Commitments and Contingencies

3 Months Ended

Mar. 31, 2013

Commitments and Contingencies [Abstract]

Commitments and Contingencies

11. Commitments and Contingencies

Leases

The Company has operating leases for office facilities through 2020 and office equipment through 2014. The future minimum rental payments under these leases at March 31, 2013, are as follows:

Year	Amount
2013	$	773
2014		958
2015		912
2016		800
2017		601
Thereafter		1,047
Future minumum lease payments	$	5,091

The Company has capital leases for office equipment. The office equipment had a cost of $3, accumulated depreciation of $1, and a net book value of $2 as of March 31, 2013.

The following table presents future minimum lease payments under capital leases together with the present value of the net minimum lease payments due in each year:

Year	Amount
2013	$	3
2014		3
Total minimum payments required:		6
Less amount representing interest:		0
Present value of net minimum lease payments:	$	6

Warranty Reserve and Sales Returns

The Company allows its major distributors and certain other customers to return unused product under specified terms and conditions. The Company accrues for product returns based on historical sales and return trends. The Company’s allowance for sales returns was $0.1 million at March 31, 2013 and December 31, 2012, respectively.

The Company offers repair and replacement warranties of primarily two years for antenna products and one year for scanning receiver products. The Company’s warranty reserve is based on historical sales and costs of repair and replacement trends. The warranty reserve was $0.3 million at March 31, 2013 and December 31, 2012, respectively, and is included in other accrued liabilities in the accompanying condensed consolidated balance sheets.

Changes in the warranty reserves during the three months ended March 31, 2013 and 2012, were as follows:

	Three Months Ended March 31,
	2013			2012
Beginning balance	$	270		$	249
Provisions for warranty		59			25
Consumption of reserves		(52	)		(30	)
Ending balance	$	277		$	244

Restructuring

The Company will integrate the TelWorx business with its Connected Solutions segment. As part of the integration, the Company announced the termination of seventeen PCTelWorx employees in March 2013. Three employees were separated in March 2013 and the remaining employees will be terminated by September 30, 2013. The Company is in process of evaluating the products and services of the PCTelWorx business. The Company recorded restructuring expense of $0.1 million for employee severance during the three months ended March 31, 2013 and will record additional restructuring expense during the remainder of 2013 for severance and asset disposals.

There was no restructuring activity during the three months ended March 31, 2012.

The following table summarizes the restructuring activity during the three months ended March 31, 2013 and the status of the reserves at March 31. 2013:

	Accrual Balance at December 31, 2012		Restructuring Expense		Cash Payments			Accrual Balance at March 31, 2013
2013 Restructuring Plans Telworx integration	$	0	$	101	($	24	)	$	77
2012 Restructuring Plans Bloomingdale manufacturing		1		0		(1	)		0
	$	1	$	101	($	25	)	$	77

TelWorx Settlement

On March 27, 2013, the Company, its wholly-owned subsidiary PCTelWorx, Inc. (“PCTelWorx”), and the TelWorx Parties (as defined below) entered into an Amendment (the “Amendment”) to the Asset Purchase Agreement, dated July 9, 2012 (the “Original Agreement), among the Company, PCTelWorx, Ciao Enterprises, LLC f/k/a TelWorx Communications, LLC and certain of its affiliated entities (collectively, the “TelWorx Entities”) and Tim and Brenda Scronce (“Sellers” and collectively with the TelWorx Entities, the “TelWorx Parties”), as part of a settlement arrangement relative to PCTelWorx’s acquisition of certain assets and the assumption of certain liabilities of the TelWorx Entities on July 9, 2012 (the “Acquisition”).

As part of the Acquisition, PCTelWorx previously executed a 5 year lease with Scronce Real Estate, LLC for the continued use of an operating facility and offices in Lexington, North Carolina, which provided for annual rental payments of approximately $200,000.

As disclosed in the Company’s Form 8-K/A filed with the Securities and Exchange Commission (the “Commission”) on March 13, 2013, after completion of the Acquisition, the Company became aware of certain accounting irregularities with respect to the TelWorx Entities and the Company’s Board of Directors directed management to conduct an internal investigation. Based on the results of the Company’s investigation, the Company’s Board of Directors directed management to seek restitution from the TelWorx Parties, and after protracted negotiations and concurrent litigation, the parties entered into the Amendment and related settlement agreements to settle the dispute.

The following is a summary of the material terms of the Amendment:

• the TelWorx Parties paid the Company a cash payment of $4.3 million, which includes $1.0 million pursuant to the working capital adjustment provisions of the Original Agreement;

• the TelWorx Parties forfeited all $1.5 million of the potential contingent consideration earnable under the Original Agreement, which had a fair value of $0.6 million, which, if earned, would have been payable in the form of common stock of the Company;

• the TelWorx Parties forfeited the holdback escrow under the Original Agreement and released the $0.5 million holdback escrow to the Company;

• the parties agreed to the elimination of all indemnification obligations provided for under the Original Agreement;

• the Company, PCTelWorx and Sellers each agreed to execute mutual releases of all claims arising in connection with the dispute; and

• Sellers agreed that PCTelWorx has the option to terminate its current facility lease in Lexington, North Carolina with Scronce Real Estate, LLC (which is controlled by Sellers) upon 180 days written notice.

The settlement has an aggregate fair value of $5.4 million, consisting of $4.3 million cash received, $0.6 million for the contingent consideration, and $0.5 million for the escrow balance. Approximately $1.0 million of the cash received was pursuant to the working capital adjustment provisions of the Original Agreement and settles the miscellaneous accounts receivable recorded in prepaid expenses and other assets at December 31, 2012. The remaining $4.3 million settlement amount, consisting of $3.2 million cash and the release of the $0.6 million contingent consideration fair value and the $0.5 million release of the holdback escrow, was recorded as income in the quarter ended March 31, 2013, consistent with accounting for legal settlements.

The Company recorded a $12.5 million impairment of goodwill related to the TelWorx Entities in the fourth quarter of 2012. See Footnote 8 Acquisition of TelWorx Communications LLC for full details. The Company is also currently in discussions with the independent accountants that provided the 2010 and 2011 audited financial statements for TelWorx and the investment banking firm used by the TelWorx Parties to seek further restitution from them for the PCTEL shareholders. The Company cannot predict the total restitution it will eventually obtain, if any. In accepting the Scronces’ settlement, management considered the risks and expenses associated with protracted litigation as well as the consumption of Company resources that would otherwise be applied to operating activities.