUnplugged, Microsoft, NetnearU, Nokia, Nomadix, Pronto Networks, Sierra Wireless and Starfish. We could also face future competition from companies that offer alternative communications solutions, or from large computer companies, PC peripheral companies and other large networking equipment companies. Competitors in the software radio product space and specifically for OEM receiver products include Agilent, Berkeley Varitronics, Comarco, Grayson Wireless, and Rohde & Schwarz. Furthermore, we could face competition from certain of our customers, which have, or could acquire, wireless engineering and product development capabilities, or might elect to offer competing technologies. We can offer no assurance that we will be able to compete successfully against these competitors or that the competitive pressures we face will not adversely affect our business or operating results. Many of our present and potential competitors have substantially greater financial, marketing, technical and other resources with which to pursue engineering, manufacturing, marketing, and distribution of their products. These competitors may succeed in establishing technology standards or strategic alliances in the connectivity device and wireless markets, obtain more rapid market acceptance for their products, or otherwise gain a competitive advantage. We can offer no assurance that we will succeed in developing products or technologies that are more effective than those developed by our competitors. We can offer no assurance that we will be able to compete successfully against existing and new competitors as the connectivity wireless markets evolve and the level of competition increases. OUR BUSINESS WILL DEPEND ON RAPIDLY EVOLVING TELECOMMUNICATIONS AND INTERNET INDUSTRIES. Our future success is dependent upon the continued growth of the data communications and wireless industries, particularly with regard to Internet usage. The global data communications and Internet industries are evolving rapidly and it is difficult to predict potential growth rates or future trends in technology development. We cannot assure you that the deregulation, privatization and economic globalization of the worldwide telecommunications market that has resulted in increased competition and escalating demand for new technologies and services will 28 continue in a manner favorable to us or our business strategies. In addition, there can be no assurance that the growth in demand for wireless and Internet services, and the resulting need for high speed or enhanced data communications products and wireless systems, will continue at its current rate or at all. OUR ABILITY TO GROW OUR BUSINESS MAY BE THREATENED IF THE DEMAND FOR WIRELESS SERVICES IN GENERAL AND WLAN PRODUCTS IN PARTICULAR DOES NOT CONTINUE TO GROW. Our success in the wireless market is dependent on the continued trend toward wireless telecommunications and data communications services. If the rate of growth slows and service providers reduce their capital investments in wireless infrastructure or fail to expand into new geographic markets, our revenue may decline. Wireless access solutions relatively are unproven in the marketplace and some of the wireless technologies have only been commercially introduced in the last few years. We only began offering wireless products in the second quarter of fiscal 2002. If wireless access technology turns out to be unsuitable for widespread commercial deployment, we may not be able to generate enough sales to achieve and grow our business. We have listed below some of the factors that we believe are key to the success or failure of wireless access technology: - reliability and security of wireless access technology and the perception by end-users of its reliability and security, - capacity to handle growing demands for faster transmission of increasing amounts of data, voice and video, - the availability of sufficient frequencies for network service providers to deploy products at commercially reasonable rates, - cost-effectiveness and performance compared to wire line or other high speed access solutions, whose prices and performance continue to improve, - suitability for a sufficient number of geographic regions, and - availability of sufficient site locations for wireless access. The factors listed above influence our customers' purchase decisions when selecting wireless versus other high-speed access technology. For example, because of the frequency with which individuals using cellular phones experience fading or a loss of signal, customers often have the perception that all wireless technologies will have the same reliability constraints even though the wireless technology underlying wireless access products does not have the same problems as cellular phones. In some geographic areas, because of adverse weather conditions that affect wireless transmissions, but not wire line technologies, wireless products are not as successful as wire line technology. In addition, future legislation, legal decisions and regulation relating to the wireless telecommunications industry may slow or delay the deployment of wireless networks. Wireless access solutions, including WLANs, compete with other high-speed access solutions such as digital subscriber lines, cable modem technology, fiber optic cable and other high-speed wire line and satellite technologies. If the market for our wireless solutions fails to develop or develops more slowly than we expect due to this competition, our sales opportunities will be harmed. Many of these alternative technologies can take advantage of existing installed infrastructure and are generally perceived to be reliable and secure. As a result, they have already achieved significantly greater market acceptance and penetration than wireless access technologies. Moreover, current wireless access technologies have inherent technical limitations that may inhibit their widespread adoption in many areas. We expect wireless access technologies to face increasing competitive pressures from both current and future alternative technologies. In light of these factors, many service providers may be reluctant to invest heavily in wireless access solutions, including WLANs. If service providers do not continue to establish WLAN "hot spots," we may not be able to generate sales for our WLAN products and our revenue may decline. OUR GROSS MARGINS MAY VARY BASED ON THE MIX OF SALES OF OUR PRODUCTS AND LICENSES OF OUR INTELLECTUAL PROPERTY, AND THESE VARIATIONS MAY CAUSE OUR NET INCOME TO DECLINE. We derive a significant portion of our sales from our software-based connectivity products. We expect gross margins on newly introduced products generally to be higher than our existing products. However, due in part to the competitive pricing pressures that affect our products and in part to increasing component and manufacturing costs, we expect gross margins from both existing and future products to decrease over time. In addition, licensing 29 revenues from our intellectual property historically have provided higher margins than our product sales. Changes in the mix of products sold and the percentage of our sales in any quarter attributable to products as compared to licensing revenues could cause our quarterly results to vary and could result in a decrease in gross margins and net income. WE MAY NEVER ACHIEVE THE ANTICIPATED BENEFITS FROM OUR ACQUISITION OF DYNAMIC TELECOMMUNICATIONS, INC. We acquired Dynamic Telecommunications, Inc. in March 2003 as part of our continuing efforts to expand our wireless business and product offerings. We may experience difficulties in achieving the anticipated benefits of our acquisition of Dynamic Telecommunications. Dynamic Telecommunication's business utilizes software-defined radio technology to optimize and plan wireless networks. This acquisition represents a significant expansion of and new direction for our wireless business. Potential risks with this acquisition include: - large wireless carriers choosing to participate in Wi-Fi as a viable wireless access technology; - successfully developing and marketing security-related applications for the software-defined radio technology of Dynamic Telecommunications; - reduction or delay of capital expenditures by wireless operations for network deployments; - inability to retain key employees of Dynamic Telecommunications; - diversion of management's attention from other business concerns; - impairment of assets related to resulting goodwill, and reductions in our future operating results from amortization of intangible assets; - difficulties in assimilation of acquired personnel, operations, technologies or products; - possible impairment of relationships with employees and customers as a result of the acquisition of Dynamic Telecommunications; and - acceptance of Wi-Fi as a viable technology for public Internet access. Furthermore, under the asset purchase agreement, PCTEL has an obligation to pay additional consideration to Dynamic Telecommunications if the business of Dynamic Telecommunications meets specified earnings targets. Any such earn-out payments may be paid, at our option, in cash or a combination of cash and our common stock. If the earn-out payments are paid in common stock, this would dilute our existing stockholders. WE MAY EXPERIENCE INTEGRATION OR OTHER PROBLEMS WITH POTENTIAL ACQUISITIONS, WHICH COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS OR RESULTS OF OPERATIONS. NEW ACQUISITIONS COULD DILUTE THE INTERESTS OF EXISTING STOCKHOLDERS, AND THE ANNOUNCEMENT OF NEW ACQUISITIONS COULD RESULT IN A DECLINE IN THE PRICE OF OUR COMMON STOCK. We may in the future make acquisitions of, or large investments in, businesses that offer products, services, and technologies that we believe would complement our products or services, including wireless products and technology. We may also make acquisitions of, or investments in, businesses that we believe could expand our distribution channels. Even if we were to announce an acquisition, we may not be able to complete it. Additionally, any future acquisition or substantial investment would present numerous risks, including: - difficulty in integrating the technology, operations or work force of the acquired business with our existing business, - disruption of our on-going business, - difficulty in realizing the potential financial or strategic benefits of the transaction, - difficulty in maintaining uniform standards, controls, procedures and policies, - possible impairment of relationships with employees and customers as a result of integration of new businesses and management personnel, and 30 - impairment of assets related to resulting goodwill, and reductions in our future operating results from amortization of intangible assets. We expect that future acquisitions could provide for consideration to be paid in cash, shares of our common stock, or a combination of cash and our common stock. If consideration for a transaction is paid in common stock, this would further dilute our existing stockholders. OUR REVENUES MAY FLUCTUATE EACH QUARTER DUE TO BOTH DOMESTIC AND INTERNATIONAL SEASONAL TRENDS. Wi-Fi is too new for us to be able to predict seasonal revenue patterns. Such patterns are true for wireless test and measurements businesses, such as DTI's, where capital spending is involved. We are currently expanding our sales in international markets, particularly in Europe and Asia. To the extent that our revenues in Europe and Asia or other parts of the world increase in future periods, we expect our period-to-period revenues to reflect seasonal buying patterns in these markets. 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 integration of our products by an original equipment manufacturer and carriers is typically limited during the initial release to evaluate product performance, - the development and commercial introduction of products incorporating new technologies frequently are delayed, and o significant portion of our operating expenses is relatively fixed. IP RIGHTS WIRELESS WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY RIGHTS WITH RESPECT TO OUR WIRELESS BUSINESS AND THESE RIGHTS OFFER ONLY LIMITED PROTECTION AGAINST COMPANIES WHO MAY INFRINGE UPON OUR INTELLECTUAL PROPERTY. Our wireless products are dependent on trademarks and know how and other intellectual property rights. Despite precautions that we take, it may be possible for unauthorized third parties to copy aspects of our current or future products or to obtain and use information that we regard as proprietary. Unauthorized use of our wireless technology may result in development of products that compete with our products, which could impair our ability to grow or sustain our wireless business and our related revenues. As a result our business, financial condition, results of operations, and prospects may be materially and adversely affected. Policing unauthorized use of proprietary technology is difficult, and some foreign laws do not protect our proprietary rights to the same extent as United States laws. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Litigation could result in substantial costs and diversion of resources, including management attention. We rely primarily on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. These means of protecting our proprietary rights may not be adequate. For example, pending patents may never be issued and current patents may be invalidated. As a result, these patents, both issued and pending, may not prove enforceable in actions against companies using technology we believe to be proprietary. WE MAY BE SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY ASSOCIATED WITH OUR WIRELESS BUSINESS AND THIS COULD BE COSTLY TO DEFEND AND COULD PREVENT US FROM USING OR SELLING THE CHALLENGED TECHNOLOGY. In recent years, there has been significant litigation in the United States involving intellectual property rights. We have from time to time in the past-received correspondence from third parties alleging that we infringe the third 31 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 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. IN ORDER FOR US TO OPERATE AT A PROFITABLE LEVEL AND CONTINUE TO INTRODUCE AND DEVELOP NEW PRODUCTS FOR EMERGING MARKETS, WE MUST ATTRACT AND RETAIN OUR EXECUTIVE OFFICERS AND QUALIFIED TECHNICAL, SALES, SUPPORT AND OTHER ADMINISTRATIVE PERSONNEL. Our past performance has been and our future performance is substantially dependent on the performance of our current executive officers and certain key engineering, sales, marketing, financial, technical and customer support personnel. If we lose the services of our executives or key employees, replacements could be difficult to recruit and, as a result, we may not be able to grow our business. Competition for personnel, especially qualified engineering personnel, is intense. We are particularly dependent on our ability to identify, attract, motivate and retain qualified engineers with the requisite education, background and industry experience. As of June 30, 2003, we employed a total of 34 people in our engineering department. If we lose the services of one or more of our key engineering personnel, our ability to continue to develop products and technologies responsive to our markets will be impaired. WE 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. Segue Client: Our products are software products that operate on off-the-shelf 802.11b/g hardware. Segue Soft AP (SAM): We rely on our ability to forge relationships with 802.11 chipset manufacturers, in order to ensure that our software is compatible with their chipsets. There are many risks associated with this: - Chipset manufacturers general unwillingness to partner with PCTEL, - Chipset manufacturers not seeing the value provided by Soft AP; and - Chipset manufacturers viewing Soft AP as a threat to the hardware AP side of the business. 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. 32 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 a subsidiary in Japan as well as branch offices in Taiwan, France, Yugoslavia and Korea. Yugoslavia and Korea are presently in the liquidation process. The complexities resulting from by operating in several different tax jurisdictions inevitably leads to an increased exposure to worldwide tax challenges. RISKS RELATED TO OUR INDUSTRY IF THE WIRELESS MARKET DOES NOT GROW AS WE ANTICIPATE, OR IF OUR WIRELESS PRODUCTS ARE NOT ACCEPTED IN THESE MARKETS, OUR REVENUES MAY BE ADVERSELY AFFECTED. Our future success depends on market demand and growth patterns for products using wireless technology. Our wireless products may not be successful as a result of the following reasons: - intense competition in the wireless market, - our relative inexperience in developing, marketing, selling and supporting these products, and - inability of these products to complement our legacy business. If these new wireless products are not accepted in the markets as they are introduced, our revenues and profitability will be negatively affected. OUR INDUSTRY IS CHARACTERIZED BY RAPIDLY CHANGING TECHNOLOGIES. IF WE ARE NOT SUCCESSFUL IN RESPONSE TO RAPIDLY CHANGING TECHNOLOGIES, OUR PRODUCTS MAY BECOME OBSOLETE AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY. The Internet access business is characterized by rapidly changing technologies, short product life cycles and frequent new product introductions. To remain competitive, we have successfully introduced several new products. Both the cellular (2.5G) and WLAN (802.11) space is 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 Internet 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, international regulatory bodies are beginning to adopt standards for the communications industry. Although our business has not been hurt by any regulations to date, in the future, delays caused by our compliance with regulatory requirements may result in order cancellations or postponements of product purchases by our customers, which would reduce our profitability. RISKS RELATED TO OUR LICENSING PROGRAM IP 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. 33 We may not be able to sustain or grow our revenue from the licensing of our intellectual property. In addition to our wireless product line and software-defined radio technology, we offer our intellectual property through licensing and product royalty arrangements. We have over 130 patents granted or pending addressing both essential International Telecommunications Union and non-essential technologies. We intend to continue our efforts to expand our intellectual property portfolio. In connection with our intellectual property licensing efforts, we have filed several patent infringement lawsuits and are aggressively pursuing unlicensed companies to license their unauthorized use of our intellectual property. We have pending patent infringement litigation claims with 3Com, U.S. Robotics, Broadcom, Agere and Lucent. We expect litigation to continue to be necessary to enforce our intellectual property rights and to determine the validity and scope of the proprietary rights of others. Because of the high degree of complexity of the intellectual property at issue, the inherent uncertainties of litigation in general and the preliminary nature of these litigation matters, we cannot assure you that we will ultimately prevail or receive the judgments that we seek. We may not be able to obtain licensing agreements from these companies on terms favorable to us, if at all. In addition, we may be required to pay substantial monetary damages as a result of claims these companies have brought against us which could materially and adversely affect our business, financial condition and operating results. LITIGATION EFFORTS RELATED TO OUR LICENSING PROGRAM ARE EXPECTED TO BE COSTLY AND MAY NOT ACHIEVE OUR OBJECTIVES Litigation such as our suits with 3Com, Broadcom, U.S. Robotics, Agere and Lucent can take years to resolve and can be expensive to pursue or defend. We currently expect our intellectual property litigation costs to be approximately $3.0 to $4.0 million on an annual basis. In addition, the allegations and claims involved in these lawsuits, even if ultimately resolved in our favor, could be time consuming to litigate and divert management attention. We may not ultimately prevail in these matters or receive the judgments that we seek. We could also face substantial monetary damages as a result of claims others bring against us. In addition, courts' decisions on current pending and future motions could have the effect of determining the ultimate outcome of the litigation prior to a trial on the merits, or strengthen or weaken our ability to assert claims and defenses in the future. Accordingly, an adverse judgment could seriously harm our business, financial position and operating results and cause our stock price to decline substantially. WE EXPECT TO CONTINUE TO BE SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY CLAIMS RELATED TO OUR LICENSING PROGRAM WHICH COULD IMPAIR OUR ABILITY TO GROW OR SUSTAIN REVENUES FROM OUR LICENSING EFFORTS. 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 claiming that challenge the validity of our intellectual property or that allege that we have infringed third party intellectual property rights. Any of these claims could results in substantial damages against us and could impair our ability to grow and sustain our licensing business. This could materially and adversely affect our business, financial condition, operating results and prospects. As a result, at least in part, of our licensing efforts to date, we are currently subject to claims from 3Com, U.S. Robotics, Broadcom, Agere and Lucent regarding patent infringement matters of the nature described above. We have also been subject to claims from others in the past regarding similar matters. In addition, in recent years, there has been significant litigation in the United States involving intellectual property rights. We expect these claims to increase as our intellectual property portfolio becomes larger. Intellectual property claims against us, and any resulting lawsuit, may result in our incurring significant expenses and could subject us to significant liability for damages and invalidate what we currently believe are our proprietary rights. These lawsuits, regardless of their merits or success, would likely be time-consuming and expensive to resolve and could divert management's time and attention. OUR ABILITY TO ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS MAY BE LIMITED, AND ANY LIMITATION COULD ADVERSELY AFFECT OUR ABILITY TO SUSTAIN OR INCREASE REVENUE FROM OUR LICENSING PROGRAM. Our ability to sustain and grow revenue from the licensing of our intellectual property is dependant on our ability to enforce our intellectual property rights. Our ability to enforce these rights is subject to may challenges may be limited. For example, one or more of our pending patents may never be issued. In addition, our patents, both issued and pending, may not prove enforceable in actions against alleged infringers. 3Com, U.S. Robotics, Broadcom, Agere and Lucent have currently pending claims seeking to invalidate on 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, 34 some foreign laws, including those of various countries in Asia, do not protect our proprietary rights to the same extent as United States laws. WE HAVE ACCRUED FOR NEGOTIATED LICENSE FEES AND ESTIMATED ROYALTY SETTLEMENTS RELATED TO EXISTING AND PROBABLE CLAIMS OF PATENT INFRINGEMENT. IF THE ACTUAL SETTLEMENTS EXCEED THE AMOUNTS ACCRUED, ADDITIONAL LOSSES COULD BE SIGNIFICANT, WHICH WOULD ADVERSELY AFFECT FUTURE OPERATING RESULTS. We recorded an accrual for estimated future royalty payments for relevant technology of others used in our product offerings in accordance with SFAS No. 5, "Accounting for Contingencies." The estimated royalties accrual reflects management's broader litigation and cost containment strategies, which may include alternatives such as entering into cross-licensing agreements, cash settlements and/or ongoing royalties based upon our judgment that such negotiated settlements would allow management to focus more time and financial resources on the ongoing business. Accordingly, the royalties accrual reflects estimated costs of settling claims rather than continuing to defend our legal positions, and is not intended to be, nor should it be interpreted as, an admission of infringement of intellectual property, valuation of damages suffered by any third parties or any specific terms that management has predetermined to agree to in the event of a settlement offer. We have accrued our best estimate of the amount of royalties payable for royalty agreements already signed and unasserted, but probable, claims of others using advice from third party technology advisors and historical settlements. Should the final license agreements result in royalty rates significantly higher than our current estimates, our business, operating results and financial condition could be materially and adversely affected. RISKS RELATED TO OUR COMMON STOCK OUR STOCK PRICE MAY BE VOLATILE BASED ON A NUMBER OF FACTORS, SOME OF WHICH ARE NOT IN OUR CONTROL. The trading price of our common stock has been highly volatile. The common stock price has fluctuated at a low of $4.58 to a high of $13.34 over the last twelve months. Our stock price could be subject to wide fluctuations in response to a variety of factors, many of which are out of our control, including: - actual or anticipated variations in quarterly operating results, - announcements of technological innovations, - new products or services offered by us or our competitors, - changes in financial estimates by securities analysts, - conditions or trends in our industry, - our announcement of significant acquisitions, strategic partnerships, joint ventures or capital commitments, - additions or departures of key personnel, - mergers and acquisitions, and - sales of common stock by 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. 35 PROVISIONS IN OUR CHARTER DOCUMENTS MAY INHIBIT A CHANGE OF CONTROL OR A CHANGE OF MANAGEMENT WHICH MAY CAUSE THE MARKET PRICE FOR OUR COMMON STOCK TO FALL AND MAY INHIBIT A TAKEOVER OR CHANGE IN OUR CONTROL THAT A STOCKHOLDER MAY CONSIDER FAVORABLE. Provisions in our charter documents could discourage potential acquisition proposals and could delay or prevent a change in control transaction that our stockholders may favor. These provisions could have the effect of discouraging others from making tender offers for our shares, and as a result, these provisions may prevent the market price of our common stock from reflecting the effects of actual or rumored takeover attempts and may prevent stockholders from reselling their shares at or above the price at which they purchased their shares. These provisions may also prevent changes in our management that our stockholders may favor. Our charter documents do not permit stockholders to act by written consent, do not permit stockholders to call a stockholders meeting, and provide for a classified board of directors, which means stockholders can only elect, or remove, a limited number of our directors in any given year. Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock in one or more series. The board of directors can fix the price, rights, preferences, privileges and restrictions of this preferred stock without any further vote or action by our stockholders. The rights of the holders of our common stock will be affected by, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. Further, the issuance of shares of preferred stock may delay or prevent a change in control transaction without further action by our stockholders. As a result, the market price of our common stock may drop. 36 PCTEL, INC. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ================================================================================ We are exposed to market risks. We manage the sensitivity of our results of operations to credit risks and interest rate risk by maintaining a conservative investment portfolio, which is comprised solely of, highly rated, short-term investments. We have investments in both fixed rate and floating rate interest earning instruments. Fixed rate securities may have their fair market value adversely impacted based on the duration of such investments if interest rates rise, while floating rate securities and the reinvestment of funds from matured fixed rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents, short-term and long-term investments in a variety of securities, including both government and corporate obligations with ratings of A or better, and money market funds. We have accumulated a $94,783 and $263,000 unrealized holding gain as of June 30, 2003 and December 31, 2002, respectively. A hypothetical decrease of 10% in market interest rates would not result in a material decrease in interest income earned through maturity on investments held at June 30, 2003. We do not hold or issue derivative, derivative commodity instruments or other financial instruments for trading purposes. We are exposed to currency fluctuations, as we sell our products internationally. We manage the sensitivity of our international sales by denominating all transactions in U.S. dollars. If the United States dollar uniformly increased or decreased in strength by 10% elative to the currencies in which are sales were denominated, our net loss would not have changed by a material amount for the six months ended June 30, 2003. For purposes of this calculation, we have assumed that the exchange rates would change in the same direction relative to the United States dollar. Our exposure to foreign exchange rate fluctuations, however, arises in part from translation of the financial statements of foreign subsidiaries into U.S. dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall expected profitability. The effect of foreign exchange rate fluctuation gains for the six months ended June 30, 2003 and year ended December 31, 2002 was $31,220 and $35,000, respectively. 37 PCTEL, INC. ITEM 4: CONTROLS AND PROCEDURES ================================================================================ (a) Evaluation of disclosure controls and procedures. Our management carried out an evaluation, with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. (b) Changes in internal controls. There was no change in our internal controls over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, or in other factors that could significantly affect these controls subsequent to the date of their last evaluation. 38 PCTEL, INC. PART II. OTHER INFORMATION FOR THE THREE AND SIX MONTHS ENDED: JUNE 30, 2003 ITEM 1 LEGAL PROCEEDINGS: 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 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 in June 2002 and in July 2002, the Company filed a Verified Answer to the Complaint, denying Fraser's claims and asserting numerous affirmative defenses. Wells Fargo and the Company have each filed Cross-complaints against the other for indemnity. Wells Fargo filed a motion for summary judgment, or alternatively for summary adjudication, which was heard on July 29, 2003. The Court has not issued its ruling on Wells Fargo's motion. A trial setting conference has been scheduled for August 19, 2003. We believe that we have meritorious defenses and intend to vigorously defend the action. Because the action is still in its early stages, we cannot at this time provide an estimate of the range of potential loss, or the probability of a favorable or unfavorable outcome. Licensing Program. In addition to our wireless product line and software-defined radio technology, PCTEL offers our intellectual property through licensing and product royalty arrangements. We have over 130 patents granted or pending addressing technology essential to International Telecommunications Union communication standards as well as other communications technology related areas. We will continue to explore other opportunities to acquire relevant technology and to incorporate new assets into our licensing program. For example, as part of our transaction with Conexant that was completed in May 2003, we expanded our intellectual property portfolio by acquiring 46 patents. As part of our licensing efforts, we are pursuing opportunities through litigation in parallel with business discussions with those parties using our intellectual property. As part of these efforts, in May 2003, we filed three separate lawsuits asserting infringement of our intellectual property rights. Below is a description of the claims and status of those lawsuits: - U.S. Robotics Corporation. On May 23, 2003, we filed in the U.S. District Court for the Northern District of California (C03-2471 MJJ) a patent infringement lawsuit against U.S. Robotics Corporation claiming that U.S. Robotics has infringed one of our patents (U.S. Patent No. 4,841,561 (`561)). U.S. Robotics filed its answer and counterclaim to our complaint in June 2003 asking for a declaratory judgment that the claims of the `561 patent are invalid and not infringed by U.S. Robotics. We filed our reply to U.S. Robotics' counterclaim on July 2, 2003. - PCTEL v. Broadcom Corporation. On May 23, 2003, we filed in the U.S. District Court for the Northern District of California (C03-2475 MJJ) a patent infringement lawsuit against Broadcom Corporation claiming that Broadcom has infringed four of our patents (`561; and U.S. patent numbers 5,787,305 (`305); 5,931,950 (`950); and 6,493,780 (`780)). Broadcom filed its answer and counterclaim to our complaint in July 2003 asking for a declaratory judgment that the claims of the four patents are invalid and/or unenforceable, and not infringed by Broadcom. - Agere Systems and Lucent Technologies. On May 23, 2003, we filed in the U.S. District Court for the Northern District of California (C03-2474 MJJ) a patent infringement lawsuit against Agere Systems and Lucent Technologies claiming that Agere has infringed four of our patents (`561, `305, `950 and `780) and that Lucent was infringing three of our patents (`561, `305 and `950). Agere and Lucent filed their answers to our complaint in July 39 2003. Agere filed a counterclaim asking for a declaratory judgment that the claims of the four patents are invalid, unenforceable and not infringed by Agere. In addition to the three lawsuits described above, we also have continuing litigation with 3Com related to intellectual property infringement and related matters. Both we and 3Com having pending patent infringement lawsuit against one another in the U.S. District Court for the Northern District of California. Both suits were initially filed in March 2003. 3Com initially filed their suit against us in the Northern District of Illinois, but that case was subsequently remanded to the Northern California District Court. We are claiming that 3Com is infringing one of our patents (`561) and are seeking a declaratory judgment that certain 3Com patents are invalid and not infringed by PCTEL. 3Com is alleging that our HSP modem products infringed certain 3Com patents and is seeking a declaratory judgment that our `561 patent is invalid and not infringed by 3Com. In addition, in May 2003, we filed a complaint against 3Com in the Santa Clara Superior Court of the State of California in the County of Santa Clara (C03-3124 SI) under California's Unfair Competition Act. Subsequently, 3Com filed a notice of removal, removing the case to the Northern District of California and we have filed a notice of motion and motion to remand the case to the Santa Clara Superior Court. In June 2003, we filed a motion to consolidate our pending patent infringement cases with 3Com filed as well as our pending patent infringement lawsuits with U.S. Robotics, Broadcom, Agere and Lucent described above. The hearing on our motion to consolidate is set for August 19, 2003 and the court has issued an order relating all of the cases to the same judge. We believe we have meritorious claims and defenses in our disputes with 3Com, Broadcom, U.S. Robotics, Agere and Lucent. However, because of the inherent uncertainties of litigation in general, we cannot assure you that we will ultimately prevail or receive the judgments that we seek. In addition, we may be required to pay substantial monetary damages. Litigation such as our suits with 3Com, Broadcom, U.S. Robotics, Agere and Lucent can take years to resolve and can be expensive to pursue and/or defend. The court's decisions on current, pending and future motions could have the effect of determining the ultimate outcome of the litigation prior to a trial on the merits, or strengthen or weaken our ability to assert claims and defenses. Accordingly, an adverse judgment could seriously harm our business, financial position and results of operations and cause our stock price to decline substantially. In addition, the allegations and claims involved in these lawsuits, even if ultimately resolved in our favor, could be time consuming to litigate, result in costly litigation and divert management attention. These lawsuits could significantly harm our business, financial position and results of operations and cause our stock price to decline substantially. Due to the nature of litigation generally, we cannot ascertain the final resolution of the lawsuits, or estimate the total expenses, possible damages or settlement value, if any, that we may ultimately receive or incur in connection with these lawsuits. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: We held our 2003 Annual Meeting of Stockholders on June 3, 2003 in Chicago, Illinois. We solicited votes by proxy pursuant to proxy solicitation materials determined to our shareholders on or about June 3, 2003. The following is a brief description of matters voted on at the meeting and a statement of the number of votes cast for, against or withheld and the number of abstains: 1. Election of Brian J. Jackman and John Sheehan as Class I directors until the Annual Meeting of Stockholders in 2006:
---------------------------------------------------------------------- FOR WITHHOLD ---------------------------------------------------------------------- Brian J. Jackman 16,834,586 1,134,987 ---------------------------------------------------------------------- John Sheehan 17,338,108 631,465 ----------------------------------------------------------------------
2. Approval of our 1997 Stock Plan to preserve the corporate income tax deduction available pursuant to Section 162(m) of the Internal Revenue Code: 40
---------------------------------------------------------------------- VOTES FOR VOTES AGAINST ABSTAIN ---------------------------------------------------------------------- 13,773,668 4,132,321 63,584 ----------------------------------------------------------------------
3. Amendment and restatement of our 1998 Director Option Plan to (i) increase the number of shares reserved for issuance thereunder by 200,000 shares, and (ii) to increase the number of shares granted to each non-employee director on January 1 of each year from 7,500 to 10,000 shares:
---------------------------------------------------------------------- VOTES FOR VOTES AGAINST ABSTAIN ---------------------------------------------------------------------- 12,491,592 5,423,052 54,929 ----------------------------------------------------------------------
4. Ratification of appointment of PricewaterhouseCoopers LLP as our independent public accountants for the fiscal year ending December 31, 2003:
---------------------------------------------------------------------- VOTES FOR VOTES AGAINST ABSTAIN ---------------------------------------------------------------------- 14,410,063 3,556,040 3,470 ----------------------------------------------------------------------
ITEM 5 OTHER INFORMATION In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002 (Act), we are required to disclose the non-audit services approved by our audit committee to be performed by PricewaterhouseCoopers LLP (PwC), our external auditor. Non-audit services are defined as services other than those provided in connection with an audit or a review of the financial statements of a company. Our audit committee has approved the engagement of PwC for non-audit services in 2003 relating to, among other things, acquisition due diligence, liquidation of subsidiaries, tax consultation, and our internal controls. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.39 Board of Directors Deferred Compensation Plan 10.40 Board of Directors Deferred Stock Plan 31.1 Certification of Principal Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 31.2 Certification of Principal Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 32 Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: We filed a report on Form 8-K dated April 29, 2003 announcing our financial results for the fiscal quarter ended March 31, 2003. We filed a report on Form 8-K May 8, 2003 announcing the sale of PCTEL's soft modem product line to Conexant Systems, Inc. We filed a report on Form 8-K dated May 27, 2003 to report our disposition of certain assets to Conexant Systems, Inc. 41 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PCTEL, Inc. Delaware Corporation August 14, 2003 By: /s/ JOHN SCHOEN ------------------------------------- John Schoen Chief Operating Officer and Chief Financial Officer (Principal Financial and Accounting Officer) 42 EX-10.39 3 c78775exv10w39.txt EXHIBIT 10.39 Exhibit 10.39 PCTEL, INC. BOARD OF DIRECTORS DEFERRED COMPENSATION PLAN EFFECTIVE AS OF JANUARY 1, 2004
TABLE OF CONTENTS ARTICLE 1 DEFINITIONS ...................................... 1 ARTICLE 2 ELIGIBILITY AND PARTICIPATION .................... 4 ARTICLE 3 CONTRIBUTIONS TO DEFERRAL ACCOUNTS ............... 5 ARTICLE 4 ACCOUNTS AND ALLOCATION OF FUNDS ................. 5 ARTICLE 5 ENTITLEMENT TO BENEFITS .......................... 7 ARTICLE 6 DISTRIBUTION OF BENEFITS ......................... 11 ARTICLE 7 BENEFICIARIES; PARTICIPANT DATA .................. 11 ARTICLE 8 PLAN ADMINISTRATION .............................. 12 ARTICLE 9 AMENDMENT OR TERMINATION ......................... 15 ARTICLE 10 MISCELLANEOUS .................................... 16
EXHIBIT A PARTICIPANT ENROLLMENT AND ELECTION FORM EXHIBIT B DEEMED INVESTMENT ELECTIONS EXHIBIT C DESIGNATION OF BENEFICIARY EXHIBIT D DEATH BENEFIT EXHIBIT E DEEMED INVESTMENT OPTION CHANGE FORM i PCTEL, INC. BOARD OF DIRECTORS DEFERRED COMPENSATION PLAN THIS PLAN is adopted as of the __ day of _________, 200_, by PCTEL, Inc., a Delaware corporation (the "Corporation"), as follows: RECITALS WHEREAS, the Corporation wishes to establish the PCTEL, Inc. "Board of Directors Deferred Compensation Plan" (the "Plan") to provide additional retirement benefits and income tax deferral opportunities for its non-employee members of the Board of Directors; and WHEREAS, the Corporation intends that the Plan shall at all times be administered and interpreted in such a manner as to constitute an unfunded nonqualified deferred compensation plan for a select group of management or highly compensated employees and to qualify for all available exemptions from the provisions of ERISA; NOW, THEREFORE, the Corporation hereby adopts the following Board of Directors Deferred Compensation Plan. ARTICLE 1 DEFINITIONS DEFINITION OF TERMS. Certain words and phrases are defined when first used in later sections of this Plan. Whenever any words are used in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply. In addition, the following words and phrases when used, unless the context clearly requires otherwise, shall have the following respective meanings: 1.1. ACCOUNT. A Participant's Deferral Account. 1.2. BENEFICIARY. The Beneficiary(ies) designated by a Participant under Article 7, or, if the Participant has not designated a Beneficiary under Article 7, the person or persons entitled to receive distributions of benefits under Article 5. 1.3. BOARD MEMBER. Any member of the Board of Directors of the Corporation. 1.4. CALENDAR YEAR. January 1 to December 31. 1.5. CAUSE. For purposes of this Plan "Cause" shall mean any of the following acts or circumstances: (i) willful destruction by the Participant of property of the Corporation having a material value to the Corporation; (ii) fraud, embezzlement, theft, or comparable dishonest activity committed by the Participant (excluding acts involving a de minimis dollar value and not related to the Corporation); (iii) the Participant's conviction of or entering a plea of guilty or nolo contendere to any crime constituting a felony or any 1 misdemeanor involving fraud, dishonesty or moral turpitude (excluding acts involving a de minimis dollar value and not related to the Corporation); (iv) the Participant's breach, neglect, refusal, or failure to materially discharge the Participant's duties (other than due to physical or mental illness); (v) any willful misconduct by the Participant which may cause substantial economic or reputational injury to the Corporation, including, but not limited to, sexual harassment, or (vi) a willful and knowing material misrepresentation to the Board or the Chief Executive Officer of the Corporation. 1.6. CHANGE IN CONTROL shall mean the occurrence of any of the following: (i) Any "Person" or "Group", as such terms are defined in Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules and regulations promulgated thereunder, excluding any excluded stockholder, who is or becomes the "Beneficial Owner" (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation, or of any entity resulting from a merger or consolidation involving the Corporation, representing more than thirty percent (30%) of the combined voting power of the then outstanding securities of the Corporation or such entity. (ii) A change in the composition of the Board occurring within any two year period commencing with the Effective Date, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Corporation as of the Effective Date, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of those directors whose election or nomination was not in connection with any transaction described in subsections (i) or (iii) hereof, or in connection with an actual or threatened proxy contest relating to the election of directors to the Corporation. (iii) The consummation of (x) a merger, consolidation or reorganization to which the Corporation is a party, whether or not the Corporation is the Person surviving or resulting therefrom, or (y) a sale, assignment, lease, conveyance or other disposition of all or substantially all of the assets of the Corporation, in one transaction or a series of related transactions, to any Person other than the Corporation, where any such transaction or series of related transactions as is referred to in clause (x) or clause (y) above in this subparagraph (iii) (singly or collectively, a "Transaction") does not otherwise result in a "Change in Control" pursuant to subparagraph (i) of this definition of "Change in Control"; provided, however, that no such Transaction shall constitute a "Change in Control" under this subparagraph (iii) if the Persons who were the stockholders of the Corporation immediately before the consummation of such Transaction are the Beneficial Owners, immediately following the consummation of such Transaction, of thirty percent (30%) or more of the combined voting power of the then outstanding voting securities of the Person surviving or resulting from any merger, consolidation or reorganization referred to in clause (x) above in this subparagraph (iii) or 2 the Person to whom the assets of the Corporation are sold, assigned, leased, conveyed or disposed of in any transaction or series of related transactions referred in clause (y) above in this subparagraph (iii), in substantially the same proportions in which such Beneficial Owners held voting stock in the Corporation immediately before such Transaction. 1.7. CODE. The Internal Revenue Code of 1986, as amended from time to time. 1.8. COMPENSATION. The amount(s) to which a Participant is entitled during a Calendar Year. 1.9. DEFERRAL ACCOUNT. The account maintained on the books by the Plan Administrator for the Participant including (i) the Participant Annual Deferral and (ii) deemed investment earnings, gains and losses credited to the Participant; provided, however, that the existence of such book entries and the Deferral Account shall not create, and shall not be deemed to create, a trust of any kind, or a fiduciary relationship between the Corporation and the Participant, his or her designated beneficiaries, or other beneficiaries under this Plan. 1.10. DEFERRAL PERIOD. The period after which payment of the Deferral Account is to be made or begun to be made. 1.11. DISABILITY. Disability shall mean the total and permanent incapacity of the Participant, due to physical impairment or legally established mental incompetence, to perform the usual duties of his service as a Board Member with the Corporation. 1.12. EFFECTIVE DATE. January 1, 2004. 1.13. ELECTION OF DEFERRAL. A written notice filed by the Participant with the Plan Administrator of the Corporation in substantially the form attached hereto as Exhibit A, and referred herein as the "ELECTION FORM," specifying the amount (if any) of Compensation to be deferred. 1.14. ERISA. The Employee Retirement Income Security Act of 1974, as amended from time to time. 1.15. GOOD REASON means the reduction by the Corporation, on or after the occurrence of a Change in Control, of the Participant's Compensation, except in the context of a general reduction for all Board Members of up to ten per cent (10%). 1.16. PARTICIPANT. Any member of the Board of Directors who has completed and submitted an Election Form, substantially in the form of Exhibit A attached hereto. 1.17. PARTICIPANT ANNUAL DEFERRAL. The portion of a Participant's Compensation, which he or she elects to defer for the Calendar Year in question. 1.18. PLAN. This Plan, together with any and all amendments or supplements thereto. 1.19 PLAN ADMINISTRATOR. A duly authorized officer of the Corporation designated by the Board of Directors. 3 1.20 PLAN RETIREMENT DATE. The date selected by a Participant, however, no earlier than the date he or she attains 55 years of age. 1.21 PLAN YEAR. The Calendar Year. 1.22 RETIREMENT. The termination of a Participant's service on the Board of Directors of the Corporation on or after the Participant has reached his or her Plan Retirement Date. 1.23 VALUATION DATE. The last day of each quarter during a Plan Year, or such other dates as the Plan Administrator may establish in its discretion. 1.24 YEAR OF PARTICIPATION. Twelve months of continuous service on the Board of Directors of the Corporation measured from the Participant's date of entry into this Plan. ARTICLE 2 ELIGIBILITY AND PARTICIPATION 2.1 ELIGIBILITY. (a) A Board Member shall become a Participant in the Plan following submittal of a completed Participant Election Form, substantially in the form of Exhibit A attached hereto. The initial Election of Deferral must be filed on or before December 15, 2003 for any Board Member wishing to become a Participant. The Plan Administrator shall be notified by the Corporation as new Participants participate in the Plan. (b) Once a Board Member becomes a Participant, he or she shall remain a Participant until his or her termination of service on the Board of Directors of Corporation, and thereafter, until all benefits to which he or she (or his or her Beneficiaries) is entitled under the Plan have been paid. 2.2 PARTICIPATION. (a) Each Participant Annual Deferral shall be effective for Compensation that would otherwise be paid in the Calendar Year to which the Election of Deferral applies, and shall be irrevocable during such Calendar Year. Any subsequent Election of Deferral, to be effective, must be filed at least 10 days prior to the beginning of the Calendar Year for which deferral is sought. Any newly elected Board Member who chooses to participate and commence deferrals shall file an Election of Deferral within 30 days following his/her election to the Board. (b) AUTOMATIC ELECTION RENEWAL OF THE PARTICIPANT ANNUAL DEFERRAL. If a Participant fails to make a timely election to defer pursuant to the above, the Participant shall be deemed to have made the same election as is then currently in effect. 4 ARTICLE 3 CONTRIBUTIONS TO DEFERRAL ACCOUNTS 3.1 DEFERRAL ELECTION. (a) Commencing on the Effective Date, and continuing through the date on which the Participant's service as a Board Member terminates because of his or her death, Retirement, Disability, or any other cause, each Participant shall be entitled to elect to defer into his or her Deferral Account, by filing with the Plan Administrator an Election of Deferral prior to the beginning of the Plan Year, a portion of the Compensation that the Participant would be entitled to receive from the Corporation during the Plan Year. (b) In the Election of Deferral, the Participant shall specify the amount to be deferred, that may be expressed as a percentage, where applicable, or as a fixed dollar amount. ARTICLE 4 ACCOUNTS AND ALLOCATION OF FUNDS 4.1. DEFERRAL ACCOUNT ALLOCATIONS. (a) Compensation that is deferred under Section 3.1 shall be credited to the Deferral Account on or about the date the Compensation would otherwise have been paid. (b) All amounts paid from a Deferral Account are assumed to be paid on the first day of the month. (c) Based on the Deemed Investment Elections (as that term is defined in Section 4.2 (a) below) of a Participant made under Section 4.2, the Participant's Deferral Account shall be credited with deemed investment earnings, gains, losses or changes in value effective at the end of each calendar quarter during the Plan Year, except as otherwise provided in this Plan. (d) The Plan Administrator may, at any time, change the timing or methods for crediting or debiting earnings, gains, losses, and changes in value of deemed investment options, deferrals of Compensation, and payments of benefits and withdrawals under this Plan; provided, however, that the times and methods for crediting or debiting such items in effect at any particular time shall be uniform among all Participants and Beneficiaries. 4.2 DEEMED INVESTMENT ELECTION AND DECLARED RATES. (a) Deemed investment elections may be made from any of the various deemed investment alternatives selected by a Participant ("Deemed Investment Elections") from among those made available by the Corporation from time to time, which are outlined in Exhibit B. 5 (b) A Participant (or, in the event of the Participant's death, the Participant's Beneficiary) shall make Deemed Investment Elections for the Participant's Deferral Account by filing a form substantially in the form of Exhibit B (or another form acceptable to the Plan Administrator) with the Plan Administrator. A Participant may elect to have his or her Deferral Account deemed to be invested in up to ten (10) deemed investment alternatives, provided, however, that each deemed investment alternative must be applied to at least 10% of the total balance in his or her Deferral Account and must be in a whole percentage amount. Deemed Investment Elections shall remain in effect until changed and may be changed not more than once a month, such change to be effective on the 1st day of the succeeding month, by completing a Deemed Investment Option Change Form, a copy of which is attached as Exhibit E. (c) At the end of each calendar quarter (or such shorter period as the Plan Administrator may determine), the Corporation shall compute the total return for the quarter (or such shorter period) as to each Participant's Deemed Investment Elections. (d) From time to time, and at its sole discretion, the Corporation may change the deemed investment alternatives that it makes available to the Participant. However, notwithstanding the provisions of this Section 4.2, the Corporation may invest contributions in investments other than the investments selected by such Participant but the Participant's return will solely be based on the results of his or her Deemed Investment Elections. (e) The Corporation shall be under no obligation to purchase or maintain any life insurance policy, annuity contract, or any other asset, or in any manner provide funding for its obligations under this Plan. Nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Corporation and the Participant, or his designated beneficiary(ies) or any other person. (f) If the Corporation chooses to obtain insurance on the life of a Participant in connection with its obligations under this Plan, the Participant hereby agrees to take such physical examinations and to truthfully and completely supply such information as may be required by the Corporation or the insurance company(ies) designated by the Corporation. If a Participant submits information to any such insurance company(ies) and if the Participant makes a material misrepresentation in an application for any insurance that may be used to insure any of the Corporation's obligations under this Plan, and if as a result of that material misrepresentation an insurance company is not required to pay all or any part of the benefit provided under that insurance, the Participant's right to a benefit under this Plan will be reduced by the amount of the benefit that is not paid by the insurance company because of such material misrepresentation. 4.3 DETERMINATION OF ACCOUNTS. A Participant's benefit as of each Valuation Date shall consist of the balance of deferrals of Compensation and deemed investment earnings, gains, losses, and changes in value in his or her Deferral Account determined in accordance with this Section. 6 ARTICLE 5 ENTITLEMENT TO BENEFITS 5.1 VESTING OF BENEFITS. The portion of a Participant's Deferral Account that is attributable to his or her Participant Annual Deferral and deemed investment earnings, gains, losses and changes in value credited thereon shall be immediately fully vested. 5.2 RETIREMENT BENEFIT. (a) From and after the Retirement of the Participant, the Corporation shall thereafter pay to the Participant his or her Accounts. Such benefits shall be payable in the manner elected by the Participant as follows: 1. Lump Sum; or 2. Annual over 15 years; or 3. Lifetime of the Participant with 20 annual payments guaranteed Such election may be changed by the Participant by giving written notice to the Corporation not later than one year before Retirement, or promptly following a Disability. Such payments shall commence on or about the first day of the first month following the Participant's Retirement or Disability. The amount of each installment to be paid during the Calendar Year in which payment begins shall be equal to one-twelfth (1/12th) of (i) the total amount payable to the Participant as of his or her Plan Retirement Date, divided by (ii) the total number of installment payments to be made. Expected payments under the "Lifetime" option will be based on life expectancy under the 1980 CSO Mortality Table, but in no event less than 20 payments. (b) As of January 1 of each subsequent Calendar Year during the benefit payment period, the amount of each installment to be paid during such Calendar Year for elections 2 and 3 above, shall be recalculated and shall be equal to: (i) the remaining balance in the Participant's Accounts as of January 1; divided by (ii) the number of installment payments to be made in or after such subsequent Calendar Year. (c) The final installment payment for elections 2 and 3 above shall be equal to the remaining amount payable to the Participant. In no event shall the amount of any installment payment exceed the remaining amount payable to the Participant. (d) Notwithstanding the foregoing, the Corporation reserves the right to distribute a Participant's retirement benefit in one lump sum rather than in installments if the balance in the Participant's Accounts as of his Plan Retirement Date and/or as of January 1 of any subsequent Calendar Year during the benefit payment period, is less than $25,000.00. 7 5.3 FIXED PAYMENT DATE BENEFIT FOR IN-SERVICE DISTRIBUTION PRIOR TO RETIREMENT. (a) A Participant may select a fixed payment date for the payment of his or her vested Account. Payments made under this election will be payable in a lump sum. A Participant may extend a fixed payment date by written notice to the Plan Administrator, provided that the Participant gives such written notice at least one (1) year prior to the fixed payment date before such extension. Such fixed payment dates may not be accelerated. (b) Any fixed payment date elected by a Participant as provided under Section 5.3(a) above must be no earlier than the January 1 of the third Calendar Year after the Calendar Year in which the election is made, or in which the Participant gives a written notice of extension. 5.4 DISABILITY RETIREMENT BENEFIT. The Participant shall be entitled to receive payments prior to his or her Plan Retirement Date if he or she is disabled. If the Participant's service as a Board Member is terminated due to Disability, the benefit payable hereunder shall be the same amount as would have been payable as a Retirement Benefit under Section 5.2 above had the Participant attained his or her Plan Retirement Date on the date of the Disability. If the total amount of benefits payable is less than $25,000.00 the Plan Administrator will be required to pay the benefit in a lump sum rather than in installments. 5.5 DEATH BENEFITS. (a) DEATH BENEFIT PRIOR TO COMMENCEMENT OF BENEFITS. In the event of the Participant's death while in the service as a Board Member of the Corporation and prior to commencement of benefit payments, the Corporation shall pay a death benefit equal to the greater of either: (i) the Deferral Account as of the date of his or her death, or (ii) the amount, if any, the Corporation from time to time elects for such Participant in substantially the form attached hereto as Exhibit D. The death benefit payable under this Section shall be distributed to the Participant's Beneficiary in a lump sum on or about the first day of the fourth month following the Participant's death. The distribution shall be made in accordance with the last beneficiary designation received by the Plan Administrator from the Participant prior to his or her death. If no such designation has been received by the Corporation, such payments shall be made to the Participant's surviving legal spouse. If the Participant is not survived by a legal spouse, or if such spouse shall fail to so appoint, the said payments shall be made to the then living children of the Participant, if any, in equal shares. If there are no surviving children, the payments will be made to the estate of the later to die of the Participant and his or her legal spouse, if any. (b) DEATH BENEFITS AFTER COMMENCEMENT OF RETIREMENT BENEFITS. In the event of the Participant's death after the commencement of benefit payments, but prior to the completion of such payments due and owing hereunder, the Corporation shall continue to make such payments in installments over the remainder of the period specified in Sections 5.2 or 5.3 hereof that would have been applicable to the Participant had he or she survived. Such continuing payments shall be made to the 8 Participant's designated Beneficiary in accordance with the last such designation received by the Corporation from the Participant prior to his death. If no such designation has been received by the Corporation, such payments shall be made to the Participant's surviving legal spouse. If such spouse dies before receiving all payments to which he or she is entitled hereunder, then the balance of the Deferral Account shall be paid to the spouse's estate. If the Participant is not survived by a legal spouse, then the said payments shall be made to the then living children of the Participant, if any, in equal shares. If there are no surviving children, the balance of the Accounts shall be paid to the estate of the Participant. 5.6 TERMINATION OF BENEFITS. (a) In the event of the Participant's termination of service as a Board Member with the Corporation for any reason other than for Cause, Disability, Retirement or death, the Corporation shall pay to the Participant a termination benefit based on the vested value of the Participant's Deferral Account. Such termination benefit shall be payable in a lump sum on or about the first day of the third month following the date of termination. (b) In the event the Participant's service as a Board Member is terminated for Cause, Participant will be entitled to receive the value of the Participant's Annual Deferral(s), any cumulative earnings, gains, and changes in value thereof. 5.7 HARDSHIP DISTRIBUTION. (a) HARDSHIP WITHDRAWAL. In the event that the Plan Administrator, under written request of a Participant, determines, in its sole discretion, that a Participant has suffered an unforeseeable financial emergency, the Corporation shall pay to the Participant, as soon as practicable following such determination, an amount necessary to meet the emergency (the "Hardship Withdrawal"), but not exceeding the vested balance of such Participant's Deferral Account as of the date of such payment. For purposes of Section 5.7(a), an "unforeseeable financial emergency" shall mean an event that the Plan Administrator determines to give rise to an unexpected need for cash arising from an illness, casualty loss, sudden financial reversal or other such unforeseeable occurrence. Amounts of Hardship Withdrawal may not exceed the amount the Plan Administrator reasonably determines to be necessary to meet such emergency needs (including taxes incurred by reason of a taxable distribution). The amount of the deferral benefit otherwise payable under the Plan to such Participant shall be adjusted to reflect the early payment of the Hardship Withdrawal. (b) RULES ADOPTED BY PLAN ADMINISTRATOR. The Plan Administrator shall have the authority to adopt additional rules relating to Hardship Withdrawals. In administering these rules, the Plan Administrator shall act in accordance with the principle that the primary purpose of this Plan is to provide additional retirement income, not additional funds for current consumption. (c) LIMIT ON NUMBER OF HARDSHIP WITHDRAWALS. No Participant may receive more than one Hardship Withdrawal in any Calendar Year. 9 (d) PROHIBITION OF FURTHER DEFERRALS. A Participant who receives a Hardship Withdrawal and who is still a member of the Board of Directors of the Corporation, shall be prohibited from making deferrals under Section 3.1 for the remainder of the Calendar Year in which the Hardship Withdrawal is made. 5.8 TERMINATION BASED ON CORPORATE PERFORMANCE. If the amount of the Corporation's net worth, as reported on any of its quarterly filed financial statements, at any time declines below $50,000,000.00, this Plan shall terminate and each Participant shall receive a termination benefit as provided for under Section 5.6 (a) above. 5.9 ADVERSE ACTION ON PARTICIPANT OR PLAN. (a) Notwithstanding any other provision hereof, in the event there is a determination by the U.S. Internal Revenue Service ("IRS"), or in the event of a final determination by a court of competent jurisdiction, that amounts credited to Participants' Deferral Account hereunder are includable in the gross income of such Participants or their respective Beneficiaries, the Plan Administrator may, in its sole discretion, distribute the entire amount credited to the Participants Deferral Account to the Participant or their respective Beneficiaries and cause the termination of future deferrals of Compensation by the Participant. (b) In the event that there is a determination by the U.S. Department of Labor, or a final determination of a court of competent jurisdiction, that the Plan is subject to Part 2, 3 or 4 of Title I of ERISA, the Plan Administrator may, in its sole discretion, distribute the entire amount credited to the Participants' Deferral Accounts to the Participants or their respective Beneficiaries and cause the termination of future deferrals of Compensation by the Participants. 5.10 BENEFITS NOT TRANSFERABLE. No Participant or Beneficiary under this Plan shall have any power or right to transfer, assign, anticipate, hypothecate or otherwise encumber all or any part of the amounts payable hereunder. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency, or dissolution of marriage. Any such attempted assignment shall be void. 5.11 NO TRUST CREATED. Nothing contained in this Plan, and no action taken pursuant to its provisions by any person shall create, or be construed to create, a trust of any kind, or a fiduciary relationship between the Corporation and any other person. 5.12 UNCLAIMED BENEFITS. In the case of a benefit payable on behalf of a Participant, if the Plan Administrator is unable to locate the Participant or Beneficiary to whom such benefit is payable, such Plan benefit may be forfeited to the Corporation upon the Plan Administrator's determination. Notwithstanding the foregoing, if, subsequent to any such forfeiture, the Participant or Beneficiary to whom such Plan benefit is payable makes a valid claim for such Plan benefit, such forfeited Plan benefit shall be paid by the Plan Administrator to the Participant or Beneficiary, without interest on the Accounts from the date it would have otherwise been paid. 10 ARTICLE 6 DISTRIBUTION OF BENEFITS 6.1 BENEFITS PAYABLE ONLY FROM GENERAL CORPORATE ASSETS: UNSECURED GENERAL CREDITOR STATUS OF PARTICIPANT. (a) Payment to a Participant or any Beneficiary hereunder shall be made from assets which shall continue, for all purposes, to be part of the general, unrestricted assets of the Corporation; no person shall have any interest in any such asset by virtue of any provision of this Plan. The Corporation's obligation hereunder shall be an unfunded and unsecured promise to pay money in the future. To the extent that any person acquires a right to receive payments from the Corporation under the provisions hereof, such right shall be no greater than the right of any unsecured general creditor of the Corporation; no such person shall have or acquire any legal or equitable right, interest or claim in or to any property or assets of the Corporation. (b) In the event that the Corporation elects to purchase an insurance policy or policies insuring the life of a Participant, to allow the Corporation to recover or meet the cost of providing benefits in whole or in part, hereunder, no Participant or Beneficiary shall have any rights whatsoever therein or in said policy or the proceeds therefrom. The Corporation shall be the sole owner and beneficiary of any such insurance policy or property and shall possess and may exercise all incidents of ownership therein. 6.2 FACILITY OF PAYMENT. If a distribution is to be made to a minor, or to a person who is otherwise incompetent, then the Plan Administrator may, in its discretion, make such distribution (i) to the legal guardian, or if none, to a parent of a minor payee with whom the payee maintains his or her residence, or (ii) to the conservator or committee or, if none, to the person having custody of an incompetent payee. Any such distribution shall fully discharge the Plan Administrator, the Corporation and Plan from further liability on account thereof. 6.4 WITHHOLDING. Any and all payments to be made to a Participant or a Participant's Beneficiaries pursuant to this Plan shall be subject to all applicable federal, state and local income taxes, if any, and such taxes may be withheld, accordingly, by the Corporation, from benefits under this Plan or from Compensation due to the Participant, as determined by the Plan Administrator. ARTICLE 7 BENEFICIARIES; PARTICIPANT DATA 7.1 BENEFICIARY DESIGNATION. The Participant shall have the right, at any time, to submit in substantially the form attached hereto as Exhibit C, a written designation of primary and secondary Beneficiaries to whom payment under this Plan shall be made in the event of his or her death prior to complete distribution of the benefits payable hereunder. Each 11 beneficiary designation shall become effective only when receipt thereof is acknowledged in writing by the Corporation. The Corporation shall have the right, in its sole discretion, to reject any beneficiary designation that is not in substantially the form attached hereto as Exhibit C. Any attempt to designate a Beneficiary, otherwise than as provided in this Section 7.1, shall be ineffective. 7.2 SPOUSE'S INTEREST. A Participant's beneficiary designation shall be deemed automatically revoked if the Participant names a spouse as Beneficiary and the marriage is later dissolved or the spouse dies. Without limiting the generality of the foregoing, the interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant or whose marriage with the Participant has been dissolved shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. ARTICLE 8 PLAN ADMINISTRATION 8.1 RESPONSIBILITY OF ADMINISTRATION OF THE PLAN. (a) The Plan Administrator shall be responsible for the management, operation and administration of the Plan. The Plan Administrator may employ others to render advice with regard to its responsibilities under this Plan. It may also allocate its responsibilities to others and may exercise any other powers necessary for the discharge of its duties. The Plan Administrator shall be entitled to rely conclusively upon all tables, valuations, certifications, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Plan Administrator with respect to the Plan. (b) The primary responsibility of the Plan Administrator is to administer the Plan for the benefit of the Participants and their respective Beneficiaries, subject to the specific terms of the Plan. The Plan Administrator shall administer the Plan in accordance with its terms and shall have the power to determine all questions arising in connection with the administration, interpretation, and application of the Plan. Any such determination shall be conclusive and binding upon all persons and their heirs, executors, beneficiaries, successors and assigns. The Plan Administrator shall have all powers necessary or appropriate to accomplish its duties under the Plan. The Plan Administrator shall also have the discretion and authority to make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan and decide or resolve any and all questions, including but not limited to, interpretations of this Plan and entitlement to or amount of benefits under this Plan, as may arise in connection with the Plan. 8.2 CLAIMS PROCEDURE. (a) CLAIM. A person who believes that he or she is being denied a benefit to which he or she is entitled under the Plan (hereinafter referred to as a "Claimant") may file a written request for such benefit with the Plan Administrator, setting forth his 12 or her claim. The request must be addressed to the Plan Administrator at its then principal place of business. Notwithstanding anything to the contrary, pending a determination under this Section 8.2, the undisputed portion of a benefit due to Claimant shall be timely distributed pursuant to the terms of the Plan. (b) CLAIM DECISION. Upon receipt of a claim, the Plan Administrator shall advise the Claimant that a reply will be forthcoming within 45 days. The Plan Administrator may, however, extend the reply period for an additional 30 days for reasonable cause. If the claim is denied in whole or in part, the Plan Administrator shall adopt a written opinion setting forth to the extent applicable: (i) The specific reasons for such denial; (ii) Specific reference to pertinent provisions of this Plan on which such denial is based; (i) A description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation why such material or such information is necessary; (ii) Appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review, and (iii) The time limits for requesting a review under subsection (c) hereof. (c) REQUEST FOR REVIEW. Within 60 days after receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Corporation, through its Chief Executive Officer, review the Plan Administrator's determination. Such request must be addressed to the Plan Administrator of the Corporation at its then principal place of business. The Claimant or his or her duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Corporation. If the Claimant does not request a review of the determination within such 60 day period, he or she shall be barred and estopped from challenging the determination. (d) REVIEW OF DECISION. Within 30 days after the Corporation's receipt of a request for review by a Claimant pursuant to 8.2 (c) above, the Corporation will review the Plan Administrator's determination. After considering all materials presented by the Claimant, the Corporation, through its Chief Executive Officer, will render a written opinion setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Plan on which the decision is based. If special circumstances require that the 30 day time period be extended, the Corporation will so notify the Claimant and will render the decision as soon as possible, but in no event later than 60 days after receipt of the request for review. 8.3 ARBITRATION. Any claim or controversy between the parties which the parties are unable to resolve themselves, and which is not resolved through the claims procedure set forth in Section 8.2, including any claim arising out of, connected with, or related to the interpretation, performance or breach of any provision of this Plan, and any claim or dispute as to whether a claim is subject to arbitration, shall be submitted to and resolved 13 exclusively by expedited arbitration by a single arbitrator in accordance with the following procedures: (a) In the event of a claim or controversy subject to this arbitration provision, the complaining party shall promptly send written notice to the other party identifying the matter in dispute and the proposed remedy. Following such notice, the parties shall meet and attempt in good faith to resolve the matter. In the event the parties are unable to resolve the matter within 21 days, the parties shall meet and attempt in good faith to select a single arbitrator acceptable to both parties. If a single arbitrator is not selected by mutual consent within 10 business days following the expiration of the 21 day period, an arbitrator shall be selected from a list of nine persons each of whom shall be an attorney who is either engaged in the active practice of law or a recognized arbitrator who is experienced in serving as an arbitrator in such disputes, which list shall be provided by the office of the American Arbitration Association ("AAA") or of the Federal Mediation and Conciliation Service. If, within three business days of the parties' receipt of such list, the parties are unable to agree upon an arbitrator from the list, then the parties shall each strike names alternatively from the list, with the first to strike being determined by the flip of a coin. After each party has had four strikes, the remaining name on the list shall be the arbitrator. If such person is unable to serve for any reason, the parties shall repeat this process until an arbitrator is selected. (b) Unless the parties agree otherwise, within 60 days of the selection of the arbitrator, a hearing shall be conducted before such arbitrator at a time and a place agreed upon by the parties. In the event the parties are unable to agree upon the time or place of the arbitration, the time and place shall be designated by the arbitrator after consultation with the parties. Within 30 days of the conclusion of the arbitration hearing, the arbitrator shall issue an award, accompanied by a written decision explaining the basis for the arbitrator's award. The arbitrator's award may not include a provision for punitive damages. (c) In any arbitration hereunder, the Corporation shall pay all administrative fees of the arbitration, all fees of the arbitrator and each party's reasonable attorneys' fees, costs, and expenses. The arbitrator shall have no authority to add to or to modify the Plan, shall apply all applicable law, and shall have no lesser and no greater remedial authority than would a court of law resolving the same claim or controversy. The arbitrator shall, upon an appropriate motion, dismiss any claim without an evidentiary hearing if the party bringing the motion establishes that it would be entitled to summary judgment if the matter had been pursued in court litigation. The parties shall be entitled to reasonable discovery subject to the discretion of the arbitrator. (d) The decision of the arbitrator shall be final, binding, and non-appealable, and may be enforced as a final judgment in any court of competent jurisdiction. (e) This Section 8.3 shall extend to claims against any officer, director, shareholder, Participant, Beneficiary, or agent of each party, or of any of the above, and shall 14 apply as well to claims arising out of state and federal statutes and local ordinances as well as to claims arising under the common law or under this Plan. (f) Notwithstanding the foregoing, and unless otherwise agreed between the parties, either party may, in an appropriate manner, apply to a court for provisional relief, including a temporary restraining order or preliminary injunction, on the ground that the arbitration award to which the applicant may be entitled may be rendered ineffectual without provisional relief. (g) Any arbitration hereunder shall be conducted in accordance with the rules and procedures of the AAA then in effect; provided, however, that, (i) all evidence presented to the arbitrator shall be in strict conformity with the legal rules of evidence, and (ii) in the event of any inconsistency between the board member benefit plan claims rules and procedures of the AAA and the terms of this Plan, the terms of this Plan shall prevail. (h) If any of the provisions of this Section 8.3 are determined to be unlawful or otherwise unenforceable, in whole or in part, such determination shall not affect the validity of the remainder of this Section 8.3, and this Section 8.3 shall be reformed to the extent necessary to carry out its provisions to the greatest extent possible and to insure that the resolution of all conflicts between the parties, including those arising out of statutory claims, shall be resolved by neutral, binding arbitration. If a court should find that the provisions of this Section 8.3 are not absolutely binding, then the parties intend any arbitration decision and award to be fully admissible in evidence in any subsequent action, given great weight by any finder of fact, and treated as determinative to the maximum extent permitted by law. 8.4 NOTICE. Any notice, consent or demand required or permitted to be given under the provisions of this Plan shall be in writing and shall be signed by the party giving or making the same. If such notice, consent or demand is mailed, it shall be sent by United States certified mail, postage prepaid, return receipt requested, addressed to the addressee's last known address as shown on the records of the Corporation. The date of receipt, or the date of refusal by addressee upon presentation, shall be deemed the date of such notice, consent or demand. Any person may change the address to which notice is to be sent by giving written notice of the change of address in the manner aforesaid. ARTICLE 9 AMENDMENT OR TERMINATION 9.1 AMENDMENT OR TERMINATION. (a) This Plan may be amended or terminated by the Corporation at any time, without notice to or consent of any person, pursuant to resolutions adopted by its Board of Directors. Any such amendment or termination shall take effect as of the date specified therein and, to the extent permitted by law. However, no such amendment or termination shall reduce the amount then credited to a Participant's 15 Deferral Account. If the Plan is terminated, benefits will be distributed in one lump sum. (b) Any other provision of this Plan to the contrary notwithstanding, the Plan may be amended by the Corporation at any time, to the extent that, in the opinion of the Corporation, such amendment shall be necessary in order to ensure that the Plan will be characterized as a plan maintained for a select group of management or highly compensated employees, as described in sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, or to conform the Plan to the requirements of any applicable law, including ERISA and the Code. No such amendment shall be considered prejudicial to any interest of a Participant or Beneficiary hereunder. ARTICLE 10 MISCELLANEOUS 10.1 ENTIRE AGREEMENT. The Plan and the executed Election Forms, Deemed Investment Election Form, and Beneficiary Designation Form, and other administrative forms shall constitute the total understanding between the Corporation and the Participant. No oral statement regarding the Plan may be relied upon by the Participant. In the event that there is a discrepancy between forms, this Plan will control. 10.2 INVALIDITY OF PROVISIONS. If any provision of this Plan shall, for any reason, be held to be invalid or unenforceable, the remaining provisions shall nevertheless be carried into effect. 10.3 GOVERNING LAW. The Plan and the rights and obligations of all persons hereunder shall be governed by and construed in accordance with the laws of the State of Illinois, other than its laws regarding choice of law, to the extent that such state law is not preempted by federal law. IN WITNESS WHEREOF, the Corporation has executed this Plan as of the day and year above first written. ATTEST: PCTEL, INC. By: ____________________________ ____________________, Secretary Title: Chief Executive Officer 16 PCTEL, INC. BOARD OF DIRECTORS DEFERRED COMPENSATION PLAN PARTICIPATION AGREEMENT ELECTION FORM EXHIBIT A THIS PARTICIPATION AGREEMENT is entered into this ____day of ___________, 20___ between PCTEL, INC., hereinafter referred to as the "Corporation", and _______________________, hereinafter referred to as the "Participant". PART I. ELECTION TO DEFER (Please check all that apply) I understand and acknowledge that this Election of Deferral will be effective for the following Plan Year. If I wish to change my deferral election in subsequent Plan Year(s), I realize that I must deliver a new Election Form to the Plan Administrator of the Corporation at least 10 days prior to the beginning of the Plan Year for which the deferral is sought. If I fail to timely make an election, I shall be deemed to have made the same election as is then currently in effect. [ ] I WILL participate in the Corporation's Board of Directors Deferred Compensation Plan for the forthcoming Plan Year and duly authorize the Corporation to make the appropriate withdrawals from my Compensation. I hereby elect to defer receipt of board fees and committee fees for the forthcoming Plan Year as set forth below: [ ] ____% or $________ of my board fees to be withdrawn from my Compensation for each board meeting during the Plan Year. [ ] ____% or $________ of my Committee Fees to be withdrawn from my Compensation for each Committee Fee during the Plan Year. OR; [ ] I will NOT participate in the Corporation's Board of Directors Deferred Compensation Plan for the forthcoming Plan Year. NOTE: THIS ELECTION IS IRREVOCABLE FOR THE FORTHCOMING PLAN YEAR. PART II. DISTRIBUTION OF BENEFITS ELECTION (ARTICLE 5 OF THE PLAN): Please select A (and the choices under A) or B. [ ] A. RETIREMENT BENEFITS. I hereby elect to have my Retirement or Disability benefits distributed to me in the following manner: Distribution to be paid (check one): [ ] Lump Sum [ ] Annually over 15 years [ ] Lifetime of the Participant with 20 annual payments guaranteed NOTE: THIS ELECTION MAY BE CHANGED BY THE PARTICIPANT BY GIVING WRITTEN NOTICE TO THE CORPORATION NOT LATER THAN ONE YEAR BEFORE RETIREMENT, OR PROMPTLY FOLLOWING A DISABILITY. BY THE TERMS OF THE PLAN, THE RETIREMENT AGE IS AGE 55 OR LATER. [ ] B. FIXED PAYMENT DATE BENEFITS. This Section applies if you wish to elect an in-service distribution prior to retirement age. All distributions under this section are made in a lump sum. I hereby elect to have my fixed payment date benefits distributed to me at the following date: Date for fixed payments to commence_____________________________ (This date may be no earlier than the January 1 of the third Calendar Year after the Calendar Year in which this election is made. NOTE: THIS ELECTION MAY BE CHANGED TO EXTEND THE FIXED PAYMENT DATE TO A LATER DATE SO LONG AS (a) THE ELECTION TO SO EXTEND THE DATE IS AT LEAST ONE YEAR BEFORE THE ORIGINAL DATE, AND (b) THE EXTENDED DATE IS NO EARLIER THAN JANUARY 1 OF THE THIRD CALENDAR YEAR AFTER ISSUING THE ELECTION TO EXTEND. SUCH DATES MAY NOT BE ACCELERATED. PCTEL, INC. PARTICIPANT ____________________________________ ____________________________________ Signature 2 PCTEL, INC. BOARD OF DIRECTORS DEFERRED COMPENSATION PLAN ---DEEMED INVESTMENT ELECTIONS--- EXHIBIT B THIS ELECTION is submitted by ____________________ ("Participant") to PCTEL, Inc. this _____ day of ________, 20___. DEEMED INVESTMENT ELECTIONS: I elect to have my Deferral Account credited with a rate of return based on the following Deemed Investment Elections. These Deemed Investment Elections shall supersede any prior elections that I have made and shall continue until such time as I make a new Deemed Investment Election in accordance with the terms of the Plan. I acknowledge that Deemed Investment Elections may be changed by a Participant not more than once a month and each investment option must have at least a 10% allocation of the Participant's deferral. (I further acknowledge that materials and a prospectus have been made available to me containing detailed explanations of Deemed Investment options.)
DEEMED INVESTMENT OPTIONS % DEEMED INVESTMENT OPTIONS % Money Market Fidelity VIP Mid Cap SC2 Mortgage Securities Index 400 Mid-Cap Bond Small Company Value Global Bond Capital Appreciation Asset Allocation Janus Aspen International Growth Fund CL2 Real Estate Securities International Stock Macro Cap Value Small Company Growth Fidelity VIP Equity-Income SC2 Franklin Small Cap Fund CL2 Value Stock Micro Cap Growth Templeton Asset Strategy Fund CL2 Janus Aspen Cap Appreciation - Srv Sh Index 500 CSWP Global Post Venture Cap Fidelity VIP Contrafund SC2 Templeton Developing Markets Fund CL2 Growth
PARTICIPANT ___________________________________ Signature PCTEL, INC. BOARD OF DIRECTORS DEFERRED COMPENSATION PLAN DESIGNATION OF BENEFICIARY EXHIBIT C TO: PCTEL, INC. (hereinafter referred to as the "Corporation"), In accordance with the rights granted to me as a Participant in the PCTEL, Inc. Board of Directors Deferred Compensation Plan, I hereby designate the following as primary and 1st contingent Beneficiary(ies) thereunder to receive payments in the event of my death: PRIMARY Beneficiary: _________________________________________________ Relationship: ___________________________________ 1ST CONTINGENT Beneficiary: __________________________________________ Relationship: ___________________________________ I further reserve the privilege of changing the Beneficiary(ies) herein named at any time or times without the consent of any such Beneficiary(ies). This designation is made upon the following terms and conditions: 1. The word "Beneficiary" as used herein shall include the plural, Beneficiaries, wherever the Plan permits. 2. For purposes of this Beneficiary Designation, no person shall be deemed to have survived the Participant if that person dies within thirty (30) days of the Participant's death. 3. Beneficiary shall mean the Primary Beneficiary if such Primary Beneficiary survives the Participant by at least thirty (30) days, and shall mean the 1st Contingent Beneficiary if the Primary Beneficiary does not survive the Participant by at least thirty (30) days. 4. If the Primary Beneficiary shall be deceased on any annual payment date provided in said Plan, any and all remaining annual payments shall be payable to the 1st Contingent Beneficiary unless the executors or administrators of said deceased Beneficiary are named as Primary Beneficiary hereinabove. 5. If more than one Beneficiary is named within the same class (i.e., Primary or 1st Contingent), then annual payments shall be made equally to such Beneficiaries unless otherwise provided hereinabove. If any such Beneficiary dies while receiving annual payments under said Agreement, any and all remaining payments shall continue to be made to the surviving Beneficiaries of such class and to the legal heirs of the deceased Beneficiary, which legal heirs shall receive the amount that was being received by said deceased Beneficiary. If all of the Beneficiaries of a class shall die, any and all remaining payments shall be made to the next class of Beneficiaries, as provided under Paragraph 4 above. 6. If none of the Beneficiaries named hereinabove are living on any said annual payment date, any and all remaining payments shall be made to my executors or administrators, or upon their written request, to any person or persons so designated by them. 7. If any such annual payments shall be payable to any trust, the Corporation shall not be liable to see to the application by the Trustee of any payment hereunder at any time, and may rely upon the sole signature of the Trustee to any receipt, release or waiver, or to any transfer or other instrument to whomsoever made purporting to affect this nomination or any right hereunder. 8. A Participant's Beneficiary designation shall be deemed automatically revoked if the Participant names a spouse as Beneficiary and the marriage is later dissolved or the spouse dies. Without limiting the generality of the foregoing, the interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant or whose marriage with the Participant has been dissolved shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. THIS DESIGNATION CANCELS AND SUPERSEDES ANY DESIGNATION OF BENEFICIARY HERETOFORE MADE BY ME WITH RESPECT TO SAID PLAN AND THE RIGHT TO RECEIVE PAYMENTS THEREUNDER. Dated: ___________________ Participant/Board Member: ____________________ I am the spouse of the Participant/Board Member named above. I have read and understood the foregoing Designation of Beneficiary, and especially paragraph 8 thereof. I understand that the Plan does not permit the assignment of the Participant/Board Member's benefits to me in the event of the dissolution of my marriage. I also understand that, even if I am named as a Beneficiary, my rights may be impaired in the event of the dissolution of my marriage or my death before the Participant/Board Member. Dated: _____________________ _____________________________________ Spouse Acknowledgment of receipt this __day of ___________, 20__ By:_________________ 2 PCTEL, INC. BOARD OF DIRECTORS DEFERRED COMPENSATION PLAN DEATH BENEFIT EXHIBIT D Section 5.5(a) of the PCTEL, Inc. Board of Directors Deferred Compensation Plan provides that the death benefit attributable to a Participant's Deferral Account shall equal the Participant's Deferral Account or the amount stated in this Exhibit D, whichever is greater. The death benefit for _______________________________________________ (Name of Participant ) is $_______________________. This Exhibit D supersedes and replaces all prior Exhibit's D executed by PCTEL, Inc. with respect to the above named Participant. Dated this __________ day of __________________________, 20______. PCTEL, Inc. By: _____________________________ Its: _____________________________ DEEMED INVESTMENT OPTION CHANGE FORM FOR THE PCTEL, INC. BOARD OF DIRECTORS DEFERRED COMPENSATION PLAN EXHIBIT E ____________________________ _____________________________ Participant's Name Social Security Number I hereby request that my existing account balances and future contributions be allocated as follows: (Minimum allocation is 10% - total must equal 100%). If no change is desired in your current account, do NOT complete Column A. Complete both Columns A and B, if you want your existing balances and future contributions changed.
COLUMN A COLUMN B -------- -------- Change Existing Future Payroll Account Balances Contributions Only DEEMED INVESTMENT OPTIONS Money Market __________% __________% Mortgage Securities __________% __________% Bond __________% __________% Global Bond __________% __________% Asset Allocation __________% __________% Real Estate Securities __________% __________% Macro Cap Value __________% __________% Fidelity VIP Equity-Income SC2 __________% __________% Value Stock __________% __________% Templeton Asset Strategy Fund CL2 __________% __________% Index 500 __________% __________% Fidelity VIP Contrafund SC2 __________% __________% Growth __________% __________% Fidelity VIP Mid Cap SC2 __________% __________% Index 400 Mid-Cap __________% __________% Small Company Value __________% __________% Capital Appreciation __________% __________% Janus Aspen International Growth Fund CL2 __________% __________% International Stock __________% __________% Small Company Growth __________% __________% Franklin Small Cap Fund CL2 __________% __________% Micro Cap Growth __________% __________% Janus Aspen Cap Appreciation - Srv Sh __________% __________% CSWP Global Post Venture Cap __________% __________% Templeton Developing Markets Fund CL2 __________% __________% TOTAL MUST EQUAL 100% FOR EACH COLUMN USED 100% 100%
IMPORTANT: The Participant acknowledges that he/she has received information regarding each of the above Deemed Investment Options, including a copy of the prospectus. The Participant further acknowledges that the Plan Administrator has discretion as to whether his/her deferrals are actually invested in the funds selected above; the Corporation is not obligated to acquire or hold any of the investments selected above. AGREED AND ACCEPTED BY THE PARTICIPANT ________________________________________ ________________________ Signature of Participant Date AGREED AND ACCEPTED BY THE CORPORATION ________________________________________ ________________________ Signature of Corporation Officer Date 2 EX-10.40 4 c78775exv10w40.txt EXHIBIT 10.40 Exhibit 10.40 PCTEL, INC. BOARD OF DIRECTORS DEFERRED STOCK PLAN EFFECTIVE AS OF JANUARY 1, 2004
TABLE OF CONTENTS ARTICLE 1 DEFINITIONS ................................... 1 ARTICLE 2 ELIGIBILITY ................................... 3 ARTICLE 3 STOCK OPTION GAIN DEFERRALS ................... 3 ARTICLE 4 RESTRICTED STOCK DEFERRALS ................... 5 ARTICLE 5 ACCOUNTS AND ALLOCATION OF FUNDS ............. 6 ARTICLE 6 ENTITLEMENT TO BENEFITS ...................... 7 ARTICLE 7 DISTRIBUTION OF BENEFITS ..................... 9 ARTICLE 8 BENEFICIARIES; PARTICIPANT DATA .............. 10 ARTICLE 9 PLAN ADMINISTRATION .......................... 10 ARTICLE 10 AMENDMENT OR TERMINATION .................... 14 ARTICLE 11 MISCELLANEOUS ............................... 14
EXHIBIT A PARTICIPANT AGREEMENT AND ELECTION FORM EXHIBIT B DESIGNATION OF BENEFICIARY i PCTEL, INC. BOARD OF DIRECTORS DEFERRED STOCK PLAN THIS PLAN is adopted as of the 1st day of January, 2004, by PCTEL, Inc., a Delaware corporation (the "Corporation"), as follows: RECITALS WHEREAS, the Corporation wishes to establish the PCTEL, Inc. "Board of Directors Deferred Stock Plan" (the "Plan") to provide additional retirement benefits and income tax deferral opportunities for a select group of management or highly compensated employees; and WHEREAS, the Corporation intends that the Plan shall at all times be administered and interpreted in such a manner as to constitute an unfunded nonqualified deferred plan for a select group of management or highly compensated employees and to qualify for all available exemptions from the provisions of ERISA; NOW, THEREFORE, the Corporation hereby adopts the following Board of Directors Deferred Stock Plan. ARTICLE 1 DEFINITIONS DEFINITION OF TERMS. Certain words and phrases are defined when first used in later sections of this Plan. Whenever any words are used in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply. In addition, the following words and phrases when used, unless the context clearly requires otherwise, shall have the following respective meanings: 1.1. ACCOUNTS. A Participant's Gain Share Account and Restricted Stock Account. 1.2. AFFILIATE. Any corporation, partnership, joint venture, association, or similar organization or entity, which is a member of a controlled group of companies which includes, or which is under common control with, the Corporation under Section 414 of the Code. 1.3. BENEFICIARY. The Beneficiary(ies) designated by a Participant under Article 8, or, if the Participant has not designated a Beneficiary under 6. 1.4. CALENDAR YEAR. January 1 to December 31. 1.5. CODE. The Internal Revenue Code of 1986, as amended from time to time. 1.6. COMMON STOCK. The common stock of PCTEL, Inc. 1.7 COMPENSATION. The amount(s) to which a Participant is entitled during a Calendar Year. 1.8 CONSIDERATION SHARES. The shares of Common Stock owned by a Participant for six months or longer. 1.9 DATE OF EXERCISE. The date on or after which Options designated in the Election Form will be exercised and the elected percentage of the gain derived therefrom will be deferred pursuant to Article 3 of this Plan; provided that such date shall be at least six months from the election date. 1.10 DEFERRAL PERIOD. The period after which distribution of the Gain Share Account and Restricted Stock Account is to be made. 1.11 DISABILITY. Disability shall mean the total and permanent incapacity of the Participant, due to physical impairment or legally established mental incompetence, to perform the usual duties of his/her service as a Board Member with the Corporation. 1.12 EFFECTIVE DATE. January 1, 2004. 1.13 ELECTION OF DEFERRAL. A written notice filed by the Participant with the Plan Administrator of the Corporation in substantially the form attached hereto as Exhibit A, and referred herein as the "ELECTION FORM," specifying the amount (if any) of Restricted Stock and/or Gain Shares to be deferred. 1.14 ERISA. The Employee Retirement Income Security Act of 1974, as amended from time to time. 1.15 FAIR MARKET VALUE. With respect to a share of Common Stock as of any date, (a) the closing sales price of Common Stock in the NASDAQ National Market System or on any such other exchange on which the Common Stock is traded on such date, or in the absence of sales on such date, the closing sales price on the immediately preceding date on which sales were reported, or (b) in the event there is no public market for the Common Stock on such date, the Fair Market Value as determined in good faith by the Board of Directors. 1.16 GAIN SHARES. The shares of Common Stock so determined under Section 3.5 as resulting from the exercise 1.17 GAIN SHARE ACCOUNT. The account maintained by the Plan Administrator for the Participant of the number of Phantom Share Units related to Gain Shares, adjusted for hypothetical gains, earnings, dividends, losses, distributions, withdrawals and other similar activities. 1.18 OPTION. A nonqualified stock option to purchase shares of Common Stock. 1.19 PARTICIPANT. Any member of the Board of Directors who has completed and submitted an Election Form, substantially in the form of Exhibit A attached hereto. 1.20 PHANTOM SHARE UNITS. Units of deemed investment in shares of Common Stock so determined under Sections 3.6 and 5.1(b). 1.21 PLAN. This Plan, together with any and all amendments or supplements thereto. 2 1.22 PLAN ADMINISTRATOR. A duly authorized officer of the Corporation designated by the Board of Directors. 1.23 PLAN RETIREMENT DATE. The date selected by a Participant, however, no earlier than the date he or she attains 55 years of age. 1.24 PLAN YEAR. The Calendar Year. 1.25 RESTRICTED STOCK. The shares of Common Stock so determined under Section 4.4. 1.26 RESTRICTED STOCK ACCOUNT. The account maintained by the Plan Administrator for the Participant of the number of Phantom Share Units related to Restricted Stock shares, adjusted for hypothetical gains, earnings, dividends, losses, distributions, withdrawals and other similar activities. 1.27 RETIREMENT. The termination of a Participant's service on the Board of Directors of the Corporation on or after the Participant has reached his or her Plan Retirement Date. 1.28 VALUATION DATE. The last day of each quarter during a Plan Year, or such other dates as the Plan Administrator may establish in its discretion. 1.29 YEAR OF PARTICIPATION. Twelve months of continuous service on the Board of Directors of the Corporation measured from the Participant's date of entry into this Plan. ARTICLE 2 ELIGIBILITY AND PARTICIPATION 2.1 A Board Member shall become a Participant in the Plan following submittal of a completed Participant Election Form, substantially in the form of Exhibit A attached hereto. 2.2 Once a Board Member becomes a Participant, he or she shall remain a Participant until his or her termination of service on the Board of Directors of the Corporation, and thereafter, until all benefits to which he or she (or his or her Beneficiaries) is entitled under the Plan have been paid. ARTICLE 3 STOCK OPTION GAIN DEFERRALS 3.1 GENERAL. Subject to provisions of this Article 3, Participants may elect to defer receipt and distribution of the gain related to the exercise of Options and resulting Gain Shares until the end of the Deferral Period by completing the appropriate portion of the Election Form and timely filing such form with the Plan Administrator. 3.2 TIMING OF FILING STOCK OPTION GAIN DEFERRAL ELECTION. The Election Form must be filed at least six months prior to the Date of Exercise and no later than the day before the first day of the six month period ending on the Option expiration date. An Option with 3 respect to which an Election Form has been filed may not be exercised prior to the dates specified in the preceding sentence. 3.3 CONTENTS OF STOCK OPTION GAIN DEFERRAL ELECTION. Each stock option gain deferral election shall set forth: (i) the number of Options to be exercised in connection with the deferrals hereunder; (ii) the date of grant of the Options; (iii) the Deferral Period; and (iv) any other item determined to be appropriate by the Plan Administrator. A Participant may elect to defer gain in increments of 25%, 50%, 75% or 100% of the number of Gain Shares resulting from Options exercised on any one Date of Exercise. 3.4 MANNER OF EXERCISING OPTION SHARES. A Participant who desires to exercise an Option and to defer current receipt and distribution of the related Gain Shares must follow the procedures and requirements that are applicable to the Option pursuant to the PCTEL, Inc. 1997 Stock Plan (as amended and restated April 13, 1998) or, if applicable, the PCTEL, Inc. 2001 Nonstatutory Stock Option Plan, including the procedures and requirements relating to the exercise of an Option; provided, however, that in the case of a deferral of Gain Shares under this Plan, the Participant shall only be permitted to tender Consideration Shares to pay the entire exercise price for any such Option exercised. Notwithstanding the foregoing, the Plan Administrator may in its discretion accept the Participant's attestation that he or she owns the number of Consideration Shares necessary to effectuate the stock swap contemplated hereunder. 3.5 DETERMINATION OF GAIN SHARES. Upon exercise of an Option, the Gain Shares from which the Participant has elected to defer hereunder shall be determined as follows: (i) the aggregate exercise price for all exercised Option shares shall be determined; (ii) the number of Consideration Shares needed to pay the exercise price for such Option shares shall be determined; (iii) the difference between the number of exercised Option shares and the number of Consideration Shares shall be the number of Gain Shares resulting from such exercise. Any fractional Gain Share that results from the computations hereunder shall be rounded up to the nearest whole number. 3.6 CONVERSION OF GAIN SHARES TO PHANTOM SHARE UNITS. As of the Date of Exercise, Gain Shares shall be converted to Phantom Share Units by dividing the amount of the aggregate Fair Market Value of the Gain Shares as of the Date of Exercise by the Fair Market Value of one share of Common Stock as of the Date of Exercise. The resulting number of Phantom Share Units shall be credited to the Participant's Gain Share Account. Any fractional Phantom Share Unit that results from the computations hereunder shall be rounded up to the nearest 1/100. 3.7 CHANGES TO THE STOCK OPTION GAIN DEFERRAL ELECTION. The Election Form relating to a particular stock option gain deferral may not be amended or revoked after the day on which it is filed with the Plan Administrator, except that the Deferral Period identified by the Participant in the Election Form may be extended if an amended Election Form is filed with the Plan Administrator at least one year before the Deferral Period (as in effect before such amendment) ends. 3.8 FAILURE TO PROPERLY EXERCISE. If a Participant makes a valid election under this Article 3 to defer Gain Shares and if the Option expires without a proper exercise of the Option by the Participant, or if the Participant fails to properly tender or attest to the Consideration 4 Shares by the last day of the Option term, the Participant shall forfeit any opportunity to exercise the Option and the Option shall be canceled as of the end of the last business day of the Option term, according to the terms of the PCTEL, Inc. 1997 Stock Plan (as amended and restated April 13, 1998) or, if applicable, the PCTEL, Inc. 2001 Nonstatutory Stock Option Plan. 3.9 DELIVERY OF GAIN SHARES. The Gain Shares shall be physically delivered to the person or entity designated by the Plan Administrator for safekeeping. ARTICLE 4 RESTRICTED STOCK DEFERRALS 4.1 GENERAL. Subject to provisions of this Article 4, Participants may elect to defer receipt of Restricted Stock until the end of the Deferral Period by completing the appropriate portion of the Election Form and filing such Election Form with the Plan Administrator. 4.2 TIMING OF FILING RESTRICTED STOCK DEFERRAL ELECTION. The Election Form must be filed at least six months prior to the vesting of such Restricted Stock grant, except for the first Plan Year in which case the deferral must be completed prior to the vesting date. 4.3 CONTENTS OF RESTRICTED STOCK DEFERRAL AGREEMENT. Each Restricted Stock deferral election shall set forth: (i) the number of shares to be deferred hereunder; (ii) the Deferral Period, which is not to be less than one year; and (iii) any other item determined to be appropriate by the Plan Administrator. 4.4 CONVERSION OF RESTRICTED STOCK TO PHANTOM SHARE UNITS. As of the date immediately prior to the date the applicable restriction period expired, the Restricted Stock shall be converted to Phantom Share Units by dividing the amount of the aggregate Fair Market Value of the Restricted Stock as of the date of vesting by the Fair Market Value of one share of Common Stock as of the date of deferral. The resulting number of Phantom Share Units shall be credited to the Participant's Restricted Stock Account. Any fractional Phantom Share Unit that results from the computations hereunder shall be rounded up to the nearest whole number. 4.5 CHANGES TO THE RESTRICTED STOCK DEFERRAL ELECTION. The Election Form relating to a particular Restricted Stock deferral may not be amended or revoked after the day on which it is filed with the Plan Administrator, except that the Deferral Period identified by the Participant in the Election Form may be extended if an amended Election Form is filed with the Plan Administrator at least one year before the Deferral Period (as in effect before such amendment) ends. 4.6 DELIVERY OF RESTRICTED STOCK SHARES. The Restricted Stock Shares shall be physically delivered to the person or entity as designated by the Plan Administrator for safekeeping. 5 ARTICLE 5 ACCOUNTS AND ALLOCATION OF FUNDS 5.1 INVESTMENT ELECTION AND DECLARED RATES. (a) Investment elections for Gain Share Accounts and Restricted Stock Accounts are deemed investments in shares of Common Stock. These deemed investment amounts shall be converted into Phantom Share Units based upon the Fair Market Value of the Common Stock as of the date(s) the amounts are to be credited to a Restricted Stock Account or Gain Shares Account. Dividends paid on Common Stock will be deemed to be immediately reinvested in Common Stock. When a distribution of all or a portion of the Gain Share Account or Restricted Stock Account that is invested hereunder is to be made, the balance in such Account shall be determined by multiplying the Fair Market Value of one share of Common Stock on the most recent Valuation Date preceding the date of such distribution by the number of Phantom Share Units to be distributed. The amount shall be distributed in the form of actual shares of Common Stock. In the event of a stock dividend, split-up or combination of the Common Stock, merger, consolidation, reorganization, recapitalization, or other change in the corporate structure or capitalization affecting the Common Stock, such that an adjustment is determined by the Plan Administrator to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under this Plan, then the Plan Administrator may make appropriate adjustments to the number of deemed shares credited to the applicable Gain Share Account or Restricted Stock Account. The determination of the Plan Administrator as to such adjustments, if any, to be made shall be conclusive. Notwithstanding any other provision of this Plan, the Plan Administrator shall adopt such procedures as it may determine are necessary to ensure that with respect to any Participant who is actually or potentially subject to Section 16(b) of the Securities Exchange Act of 1934, as amended, the crediting of deemed shares to his or her Gain Share Account or Restricted Stock Account is not deemed to be a non-exempt purchase for purposes of such Section 16(b), including without limitation requiring that no shares of Common Stock or cash relating to such deemed shares may be distributed for six months after being credited to such Gain Share Account or Restricted Stock Account. (b) At the end of each calendar quarter (or such shorter period as the Plan Administrator may determine), the Corporation shall provide Participant with a report indicating the number of shares in the Participants' Gain Share and Restricted Stock Accounts. 5.2 DETERMINATION OF ACCOUNTS. A Participant's benefit as of each Valuation Date shall consist of the value of the Participant's Gain Share Account and Restricted Stock Account. 6 ARTICLE 6 ENTITLEMENT TO BENEFITS 6.1 VESTING OF BENEFITS. A Participant shall be fully vested in his or her Gain Share Account and Restricted Stock Account. 6.2 RETIREMENT BENEFIT. After the Retirement of the Participant, the Corporation shall pay to the Participant his or her Accounts. Such benefits shall be payable in a single in-kind distribution of Common Stock. Such distribution shall commence on or about the first day of the first month following the Participant's Retirement or Disability. 6.3 FIXED PAYMENT DATE BENEFIT FOR IN-SERVICE DISTRIBUTION PRIOR TO RETIREMENT. (a) A Participant may select a fixed payment date for the payment of his or her Accounts. A payment made under this election will be payable in a single in-kind distribution of Common Stock. A Participant may extend a fixed payment date by written notice to the Plan Administrator, provided that the Participant gives such written notice at least one (1) year prior to the fixed payment date before such extension. Such fixed payment dates may not be accelerated. (b) Any fixed payment date elected by a Participant as provided under Section 6.3(a) above must be no earlier than the January 1 of the third Calendar Year after the Calendar Year in which the election is made, or in which the Participant gives a written notice of extension. 6.4 DISABILITY RETIREMENT BENEFIT. The Participant shall be entitled to receive payment prior to his or her Plan Retirement Date if he or she is disabled. If the Participant is no longer providing services as a member of the Board of Corporation due to Disability, the benefit payable hereunder shall be the same amount as would have been payable as a Retirement Benefit under Section 6.2 above had the Participant attained his or her Plan Retirement Date on the date of the Disability. 6.5 DEATH BENEFITS. In the event of the Participant's death while providing services to the Corporation as a member of the Board of Directors and prior to distribution of his or her Accounts, the Corporation shall pay a death benefit equal to Gain Share Account and Restricted Stock Account. The death benefit payable under this Section shall be distributed to the Participant's Beneficiary in a lump sum on or about the first day of the third month following the Participant's death. The distribution shall be made in accordance with the last beneficiary designation received by the Plan Administrator from the Participant prior to his or her death. If no such designation has been received by the Corporation, such payments shall be made to the Participant's surviving legal spouse. If the Participant is not survived by a legal spouse, or if such spouse shall fail to so appoint, the said payments shall be made to the then living children of the Participant, if any, in equal shares. If there are no surviving children, the payments will be made to the estate of the later to die of the Participant and his or her legal spouse, if any. 6.6 TERMINATION OF BENEFITS. If, for any reason, Participant is no longer providing services as a member of the Board of Directors of the Corporation, the Corporation shall pay to the Participant the value of the Participant's Accounts. Such termination benefit shall be 7 payable on or about the first day of the third month following the date of termination with shares of Common Stock. 6.7 HARDSHIP DISTRIBUTION. (a) HARDSHIP WITHDRAWAL. In the event that the Plan Administrator, under written request of a Participant, determines, in its sole discretion, that a Participant has suffered an unforeseeable financial emergency, the Corporation shall distribute to the Participant, as soon as practicable following such determination, Common Stock necessary to meet the emergency (the "Hardship Withdrawal"), but not exceeding the balance of such Participant's Accounts as of the date of such payment. For purposes of Section 6.7(a), an "unforeseeable financial emergency" shall mean an event that the Plan Administrator determines to give rise to an unexpected need for cash arising from an illness, casualty loss, sudden financial reversal or other such unforeseeable occurrence. Amounts of Hardship Withdrawal may not exceed the amount the Plan Administrator reasonably determines to be necessary to meet such emergency needs (including taxes incurred by reason of a taxable distribution). The amount of the deferral benefit otherwise payable under the Plan to such Participant shall be adjusted to reflect the early payment of the Hardship Withdrawal. (b) RULES ADOPTED BY PLAN ADMINISTRATOR. The Plan Administrator shall have the authority to adopt additional rules relating to Hardship Withdrawals. In administering these rules, the Plan Administrator shall act in accordance with the principle that the primary purpose of this Plan is to provide additional retirement income, not additional funds for current consumption. (c) LIMIT ON NUMBER OF HARDSHIP WITHDRAWALS. No Participant may receive more than one Hardship Withdrawal in any Calendar Year. 6.8 TERMINATION BASED ON CORPORATE PERFORMANCE. If the amount of the Corporation's net worth, as reported on any of its quarterly filed financial statements, at any time declines below $ 50,000,000.00, this Plan shall terminate and each Participant shall receive a termination benefit as provided for under Section 6.6 above. 6.9 ADVERSE ACTION ON PARTICIPANT OR PLAN. (a) Notwithstanding any other provision hereof, in the event there is a determination by the U.S. Internal Revenue Service ("IRS"), or in the event of a final determination by a court of competent jurisdiction, that amounts credited to Participants' Accounts hereunder are includable in the gross incomes of such Participants or their respective Beneficiaries, the Plan Administrator may, in its sole discretion, distribute the entire amount credited to the Participants' Accounts to the Participants or their respective Beneficiaries and cause the termination of future deferrals by the Participants. (b) In the event that there is a determination by the U.S. Department of Labor, or a final determination of a court of competent jurisdiction, that the Plan is subject to Part 2, 3 or 4 of Title I of ERISA, the Plan Administrator may, in its sole discretion, distribute the entire amount credited to the Participants' Accounts to 8 the Participants or their respective Beneficiaries and cause the termination of future deferrals by the Participants. 6.10 BENEFITS NOT TRANSFERABLE. No Participant or Beneficiary under this Plan shall have any power or right to transfer, assign, anticipate, hypothecate or otherwise encumber all or any part of the amounts payable hereunder. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency, or dissolution of marriage. Any such attempted assignment shall be void. 6.11 NO TRUST CREATED. Nothing contained in this Plan, and no action taken pursuant to its provisions by any person shall create, or be construed to create, a trust of any kind, or a fiduciary relationship between the Corporation and any other person. 6.12 UNCLAIMED BENEFITS. In the case of a benefit payable on behalf of a Participant, if the Plan Administrator is unable to locate the Participant or Beneficiary to whom such benefit is payable, such Plan benefit may be forfeited to the Corporation upon the Plan Administrator's determination. Notwithstanding the foregoing, if, subsequent to any such forfeiture, the Participant or Beneficiary to whom such Plan benefit is payable makes a valid claim for such Plan benefit, such forfeited Plan benefit shall be paid by the Plan Administrator to the Participant or Beneficiary, without interest on the Accounts from the date it would have otherwise been paid. ARTICLE 7 DISTRIBUTION OF BENEFITS 7.1 BENEFITS PAYABLE ONLY FROM GENERAL CORPORATE ASSETS: UNSECURED GENERAL CREDITOR STATUS OF PARTICIPANT. Payment to a Participant or any Beneficiary hereunder shall be made from assets which shall continue, for all purposes, to be part of the general, unrestricted assets of the Corporation; no person shall have any interest in any such asset by virtue of any provision of this Plan. The Corporation's obligation hereunder shall be an unfunded and unsecured promise to pay money in the future. To the extent that any person acquires a right to receive payments from the Corporation under the provisions hereof, such right shall be no greater than the right of any unsecured general creditor of the Corporation; no such person shall have or acquire any legal or equitable right, interest or claim in or to any property or assets of the Corporation. 7.2 FACILITY OF PAYMENT. If a distribution is to be made to a minor, or to a person who is otherwise incompetent, then the Plan Administrator may, in its discretion, make such distribution (i) to the legal guardian, or if none, to a parent of a minor payee with whom the payee maintains his or her residence, or (ii) to the conservator or committee or, if none, to the person having custody of an incompetent payee. Any such distribution shall 9 fully discharge the Plan Administrator, the Corporation and Plan from further liability on account thereof. 7.3 WITHHOLDING. Any and all payments to be made to a Participant or a Participant's Beneficiaries pursuant to this Plan shall be subject to all applicable federal, state and local income taxes and such taxes may be withheld accordingly by the Corporation from benefits under this Plan or from Compensation or other amounts due to the Participant, as determined by the Plan Administrator. The Corporation may, in its discretion, accept payment by the Participant or Beneficiary of the amount of any applicable taxes in lieu of deducting such amount from the Participant's Accounts, Compensation or other amounts due to the Participant. ARTICLE 8 BENEFICIARIES; PARTICIPANT DATA 8.1 BENEFICIARY DESIGNATION. The Participant shall have the right, at any time, to submit in substantially the form attached hereto as Exhibit B, a written designation of primary and secondary Beneficiaries to whom payment under this Plan shall be made in the event of his or her death prior to distribution of the Accounts. Each beneficiary designation shall become effective only when receipt thereof is acknowledged in writing by the Corporation. The Corporation shall have the right, in its sole discretion, to reject any beneficiary designation that is not in substantially the form attached hereto as Exhibit B. Any attempt to designate a Beneficiary, otherwise than as provided in this Section 8.1, shall be ineffective. 8.2 SPOUSE'S INTEREST. A Participant's beneficiary designation shall be deemed automatically revoked if the Participant names a spouse as Beneficiary and the marriage is later dissolved or the spouse dies. Without limiting the generality of the foregoing, the interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant or whose marriage with the Participant has been dissolved shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. ARTICLE 9 PLAN ADMINISTRATION 9.1 RESPONSIBILITY OF ADMINISTRATION OF THE PLAN. (a) The Plan Administrator shall be responsible for the management, operation and administration of the Plan. The Plan Administrator may employ others to render advice with regard to its responsibilities under this Plan. It may also allocate its responsibilities to others and may exercise any other powers necessary for the discharge of its duties. The Plan Administrator shall be entitled to rely conclusively upon all tables, valuations, certifications, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Plan Administrator with respect to the Plan. 10 (b) The primary responsibility of the Plan Administrator is to administer the Plan for the benefit of the Participants and their respective Beneficiaries, subject to the specific terms of the Plan. The Plan Administrator shall administer the Plan in accordance with its terms and shall have the power to determine all questions arising in connection with the administration, interpretation, and application of the Plan. Any such determination shall be conclusive and binding upon all persons and their heirs, executors, beneficiaries, successors and assigns. The Plan Administrator shall have all powers necessary or appropriate to accomplish its duties under the Plan. The Plan Administrator shall also have the discretion and authority to make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan and decide or resolve any and all questions, including but not limited to, interpretations of this Plan and entitlement to or amount of benefits under this Plan, as may arise in connection with the Plan. 9.2 CLAIMS PROCEDURE. (a) CLAIM. A person who believes that he or she is being denied a benefit to which he or she is entitled under the Plan (hereinafter referred to as a "Claimant") may file a written request for such benefit with the Plan Administrator, setting forth his or her claim. The request must be addressed to the Plan Administrator at its then principal place of business. Notwithstanding anything to the contrary, pending a determination under this Section 9.2, the undisputed portion of a benefit due to Claimant shall be timely distributed pursuant to the terms of the Plan. (b) CLAIM DECISION. Upon receipt of a claim, the Plan Administrator shall advise the Claimant that a reply will be forthcoming within 45 days. The Plan Administrator may, however, extend the reply period for an additional 30 days for reasonable cause. If the claim is denied in whole or in part, the Plan Administrator shall adopt a written opinion, using language calculated to be understood by the Claimant, setting forth to the extent applicable: (i) The specific reasons for such denial; (ii) Specific reference to pertinent provisions of this Plan on which such denial is based; (iii) A description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation why such material or such information is necessary; (iv) Appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review, and (v) The time limits for requesting a review under subsection (c) hereof. (c) REQUEST FOR REVIEW. Within 60 days after receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Corporation, through its Board of Directors, review the Plan Administrator's determination. Such request must be addressed to the Plan Administrator of the Corporation at its then principal place of business. The Claimant or his or her 11 duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Corporation. If the Claimant does not request a review of the determination within such 60-day period, he or she shall be barred and estopped from challenging the determination. (d) REVIEW OF DECISION. Within 30 days after the Corporation's receipt of a request for review by a Claimant pursuant to 9.2 (c) above, the Corporation will review the Plan Administrator's determination. After considering all materials presented by the Claimant, the Corporation, through its Board of Directors, will render a written opinion, written in a manner calculated to be understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Plan on which the decision is based. If special circumstances require that the 30 day time period be extended, the Corporation will so notify the Claimant and will render the decision as soon as possible, but in no event later than 60 days after receipt of the request for review. 9.3 ARBITRATION. Any claim or controversy between the parties which the parties are unable to resolve themselves, and which is not resolved through the claims procedure set forth in Section 9.2, including any claim arising out of, connected with, or related to the interpretation, performance or breach of any provision of this Plan, and any claim or dispute as to whether a claim is subject to arbitration, shall be submitted to and resolved exclusively by expedited arbitration by a single arbitrator in accordance with the following procedures: (a) In the event of a claim or controversy subject to this arbitration provision, the complaining party shall promptly send written notice to the other party identifying the matter in dispute and the proposed remedy. Following such notice, the parties shall meet and attempt in good faith to resolve the matter. In the event the parties are unable to resolve the matter within 21 days, the parties shall meet and attempt in good faith to select a single arbitrator acceptable to both parties. If a single arbitrator is not selected by mutual consent within 10 business days following the expiration of the 21 day period, an arbitrator shall be selected from a list of nine persons each of whom shall be an attorney who is either engaged in the active practice of law or a recognized arbitrator and who, in either event, is experienced in serving as an arbitrator in disputes between employers and employees, which list shall be provided by the office of the American Arbitration Association ("AAA") or of the Federal Mediation and Conciliation Service. If, within three business days of the parties' receipt of such list, the parties are unable to agree upon an arbitrator from the list, then the parties shall each strike names alternatively from the list, with the first to strike being determined by the flip of a coin. After each party has had four strikes, the remaining name on the list shall be the arbitrator. If such person is unable to serve for any reason, the parties shall repeat this process until an arbitrator is selected. (b) Unless the parties agree otherwise, within 60 days of the selection of the arbitrator, a hearing shall be conducted before such arbitrator at a time and a place agreed upon by the parties. In the event the parties are unable to agree upon the time or place of the arbitration, the time and place shall be designated by the arbitrator after consultation with the parties. Within 30 days of the conclusion of 12 the arbitration hearing, the arbitrator shall issue an award, accompanied by a written decision explaining the basis for the arbitrator's award. The arbitrator's award may not include a provision for punitive damages. (c) In any arbitration hereunder, the Corporation shall pay all administrative fees of the arbitration, all fees of the arbitrator and each party's reasonable attorneys' fees, costs, and expenses. The arbitrator shall have no authority to add to or to modify the Plan, shall apply all applicable law, and shall have no lesser and no greater remedial authority than would a court of law resolving the same claim or controversy. The arbitrator shall, upon an appropriate motion, dismiss any claim without an evidentiary hearing if the party bringing the motion establishes that it would be entitled to summary judgment if the matter had been pursued in court litigation. The parties shall be entitled to reasonable discovery subject to the discretion of the arbitrator. (d) The decision of the arbitrator shall be final, binding, and non-appealable, and may be enforced as a final judgment in any court of competent jurisdiction. (e) This Section 9.3 shall extend to claims against any officer, director, shareholder, Participant, Beneficiary, or agent of each party, or of any of the above, and shall apply as well to claims arising out of state and federal statutes and local ordinances as well as to claims arising under the common law or under this Plan. (f) Notwithstanding the foregoing, and unless otherwise agreed between the parties, either party may, in an appropriate manner, apply to a court for provisional relief, including a temporary restraining order or preliminary injunction, on the ground that the arbitration award to which the applicant may be entitled may be rendered ineffectual without provisional relief. (g) Any arbitration hereunder shall be conducted in accordance with the rules and procedures of the AAA then in effect; provided, however, that, (i) all evidence presented to the arbitrator shall be in strict conformity with the legal rules of evidence, and (ii) in the event of any inconsistency between the rules and procedures of the AAA and the terms of this Plan, the terms of this Plan shall prevail. (h) If any of the provisions of this Section 9.3 are determined to be unlawful or otherwise unenforceable, in whole or in part, such determination shall not affect the validity of the remainder of this Section 9.3, and this Section 9.3 shall be reformed to the extent necessary to carry out its provisions to the greatest extent possible and to insure that the resolution of all conflicts between the parties, including those arising out of statutory claims, shall be resolved by neutral, binding arbitration. If a court should find that the provisions of this Section 9.3 are not absolutely binding, then the parties intend any arbitration decision and award to be fully admissible in evidence in any subsequent action, given great weight by any finder of fact, and treated as determinative to the maximum extent permitted by law. 13 9.4 NOTICE. Any notice, consent or demand required or permitted to be given under the provisions of this Plan shall be in writing and shall be signed by the party giving or making the same. If such notice, consent or demand is mailed, it shall be sent by United States certified mail, postage prepaid, return receipt requested, addressed to the addressee's last known address as shown on the records of the Corporation. The date of receipt, or the date of refusal by addressee upon presentation, shall be deemed the date of such notice, consent or demand. Any person may change the address to which notice is to be sent by giving written notice of the change of address in the manner aforesaid. ARTICLE 10 AMENDMENT OR TERMINATION 10.1 AMENDMENT OR TERMINATION. (a) This Plan may be amended or terminated by the Corporation at any time, without notice to or consent of any person, pursuant to resolutions adopted by its Board of Directors. Any such amendment or termination shall take effect as of the date specified therein and, to the extent permitted by law. However, no such amendment or termination shall reduce the amount then credited to the Participant's Accounts. If the Plan is terminated, the Participant's Accounts will be distributed in a single in-kind distribution of Common Stock. (b) Any other provision of this Plan to the contrary notwithstanding, the Plan may be amended by the Corporation at any time, to the extent that, in the opinion of the Corporation, such amendment shall be necessary in order to ensure that the Plan will be characterized as a plan maintained for a select group of management or highly compensated employees, as described in sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, or to conform the Plan to the requirements of any applicable law, including ERISA and the Code. No such amendment shall be considered prejudicial to any interest of a Participant or Beneficiary hereunder. ARTICLE 11 MISCELLANEOUS 11.1 ENTIRE AGREEMENT. The Plan and the executed Election Form and Beneficiary Designation Form, and other administrative forms shall constitute the total understanding between the Corporation and the Participant. No oral statement regarding the Plan may be relied upon by the Participant. In the event that there is a discrepancy between forms, this Plan will control. 11.2 INVALIDITY OF PROVISIONS. If any provision of this Plan shall, for any reason, be held to be invalid or unenforceable, the remaining provisions shall nevertheless be carried into effect. 14 11.3 GOVERNING LAW. The Plan and the rights and obligations of all persons hereunder shall be governed by and construed in accordance with the laws of the State of Illinois, other than its laws regarding choice of law, to the extent that such state law is not preempted by federal law. IN WITNESS WHEREOF, the Corporation has executed this Plan as of the day and year above first written. ATTEST: PCTEL, INC. By: __________________________ ____________________, Secretary Title: Chief Executive Officer 15 PCTEL, INC. BOARD OF DIRECTORS DEFERRED STOCK PLAN PARTICIPATION AGREEMENT ELECTION FORM EXHIBIT A THIS PARTICIPATION AGREEMENT is entered into this ____day of ___________, 20___ between PCTEL, INC., hereinafter referred to as the "Corporation", and _______________________, hereinafter referred to as the "Participant". PART I STOCK OPTION GAIN DEFERRAL ELECTION [ ] I hereby elect to defer stock option gains. I understand that this election must be made at least 6 months prior to my Date of Exercise. a) Number of Options to be exercised is ___________________. b) Date of grant of the Option is ___________________. c) ________% of my stock option gains to be deferred (in increments of 25%). d) Date this election is being made: ___________________. e) The Deferral Period for my election begins on my Date of Exercise and ends on the date distribution commences pursuant to my election in Part III below. PART II. RESTRICTED STOCK DEFERRAL ELECTION [ ] I hereby make a Restricted Stock deferral election. I understand that this election must be made at least 6 months prior to the vesting of my Restricted Stock (except with respect to the first Plan Year, in which case this election must be made prior to the vesting date). a) Number of shares to be deferred ___________________. b) Date this election is being made ___________________. c) The Deferral Period for my election begins on the date my Restricted Stock deferral election is filed with the Plan Administrator and ends on the date distribution commences pursuant to my election in Part III below. PART III. DISTRIBUTION OF BENEFITS ELECTION (ARTICLE 6 OF THE PLAN): Please select A or B. [ ] A. RETIREMENT BENEFITS. I hereby elect to have my Retirement or Disability benefits distributed to me in a single in-kind distribution of Common Stock. NOTE: THIS ELECTION MAY BE CHANGED BY THE PARTICIPANT BY GIVING WRITTEN NOTICE TO THE CORPORATION NOT LATER THAN ONE YEAR BEFORE RETIREMENT, OR PROMPTLY FOLLOWING A DISABILITY. BY THE TERMS OF THE PLAN, THE RETIREMENT AGE IS AGE 55 OR LATER. 16 [ ] B. FIXED PAYMENT DATE BENEFITS. This Section applies if you wish to elect an in-service distribution prior to retirement age. All distributions under this section are made in a lump sum. I hereby elect to have my fixed payment date benefits distributed to me at the following date: Date for fixed payments to commence ____________________________ (This date may be no earlier than the January 1 of the third Calendar Year after the Calendar Year in which this election is made. NOTE: THIS ELECTION MAY BE CHANGED TO EXTEND THE FIXED PAYMENT DATE TO A LATER DATE SO LONG AS (a) THE ELECTION TO SO EXTEND THE DATE IS AT LEAST ONE YEAR BEFORE THE ORIGINAL DATE, AND (b) THE EXTENDED DATE IS NO EARLIER THAN JANUARY 1 OF THE THIRD CALENDAR YEAR AFTER ISSUING THE ELECTION TO EXTEND. SUCH DATES MAY NOT BE ACCELERATED. PCTEL, INC. PARTICIPANT _________________________ _________________________ 17 PCTEL, INC. BOARD OF DIRECTORS DEFERRED STOCK PLAN DESIGNATION OF BENEFICIARY EXHIBIT B TO: PCTEL, INC. (hereinafter referred to as the "Corporation"). In accordance with the rights granted to me as a Participant in the PCTEL, Inc. Board of Directors Deferred Stock Plan, I hereby designate the following as primary and 1st contingent Beneficiary(ies) thereunder to receive payments in the event of my death: PRIMARY Beneficiary: _________________________________________________ Relationship: ___________________________________ 1ST CONTINGENT Beneficiary: __________________________________________ Relationship: ___________________________________ I further reserve the privilege of changing the Beneficiary(ies) herein named at any time or times without the consent of any such Beneficiary(ies). This designation is made upon the following terms and conditions: 1. The word "Beneficiary" as used herein shall include the plural, Beneficiaries, wherever the Plan permits. 2. For purposes of this Beneficiary Designation, no person shall be deemed to have survived the Participant if that person dies within thirty (30) days of the Participant's death. 3. Beneficiary shall mean the Primary Beneficiary if such Primary Beneficiary survives the Participant by at least thirty (30) days, and shall mean the 1st Contingent Beneficiary if the Primary Beneficiary does not survive the Participant by at least thirty (30) days. 4. If the Primary Beneficiary shall be deceased on the date of distribution as provided in the Plan the distribution shall be payable to the 1st Contingent Beneficiary unless the executors or administrators of said deceased Beneficiary are named as Primary Beneficiary hereinabove. 5. If more than one Beneficiary is named within the same class (i.e., Primary or 1st Contingent), then distribution shall be made equally to such Beneficiaries unless otherwise provided hereinabove. If none of the Beneficiaries named hereinabove are living on the date distribution is to be made, distribution shall be made to my executors or administrators, or upon their written request, to any person or persons so designated by them. 6. If any distribution shall be payable to any trust, the Corporation shall not be liable to see to the application by the Trustee of any payment hereunder at any time, and may rely upon the sole signature of the Trustee to any receipt, release or waiver, or to any transfer or other instrument to whomsoever made purporting to affect this nomination or any right hereunder. 7. A Participant's Beneficiary designation shall be deemed automatically revoked if the Participant names a spouse as Beneficiary and the marriage is later dissolved or the spouse dies. Without limiting the generality of the foregoing, the interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant or whose marriage with the Participant has been dissolved shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. THIS DESIGNATION CANCELS AND SUPERSEDES ANY DESIGNATION OF BENEFICIARY HERETOFORE MADE BY ME WITH RESPECT TO SAID PLAN AND THE RIGHT TO RECEIVE PAYMENTS THEREUNDER. Dated: __________________________ Board Member:_________________________ I am the spouse of the Participant/Board Member named above. I have read and understood the foregoing Designation of Beneficiary, and especially paragraph 8 thereof. I understand that the Plan does not permit the assignment of the Participant/Board Member's benefits to me in the event of the dissolution of my marriage. I also understand that, even if I am named as a Beneficiary, my rights may be impaired in the event of the dissolution of my marriage or my death before the Participant/Board Member. Dated: _____________________ ______________________________________ Spouse Acknowledgment of receipt this __ day of __________, 20__ By:__________________ EX-31.1 5 c78775exv31w1.txt CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION I, Martin H. Singer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of PCTEL, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/ MARTIN H. SINGER -------------------------- Martin H. Singer Chief Executive Officer EX-31.2 6 c78775exv31w2.txt CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION I, John Schoen, certify that: 1. I have reviewed this quarterly report on Form 10-Q of PCTEL, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/ JOHN SCHOEN ----------------------------- John Schoen Chief Operating Officer and Chief Financial Officer EX-32 7 c78775exv32.txt 906 CERTIFICATIONS EXHIBIT 32 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Martin H. Singer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of PCTEL, Inc. on Form 10-Q for the fiscal quarter ended June 30, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of PCTEL, Inc. A signed original of this written statement required by Section 906 has been provided to PCTEL, Inc. and will be retained by PCTEL, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. By: /s/ Martin H. Singer ----------------------------- DATE: August 14, 2003 NAME: MARTIN H. SINGER Title: Chief Executive Officer I, John Schoen, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of PCTEL, Inc. on Form 10-Q for the fiscal quarter ended June 30, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of PCTEL, Inc. A signed original of this written statement required by Section 906 has been provided to PCTEL, Inc. and will be retained by PCTEL, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. By: /s/ John Schoen ----------------------------- DATE: August 14, 2003 NAME: JOHN SCHOEN Title: Chief Operating Officer and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to PCTEL, Inc. and will be retained by PCTEL, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----