-----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, RPOUxqBCzEWnb+lSM2IK1XgfM/ZsnYUtSEJJx/P6nOtiJs5xnTGCdha8KiCyKLca S7BaC4IRlCxtjj/E7AoKYw== 0000950137-03-005603.txt : 20031031 0000950137-03-005603.hdr.sgml : 20031031 20031031160533 ACCESSION NUMBER: 0000950137-03-005603 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031031 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: 03970043 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 c80270e10vq.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 September 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 October 24, 2003, there were 20,539,411 shares of the Registrant's Common Stock outstanding. ================================================================================ PCTEL, INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2003
PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) as of September 30, 2003 and December 31, 2002 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) for the three and nine months ended September 30, 2003 and 2002 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) for the three and nine months ended September 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 16 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 33 ITEM 4 CONTROLS AND PROCEDURES 34 PART II. OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS 35 ITEM 5 OTHER INFORMATION 36 ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 36
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PCTEL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED, IN THOUSANDS, EXCEPT SHARE INFORMATION)
SEPTEMBER 30, DECEMBER 31, 2003 2002 ------------ ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 89,587 $ 52,986 Restricted cash 278 347 Short-term investments 19,037 58,405 Accounts receivable, net of allowance of $50 and $368 at September 30, 2003 and December 31, 2002 respectively 2,631 5,379 Inventories, net 1,281 1,115 Non-trade receivable (see Note 4) 4,000 - Prepaid expenses and other assets 2,225 5,144 --------- --------- Total current assets 119,039 123,376 PROPERTY AND EQUIPMENT, net 1,013 1,532 GOODWILL 4,261 1,255 OTHER INTANGIBLE ASSETS, net (see Note 5) 4,483 365 OTHER ASSETS 378 2,898 --------- --------- TOTAL ASSETS $ 129,174 $ 129,426 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 894 $ 1,498 Accrued royalties 3,208 3,658 Income taxes payable 5,621 6,289 Accrued liabilities 4,983 5,313 --------- --------- Total current liabilities 14,706 16,758 Long-term liabilities 784 115 --------- --------- Total liabilities 15,490 16,873 --------- --------- STOCKHOLDERS' EQUITY: Common stock, $0.001 par value, 100,000,000 shares authorized, 20,116,565 and 19,927,616 issued and outstanding at September 30, 2003 and December 31, 2002 respectively 20 20 Additional paid-in capital 154,515 152,272 Deferred stock compensation (2,722) (3,958) Accumulated deficit (38,223) (36,079) Accumulated other comprehensive income 94 298 --------- --------- Total stockholders' equity 113,684 112,553 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 129,174 $ 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ------------------------ 2003 2002 2003 2002 ----------- ----------- ----------- ----------- REVENUES $ 4,030 $ 12,548 $ 27,288 $ 32,447 COST OF REVENUES 755 7,481 12,871 18,275 --------- --------- --------- --------- INVENTORY RECOVERY (see Note 6) - (3,795) (1,800) (5,348) --------- --------- --------- --------- GROSS PROFIT 3,275 8,862 16,217 19,520 --------- --------- --------- --------- OPERATING EXPENSES: Research and development 1,792 2,477 6,093 7,634 Sales and marketing 1,501 1,904 5,655 5,395 General and administrative 2,644 1,248 7,295 3,856 Amortization of other intangible assets (see Note 5) 343 50 781 50 Acquired in-process research and development (see Note 3) - - 1,100 - Restructuring charges (see Note 7) 288 88 2,940 735 Gain on sale of assets and related royalties (see Note 4) (644) - (4,976) - Amortization of deferred compensation (see Note 9) 208 170 748 528 --------- --------- --------- --------- Total operating expenses 6,132 5,937 19,636 18,198 --------- --------- --------- --------- INCOME (LOSS) FROM OPERATIONS (2,857) 2,925 (3,419) 1,322 OTHER INCOME, NET 291 641 1,120 2,631 --------- --------- --------- --------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (2,566) 3,566 (2,299) 3,953 PROVISION (BENEFIT) FOR INCOME TAXES (248) 352 (155) 415 --------- --------- --------- --------- NET INCOME (LOSS) $ (2,318) $ 3,214 $ (2,144) $ 3,538 ========= ========= ========= ========= Basic earnings (loss) per share $ (0.12) $ 0.16 $ (0.11) $ 0.18 Shares used in computing basic earnings (loss) per share 19,663 19,972 19,913 19,876 Diluted earnings (loss) per share $ (0.12) $ 0.16 $ (0.11) $ 0.18 Shares used in computing diluted earnings (loss) per share 19,663 20,139 19,913 20,101
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)
NINE MONTHS ENDED SEPTEMBER 30, -------------------- 2003 2002 -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (2,144) $ 3,538 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,498 1,487 In-process research and development 1,100 - Loss on disposal/sale of fixed assets 670 83 Gain on sale of assets and related royalties (4,976) - Extended vesting of stock options 182 - Recovery of allowance for doubtful accounts (368) (431) Recovery of excess and obsolete inventories 1,800 (184) Decrease in deferred tax asset - 400 Tax benefit from stock options exercises - 853 Amortization of deferred compensation 748 533 Changes in operating assets and liabilities: Decrease in accounts receivable 519 (953) Decrease (increase) in inventories (1,317) 1,511 Decrease (increase) in prepaid expenses and other assets 5,539 (4,617) Decrease in accounts payable (604) (3,938) Decrease in accrued royalties (450) (8,835) Increase (decrease) in income taxes payable (668) 1,279 Decrease in accrued liabilities (265) (3,571) Increase (decrease) in long-term liabilities 669 (92) -------- -------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,933 (12,937) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for property and equipment (768) (394) Proceeds on sale of property and equipment 153 19 Proceeds on sale of assets and related royalties 6,743 - Sales (purchases) of available-for-sale investments 36,734 18,646 Purchase of assets/business, net of cash acquired (10,762) (1,598) -------- -------- NET CASH PROVIDED BY INVESTING ACTIVITIES 32,100 16,673 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principle payments of notes payable - (20) Proceeds from the exercise of stock options 8,773 2,659 Payments for repurchase of common stock (6,224) (741) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 2,549 1,898 -------- -------- Net increase in cash and cash equivalents 36,582 5,634 Cumulative translation adjustment 19 22 Cash and cash equivalents, beginning of period 52,986 38,393 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 89,587 $ 44,049 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 PCTEL, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 nine months ended September 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 September 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 September 30, 2003 and December 31, 2002. Due to competitive pressures and technological innovation, we may have excess inventory in the future. As of September 30, 2003 and December 31, 2002, the allowance for inventory losses was $0 million and $2.1 million, respectively. We sold part of the written-down inventories and recovered $0 and $1.8 million of the former write-downs during the three and nine months ended September 30, 2003, respectively. Write-downs of inventories would have a negative impact on gross margin. EARNINGS PER SHARE We compute earnings per share in accordance with SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires companies to compute net income per share under two different methods, basic and diluted, and present per share data for all periods in which statements of operations are presented. Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding, less shares subject to repurchase. Diluted earnings per share are computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding. Common stock equivalents consist of stock options and warrants using the treasury stock method. Common stock options and warrants are excluded from the computation of diluted earnings per share if their effect is not dilutive (where the price exceeds the fair market value of the underlying securities). 6 The following table provides a reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share for the three and nine months ended September 30, 2003 and 2002, respectively (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Net income (loss) $ (2,318) $ 3,214 $ (2,144) $ 3,538 ========= ========= ========= ========= Basic earnings (loss) per share: Weighted average common shares outstanding 20,113 20,123 20,363 20,022 Less: Weighted average shares subject to repurchase (450) (151) (450) (146) --------- --------- --------- --------- Weighted average common shares outstanding 19,663 19,972 19,913 19,876 --------- --------- --------- --------- Basic earnings (loss) per share $ (0.12) $ 0.16 $ (0.11) $ 0.18 ========= ========= ========= ========= Diluted earnings (loss) per share: Weighted average common shares outstanding 19,663 19,972 19,913 19,876 Weighted average shares subject to repurchase -* 151 -* 146 Weighted average common stock option grants and outstanding warrants -* 16 -* 79 --------- --------- --------- --------- Weighted average common shares and common stock equivalents outstanding 19,663 20,139 19,913 20,101 --------- --------- --------- --------- Diluted earnings (loss) per share $ (0.12) $ 0.16 $ (0.11) $ 0.18 ========= ========= ========= =========
* These amounts have been excluded since the effect is not 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 nine months ended September 30, 2003 and 2002 (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------ 2003 2002 2003 2002 ---------- ---------- --------- ---------- Net (loss) income--as reported $ (2,318) $ 3,214 $(2,144) $ 3,538 Add: Stock-based employee compensation expense included in reported net income 208 170 748 528 Add (deduct): Stock-based employee compensation income (expense) determined under fair value based method for all awards (72) (1,974) 170 (2,751) -------- -------- ------- -------- Net (loss) income--as adjusted $ (2,182) $ 1,410 $(1,226) $ 1,315 ======== ======== ======= ======== Net (loss) income per share--basic as reported $ (0.12) $ 0.16 $ (0.11) $ 0.18 ======== ======== ======= ======== Net (loss) income per share--basic as adjusted $ (0.11) $ 0.07 $ (0.06) $ 0.07 ======== ======== ======= ======== Net (loss) income per share--diluted as reported $ (0.12) $ 0.16 $ (0.11) $ 0.18 ======== ======== ======= ======== Net (loss) income per share--diluted as adjusted $ (0.11) $ 0.07 $ (0.06) $ 0.07 ======== ======== ======= ========
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% 71% 60% 71% Risk-free interest rate 1.8% 1.9% 1.0% 1.5% 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 7 including the expected stock price volatility and expected option life. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models may not necessarily provide a reliable single measure of the fair value of our employee stock options. Restricted stock awards are recorded at the fair market value of the stock on the date of grant and are expensed over the vesting period. INDUSTRY SEGMENT, CUSTOMER AND GEOGRAPHIC INFORMATION We 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- ------------------- 2003 2002 2003 2002 ------ ------ ------ ------ (UNAUDITED) (UNAUDITED) Taiwan -% 55% 42% 65% China (Hong Kong) 1 31 15 17 Rest of Asia 2 1 4 2 Japan 2 - 2 - Europe 13 - 5 1 -- -- -- -- Total 18% 87% 68% 85% == == == ==
Sales to our major customers representing greater than 10% of total revenues are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- ---------------------- CUSTOMER 2003 2002 2003 2002 -------- ------- -------- ------- -------- (UNAUDITED) (UNAUDITED) Askey -% 21% 12% 26% Prewell - 31 14 16 Lite-On Technology (GVC) - 24 13 27 Creative Marketing Associates 19 - - - Cingular 11 - - - Silicon Laboratories 12 - - - Ericsson 12 - - - -- -- -- -- Total 54% 76% 39% 69% == == == ==
COMPREHENSIVE INCOME The following table provides the calculation of other comprehensive income for the three and nine months ended September 30, 2003 and 2002 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ------------------------ 2003 2002 2003 2002 ----------- --------- ---------- --------- (UNAUDITED) (UNAUDITED) Net income (loss) $ (2,318) $ 3,214 $(2,144) $ 3,538 ======== ======= ======= ======= Other comprehensive income: Unrealized gains (loss) on available-for-sale securities (54) (9) (223) (430) Cumulative translation adjustment 22 (9) 19 22 -------- ------- ------- ------- Comprehensive income (loss) $ (2,350) $ 3,196 $(2,348) $ 3,130 ======== ======= ======= =======
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, 8 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS No. 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 became effective for exit or disposal activities initiated after December 31, 2002. We adopted SFAS No. 146 on January 1, 2003. The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS No. 146. The effect of adopting SFAS No. 146 changed the time of when restructuring charges are recorded from a commitment date approach to when the liability is incurred. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability be recorded in the guarantor's balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity's product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. Adoption of this standard did not have a material impact on the Company's financial position, results of operations, or cash flows. In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after December 15, 2003. The company believes that there will be no 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. Adoption of this standard did not have a material impact on the Company's financial position, results of operations, or cash flows. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure ("SFAS 148")." SFAS 148 amends FASB Statement No. 123, "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Generally the provisions of SFAS 148 became effective for financial statements for fiscal years ending after December 15, 2002. The Company continues to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The disclosures of SFAS 148 are included in Note 2. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149")." SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is generally effective for derivative instruments, including derivative instruments embedded in certain contracts, entered into or modified after September 30, 2003 and for hedging relationships designated after September 30, 2003. The Company does not expect the adoption of SFAS 149 to have a material impact on its operating results or financial condition. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS 150")." SFAS 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to the Company's existing financial instruments effective July 1, 2003, the 9 beginning of the first fiscal period after June 15, 2003. Adoption of this standard did not have a material impact on the Company's financial position, results of operations, or cash flows. 3. ACQUISITION On March 12, 2003, PCTEL, Inc., 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 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 amortized 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 final balance sheet as of March 31, 2003. 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:
NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 2003 2002 ---------- ---------- REVENUES $ 33,334 $ 38,746 INCOME (LOSS) FROM OPERATIONS (1,417) 3,526 NET INCOME (LOSS) $ (137) $ 4,805 ========= ========= Basic earnings per share $ (0.01) $ 0.24 Shares used in computing basic earnings per share 19,913 19,876 Diluted earnings per share $ (0.01) $ 0.24 Shares used in computing diluted earnings per share 19,913 20,101
4. DISPOSITION In May 2003, PCTEL, Inc., completed the sale of certain of its assets to Conexant Systems, Inc., ("Conexant"). Conexant is a supplier of semiconductor system solutions for communications applications. In connection with the transaction, PCTEL and Conexant entered into an Asset Purchase Agreement dated as of May 8, 2003 (the "Purchase Agreement") under which Conexant acquired specified assets of PCTEL relating to a component of PCTEL's HSP modem operations and consisting of inventory, fixed assets from PCTEL's offices in Taiwan, contracts with customers and distributors related to the soft modem products, and limited intellectual property. PCTEL did not transfer any of its patent portfolio in connection with this transaction, and PCTEL retained all operating contracts and intellectual property assets associated with our hardware modem and wireless products. In exchange for the assets acquired from PCTEL, Conexant delivered approximately $6.75 million in cash to PCTEL, which represents $4.25 million plus the book value of the acquired inventory and fixed assets being transferred to Conexant. Conexant has also agreed to assume certain liabilities of PCTEL and agreed to pay an additional $4.0 million in cash to PCTEL in two equal 10 installments due on November 1, 2003 and December 31, 2003. The total proceeds of $10.7 million netted a gain on sale of assets of $4.3 million. In connection with the Purchase Agreement, Conexant agreed to license PCTEL's Segue Wi-Fi software for use with certain of its products. Conexant will pay to PCTEL an aggregate of $1 million, payable in quarterly installments of $250,000 as consideration for this license beginning in the quarter ended September 30, 2003. Concurrently with the completion of the transaction with Conexant, PCTEL and Conexant also completed an Intellectual Property Assignment Agreement and Cross-License Agreement ("IPA"). PCTEL provided Conexant with a non-exclusive, worldwide license to certain of PCTEL's soft modem patents, including technology essential to the implementation of the V.90 standard (soft modems). In addition, Conexant assigned 46 U.S. patents and patent applications relating to modem and other access technologies to PCTEL as part of the transaction. In consideration for the rights obtained by Conexant from PCTEL under this agreement, and taking into account the value of rights obtained by PCTEL from Conexant under this agreement, during the four-year period beginning on July 1, 2003 and ending on September 30, 2007, Conexant agreed to pay to PCTEL, on a quarterly basis, royalties in the amount of ten percent (10%) of the revenue received during the royalty period, up to a maximum amount of $500,000 per quarter with respect to each calendar quarter during the royalty period, contingent upon sales by Conexant during the period. Any such future payments by Conexant to PCTEL in connection with the IPA will be recorded as part of the gain on sale of assets and related royalties in the statement of operations, pursuant to Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." 5. GOODWILL AND OTHER INTANGIBLE ASSETS 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 September 30, 2001 to be accounted for using the purchase method. SFAS No. 142 supersedes Accounting Principles Board Opinion ("APB") No. 17 and addresses the financial accounting and reporting standards for goodwill and intangible assets subsequent to their initial recognition. SFAS No. 142 requires that goodwill no longer be amortized. It also requires that goodwill and other intangible assets be tested for impairment at least annually and whenever events or circumstances occur indicating that goodwill might be impaired. Additionally, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. We adopted SFAS No. 142 on January 1, 2002 at which time we ceased amortization of goodwill. The changes in the carrying amount of goodwill for the nine months ended September 30, 2003 was increased $3.0 million due to the DTI acquisition.
GOODWILL -------- Balance at December 31, 2002 1,255 Goodwill from the acquisition of DTI 3,006 -------- Balance at September 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 (201) 251 Other intangible assets from the acquisition of DTI 4,600 (661) 3,939 Purchase of patents 300 (7) 293 -------- ------- -------- Balance at September 30, 2003 $ 5,352 $ (869) $ 4,483 ======== ======= ========
6. INVENTORY LOSSES AND RECOVERY Due to the changing market conditions, economic downturn and estimated future requirements, inventory write-downs of $10.9 million were recorded in the second half of 2001. Of the $10.9 million, $2.3 million related to firm purchase order commitments with our major suppliers and the remaining $8.6 million related to excess inventory on hand or disposed. During the nine months ended September 30, 2003, we did not record any additional inventory write-downs having either sold or disposed of all the written down inventories and recovered $1.8 million of the former write-downs. As of September 30, 2003 and December 31, 2002, the cumulative write down for excess inventory on hand was $0 and $2.1 million, respectively. 11 7. RESTRUCTURING CHARGES 2003 Restructuring In May 2003, PCTEL, Inc., completed the sale of certain of its assets to Conexant relating to a component of PCTEL's HSP modem operations. 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 $2.9 million consisting of severance and employment related costs of $1.6 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 September 30, 2003, $0.3 million was expensed. The remaining balance of $0.1 million would be expensed during the fourth quarter 2003. As of September 30, 2003, approximately $929,000 of termination compensation and related benefits had been paid to terminated employees and approximately $451,000 of lease payments and related costs had been paid to the landlord for the excess facilities. As of September 30, 2003, the remaining accrual balance of $1.4 million restructuring will be paid monthly through January 2006. The following analysis sets forth the rollforward of this charge:
ACCRUAL ACCRUAL BALANCE AT BALANCE AT JUNE 30, RESTRUCTURING SEPTEMBER 30, 2003 CHARGES PAYMENTS 2003 ----------- ------------- -------- ------------ Severance and employment related costs $ 516 $ 325 $ 354 $ 487 Costs for closure of excess facilities 940 (37) 18 885 ------- --------- -------- -------- $ 1,456 $ 288 $ 372 $ 1,372 ======= ========= ======== ======== Amount included in long-term liabilities $ 689 ======== Amount included in short-term liabilities $ 683 ========
2002 Restructuring In the quarter ended June 30, 2002, we eliminated 20 positions (consisting of 13 research and development, 5 sales and marketing and 2 general and administrative positions). In September 2002, we announced our intention to relocate our headquarters and finance functions to Chicago, Illinois. As a result of the move, 5 general and administrative positions were replaced in December 2002 and we further eliminated 7 research and development positions. In the aggregate, 27 positions were eliminated during the year ended December 31, 2002. The restructuring resulted in $928,000 of charges for the year ended December 31, 2002, consisting of severance and employment related costs of $688,000 and costs related to closure of excess facilities as a result of the reduction in force of $240,000. As of September 30, 2003, approximately $671,000 of termination compensation and related benefits had been paid to terminated employees in connection with the 2002 restructuring. As of September 30, 2003, approximately $329,000 of lease payments and related costs had been paid to the landlord for the excess facilities. As of September 30, 2003, the entire 2002 restructuring has been completed. 2001 Restructuring On February 8, 2001, we announced a series of actions to streamline support for our voiceband operations and sharpen our focus on emerging growth sectors. These measures were part of a restructuring program and included a reduction in worldwide headcount of a total of 22 employees (consisting of 7 research and development employees, 9 sales and marketing employees and 6 general and administrative employees), a hiring freeze and cost containment programs. On May 1, 2001, we announced a new business structure to provide for greater focus on our activities with a significantly reduced workforce. A total of 42 positions were eliminated as part of this reorganization (consisting of 13 research and development, 12 sales and marketing and 17 general and administrative positions). In the fourth quarter of 2001, a total of 26 positions (consisting of 7 research and development, 8 sales and marketing and 11 general and administrative positions) were eliminated to further focus our business. In the aggregate, 90 positions were eliminated during the year ended December 31, 2001. The restructuring resulted in $3.8 million of charges for the year ended December 31, 2001, 12 consisting of severance and employment related costs of $2.5 million and costs related to closure of excess facilities as a result of the reduction in force of $1.3 million. As of December 31, 2002, approximately $2.4 million of termination compensation and related benefits had been paid to terminated employees. As of December 31, 2002, approximately $1.2 million of lease payments and related costs had been paid to the landlord for the excess facilities. As of March 31, 2003, the entire 2001 restructuring has been completed, with cash payments of $141,000 in the three months ended March 31, 2003. 8. CONTINGENCIES: We record an accrual for estimated future royalty payments for relevant technology of others used in our product offerings in accordance with SFAS No. 5, "Accounting for Contingencies." The estimated royalties accrual reflects management's broader litigation and cost containment strategies, which may include alternatives such as entering into cross-licensing agreements, cash settlements and/or ongoing royalties based upon our judgment that such negotiated settlements would allow management to focus more time and financial resources on the ongoing business. We have accrued our estimate of the amount of royalties payable for royalty agreements already signed, agreements that are in negotiation and unasserted but probable claims of others using advice from third party technology advisors and historical settlements. Should the final license agreements result in royalty rates significantly greater than our current estimates, our business, operating results and financial condition could be materially and adversely affected. As of September 30, 2003 and December 31, 2002, we had accrued royalties of approximately $3.2 million and $3.7 million, respectively. Of these amounts, approximately $0 and $450,000 represent amounts accrued based upon signed royalty agreements as of September 30, 2003 and December 31, 2002, respectively. 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. 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 PCTEL, and for breach of contract, conversion, negligence and declaratory relief against PCTEL'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, PCTEL filed a Verified Answer to the Complaint, denying Fraser's claims and asserting numerous affirmative defenses. Wells Fargo and PCTEL 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. On July 30, the Court granted Wells Fargo's motion for summary adjudication on Fraser's Third and Fourth Causes of action for Breach of Fiduciary Duty and Declaratory Relief, but denied Wells Fargo's motion for summary judgment and summary adjudication of Fraser's First and Second Causes of Action for Breach of Contract and Conversion. PCTEL has filed a Motion for Summary Judgment or, Alternatively, Summary Adjudication, against Fraser. The Motion is scheduled for December 9, 2003. Trial of this matter has been set for January 12, 2004. 13 We believe that we have meritorious defenses and intend to vigorously defend the action. Because the action is still in its early stages, we 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 120 U.S. patents granted or pending addressing technology essential to International Telecommunications Union communication standards as well as other communications technology related areas. We will continue to explore other opportunities to acquire relevant technology and to incorporate new assets into our licensing program. For example, as part of our transaction with Conexant that was completed in May 2003, we expanded our intellectual property portfolio by acquiring 46 patents. As part of our licensing efforts, we are pursuing opportunities through litigation in parallel with business discussions with those parties using our intellectual property. As part of these efforts, in May 2003, we filed three separate lawsuits asserting infringement of our intellectual property rights. Below is a description of the claims and status of those lawsuits: - U.S. Robotics Corporation. On May 23, 2003, we filed in the U.S. District Court for the Northern District of California (C03-2471 MJJ) a patent infringement lawsuit against U.S. Robotics Corporation claiming that U.S. Robotics has infringed one of our patents (U.S. Patent No. 4,841,561 ('561)). 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. We filed our reply to Broadcom's counterclaim on August 4, 2003. - 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. We filed our reply to Agere's counterclaim on August 4, 2003. In addition to the three lawsuits described above, we also have continuing litigation with 3Com Corporation related to intellectual property infringement and related matters. Both 3Com and we have pending patent infringement lawsuits against one another in the U.S. District Court for the Northern District of California. Both suits were filed in March 2003. 3Com initially filed their suit against us in the Northern 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 Superior Court of the State of California for the County of Santa Clara under California's Unfair Competition Act. Subsequently, 3Com filed a notice of removal, removing the case to the U.S. District Court for the Northern District of California (C03-3124 SBA). We have moved to remand the case to the Santa Clara Superior Court. The hearing on our motion to remand is set for December 9, 2003. In June 2003, we filed a motion to consolidate our pending patent infringement cases with 3Com, U.S. Robotics, Broadcom, Agere and Lucent described above. The court granted our motion to consolidate in part. On October 28, 2003, a case management conference in the consolidated actions was held. No trial date has been set. We believe we have meritorious claims and defenses in our disputes with 3Com, Broadcom, U.S. Robotics, Agere and Lucent. However, because of the inherent uncertainties of litigation in general, we cannot assure you that we will ultimately prevail or receive the judgments that we seek. In addition, we may be required to pay substantial monetary damages. Litigation such as our suits with 3Com, Broadcom, U.S. Robotics, Agere and Lucent can take years to resolve and can be expensive to pursue and/or defend. The court's decisions on current, pending and future motions could have the effect of determining the ultimate outcome of the litigation prior to a trial on the merits, or strengthen or weaken our ability to assert claims and defenses. Accordingly, an adverse judgment 14 could seriously harm our business, financial position and results of operations and cause our stock price to decline substantially. In addition, the allegations and claims involved in these lawsuits, even if ultimately resolved in our favor, could be time consuming to litigate, result in costly litigation and divert management attention. These lawsuits could significantly harm our business, financial position and results of operations and cause our stock price to decline substantially. Due to the nature of litigation generally, we cannot ascertain the final resolution of the lawsuits, or estimate the total expenses, possible damages or settlement value, if any, that we may ultimately receive or incur in connection with these lawsuits. 9. AMORTIZATION OF DEFERRED COMPENSATION: For the three and nine months ended September 30, 2003 and 2002, amortization of deferred compensation (in thousands) relates to the following functional categories:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- -------------------------------- 2003 2002 2003 2002 ------------ ------------- ------------ ------------ Research and development $ 0 $ 39 $ 75 $ 112 Sales and marketing $ 39 $ 41 $ 188 $ 112 General and administrative $ 169 $ 90 $ 485 $ 304 ------ ------ ------ ------ $ 208 $ 170 $ 748 $ 528 ====== ====== ====== ======
The amount of deferred stock compensation expense to be recorded in future periods could decrease if options for which accrued but unvested compensation has been recorded are forfeited. In the event that options are issued in the future, the deferred stock compensation expense could increase. 10. STOCK REPURCHASES: In August 2002, the Board of Directors authorized the repurchase of up to one million shares of our common stock, which was completed in February 2003. In February 2003, PCTEL extended its stock repurchase program and announced its intention to repurchase up to one million additional shares on the open market from time to time. PCTEL's repurchase activities will be at management's discretion based on market conditions and the price of PCTEL's common stock. During the three and nine months ended September 30, 2003, we repurchased 257,400 and 762,800 shares, respectively, of our outstanding common stock for approximately $2.7 and $6.2 million, respectively. Since the inception of the stock repurchase program we have repurchased 1,538,600 shares of our outstanding common stock for approximately $11.5 million. 15 PCTEL, INC. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the condensed interim financial statements and the notes thereto included in Item 1 of this Quarterly Report and with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 30, 2003. 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 provider of cost-effective wireless networking solutions, including Wi-Fi and cellular mobility software, software-defined radio products, access technology and intellectual property licensing. Over the past 24 months, the Company restructured from a provider of soft analog and hard analog modems to a provider of wireless data access solutions, with the acquisition of cyberPIXIE, Inc., a wireless access provider, 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 transactions, 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. Our products provide both client and infrastructure solutions for public wireless local area network ("WLAN") environments. Client products enable public WLAN access and ease of use across a wide range of Microsoft operating systems. The infrastructure products enable cost effective "hot spot" deployments within the constraints of widely recognized networking and security standards. Customers for our WLAN products are not typically individual end-users, but Internet access service providers such as WISPs (Wireless ISPs), cellular carriers, or other service aggregators. The products are offered as custom branded offerings associated with a particular carrier and typically include carrier specific 'service finder' location databases. PCTEL receives an established fee, plus annual maintenance for software. PCTEL has a strong intellectual property portfolio consisting of over 120 U.S. patents and applications in areas of Internet client software and wireless LAN/WAN roaming technologies. Many of the Company's patents are integral to the development and use of commercially viable soft modems of any kind. PCTEL is constantly looking to expand and strengthen its intellectual property portfolio in these areas through additional acquisitions. The company has an aggressive licensing program through which it has licensed its intellectual property to many industry leaders including Motorola, Conexant, Broadcom, ESS Technologies, U.S. Robotics, and SmartLink. The company has also asserted its patents and is currently litigating against several other manufacturers who are unlicensed and using PCTEL's intellectual property. 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 16 assets from PCTEL's offices in Taiwan, contracts with customers and distributors related to the soft modem products, and limited intellectual property. PCTEL did not transfer any of its patent portfolio in connection with this transaction, and PCTEL retained all operating contracts and intellectual property assets associated with our hardware modem and wireless products. As of September 30, 2003, we have $108.9 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. 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, when the price is fixed and determinable and when there is evidence of an arrangement, unless we have future obligations or have to obtain customer acceptance, in which case revenue is not recorded until such obligations have been satisfied or customer acceptance has been achieved. Revenues 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 or for non-refundable minimum royalty agreements over the period that that Company provides support to the customers and where we offer extended payment terms, as payments are received. Furthermore, revenues from technology licenses are recognized after delivery has occurred and the amount is fixed and determinable, generally based upon the contract's nonrefundable payment terms, and collection is reasonably assured. To the extent there are extended payment terms on these contracts; revenue is recognized as the payments become due and the cancellation privilege lapses. Inventory Write-downs and Recoveries Inventories are stated at the lower of cost or market and include material, labor and overhead costs. Inventories as of September 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 September 30, 2003 and December 31, 2002. Due to competitive pressures and technological innovation, we may have excess inventory in the future. Write-downs of inventories would have a negative impact on gross margin. Accrued 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 17 the event of a settlement offer. We have accrued our best estimate of the amount of royalties payable for royalty agreements already signed, agreements that are in negotiation and unasserted but probable claims of others using advice from third party technology advisors and historical settlement rates. As of September 30, 2003 and December 31, 2002, we had accrued royalties of approximately $3.2 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. 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. We currently have a subsidiary in Japan and Israel as well as branch offices in Taiwan, France and Yugoslavia. Yugoslavia is presently in the liquidation process. The complexities brought on by operating in several different tax jurisdictions inevitably lead to an increased exposure to worldwide taxes. Should review of our tax filings result in unfavorable adjustments to our tax returns, our operating results and financial position could be materially and adversely affected. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes, which involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Significant management judgment is required to assess the likelihood that our deferred tax assets will be recovered from future taxable income. We maintain a full valuation allowance against our deferred tax assets. In the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of 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 NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (All amounts in tables, other than percentages, are in thousands) Revenues
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2003 2002 ---------------- ---------------- --------------- -------------- Revenues.......................... $ 4,030 $ 12,548 $ 27,288 $ 32,447 % change from year ago period..... (67.9)% (15.9)%
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 decreased $8.5 million for the three months ended September 30, 2003 compared to the same period in 2002. Revenues for the nine months ended September 30, 2003 decreased $5.2 million compared to the same period in 2002. The revenue decrease was primarily due to our disposition of our HSP analog modem products to Conexant. Going forward, revenue will be primarily related to wireless solutions and our access technology licensing efforts. Gross Profit
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2003 2002 ---------------- ---------------- --------------- -------------- Gross profit...................... $ 3,275 $ 8,862 $ 16,217 $ 19,520 Percentage of revenues............ 81.3% 70.6% 59.4% 60.2% % change from year ago period..... (63.0)% (16.9)%
18 Cost of revenues consists primarily of cost of operations and components we purchase from third party manufacturers. Gross profit decreased $5.6 million for the three months ended September 30, 2003 compared to the same period in 2002 was primarily due to our disposition of our HSP analog modem products to Conexant. Gross profit as a percentage of revenues increased from 70.6% for the three months ended September 30, 2002 to 81.3% for the three months ended September 30, 2003 due to higher margins. For the nine months ended September 30, 2003 compared to the same period last year, gross profit remained approximately the same. Research and Development
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2003 2002 ---------------- ---------------- --------------- -------------- Research and development.......... $ 1,792 $ 2,477 $ 6,093 $ 7,634 Percentage of revenues............ 44.5% 19.7% 22.3% 23.5% % change from year ago period..... (27.7)% (20.2)%
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 $0.7 and $1.5 million for the three and nine months ended September 30, 2003 compared to the same periods in 2002 primarily due to our disposition of our HSP analog modem products to Conexant. As a percentage of revenues, research and development costs increased for the three months ended September 30, 2003 due to reduced revenues for the same period. For the nine months ended September 30, 2003 compared to the same period last year, research and development remained approximately the same. Sales and Marketing
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2003 2002 ---------------- ---------------- --------------- -------------- Sales and marketing............... $ 1,501 $ 1,904 $ 5,655 $ 5,395 Percentage of revenues............ 37.2% 15.2% 20.7% 16.6% % change from year ago period..... (21.2)% 4.8%
Sales and marketing expenses consist primarily of personnel costs, sales commissions and marketing costs. Marketing costs include promotional costs, public relations and trade shows. Sales and marketing expenses decreased $0.04 and increased $0.3 million for the three and nine months ended September 30, 2003, respectively, compared to the same period in 2002 due to timing of the trade shows. Sales and marketing expenses as a percentage of revenues changed for the three and nine months ended September 30, 2003 compared to the same period in 2002 due to reduced revenues for the same period. General and Administrative
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2003 2002 ---------------- ---------------- --------------- -------------- General and administrative........ $ 2,644 $ 1,248 $ 7,295 $ 3,856 Percentage of revenues............ 65.6% 9.9% 26.7% 11.9% % change from year ago period..... 111.9% 89.2%
General and administrative expenses include costs associated with our general management and finance functions as well as professional service charges, such as legal, tax, audit and accounting fees. Other general expenses include rent, insurance, utilities, travel and other operating expenses to the extent not otherwise allocated to other functions. 19 General and administrative expenses increased $1.4 and $3.4 million for the three and nine months ended September 30, 2003, respectively, compared to the same period in 2002. The increase was due to inclusion of DTI's expenses, increased insurance expenses and legal costs associated with our patent infringement litigation against 3Com, U.S. Robotics, Broadcom, Agere Systems and Lucent Technologies. General and administrative expenses as a percentage of revenues increased for the three and nine months ended September 30, 2003 compared to the same period in 2002 for the same reasons as above. We anticipate spending between $3.0 and $4.0 million per year in legal expenses related to these lawsuits. Amortization of Other Intangible Assets
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2003 2002 ---------------- ---------------- --------------- -------------- Amortization of other intangible assets.. $ 343 $ 50 $ 781 $ 50 Percentage of revenues................... 8.5% 0.4% 2.9% 0.2%
In March 2003, we acquired the assets of DTI for a total of $11.0 million in cash. The acquisition was accounted for under the purchase method of accounting and the results of operations of DTI were included in our financial statements from the date of acquisition. Under the purchase method of accounting, 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 $781,000 for the nine months ended September 30, 2003. Restructuring Charges
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2003 2002 ---------------- ---------------- --------------- -------------- Restructuring charges.... $ 288 $ 88 $ 2,940 $ 735 Percentage of revenues... 7.1% 0.7% 10.8% 2.3%
Restructuring expenses increased $0.2 and $2.2 million for the three and nine months ended September 30, 2003, respectively, compared to the same periods in 2002. These increases are from the 2003 restructuring due to our disposition of our HSP analog modem products to Conexant. 26 employees, both foreign and domestic, were terminated subsequent to the sale of the soft modem product line to Conexant in May 2003 along with the related facilities closures, which will occur over the remainder of the calendar year. The total restructuring may aggregate $2.9 million consisted of severance and employment related costs of $1.6 million and costs related to closure of excess facilities as a result of the reduction in force of $1.3 million. For the three and nine months ended September 30, 20 2003, $0.3 and $2.9 million was expensed, respectively. The remaining 2003 restructuring balance of $0.1 million would be expensed during the fourth quarter 2003. Amortization of Deferred Compensation
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2003 2002 ---------------- ---------------- --------------- -------------- Amortization of deferred compensation..... $ 208 $ 170 $ 748 $ 528 Percentage of revenues.................... 5.2% 1.4% 2.7% 1.6% % change from year ago period............. 22.4% 41.7%
In connection with the grant of restricted stock to employees in 2003, 2002 and 2001, we recorded deferred stock compensation of $0.8, $3.7 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 $0.04 and $0.2 million for the three and nine months ended September 30, 2003, respectively, compared to the same period in 2002 primarily due to the grant of restricted stock to employees in 2003. We expect the amortization of deferred stock compensation to be approximately $197,000 for fourth quarter 2003, based on restricted stock option grants through September 30, 2003. The amount of deferred stock compensation expense to be recorded in future periods could decrease if options for which accrued but unvested compensation has been recorded are forfeited. If we grant additional restricted stock, the amortization of deferred compensation will increase. Other Income, Net
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2003 2002 ---------------- ---------------- --------------- -------------- Other income, net................. $ 291 $ 641 $ 1,120 $ 2,631 Percentage of revenues............ 7.2% 5.1% 4.1% 8.1% % change from year ago period..... (54.6)% (57.4)%
Other income, net, consists of interest income, net of interest expense. Interest income is expected to fluctuate over time. Other income, net, decreased $0.4 and $1.5 million for the three and nine months ended September 30, 2003, respectively, 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 DTI offset by the proceeds received from the disposition of assets to Conexant. Provision for Income Taxes
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2003 2002 ---------------- ---------------- --------------- -------------- Provision (Benefit) for income taxes $(248) $ 352 $(155) $ 415
The realization of deferred tax assets is dependent on future profitability. During the third quarter of 2001, we recorded $5.3 million of provision for income taxes to establish valuation allowances against deferred tax assets in accordance with the provisions of FASB No. 109, "Accounting for Income Taxes" as a result of uncertainties regarding realizability. For the three and nine months ended September 30, 2003, we recorded a net benefit of $248,000 and $155,000, respectively, tax benefit primarily for a carryback in accordance with APB No. 28, "Interim Financial Reporting" calculated tax provision for 2003 net of foreign income taxes paid. 21 LIQUIDITY AND CAPITAL RESOURCES
NINE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 2003 2002 --------------- --------------- Net cash provided by (used in) operating activities....................... $ 1,933 $ (12,937) Net cash provided by investing activities................................. 32,100 16,673 Net cash provided by financing activities................................. 2,549 1,898 Cash, cash equivalents and short-term investments at the end of period.... 108,902 112,206 Working capital at the end of period...................................... 104,333 107,636
The increase in net cash provided by operating activities for the nine months ended September 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. Accounts receivable, as measured in days sales outstanding, was 40 days at September 30, 2003 compared to 30 days at September 30, 2002. The increase in days sales outstanding from September 30, 2002 to 2003 was primarily due to the change from the HSP soft modem product line to the DTI cash collection cycle. We anticipate spending between $3.0 and $4.0 million per year in legal expenses associated with our patent infringement litigation against 3Com, U.S. Robotics, Broadcom, Agere Systems and Lucent Technologies. Net cash provided by investing activities for the nine months ended September 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 increase in net cash provided by financing activities for the nine months ended September 30, 2003 consists of proceeds from the issuance of common stock on exercise of stock options net of payments for the repurchase of common stock associated with the shares repurchased by PCTEL. In August 2002, the Board of Directors authorized the repurchase of up to one million shares of our common stock, which was completed in February 2003. In February 2003, PCTEL extended its stock repurchase program and announced its intention to repurchase up to one million additional shares on the open market from time to time. PCTEL's repurchase activities will be at management's discretion based on market conditions and the price of PCTEL's common stock. During the three and nine months ended September 30, 2003, we repurchased 257,400 and 762,800 shares, respectively, of our outstanding common stock for approximately $2.7 and $6.2 million, respectively. Since the inception of the stock repurchase program we have repurchased 1,538,600 shares of our outstanding common stock for approximately $11.5 million. As of September 30, 2003, we had $108.9 million in cash, cash equivalents and short-term investments and working capital of $104.3 million. 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. The following summarizes our contractual obligations (non-cancelable operating leases) for office facilities and the 2003 restructuring as of September 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 $ 1,470 $ 399 $ 736 $ 335 $ - ------- ------ ------- ----- --- 2003 Restructuring 1,372 683 689 - - ------- ------ ------- ----- --- Total obligations $ 2,842 $1,082 $ 1,425 $ 335 $ - ======= ====== ======= ===== ===
22 If the current economic downturn prolongs, we will need to continue to expend our cash reserves to fund our operations. As of September 30, 2003, we have non-cancelable operating leases for office facilities of $1.5 million through 2007, unpaid restructuring (severance and employment related costs and costs related to closure of excess facilities) of $1.4 million through December 2004 and no outstanding firm inventory purchase contract commitments with our major suppliers. As part of the acquisition of DTI there is an earn out potential of $7.5 million over two years if certain milestones are achieved. At PCTEL's option, DTI could be paid in PCTEL stock or cash. FACTORS AFFECTING OPERATING RESULTS This quarterly report on Form 10-Q contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking statements as a result of certain factors including those set forth below. RISKS RELATED TO OUR BUSINESS COMPETITION WITHIN THE 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 materially and adversely affect our business and operating results through pricing pressures, the loss of market share and other factors. The principal competitive factors affecting wireless markets include the following: - maintaining effective data throughput and coverage area, interference immunity and network security and scalability, - keeping product costs low while, at the same time, increasing roaming capability, decreasing power consumption and the size of products and improving product reliability, ease of use, brand recognition and product features and applications, - integration with existing technology, - maintaining industry standards and obtaining product certifications as wireless networks continue to become more sophisticated, - decreasing product time to market, - complying with changes to government regulations with respect to each country served and related to the use of radio spectrum, and - obtaining favorable carrier and OEM relationships, marketing alliances and effective distribution channels. Competitors in the market for products and technology that enable roaming between and among 802.11 wireless and cellular networks include Aptilo, Boingo, BVRP, Cisco, Colubris, Funk, GRIC, IBM, iPass, ipUnplugged, Microsoft, NetnearU, Nokia, Nomadix, Pronto Networks, Sierra Wireless and Starfish. We could also face future competition from companies that offer alternative communications solutions, or from large computer companies, PC peripheral companies and other large networking equipment companies. Competitors in the software radio product space and specifically for OEM receiver products include Agilent, Berkeley Varitronics, Comarco, Allen Telecom, and Rohde & Schwarz. Furthermore, we could face competition from certain of our customers, which have, or could acquire, wireless engineering and product development capabilities, or might elect to offer competing technologies. We can offer no assurance that we will be able to compete successfully against these competitors or that the competitive pressures we face will not adversely affect our business or operating results. 23 Many of our present and potential competitors have substantially greater financial, marketing, technical and other resources with which to pursue engineering, manufacturing, marketing, and distribution of their products. These competitors may succeed in establishing technology standards or strategic alliances in the connectivity device and 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 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 ability to compute successfully in the wireless market is dependent on the continued trend toward wireless telecommunications and data communications services. If the rate of growth slows and service providers reduce their capital investments in wireless infrastructure or fail to expand into new geographic markets, our revenue may decline. Wireless access solutions are relatively unproven in the marketplace and some of the wireless technologies have only been commercially introduced in the last few years. We only began offering wireless products in the second quarter of fiscal 2002. If wireless 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 WIRELESS BUSINESS IS DEPENDENT UPON THE CONTINUED GROWTH OF EVOLVING TELECOMMUNICATIONS AND INTERNET INDUSTRIES. 24 Our future success is dependent upon the continued growth of the data communications and wireless industries, particularly with regard to Internet usage. The global data communications and Internet industries are relatively new and evolving rapidly and it is difficult to predict potential growth rates or future trends in technology development for this industry. We cannot assure you that the deregulation, privatization and economic globalization of the worldwide telecommunications market that has resulted in increased competition and escalating demand for new technologies and services will continue in a manner favorable to us or our business strategies. In addition, there can be no assurance that the growth in demand for wireless and Internet services, and the resulting need for high speed or enhanced data communications products and wireless systems, will continue at its current rate or at all. OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND SUCCESSFULLY INTRODUCE NEW AND ENHANCED PRODUCTS FOR THE WIRELESS MARKET, WHICH MEET THE NEEDS OF OUR EXISTING AND PROSPECTIVE CUSTOMERS AND ACHIEVE BROAD MARKET ACCEPTANCE. Our revenue depends on our ability to anticipate our existing and prospective customers' needs and develop products that address those needs. Our future success will depend on our ability to introduce new products for the wireless market, anticipate improvements and enhancements in wireless technology and in WLAN standards, and to develop products that are competitive in the rapidly changing wireless industry. Introduction of new products and product enhancements will require coordination of our efforts with those of our suppliers and manufacturers to rapidly achieve volume production. If we fail to coordinate these efforts, develop product enhancements or introduce new products that meet the needs of our customers as scheduled, our operating results will be materially and adversely affected and our business and prospects will be harmed. We cannot assure you that product introductions will meet the anticipated release schedules or that our wireless products will be competitive in the market. Furthermore, given the emerging nature of the wireless market, there can be no assurance our products and technology will not be rendered obsolete by alternative or competing technologies. WE MAY EXPERIENCE INTEGRATION OR OTHER PROBLEMS WITH POTENTIAL ACQUISITIONS, WHICH COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS OR RESULTS OF OPERATIONS. NEW ACQUISITIONS COULD DILUTE THE INTERESTS OF EXISTING STOCKHOLDERS, AND THE ANNOUNCEMENT OF NEW ACQUISITIONS COULD RESULT IN A DECLINE IN THE PRICE OF OUR COMMON STOCK. We may in the future make acquisitions of, or large investments in, businesses that offer products, services, and technologies that we believe would complement our products or services, including wireless products and technology. We may also make acquisitions of, or investments in, businesses that we believe could expand our distribution channels. Even if we were to announce an acquisition, we may not be able to complete it. Additionally, any future acquisition or substantial investment would present numerous risks, including: - difficulty in integrating the technology, operations or work force of the acquired business with our existing business, - disruption of our on-going business, - difficulty in realizing the potential financial or strategic benefits of the transaction, - difficulty in maintaining uniform standards, controls, procedures and policies, - possible impairment of relationships with employees and customers as a result of integration of new businesses and management personnel, and - impairment of assets related to resulting goodwill, and reductions in our future operating results from amortization of intangible assets. We expect that future acquisitions could provide for consideration to be paid in cash, shares of our common stock, or a combination of cash and our common stock. If consideration for a transaction is paid in common stock, this would further dilute our existing stockholders. WE MAY NEVER ACHIEVE THE ANTICIPATED BENEFITS FROM OUR ACQUISITION OF DYNAMIC TELECOMMUNICATIONS, INC. 25 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: - 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 (extensions of existing wireless networks and network technologies as well as 3G and 4G technologies); - failure to develop a productive Governments product distribution capability; - difficulties in assimilation of acquired personnel, operations, technologies or products; and - migration of network test and measurement functions into wireless infrastructure as a standard part of product offerings.. 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. OUR GROSS MARGINS MAY VARY BASED ON THE MIX OF SALES OF OUR PRODUCTS AND LICENSES OF OUR INTELLECTUAL PROPERTY, AND THESE VARIATIONS MAY CAUSE OUR NET INCOME TO DECLINE. We derive a significant portion of our sales from our software-based connectivity products. We expect gross margins on newly introduced products generally to be higher than our existing products. However, due in part to the competitive pricing pressures that affect our products and in part to increasing component and manufacturing costs, we expect gross margins from both existing and future products to decrease over time. In addition, licensing revenues from our intellectual property historically have provided higher margins than our product sales. Changes in the mix of products sold and the percentage of our sales in any quarter attributable to products as compared to licensing revenues could cause our quarterly results to vary and could result in a decrease in gross margins and net income. ANY DELAYS IN OUR NORMALLY LENGTHY SALES CYCLES COULD RESULT IN CUSTOMERS CANCELING PURCHASES OF OUR PRODUCTS. Sales cycles for our products with major customers are lengthy, often lasting nine months or longer. In addition, it can take an additional nine months or more before a customer commences volume production of equipment that incorporates our products. Sales cycles with our major customers are lengthy for a number of reasons, including: - 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. A significant portion of our operating expenses is relatively fixed and is based in large part on our forecasts of volume and timing of orders. The lengthy sales cycles make forecasting the volume and timing of product orders difficult. In addition, the delays inherent in lengthy sales cycles raise additional risks of customer decisions to cancel or change product phases. If customer cancellations or product changes were to occur, this could result in the loss of anticipated sales without sufficient time for us to reduce our operating expenses. 26 OUR REVENUES MAY FLUCTUATE EACH QUARTER DUE TO BOTH DOMESTIC AND INTERNATIONAL SEASONAL TRENDS. Wi-Fi is too new for us to be able to predict seasonal revenue patterns. Such patterns are true for wireless test and measurements products, such as DTI's, where capital spending is involved. We are currently expanding our sales in international markets, particularly in Europe and Asia. To the extent that our revenues in Europe and Asia or other parts of the world increase in future periods, we expect our period-to-period revenues to reflect seasonal buying patterns in these markets. WE REQUIRE TECHNICAL COOPERATION WITH 802.11 CHIPSET MANUFACTURERS IN ORDER TO REALIZE OUR SOFT ACCESS POINT PRODUCT. FAILURE TO SUCCESSFULLY SECURE THIS COOPERATION WOULD IMPAIR OUR REVENUE FROM THIS PRODUCT. We rely on our ability to forge relationships with 802.11 chipset manufacturers, in order to ensure that our Segue Soft AP (SAM) software is compatible with their chipsets. This relationship requires that source code be given to PCTEL or that 802.11 chipset manufacturers undertake development activities to enable our Soft AP capability. There are many risks associated with this: - Chipset manufacturers general unwillingness to partner with PCTEL, - Chipset manufacturers internally developing their own Soft AP capabilities, - 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. WE RELY ON INDEPENDENT COMPANIES TO MANUFACTURE, ASSEMBLE AND TEST OUR PRODUCTS. IF THESE COMPANIES DO NOT MEET THEIR COMMITMENTS TO US, OUR ABILITY TO SELL PRODUCTS TO OUR CUSTOMERS WOULD BE IMPAIRED. We do not have any manufacturing capability and limited assembly capacity. For some product lines we outsource the manufacturing, assembly, and testing of printed circuit board subsystems. For other product lines, we purchase completed hardware platforms and add our proprietary software. While there is no unique capability with these suppliers, any failure by these suppliers to meet delivery commitments would cause us to delay shipments and potentially be unable to accept new orders for product. IN ORDER FOR US TO OPERATE AT A PROFITABLE LEVEL AND CONTINUE TO INTRODUCE AND DEVELOP NEW PRODUCTS FOR EMERGING MARKETS, WE MUST ATTRACT AND RETAIN OUR EXECUTIVE OFFICERS AND QUALIFIED TECHNICAL, SALES, SUPPORT AND OTHER ADMINISTRATIVE PERSONNEL. Our past performance has been and our future performance is substantially dependent on the performance of our current executive officers and certain key engineering, sales, marketing, financial, technical and customer support personnel. If we lose the services of our executives or key employees, replacements could be difficult to recruit and, as a result, we may not be able to grow our business. Competition for personnel, especially qualified engineering personnel, is intense. We are particularly dependent on our ability to identify, attract, motivate and retain qualified engineers with the requisite education, background and industry experience. As of September 30, 2003, we employed a total of 35 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. FAILURE TO MANAGE OUR TECHNOLOGICAL AND PRODUCT GROWTH COULD STRAIN OUR MANAGEMENT, FINANCIAL AND ADMINISTRATIVE RESOURCES. Our ability to successfully sell our products and implement our business plan in rapidly evolving markets requires an effective management planning process. Future product expansion efforts could be expensive and put a strain on our management by significantly increasing the scope of their responsibilities and by increasing the demands on their management abilities. To effectively manage our growth in these new technologies, we must enhance our marketing, sales, research and development areas. 27 WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY RIGHTS WITH RESPECT TO OUR WIRELESS BUSINESS AND THESE RIGHTS OFFER ONLY LIMITED PROTECTION AGAINST COMPANIES WHO MAY INFRINGE UPON OUR INTELLECTUAL PROPERTY. Our wireless products are dependent on trademarks and know how and other intellectual property rights. Despite precautions that we take, it may be possible for unauthorized third parties to copy aspects of our current or future products or to obtain and use information that we regard as proprietary. Unauthorized use of our wireless technology may result in development of products that compete with our products, which could impair our ability to grow or sustain our wireless business and our related revenues. As a result our business, financial condition, results of operations, and prospects may be materially and adversely affected. Policing unauthorized use of proprietary technology is difficult, and some foreign laws do not protect our proprietary rights to the same extent as United States laws. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Litigation could result in substantial costs and diversion of resources, including management attention. We rely primarily on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. These means of protecting our proprietary rights may not be adequate. For example, pending patents may never be issued and current patents may be invalidated. As a result, these patents, both issued and pending, may not prove enforceable in actions against companies using technology we believe to be proprietary. WE MAY BE SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY ASSOCIATED WITH OUR WIRELESS BUSINESS AND THIS COULD BE COSTLY TO DEFEND AND COULD PREVENT US FROM USING OR SELLING THE CHALLENGED TECHNOLOGY. In recent years, there has been significant litigation in the United States involving intellectual property rights. We have from time to time in the past-received correspondence from third parties alleging that we infringe the third party's intellectual property rights. We expect potential claims to increase in the future, including with respect to our wireless business. Intellectual property claims against us, and any resulting lawsuit, may result in our incurring significant expenses and could subject us to significant liability for damages and invalidate what we currently believe are our proprietary rights. These lawsuits, regardless of their merits or success, would likely be time-consuming and expensive to 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. UNDETECTED SOFTWARE ERRORS OR FAILURES FOUND IN NEW PRODUCTS MAY RESULT IN A LOSS OF CUSTOMERS OR A DELAY IN MARKET ACCEPTANCE OF OUR PRODUCTS. Our products may contain undetected software errors or failures when first introduced or as new versions are released. To date, we have not been made aware of any significant software errors or failures in our products. However, despite testing by us and by current and potential customers, errors may be found in new products after commencement of commercial shipments, resulting in loss of customers or delay in market acceptance. 28 OUR FINANCIAL POSITION AND RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED IF TAX AUTHORITIES CHALLENGE US AND THE TAX CHALLENGES RESULT IN UNFAVORABLE OUTCOMES. We currently have a subsidiary in Japan and Israel as well as branch offices in Taiwan, France and Yugoslavia. Yugoslavia is 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 OUR ABILITY TO SUSTAIN OR GROW OUR REVENUE FROM THE LICENSING OF OUR INTELLECTUAL PROPERTY IS SUBJECT TO MANY RISKS, AND ANY INABILITY TO SUCCESSFULLY LICENSE OUR INTELLECTUAL PROPERTY COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS. 29 We may not be able to sustain or grow our revenue from the licensing of our intellectual property. In addition to our wireless product line and software-defined radio technology, we offer our intellectual property through licensing and product royalty arrangements. We have over 120 U.S. patents granted or pending addressing both essential International Telecommunications Union and non-essential technologies. In connection with our intellectual property licensing efforts, we have filed several patent infringement lawsuits and are aggressively pursuing unlicensed companies to license their unauthorized use of our intellectual property. We have pending patent infringement litigation claims with 3Com, U.S. Robotics, Broadcom, Agere and Lucent. We expect litigation to continue to be necessary to enforce our intellectual property rights and to determine the validity and scope of the proprietary rights of others. Because of the high degree of complexity of the intellectual property at issue, the inherent uncertainties of litigation in general and the preliminary nature of these litigation matters, we cannot assure you that we will ultimately prevail or receive the judgments that we seek. We may not be able to obtain licensing agreements from these companies on terms favorable to us, if at all. In addition, we may be required to pay substantial monetary damages as a result of claims these companies have brought against us which could materially and adversely affect our business, financial condition and operating results. LITIGATION EFFORTS RELATED TO OUR LICENSING PROGRAM ARE EXPECTED TO BE COSTLY AND MAY NOT ACHIEVE OUR 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 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 many challenges and may be limited. For example, one or more of our pending patents may never be issued. In addition, our patents, both issued and pending, may not prove enforceable in actions against alleged infringers. 3Com, U.S. Robotics, Broadcom, Agere and Lucent have currently pending claims seeking to invalidate 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, some foreign laws, including those of various countries in Asia, do not protect our proprietary rights to the same extent as United States laws. 30 WE HAVE ACCRUED FOR NEGOTIATED LICENSE FEES AND ESTIMATED ROYALTY SETTLEMENTS RELATED TO EXISTING AND PROBABLE CLAIMS OF PATENT INFRINGEMENT. IF THE ACTUAL SETTLEMENTS EXCEED THE AMOUNTS ACCRUED, ADDITIONAL LOSSES COULD BE SIGNIFICANT, WHICH WOULD ADVERSELY AFFECT FUTURE OPERATING RESULTS. We recorded an accrual for estimated future royalty payments for relevant technology of others used in our product offerings in accordance with SFAS No. 5, "Accounting for Contingencies." The estimated royalties accrual reflects management's broader litigation and cost containment strategies, which may include alternatives such as entering into cross-licensing agreements, cash settlements and/or ongoing royalties based upon our judgment that such negotiated settlements would allow management to focus more time and financial resources on the ongoing business. Accordingly, the royalties accrual reflects estimated costs of settling claims rather than continuing to defend our legal positions, and is not intended to be, nor should it be interpreted as, an admission of infringement of intellectual property, valuation of damages suffered by any third parties or any specific terms that management has predetermined to agree to in the event of a settlement offer. We have accrued our best estimate of the amount of royalties payable for royalty agreements already signed 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 from a low of $4.58 to a high of $13.60 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, - outcome of on going intellectual property related litigations, - 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 31 company's securities, securities class action litigation often has been instituted against that company. This type of litigation, if instituted, could result in substantial costs and a diversion of management's attention and resources. PROVISIONS IN OUR CHARTER DOCUMENTS MAY INHIBIT A CHANGE OF CONTROL OR A CHANGE OF MANAGEMENT WHICH MAY CAUSE THE MARKET PRICE FOR OUR COMMON STOCK TO FALL AND MAY INHIBIT A TAKEOVER OR CHANGE IN OUR CONTROL THAT A STOCKHOLDER MAY CONSIDER FAVORABLE. Provisions in our charter documents could discourage potential acquisition proposals and could delay or prevent a change in control transaction that our stockholders may favor. These provisions could have the effect of discouraging others from making tender offers for our shares, and as a result, these provisions may prevent the market price of our common stock from reflecting the effects of actual or rumored takeover attempts and may prevent stockholders from reselling their shares at or above the price at which they purchased their shares. These provisions may also prevent changes in our management that our stockholders may favor. Our charter documents do not permit stockholders to act by written consent, do not permit stockholders to call a stockholders meeting, and provide for a classified board of directors, which means stockholders can only elect, or remove, a limited number of our directors in any given year. Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock in one or more series. The board of directors can fix the price, rights, preferences, privileges and restrictions of this preferred stock without any further vote or action by our stockholders. The rights of the holders of our common stock will be affected by, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. Further, the issuance of shares of preferred stock may delay or prevent a change in control transaction without further action by our stockholders. As a result, the market price of our common stock may drop. 32 PCTEL, INC. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks. We manage the sensitivity of our results of operations to credit risks and interest rate risk by maintaining a conservative investment portfolio, which is comprised solely of, highly rated, short-term investments. We have investments in both fixed rate and floating rate interest earning instruments. Fixed rate securities may have their fair market value adversely impacted based on the duration of such investments if interest rates rise, while floating rate securities and the reinvestment of funds from matured fixed rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents, short-term and long-term investments in a variety of securities, including both government and corporate obligations with ratings of A or better, and money market funds. We have accumulated a $40,638 and $263,000 unrealized holding gain as of September 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 September 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% relative to the currencies in which are sales were denominated, our net loss would not have changed by a material amount for the nine months ended September 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 nine months ended September 30, 2003 and year ended December 31, 2002 was $53,518 and $35,000, respectively. 33 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. 34 PCTEL, INC. PART II. OTHER INFORMATION FOR THE THREE AND NINE MONTHS ENDED: SEPTEMBER 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 PCTEL, and for breach of contract, conversion, negligence and declaratory relief against PCTEL'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, PCTEL filed a Verified Answer to the Complaint, denying Fraser's claims and asserting numerous affirmative defenses. Wells Fargo and PCTEL 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. On July 30, the Court granted Wells Fargo's motion for summary adjudication on Fraser's Third and Fourth Causes of action for Breach of Fiduciary Duty and Declaratory Relief, but denied Wells Fargo's motion for summary judgment and summary adjudication of Fraser's First and Second Causes of Action for Breach of Contract and Conversion. PCTEL has filed a Motion for Summary Judgment or, Alternatively, Summary Adjudication, against Fraser. The Motion is scheduled for December 9, 2003. Trial of this matter has been set for January 12, 2004. We believe that we have meritorious defenses and intend to vigorously defend the action. Because the action is still in its early stages, we 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 120 U.S. patents granted or pending addressing technology essential to International Telecommunications Union communication standards as well as other communications technology related areas. We will continue to explore other opportunities to acquire relevant technology and to incorporate new assets into our licensing program. For example, as part of our transaction with Conexant that was completed in May 2003, we expanded our intellectual property portfolio by acquiring 46 patents. As part of our licensing efforts, we are pursuing opportunities through litigation in parallel with business discussions with those parties using our intellectual property. As part of these efforts, in May 2003, we filed three separate lawsuits asserting infringement of our intellectual property rights. Below is a description of the claims and status of those lawsuits: - U.S. Robotics Corporation. On May 23, 2003, we filed in the U.S. District Court for the Northern District of California (C03-2471 MJJ) a patent infringement lawsuit against U.S. Robotics Corporation claiming that U.S. Robotics has infringed one of our patents (U.S. Patent No. 4,841,561 ('561)). 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. We filed our reply to Broadcom's counterclaim on August 4, 2003. - 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. We filed our reply to Agere's counterclaim on August 4, 2003. 35 In addition to the three lawsuits described above, we also have continuing litigation with 3Com Corporation related to intellectual property infringement and related matters. Both 3Com and we have pending patent infringement lawsuits against one another in the U.S. District Court for the Northern District of California. Both suits were filed in March 2003. 3Com initially filed their suit against us in the Northern 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 Superior Court of the State of California for the County of Santa Clara under California's Unfair Competition Act. Subsequently, 3Com filed a notice of removal, removing the case to the U.S. District Court for the Northern District of California (C03-3124 SBA). We have moved to remand the case to the Santa Clara Superior Court. The hearing on our motion to remand is set for December 9, 2003. In June 2003, we filed a motion to consolidate our pending patent infringement cases with 3Com, U.S. Robotics, Broadcom, Agere and Lucent described above. The court granted our motion to consolidate in part. On October 28, 2003, a case management conference in the consolidated actions was held. No trial date has been set. We believe we have meritorious claims and defenses in our disputes with 3Com, Broadcom, U.S. Robotics, Agere and Lucent. However, because of the inherent uncertainties of litigation in general, we cannot assure you that we will ultimately prevail or receive the judgments that we seek. In addition, we may be required to pay substantial monetary damages. Litigation such as our suits with 3Com, Broadcom, U.S. Robotics, Agere and Lucent can take years to resolve and can be expensive to pursue and/or defend. The court's decisions on current, pending and future motions could have the effect of determining the ultimate outcome of the litigation prior to a trial on the merits, or strengthen or weaken our ability to assert claims and defenses. Accordingly, an adverse judgment 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 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 ------ ----------- 10.41a Martin H. Singer Amended and Restated Employment Agreement 10.41b Addendum to Martin H. Singer Amended and Restated Employment Agreement 31.1 Certification of Principal Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 31.2 Certification of Principal Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 32 Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K: 36 We furnished a report on Form 8-K dated October 28, 2003 announcing our financial results for the fiscal quarter ended September 30, 2003. Such report was "furnished" but not "filed" with the SEC. We furnished a report on Form 8-K dated July 11, 2003 announcing additional information on sale of HSP modem product line. Such report was "furnished" but not "filed" with the SEC. We furnished a report on Form 8-K dated July 29, 2003 announcing our financial results for the fiscal quarter ended June 30, 2003. Such report was "furnished" but not "filed" with the SEC. 37 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PCTEL, Inc. Delaware Corporation October 31, 2003 By: /s/ JOHN SCHOEN --------------------------------------------------- John Schoen Chief Operating Officer and Chief Financial Officer (Principal Financial and Accounting Officer) 38 EX-10.41A 3 c80270exv10w41a.txt AMENDED AND RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.41a PCTEL, INC. MARTIN H. SINGER AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Agreement is entered into effective as of July 1, 2003 (the "Effective Date") by and between PCTEL, Inc. (the "Company") and Martin H. Singer ("Executive"). 1. Superceding Agreement. This Agreement shall supercede the Employment Agreement, dated effective as of October 17, 2001, between Executive and the Company and together with the other agreements identified in Section 16 below, shall represent the entire agreement and understanding between the parties as to the subject matter herein. 2. Duties and Scope of Employment. (a) Positions and Duties. Executive will continue to serve as Chief Executive Officer of the Company, a position Executive has held since October 17, 2001. Executive will render such business and professional services in the performance of his duties, consistent with Executive's position within the Company, as shall reasonably be assigned to him by the Company's Board of Directors (the "Board"). (b) Board Membership. Executive will continue to serve as a member and Chairman of the Board, subject to any required Board and/or stockholder approval. (c) Obligations. During the Employment Term (as defined below), Executive will perform his duties faithfully and to the best of his ability and will devote his full business efforts and time to the Company. For the duration of Executive's employment with the Company, Executive agrees not to actively engage in any other employment, occupation or consulting activity for any direct or indirect remuneration without the prior approval of the Board. 3. Employment Term. It is intended that the employment arrangement contemplated by this Agreement shall continue until the fifth anniversary of the Effective Date (such five year period being referred to herein as the "Employment Term"). Notwithstanding the foregoing, the parties agree that neither this Agreement nor any provision herein is intended to guarantee the continuation of Executive's employment for the duration of the Employment Term. In the event that Executive's employment with the Company terminates prior to the expiration of the Employment Term for any reason, the parties agree that Executive shall be entitled to receive only those benefits that are expressly provided by this Agreement in such circumstances. 4. Base Salary. During the Employment Term, the Company will pay Executive as compensation for his services a base salary at the annualized rate of $385,000 (the "Base Salary"). The Base Salary will be paid periodically in accordance with the Company's normal payroll practices and be subject to the usual, required withholding. Executive's annual base salary will be reviewed on an annual basis beginning in 2004 by the Compensation Committee of the Board (the "Compensation Committee") in accordance with such committee's established procedures for reviewing salaries of the Company's executive officers. (a) Bonus. While Executive is employed during the Employment Term, Executive shall be entitled to receive, within 60 days after the end of each completed fiscal year, an annual target bonus (the "Core Bonus"), based on the Company's fiscal year of up to 100% of Executive's then-current Base Salary based upon Executive's performance and the Company's attainment of objectives mutually agreed upon by Executive and the Compensation Committee (the objectives for fiscal 2003 are set forth in a separate schedule from this Agreement). In addition, while Executive is employed during the Employment Term, Executive shall be entitled to receive an additional annual bonus (the "Stretch Bonus") in an amount to be determined based on the Company's attainment of objectives mutually agreed upon by Executive and the Compensation Committee; the Stretch Bonus shall be based on milestones to be measured over a two-year period, with any bonus payments becoming payable within 30 days of the end of the two-year period (the target amount objectives for the Stretch Bonus for fiscal 2003-2004 are set forth in a separate schedule from this Agreement). Except as permitted under Section 8, Executive must be employed by the Company during the entire applicable bonus period for the payment of either the Core Bonus or the Stretch Bonus. With respect to any subjective milestones, the determination of whether Executive has attained the mutually agreed upon milestones for both the Core Bonus and the Stretch Bonus, and the amount, if any, of any bonus shall be reasonably determined by the Compensation Committee. (b) Equity Awards. (i) Stock Options. Effective as of the date of approval of this Agreement by the Board of Directors, Executive will be granted a stock option, which will be, to the extent possible under the $100,000 rule of Section 422(d) of the Internal Revenue Code of 1986, as amended (the "Code"), an "incentive stock option" (as defined in Section 422 of the Code), to purchase 100,000 shares of the Company's Common Stock at an exercise price equal to the fair market value of the underlying shares on the date of grant (the "Option"). As long as Executive provides continued service to the Company on the relevant vesting dates and subject to the accelerated vesting provisions set forth herein, the Option will vest as to 1/48th of the shares on a monthly basis following the Effective Date, so that the Option will be fully vested and exercisable four years from the Effective Date. The Option will be subject to the terms, definitions and provisions of the Company's 1997 Stock Plan (the "Option Plan") and the stock option agreement by and between Executive and the Company (the "Option Agreement"), both of which documents are incorporated herein by reference. (ii) Restricted Stock Grant. Executive will be granted a restricted stock award of 50,000 shares of the Company's Common Stock (the "Restricted Shares"). Such shares shall initially be unvested and subject to repurchase by the Company at a price of $0.001 per share. Executive shall acquire a vested interest in, and the Company's repurchase right shall accordingly lapse with respect to all of the Restricted Shares on August 1, 2008, subject to Executive's continued service to the Company on such date. The restricted stock grant shall be subject to the terms, definitions and provisions of the Option Plan and the restricted stock award agreement evidencing -2- the restricted stock grant (the "Restricted Stock Agreement"), which documents are incorporated herein by reference. (iii) Acceleration Upon Certain Termination Following Change of Control. The exercisability of the Option and the vesting of the Restricted Shares may be subject to acceleration in accordance with the terms and conditions set forth in the Management Retention Agreement, dated as of October __, 2001, between the Company and Executive (the "Management Retention Agreement"). (c) Deferred Compensation. Independent of the provisions of Section 8, with respect to the Company's Deferred Compensation Plans, Executive shall continue to be entitled to receive the rights and benefits permitted Executive under such plans. 5. Employee Benefits. While Executive is employed during the Employment Term, Executive will be entitled to participate in the employee benefit plans currently and hereafter maintained by the Company of general applicability to other senior executives of the Company, including, without limitation, the Company's group medical, dental, vision, disability, life insurance, flexible-spending account plans and Executive Deferred Compensation Plan and Executive Deferred Stock Plan (together the "Deferred Compensation Plans"). The Company reserves the right to cancel or change the benefit plans and programs it offers to its employees at any time; provided, however, that if the Company does so, then in such event, Executive shall be compensated in an equivalent amount for any loss represented by such cancellation or change as additional compensation, unless such cancellation or change applies equally to all senior executive officers of the Company. 6. Vacation. While Executive is employed during the Employment Term, Executive shall be entitled to vacation benefits established by the Company commensurate with Executive's status as the Chief Executive Officer and Chairman of the Board. Notwithstanding the foregoing, the Executive shall have no less than four weeks of vacation. The Company's vacation policy may be revised from time to time. 7. Expenses. While Executive is employed during the Employment Term, the Company will reimburse Executive for reasonable travel, entertainment or other expenses incurred by Executive in the furtherance of or in connection with the performance of Executive's duties hereunder, in accordance with the Company's expense reimbursement policy as in effect from time to time. In addition, Executive shall be entitled to (a) reimbursement for his legal fees incurred in connection with the legal review of this Agreement (up to a maximum of $5,000.00) and (b) a monthly car allowance of $1,500.00. 8. Severance. (a) Termination Following a Change of Control. If during the Employment Term Executive's employment is terminated within 12 months following a Change of Control, the severance and other benefits to which Executive is entitled, if any, shall be governed by the Management Retention Agreement (which includes the definition of Change of Control). Notwithstanding the foregoing, for purposes of Section 4(b) of Executive's Management Retention Agreement, the term "Target Bonus" shall be deemed to include both the Core Bonus and the Stretch -3- Bonus. Furthermore, with respect to the Deferred Compensation Plans, if during the Employment Term, Executive's employment is terminated within 12 months following a Change of Control (as defined therein), Executive shall be entitled to all rights and benefits permitted Executive under such plans. (b) Involuntary Termination Without Cause and Apart From Change of Control. If during the Employment Term, either prior to the occurrence of a Change of Control or after the 12 month period following a Change of Control, Executive's employment with the Company terminates either (A) involuntarily by the Company for reasons other than Cause, death or Disability (as such capitalized terms are defined below) or (B) by Executive pursuant to a Voluntary Termination for Good Reason, and Executive signs and does not revoke a standard release of claims with the Company, then, subject to Section 10, Executive shall be entitled to receive the following benefits from the Company: (i) Salary and Bonus Continuation. Executive shall be entitled to receive continuing payments of severance pay (less applicable withholding taxes) at the rate equal to Executive's Base Salary rate, as then in effect, for a period of 24 months from the date of such termination in accordance with the Company's normal payroll policies. In addition, Executive shall be entitled to receive 100% of Executive's Core Bonus (less applicable withholding taxes) as in effect for the fiscal year in which Executive's termination occurs; provided, however, payments of the Core Bonus will be paid over a period of 12 months from the date of such termination in accordance with the Company's normal payroll practices. Executive shall not be entitled to any Stretch Bonus as severance under this Section 8(b). Notwithstanding the term of this Agreement, such continuation of Executive's Base Salary, the payment of the Core Bonus and the provision of other benefits as provided in this Section 8(b) shall be in lieu of any and all other benefits which Executive may be entitled to receive on the date of Executive's termination of employment pursuant to any Company severance and benefit plans and practices or pursuant to other agreements with the Company, other than the Deferred Compensation Plans, the benefits of which will be provided to Executive in accordance with the terms of such plans. (ii) Benefits. Executive shall receive at the Company's expense 100% of Company-paid health, dental and vision insurance benefits at the same level of coverage as was provided to Executive immediately prior to the termination of Executive's employment with the Company ("Company-Paid Coverage"). If such coverage included Executive's dependents immediately prior to Executive's termination, such dependents shall also be covered at the Company's expense. Company-Paid Coverage shall continue until the earlier of (i) 18 months following the date of the termination of Executive's employment (the "Benefits Termination Date"), or (ii) the date upon which Executive or Executive's dependents become covered under another employer's group health, dental and vision insurance benefit plans. If, after 18 months following the Benefits Termination Date, Executive has not become covered under another employer's group health, dental and vision insurance benefit plans, Executive may independently obtain health, dental and vision insurance benefits comparable in the aggregate in scope and coverage to that provided by the Company to Executive immediately prior to the Benefits Termination Date, and the Company shall reimburse Executive for the cost of the premiums paid for such benefits until the earlier of (A) six months following the termination of Company-Paid Coverage, or (B) the date upon which Executive and Executive's dependents become covered under another employer's group health, dental and vision insurance benefit plans. -4- (iii) Partial Accelerated Vesting. All equity awards (including but not limited to the Option and the Restricted Shares) from the Company then held by Executive shall partially accelerate, or if Executive is then holding unvested shares, the Company's right to repurchase the then-unvested shares under each such equity award shall partially lapse, with respect to the number of shares under each such award that would have become vested or been released from such repurchase right under each respective equity award if Executive's employment with the Company had continued for an additional 12 months following such termination date. (c) Voluntary Termination; Termination for Cause. If during the Employment Term Executive's employment is terminated by the Company for Cause, or by Executive for any reason, including death or Disability but other than pursuant to a Voluntary Termination for Good Reason then (A) all further vesting of any stock option (including the Option), restricted stock award (including the Restricted Shares) or other Company equity compensation held by Executive will cease immediately (however, Executive shall be permitted to exercise vested options for the time period specified in his option agreements and he shall retain all vested restricted stock) and all payments of compensation by the Company to Executive hereunder will terminate immediately (except as to amounts already earned), and (B) Executive will only be eligible for severance benefits in accordance with the Company's established policies as then in effect. Except as provided in subsection (d) below, if Executive's employment is terminated for any reason subsequent to the Employment Term, Executive will only be eligible for severance and other benefits in accordance with the Company's established policies and plans as then in effect. (d) Employee Benefits Post-Retirement. Executive and the Company agree to use their good faith efforts to agree upon terms and conditions for post-retirement health and medical benefits in favor of Executive and his immediate family, with the expectation that such agreement will be completed not later than October 1, 2003. 9. Definitions. (a) Cause. "Cause" shall mean (i) an act of personal dishonesty taken by Executive in connection with his responsibilities as an employee and intended to result in substantial personal enrichment of Executive, (ii) Executive being convicted of, or a plea of nolo contendere to, a felony, (iii) a willful act by Executive which constitutes gross misconduct and which is injurious to the Company, or (iv) following delivery to Executive of a written demand for performance from the Company which describes the basis for the Company's reasonable belief that Executive has not substantially performed his duties, continued violations by Executive of Executive's obligations to the Company which are demonstrably willful and deliberate on Executive's part and affords Executive a reasonable opportunity to cure within a reasonable period of time. (b) Disability. "Disability" shall mean that (i) Executive has been unable to perform his Company duties as the result of his incapacity due to physical or mental illness, and such inability, at least 26 consecutive weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to Executive or Executive's legal representative (such Agreement as to acceptability not to be unreasonably withheld), and (ii) Executive is disabled pursuant to the terms of the Company's long-term disability insurance covering Executive as then in effect. Termination resulting from Disability may only be effected after at least 30 days' written notice by the Company of its intention to terminate -5- Executive's employment. In the event that Executive resumes the performance of substantially all of his duties hereunder before the termination of his employment becomes effective, the notice of intent to terminate shall automatically be deemed to have been revoked. (c) Voluntary Termination for Good Reason. "Voluntary Termination for Good Reason" shall mean Executive voluntarily resigns after the occurrence of any of the following (i) without Executive's express written consent, a material reduction of Executive's duties, title, authority or responsibilities, relative to Executive's duties, title, authority or responsibilities as in effect immediately prior to such reduction, or the assignment to Executive of such reduced duties, title, authority or responsibilities; provided, however, that a that a "Voluntary Termination for Good Reason" shall not be deemed to have occurred in connection with a reduction of duties, title, authority or responsibilities resulting solely from (A) a Change of Control (as defined in the Management Retention Agreement), or (B) any change in Executive's position as Chairman of the Board as a result of any legislation, statute, rule or regulation (including rule or regulation of Nasdaq) that would require, or encourage for purposes of prudent corporate governance, the separation of the roles of the Chairman and the Chief Executive Officer, or any stockholder proposal to similar effect approved by a majority of the stockholders; (ii) without Executive's express written consent, a material reduction, without good business reasons, of the facilities and perquisites (including office space and location) available to Executive immediately prior to such reduction; (iii) a reduction by the Company in the base salary of Executive as in effect immediately prior to such reduction; (iv) a material reduction by the Company in the aggregate level of employee benefits, including bonuses, to which Executive was entitled immediately prior to such reduction with the result that Executive's aggregate benefits package is materially reduced (other than a reduction that generally applies to Company employees); or (v) any act or set of facts or circumstances which would, under Illinois case law or statute constitute a constructive termination of Executive. 10. Conditional Nature of Severance Payments. (a) Noncompete. Executive acknowledges that the nature of the Company's business is such that if Executive were to become employed by, or substantially involved in, the business of a competitor of the Company during the 24 months following the termination of Executive's employment (the "Restricted Period") with the Company for any reason (whether during the Employment Term or subsequent to the end of such period), it would be very difficult for Executive not to rely on or use the Company's trade secrets and confidential information. Thus, to avoid the inevitable disclosure of the Company's trade secrets and confidential information, Executive agrees and acknowledges that Executive's right to receive the severance payments set forth in Section 8 (to the extent Executive is otherwise entitled to such payments) shall be conditioned upon Executive not directly or indirectly engaging in (whether as an employee, consultant, agent, proprietor, principal, partner, stockholder, corporate officer, director or otherwise), nor having any ownership interested in or participating in the financing, operation, management or control of, any person, firm, corporation or business that competes in the markets for the Restricted Business; provided, however, that nothing in this Section 10(a) shall prevent Executive from owning as a passive investment less than 1% of the outstanding shares of the capital stock of a publicly-held company if (A) such shares are actively traded on the New York Stock Exchange or the Nasdaq National Market and (B) Executive is not otherwise associated with such company or any of its affiliates. The "Restricted Business" for purposes of this Agreement is one which is engaged in the -6- design, development, manufacture, production, marketing, sale, licensing or servicing of any products, or the provision of any services, that are the same as or similar to those of the Company during the Restricted Period. Upon any breach of this section, all severance payments and benefits pursuant to this Agreement shall immediately cease. (b) Non-Solicitation. During the 24 months following the termination of Executive's employment with the Company for any reason (whether during or after the Employment Term), Executive agrees and acknowledges that Executive's right to receive the severance payments set forth in Section 8 (to the extent Executive is otherwise entitled to such payments) shall be conditioned upon Executive not either directly or indirectly soliciting, inducing, attempting to hire, recruiting, encouraging, taking away, hiring any employee of the Company or causing an employee to leave his or her employment either for Executive or for any other entity or person. (c) Understanding of Covenants. Executive represents that he (i) is familiar with the foregoing covenants not to compete and not to solicit, and (ii) is fully aware of his obligations hereunder, including, without limitation, the reasonableness of the length of time, scope and geographic coverage of these covenants. 11. Additional Representations, Warranties and Acknowledgments by Executive. Executive represents and warrants to the Company that Executive is not subject to any conditions, such as a covenant not to compete with a former employer, that would in any way restrict either the Company's ability and right to employ Executive or which would result in the Company incurring additional costs for employing Executive. Further, Executive acknowledges that (i) the consulting agreements between the Company and Executive dated as of February 15, 2001 and April 29, 2001 terminated in their entirety as of October 31, 2001 and (ii) Executive's obligations to maintain the confidentiality of all confidential and proprietary information of the Company under Executive's confidentiality agreement with the Company dated October 17, 2001 (the "Confidentiality Agreement") remain in full force and effect. 12. Assignment. This Agreement will be binding upon and inure to the benefit of (a) the heirs, executors and legal representatives of Executive upon Executive's death and (b) any successor of the Company. Any such successor of the Company will be deemed substituted for the Company under the terms of this Agreement for all purposes. For this purpose, "successor" means any person, firm, corporation or other business entity which at any time, whether by purchase, merger or otherwise, directly or indirectly acquires all or substantially all of the assets or business of the Company. None of the rights of Executive to receive any form of compensation payable pursuant to this Agreement may be assigned or transferred except by will or the laws of descent and distribution. Any other attempted assignment, transfer, conveyance or other disposition of Executive's right to compensation or other benefits will be null and void. 13. Notices. All notices, requests, demands and other communications called for hereunder shall be in writing and shall be deemed given (a) on the date of delivery if delivered personally, (b) one (1) day after being sent by a well established commercial overnight service, or (c) four (4) days after being mailed by registered or certified mail, return receipt requested, prepaid and addressed to the parties or their successors at the following addresses, or at such other addresses as the parties may later designate in writing: -7- If to the Company: PCTEL, Inc. 8725 West Higgins Road Suite 400 Chicago, Illinois 60631 Attn: General Counsel If to Executive: Martin H. Singer (at the last residential address known by the Company) 14. Severability. In the event that any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement will continue in full force and effect without said provision. 15. Arbitration and Equitable Relief. (a) Arbitration. Except as provided in Section 15(b) below, Executive agrees that any dispute or controversy arising out of, relating to, or concerning Executive's employment with the Company or the termination of Executive's employment with the Company, or any interpretation, construction, performance or breach of this Agreement, shall be settled by arbitration to be held in Cook County, Illinois, in accordance with the National Rules for Resolution of Employment Disputes then in effect of the American Arbitration Association, except as provided in Section 15(b) below. The arbitrator may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the arbitrator's decision in any court having jurisdiction. The Company and Executive shall each pay one-half of the costs and expenses of such arbitration, and each party shall separately pay its counsel fees and expenses. This arbitration clause constitutes a waiver of Executive's and the Company's right to a jury trial and relates to the resolution of all disputes relating to all aspects of the employer/employee relationship, except as provided in Section 15(b) below, including, but not limited to, the following claims: (i) Any and all claims for wrongful discharge of employment; breach of contract, both express and implied; breach of the covenant of good faith and fair dealing, both express and implied; negligent or intentional infliction of emotional distress; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; and defamation; (ii) Any and all claims for violation of any federal, state or municipal statute, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, and the Fair Labor Standards Act; -8- (iii) Any and all claims arising out of any other laws and regulations relating to employment or employment discrimination. (b) Equitable Remedies. Executive agrees that it would be impossible or inadequate to measure and calculate the Company's damages from any breach of the covenants set forth in Section 10. Accordingly, Executive agrees that if Executive breaches such covenants, the Company will have available, in addition to any other right or remedy available, the right to obtain an injunction from a court of competent jurisdiction restraining such breach or threatened breach and to specific performance of any such provision of this Agreement. Executive further agrees that no bond or other security shall be required in obtaining such equitable relief, and Executive hereby consents to the issuance of such injunction and to the ordering of specific performance. (c) Consideration. Executive understands that each party's promise to resolve claims by arbitration in accordance with the provisions of this Agreement, rather than through the courts, is consideration for other party's like promise. Executive further understands that Executive is offered employment hereunder in consideration of Executive's promise to arbitrate claims. (d) Administrative Relief. Executive understands that this Agreement does not prohibit Executive from pursuing an administrative claim with a local, state or federal administrative body, such as the Department of Fair Employment and Housing, the Equal Employment Opportunity Commission or the Workers' Compensation Board. This Agreement does, however, preclude Executive from pursuing court action regarding any such claim (other than workers' compensation claims). (e) Voluntary Nature of Agreement. Executive acknowledges and agrees that Executive is executing this Agreement voluntarily and without any duress or undue influence by the Company or anyone else. Executive further acknowledges and agrees that Executive has carefully read this Agreement and that Executive has asked any questions needed for Executive to understand the terms, consequences and binding effect of this Agreement and fully understands it, including that Executive is waiving Executive's right to a jury trial. Finally, Executive agrees that Executive has been provided an opportunity to seek the advice of an attorney of Executive's choice before signing this Agreement. 16. Integration. This Agreement, together with the Option Plan, Option Agreement, the Restricted Stock Agreement, the Deferred Compensation Plans, the Confidential Information Agreement, the Management Retention Agreement, and the equity awards that have previously been issued to Executive (specifically, the options granted to Executive on February 15, 2001 and October 23, 2001 and the restricted stock award granted to Executive on October 23, 2001) and the schedules apart from this Agreement that set forth the milestones for the payment of the Core Bonus and the Stretch Bonus, represents the entire agreement and understanding between the parties as to the subject matter herein and supersedes all prior or contemporaneous agreements whether written or oral. No waiver, alteration, or modification of any of the provisions of this Agreement will be binding unless in writing and signed by duly authorized representatives of the parties hereto (except that the Option Plan and the Deferred Compensation Plans may be revised or modified in accordance with their terms). -9- 17. Tax Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable taxes. 18. Governing Law. This Agreement will be governed by the laws of the State of Illinois (with the exception of its conflict of laws provisions). * * * * * -10- IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by their duly authorized officers, as of the day and year first above written. COMPANY: PCTEL, INC. By: /s/ John Schoen Date: 9-08-03 -------------------------------- -------------------------- Name: John Schoen ------------------------------ Title: Chief Operating Officer and ----------------------------- Chief Financial Officer ----------------------------- EXECUTIVE: /s/ Martin H. Singer Date: September 2, 2003 - ----------------------------------- -------------------------- Martin H. Singer -11- EX-10.41B 4 c80270exv10w41b.txt ADDENDUM TO AMENDED & RESTATED EMPLOYMENT AGMT EXHIBIT 10.41b ADDENDUM TO MARTIN H. SINGER AMENDED AND RESTATED EMPLOYMENT AGREEMENT AMENDMENT TO MANAGEMENT RETENTION AGREEMENT SEPTEMBER 30, 2003 This Agreement is entered into as of September 30, 2003 by and between PCTEL, Inc. (the "Company") and Martin H. Singer ("Executive"). The purpose of this Agreement is to serve as an addendum to Executive's Amended and Restated Employment Agreement effective as of July 1, 2003 (the "Employment Agreement"), and as an amendment to Executive's Management Retention Agreement effective as of November 15, 2001 (the "Management Retention Agreement"). 1. Addendum to Employment Agreement. The following provisions shall be an addendum to and deemed to be a part of the Employment Agreement: (a) Section 280G. The benefits to be accorded to Executive under Section 8(a) of the Employment Agreement, entitled "Severance; Termination Following a Change of Control," shall be subject to the following: In the event that the severance and other benefits provided for in the Employment Agreement or otherwise payable to Executive (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section, would be subject to the excise tax imposed by Section 4999 of the code, then Executive's severance benefits under the Employment Agreement shall be payable either (i) in full, or (ii) as to such lesser amount which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by Executive, on an after-tax basis, of the greatest amount of severance benefits under the Employment Agreement, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. Unless the Company and Executive otherwise agree in writing, any determination required under this Section shall be made in writing by the Company's independent public accountants (the "Accountants"), whose determination shall be conclusive and binding upon Executive and the Company for all purposes. For purposes of making the calculations required by this Section, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section. (b) Retirement Health Care Benefit. The Company and Executive agree as follows with respect to the provision of health care benefits to Executive and members of his immediate family, in accordance with Section 8(d) of the Employment Agreement, entitled "Severance; Employee Benefits Post-Retirement." (i) The Company will pay for the premiums for comprehensive health care coverage, consistent with the coverage provided to other executives of the Company in accordance with the Company's established policies, for the benefit of Executive and his immediate family as long as Executive remains employed by the Company. (ii) At Executive's election at any time prior to July 1, 2008 during Executive's employment, but subject to the insurability of Executive and each member of Executive's immediate family, Executive may require the Company to obtain, at the Company's expense, an individual family policy for the benefit of Executive and his immediate family (the "Individual Policy"). (In the event the Individual Policy is not available due to insurability issues, as an alternative the Company will seek to obtain an Individual Policy for those individuals who are insurable, and a Blue CHIP policy for any individuals who are not insurable. Such alternative arrangement shall be included within the definition of "Individual Policy.") (iii) Subject to Executive's continuing employment, the Company will continue to provide health care coverage for Executive and his immediate family, and to process health claims, under the Company's existing group health care plan for a period of one year from the date of obtaining the Individual Policy. At that time, Executive agrees to decline further coverage under the existing group policy. (iv) Subject to Executive's completion of the five-year term of the Employment Agreement, Executive will be responsible for continued payment of the premiums under the Individual Policy for the period prior to Executive's attaining the age of 62. At that time, the Company will be obligated to resume payments of the premiums required to maintain the Individual Policy in effect until Executive and Executive's wife have reached the age of 65. For purposes of determining the Company's obligation to pay the premiums necessary to maintain the Individual Policy, Executive will be deemed to have fulfilled the five-year term of the Employment Agreement if prior to the expiration of such term his employment with the Company shall have been terminated as a result of death or Disability or terminated without Cause. (v) Upon Executive's and Executive's wife's reaching the age of 65, the Company's obligation to pay the premiums necessary to maintain the Individual Policy shall terminate, and the Company shall thereafter pay the premiums necessary to maintain a Medicare supplemental policy for the remainder of the lives of Executive and his wife. (vi) Executive and the Company agree that the Company shall be permitted to substitute alternative retirement health care arrangements for the benefit of Executive and his immediate family to the extent that any alternative arrangement shall provide benefits that are, in the aggregate, not less beneficial than those set forth above. 2. Amendment to Management Retention Agreement. (a) Non-Competition. Section 7 of the Management Retention Agreement, entitled "Covenant Not to Compete," is hereby superseded by Section 10 of the Employment Agreement, entitled "Conditional Nature of Severance Payments." (b) Non-Solicitation. Section 5 of the Management Retention Agreement, entitled "Non-Solicitation," is hereby superseded by Section 10 of the Employment Agreement, entitled "Conditional Nature of Severance Payments." (c) Employment Term. The first sentence of Section 2 of the Management Retention Agreement, entitled "At-Will Employment," is hereby superseded by Section 3 of the Employment Agreement, entitled "Employment Term." IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. COMPANY: PCTEL, INC. By: /s/ John Schoen Date: 9-30-03 -------------------------------- -------------------------- Name: John Schoen ------------------------------ Title: Chief Operating Officer and ----------------------------- Chief Financial Officer ----------------------------- EXECUTIVE: /s/ Martin H. Singer Date: September 30, 2003 - ----------------------------------- -------------------------- Martin H. Singer EX-31.1 5 c80270exv31w1.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 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: October 31, 2003 /s/ MARTIN H. SINGER ------------------------------------- Martin H. Singer Chief Executive Officer 39 EX-31.2 6 c80270exv31w2.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 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: October 31, 2003 /s/ JOHN SCHOEN -------------------------------------------- John Schoen Chief Operating Officer and Chief Financial Officer 40 EX-32 7 c80270exv32.txt SECTION 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 September 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: October 31, 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 September 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: October 31, 2003 NAME: JOHN SCHOEN Title: Chief Operating Officer and Chief Financial Officer 41 -----END PRIVACY-ENHANCED MESSAGE-----