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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, DC 20549
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Form---------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the year ended December 31, 2000
[ ] 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
COMMISSION FILE NUMBER 000-27115
PCTEL, Inc.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)
1331 California Circle, Milpitas, CA
DELAWARE 77-0364943
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1331 CALIFORNIA CIRCLE, 95035
MILPITAS, CA (Zip Code)
(Address of Principal Executive Office)
(Zip Code)
(408) 965-2100
(Registrant's Telephone Number, Including Area Code)
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Securities registered pursuant to Section---------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) of the Act:OF THE ACT:
None
Securities registered pursuant to SectionSECURITIES REGISTERED PURSUANT TO SECTION 12(g) of the Act:OF THE ACT:
Common Stock, $0.001 Par Value Per Share.
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 check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
AS OF MARCH 22, 2002, THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON
STOCK HELD BY NONAFFILIATES OF THE REGISTRANT WAS $160,623,019 BASED ON THE
CLOSING SALE PRICE AS REPORTED ON THE NASDAQ NATIONAL MARKET. THIS CALCULATION
DOES NOT REFLECT A DETERMINATION THAT CERTAIN PERSONS ARE AFFILIATES OF THE
REGISTRANT FOR ANY OTHER PURPOSES.
As of February 28, 2001, the aggregate market value of the Registrant's common
stock held by nonaffiliates of the Registrant was $171,956,080 based on the last
transaction price as reported on the Nasdaq National Market. This calculation
does not reflect a determination that certain persons are affiliates of the
Registrant for any other purposes.
As of February 28, 2001,March 22, 2002, the number of shares of the Registrant's common stock
outstanding was 18,974,464.19,953,170.
Items 10, 11, 12 and 13 of Part III incorporate information by reference
from the definitive proxy statement for the Annual Meeting of Stockholders to be
held on May 15, 2001.
129, 2002.
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PCTEL, Inc.
FormINC.
FORM 10-K
For the Year Ended DecemberFOR THE YEAR ENDED DECEMBER 31, 20002001
PagePAGE
----
Part I
PART I
Item 1 Business 3Business.................................................... 1
Item 2 Properties 17Properties.................................................. 5
Item 3 Legal Proceedings 18Proceedings........................................... 6
Item 4 Submission of Matters to a Vote of Security Holders 21
PartHolders......... 7
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 22Matters......................................... 8
Item 6 Selected Financial Data 23Data..................................... 8
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 25Operations................................... 10
Item 7A Quantitative and Qualitative Disclosures about Market
Risk 32Risk........................................................ 28
Item 8 Financial Statements and Supplementary Data 33Data................. 30
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 57
PartDisclosure.................................... 58
PART III
Item 10 Directors and Executive Officers of the RegistrantRegistrant.......... 58
Item 11 Executive CompensationCompensation...................................... 58
Item 12 Security Ownership of Certain Beneficial Owners and
ManagementManagement.................................................. 58
Item 13 Certain Relationships and Related TransactionsTransactions.............. 58
PartPART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K8-K......................................................... 58
Signatures 60Signatures............................................................ 62
2i
PartPART I
ItemITEM 1: Business
================================================================================BUSINESS
This Annual Report on Form 10-Kreport contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements include, butamong other things, statements
concerning our future operations, financial condition and prospects, and
business strategies. The words "believe," "expect," "anticipate" and other
similar expressions generally identify forward-looking statements. Investors in
our common stock are cautioned not limited
to the statements relating to the development of new products in new and
existing markets in the second paragraph of the overview, the evolving
development of mass market adoption of asymmetric digital subscriber line based
data communications in the third paragraph under "Overview", the availability of
products using LiteSpeed(TM) and the development of Solsis(TM), Accelsis and
Solsis II under "Products", the development of additional digital subscriber
line and wireless spread spectrum technologies and our intention to file patents
covering such technologies under "Intellectual Property Licensing", the
statements regarding the duration of our patents under "Licenses, Patents and
Trademarks", the statements regarding unauthorized use of our technology under
"Licenses, Patents and Trademarks", the statements regarding our competition
under "Competition", the statements regarding the ESS and Smart Link litigation
under Item 3 of "Legal Proceedings", the statements regarding future research
and development expenses under "Research and Development", the statements
regarding future selling and marketing expenses under "Sales and Marketing", the
statements regarding future general and administrative expenses under "General
and Administrative", the statements regarding future amortization of deferred
compensation expenses under "Amortization of Deferred Compensation", the
statements regarding future provision for income taxes under "Provision for
Income Taxes", the statements regarding available cash resources available to
meet capital requirements, the factors affecting capital requirements and the
raising and availability of additional funds in the fourth paragraph under
"Liquidity and Capital Resources", and the statements under "Factors Affecting
Operating Results" among others.place undue reliance on these
forward-looking statements. These forward-looking statements are based on
current expectations and entail varioussubject to
substantial risks and uncertainties that could cause actualour future business,
financial condition, or results of operations to differ materially from those projectedour
historical results or currently anticipated results. Investors should carefully
review the information contained under the caption "Factors That May Affect Our
Business, Financial Condition, and Future Operating Results," beginning on page
20 of the section of this report entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and elsewhere in, the forward-looking
statements. Such risks and uncertainties are set forth below under "Factors
Affecting Operating Results".
Overviewor
incorporated by reference into, this report.
OVERVIEW
We are a leading developer and supplier of cost-effective connectivity
solutions, which enable high speed Internet access
solutions. Today our products enable high-speed Internet connections through
analog broadbandnetworks. Additionally, we are developing new technologies and products
to address wireless local area networks.
As a pioneer in developing hostHSP (host signal processingprocessing) technology, a
proprietary set of algorithms that enables cost-effective software-based digital
signal processing solutions, our solution utilizes the computational and
processing resources of a host central processing unit rather than requiring
additional special-purpose hardware. Based on our own research and testing, this
architecture can reduce space requirements by 50% and power requirements by 70%
compared to conventional hardware-based solutions. The first implementation of
our host signal processing technology was in a software modem, or soft modem, in
1995. For the fiscal year ended 2000, we shipped 24.9 million soft modems.
Various original equipment manufacturers, including Compaq, Dell, emachines,
Fujitsu,
Legend, MicronHewlett Packard, NEC and NEC,Samsung, have integrated our soft modems into their
products.
Our proprietary software architecture provides significant benefits over
traditional hardware-based solutions. Our software architecture:
.- Reduces the hardware, space and power requirements of conventional
hardware-based connectivity devices, which reduces our customers'
manufacturing costs while offering superior or comparable performance;
.- Minimizes the risk of technological obsolescence and enables an array of
communication solutions for PCs and alternative Internet access devices
that are easily upgradeable;
.- Allows us to quickly and cost-effectively develop new products to
capitalize on rapidly growing market segments such as the developing
broadband and wireless local area network markets; and
.- Is compatible with multiple operating systems, including but not limited
to Windows 3.1,(3.1, 95, 98, 2000, NT, XP) and CE, and BeOS, Linux, OS/2 and
VXWorks.
We are also developing a distribution concept designed to accelerate the
mass market adoption of digital subscriber line based communications. We believe
that the current means of deploying these modems, which requires a technician to
visit the customer's home, is a complicated, time consuming and expensive
process which severely limits the potential mass market adoption of broadband
technology. We believe that to limits the estimated annual
3
volumes of three to five million subscripted installations as forecasted by
industry analysts, the industry may need to change its distribution model. We
believe that a logical solution for accelerating the mass market deployment of
digital subscriber line technology is to evolve today's complicated and
expensive provisioning model to resemble the current 56k/V.90 modem distribution
model wherein the modem is bundled inside of personal computers or alternative
Internet access devices. This allows the end-user and the telephone company to
initiate the digital subscriber line communications services without requiring a
technician to visit the home, accelerating adoption of broadband services, and
significantly reducing upfront deployment costs.
Corporate BackgroundLinux.
CORPORATE BACKGROUND
We were incorporated in California in 1994 and reincorporated in Delaware
in 1998. Our principal executive offices are located at 1331 California Circle,
Milpitas, California 95035. Our telephone number at that address is (408)
965-2100.
Products
Current Products
MicroModem.1
PRODUCTS
CURRENT PRODUCTS
MicroModem(TM). The MicroModem integrates our host signal processing
technology with a micro form-factor, datasilicon DAA (data access arrangement.arrangement). In
contrast to thea conventional hardware modem, our soft architecture replaces the
memory chip, digital signal processing chip, universal asynchronous receiver and
transmitter, and controller chip with customized software that draws upon the
excess capacity of the host central processing unit. Our patented MicroModem
further reduces power and size requirements by replacing approximately 90
discrete hardware components with one or two mini data access arrangementsilicon DAA chips. This integration
reduces the number of components in a conventional modem data access arrangement
by approximately 40%. The MicroModem is certified as being compatible with the
telecommunications standards of most industrialized countries, allowing original
equipment manufacturers to accomplish seamless global interoperability. The
MicroModem currently comes with standard interfaces to computers such as PCI,
ACR, Modem Riser and USB.
LiteSpeed(TM)MDC.
Lansis(TM). In November 2000,June 2001, we began to ship our G. Lite LiteSpeed(TM)
family of customer premiseLansis product. Lansis is a
combination HSP modem and LAN (local area network) solution. It allows PC
original equipment digital subscriber line products. Operating
at 30 timesmanufacturers ("OEMs") to implement a solution for LAN
connectivity with the speed ofsame performance as more expensive branded CardBus and
Personal Computer Memory Card International Association (PCMCIA) cards. Combined
with V.90 modem functionality, it provides a standard 56K analogcost-effective alternative to
provide modem LiteSpeed(TM) isand network connectivity to the first
modem chipset to offer both 56K and digital subscriber line operability in a
single chip and with simultaneous operations. Compatible with industry
standards, this chipset is our first foray into the broadband market.PC customer.
Solsis(TM). In the fourth quarter of 2000, we began shippingto ship our Solsis(TM)
product. Solsis(TM)Solsis
product line. Solsis is our first embedded solution for Internet access devices
that either do not use a central processing unit or lack the excess processing
capacity necessary to support our host signal processing solution. These devices
includeSolsis
operates on Texas Instruments DSPs (digital signal processing); targeted for
Internet appliances, such as set-top boxes, game consoles and other Internet
access devices. Design wins in each of these areas have already been announced. By offering reductions in size, cost and power consumption, we
believe that our embedded solution is also ideal for many of these
space restricted orspace-restricted mobile appliances.
Future Products
Accelsis. We are developing the G.DMT standard version of asymmetric digital
subscriber line customer premise equipment which will allow for full-rate data
transmission. Full-rate solutions can accommodate eight megabits per second
downstream and one megabit per second upstream. We expect this modem to be
developed in 2002.
Solsis II. We are also developingIn the fourth quarter of 2001, we began to ship the second
generation of our Solsis(TM)Solsis embedded solution that utilizes lesser components.a two-chip solution
versus the previous five-chip version. This will further reducereduces the cost and power
consumption for these non-PC Internet appliances. We expect thisSolsis II utilizes the new TI
TMS320C54V90 DSP, integrating all modem functions into the DSP except the line
side DAA chip.
FUTURE PRODUCTS
Future products are intended to be developed inaddress the second half of 2001.
Intellectual Property Licensingexpanding market for wireless
LAN products intended for use directly by consumers. Further announcements are
anticipated during 2002.
INTELLECTUAL PROPERTY LICENSING
We offer our intellectual property through licensing and product royalty
arrangements. We have over 80 patents granted or pending addressing both
essential International Telecommunications Union (ITU) and non-essential
technologies. Our technology is licensed directly or indirectly by hundreds ofmany
companies in the communications industry, such as Cisco, Conexant, Texas
Instruments, 3Com, Hitachi, IntelESS Technology,
Smart Link and NEC,others, who use International Telecommunications Union standard
technology.
In addition, we are developing digital subscriber line and wireless spread spectrum intellectual
property
4
technologies, which may be patentable. Once developed, we intend to
file patents covering such technologies.
CustomersCUSTOMERS
Our MicroModem and Lansis products are targeted for manufacturing
integration by PC OEMs, PC motherboard and modem card manufacturers. The Solsis
embedded modem products are typically integrated by non-PC Internet access
product manufacturers, such as set-top box makers. We sell our products directly to OEMs and
indirectly tothrough a number of distributorsdistributors.
2
For the year ended December 31, 2001, approximately 79% of our revenues
were generated by three of our customers, with Prewell International
representing 47% of revenues, GVC Corporation representing 22% and customers. The following is a listAskey
Computer representing 10% of selected direct and indirect customers,
all of which have either purchased our products during fiscal year 2000 or are
currently incorporating our modem products into their product lines. The
companies listed in the table, other than those identified as distributors, are
representative of the various distribution channels in which we sell our
products.
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Modem Board Motherboard PC OEM Embedded System
Distributors Manufacturers Manufacturers Companies Integrator
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Golden Way Amigo Prewell International Compaq Ericsson
InnoMicro Askey Computer Dell* LSI Logic
Lestina International Aztech emachines NEC
Roxan USA CIS Fujitsu Sagem
Silicon Application E-Tech Hewlett Packard Silicon Laboratories
Corporation GVC Legend Computer
Serome Micron
Uniwell NEC
Sharp*
TwinHead*
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*Each of the companies designated with an asterisk is an indirect customer of
ours.revenues. For the year ended December 31, 2000,
approximately 60% of our revenues derived from sales towere generated by the same three customers,
with Prewell International Askey Computer andrepresenting 32% of revenues, GVC Corporation
accounted
for approximately 32%, 15% andrepresenting 13%, respectively, of product sales. For the year
ended December 31, 1999, revenues derived from sales to customers Prewell
International and Askey Computer accounted for 47% and 13%, respectively, of our
product sales.representing 15%. No other customers
represented more than 10% of our product sales for these periods.
Sales, Marketing and SupportSALES, MARKETING AND SUPPORT
We sell our products directly to modem board and motherboard manufacturers
who assemble and distribute the end product directly to original equipment
manufacturers and systems integrators and indirectly through distributors. In
many cases, modems are manufactured by third parties on behalf of the final
brand name original equipment manufacturer. We focus on developing long-term
customer relationships with our direct and indirect customers. In many cases,
our indirect original equipment manufacturer customers specify our products be
included on their modem boards or motherboards purchased from board
manufacturers.
We employ a direct sales force with a thorough level of technical
expertise, product background and industry knowledge. Our sales force includes a
highly-
trained team of application engineers to assist customers in designing, testing and
qualifying system designs that incorporate our products. Our sales force also
supports the sales efforts of our distributors. We believe the depth and quality
of our sales support team is critical to:
. achieving- Achieving design wins,
. improving- Improving customers' time to market,
. maintaining- Maintaining a high level of customer satisfaction, and
. engendering- Engendering customer loyalty for our next generation of products.
Our marketing strategy is focused on further building market awareness and
acceptance of our new products. We market our products directly to both
prospective and existing customers. Our marketing organization also provides a wide
range of programs, materials and events to support the sales organization.
As of December 31, 2000,2001, we employed 7534 individuals in sales, marketing and
support and maintained regional
5
sales support operations in Tokyo, Japan,
Taipei, Taiwan, Seoul, Korea and Paris, France.
BacklogBACKLOG
Sales of our products are generally made pursuant to standard purchase
orders, which are officially acknowledged by us according to our terms and
conditions. Due to industry practice, which allows customers to cancel or
reschedule orders with limited advance notice to us prior to shipment without
significant penalties, we believe that our backlog, while useful for scheduling
production, is not necessarily a reliablemeaningful indicator of future revenues.
Research and DevelopmentRESEARCH AND DEVELOPMENT
We recognize that a strong technical base is essential to our long-term
success and have made a substantial investment in research and development. We
will continue to devote substantial resources to product development and patent
submissions. We monitor changing customer needs and work closely with our
customers, partners and market research organizations to track changes in the
marketplace, including emerging industry standards.
As of December 31, 2000,2001, we employed 7647 employees in research and
development, 61 of whom have advanced degrees, including eight who have earned
PhDs.development. For the year ended December 31, 2000,2001, total research and
development costs incurred were $14.1$11.6 million, compared to $14.1 million and
$10.3 million for 2000 and $4.9 million for 1999, and 1998, respectively.
Manufacturing3
MANUFACTURING
We outsource the manufacturing of our application specific integrated
circuit, coder/decoder and data access arrangementprocure DAA chips to independent
foundries in order to avoid significant fixed overhead, staffing and capital
requirements associated with semiconductor fabrication.
Our primary chipset suppliers are Kawasaki/LSI, Silicon Labs and Taiwan
Semiconductor Manufacturing Corporation. The major operations of each of these
manufacturers meet ISO-9001 international manufacturing standards. Our data
access arrangement chips are currently purchased from Silicon Labs of Austin, Texas on a purchase order
basis. We have a limited guaranteed supply of data access arrangement chips
through a long-term contractbusiness arrangement with Silicon Labs. We have no
guaranteed supply or long-term contract agreements with any other of our
suppliers.
Licenses, Patents and TrademarksLICENSES, PATENTS AND TRADEMARKS
We seek to protect our technology through a combination of patents,
copyrights, trade secret laws, trademark registrations, confidentiality
procedures and licensing arrangements. We hold a total of 45have over 80 patents a number
of which cover technology that is consideredgranted or
pending addressing both essential for International
Telecommunications Union standard communication solutions. We also have 27
additional patent applications pending or filed relating to soft modem, digital
subscriber lineITU and wireless technology.non-essential technologies. Because of
the fast pace of innovation and product development, our products are often
obsolete before the patents related to them expire. As a result, we believe that
the duration of the applicable patents is adequate relative to the expected
lives of our products.
We believe that our patent portfolio is one of the largest in the analog
modem market. To supplement our proprietary technology, we have licensed rights
to use patents held by third parties.
We have received communications from Agere Systems and 3Com, and may
receive communications from other third parties including Lucent and Dr.
Brent Townshend,in the future, claiming to own
patent rights in technologies that are part of communications standards adopted
by the International Telecommunications Union, such as V.90, V.34, V.42bis and
V.32bis, and other common communications standards. These third parties claim
that our products utilize these patented technologies and have requested that we
enter into license agreements with them. At various times, weWe have engaged in negotiations with,also recently settled patent
infringement litigation against ESS Technology and are continuing to
negotiate with, Lucent to obtain licenses under its patents. To date, we have
not obtained any licenses from Lucent or Dr. Townshend because we believe that
both LucentBrent Townshend. Other
than the ESS Technology and Dr. Townshend have requested license fees or cross licenses of
our portfolio oflawsuits described below, no material
lawsuits relating to intellectual property on terms that are not fair, reasonable
and nondiscriminatory as required by the International Telecommunications Union.
6
currently filed against us.
In addition, there are numerous risks that result from our reliance on our
proprietary technology in the conduct of our business. See "Risk Factors--WeFactors -- We
rely heavily on our intellectual property rights which offer only limited
protection against potential infringers. Unauthorized use of our technology may
result in development of products that compete with our products, which could
cause our market share and our revenues to be reduced."
CompetitionCOMPETITION
The connectivityInternet access device market is intensely competitive. Our current
competitors include Agere Systems, Broadcom, Conexant, ESS Technology Lucent Technologies,
Motorola, SmartLink and
Texas Instruments.SmartLink. We expect competition to increase in the future as current
competitors enhance their product offerings new suppliers
enter the connectivity device market and new communication technologies
are introduced and deployed.
We may in the future also face competition from other suppliers of products
based on new or emerging communication technologies, which may render our
existing or future products obsolete or otherwise unmarketable. We believe that
these competitors may include 3Com, Aironet, Alcatel, Analog Devices, Aware,
Breezecom, Centilllium Communications, Efficient Networks, Globespan,GlobespanVirata,
Intersil, ITeX, Metalink, Proxim, SymbolTechnologies and Virata.Proxim.
We believe that the principal competitive factors required by users and
customers in the connectivityInternet access device market include compatibility with
industry standards, price, functionality, ease of use, and customer service and
support. We believe that our products currently compete favorably in these
areas.
EmployeesEMPLOYEES
As of December 31, 2000,2001, we employed 198112 people full-time, including 7534 in
sales and marketing, 7647 in research and development, and 4731 in general and
administrative functions. Over 50% of our employees have advanced degrees, with
eight having earned doctoral level degrees. None of our employees is represented by a labor union.
We consider our employee relations to be good.
On February 8, 2001, we went through a reduction in workforce which
amounted to 11% of the employee population.
Executive Officers4
EXECUTIVE OFFICERS
The following table sets forth information with respect to our executive
officers as of December 31, 2000:2001:
Name Age PositionNAME AGE POSITION
- ------------------------------- ------ ---------------------------------------------------- --- --------
Peter Chen (1) 46Martin H. Singer..................... 50 Chief Executive Officer, William F. Roach (2) 56 President andChairman of the Board
John Schoen.......................... 46 Chief Operating Officer, Andrew D. Wahl (3) 52 Vice President, Finance, Chief Financial Officer
Mark Wilson 49 Vice President, Marketing
Derek S. Obata 42 Vice President, Sales
J. Terry Huang 47and Secretary
Jeffrey A. Miller.................... 46 Vice President, Engineering Navin Rao 40and Development
Mark Wilson.......................... 49 Vice President, Business Development
Thomas A. Capizzi 42 Vice President, Human ResourcesMarketing
___________________________
(1) Resigned as Chief Executive Officer on February 15, 2001 and appointed as
Honorary Chairman of the Board
(2) Appointed as Chief Executive Officer on February 15, 2001
(3) Appointed as Secretary on February 15, 2001
Mr. Peter Chen was one of our co-founders andDr. Martin H. Singer has served as our Honorary
Chairman of the Board since February 15, 2001. From our inception in March
1994 to February 15, 2001, Mr. Chen served asbeen our Chief Executive Officer and Chairman of
the Board. Mr. Chen is alsoBoard since October 17, 2001. Prior to that, Dr. Singer has served as our
Non-Executive Chairman of the cousin of one of our directors,Board since February 2001 and a director for the
Company from August 1999. From October 2000 to May 2001, Dr. Mike Min-Chu Chen. Mr. Chen has over 15 years experience in data communications
and modem development at Digicom Systems, Inc. (a company which he co-founded),
Cermetek, Inc. and Anderson-Jacobson, Inc., all data communications companies.
Mr. Chen has a Bachelor of Science in Control Engineering from National Chiao-
Tung University, Taiwan, and holds a Master of Science in Electrical Engineering
from Arizona State University.
Mr. William F. Roach has been ourSinger served as
President and Chief Executive Officer of Ultra Fast Optical Systems, Inc. From
December 1997 to August 2000, Dr. Singer served as President and CEO of SAFCO
Technologies, Inc., a wireless communications company. He left SAFCO in August
2000 after its sale to Agilent Technologies. From September 1994 to December
1997, Dr. Singer served as Vice President and General Manager of the Wireless
Access Business Development Division for Motorola, Inc., a communications
equipment company. Prior to this period, Dr. Singer held senior management and
technical positions in Motorola Inc., Tellabs, Inc., AT&T and Bell Labs. Dr.
Singer holds a Bachelor of Arts in Psychology from the University of Michigan,
and a Master of Arts and a Ph.D. in Experimental Psychology from Vanderbilt
University.
Mr. John Schoen has been our Chief Operating Officer, Chief Financial
Officer and Secretary since February 15,November 12, 2001. Prior to that, Mr. RoachSchoen was
our President andBusiness Development Manager at Agilent Technologies. From May 1999 to July
2001, Mr. Schoen served as Chief Operating Officer from August 1999and Chief Financial Officer
of SAFCO Technologies, Inc. before its acquisition by Agilent Technologies Inc.
Prior to February 2001.this period, Mr. Roach has been a
director since August 2000. From January 1997 until joining us,Schoen held various financial positions for over 19
years in Motorola Inc., including Controller of its Wireless Access Business
Development Division. Mr. Roach served
as a Senior Vice President, Worldwide Sales and Marketing for Maxtor
Corporation, a data storage company, from November 1996 to January 1997 as
Executive Vice President for Worldwide Marketing for Wyle Electronics, an
electronic component distribution company, and from 1989 to November 1996, as
Executive Vice President, Worldwide Sales, for Quantum Corporation, a data
storage company. Mr. RoachSchoen received a Bachelor of Science in Industrial
EconomicsAccounting
from Purdue University.DePaul University and is a Certified Public Accountant.
Mr. Andrew D. WahlJeffrey A. Miller has been our Vice President of FinanceEngineering and
Chief Financial
OfficerDevelopment since January 1997. From March 1995 to April 1996, Mr. Wahl served as
Chief Financial Officer and, from April 1996 to January 1997, as President and
Chief Executive Officer for Designs for Education, Inc., an apparel company.
From 1993 to March 1995, Mr. Wahl served as Chief Financial and Operations
Officer for StarBase Corporation, an object-oriented database developer.November 7, 2001. Prior to that, Mr. WahlMiller was Functional
Manager of Wireless Optimization Products at Wireless Network Test Division of
Agilent Technologies Inc. From January 1998 to July 2001, Mr. Miller served as
Vice President of Engineering of SAFCO Technologies, Inc. and led its Test and
Measurement Group before its acquisition by Agilent Technologies Inc. Prior to
this period, Mr. Miller held various seniortechnical positions in general management, finance
and management consulting.Motorola Inc.,
including its Cellular Infrastructure Group. Mr. WahlMiller received a Bachelor of
ArtsScience in PoliticalComputer Science from Villanova University and a Master in Business Administration in
Accounting from Rutgers University.of Illinois.
Mr. Mark Wilson has been our Vice President of Marketing since July 2000.
Before joining us, Mr. Wilson most recently served as director of product
management for privately-held NARUS, Inc., a leading provider of Internet
business infrastructure solutions
before joining us.solutions. With more than twenty years of experience in
the industry, Mr. Wilson's portfolio of industry experience includes upper-level
management positions in firms such as Hewlett Packard, where he was charged with
market development and product management for the Internet Business Unit of the
VeriFone Division. While with Cirrus Logic, Inc., he served as Vice President of
Customer Marketing. Mr. Wilson also held the position of Vice President of OEM
Marketing at IBM Corporation's Storage Systems Division and was Vice President
of Marketing at Quantum Corporation. Mr. Wilson holds an MBA from Boston
University and an undergraduate degree in Electrical Engineering from the
University of Massachusetts.
Mr. Derek S. Obata has been our Vice President of Sales since April 1998. From
1997 until joining us, Mr. Obata was an independent consultant providing
strategic planning, business development, marketing and sales support to
emerging high technology companies. Mr. Obata served from 1996 to 1998 as Vice
President, Worldwide Sales for Network Peripherals Incorporated, a networking
company, and from 1992 to 1995 as Vice President, Worldwide Sales at Ministor
Peripherals Corporation, a data storage company. Prior to this period, Mr. Obata
served in a number of sales and sales management positions with Conner
Peripherals and Seagate Technologies, which are data storage companies. Mr.
Obata holds a Bachelor of Science in Engineering Sciences from the University of
California, Berkeley.
Mr. J. Terry Huang has been our Vice President of Engineering since April
2000. Formerly our Senior Director of Program Management, Mr. Huang joined us in
1997 as Director of Engineering. He has more than twenty years of R&D
experience in microprocessor-based systems and software design for embedded,
multi-processor systems. Prior to joining us, Mr. Huang managed the Electrical
Engineering and Application Engineering departments at Photon Dynamics, and
served as a Program Manager and Principal Engineer at Abbott Laboratories. He
has also worked for Rockwell International and Tencor Instruments and holds
multiple U.S. patents. Mr. Huang holds a Bachelor degree from Taiwan's National
Cheng-Kung University and a Master of Science degree in Electrical Engineering
from the University of Texas, Arlington.
Mr. Navin Rao has been our Vice President of Business Development since
October 2000. Mr. Rao had previously served as Vice President in various areas
for us from January 1996 to October 2000. From 1990 until joining us in 1996,
Mr. Rao was Product Marketing Manager in the communications business unit at
SGS-Thomson Microelectronics and was responsible for marketing and market
development activities for the North America region. Mr. Rao served from 1988
to 1990 as Senior Field Applications Engineer in Teradyne Inc. on DSP based
testers, and from 1985 to 1998 as Senior Product Planning and Applications
Engineer at Advanced Micro Devices in its Communications Products Division. Mr.
Rao holds a Bachelor of Science degree in Electronics and Communications from
Osmania University, India, a Master of Science degree in Electrical Engineering
from Utah State University and a Master in Business Administration from
University of Texas.
Mr. Thomas A. Capizzi has been our Vice President of Human Resources and Chief
Administrative Officer since January 2000. From July 1997 until joining us, Mr.
Capizzi served as Vice President, Corporate Human Resources for McKessonHBOC, a
pharmaceutical supply and information company. From August 1995 to July 1997,
Mr. Capizzi served as Senior Director, Human Resources, Worldwide Sales and
International for Quantum Corporation, a data storage company. Mr. Capizzi holds
a Bachelor of Arts in Psychology from Cathedral College and St. John's
University in New York.
Factors Affecting Operating Results
This annual report on Form 10-K 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
The recent economic slowdown, particularly the rapid deterioration in PC demand,
makes it difficult to forecast customer demand for our products, and will likely
result in excessive operating costs and loss of product revenues.
In the fourth quarter of 2000, our customers, primarily our PC motherboard
and distribution manufacturers, were impacted by significantly lower PC demand,
which forced them to unexpectedly reschedule or cancel orders for our products
late in the fourth quarter. As a result, our revenues and earnings were
negatively affected. Because we expect PC demand to continue to be weak for the
foreseeable term, we expect our revenues to continue to be negatively affected.
In February 2001, we announced projected revenues and earnings for fiscal 2001
at levels approximately the same or less than those recorded for fiscal 2000.
However, if PC demand does not recover during the latter half of 2001, or if we
are unable to manage our operating expenses, we will not be able to meet these
projections.
In addition, the current economic environment also makes it extremely
difficult for us to forecast customer demand for our products. We must forecast
and place purchase orders for specialized semiconductor chips several months
before we receive purchase orders from our own customers. This forecasting and
order lead time requirement
7
limits our ability to react to unexpected fluctuations in demand for our
products. These fluctuations can be unexpected and may cause us to have excess
inventory or a shortage of a particular product. In the event that our forecasts
are inaccurate, we may need to write down excess inventory. Similarly, if we
fail to purchase sufficient supplies on a timely basis, we may incur additional
rush charges or we may lose product revenues if we are not able to meet a
purchase order. These failures could also adversely affect our customer
relations. Significant write-downs of excess inventory or declines in inventory
value in the future could cause our gross margin and net income to decrease.
Our sales are concentrated among a limited number of customers and the loss of
one or more of these customers could cause our revenues to decrease.
Our sales are concentrated among a limited number of customers. If we were
to lose one or more of these customers, or if one or more of these customers
were to delay or reduce purchases of our products, our sales revenues may
decrease. For the year ended December 31, 2000, approximately 74% of our
revenues were generated by five of our customers, with one customer representing
32% of revenues. These customers may in the future decide not to purchase our
products at all, purchase fewer products than they did in the past or alter
their purchasing patterns, because:
. we do not have any long-term purchase arrangements or contracts with these
or any of our other customers,
. our product sales to date have been made primarily on a purchase order
basis, which permits our customers to cancel, change or delay product
purchase commitments with little or no notice and without penalty, and
. many of our customers also have pre-existing relationships with current or
potential competitors which may affect our customers' purchasing
decisions.
We expect that a small number of customers will continue to account for a
substantial portion of our revenues for at least the next 12 to 18 months and
that a significant portion of our sales will continue to be made on the basis of
purchase orders.
Continuing decreases in the average selling prices of our products could result
in decreased revenues.
Product sales in the connectivity industry have been characterized by
continuing erosion of average selling prices. Price erosion experienced by any
company can cause revenues and gross margins to decline. The average selling
price of our products has decreased by approximately 69% from October 1995 to
December 31, 2000. We expect this trend to continue.
In addition, we believe that the widespread adoption of industry standards
in the soft modem industry is likely to further erode average selling prices,
particularly for analog modems. Adoption of industry standards is driven by the
market requirement to have interoperable modems. End-users need this
interoperability to ensure modems from different manufacturers communicate with
each other without problems. Historically, users have deferred purchasing modems
until these industry standards are adopted. However, once these standards are
accepted, it lowers the barriers to entry and price erosion results. Decreasing
average selling prices in our products could result in decreased revenues even
if the number of units that we sell increases. Therefore, we must continue to
develop and introduce next generation products with enhanced functionalities
that can be sold at higher gross margins. Our failure to do this could cause our
revenues and gross margin to decline.
Our gross margins may vary based on the mix of sales of our products and
services, and these variations may hurt our net income.
We derive a significant portion of our sales from our software-based
connectivity products. We expect 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 margins from both existing and
future products to decrease over time. In addition, licensing revenues from our
products 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 will cause
our quarterly results to vary and could result in a decrease in gross margins
and net income.
8
We have significant sales and operations concentrated in Asia. Continued
political and economic instability in Asia and difficulty in collecting accounts
receivable may make it difficult for us to maintain or increase market demand
for our products.
Our sales to customers located in Asia accounted for 91% of our total
revenues for the year ended December 31, 2000. The predominance of our sales is
in Asia, mostly in Taiwan and China, because our customers are primarily
motherboard or modem manufacturers that are located there. In many cases, our
indirect original equipment manufacturer customers specify that our products be
included on the modem boards or motherboards, the main printed circuit board
containing the central processing unit of a computer system, that they purchase
from board manufacturers, and we sell our products directly to the board
manufacturers for resale to our indirect original equipment manufacturer
customers, both in the United States and internationally. Due to the industry
wide concentration of modem manufacturers in Asia, we believe that a high
percentage of our future sales will continue to be concentrated with Asian
customers. As a result, our future operating results could be uniquely affected
by a variety of factors outside of our control, including:
. delays in collecting accounts receivable, which we have experienced from
time to time,
. fluctuations in the value of Asian currencies relative to the U.S. dollar,
which may make it more costly for us to do business in Asia and which may
in turn make it difficult for us to maintain or increase our revenues,
. changes in tariffs, quotas, import restrictions and other trade barriers
which may make our products more expensive compared to our competitors'
products, and
. political and economic instability.
To successfully expand our sales in Asia and internationally, we must
strengthen foreign operations, hire additional personnel and recruit additional
international distributors and resellers. This will require significant
management attention and financial resources. To the extent that we are unable
to effect these additions in a timely manner, we may not be able to maintain or
increase market demand for our products in Asia and internationally, and our
operating results could be hurt.
Our future success depends on our ability to develop and successfully introduce
new and enhanced products that meet the needs of our customers.
Our revenue depends on our ability to anticipate our customers' needs and
develop products that address those needs. In particular, our success in 2001
will depend on our ability to introduce new products for the wireless and
broadband markets. Introduction of new products and product enhancements will
require coordination of our efforts with those of our suppliers to rapidly
achieve volume production. If we fail to coordinate these efforts, develop
product enhancements or introduce new products that meet the needs of our
customers as scheduled, our revenues may be reduced and our business may be
harmed. We cannot assure you that product introductions will meet the
anticipated release schedules.
Our revenues may fluctuate each quarter due to both domestic and international
seasonal trends.
We have experienced and continue to experience seasonality in sales of our
connectivity products. These seasonal trends materially affect our quarter-to-
quarter operating results. Our revenues are typically higher in the third and
fourth quarters due to the back-to-school and holiday seasons as well as
purchasers of PCs making purchase decisions based on their calendar year-end
budgeting requirements, except for the fourth quarter of 2000 due to economic
slowdown.
We are currently expanding our sales in international markets, particularly
in Asia, Europe and South America. To the extent that our revenues in Asia,
Europe or other parts of the world increase in future periods, we expect our
period-to-period revenues to reflect seasonal buying patterns in these markets.
Any delays in our normally lengthy sales cycles could result in customers
canceling purchases of our products.
Sales cycles for our products with major customers are lengthy, often
lasting six months or longer. In addition, it can take an additional six 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:
9
. our original equipment manufacturer customers usually complete a lengthy
technical evaluation of our products, over which we have no control,
before placing a purchase order,
. the commercial integration of our products by an original equipment
manufacturer is typically limited during the initial release to evaluate
product performance, and
. the development and commercial introduction of products incorporating new
technologies frequently are delayed.
A significant portion of our operating expenses is relatively fixed and is
based in large part on our forecasts of volume and timing of orders. The lengthy
sales cycles make forecasting the volume and timing of product orders difficult.
In addition, the delays inherent in lengthy sales cycles raise additional risks
of customer decisions to cancel or change product phases. If customer
cancellations or product changes were to occur, this could result in the loss of
anticipated sales without sufficient time for us to reduce our operating
expenses.
We expect that our operating expenses will continue to increase in the future
and these increased expenses may diminish our ability to remain profitable.
Although we have been profitable in recent years, we may not remain
profitable on a quarterly or annual basis in the future. Although we intend to
control expenses given the current PC market environment, in order to expand and
develop our core business, we still anticipate that our expenses will continue
to increase over at least the next three years as we:
. further develop and introduce new applications and functionality for our
host signal processing technology,
. conduct research and development and explore emerging product
opportunities in digital technologies and wireless communications,
. expand our distribution channels, both domestically and in our
international markets, and
. pursue strategic relationships and acquisitions.
In order to maintain profitability we will be required to increase our
revenues to meet these additional expenses. Any failure to significantly
increase our revenues as we implement our product, service, distribution and
strategic relationship strategies would result in a decrease in our overall
profitability.
To date, we have principally relied upon our distributor sales organization
for product sales to smaller accounts. Our direct sales efforts have focused
principally on board manufacturers and smaller PC original equipment
manufacturers. To increase penetration of our target customer base, including
large, tier-one original equipment manufacturers, we must significantly increase
the size of our direct sales force and organize and deploy sales teams targeted
at specific domestic tier-one original equipment manufacturer accounts. If we
are unable to expand our sales to additional original equipment manufacturers,
our revenues may not meet analysts' expectations, which could cause our stock
price to drop.
We rely heavily on our intellectual property rights which offer only limited
protection against potential infringers. Unauthorized use of our technology may
result in development of products that compete with our products, which could
cause our market share and our revenues to be reduced.
Our success is heavily dependent upon our proprietary technology. We rely
primarily on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. These means of protecting our proprietary rights may not be
adequate. We hold a total of 45 patents, a number of which cover technology that
is considered essential for International Telecommunications Union standard
communications solutions, and also have 27 additional patent applications
pending or filed. These patents may never be issued. These patents, both issued
and pending, may not provide sufficiently broad protection against third party
infringement lawsuits or they may not prove enforceable in actions against
alleged infringers.
Despite precautions that we take, it may be possible for unauthorized third
parties to copy aspects of our current or future products or to obtain and use
information that we regard as proprietary. We may provide our licensees with
access to our proprietary information underlying our licensed applications.
Additionally, our competitors may independently develop similar or superior
technology. Finally, policing unauthorized use of software is difficult, and
10
some foreign laws, including those of various countries in Asia, do not protect
our proprietary rights to the same extent as United States laws. Litigation may
be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Litigation could result in substantial costs and
diversion of resources.
We have received communications from Lucent and Dr. Brent Townshend, and may
receive communications from other 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. These claims could affect our relationships with
existing customers and may prevent potential future customers from purchasing
our products or licensing our technology. Because we depend upon a limited
number of products, any claims of this kind, whether they are with or without
merit, could be time consuming, result in costly litigation, 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 Lucent or Dr. Townshend because we believe that
both Lucent and Dr. Townshend have requested license fees or cross licenses of
our portfolio of intellectual property on terms that are not fair, reasonable
and nondiscriminatory as required by the International Telecommunications Union.
Other than the ESS Technology and Smart Link lawsuits described elsewhere in the
notes to financial statements, no material lawsuits relating to intellectual
property are currently filed against us.
New patent applications may be currently pending or filed in the future by
third parties covering technology that we use currently or may use in the
future. Pending U.S. patent applications are confidential until patents are
issued, and thus it is impossible to ascertain all possible patent infringement
claims against us. We believe that several of our competitors, including Lucent,
Motorola and Texas Instruments, may have a strategy of protecting their market
share by filing intellectual property claims against their competitors and may
assert claims against us in the future. The legal and other expenses and
diversion of resources associated with any such litigation could result in a
decrease in our revenues and profitability.
In addition, some of our customer agreements include an indemnity clause
that obligates us to defend and pay all damages and costs finally awarded by a
court should third parties assert patent and/or copyright claims against our
customers. As a result, we may be held responsible for infringement claims
asserted against our customers.
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 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 higher than our current estimates, our business, operating results
and financial condition could be materially and adversely affected.
Competition in the connectivity market is intense, and if we are unable to
compete effectively, the demand for, or the prices of, our products may be
reduced.
The connectivity device market is intensely competitive. We may not be able
to compete successfully against current or potential competitors. Our current
competitors include Conexant, ESS Technology, Lucent Technologies, Motorola,
Smart Link, Broadcom and Texas Instruments. We expect competition to increase in
the future as current
11
competitors enhance their product offerings, new suppliers enter the
connectivity device market, new communication technologies are introduced and
additional networks are deployed.
We may in the future also face competition from other suppliers of products
based on broadband and/or wireless technologies or on emerging communication
technologies, which may render our existing or future products obsolete or
otherwise unmarketable. We believe that these competitors may include Aironet,
Alcatel, Analog Devices, Aware, Breezecom, Centillium Communications, Efficient
Networks, Globespan, Intersil, ITeX, Metalink, Proxim, Symbol Technologies and
Virata.
We believe that the principal competitive factors required by users and
customers in the connectivity product market include compatibility with industry
standards, price, functionality, ease of use and customer service and support.
Although we believe that our products currently compete favorably with respect
to these factors, we may not be able to maintain our competitive position
against current and potential competitors.
In order for us to maintain our profitability 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 one or more of our executives or key
employees, a replacement could be difficult to recruit and we may not be able to
grow our business.
Competition for personnel, especially engineers and marketing and sales
personnel in Silicon Valley, 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 December 31,
2000, we employed a total of 76 people in our engineering department, over half
of whom have advanced degrees. In the past we have experienced difficulty in
recruiting qualified engineering personnel, especially developers, on a timely
basis. If we are not able to hire at the levels that we plan, 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 resources by increasing the demands on their management abilities during
periods of constrained spending. We are focusing on the broadband and wireless
areas as well as placing substantial effort on sustaining our leadership
position in the analog modem space. To effectively manage our growth in these
new technologies, we must enhance our marketing, sales, research and development
areas. With revenues either stabilizing or declining these efforts will have to
be accomplished with limited funding. This will require management to
effectively manage significant technological advancement within existing
budgets.
We rely on independent companies to manufacture, assemble and test our products.
If these companies do not meet their commitments to us, our ability to sell
products to our customers would be impaired.
We do not have our own manufacturing, assembly or testing operations.
Instead, we rely on independent companies to manufacture, assemble and test the
semiconductor chips, which are integral components of our products. Most of
these companies are located outside of the United States. There are many risks
associated with our relationships with these independent companies, including
reduced control over:
. delivery schedules,
. quality assurance,
. manufacturing costs,
. capacity during periods of excess demand, and
12
. access to process technologies.
In addition, the location of these independent parties outside of the United
States creates additional risks resulting from the foreign regulatory, political
and economic environments in which each of these companies exists. Further, some
of these companies are located near earthquake fault lines. While we have not
experienced any material problems to date, failures or delays by our
manufacturers to provide the semiconductor chips that we require for our
products, or any material change in the financial arrangements we have with
these companies, could have an adverse impact on our ability to meet our
customer product requirements.
We design, market and sell application specific integrated circuits and
outsource the manufacturing and assembly of the integrated circuits to third
party fabricators. The majority of our products and related components are
manufactured by three principal companies: Taiwan Semiconductor Manufacturing
Corporation, Kawasaki/LSI and Silicon Labs. We expect to continue to rely upon
these third parties for these services. Currently, the data access arrangement
chips used in our soft modem products are provided by a sole source, Silicon
Labs, on a purchase order basis, and we have only a limited guaranteed supply
arrangement under a contract with our supplier. Although we believe that we
would be able to qualify an alternative manufacturing source for data access
arrangement chips within a relatively short period of time, this transition, if
necessary, could result in loss of purchase orders or customer relationships,
which could result in decreased revenues.
Undetected software errors or failures found in new products may result in loss
of customers or 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.
Connectivity devices generally require individual government approvals
throughout the world to operate on local telephone networks. These
certifications collectively referred to as homologation can delay or impede the
acceptance of our products on a worldwide basis.
Connectivity products require extensive testing prior to receiving
certification by each government to be authorized to connect to their telephone
systems. This testing can delay the introduction or, in extreme cases, prohibit
the product usage in a particular country. International Telecommunications
Union standards seek to provide a worldwide standard to avoid these issues, but
they do not eliminate the need for testing in each country. In addition to these
government certifications, individual Internet Service Providers, or "ISPs", can
also have unique line conditions that must be addressed. Since most large PC
manufacturers want to be able to release their products on a worldwide basis,
this entire process can significantly slow the introduction of new products.
Risks Related to Our Industry
If the market for applications using our host signal processing technology does
not grow as we anticipate, or if our products are not accepted in these markets,
our revenues may stagnate or decrease.
Our success depends on the growth of the market for applications using our
host signal processing technology. Market demand for host signal processing
technology depends primarily upon the cost and performance benefits relative to
other competing solutions. This market has only recently begun to develop and
may not develop at the growth rates that have been suggested by industry
estimates. Although we have shipped a significant number of soft modems since we
began commercial sales of these products in October 1995, the current level of
demand for soft modems may not be sustained or may not grow. If customers do
not accept soft modems or the market for soft modems does not grow, our revenues
will decrease.
Further, we are in the process of developing next generation products and
applications which improve and extend upon our host signal processing
technology. If these products are not accepted in the markets when they are
introduced, our revenues and profitability will be negatively affected. We only
recently introduced our Solsis(TM) modem for the embedded market. We expect
sales of this product to increase during the first quarter of 2001 and
13
become visible in our product mix by the second quarter of 2001. However, if the
market does not accept our product, or if PC demand remains weak, our revenues
will be adversely affected.
In addition, distribution models need to change in order for some of our
products to be accepted. For example, in order for our LiteSpeed(TM) product to
be adopted by a mass market, the distribution model for broadband technology
must change from the current complicated provisioning model (which requires a
technician to visit the home to install additional equipment) to a 56K/V.90
modem distribution model (where the modem is bundled inside a personal computer
or alternative access device.) We believe that the market will in fact move
towards the 56K/V.90 business model towards the end of 2001. However, if it
does not, then our LiteSpeed(TM) product may not be accepted by the mass market,
and our revenues will be adversely affected.
Our industry is characterized by rapidly changing technologies. If we do not
adapt to these technologies, our products will become obsolete.
The connectivity product market is characterized by rapidly changing
technologies, limited product life cycles and frequent new product
introductions. To remain competitive in this market, we have been required to
introduce many products over a limited period of time. For example, we
introduced a 14.4 Kbps product in 1995, a 28.8 Kbps product in 1996, a 33.6 Kbps
product in late 1996, a non-International Telecommunications Union standard 56
Kbps modem in the second half of 1997 and a V.90 International
Telecommunications Union standard 56 Kbps modem in early 1998. During 2001, we
expect to see the introduction of additional International Telecommunications
Union standards referred to as V.92 and V.44. The market for high speed data
transmission is also characterized by several competing technologies that offer
alternative broadband solutions which allow for higher modem speeds and faster
Internet access. These competing broadband technologies include digital
subscriber line and wireless. In the digital subscriber line area, various
speed and technologies are currently being considered in the market such as
G.Lite at 1.5Mbps, G.DMT at 8Mbps and VDSL at 52 Mbps. The wireless area
includes competing standards such as Bluetooth, HomeRF 1.0 and HomeRF 2.0 as
well as 802.11b and 802.11a. However, substantially all of our current product
revenue is derived from sales of analog modems, which use a more conventional
technology. We must continue to develop and introduce technologically advanced
products that support one or more of these competing broadband technologies.
These new technology developments have taken longer time than expected. If we
are not successful in our response, our products will become obsolete and we
will 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.
We rely on a continuous power supply to conduct our operations, and California's
current energy crisis could disrupt our operations and increase our expenses.
Our business operations depend on our ability to maintain and protect our
facilities, computer systems and personnel, which are primarily located in or
near our principal headquarters in Milpitas, California. California is
currently experiencing power outages due to a shortage in the supply of power
within the state. In anticipation of continuing power shortages, the electric
utility industry in California has warned power consumers to expect rolling
blackouts throughout the state, particularly during the summer months when power
usage peaks. We currently do not have backup generators or alternate sources of
power in the event of a blackout, and our current insurance does not provide
coverage for any damages we or our customers may suffer as a result of any
interruption in our power supply. Although the blackouts we have experienced to
date have not materially impacted our business, an increase in the frequency or
length of the blackouts could damage our reputation, harm our ability to retain
existing customers and to obtain new customers, and could result in lost
revenue, any of which could substantially harm our business
14
and results of operations. Furthermore, the deregulation of the energy industry
has caused power prices to increase. If wholesale prices continue to increase,
our operating expenses will likely increase, as the majority of our facilities
are located in California.
Risks Related to our Common Stock
Our stock price may be volatile based on a number of factors, some of which are
not in our control.
The trading price of our common stock has been highly volatile. Our stock
price could be subject to wide fluctuations in response to a variety of factors,
many of which are out of our control, including:
. actual or anticipated variations in quarterly operating results,
. announcements of technological innovations,
. new products or services offered by us or our competitors,
. changes in financial estimates by securities analysts,
. conditions or trends in our industry,
. our announcement of significant acquisitions, strategic partnerships,
joint ventures or capital commitments,
. additions or departures of key personnel,
. mergers and acquisitions, and
. sales of common stock by us or our stockholders.
In addition, the Nasdaq National Market, where many publicly held
telecommunications companies, including our company, are traded, often
experiences extreme price and volume fluctuations. These fluctuations often have
been unrelated or disproportionate to the operating performance of these
companies. The trading prices of many technology companies continue to trade at
multiples of earnings or revenues which are substantially above historic levels.
These trading prices and multiples may not be sustainable. These broad market
and industry factors may seriously harm the market price of our common stock,
regardless of our actual operating performance. In the past, following periods
of volatility in the market price of an individual company's securities,
securities class action litigation often has been instituted against that
company. This type of litigation, if instituted, could result in substantial
costs and a diversion of management's attention and resources.
Substantial future sales of our common stock in the public market may depress
our stock price.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our common stock could cause our stock price to
fall.
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.
15
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. The board of directors has not
elected to issue additional shares of preferred stock since the initial public
offering on October 19, 1999.
16
ItemITEM 2: Properties
================================================================================PROPERTIES
In September 1999, we entered into an operating lease for our new
headquarter facilities in Milpitas, California. This office building is 100,026
square feet and the lease expires February 2003. In addition, we have a
subsidiary office in Waterbury, Connecticut, an engineering office in Taipei,
Taiwan, and sales support
5
offices in Tokyo, Japan, Taipei, Taiwan, Seoul, Korea and Seoul, Korea.Paris, France. We
believe that we have adequate space for our current needs.
17
ItemAs a result of the restructuring programs implemented in 2001, a portion of
our current headquarter facilities was closed and became available for rent. We
are currently actively marketing the excess facilities. As of December 31, 2001,
the idle space has not been subleased.
ITEM 3: Legal Proceedings
================================================================================LEGAL PROCEEDINGS
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 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 settlements. Should
the final license agreements result in royalty rates significantly different
than our current estimates, our business, operating results and financial
condition could be materially and adversely affected.
AsPCTEL, Inc. v. Brent Townshend
In September 1998 and May 1999, Dr. Brent Townshend ("Townshend") alleged
by letter that our products infringe a number of December 31, 2000patents owned by him and 1999,that
we had accrued royaltiesowed him royalties. In May 2001, we filed a complaint against Townshend in
the U.S. District Court for the Northern District of approximately
$11.7 millionCalifornia, contending that
Townshend's ITU-related patents are invalid, void, unenforceable and/or not
infringed ("Federal Court Action"). Our complaint also contends that Townshend's
patents are already licensed to us.
In September 2001, Townshend answered and $7.9 million, respectively. Of these amounts, approximately
$1.2 millionfiled a motion to dismiss the
complaint. Townshend also asserted counter-claims for patent infringement
against us seeking damages. Townshend sought exemplary and $700,000 represent amounts accrued based upon signed royalty
agreements aspunitive damages and
asked that damages be increased three times the amount found or assessed,
alleging willful infringement. Townshend's answer also sought costs, fees,
interest and restitution. In January 2002, Townshend's motion to dismiss was
denied.
In September 2001, on behalf of December 31, 2000ourselves and 1999, respectively. The remainder of
accrued royalties represents management's estimate withinthe general public, we filed
a range of possible
settlement losses as of each date presented. While management is unable to
estimatecomplaint against Townshend and others in the maximum amountCalifornia Superior Court for
unfair competition in the marketplace ("State Court Action"). This Superior
Court action was stayed, pending resolution of the rangeU.S. District Court
litigation.
On March 19, 2002, Townshend entered into a settlement agreement with us,
which settled the Federal Court Action and State Court Action. Under the
Settlement Agreement, the terms of possiblethe settlement losses, it is
possible that actual losses could exceed the amounts accrued asare confidential. The
Settlement Agreement required us to make a cash royalty payment on March 19,
2002 of each date
presented.
On$14.3 million related to past liability and prepayment of future
liabilities.
ESS Technology, Inc. v. PCTEL, Inc.
In April 9, 1999, ESS Technology, Inc. ("ESS") filed a complaint against us in
the U.S. District Court for the Northern District of California, alleging that
we failed to grant licenses for some of our International Telecommunications
Union-related patents to ESS on fair, reasonable and non-discriminatory terms.
ESS's complaint includes claims based on antitrust law, patent misuse, breach of
contract and unfair competition. In its complaint, ESS also seeks a declaration
that some of our International Telecommunications Union-related patents are
unenforceable and that we should be ordered by the court to grant a license to
ESS on fair, reasonable and non-discriminatory terms.
We filed an answer to ESS's complaint by moving to dismissentered into a settlement agreement with ESS on February 5, 2002, which
settled this litigation matter and the basis thatlitigation matter involving ESS had not alleged facts sufficient to state a legal claim. ESS responded by
amending its complaint to include additional factual and legal allegations and
filing an opposition to the motion to dismiss. On August 2, 1999, the Court
denied our motion to dismiss as mootpending
in view of ESS's amended complaint.
On August 12, 1999, we filed a motion to dismiss ESS's amended complaint. On
November 4, 1999, the United States District Court in San Jose, California,
granted a dismissalInternational Trade Commission
6
described below. The settlement required ESS to make an initial license payment
of the antitrust$2.0 million and state unfair competition claims, ruling
that ESS had failedfuture royalty payments to allege injury to competition in the market for modems.
The Court allowed the specific performance of contract claim to stand, ruling
that the license terms granted to other market participants would provide a
sufficient basis for defining contractual terms that could be applied to ESS.
The Court also denied the motion with respect to dismissal of the declaratory
relief claims, holding that they were sufficiently ripe for adjudication. The
Court granted ESS leave to again amend its complaint, which it did on November
24, 1999, by filing a second amended complaint.
On January 14, 2000, we filed a motion to dismiss the second amended
complaint. ESS filed its opposition to the motion on January 21, 2000 and we
filed our reply on January 28, 2000. On February 11, 2000, the Court heard oral
argument on our motion to dismiss the second amended complaint. On February 14,
2000, the Court dismissed ESS's complaint and gave ESS twenty days to amend its
complaint. In particular, the Court stated that ESS must allege the relevant
geographic market and product market in the complaint. In response to the
Court's February 14, 2000 order, ESS filed its third amended complaint on March
6, 2000.
On March 15, 2000, we filed a motion to dismiss ESS's third amended complaint.
ESS responded on March 31, 2000 and we filed reply papers on April 6, 2000. A
case management conference was held on April 21, 2000. The motion was denied on
July 3, 2000. The judge ordered that discovery proceed onlyus based on the issueterms under the
settlement agreement.
In the Matter of whether we license our patents on a reasonableCertain HSP Modems, Software and non-discriminatory basis.
This initial discovery period is currently scheduled to end on August 10, 2001.
During this period of time,Hardware Components Thereof,
and Products Containing the parties will disclose experts and exchange
expert reports on the above issue. A further case management conference is
scheduled to be held on August 24, 2001.
18
On August 7, 2000, we filed counterclaims alleging that ESS infringes our five
patents that are the subject of ESS's complaint.Same.
In addition, on October 3,
2000, the parties stipulated to permit us to amend our counterclaims to include
claims that ESS infringes three of our additional patents. Six of our eight
patents asserted against ESS are International Telecommunications Union-related
patents. These infringement claims will be litigated, if necessary, only after
the issue of whether we license our patents on a reasonable and non-
discriminatory basis is resolved. The other two patents asserted against ESS
are not related to International Telecommunications Union standards.
Due to the nature of litigation generally, we cannot ascertain the outcome of
the final resolution of the lawsuit, the availability of injunctive relief or
other equitable remedies, or estimate the total expenses, possible damages or
settlement value, if any, that we may ultimately incur in connection with ESS's
suit. This litigation could be time consuming and costly, and we will not
necessarily prevail given the inherent uncertainties of litigation. However, we
believe that we have valid defenses to this litigation, including the fact that
other companies license these International Telecommunications Union-related
patents from us on the same terms that are being challenged by ESS. We believe
that it is unlikely this litigation will have a material adverse effect on our
financial position or results of operations and, accordingly, have not accrued
any amounts in the financial statements related to this claim. We are vigorously
contesting, and intend to continue to vigorously contest, all of ESS's claims.
We are vigorously litigating, and intend to continue to vigorously litigate our
claims against ESS.
On August 9,September 2000, we filed a complaint for patent infringement in the United
States District Court, District of Delaware against Smart Link Ltd. and Smart
Link Technologies, Inc. (collectively, "Smart Link"). Our complaint alleges that
Smart Link infringed four of our patents. On August 18, 2000, we amended our
complaint to claim that Smart Link's infringement was willful.
On September 18, 2000, Smart Link answered our amended complaint and
counterclaimed against us. Smart Link's answer denied our allegations of
infringement. Smart Link's counterclaims seek declaratory relief that our
asserted patents are invalid and not infringed. Smart Link also counterclaims
for tortious interference with a business relation. On October 10, 2000, we
replied to Smart Link's counterclaims and moved to strike portions of Smart
Link's answer, which resulted in Smart Link agreeing to withdraw the offending
portions of the answer. On January 12, 2001, the parties exchanged initial
disclosures and discovery is underway. On March 5, 2001, we filed a motion in
this case to amend our complaint to withdraw one patent already asserted against
Smart Link and assert a new patent against Smart Link. If our motion is
granted, the number of patents asserted against Smart Link will remain at four
patents. Smart Link's response to this motion was due on March 19, 2001. The
judge has scheduled this case for trial beginning on January 22, 2002.
Due to the nature of litigation generally, we cannot ascertain the outcome of
the final resolution of this lawsuit. This litigation could be time consuming
and costly, and we will not necessarily prevail given the inherent uncertainties
of litigation. We believe that it is unlikely this litigation will have a
material adverse effect on our financial position or results of operations and,
accordingly, have not accrued any amounts in the financial statements related to
this lawsuit. We are vigorously litigating, and intend to continue to vigorously
litigate, our claims against Smart Link.
On August 25, 2000, Smart Link Ltd. filed a complaint against us in the United
States District Court, District of Massachusetts, alleging that we infringe two
of Smart Link Ltd.'s patents.
On October 11, 2000, we answered Smart Link Ltd.'s complaint and
counterclaimed against Smart Link Ltd. and Smart Link Technologies, Inc. Our
answer denies Smart Link Ltd.'s allegations of infringement. Our counterclaims
seek declaratory relief that the asserted Smart Link patents are invalid and not
infringed. Our counterclaim also alleges that Smart Link infringes one of our
patents.
The parties are to exchange initial disclosures and a case management
conference was held on March 23, 2001.
Due to the nature of litigation generally, we cannot ascertain the outcome of
the final resolution of this lawsuit, the availability of injunctive relief or
other equitable remedies, or estimate the total expenses, possible damages or
settlement value, if any, that we may ultimately incur in connection with this
lawsuit. This litigation could be time consuming and costly, and we will not
necessarily prevail given the inherent uncertainties of litigation. We believe
that it is unlikely this litigation will have a material adverse effect on our
financial position or results of operations
19
and, accordingly, have not accrued any amounts in the financial statements
related to this claim. We are vigorously contesting, and intend to continue to
vigorously contest, all of Smart Link's claims.
On September 15, 2000, we filed a complaint Underunder Section 337 of the Tariff Act
of 1930, as Amendedamended, with the United States International Trade Commission
("ITC"). Our complaint requested that the ITC commence an investigation into
whether Smart Link and ESS are engaged in unfair trade practices by selling for
importation into the United States, directly or indirectly importing into the
United States, or selling in the United States after importation devices which
infringe our patents.
Four of our patents were asserted against Smart Link and
two of those four patents were asserted against ESS. A supplemental complaint
was filedentered into a settlement agreement with us on October 3, 2000. On February 5, 2001, we filed a motion to reduce
the number of patents asserted againstMay 17, 2001. The
settlement requires Smart Link from four patents to three
patents. This motion was granted February 16, 2001.
On October 11, 2000,make royalty payments to us based on the ITC voted to institute an investigation into our
complaint. On October 18, 2000, notice ofterms
under the ITC investigation was published
in the Federal Register. Smart Link and ESS filed their responses to our
complaint and the notice of investigation on November 13, 2000 and October 31,
2000, respectively. Discovery is currently underway. By order of the
administrative law judge, the ITC investigation is to be completed by December
18, 2001.
Due to the nature of litigation generally, we cannot ascertain the outcome of
the final resolution of this lawsuit. This litigation could be time consuming
and costly, and we willsettlement agreement. The settlement did not necessarily prevail given the inherent uncertainties
of litigation. We believe that it is unlikely this litigation will have a material adverse effect on
our financial position or operating results.
The hearing in this investigation against ESS took place from July 17, 2001
to July 27, 2001. In October 2001, the administrative law judge issued an
initial determination, which found that ESS infringes one of our key patents.
We entered into a settlement agreement and cross-license with ESS on
February 5, 2002, which settled this litigation matter and the litigation matter
between ESS and us pending in the United States District Court described above.
The settlement required ESS to make an initial license payment of $2.0 million
and future royalty payments to us based on the terms under the settlement
agreement. On February 22, 2002, ESS and us jointly filed a motion for
termination on the basis of the settlement agreement and on March 13, 2002, the
ITC granted the motion for termination.
Based on the settlements discussed above in the quarter ending March 31,
2002 and the settlement record within the modem industry, management has
re-evaluated its best estimate of accrued royalties, within a range of possible
settlement losses. We have concluded that these settlements do not have a
significant impact on our results of operations and,
accordingly, have not accrued any amounts in the financial statements related to
this lawsuit. We are vigorously litigating, and intend to continue to vigorously
litigate, our claims against Smart Link and ESS.operations.
We are subject to various other claims which arise in the normal course of
business. In the opinion of management, the ultimate disposition of these claims
will not have a material adverse effect on our financial position, liquidity or
results of operations.
20
ItemITEM 4: Submission of Matters to a Vote of Security Holders
================================================================================SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No stockholder votes took place during the fourth quarter of the year ended
December 31, 2000.
212001.
7
PartPART II
ItemITEM 5: Market for Registrant's Common Equity and Related Stockholder Matters
================================================================================
Price Range of Common StockMARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under the
symbol PCTI since our initial public offering on October 19, 1999. The following
table shows the high and low sale prices of our common stock as reported by the
Nasdaq National Market for the periods indicated.
High Low
Fiscal 2000: --------- --------
Fourth Quarter $ 22.63 $ 8.88
Third Quarter $ 36.50 $ 22.94
Second Quarter $ 62.50 $ 25.06
First Quarter $ 95.88 $ 44.19
Fiscal 1999:
Fourth Quarter (from October 19, 1999) $ 52.50 $ 23.13
HIGH LOW
------ ------
FISCAL 2001:
Fourth Quarter............................................ $10.46 $ 6.66
Third Quarter............................................. $ 8.86 $ 6.74
Second Quarter............................................ $10.70 $ 6.50
First Quarter............................................. $12.19 $ 7.00
FISCAL 2000:
Fourth Quarter............................................ $22.63 $ 8.88
Third Quarter............................................. $36.50 $22.94
Second Quarter............................................ $62.50 $25.06
First Quarter............................................. $95.88 $44.19
The closing sale price of our common stock as reported on the Nasdaq
National Market on December 29, 2000,31, 2001, the last trading day of fiscal year 2000,2001,
was $10.75$9.71 per share. As of that date there were 13388 holders of record of our
common stock.
DividendsDIVIDENDS
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all of our earnings, if any, for use in our business
and do not anticipate paying any cash dividends in the foreseeable future. The
payment of any future dividends will be at the discretion of our Board of
Directors and will depend upon a number of factors, including future earnings,
the success of our business activities, regulatory capital requirements, the
general financial condition and our future prospects, general business
conditions and such other factors as the Board of Directors may deem relevant.
22
ItemITEM 6: Selected Financial Data
================================================================================SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," our Consolidated Financial Statements and related
notes and other financial information appearing elsewhere in this Form 10-K. The
statement of operations data for the years ended December 31, 2001, 2000 1999 and
19981999 and the balance sheet data as of December 31, 20002001 and 19992000 are derived
from audited financial statements included elsewhere in this Form 10-K. The
statement of operationoperations data for the years ended December 31, 19971998 and 19961997 and
the balance sheet data as of December 31, 1999, 1998 1997 and 19961997 are derived from
audited financial statements not included in this Form 10-K. For the year ended
December 31, 2001, operating results include the $10.9 million provision for
inventory losses, the $3.8 million restructuring charges and the $16.8 million
impairment of goodwill and intangible assets related to our acquisitions of
Communications Systems Division ("CSD"), Voyager Technologies, Inc. ("Voyager")
and BlueCom Technology Corp. ("BlueCom"). The operating results for the year
ended December 31, 2000 include the $1.6 million write-off of in-process
research and development costs related to our acquisition of Voyager Technologies, Inc.Voyager. For the
year ended December 31, 1998, operating results include the $6.1 million
write-off of in-process research and development costs related to our
8
acquisition of Communications Systems Division.CSD. The operating results for the year ended December 31, 1999
include an extraordinary loss of $1.6 million related to the early
extinguishment of debt.
Year Ended DecemberYEARS ENDED DECEMBER 31,
=============================================================------------------------------------------------
2001 2000 1999 1998 1997
-------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998 1997 1996
-------------------------------------------------------------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
RevenuesCONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................... $ 40,971 $97,183 $76,293 $33,004 $24,009
$16,573
Cost of revenuesrevenues............................ 27,899 53,940 39,428 13,878 12,924
9,182
-------Inventory losses............................ 10,920 -- -- -- --
-------- ------- ------- ------- -------
Gross profitprofit................................ 2,152 43,243 36,865 19,126 11,085
7,391
--------------- ------- ------- ------- -------
Operating expenses:
Research and developmentdevelopment.................. 11,554 14,130 10,317 4,932 3,348
2,152
Sales and marketingmarketing....................... 10,926 14,293 10,523 5,624 3,168
839
General and administrativeadministrative................ 14,023 8,058 5,459 2,169 1,612
477
Acquired in-process research and
developmentdevelopment............................ -- 1,600 --- 6,130 - -
Goodwill amortization--
Amortization of goodwill and intangible
assets................................. 3,068 2,638 - - - --- -- --
Impairment of goodwill and intangible
assets................................. 16,775 -- -- -- --
Restructuring charges..................... 3,787 -- -- -- --
Amortization of deferred compensationstock
compensation........................... 1,081 1,308 790 43 - 41
---------
-------- ------- ------- ------- -------
Total operating expensesexpenses.......... 61,214 42,027 27,089 18,898 8,128
3,509
--------------- ------- ------- ------- -------
Income (loss) from operationsoperations............... (59,062) 1,216 9,776 228 2,957
3,882
Other income, netnet........................... 6,154 7,288 271 479 299
127
--------------- ------- ------- ------- -------
Income (loss) before provision for income
taxestaxes..................................... (52,908) 8,504 10,047 707 3,256
4,009
Provision for income taxestaxes.................. 5,311 2,366 3,014 212 955
1,005
--------------- ------- ------- ------- -------
Net income (loss) before extraordinary
lossloss...................................... (58,219) 6,138 7,033 495 2,301 3,004
Extraordinary loss, net of income taxes -taxes..... -- -- (1,611) - - -
--------- --
-------- ------- ------- ------- -------
Net income (loss)........................... $(58,219) $ 6,138 $ 5,422 $ 495 $ 2,301
$ 3,004======== ======= ======= ======= ====== =======
Basic earnings (loss) per share before
extraordinary lossloss........................ $ (3.02) $ 0.34 $ 1.33 $ 0.21 $ 1.13
$ 4.79
Basic earnings (loss) per share after
extraordinary lossloss........................ $ --- $ -- $ 1.03 $ --- $ - $ ---
Shares used in computing basic earnings
(loss) per shareshare.......................... 19,275 18,011 5,287 2,355 2,032
627
Diluted earnings (loss) per share before
extraordinary lossloss........................ $ (3.02) $ 0.30 $ 0.48 $ 0.04 $ 0.20
$ 0.29
Diluted earnings (loss) per share after
extraordinary lossloss........................ $ --- $ -- $ 0.37 $ --- $ - $ ---
Shares used in computing diluted earnings
(loss) per shareshare.......................... 19,275 20,514 14,666 12,325 11,645 10,280
239
DecemberDECEMBER 31,
-------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- ------- -------
(IN THOUSANDS)
2000 1999 1998 1997 1996
-----------------------------------------------------------
(in thousands)
Consolidated Balance Sheet Data:CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investmentsinvestments............................. $125,628 $118,380 $ 98,290 $12,988 $ 6,685
$ 5,585
Working capitalcapital........................... 104,521 130,911 89,892 14,011 12,840
6,236
Total assetsassets.............................. 140,183 192,956 130,605 45,996 23,148 14,110
Long term debt, net of current portion - -portion.... -- -- -- 14,709 38
5
Total stockholders' equityequity................ 107,761 159,847 104,278 15,139 13,610 6,689
24
ItemITEM 7: Management's Discussion and Analysis of Financial Condition and
results of Operations
================================================================================MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion in conjunction with our
Consolidated Financial Statements and related notes appearing elsewhere in this
Form 10-K. Except for historical information, the following discussion contains
forward looking statements that involve risks and uncertainties, including
statements regarding our anticipated revenues, profits, costs and expenses and
revenue mix. These forward looking statements include, among others, those
statements including the words, "may," "will," "plans," "seeks," "expects,"
"anticipates," "intends," "believes" and words of similar import, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. You should not place undue reliance on these
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including the risks faced by us described below and elsewhere in this Form 10-K,
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 "Business" and
elsewhere in this Form 10-K.
OverviewOVERVIEW
We provide cost-effective software-based communications solutions that
address high-speed Internet connectivity requirements for existing and emerging
technologies. Our communications products enable Internet access through PCs and
alternative Internet access devices. Our soft modem products consist of a
hardware chipset containing a proprietary host signal processing software
architecture which allows for the utilization of the computational and
processing resources of a host central processor, effectively replacing
special-
purposespecial-purpose hardware required in conventional hardware-based modems.
Together, the combination of the chipset and software drivers are a component
part within a computer which allows for telecommunications connectivity. By
replacing hardware with a software solution, our host signal processing
technology lowers costs while enhancing capabilities.
From our inception in February 1994 through the end of 1995, we were a
development stage company primarily engaged in product development, product
testing and the establishment of strategic relationships with customers and
suppliers. From December 31, 1995 to December 31, 2000, our total headcount
increased from 18 to 198. In 2001, we reduced our headcount by 90 through
reductions in force. As of December 31, 2001, our total headcount was 112. We
first recognized revenue on product sales in the fourth quarter of 1995, and
became profitable in 1996, our first full year of product shipments. Revenues
increased from $24.0 million in 1997 to $33.0 million in 1998, $76.3 million in
1999 and $97.2 million in 2000. Since the fourth quarter of 2000, our customers,
primarily our PC motherboard and distribution manufacturers, were impacted by
significantly lower PC demand. As a result, our revenues decreased to $41.0
million in 2001. Because we expect PC demand to continue to be weak for the
foreseeable term, we expect our revenues and earnings to continue to be
negatively affected.
We sell soft modems to manufacturers and distributors principally in Asia
through our sales personnel, independent sales representatives and distributors.
Our sales to manufacturers and distributors in Asia were 91%, 99%91% and 76%99% of our
total sales for the years ended 2001, 2000 1999 and 1998,1999, respectively. The
predominance of our sales is in Asia because our customers are primarily
motherboard and modem manufacturers, and the
10
majority of these manufacturers are located in Asia. In many cases, our indirect
original equipment manufacturer customers specify that our products be included
on the modem boards or motherboards that they purchase from the board
manufacturers, and we sell our products directly to the board manufacturers for
resale to our indirect original equipment manufacturer customers, both in the
United States and internationally.
Industry statistics indicateCRITICAL ACCOUNTING POLICIES
Our significant accounting policies are more fully described in Note 1 to
the consolidated financial statements included in this Form 10-K. The
preparation of our consolidated financial statements in accordance with
generally accepted accounting principles require us to make estimates and
judgments that approximately two-thirdsaffect the reported amounts of modems
manufacturedassets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the period
reported. By their nature, these estimates and judgments are subject to an
inherent degree of uncertainty. Management bases its estimates and judgments on
historical experience, market trends, and other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. Management believes the
following critical accounting policies affect its more significant judgments and
estimates used in Asia are sold in North America.
We recognize revenuesthe preparation of its consolidated financial statements.
REVENUE RECOGNITION
Revenues consist primarily of sales of products to OEMs and distributors.
Revenues from product sales to customers are recognized upon shipment except
sales to distributors which are recognized only when distributors have sold the
producttitle and
risk of loss passes to the end-user.customers, unless we have future obligations or have
to obtain customer acceptance, in which case revenue is not recorded until such
obligations have been satisfied or customer acceptance has been achieved. We
provide for estimated sales returns and price rebate
allowancescustomer rebates related to sales to
OEMs at the time of shipment. Customer rebates are recorded against receivables
to the extent that the gross amount has not been collected by the end customer.
Once the gross amount has been collected, the accrued customer rebate is then
reclassified to liabilities. As of December 31, 2001 and 2000, we have an
allowance for customer rebates against accounts receivable of $200,000 and $6.8
million, respectively, and accrued customer rebates of $2.1 million and $0,
respectively, presented as current liabilities on the balance sheet. Accrued
customer rebates will be paid to the customers, upon request, in the future
unless they are forfeited by the customer. Revenues from sales to distributors
are made under agreements allowing price protection and rights of return on
unsold products. We recognizerecord 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 non-recurringengineering contracts. Revenues from
engineering contracts are recognized as contract milestones and customer
acceptance are achieved. RevenuesRoyalty revenue is recognized when confirmation of
royalties due to us is received from licensees. Furthermore, revenues from
technology licenses are recognized after delivery has occurred and the amount is
fixed and determinable, generally based upon the contract's nonrefundable
payment terms. To the extent there are extended payment terms on these
contracts, revenue is recognized as the payments become due and the cancellation
privilege lapses. To date, we have not offered post-contract customer support.
Customer payment terms generally rangeINVENTORY RESERVES
Due to the changing market conditions, recent economic downturn and
technological innovation, inventory valuation charges of $10.9 million were
recorded in the second half of 2001. Given the volatility of the market, the age
of the inventories on hand and the introduction of new products in 2002, we
wrote down excess inventories to net realizable value based on forecasted demand
and the firm purchase order commitments from lettersour major suppliers. Of the $10.9
million inventory valuation charges recorded, $2.3 million is related to firm
purchase order commitments and the remaining $8.6 million is related to excess
inventories on hand or disposed. Actual demand may differ from forecasted demand
and such difference may have a material effect on our financial position and
results of credit
collectible upon shipmentoperations. In addition to open accounts payable 60 days after shipment.
25the reserve for excess
11
Resultsinventory, we also provide for an allowance against obsolete inventory. As of Operations
Years ended
December 31, 2000, 19992001, there is an allowance for inventory obsolescence of $1.4
million.
ACCRUED ROYALTIES
We record an accrual for estimated future royalty payments for relevant
technology of others used in our product offerings in accordance with SFAS No.
5, "Accounting for Contingencies." The estimated royalties accrual reflects
management's broader litigation and 1998
(All amountscost 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 tables, other than percentages,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 thousands)negotiation and unasserted but probable
claims of others using advice from third party technology advisors and
historical settlement rates.
As of December 31, 2001 and 2000, we had accrued royalties of approximately
$12.3 million and $11.7 million, respectively. However, the amounts accrued may
be inadequate and we will be required to take an immediate charge if royalty
payments are settled at a higher rate than expected, or if we do not prevail in
the litigation. In addition, settlement arrangements may require royalties for
both past and future sales of the associated products. If this is the case, in
addition to an immediate charge if our accrual is inadequate, our gross margins
will decrease on these future product sales. As a result of the litigation
settlement with Townshend, we made a cash royalty payment of $14.3 million
related to past liability and prepayment of future liabilities to Townshend in
March 2002. See discussion under "Contingencies" in Note 11 for the impact of
settlement on our financial position and results of operations.
INCOME TAXES
We currently operate with subsidiaries in the Cayman Islands and Japan as
well as branch offices in Taiwan, Korea and France. The complexities brought on
by operating in several different tax jurisdictions inevitably lead to an
increased exposure to worldwide tax challenges. Should the tax authorities
challenge us and the tax challenges result in unfavorable outcomes, our
operating results and financial position could be materially and adversely
affected.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(ALL AMOUNTS IN TABLES, OTHER THAN PERCENTAGES, ARE IN THOUSANDS)
REVENUES
Revenues
- -----------------------------------------------------------------------------------------------------2001 2000 1999
------- ------- -------
2000 1999 1998
--------- -------- --------
Revenues..............................................................Revenues................................................ $40,971 $97,183 $76,293 $33,004
% change from prior period............................................period.............................. (57.8)% 27.4% 131.2% 37.5%
- ------------------------------------------------------------------------------------------------------
Our revenues primarily consist of product sales of soft modems to board
manufacturers and distributors in Asia. Revenues decreased $56.2 million for the
year ended December 31, 2001 from 2000. The revenue decrease was primarily
attributable to 53% less unit shipments as a result of an abnormally poor PC
market due to poor economic conditions. Additionally, the decrease in sales
revenues was due to downward pressure on average selling prices commonly seen in
the industry. Our average selling prices decreased 9% from 2000 to 2001, mainly
due to the downward pricing pressure which is commonly seen in the industry.
Because we expect PC demand to continue to be weak for the foreseeable term, we
expect our revenues to continue to be negatively affected in 2002.
12
Revenues increased $20.9 million for the year ended December 31, 2000
compared to the same period in 1999. These increases were attributable to
increased units sold to tier-one OEMs such as Compaq Corporation, Intel
Corporation, Fujitsu Limited and NEC Corporation, and to a lesser extent,
increased license revenues recognized during fiscal year 2000. The increase in
sales volume was partly offset by downward pressure on average selling prices
and sales discounts to customers.
Our average selling
prices decreased from December 31, 1999 to December 31, 2000, mainly due to the
downward pricing pressure which is commonly seen in the industry. However, we
believe this decrease in selling prices has generated the increase in sales
volume.
Revenues increased $43.3 million for 1999 compared to 1998. The revenue
increase was attributable to unit growth following the implementation of a new
sales channel partners program and to the general acceptance of our products in
the sub-$1,000 PC marketplace. The increase in sales volume was partly offset by
downward pressure on average selling prices and sales discounts to customers.
Our average selling prices decreased 42% from 1998 to 1999, mainly due to the
elimination of one out of three chips in the hardware component of the
MicroModem product. We believe that this 33% hardware reduction combined with
the downward pricing pressure commonly seen in the industry resulted in the
decreases in the average selling price of our MicroModem product. However, we
believe this decrease has generated the increase in our market share.GROSS PROFIT
Gross Profit
- ------------------------------------------------------------------------------------------------------2001 2000 1999
1998
-------- -------------- ------- -------
Gross profit..........................................................profit............................................. $2,152 $43,243 $36,865
$19,126
Percentage of revenues................................................revenues................................... 5.3% 44.5% 48.3% 58.0%
% change from prior period............................................period............................... (95.0)% 17.3% 92.7% 72.5%
- ------------------------------------------------------------------------------------------------------
Cost of revenues consists primarily of chipsets we purchase from third
party manufacturers and also includes amortization of intangibles related to the
Communications Systems Division ("CSD")CSD acquisition, accrued intellectual property royalties, cost of operations,
provision for inventory obsolescence and distribution costs. Provision for
inventory losses are also included in the determination of gross profit.
Gross profit decreased $41.1 million for the year ended December 31, 2001
compared to the same period last year primarily due to decreased sales revenues
and the provision for inventory losses of $10.9 million recorded in the second
half of 2001. Gross margin as a percentage of revenue decreased from 44.5% for
the year ended December 31, 2000 to 5.3% for the year ended December 31, 2001
because of the provision for inventory losses and because average selling prices
decreased faster than the rate of cost reduction. In addition, the fixed portion
of our costs as a percentage of revenue increased due to the decrease in
revenues. We expect the gross profit and gross margin as a percentage of revenue
in 2002 to be higher than 2001 as we do not expect to record additional
provision for inventory losses in 2002 and licensing/royalty revenue as a
percentage of revenues will be higher in 2002 as a result of the ESS litigation
settlement, offset by the continuing pressure for price decreases.
Gross profit increased $6.4 million for the year ended December 31, 2000
compared to the same period last year1999 due to increased volume, partially offset by a decline in the
per-unit average gross profit. Gross profit as a percentage of revenue decreased
from 48.3% for the year ended December 31, 1999 to 44.5% for the year ended
December 31, 2000 because of a shift to higher volume, lower margin sales to
OEMs and, generally, average selling prices decreased faster than the rate of
cost reductions. On the other hand, higher-margin license revenues favorably
impacted gross margins during the year, partially offsetting the decrease from
average selling prices.
Gross profit increased $17.7 million for 1999 compared to 1998. The increase
in gross profit was the direct result of increased revenues, inventory cost
reduction and economies of scale. Gross profit as a percentage of revenue
decreased from 58.0% for the year ended December 31, 1998 to 48.3% for the year
ended December 31, 1999 as a result of a reversal of royalty reserves of $3.0
million. Excluding this reversal, gross profit would have been 48.9% in 1998.
Upon consummation of the CSD acquisition in December 1998, we reversed $3.0
million of previously recorded accrued royalties because CSD had licensing
agreements with payment terms more favorable than management's previous
estimates of the cost of obtaining such licensing rights through our own
negotiations. Additionally, we believed that future settlements with other
third parties were more likely after the CSD acquisition to include cross
licensing of our intellectual property rather than payments of license fees or
royalties, thus reducing the estimated amount of accrued royalty liability.
Nonrecurring engineering and licensing revenues, which are characterized by high
gross margins, were a reduced percentage of total sales in 1999 compared to
1998. This reduction adversely impacted our profit margins.
26
RESEARCH AND DEVELOPMENT
Research and Development
- ------------------------------------------------------------------------------------------------------2001 2000 1999
1998
-------- ------- --------------- -------
Research and development..............................................development................................ $11,554 $14,130 $10,317
$4,932
Percentage of revenues................................................revenues.................................. 28.2% 14.5% 13.5% 14.9%
% change from prior period............................................period.............................. (18.2)% 37.0% 109.2% 47.3%
- -----------------------------------------------------------------------------------------------------
Research and development expenses include compensation 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 $2.6 million for the year ended
December 31, 2001 compared to 2000 as a result of the completion of certain
projects and the reduction in headcount gradually through the year. As a
percentage of revenues, research and development increased for the year ended
December 31, 2001 because of lower revenues in 2001. Research and development
headcount decreased from 76 to 47 from December 31, 2000 to December 31, 2001.
We expect research and development expenses, as a percentage of revenues, to be
lower in 2002 because of lower average headcount. However, in the event that
13
we decide to pursue new research and development opportunities, research and
development expenses may increase in 2002.
Research and development expenses increased $3.8 million for the year ended
December 31, 2000 compared to 1999 as we continuecontinued to invest heavily in the
development of the G.DMT, wireless and embedded modems, as well as a V.92
upgrade.
Approximately 68% of research and development expenses for the year
ended December 31, 2000 were payroll related. As a percentage of revenues, we
expect that our research and development expenses will remain at the same level
in 2001 as we continue to develop new products.
Research and development expenses increased $5.4 million for 1999 compared to
1998 due to the addition of personnel to develop new products related to the
G.Lite, Modem Riser card and HIDRA projects as well as engineering work related
to V.90 modems. HIDRA is one of our product names and is also an acronym for
High Density Remote Access. As a percentage of revenues, research and
development expenses decreased in 1999 because revenue growth was proportionally
greater than the increase in research and development expenses. Approximately
68% of research and development expenses for the year ended December 31, 1999
were payroll related.SALES AND MARKETING
Sales and Marketing
- ------------------------------------------------------------------------------------------------------2001 2000 1999
1998
-------- ------- --------------- -------
Sales and marketing...................................................marketing..................................... $10,926 $14,293 $10,523
$5,624
Percentage of revenues................................................revenues.................................. 26.7% 14.7% 13.8% 17.0%
% change from prior period............................................period.............................. (23.6)% 35.8% 87.1% 77.5%
- -----------------------------------------------------------------------------------------------------
Sales and marketing expenses consist primarily of personnel costs, sales
commissions and marketing costs. Sales commissions payable to our distributors
are recognized when our products are "sold through" from the distributors to
end-users so that the commission expense is matched with related recognition of
revenues. Marketing costs include promotional goods,costs, public relations and trade
shows.
Sales and marketing expenses decreased $3.4 million for the year ended
December 31, 2001 compared to 2000. The decrease in spending reflects the
reduction of sales and marketing personnel as a result of lower revenues and the
reduction in force in 2001. Sales and marketing headcount decreased from 75 to
34 from December 31, 2000 to December 31, 2001. We expect sales and marketing
expenses, as a percentage of revenues, to be lower in 2002 because of lower
average headcount.
Sales and marketing expenses increased $3.8 million for the year ended
December 31, 2000 compared to 1999. The increase reflects the increased costs to
support higher sales and the addition of sales and marketing personnel to
develop new accounts and drive new product development and product launches.
Public relation costs, trade shows, press tours, sales programs, the production
of collateral sales materials and travel costs also increased from a year ago.
As a percentage of revenues, we expect that our sales and marketing expenses
will remain at the same level in 2001.
Sales and marketing expenses increased $4.9 million for 1999 compared to 1998.
The increase reflects the addition of sales and marketing personnel to develop
new accounts, support customers, and to drive new product development and
product launches. We also expanded our sales regions geographically to include
Japan and Korea. The production of collateral sales materials, travel costs,
trade shows, sales programs and press tours also resulted in the increase in our
sales and marketing expenses. In addition, we implemented a new sales force
automation system in the third quarter of 1999 to more efficiently manage our
increased sales volume.1999.
GENERAL AND ADMINISTRATIVE
General and Administrative
- ----------------------------------------------------------------------------------------------------2001 2000 1999
1998
-------- ------- ------ ------
General and administrative............................................administrative................................ $14,023 $8,058 $5,459
$2,169
Percentage of revenues................................................revenues.................................... 34.2% 8.3% 7.2% 6.6%
% change from prior period............................................period................................ 74.0% 47.6% 151.6% 34.6%
- ---------------------------------------------------------------------------------------------------
General and administrative expenses include costs associated with our
general management and finance functions as well as professional service
charges, such as legal, tax and accounting fees. Other general expenses 27
include
rent, insurance, utilities, travel and other operating expenses to the extent
not otherwise allocated to other functions.
General and administrative expenses increased $6.0 million for the year
ended December 31, 2001 compared to 2000. The increase was primarily due to the
increased legal costs associated with the patent infringement litigation against
Smart Link, ESS and Townshend. We expect that our general and administrative
expenses will be significantly lower in 2002 as a result of reaching a
settlement with Smart Link in 2001 and ESS and Townshend in early 2002. However,
should any new litigation arise in 2002, our legal costs and general and
administrative expenses could significantly increase.
General and administrative expenses increased $2.6 million for the year
ended December 31, 2000 compared to 1999. The increase was primarily due to our
increase in staffing and related infrastructure to support our continued growth and the increased
legal costs associated with the patent infringement litigation against Smart
Link and ESS.
We expect that our general and administrative
expenses will continue to increase in 2001 as a result of the patent
infringement litigation.
General and administrative expenses increased $3.3 million for 1999 compared
to 1998. This increase reflected additional legal costs related to an increased
number of contract negotiations and patent submissions, additional tax planning,
and litigation expenses related to the Motorola lawsuit. We also incurred
additional expenses related to an increase in personnel.14
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
Acquired In-Process Research and Development
- ----------------------------------------------------------------------------------------------------2001 2000 1999
1998
-------- ----------- ------ ----
Acquired in-process research and development..........................development................ $-- $1,600 $ -- $6,130$--
Percentage of revenues................................................revenues...................................... -- 1.6% -- 18.6%
- ----------------------------------------------------------------------------------------------------
Upon completion of the Voyager acquisition on February 24, 2000, we
immediately expensed $1.6 million representing purchased in-process technology
that had not yet reached technological feasibility and had no alternative future
use. The $1.6 million expensed as in-process research and development was
approximately 9% of the purchase price and was attributed and supported by a
discounted cash flow analysis that identified revenues and costs on a project by
project basis. The value assigned to purchased in-process technology, based on a
percentage of completion discounted cash flow method, was determined by
identifying research projects in areas for which technological feasibility has
not been established. The following in-process projects existed at Voyager as of
the acquisition date: Bluetooth, HomeRF, Direct Sequence Cordless,
Bluetooth/HomeRF Combo, Bluetooth/HomeRF/Direct Sequence, Wireless Gas Tank
Sensor, Wireless GPS and Wireless Industrial Garage Door Opener projects.
The value of in-process research and development was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from such
projects and discounting the net cash flows back to their present value. The
discount rate includes a risk adjusted discount rate to take into account the
uncertainty surrounding the successful development of the purchased in-process
technology. The risk-adjusted discount rate applied to the projects' cash flows
was 15% for existing technology and 20% for the in-process technology. Based
upon assessment of each in-process project's development stage, including
relative difficulty of remaining development milestones, it was determined that
application of a 20% discount rate was appropriate for all acquired in-process
projects. The valuation includes cash inflows from in-process technology through
2005 with revenues commencing in 2000 and increasing significantly in 2001
before declining in 2005. The projected total revenue of Voyager was broken down
to revenue attributable to the in-process technologies, existing technologies,
core technology and future technology. The revenue attributable to core
technology was determined based on the extent to which the in-process
technologies rely on the already developed intellectual property. The Bluetooth
and HomeRF projects were approximately 25% complete at the time of the valuation
and the expected timeframe for achieving these product releases was assumed to
be in the second half of 2000. The Direct Sequence Cordless project was
approximately 65% complete at the time of the valuation and the expected time
frame for achieving this product release was assumed to be in the second half of
2000. The Bluetooth/HomeRF Combo and Bluetooth/HomeRF/Direct Sequence projects
were approximately 10% complete at the time of the valuation and the expected
timeframe for achieving these product releases was assumed to be in the second
half of 2000 and the first half of 2000, respectively. The Wireless Gas Tank
Sensor and the Wireless Industrial Garage Door Opener projects were
approximately 70% complete at the time of the valuation and the expected time
frame for achieving these product releases was assumed to be 2001. The Wireless
GPS was approximately 50% complete at the time of the valuation and the expected
time frame for achieving this product release was assumed to be in the second
half of 2000. The percentage complete calculations for all projects were
estimated based on research and development expenses incurred to date and
management estimates of remaining development costs. Significant remaining
development efforts were to be completed in the next 6 to 18 months in order for
Voyager's projects to become implemented in a commercially viable timeframe.
Management's cash flow 28
and other assumptions utilized at the time of acquisition
dodid not materially differ from historical pricing/licensing, margin, and expense
levels of the Voyager group prior to acquisition.
Approximately $0.5 million was attributed to core wireless technology and
royalty revenue associated with the Wireless Water Meter Reading Device project.
15
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS
2001 2000 1999
------ ------ ----
Amortization of Deferred Compensation
- ----------------------------------------------------------------------------------------------------goodwill and intangible assets.............. $3,068 $2,638 $--
Percentage of revenues...................................... 7.5% 2.7% --
On December 14, 2000, we completed the acquisition of BlueCom. The purchase
price of BlueCom was allocated based upon the estimated fair value of the assets
acquired and liabilities assumed, which approximated book value. The acquisition
was accounted for under the purchase method of accounting. Under this method, if
the purchase price exceeds the net tangible assets acquired, the difference is
recorded as excess purchase price. In this circumstance, the difference was $1.8
million which was attributed to goodwill ($1,124,000) and a covenant not to
compete ($656,000). We classified this balance of $1.8 million as goodwill and
other intangible assets, net, in the accompanying consolidated balance sheets
and were amortizing it over useful lives of two to five years prior to the
impairment recorded in the quarter ended December 31, 2001 (see below).
On February 24, 2000, we completed the acquisition of Voyager. The purchase
price of Voyager was allocated based upon the estimated fair value of the assets
acquired and liabilities assumed, which approximated book value. The acquisition
was structured as a tax-free reorganization and was accounted for under the
purchase method of accounting. Under this method, if the purchase price exceeds
the net tangible assets acquired, the difference is recorded as excess purchase
price. In this circumstance, the difference was $17.8 million. We attributed
$1.6 million of the excess purchase price to in-process research and
development, which we expensed immediately, and the balance of $16.2 million was
attributed to intellectual property ($0.5 million), workforce ($0.3 million) and
goodwill ($15.4 million). We classified this balance of $16.2 million as
goodwill and other intangible assets, net, in the accompanying consolidated
balance sheets and were amortizing it over useful lives of five years prior to
the impairment recorded in the quarter ended September 30, 2001 (see below).
In July 2001, the Financial Accounting Standards Board issued SFAS No.'s
141 and 142, "Business Combinations" and "Goodwill and Other Intangibles". SFAS
No. 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under SFAS No. 142, goodwill and
intangible assets with indefinite lives are not amortized but are subject to at
least an annual assessment for impairment applying a fair-value based test.
Effective January 1, 2002, existing goodwill will no longer be amortized.
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. Upon
adoption of SFAS No. 142 on January 1, 2002, we will no longer amortize
goodwill, thereby eliminating annual goodwill amortization of approximately
$192,000, based on anticipated amortization for 2002.
IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
2001 2000 1999
1998------- ---- ----
Impairment of goodwill and intangible assets................ $16,775 $-- $--
Percentage of revenues...................................... 40.9% -- --
In the second half of 2001, pursuant to SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," we
evaluated the recoverability of the long-lived assets, including intangibles,
acquired from CSD, Voyager and BlueCom, and recorded impairment charges totaling
$16.8 million. Due to the recent economic downturn, we determined that CSD's
estimated future undiscounted cash flows were below the carrying value of CSD's
long-lived assets. Accordingly, during the third quarter of 2001, we adjusted
the carrying value of CSD's long-lived assets, primarily goodwill, to their
estimated fair value of approximately $0.4 million, resulting in an impairment
charge of approximately $4.5 million. The estimated fair value was based on
anticipated future cash flows discounted at a rate commensurate with the risk
involved. In regards to the goodwill and intangible assets acquired from
Voyager, as a result of the recent corporate restructuring and reorganization,
we determined that there are no future
16
cash flows expected from this business. Accordingly, during the third quarter of
2001, we wrote off the carrying value of Voyager's long-lived assets, primarily
goodwill, resulting in an impairment charge of approximately $11.1 million. In
regards to the goodwill and intangible assets acquired from BlueCom, as a result
of the recent corporate restructuring and reorganization, we determined that
there are no future cash flows expected from this business. Accordingly, during
the fourth quarter of 2001, we wrote off the carrying value of BlueCom's
long-lived assets, resulting in an impairment charge of approximately $1.2
million.
RESTRUCTURING CHARGES
2001 2000 1999
------ ---- ----
Restructuring charges....................................... $3,787 $-- $--
Percentage of revenues...................................... 9.2% -- --
On February 8, 2001, we announced a series of actions to streamline support
for our voiceband business and sharpen our focus on emerging growth sectors.
These measures were part of a restructuring program to return the company to
profitability and operational effectiveness and included a reduction in
worldwide headcount 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 greater focus on our activities with a significantly
reduced workforce. 13 research and development, 12 sales and marketing and 17
general and administrative positions were eliminated as part of this
reorganization. In the fourth quarter of 2001, 7 research and development, 8
sales and marketing and 11 general and administrative positions were eliminated
to further focus our business. In total, 90 positions were eliminated during the
year ended December 31, 2001. The restructuring resulted in $3.8 million of
charges for the year ended December 31, 2001, consisting of severance and
employment related costs of $2.5 million and costs related to closure of excess
facilities of $1.3 million as a result of the reduction in force.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
2001 2000 1999
------ ------ -------- ------- ------
Amortization of deferred compensation.................................stock compensation............... $1,081 $1,308 $ 790
$ 43
Percentage of revenues................................................revenues.................................... 2.6% 1.3% 1.0% 0.1%
% change from prior period............................................period................................ (17.4)% 65.6% 1,737.2% --
- ----------------------------------------------------------------------------------------------------
In connection with the grant of stock options to employees prior to our
initial public offering in 1999, we have recorded deferred stock compensation of $5.4
million representing the difference between the exercise price and deemed fair market
value of our common stock on the date these stock options were issued.granted. Such
amount is presented as a reduction of stockholders' equity and is amortized
ratably over the vesting period of the applicable options. 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 connection with the grant of restricted stock to employees in 2001, we
recorded deferred stock compensation of $1.8 million representing the fair value
of our common stock on the date the restricted stock was granted. Such amount is
presented as a reduction of stockholders' equity and is amortized ratably over
the vesting period of the applicable shares. Subsequent to the issuance of the
restricted stock, employee terminations resulted in the reversal of $859,000
from deferred stock compensation. 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.
The amortization of deferred stock compensation decreased $227,000 for the
year ended December 31, 2001 compared to 2000 primarily due to the termination
of employees in 2001 and the corresponding reversal of the remaining deferred
stock compensation balance, offset by the additional expense related to the
restricted stock grants in 2001. We expect the amortization of deferred stock
compensation to decrease to approximately $170,000 per quarter through 2003,
based on restricted stock grants and stock option grants through December 31,
2001.
17
The amortization of deferred stock compensation increased $518,000 for the
year ended December 31, 2000 compared to 1999 because 2000 reflectsreflected a full year
of amortization whereas 1999 reflectsreflected amortization from the date of grant, which
tended to beand
there were more grants in the second half of 1999.
We expect that the amortization of
deferred compensation to remain at approximately $320,000 per quarter through
the third quarter of 2003.
In December 2000, an employee and usthe Company mutually agreed to rescind an
option exercise to purchase 30,000 shares of common stock which occurred in
January 2000. There was no effect on our financial position or results of
operations for the year ended December 31, 2000 as a result of this rescission.
The amortization of deferred compensation increased $747,000 for 1999 compared
to 1998 primarily due to a higher deemed fair market value of our stock and
additional stock options granted to new employees. The amount of deferred
compensation expense recorded for the grant of stock options to employees in
1999 was $5.4 million, which is being amortized over the vesting periods of the
options.OTHER INCOME, NET
Other Income, Net
- --------------------------------------------------------------------------------------------------2001 2000 1999
1998
------- ------- ------ ------ ----
Other income, net.....................................................net........................................... $6,154 $7,288 $ 271 $ 479$271
Percentage of revenues................................................revenues...................................... 15.0% 7.5% 0.4% 1.4%
- --------------------------------------------------------------------------------------------------
Other income, net, consists of interest income, net of interest expense.
Interest income is expected to fluctuate over time.time, depending on future interest
rates. Other income, net, decreased $1.1 million for the year ended December 31,
2001 compared to 2000 primarily due to the decrease in interest rates in 2001.
Other income, net, increased $7.0 million for the year ended December 31,
2000 compared to 1999 primarily due to interest earned fromon the proceeds from theour
initial public
offering and secondary public offeringofferings and the elimination of interest expense
on the loan used to acquire Communications Systems Division.
Other income, net, decreased $208,000 for 1999 compared to 1998 primarily due
to the interest expense related to the loan used to acquire Communications
Systems Division, offset by interest income generated by cash balances.PROVISION FOR INCOME TAXES
Provision for Income Taxes
- --------------------------------------------------------------------------------------------------2001 2000 1999
1998
------- ------------- ------ ------
Provision for income taxes............................................taxes................................. $5,311 $2,366 $3,014 $ 212
Effective tax rate.................................................... 27.8% 30.0% 30.0%
- -------------------------------------------------------------------------------------------------
ProvisionDuring the third quarter of 2001, we recorded $5.3 million of provision for
income taxes decreasedto 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. After the year endedestablishment of
the valuation allowances, we have $400,000 in remaining net deferred tax assets
as of December 31, 2000
compared to 1999 due to lower taxable income. The effective tax rate decreased
from 30.0% a year ago to 27.8% mainly due to an increase in our business in
foreign jurisdictions with lower tax rates.
Provision for income taxes increased $2.8 million for 1999 compared to 1998
due to higher taxable income, while the effective tax rate remained at
approximately 30.0%.
29
2001.
We havehad $5.7 million in deferred tax assets as of December 31, 2000. We
believe that ourOur
effective tax rate will continue to bewas below the statutory tax rate of 35% due to international
sales and profits through our wholly owned subsidiaries, which are taxed at
rates below the statutory tax rate in the U.S.
Extraordinary Items
- --------------------------------------------------------------------------------------------------
2000 1999 1998
------- ------- ------
Income before extraordinary item...................................... $6,138 $ 7,033 $ 495
Extraordinary loss on extinguishment of debt, net of income taxes of -- (1,611) --
$135................................................................ ------- ------- -----
Net income............................................................ $6,138 $ 5,422 $ 495
- -------------------------------------------------------------------------------------------------
EXTRAORDINARY ITEMS
On October 25, 1999, we retired $15.0 million of notes payable with
proceeds from the initial public offering. In connection with the early
retirement of debt, we incurred a $1.6 million, net of taxes, extraordinary loss
forof prepayment penalties and the write-off of deferred debt charges.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
- -----------------------------------------------------------------------------------------------------2001 2000 1999
1998
------- ------- -------------- -------- --------
Net cash provided by (used in) operating
activities..................activities......................................... $ 4,343 $ (5,215) $ 21,541
$ 2,719
Net cash used inprovided by (used in) investing
activities................................activities......................................... 5,626 (47,236) (56,380) (17,344)
Net cash provided by financing activities............................activities............ 3,027 33,143 66,556 20,928
Cash, cash equivalents and short-term investments at
the end of year.year.................................... 125,628 118,380 98,290 12,988
Working capital at the end of year...................................year................... 104,521 130,911 89,892 14,011
- -----------------------------------------------------------------------------------------------------
For the year ended December 31, 2000,2001, net cash provided by operating
activities was $4.3 million, compared to net cash used in operating activities
wasof $5.2 million, compared to net cash provided by operating activities of $21.5 million for the year ended December 31, 1999.2000. The primary source for the use of cash
inprovided by operating activities for the year ended December 31, 2001 was the
decrease in accounts receivable and inventories. Net cash provided by investing
activities for the year ended December 31, 2001 consisted of maturities and
sales of short-term investments of $82.1 million, offset by
18
purchases of property and equipment of $702,000 and purchases of short-term
investments of $75.8 million. Net cash provided by financing activities for the
year ended December 31, 2001 consisted of proceeds from issuance of common stock
from stock option exercises and shares issued through the employee stock
purchase plan.
As of December 31, 2001, we had $125.6 million in cash, cash equivalents
and short-term investments, and working capital of $104.5 million. Accounts
receivable, as measured in days sales outstanding ("DSO"), was 34 days at
December 31, 2001 compared to 130 days in December 31, 2000. The decrease in DSO
from December 31, 2000 to 2001 was primarily due to lower revenue in 2001 and
the increased cash collection efforts throughout 2001.
The decrease in net cash provided by operating activities for 2000 compared
to 1999 was primarily due to the increase in accounts receivable. Net cash used
in investing activities for the
year ended December 31, 2000 consistsconsisted of the acquisition of Voyager
Technologies and BlueCom Technology of $5.1 million, purchases of property and
equipment of $3.0 million and purchases of short-term investments of $109.6
million, offset by maturities and sales of short-term investments of $70.5$70.6
million. Net cash provided by financing activities for the year ended December 31, 2000 consisted of
proceeds from issuance of common stock associated with the secondary public
offering and proceeds from stock option exercises and shares issued through the
employee stock purchase plan.
As of December 31, 2000, we had $118.4 million in cash, cash equivalents and
short-term investments, and working capital of $130.9 million. Accounts
receivable, as measured in days sales outstanding ("DSO"), was 130 days at
December 31, 2000 compared to 26 days in December 31, 1999. Collection terms on
our sales to tier-one customers are generally 60 days after shipment, which is
standard for our industry. As sales to tier-one customers increase, we expect
DSO to increase as compared to prior periods where sales to smaller customers
with payment terms of 45 days or less were proportionately greater. However,
DSO at December 31, 1999 was abnormally low primarily due to increased cash
collection efforts prior to the year-end holiday period, partially offset by the
increase in sales to tier-one customers.
The increase in net cash provided by operating activities for 1999 compared to
1998 was primarily due to improved collection in accounts receivable due to the
use of letters of credit and higher net income in 1999. Net cash used in
investing activities for 1999 reflected the purchases of short-term investments,
property and equipment. Net cash provided by financing activities for 1999
consisted of proceeds from the initial public offering, offset by the repayment
of the notes payable associated with the Communications Systems Division
acquisition.
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 for the foreseeable future, after the $14.3 million cash royalty
payment to Townshend discussed in Note 11. We will continue to evaluate
opportunities for development of new products and anticipated capital expenditure requirementspotential acquisitions of
technologies or businesses that could complement our business. We may use
available cash or other sources of funding for at
least the next 12 months. Thereafter, wesuch purposes. However, possible
investments in or acquisitions of complementary businesses, products or
technologies, or cash settlements resulting from existing or new litigation, may
require additional fundsus to supportuse our existing working capital requirements or to seek additional financing.
In addition, if the current economic downturn prolongs, we will need to continue
to expend our cash reserves to fund our operations. As of December 31, 2001, we
have outstanding firm inventory purchase order commitments with our major
suppliers of $3.0 million, of which $2.3 million was accrued as inventory
losses, and non-cancelable operating leases for other purposes, and we may seek,
even before that time, to raise additional fundsoffice facilities of $1.8
million through public or private
equity or debt financing or from other sources. Additional financing may not be
available at all, and if it is available, the financing may not be obtainable on
terms acceptable to us or that are not dilutive to our stockholders.
30
Recent Accounting Pronouncements2005.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998,July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No.'s 141 and 142,
"Business Combinations" and "Goodwill and Other Intangible Assets". SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are not amortized but are subject to at least an
annual assessment for impairment applying a fair-value based test. Effective
January 1, 2002, existing goodwill will no longer be amortized. 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. Upon adoption of SFAS No. 142 on
January 1, 2002, we will no longer amortize goodwill, thereby eliminating annual
goodwill amortization of approximately $192,000, based on anticipated
amortization for 2002.
In October 2001, the FASB issued SFAS No. 133144, "Accounting for Derivative Instrumentsthe
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supercedes SFAS No.
121 by requiring that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and Hedging Activities," which requires
certain accountingused or newly acquired and reporting standardsby
broadening the presentation of discontinued operations to include more disposal
transactions. The Statement will be effective for derivative financial instruments
and hedging activities. It applies for the first quarterfiscal years beginning January 1,after
December 15, 2001. Because weWe do not currently hold any derivative instruments and do not
engage in hedging activities, we do not believeexpect that the adoption of SFAS No. 133, as amended,144 will have
a material impact on our financial position or results of operations.
19
FACTORS THAT MAY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND FUTURE OPERATING
RESULTS
This annual report on Form 10-K, including this Management's Discussion and
Analysis, contains forward-looking statements. These forward-looking statements
are subject to substantial risks and uncertainties that could cause our future
business, financial condition or results of operations to differ materially from
our historical results or currently anticipated results, including those set
forth below.
RISKS RELATED TO OUR BUSINESS
THE RECENT ECONOMIC SLOWDOWN, PARTICULARLY THE RAPID DETERIORATION IN PC DEMAND,
MAKES IT DIFFICULT TO FORECAST CUSTOMER DEMAND FOR OUR PRODUCTS, AND WILL LIKELY
RESULT IN EXCESSIVE OPERATING COSTS AND LOSS OF PRODUCT REVENUES.
Since the fourth quarter of 2000, our customers, primarily our PC
motherboard and distribution manufacturers, have been impacted by significantly
lower PC demand. As a result, our revenues and earnings in fiscal year of 2001
were negatively affected. Because we expect PC demand to continue to be weak for
the foreseeable term, we expect our revenues and earnings to continue to be
negatively affected.
In addition, the current economic environment also makes it extremely
difficult for us to forecast customer demand for our products. We must forecast
and place purchase orders for specialized semiconductor chips several months
before we receive purchase orders from our own customers. This forecasting and
order lead time requirement limits our ability to react to unexpected
fluctuations in demand for our products. These fluctuations can be unexpected
and may cause us to have excess inventory or a shortage of a particular product.
During the second half of 2001, due to the changing market conditions, recent
economic downturn and technological innovation, a provision for inventory losses
of $10.9 million was charged against operations. Given the volatility of the
market, the age of the inventories on hand and the introduction of a new
products in 2002, we wrote down inventories to net realizable value based on
forecasted demand and firm purchase order commitments from our major suppliers.
Of the $10.9 million inventory valuation charges recorded, $2.3 million is
related to firm purchase order commitments with our major suppliers and the
remaining $8.6 million is related to excess inventory on hand or disposed.
Actual demand may differ from forecasted demand and such difference may have a
material effect on our financial position or
resultsand result of operations.
In December 1999,OUR SALES ARE CONCENTRATED AMONG A LIMITED NUMBER OF CUSTOMERS AND THE LOSS OF
ONE OR MORE OF THESE CUSTOMERS COULD CAUSE OUR REVENUES TO DECREASE.
Our sales are concentrated among a limited number of customers. If we were
to lose one or more of these customers, or if one or more of these customers
were to delay or reduce purchases of our products, our sales revenues may
decrease. For the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition". In June 2000, the
SEC deferred the adoption date for SAB 101 until our fourth quarteryear ended December 31, 2000. SAB 101 summarizes certain areas2001, approximately 79% of our
revenues were generated by three of our customers, with one customer
representing 47% of revenues, another customer representing 22% and a third
customer representing 10% of revenues. These customers may in the future decide
not to purchase our products at all, purchase fewer products than they did in
the past or alter their purchasing patterns, because:
- we do not have any long-term purchase arrangements or contracts with
these or any of our other customers,
- our product sales to date have been made primarily on a purchase order
basis, which permits our customers to cancel, change or delay product
purchase commitments with little or no notice and without penalty, and
- many of our customers also have pre-existing relationships with current
or potential competitors which may affect our customers' purchasing
decisions.
We expect that a small number of customers will continue to account for a
substantial portion of our revenues for at least the next 12 to 18 months and
that a significant portion of our sales will continue to be
20
made on the basis of purchase orders. Our number of customers may be reduced in
the future through mergers in the PC OEM sector, such as HP and Compaq.
CONTINUING DECREASES IN THE AVERAGE SELLING PRICES OF OUR PRODUCTS COULD RESULT
IN DECREASED REVENUES.
Product sales in the connectivity industry have been characterized by
continuing erosion of average selling prices. Price erosion experienced by any
company can cause revenues and gross margins to decline. The average selling
price of our products has decreased by approximately 9% from fiscal year 2000 to
fiscal year 2001. We believe that the average selling price of our products is
likely to continue to decline in the future due principally to competition
pressure.
In addition, we believe that the widespread adoption of industry standards
in the soft modem industry is likely to further erode average selling prices,
particularly for analog modems. Adoption of industry standards is driven by the
market requirement to have interoperable modems. End-users need this
interoperability to ensure modems from different manufacturers communicate with
each other without problems. Historically, users have deferred purchasing modems
until these industry standards are adopted. However, once these standards are
accepted, it lowers the barriers to entry and price erosion results. Decreasing
average selling prices in our products could result in decreased revenues even
if the number of units that we sell increases. Therefore, we must continue to
develop and introduce next generation products with enhanced functionalities
that can be sold at higher gross margins. Our failure to do this could cause our
revenues and gross margin to decline.
OUR GROSS MARGINS MAY VARY BASED ON THE MIX OF SALES OF OUR PRODUCTS AND
SERVICES, AND THESE VARIATIONS MAY HURT OUR NET INCOME.
We derive a significant portion of our sales from our software-based
connectivity products. We expect 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 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 will
cause our quarterly results to vary and could result in a decrease in gross
margins and net income.
WE HAVE SIGNIFICANT SALES CONCENTRATED IN ASIA. CONTINUED POLITICAL AND ECONOMIC
INSTABILITY IN ASIA AND DIFFICULTY IN COLLECTING ACCOUNTS RECEIVABLE MAY MAKE IT
DIFFICULT FOR US TO MAINTAIN OR INCREASE MARKET DEMAND FOR OUR PRODUCTS.
Our sales to customers located in Asia accounted for 91% of our total
revenues for the year ended December 31, 2001. The predominance of our sales is
in Asia, mostly in Taiwan and China, because our customers are primarily
motherboard or modem manufacturers that are located there. In many cases, our
indirect original equipment manufacturer customers specify that our products be
included on the modem boards or motherboards, the main printed circuit board
containing the central processing unit of a computer system, that they purchase
from board manufacturers, and we sell our products directly to the board
manufacturers for resale to our indirect original equipment manufacturer
customers, both in the United States and internationally. Due to the industry
wide concentration of modem manufacturers in Asia, we believe that a high
percentage of our future sales will continue to be concentrated with Asian
customers. As a result, our future operating results could be uniquely affected
by a variety of factors outside of our control, including:
- delays in collecting accounts receivable, which we have experienced from
time to time,
- fluctuations in the value of Asian currencies relative to the U.S.
dollar, which may make it more costly for us to do business in Asia and
which may in turn make it difficult for us to maintain or increase our
revenues,
21
- changes in tariffs, quotas, import restrictions and other trade barriers
which may make our products more expensive compared to our competitors'
products, and
- political and economic instability.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND SUCCESSFULLY INTRODUCE
NEW AND ENHANCED PRODUCTS THAT MEET THE NEEDS OF OUR CUSTOMERS.
Our revenue depends on our ability to anticipate our customers' needs and
develop products that address those needs. In particular, our success will
depend on our ability to introduce new products for the wireless market.
Introduction of new products and product enhancements will require coordination
of our efforts with those of our suppliers to rapidly achieve volume production.
If we fail to coordinate these efforts, develop product enhancements or
introduce new products that meet the needs of our customers as scheduled, our
revenues may be reduced and our business may be harmed. We cannot assure you
that product introductions will meet the anticipated release schedules.
OUR REVENUES MAY FLUCTUATE EACH QUARTER DUE TO BOTH DOMESTIC AND INTERNATIONAL
SEASONAL TRENDS.
We have experienced and expect to continue to experience seasonality in
sales of our connectivity products. These seasonal trends materially affect our
quarter-to-quarter operating results. Our revenues are typically higher in the
third and fourth quarters due to the back-to-school and holiday as well as
purchasers of PCs making purchase decisions based on their calendar year-end
budgeting requirements.
We are currently expanding our sales in international markets, particularly
in Asia, Europe. To the extent that our revenues in Asia, Europe or other parts
of the Staff's viewsworld increase in applying generally accepted accounting principlesfuture periods, we expect our period-to-period revenues
to revenue recognitionreflect seasonal buying patterns in financial statements.these markets.
ANY DELAYS IN OUR NORMALLY LENGTHY SALES CYCLES COULD RESULT IN CUSTOMERS
CANCELING PURCHASES OF OUR PRODUCTS.
Sales cycles for our products with major customers are lengthy, often
lasting nine months or longer. In addition, it can take an additional nine
months or more before a customer commences volume production of equipment that
incorporates our products. Sales cycles with our major customers are lengthy for
a number of reasons:
- our original equipment manufacturer customers usually complete a lengthy
technical evaluation of our products, over which we have no control,
before placing a purchase order,
- the commercial integration of our products by an original equipment
manufacturer is typically limited during the initial release to evaluate
product performance, and
- the development and commercial introduction of products incorporating new
technologies frequently are delayed.
A significant portion of our operating expenses is relatively fixed and is
based in large part on our forecasts of volume and timing of orders. The lengthy
sales cycles make forecasting the volume and timing of product orders difficult.
In addition, the delays inherent in lengthy sales cycles raise additional risks
of customer decisions to cancel or change product phases. If customer
cancellations or product changes were to occur, this could result in the loss of
anticipated sales without sufficient time for us to reduce our operating
expenses.
WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY RIGHTS WHICH OFFER ONLY LIMITED
PROTECTION AGAINST POTENTIAL INFRINGERS. UNAUTHORIZED USE OF OUR TECHNOLOGY MAY
RESULT IN DEVELOPMENT OF PRODUCTS THAT COMPETE WITH OUR PRODUCTS, WHICH COULD
CAUSE OUR MARKET SHARE AND OUR REVENUES TO BE REDUCED.
Our success is heavily dependent upon our proprietary technology. We adopted SAB 101rely
primarily on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. These means of protecting our proprietary rights may not be
adequate. We have over 80 patents granted or pending addressing both essential
ITU and non-essential technologies. These
22
patents may never be issued. These patents, both issued and pending, may not
provide sufficiently broad protection against third party infringement lawsuits
or they may not prove enforceable in October 2000actions against alleged infringers.
Despite precautions that we take, it may be possible for unauthorized third
parties to copy aspects of our current or future products or to obtain and use
information that we regard as proprietary. We may provide our licensees with
access to our proprietary information underlying our licensed applications.
Additionally, our competitors may independently develop similar or superior
technology. Finally, policing unauthorized use of software is difficult, and
some foreign laws, including those of various countries in Asia, do not protect
our proprietary rights to the same extent as United States laws. Litigation may
be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Litigation could result in substantial costs and
diversion of resources.
WE ARE SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY, WHICH HAS DIVERTED
MANAGEMENT ATTENTION, IS COSTLY TO DEFEND AND COULD PREVENT US FROM USING OR
SELLING THE CHALLENGED TECHNOLOGY.
From time to time, we have been subject to legal proceedings and claims
with respect to such matters as patents, product liabilities and other actions
arising out of the normal course of business.
We have recently settled two significant patent infringement lawsuits, as
described in more detail in Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 11 in this adoption did
not haveForm 10-K. We entered
into a material effectsettlement agreement with ESS on February 5, 2002. The settlement
requires ESS to make an initial license payment of $2.0 million and future
royalty payments to us based on the terms under the settlement agreement. On
March 19, 2002, Townshend entered into a settlement agreement with us, which
settled the Federal Court Action and State Court Action. Under the Settlement
Agreement, terms of the settlement are confidential. The Settlement Agreement
requires us to make a cash royalty payment of $14.3 million related to past
liability and prepayment of future liabilities to Townshend based on terms under
the Settlement Agreement. See discussion under "Contingencies" in Note 11 for
the impact of settlement on our financial position orand results of operations.
We have also received communications from Agere Systems and 3Com, and may
receive communications from other 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. These claims could affect our relationships with
existing customers and may prevent potential future customers from purchasing
our products or licensing our technology. Because we depend upon a limited
number of products, any claims of this kind, whether they are with or without
merit, could be time consuming, result in costly litigation, cause product
shipment delays or require us to enter into royalty or licensing agreements. In
March 2000, the FASBevent 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 Agere Systems and 3Com.
New patent applications may be currently pending or filed in the future by
third parties covering technology that we use currently or may use in the
future. Pending U.S. patent applications are confidential until patents are
issued, Financial Standards Board Interpretation (FIN)and thus it is impossible to ascertain all possible patent infringement
claims against us. We believe that several of our competitors, including Agere
Systems and Texas Instruments, may have a strategy of protecting their market
share by filing intellectual property claims against their competitors and may
assert claims against us in the future. The legal and other expenses and
diversion of resources associated with any such litigation could result in a
decrease in our revenues and cash.
In addition, some of our customer agreements include an indemnity clause
that obligates us to defend and pay all damages and costs finally awarded by a
court should third parties assert patent and/or copyright claims against our
customers. As a result, we may be held responsible for infringement claims
asserted against our customers.
23
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.
44,5, "Accounting for Certain Transactions Involving Stock Compensation--an
InterpretationContingencies." 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 APB Opinion No. 25." FIN 44 addressessettling claims rather than continuing to defend our legal
positions, and is not intended to be, nor should it be interpreted as, an
admission of infringement of intellectual property, valuation of damages
suffered by any third parties or any specific terms that management has
predetermined to agree to in the event of a settlement offer. We have accrued
our best estimate of the amount of royalties payable for royalty agreements
already signed, agreements that are in negotiation and unasserted but probable
claims of others using advice from third party technology advisors and
historical 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.
COMPETITION IN THE CONNECTIVITY MARKET IS INTENSE, AND IF WE ARE UNABLE TO
COMPETE EFFECTIVELY, THE DEMAND FOR OUR PRODUCTS MAY BE REDUCED.
The connectivity device market is intensely competitive. We may not be able
to compete successfully against current or potential competitors. Our current
competitors include Agere Systems, Boardcom, Conexant, ESS Technology and Smart
Link. We expect competition to increase in the future as current competitors
enhance their product offerings, new suppliers enter the connectivity device
market, new communication technologies are introduced and additional networks
are deployed.
We may in the future also face competition from other suppliers of products
based on broadband and/or wireless technologies or on emerging communication
technologies, which may render our existing or future products obsolete or
otherwise unmarketable. We believe that these competitors may include 3Com,
Alcatel, Analog Devices, GlobespanVirata, Intersil and Proxim.
We believe that the principal competitive factors required by users and
customers in the connectivity product market include compatibility with industry
standards, price, functionality, ease of use and customer service and support.
Although we believe that our products currently compete favorably with respect
to these factors, we may not be able to maintain our competitive position
against current and potential competitors.
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 one or more of our executives or key
employees, a replacement could be difficult to recruit and 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 December 31, 2001, we employed a total of 47
people in our engineering department. If we lose the services of one or more of
our key engineering personnel, our ability to continue to develop products and
technologies responsive to our markets will be impaired.
WE MAY HAVE TO CONTINUE TO REDUCE OUR HEADCOUNT, WHICH MAY HINDER OUR ABILITY TO
DEVELOP AND GROW OUR BUSINESS, WHICH MAY ULTIMATELY AFFECT OUR ABILITY TO BECOME
PROFITABLE.
24
In 2001, we reduced our workforce by 90 employees. If economic conditions
and the PC market do not improve, or if we decide to pursue new business
structures or focus on different sectors, we may need to reduce our workforce
even further. This may result in, as it has in the past, additional charges and
costs relating to severance and employment costs, as well as the closure of
excess facilities. If such an action is taken, it may temporarily inhibit our
ability to develop new products or become profitable.
FAILURE TO MANAGE OUR TECHNOLOGICAL AND PRODUCT GROWTH COULD STRAIN OUR
MANAGEMENT, FINANCIAL AND ADMINISTRATIVE RESOURCES.
Our ability to successfully sell our products and implement our business
plan in rapidly evolving markets requires an effective management planning
process. Future product expansion efforts could be expensive and put a strain on
our management by significantly increasing the scope of their responsibilities
and by increasing the demands on their management abilities during periods of
constrained spending. We are focusing on the wireless areas as well as placing
substantial effort on sustaining our leadership position in the analog modem
space. To effectively manage our growth in these new technologies, we must
enhance our marketing, sales, research and development areas. With revenues
either stabilizing or declining, these efforts will have to be accomplished with
limited funding. This will require management to effectively manage significant
technological advancement within reduced budgets.
WE RELY ON INDEPENDENT COMPANIES TO MANUFACTURE, ASSEMBLE AND TEST OUR PRODUCTS.
IF THESE COMPANIES DO NOT MEET THEIR COMMITMENTS TO US, OUR ABILITY TO SELL
PRODUCTS TO OUR CUSTOMERS WOULD BE IMPAIRED.
We do not have our own manufacturing, assembly or testing operations.
Instead, we rely on independent companies to manufacture, assemble and test the
semiconductor chips that are integral components of our products. Most of these
companies are located outside of the United States. There are many risks
associated with our relationships with these independent companies, including
reduced control over:
- delivery schedules,
- quality assurance,
- manufacturing costs,
- capacity during periods of excess demand, and
- access to process technologies.
In addition, the location of these independent parties outside of the
United States creates additional risks resulting from the foreign regulatory,
political and economic environments in which each of these companies exists.
Further, some of these companies are located near earthquake fault lines. While
we have not experienced any material problems to date, failures or delays by our
manufacturers to provide the semiconductor chips that we require for our
products, or any material change in the financial arrangements we have with
these companies, could have an adverse impact on our ability to meet our
customer product requirements.
We design, market and sell application specific integrated circuits and
outsource the manufacturing and assembly of APBthe integrated circuits to third
party fabricators. The majority of our products and related components are
manufactured by four principal companies: Taiwan Semiconductor Manufacturing
Corporation, Kawasaki/LSI, ADMTek and Silicon Labs. We expect to continue to
rely upon these third parties for these services. Currently, the data access
arrangement chips used in our soft modem products are provided by a sole source,
Silicon Labs, on a purchase order basis, and we have only a limited guaranteed
supply of data access arrangement chips through a long-term business arrangement
with Silicon Labs. We have no guaranteed supply or long-term contract agreements
with any other of our suppliers. Although we believe that we would be able to
qualify an alternative manufacturing source for data access arrangement chips
within a relatively short period of time, this transition, if necessary, could
result in loss of purchase orders or customer relationships, which could result
in decreased revenues. As of December 31, 2001, we have outstanding firm
inventory purchase order commitments of $3.0 million with our major suppliers,
of which $2.3 million was accrued as inventory losses.
25
UNDETECTED SOFTWARE ERRORS OR FAILURES FOUND IN NEW PRODUCTS MAY RESULT IN LOSS
OF CUSTOMERS OR 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.
CONNECTIVITY DEVICES GENERALLY REQUIRE INDIVIDUAL GOVERNMENT APPROVALS
THROUGHOUT THE WORLD TO OPERATE ON LOCAL TELEPHONE NETWORKS. THESE
CERTIFICATIONS COLLECTIVELY REFERRED TO AS HOMOLOGATION CAN DELAY OR IMPEDE THE
ACCEPTANCE OF OUR PRODUCTS ON A WORLDWIDE BASIS.
Connectivity products require extensive testing prior to clarify, among otherreceiving
certification by each government to be authorized to connect to their telephone
systems. This testing can delay the introduction or, in extreme cases, prohibit
the product usage in a particular country. International Telecommunications
Union standards seek to provide a worldwide standard to avoid these issues, (a)but
they do not eliminate the definitionneed for testing in each country. In addition to these
government certifications, individual Internet Service Providers, or "ISPs", can
also have unique line conditions that must be addressed. Since most large PC
manufacturers want to be able to release their products on a worldwide basis,
this entire process can significantly slow the introduction of employeenew products.
OUR FINANCIAL POSITION AND RESULTS OF OPERATIONS CAN BE ADVERSELY AFFECTED IF
TAX AUTHORITIES CHALLENGE US AND THE TAX CHALLENGES RESULT IN UNFAVORABLE
OUTCOMES.
We currently operate with subsidiaries in the Cayman Islands and Japan as
well as branch offices in Taiwan, Korea and France. The complexities brought on
by operating in several different tax jurisdictions inevitably leads to an
increased exposure to worldwide tax challenges. Should the tax authorities
challenge us and the tax challenges result in unfavorable outcomes, our
operating results and financial position could be materially and adversely
affected.
RISKS RELATED TO OUR INDUSTRY
IF THE MARKET FOR PRODUCTS USING OUR HSP TECHNOLOGY DOES NOT GROW AS WE PLAN, OR
IF OUR PRODUCTS ARE NOT ACCEPTED IN THESE MARKETS, OUR REVENUES MAY BE ADVERSELY
AFFECTED.
Our success depends on market demand and growth patterns for purposesproducts using
our HSP technology in soft analog modems. Market success for our products
depends primarily on cost and performance benefits relative to competing
solutions. Although we have shipped a significant number of applying APB 25, (b)soft modems since we
began commercial sales of these products, the criteriacurrent level of demand for determining whethersoft
modems may not be sustained or may not grow. Further, the company's success in
the soft modem market is dependent on developing, selling and supporting next
generation products and applications. If these new products are not accepted in
the markets as they are introduced, our revenues and profitability will be
negatively affected.
In 2000, we introduced our Solsis(TM) modem for the embedded Internet
access market. We anticipate sales of this product to grow and become an
important component in our product mix. However, if the non-PC Internet
appliance market does not accept our product or if demand for embedded analog
modems is weaker than projected, our revenues can be adversely 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
26
products with advanced technologies since our company was founded. For example,
we introduced a plan qualifies14.4 Kbps product in 1995, a 28.8 Kbps product in 1996, a 33.6
Kbps product in late 1996, a non-International Telecommunications Union standard
56 Kbps modem in the second half of 1997 and a V.90 International
Telecommunications Union standard 56 Kbps modem in early 1998. Starting in 2001
and continuing into 2002, we expect to see the introduction of additional
International Telecommunications Union standards, referred to as V.92 and V.44.
We continue to develop and sell advanced analog modem products in order to
remain competitive in our core business.
The market for high speed Internet connectivity is also characterized by
rapidly changing technologies and strong competition, such as broadband and
wireless solutions, which provide higher modem speeds and faster Internet
access. While these alternative technologies offer much faster data rates, they
are comparatively more costly than analog modems. They are also not as widely
available in the world markets. We will continue to evaluate, develop and
introduce technologically advanced products that will position the company for
possible growth in the Internet access market. If we are not successful in
response to rapidly changing technologies, our products may become obsolete and
we may not be able to compete effectively.
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.
WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND CALIFORNIA'S
CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES.
Our business operations depend on our ability to maintain and protect our
facilities, computer systems and personnel, which are primarily located in or
near our principal headquarters in Milpitas, California. California has
experienced power outages due to a shortage in the supply of power within the
state. In anticipation of continuing power shortages, the electric utility
industry in California has warned power consumers to expect rolling blackouts
throughout the state, particularly during the summer months when power usage
peaks. We currently do not have backup generators or alternate sources of power
in the event of a blackout, and our current insurance does not provide coverage
for any damages we or our customers may suffer as a noncompensatory plan, (c)result of any interruption
in our power supply. Although the accounting consequenceblackouts we have experienced to date have not
materially impacted our business, an increase in the frequency or length of various modificationsthe
blackouts could damage our reputation, harm our ability to retain existing
customers and to obtain new customers, and could result in lost revenue, any of
which could substantially harm our business and results of operations.
Furthermore, the deregulation of the energy industry has caused power prices to
increase. If wholesale prices continue to increase, our operating expenses will
likely increase, as the majority of our facilities are located in California.
27
RISKS RELATED TO OUR COMMON STOCK
OUR STOCK PRICE MAY BE VOLATILE BASED ON A NUMBER OF FACTORS, SOME OF WHICH ARE
NOT IN OUR CONTROL.
The trading price of our common stock has been highly volatile. Our stock
price could be subject to wide fluctuations in response to a variety of factors,
many of which are out of our control, including:
- actual or anticipated variations in quarterly operating results,
- announcements of technological innovations,
- new products or services offered by us or our competitors,
- changes in financial estimates by securities analysts,
- conditions or trends in our industry,
- our announcement of significant acquisitions, strategic partnerships,
joint ventures or capital commitments,
- additions or departures of key personnel,
- mergers and acquisitions, and
- sales of common stock by us or our stockholders.
In addition, the Nasdaq National Market, where many publicly held
telecommunications companies, including our company, are traded, often
experiences extreme price and volume fluctuations. These fluctuations often have
been unrelated or disproportionate to the termsoperating performance of these
companies. In the past, following periods of volatility in the market price of
an individual company's securities, securities class action litigation often has
been instituted against that company. This type of litigation, if instituted,
could result in substantial costs and a previously fixeddiversion 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 option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
was effective July 1, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998 or January 12, 2000. To the extent FIN 44
covers events occurring during the period after December 15, 1998 or January 12,
2000, but before the effective date of July 1, 2000,from reflecting the
effects of applyingactual or rumored takeover attempts and may prevent stockholders from
reselling their shares at or above the interpretationprice 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 recognizedaffected 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. The board of directors has not
elected to issue additional shares of preferred stock since the initial public
offering on a prospective basis from July 1, 2000. We
adopted FIN 44 in July 2000 and this adoption did not have a material effect on
our financial position or results of operations.
31
ItemOctober 19, 1999.
ITEM 7A: Quantitative and Qualitative Disclosures about Market Risk
================================================================================QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to minimal market risks. We manage the sensitivity of our
results of operations to these risks by maintaining a conservative investment
portfolio, which is comprised solely of highly-rated, short-term
28
investments. 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.
We may be exposed to interest rate risks, as we may use additional
financing to fund additional acquisitions and fund other capital expenditures.
The interest rate that we may be able to obtain on financings will depend on
market conditions at that time and may differ from the rates we have secured in
the past.
3229
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PCTEL, INC.
Item 8: Financial Statements and Supplementary Data
Index to The Consolidated Financial StatementsINDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
PagePAGE
----
Report of Independent Public Accountants........................................................................ 34Accountants.................... 31
Consolidated Balance Sheets as of December 31, 20002001 and
December 31, 1999....................................... 352000...................................................... 32
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 1999 and 1998...................... 361999.......................... 33
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2001, 2000 1999 and 1998........................................................................................................... 371999.............. 34
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 1999 and 1998...................... 391999.......................... 35
Notes to the Consolidated Financial Statements.................................................................. 40Statements.............. 36
3330
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the stockholders of PCTEL, Inc.:
We have audited the accompanying consolidated balance sheets of PCTEL, Inc.
(a Delaware corporation) and subsidiaries as of December 31, 20002001 and 19992000 and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000.2001. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States.States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PCTEL, Inc. and subsidiaries
as of December 31, 20002001 and 1999,2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 20002001 in
conformity with accounting principles generally accepted in the United States.States of
America.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a)2 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic consolidated financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
January 26, 2001
3422, 2002
(except with respect to the matters
discussed in Note 11, as to which
the date is March 27, 2002)
31
PCTEL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)(IN THOUSANDS, EXCEPT SHARE DATA)
DecemberDECEMBER 31, DecemberDECEMBER 31,
2001 2000
1999
--------------------------------------------------------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalentsequivalents................................. $ 38,393 $ 25,397
$ 44,705
Short-term investmentsinvestments.................................... 87,235 92,983 53,585
Accounts receivable, net of allowance for doubtful
accounts of $787 and $5,043, and $2,213, respectivelyrespectively.............. 2,849 24,112
6,555
Inventories, net.......................................... 2,870 13,837 5,741
Prepaid expenses and other assetsassets......................... 5,055 4,369 2,422
Deferred tax assetasset........................................ 400 3,322
3,211
-------------------- ----------------------------- --------
Total current assetsassets.............................. 136,802 164,020 116,219
PROPERTY AND EQUIPMENT, netnet................................. 2,769 4,722 3,099
GOODWILL AND OTHER INTANGIBLE ASSETS, netnet................... 384 21,662 8,649
DEFERRED TAX ASSETASSET.......................................... -- 2,333
2,365
OTHER ASSETSASSETS................................................ 228 219
273
-------------------- ----------------------------- --------
TOTAL ASSETS $ 192,956 $ 130,605
==================== =====================ASSETS................................................ $140,183 $192,956
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payablepayable.......................................... $ 4,944 $ 9,142
$ 7,140
Accrued royaltiesroyalties......................................... 12,343 11,656 7,868
Income taxes payablepayable...................................... 5,573 3,417 3,290
Accrued compensation and benefitsbenefits......................... 983 2,464
1,919
Accrued warrantywarranty.......................................... 283 3,520
1,200
Accrued liabilitiesinventory purchase commitments.................... 2,325 --
Accrued customer rebates.................................. 2,051 --
Accrued restructuring..................................... 1,426 --
Other accrued liabilities................................. 2,353 2,910
4,910
-------------------- ----------------------------- --------
Total current liabilitiesliabilities......................... 32,281 33,109
26,327
-------------------- ---------------------Long-term accrued restructuring........................... 141 --
-------- --------
Total liabilities................................. 32,422 33,109
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 710 and 8)11)
STOCKHOLDERS' EQUITY:
Common stock,$0.001 $0.001 par value, 50,000,000 shares
authorized, 18,817,79619,665,486 and 16,560,33518,817,796 shares issued and
outstanding at December 31, 2001 and 2000,
and 1999,
respectively.respectively........................................... 20 19 17
Additional paid-in capitalcapital................................ 150,319 146,461
99,334
Deferred compensationstock compensation............................... (1,158) (2,894) (4,856)
Retained earnings (deficit)............................... (42,232) 15,987 9,849
Accumulated other comprehensive income (loss)income.................... 812 274
(66)
-------------------- ----------------------------- --------
Total stockholders' equityequity........................ 107,761 159,847
104,278
-------------------- ----------------------------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $140,183 $192,956
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
32
PCTEL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
----------------------------
2001 2000 1999
-------- ------- -------
REVENUES.................................................... $ 40,971 $97,183 $76,293
COST OF REVENUES............................................ 27,899 53,940 39,428
INVENTORY LOSSES............................................ 10,920 -- --
-------- ------- -------
GROSS PROFIT................................................ 2,152 43,243 36,865
-------- ------- -------
OPERATING EXPENSES:
Research and development.................................. 11,554 14,130 10,317
Sales and marketing....................................... 10,926 14,293 10,523
General and administrative................................ 14,023 8,058 5,459
Acquired in-process research and development.............. -- 1,600 --
Amortization of goodwill and intangible assets............ 3,068 2,638 --
Impairment of goodwill and intangible assets.............. 16,775 -- --
Restructuring charges..................................... 3,787 -- --
Amortization of deferred stock compensation............... 1,081 1,308 790
-------- ------- -------
Total operating expenses.......................... 61,214 42,027 27,089
-------- ------- -------
INCOME (LOSS) FROM OPERATIONS............................... (59,062) 1,216 9,776
-------- ------- -------
OTHER INCOME, NET:
Interest expense.......................................... -- (131) (1,449)
Interest income........................................... 6,154 7,419 1,720
-------- ------- -------
Total other income, net........................... 6,154 7,288 271
-------- ------- -------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES............. (52,908) 8,504 10,047
PROVISION FOR INCOME TAXES.................................. 5,311 2,366 3,014
-------- ------- -------
NET INCOME (LOSS) BEFORE EXTRAORDINARY LOSS................. (58,219) 6,138 7,033
Extraordinary loss, net of income taxes..................... -- -- (1,611)
-------- ------- -------
NET INCOME (LOSS)........................................... $(58,219) $ 6,138 $ 5,422
======== ======= =======
Basic earnings per share before extraordinary loss.......... $ (3.02) $ 0.34 $ 1.33
Basic earnings per share after extraordinary loss........... $ -- $ -- $ 1.03
Shares used in computing basic earnings per share........... 19,275 18,011 5,287
Diluted earnings per share before extraordinary loss........ $ (3.02) $ 0.30 $ 0.48
Diluted earnings per share after extraordinary loss......... $ -- $ -- $ 0.37
Shares used in computing diluted earnings per share......... 19,275 20,514 14,666
The accompanying notes are an integral part of these consolidated financial
statements.
33
PCTEL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED RETAINED
--------------- --------------- PAID-IN STOCK EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT)
------ ------ ------ ------ ---------- ------------ ---------
BALANCE, DECEMBER 31, 1998................... 8,511 $9 2,412 $ 2 $ 10,915 $ (214) $ 4,427
Deferred stock compensation for stock
option grants............................ -- -- -- -- 5,432 (5,432) --
Amortization of deferred stock
compensation............................. -- -- -- -- -- 790 --
Issuance of common stock from initial
public offering.......................... -- -- 5,290 6 83,629 -- --
Issuance of common stock on exercise of
stock options............................ -- -- 346 -- 399 -- --
Conversion of preferred stock to common
stock.................................... (8,511) (9) 8,511 9 -- -- --
Issuance of common stock from warrant
exercises................................ -- -- 1 -- 11 -- --
Costs incurred related to initial public
offering................................. -- -- -- -- (1,140) -- --
Grant of stock options to non-employees.... -- -- -- -- 88 -- --
Net income................................. -- -- -- -- -- -- 5,422
Unrealized loss on available-for-sale
securities............................... -- -- -- -- -- -- --
------ -- ------ --- -------- ------- --------
BALANCE, DECEMBER 31, 1999................... -- -- 16,560 17 99,334 (4,856) 9,849
Reversal of deferred stock compensation for
terminated employees..................... -- -- -- -- (654) 654 --
Amortization of deferred stock
compensation............................. -- -- -- -- -- 1,308 --
Issuance of common stock on exercise of
stock options............................ -- -- 1,193 1 4,614 -- --
Rescission of stock option exercise........ -- -- (30) -- (14) -- --
Issuance of common stock from purchase of
ESPP shares.............................. -- -- 37 -- 834 -- --
Issuance of common stock from secondary
offering................................. -- -- 650 1 28,713 -- --
Issuance of common stock from warrant
exercises................................ -- -- 159 -- 8 -- --
Issuance of common stock to acquire
businesses............................... -- -- 249 -- 14,640 -- --
Costs incurred related to initial public
offering................................. -- -- -- -- (337) -- --
Costs incurred related to secondary
offering................................. -- -- -- -- (677) -- --
Net income................................. -- -- -- -- -- -- 6,138
Unrealized gain on available-for-sale
securities............................... -- -- -- -- -- -- --
------ -- ------ --- -------- ------- --------
BALANCE, DECEMBER 31, 2000................... -- -- 18,818 19 146,461 (2,894) 15,987
Reversal of deferred stock compensation for
terminated employees..................... -- -- -- -- (1,572) 1,572 --
Extended vesting for ex-officers........... -- -- -- -- 12 -- --
Amortization of deferred stock
compensation............................. -- -- -- -- -- 1,081 --
Issuance of common stock on exercise of
stock options............................ -- -- 620 1 2,208 -- --
Issuance of restricted common stock........ -- -- 235 -- 1,776 (1,776) --
Issuance of common stock from purchase of
ESPP shares.............................. -- -- 107 -- 818 -- --
Cancellation of restricted common stock.... -- -- (115) -- (859) 859 --
Tax benefit from stock option exercises.... -- -- -- -- 1,475 -- --
Net loss................................... -- -- -- -- -- -- (58,219)
Unrealized gain on available-for-sale
securities............................... -- -- -- -- -- -- --
------ -- ------ --- -------- ------- --------
BALANCE, DECEMBER 31, 2001................... -- $-- 19,665 $20 $150,319 $(1,158) $(42,232)
====== == ====== === ======== ======= ========
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL
INCOME STOCKHOLDERS'
(LOSS) EQUITY
------------- -------------
BALANCE, DECEMBER 31, 1998................... $ 192,956-- $ 130,605
==================== =====================15,139
Deferred stock compensation for stock
option grants............................ -- --
Amortization of deferred stock
compensation............................. -- 790
Issuance of common stock from initial
public offering.......................... -- 83,635
Issuance of common stock on exercise of
stock options............................ -- 399
Conversion of preferred stock to common
stock.................................... -- --
Issuance of common stock from warrant
exercises................................ -- 11
Costs incurred related to initial public
offering................................. -- (1,140)
Grant of stock options to non-employees.... -- 88
Net income................................. -- 5,422
Unrealized loss on available-for-sale
securities............................... (66) (66)
---- --------
BALANCE, DECEMBER 31, 1999................... (66) 104,278
Reversal of deferred stock compensation for
terminated employees..................... -- --
Amortization of deferred stock
compensation............................. -- 1,308
Issuance of common stock on exercise of
stock options............................ -- 4,615
Rescission of stock option exercise........ -- (14)
Issuance of common stock from purchase of
ESPP shares.............................. -- 834
Issuance of common stock from secondary
offering................................. -- 28,714
Issuance of common stock from warrant
exercises................................ -- 8
Issuance of common stock to acquire
businesses............................... -- 14,640
Costs incurred related to initial public
offering................................. -- (337)
Costs incurred related to secondary
offering................................. -- (677)
Net income................................. -- 6,138
Unrealized gain on available-for-sale
securities............................... 340 340
---- --------
BALANCE, DECEMBER 31, 2000................... 274 159,847
Reversal of deferred stock compensation for
terminated employees..................... -- --
Extended vesting for ex-officers........... -- 12
Amortization of deferred stock
compensation............................. -- 1,081
Issuance of common stock on exercise of
stock options............................ -- 2,209
Issuance of restricted common stock........ -- --
Issuance of common stock from purchase of
ESPP shares.............................. -- 818
Cancellation of restricted common stock.... -- --
Tax benefit from stock option exercises.... -- 1,475
Net loss................................... -- (58,219)
Unrealized gain on available-for-sale
securities............................... 538 538
---- --------
BALANCE, DECEMBER 31, 2001................... $812 $107,761
==== ========
The accompanying notes are an integral part of these consolidated financial
statements.
34
PCTEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
-------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(58,219) $ 6,138 $ 5,422
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Acquired in-process research and development............ -- 1,600 --
Depreciation and amortization........................... 6,731 6,441 2,835
Impairment of goodwill and intangible assets............ 16,775 -- --
Loss on disposal of property and equipment.............. 574 -- --
Amortization of deferred debt charge.................... -- -- 1,550
Provision for (recovery of) allowance for doubtful
accounts............................................... (1,574) 3,677 1,674
Provision for excess and obsolete inventories........... 452 918 1,121
(Increase) decrease in deferred tax asset............... 5,255 165 (1,371)
Amortization of deferred stock compensation............. 1,081 1,308 790
Grant or extended vesting of stock options to
non-employees.......................................... 12 -- 88
Tax benefit from stock option exercises................. 1,475 -- --
Changes in operating assets and liabilities, net of
acquisitions:
(Increase) decrease in accounts receivable.............. 22,745 (20,627) 4,702
(Increase) decrease in inventories...................... 10,426 (8,924) (4,789)
Increase in prepaid expenses and other assets........... (704) (1,872) (2,300)
Increase (decrease) in accounts payable................. (4,197) 1,952 1,985
Increase in accrued royalties........................... 687 3,788 2,724
Increase in income taxes payable........................ 2,156 127 2,083
Increase in other accrued liabilities................... 527 94 5,027
Increase in long-term accrued restructuring............. 141 -- --
-------- --------- --------
Net cash provided by (used in) operating activities... 4,343 (5,215) 21,541
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment........... (702) (3,044) (2,729)
Proceeds from disposal of property and equipment.......... 74 -- --
Purchase of available-for-sale investments................ (75,808) (109,611) (53,651)
Proceeds from sales and maturities of available-for-sale
investments............................................. 82,094 70,553 --
Purchase of businesses, net of cash acquired.............. (32) (5,134) --
-------- --------- --------
Net cash provided by (used in) investing activities... 5,626 (47,236) (56,380)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations........... -- -- (36)
Principal payments on notes payable....................... -- -- (16,313)
Proceeds from issuance of common stock.................... 3,027 34,157 84,045
Costs incurred related to initial public offering......... -- (337) (1,140)
Costs incurred related to secondary public offering....... -- (677) --
-------- --------- --------
Net cash provided by financing activities............. 3,027 33,143 66,556
-------- --------- --------
Net increase (decrease) in cash and cash equivalents........ 12,996 (19,308) 31,717
Cash and cash equivalents, beginning of year................ 25,397 44,705 12,988
-------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 38,393 $ 25,397 $ 44,705
======== ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.................................... $ -- $ -- $ 1,449
Cash paid for income taxes................................ $ 297 $ 2,047 $ 2,163
Increases (decreases) to deferred stock compensation,
net..................................................... $ 655 $ (654) $ 5,432
Acquisition of businesses for stock....................... $ -- $ 14,640 $ --
Issuance of restricted common stock, net of
cancellations........................................... $ 917 $ -- $ --
The accompanying notes are an integral part of these consolidated financial
statements.
35
PCTEL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
--------------------------------------------------------------
2000 1999 1998
----------------- ----------------- ----------------
REVENUES $ 97,183 $ 76,293 $ 33,004
COST OF REVENUES 53,940 39,428 13,878
----------------- ----------------- ----------------
GROSS PROFIT 43,243 36,865 19,126
----------------- ----------------- ----------------
OPERATING EXPENSES:
Research and development 14,130 10,317 4,932
Sales and marketing 14,293 10,523 5,624
General and administrative 8,058 5,459 2,169
Acquired in-process research and development 1,600 - 6,130
Goodwill amortization 2,638 - -
Amortization of deferred compensation 1,308 790 43
----------------- ----------------- ----------------
Total operating expenses 42,027 27,089 18,898
----------------- ----------------- ----------------
INCOME FROM OPERATIONS 1,216 9,776 228
OTHER INCOME, NET:
Interest expense (131) (1,449) (25)
Interest income 7,419 1,720 504
----------------- ----------------- ----------------
Total other income, net 7,288 271 479
----------------- ----------------- ----------------
INCOME BEFORE PROVISION FOR INCOME TAXES 8,504 10,047 707
PROVISION FOR INCOME TAXES 2,366 3,014 212
----------------- ----------------- ----------------
NET INCOME BEFORE EXTRAORDINARY LOSS 6,138 7,033 495
Extraordinary loss, net of income taxes - (1,611) -
----------------- ----------------- ----------------
NET INCOME $ 6,138 $ 5,422 $ 495
================= ================= ================
Basic earnings per share before extraordinary loss $ 0.34 $ 1.33 $ 0.21
Basic earnings per share after extraordinary loss - 1.03 -
Shares used in computing basic earnings per share 18,011 5,287 2,355
Diluted earnings per share before extraordinary loss $ 0.30 $ 0.48 $ 0.04
Diluted earnings per share after extraordinary loss - 0.37 -
Shares used in computing diluted earnings per share 20,514 14,666 12,325
The accompanying notes are an integral part of these consolidated financial
statements.
36
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
OF STOCKHOLDERS' EQUITY
(in thousands)
Accumulated
Preferred Stock Common Stock Additional Other
------------------------------------ Paid-In Deferred Retained Comprehensive
Shares Amount Shares Amount Capital Compensation Earnings Income (Loss) Total
--------------------------------------------------------------------------------------------------------
BALANCE,FOR THE YEAR ENDED: DECEMBER 31, 1997 8,511 $ 9 2,209 $ 2 $ 9,667 $ - $ 3,932 $ - $ 13,610
Issuance costs for Series
C convertible preferred
stock - - - - (44) - - - (44)
Deferred compensation
expense for stock option
grants - - - - 257 (257) - - -
Amortization of deferred
compensation - - - - - 43 - - 43
Issuance of common stock
on exercise of stock
options - - 203 - 34 - - - 34
Issuance of Series C
convertible stock
warrants in conjunction
with notes payable - - - - 1,350 - - - 1,350
Cost incurred related to
initial public offering - - - - (349) - - - (349)
Net income - - - - - - 495 - 495
--------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 8,511 9 2,412 2 10,915 (214) 4,427 - 15,139
Deferred compensation
expense for stock option
grants - - - - 5,432 (5,432) - - -
Amortization of deferred
compensation - - - - - 790 - - 790
Issuance of common stock
from initial public
offering - - 5,290 6 83,629 - - - 83,635
Issuance of common stock
on exercise of stock
options - - 346 - 399 - - - 399
Conversion of preferred
stock to common stock (8,511) (9) 8,511 9 - - - - -
Issuance of common stock
from warrant exercises - - 1 - 11 - - - 11
Costs incurred related to
initial public offering - - - - (1,140) - - - (1,140)
Grant of stock options to
non-employees - - - - 88 - - - 88
Net income - - - - - - 5,422 - 5,422
Unrealized loss on
available-for-sale
securities - - - - - - - (66) (66)
-------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 - - 16,560 17 99,334 (4,856) 9,849 (66) 104,278
Reversal of deferred
compensation expense for
stock option grants - - - - (654) 654 - - -
Amortization of deferred
compensation - - - - - 1,308 - - 1,308
Issuance of common stock
on exercise of stock
options - - 1,193 1 4,614 - - - 4,615
Rescission of stock
option exercise - - (30) - (14) - - - (14)
Issuance of common stock
from purchase of ESPP
shares - - 37 - 834 - - - 834
Issuance of common stock
from secondary offering - - 650 1 28,713 - - - 28,714
Issuance of common stock
from warrant exercises - - 159 - 8 - - - 8
Issuance of common stock
for the acquisition of
Voyager Technologies - - 238 - 14,318 - - - 14,318
Issuance of common stock
for the acquisition of
BlueCom - - 11 - 322 - - - 322
Costs incurred related to
initial public offering - - - - (337) - - - (337)
Costs incurred related to
secondary offering - - - - (677) - - - (677)
37
Net income - - - - - - 6,138 - 6,138
Unrealized gain on
available-for-sale
securities - - - - - - - 340 340
--------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 - $ - 18,818 $19 $146,461 $(2,894) $15,987 $274 $159,847
========================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
38
PCTEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
-------------------------------------------
2000 1999 1998
-------------------------------------------
Cash Flows from Operating Activities:
Net income $ 6,138 $ 5,422 $ 495
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Acquired in-process research and development 1,600 - 6,130
Depreciation and amortization 6,441 2,835 303
Amortization of deferred debt charge - 1,550 -
Provision for allowance for doubtful accounts 3,677 1,674 465
Provision for excess and obsolete inventories 918 1,121 330
(Increase) decrease in deferred tax asset 165 (1,371) (1,525)
Amortization of deferred compensation 1,308 790 43
Grant of stock options to non-employee - 88 -
Changes in operating assets and liabilities, net of acquisitions:
(Increase) decrease in accounts receivable (20,627) 4,702 (7,771)
Increase in inventories (8,924) (4,789) (1,352)
(Increase) decrease in prepaid expenses and other assets (1,872) (2,300) 598
Increase in accounts payable 1,952 1,985 3,578
Increase (decrease) in accrued royalties 3,788 2,724 (1,361)
Increase in income taxes payable 127 2,083 1,207
Increase in accrued liabilities 94 5,027 1,579
----------- ----------- -----------
Net cash provided by (used in) operating activities (5,215) 21,541 2,719
Cash Flows from Investing Activities:
Capital expenditures for property and equipment (3,044) (2,729) (512)
Purchase of available-for-sale investments (109,611) (53,651) -
Proceeds from sales and maturities of available-for-sale investments 70,553 - -
Purchase of businesses, net of cash acquired (5,134) - (16,832)
----------- ----------- -----------
Net cash used in investing activities (47,236) (56,380) (17,344)
Cash Flows from Financing Activities:
Principal payments on capital lease obligations - (36) (28)
Proceeds from notes payable - - 16,313
Principal payments on notes payable - (16,313) -
Proceeds from issuance of preferred stock - - 5,002
Costs incurred related to issuance of preferred stock - - (44)
Proceeds from issuance of common stock 34,157 84,045 34
Costs incurred related to initial public offering (337) (1,140) (349)
Costs incurred related to secondary public offering (677) - -
----------- ----------- -----------
Net cash provided by financing activities 33,143 66,556 20,928
Net increase (decrease) in cash and cash equivalents (19,308) 31,717 6,303
Cash and cash equivalents, beginning of year 44,705 12,988 6,685
----------- ----------- -----------
Cash and cash equivalents, end of year $ 25,397 $ 44,705 $ 12,988
=========================================
Supplemental Cash Flow Information:
Cash paid for interest $ - $ 1,449 $ 25
Cash paid for income taxes $ 2,047 $ 2,163 $ 462
Issuance of warrants for preferred and common stock $ - $ - $ 1,400
Increases (decreases) to deferred compensation $ (654) $ 5,432 $ 257
Acquisition of businesses for stock $ 14,640 $ - $ -
The accompanying notes are an integral part of these consolidated financial
statements.
39
PCTEL, Inc.
Notes to the Consolidated Financial Statements
For the Year Ended: December 31, 2000
================================================================================2001
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations of the CompanyORGANIZATION AND OPERATIONS OF THE COMPANY
We were originally incorporated in California in February 1994. In1994 and in July
1998, we reincorporated in Delaware and this reincorporation has been reflected
retroactively in the accompanying consolidated financial statements.Delaware. We are a leading provider of software-based
high speed connectivity solutions to individuals and businesses worldwide. We
design, develop, produce and market advanced software-based high performance, low cost modems
that are flexible and upgradable, with functionality that can include data/fax
transmission at various speeds, and telephony features. Our soft modem products
consist of a hardware chipset containing a proprietary host signal processing
software architecture which allows for the utilization ofutilizes the computational and processing resources
of a host central processor, effectively replacing special-purpose hardware
required in conventional hardware-based modems. Together, the combination of the
chipset and software drivers are a component part within a computer which allows
for telecommunications connectivity. By replacing hardware with a software
solution, our host signal processing technology lowers costs while enhancing
capabilities.
UseWe are subject to certain risks including the impact of Estimatesthe recent economic
slowdown, concentration of sales among a limited number of customers,
concentration of sales in Asia, the Company's ability to develop and
successfully introduce new and enhanced products, the outcome of ongoing and
potential litigation involving intellectual property, competition from larger,
more established companies and dependence on key suppliers.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.periods
reported. Actual results could differ from those estimates.
Consolidation and Foreign Currency TranslationCONSOLIDATION AND FOREIGN CURRENCY TRANSLATION
We use the United States dollar for our financial statements, even for our
subsidiaries in foreign countries.countries with the exception of our Japanese subsidiary
where the functional currency is Japanese Yen. All gains and losses resulting
from transactions originally in foreign currencies and then translated into US
dollars are included in net income. Assets and liabilities of our Japanese
operations are translated to U.S. dollars at the exchange rate in effect at the
applicable balance sheet date, and revenues and expenses are translated using
average exchange rates prevailing during that period. Operations and translation
adjustments have not been material to date. As of December 31, 2000,2001, we had
subsidiaries in the Cayman Islands, Japan and Taiwan. These consolidated
financial statements include the accounts of PCTEL and our subsidiaries after
eliminating intercompany accounts and transactions.
Cash Equivalents and Short-Term InvestmentsCASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
We divide our financial instruments into two different classifications.
Cash equivalents: are debt instruments that mature within three months after we purchase
them.
Short-term investments: are marketable debt instruments that generally mature between three months
and two years from the date we purchase them. All of our short-term
investments are classified as current assets and available-for-sale
because they are marketable and we have the option to sell them before
they mature.
As of December 31, 2000, short-term investments consisted of high-grade
corporate securities with maturity dates of approximately five months to
two years.
These investments are recorded at market price and any unrealized holding
gains and losses (based on the difference between market price and book
value) are reflected as other comprehensive income/loss in the
stockholders' equity section of the balance sheet. We have accumulated a
$274,000 unrealized holding gain as of December 31, 2000.Cash equivalents: are debt instruments that mature within three
months after we purchase them.
Short-term
investments: are marketable debt instruments that generally
mature between three months and two years from
the date we purchase them. All of our short-term
investments are classified as current assets and
available-
36
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2001
for-sale because they are marketable and we have
the option to sell them before they mature.
As of December 31, 2001, short-term investments
consisted of high-grade corporate securities with
maturity dates of approximately five months to
two years.
These investments are recorded at market price
and any unrealized holding gains and losses
(based on the difference between market price and
book value) are reflected as other comprehensive
income/loss in the stockholders' equity section
of the balance sheet. We have accumulated a
$812,000 unrealized holding gain as of December
31, 2001. Realized gains and losses
40
and declines
in value of securities judged to be other than
temporary are included in interest income and
have not been significant to date. Interest and
dividends of all securities are included in
interest income.
Concentrations of Credit Risk
We have potentialCONCENTRATIONS AND RISKS
Financial instruments that potentially subject us to concentration and
credit risk consist primarily in two areas, ourof short-term investments and trade receivables.
OurTo mitigate credit risk related to short-term investments, we have an
investment policy is to preserve the value of our capital and generate interest income
from these investments without undue exposure to risk. Market risk is the
potential loss due to the change in value of a financial instrument due to
interest rates or equity prices. We try to moderate this risk in two ways.
First, our investment portfolio is divided between Banc of America Securities
and Salomon Smith Barney. By using two independent investment banking firms, we
believe it haswe have improved market visibility. Secondly, we independently review
market pricing on a periodic basis based upon directly managing a limited amount
of funds we use for operations which are not managed by our funds' managers.
For trade receivables, credit risk is the potential for a loss due to a
customer not meeting its payment obligations. We have establishedEstimates are used in determining
an allowance for amounts which we may not be able to collect based on industry standardscurrent
trends, the length of time receivables are past due and actual payment history.historical collection
experience. We moderate this risk by establishing and reviewing credit limits,
monitoring those limits and making updates as required. See Note
9Provisions for and
recovery of bad debts are recorded against revenue in our consolidated
statements of operations.
Our customers are concentrated in the personal computer industry and modem
board manufacturer industry segment customer and in certain geographic information.
Inventorieslocations. We
actively market and sell products in Asia. We perform ongoing evaluations of our
customers' financial condition and generally require no collateral. As of
December 31, 2001, approximately 89% of gross accounts receivable were
concentrated with five customers. As of December 31, 2000, approximately 64% of
gross accounts receivable were concentrated with four customers.
For the years ended December 31, 2001, 2000 and 1999, we purchased
integrated circuits from a limited number of vendors. If these vendors are
unable to provide integrated circuits in a timely manner and we are unable to
find alternative vendors, our business, operating results and financial
condition could be adversely affected.
The majority of our revenues are derived from a limited number of products
utilizing host signal processing technology. The market for these products is
characterized by frequent transitions in which
37
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2001
products rapidly incorporate new features and performance standards. A failure
to develop products with required feature sets or performance standards or a
delay in bringing a new product to market could adversely affect our operating
results.
INVENTORIES
Inventories are stated at the lower of cost or market and include material,
labor and overhead costs. Inventories as of December 31, 20002001 and 19992000 were
composed of finished goods only. BasedWe regularly monitor inventory quantities on
hand and, based on our current estimated requirements, it was determined that
there was excess inventory and those excess amounts were fully reserved as of
December 31, 20002001 and 1999.2000. Due to competitive pressures and technological
innovation, it is possible that these estimates could change in the near term.
Property and EquipmentPROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives (three to seven years) of
the assets. Leasehold improvements are amortized over the corresponding lease
term.
Property and equipment consists of the following (in thousands):
DecemberDECEMBER 31,
-------------------------------------------
2001 2000
1999
--------- ----------------- -------
Computer and office equipmentequipment............................... $ 5,528 $ 6,753
$ 3,862
Furniture and fixturesfixtures...................................... 333 541
391
Leasehold improvementsimprovements...................................... 341 251
9
OtherOther....................................................... -- 78 -
------- -------
Total property and equipmentequipment...................... 6,202 7,623 4,262
Less: Accumulated depreciation and amortizationamortization............. (3,433) (2,901) (1,163)
------- -------
Property and equipment, netnet....................... $ 4,7222,769 $ 3,0994,722
======= =======
Software Development CostsSOFTWARE DEVELOPMENT COSTS
We account for software development costs in accordance with Statement of
Financial Accounting Standards ("SFAS")SFAS No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed." Our products include a software component. To date, we have expensed
all software development costs because these costs were incurred prior to the
products reaching technological feasibility.
Revenue RecognitionREVENUE RECOGNITION
Revenues consist primarily of sales of products to original equipment
manufacturers ("OEMs")OEMs and distributors.
Revenues from sales to OEMscustomers are recognized upon shipment.shipment when title and
risk of loss passes to the customers, unless we have future obligations or have
to obtain customer acceptance, in which case revenue is not recorded until such
obligations have been satisfied or customer acceptance has been achieved. We
provide for estimated sales returnreturns and price rebate
allowancescustomer rebates related to sales to
OEMs at the time of shipment. Customer rebates are recorded against receivables
to the extent that the gross amount has not been collected by the end customer.
Once the gross amount has been collected, the accrued customer rebate is then
reclassified to liabilities. As of December 31, 2001 and 2000, and 1999, $6.8 million and $3.0 million of returns and price rebate
allowances were nettedwe have an
allowance for customer rebates against accounts receivable of $200,000 and $6.8
million, respectively, and accrued customer rebates of $2.1 million and $0,
respectively,
38
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2001
presented as current liabilities on the balance sheet. Accrued customer rebates
will be paid to the customers, upon request, in the accompanying
41
consolidated balance sheets.future unless they are
forfeited by the customer. Revenues from sales to distributors are made under
agreements allowing price protection and rights of return on unsold products. We
record revenue relating to sales to distributors only when the distributors have
sold the product to end-users. Customer payment terms generally range from
letters of credit collectible upon shipment to open accounts payable 60 days
after shipment.
We also generate revenues from engineering contracts. Revenues from
engineering contracts are recognized as contract milestones and customer
acceptance are achieved. Royalty revenue is recognized when confirmation of
royalties due to us is received from licensees. Furthermore, revenues from
technology licenses are recognized after delivery has occurred and the amount is
fixed and determinable, generally based upon the contract's nonrefundable
payment terms. To the extent there are extended payment terms on these
contracts, revenue is recognized as the payments become due and the cancellation
privilege lapses. To date, we have not offered post-contract customer support.
Stock-Based CompensationINCOME 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. As of December 31, 2001, we have deferred tax assets, net of valuation
allowances, of $400,000.
STOCK-BASED COMPENSATION
We account for stock-based awards to employees in accordance with APBthe
Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to
Employees". We have adopted the disclosure-only alternative of SFAS No. 123,
"Accounting for Stock-Based Compensation". Under APB No. 25, if the exercise
price of our employee stock options equals or exceeds the fairmarket value of the
underlying stock on the date of grant, no compensation expense is recognized.recorded.
However, if the stock option price is less than fair market value, a stock based
compensation charge is required. We recorded a deferred compensation charge for options granted below fair market
value before our Initial Public Offering ("IPO") and have also included the pro forma disclosures
required under SFAS No. 123 in Note 6.
Earnings Per Share9. 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.
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 a statementstatements of operations isare presented. Basic earnings per
share is computed by dividing net income by the weighted average number of
shares of common stock outstanding.outstanding, less shares subject to repurchase. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common stock and common stock equivalents outstanding. Common stock
equivalents consist of preferred stock using the "if converted" method and stock
options and warrants using the treasury stock method. Preferred stock, common
stock options and warrants are excluded from the computation of diluted earnings
per share if their effect is anti-dilutive. Based on SEC Staff Accounting Bulletin No. 98, preferred andThe weighted average common stock
issued or granted for below fair market value (nominal consideration) prior tooption grants excluded from the IPO must be included in the earningscalculations of diluted net loss per share calculation as if they had
been outstandingwere
200,000 for the entire period. We have never issued or granted this type of
stock.year ended December 31, 2001.
39
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2001
The following table provides a reconciliation of the numerators and
denominators used in calculating basic and diluted earnings per share for the
years ended December 31, 2001, 2000 1999, and 1998,1999, respectively (in thousands, except
per share data):
Year Ended DecemberYEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
2001 2000 1999
1998
---------------- --------------- ----------------------- -------- -------
Net income (loss)..................................... $(58,219) $ 6,138 $ 5,422
$ 495
================ =============== ======================= ======== =======
Basic earnings (loss) per share:
Weighted average common shares outstandingoutstanding.......... 19,298 18,011 5,287
2,355
---------------- --------------- ---------------Less: Weighted average shares subject to
repurchase....................................... (23) (--) (--)
-------- -------- -------
Weighted average common shares outstanding.......... 19,275 18,011 5,287
-------- -------- -------
Basic earnings (loss) per shareshare....................... $ (3.02) $ 0.34 $ 1.03
$ 0.21
================ =============== ======================= ======== =======
Diluted earnings (loss) per share:
Weighted average common shares outstandingoutstanding.......... 19,275 18,011 5,287 2,355
Weighted average common stock option grants and
outstanding warrants............................. -- 2,503 2,603 1,518
warrants
Weighted average preferred stock outstandingoutstanding........ -- -- 6,776
8,452
---------------- --------------- ---------------
42
-------- -------- -------
Weighted average common shares and common stock
equivalents outstanding.......................... 19,275 20,514 14,666
12,325
outstanding
---------------- --------------- ----------------------- -------- -------
Diluted earnings (loss) per shareshare..................... $ (3.02) $ 0.30 $ 0.37
$ 0.04
================ =============== ======================= ======== =======
Accounting for ImpairmentGOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets are amortized using the straight-line method
over useful lives of Long-Lived Assets
Goodwill is being amortized on a straight-line basis over five2 to 5 years. As of December 31, 2001 and 2000, accumulated
amortization of goodwill and intangible assets was $48,000 and $7.0 million,
respectively.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
We assess the need to record impairment losses on long-lived assets used in
operations when indicators of impairment are present.present such as a significant
industry downturn, significant decline in the market value of the Company or
significant reductions in projected future cash flows. On an on-going basis, we
review the value and period of amortization or depreciation of long-lived
assets, including costs in excess of net assets of businesses acquired.assets. During this review, the significant assumptions used in determining the
original cost of long-lived assets are reevaluated. Although the assumptions may vary from
transaction to transaction, they generally include revenue growth, operating
results, cash flows and other indicators of value. We then determine whether
there has been a permanent impairment of the value of long-lived assets by
comparing future estimated undiscounted cash flows to the asset's carrying
value. If the carrying value of the asset exceeds the estimated future
undiscounted cash flows, exceed the carrying value
of the asset, a loss is recorded as the excess of the asset's
carrying value over fair value. To date,Long-lived assets to be disposed of are reported
at the lower of carrying amount or fair value less costs to sell.
Due to the recent economic downturn, we determined that a portion of the
remaining goodwill from the CSD acquisition and all of the remaining goodwill
and intangibles from the Voyager and BlueCom acquisitions have been impaired. As
such, an impairment charge of $16.8 million was recorded in fiscal 2001. See
Note 5 for further discussions.
40
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2001
COMPREHENSIVE INCOME
The following table provides the calculation of other comprehensive income
for the years ended December 31, 2001, 2000 and 1999 (in thousands):
YEARS ENDED DECEMBER 31,
--------------------------
2001 2000 1999
-------- ------ ------
Net income (loss)........................................ $(58,219) $6,138 $5,422
Other comprehensive income:
Unrealized gains (loss) on available-for-sale
securities.......................................... 538 340 (66)
-------- ------ ------
Comprehensive income (loss).............................. $(57,681) $6,478 $5,356
======== ====== ======
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No.'s 141 and 142, "Business
Combinations" and "Goodwill and Other Intangible Assets". SFAS No. 141 requires
all business combinations initiated after June 30, 2001 to be accounted for
using the purchase method. Under SFAS No. 142, goodwill and intangible assets
with indefinite lives are not neededamortized but are subject to record anyat least an annual
assessment for impairment losses on
long-lived assets.
Comprehensive Incomeapplying a fair-value based test. Effective January 1,
1998, we adopted2002, existing goodwill will no longer be amortized. 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. Upon adoption of SFAS No. 130 "Reporting Comprehensive
Income." Comprehensive income is to include amounts that have been previously
excluded from net income and reflected instead in stockholders' equity. For142 on
January 1, 2002, we will no longer amortize goodwill, thereby eliminating annual
goodwill amortization of approximately $192,000, based on anticipated
amortization for 2002.
In October 2001, the year ended December 31, 2000, comprehensive income was $6.5 million, which
includes an unrealized holding gain of $340,000 related to available-for-sale
investments. For the year ended December 31, 1999, comprehensive income was $5.4
million, which includes an unrealized holding loss of $66,000 related to
available-for-sale investments. For the year ended December 31, 1998,
comprehensive income was the same as reported net income.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards BoardFASB issued SFAS No. 133144, "Accounting for Derivative Instrumentsthe
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supercedes SFAS No.
121 by requiring that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and Hedging Activities," which requires
certain accountingused or newly acquired and reporting standardsby
broadening the presentation of discontinued operations to include more disposal
transactions. The Statement will be effective for derivative financial instruments
and hedging activities. It applies for the first quarterfiscal years beginning January 1,after
December 15, 2001. Because weWe do not currently hold any derivative instruments and do not
engage in hedging activities, we do not believeexpect that the adoption of SFAS No. 133, as amended,144 will have
a material effectimpact on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition". In June 2000, the
SEC deferred the adoption date for SAB 101 until our fourth quarter ended
December 31, 2000. SAB 101 summarizes certain areas of the Staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. We adopted SAB 101 in October 2000 and this adoption did
not have a material effect on our financial position or results of operations.
In March 2000, the FASB issued Financial Standards Board Interpretation (FIN)
No. 44, "Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB Opinion No. 25." FIN 44 addresses the application of APB
25 to clarify, among other issues, (a) the definition of employee for purposes
of applying APB 25, (b) the criteria for determining whether a plan qualifies as
a noncompensatory plan, (c) the accounting consequence of various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
was effective July 1, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998 or January 12, 2000. To the extent FIN 44
covers events occurring during the period after December 15, 1998 or January 12,
2000, but before the effective date of July 1, 2000, the effects of applying the
interpretation will be recognized on a prospective basis from July 1, 2000. We
adopted FIN 44 in July 2000 and this adoption did not have a material effect on
our financial position or results of operations.
Risks and Uncertainties
For the years ended December 31, 2000, 1999 and 1998, we purchased integrated
circuits from a limited number of vendors. If these vendors are unable to
provide integrated circuits in a timely manner and we are unable to find
alternative vendors, our business, operating results and financial condition
could be adversely affected.
43
The majority of our revenues are derived from a limited number of products
utilizing host signal processing technology. The market for these products is
characterized by frequent transitions in which products rapidly incorporate new
features and performance standards. A failure to develop products with required
feature sets or performance standards or a delay in bringing a new product to
market could adversely affect our operating results.
ReclassificationsRECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform with the
current yearperiod presentation.
2. SHORT-TERM INVESTMENTS
We invest in high quality, short-term investments, which we classify as
available-for-sale. There were no significant differences between amortized cost
and estimated fair value of these short-term investments at December 31, 20002001
and 1999.2000. The following table presents the estimated fair value breakdown of
investment securities by major security type (in thousands):
December
DECEMBER 31,
-----------------
2001 2000
------- -------
Commercial paper............................................ $ -- $17,997
U.S. Government obligations................................. 6,899 7,760
Corporate bonds............................................. 80,336 67,226
------- -------
Total short-term investments...................... $87,235 $92,983
======= =======
41
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, -------------------------
2000 1999
------- -------
Commercial paper $17,997 $15,884
U.S. Government obligations 7,760 7,908
Corporate bonds 67,226 29,793
------- -------
Total short-term investments $92,983 $53,585
======= =======2001
As of December 31, 2000, $47.92001, $25.6 million of the short-term investments have
maturity dates of less than one year and $45.1$61.6 million have maturity dates of
one to five years. All of our short-term investments are classified as current
assets because they are marketable and we have the option to sell them before
they mature.
3. ACQUISITIONS
BlueCom Technology Corp.BLUECOM TECHNOLOGY CORP.
On December 14, 2000, we completed the acquisition of BlueCom, Technology
Corp., ("BlueCom"), Taiwan's industry leadera Taiwanese
Company specializing in the innovation, development and marketing of MMX Signal
Processing (MSP) technology. Under the terms of the Agreement and Plan of Reorganization (the "Merger Agreement"),agreement, the former
shareholders of BlueCom received 11,245 shares of our common stock and
$1,557,770 of cash in exchange for all shares of BlueCom common stock.
The purchase price of BlueCom was allocated based upon the estimated fair
value of the assets acquired and liabilities assumed, which approximated book
value. The following table summarizes the components of the total purchase price
and the allocation (in thousands, except share amounts)thousands).
CashCash........................................................ $1,557
Fair value of 11,245 shares of our common stockstock............. 322
Acquisition costs 33
--------------------
Estimated totalcosts........................................... 71
------
Total purchase price 1,912price.............................. 1,950
Less: Net assets acquired (307)
--------------------
Estimated acquiredacquired................................... (170)
------
Acquired intangibles $1,605
====================and goodwill................. $1,780
======
The acquisition was accounted for under the purchase method of accounting.
Under this method, if the purchase price exceeds the net tangible assets
acquired, the difference is recorded as excess purchase price. In this
circumstance, the difference was $1.6$1.8 million which was attributed to goodwill
($949,000)1,124,000) and a covenant not to compete ($656,000). We have classified this
balance of $1.6$1.8 million as goodwill and other intangible assets, net, in the
accompanying consolidated balance sheets and arewere amortizing it over useful
lives of two to five years.years prior to the impairment recorded in the quarter ended
December 31, 2001 (see Note 5). We have included the results of BlueCom from the
date of acquisition to December 31, 2000 in the consolidated statements of operations.
44
Voyager Technologies, Inc.VOYAGER TECHNOLOGIES, INC.
On February 24, 2000, we completed the acquisition of Voyager, Technologies,
Inc., ("Voyager"), a provider
of personal connectivity and Internet access technology. Under the terms of the
Agreement and Plan of Reorganization (the "Merger Agreement"), the former
shareholders of Voyager received 237,272 shares of our common stock and
$2,065,331 of cash in exchange for all shares of Voyager common stock. In
addition, 645,157 vested and unvested options to purchase shares of Voyager
common stock were converted into 49,056 options to purchase our common stock at
the exchange ratio of 0.07604. Included in the 237,272 shares are 82,419
restricted shares of common stock issued to a Voyager shareholder. These shares
are not subject to forfeiture under any circumstances and, thus, were considered
in the determination of the purchase price at the date of acquisition.
The purchase price of Voyager was allocated based upon the estimated fair
value of the assets acquired and liabilities assumed, which approximated book
value. The following table summarizes the components of the total purchase price
and the allocation (in thousands, except share amounts)thousands).
42
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2001
Fair value of 237,272 shares of our common stock $ 11,814stock............ $11,814
Fair value of options for 49,056 shares of our common
stockstock..................................................... 2,504
CashCash........................................................ 2,065
Settlement of outstanding claimclaim............................. 1,500
Acquisition costscosts........................................... 687
--------------------
Estimated total-------
Total purchase priceprice.............................. 18,570
Less: Net assets acquiredacquired................................... (762)
--------------------
Estimated acquired-------
Acquired intangibles $ 17,808
====================and goodwill................. $17,808
=======
The acquisition was structured as a tax-free reorganization and was
accounted for under the purchase method of accounting. Under this method, if the
purchase price exceeds the net tangible assets acquired, the difference is
recorded as excess purchase price. In this circumstance, the difference was
$17.8 million. We attributed $1.6 million of the excess purchase price to
in-process research and development, which we expensed immediately, and the
balance of $16.2 million was attributed to intellectual property ($0.5 million),
workforce ($0.3 million) and goodwill ($15.4 million). We have classified this
balance of $16.2 million as goodwill and other intangible assets, net, in the
accompanying consolidated balance sheets and arewere amortizing it over useful
lives of five years.years prior to the impairment recorded in the quarter ended
September 30, 2001 (see Note 5). We have included the results of Voyager from
the date of acquisition to December 31,
2000 in the consolidated statements of operations.
In addition to the 237,272 shares of our common stock issued to the
shareholders of Voyager, 30,415 additional shares of common stock were held in
an escrow account pending resolution of an outstanding claim. These shares had
been treated as contingent consideration and were not initially recognized as
purchase price due to the uncertainty of how the claim would be resolved. In May
2000, the outstanding claim was settled for $1.5 million which resulted in the
return of the stock held in escrow to us. No amount was initially recorded for
the now-unissued stock while in escrow, however, the $1.5 million outstanding
claim settlement was recognized as additional purchase price in the quarter
ended June 30, 2000.
As part of the acquisition, we granted 49,056 vested and unvested options
to purchase our common stock upon conversion of the outstanding Voyager options,
based on the exchange ratio of 0.07604. The fair value of these options was
determined using the Black-Scholes option pricing model and the following
assumptions: risk-free interest rate of 5.50%; dividend yields of zero; an
estimated volatility factor of the market price of our common stock of 75%; and
an expected life between three to six months after vest date. The
weighted-
averageweighted-average estimated fair value of these options was $51.05 per share.
Upon completion of the Voyager acquisition, we immediately expensed $1.6
million representing purchased in-process technology that had not yet reached
technological feasibility and had no alternative future use. The $1.6 million
expensed as in-process research and development was approximately 9% of the
purchase price and was attributed and supported by a discounted cash flow
analysis that identified revenue and costs on a project by project basis. The
value assigned to purchased in-process technology, based on a percentage of
completion discounted cash flow method, was determined by identifying research
projects in areas for which technological feasibility has not been established.
The following in-process projects existed at Voyager as of the acquisition date:
Bluetooth, 45
HomeRF, Direct Sequence Cordless, Bluetooth/HomeRF Combo,
Bluetooth/HomeRF/Direct Sequence, Wireless Gas Tank Sensor, Wireless GPS and
Wireless Industrial Garage Door Opener projects.
The value of in-process research and development was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from such
projects and discounting the net cash flows back to their present value. The
discount rate includes a
43
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2001
risk adjusted discount rate to take into account the uncertainty surrounding the
successful development of the purchased in-process technology. The risk-adjusted
discount rate applied to the projects' cash flows was 15% for existing
technology and 20% for the in-process technology. Based upon assessment of each
in-process project's development stage, including relative difficulty of
remaining development milestones, it was determined that application of a 20%
discount rate was appropriate for all acquired in-process projects. The
valuation includes cash inflows from in-process technology through 2005 with
revenues commencing in 2000 and increasing significantly in 2001 before
declining in 2005. The projected total revenue of Voyager was broken down to
revenue attributable to the in-process technologies, existing technologies, core
technology and future technology. The revenue attributable to core technology
was determined based on the extent to which the in-process technologies rely on
the already developed intellectual property. The Bluetooth and HomeRF projects
were approximately 25% complete at the time of the valuation and the expected
timeframe for achieving these product releases was assumed to be in the second
half of 2000. The Direct Sequence Cordless project was approximately 65%
complete at the time of the valuation and the expected time frame for achieving
this product release was assumed to be in the second half of 2000. The
Bluetooth/HomeRF Combo and Bluetooth/HomeRF/Direct Sequence projects were
approximately 10% complete at the time of the valuation and the expected
timeframe for achieving these product releases was assumed to be in the second
half of 2000 and the first half of 2000, respectively. The Wireless Gas Tank
Sensor and the Wireless Industrial Garage Door Opener projects were
approximately 70% complete at the time of the valuation and the expected time
frame for achieving these product releases was assumed to be 2001. The Wireless
GPS was approximately 50% complete at the time of the valuation and the expected
time frame for achieving this product release was assumed to be in the second
half of 2000. The percentage complete calculations for all projects were
estimated based on research and development expenses incurred to date and
management estimates of remaining development costs. Significant remaining
development efforts were to be completed in the next 6 to 18 months in order for
Voyager's projects to become implemented in a commercially viable timeframe.
Management's cash flow and other assumptions utilized at the time of acquisition
dodid not materially differ from historical pricing/licensing, margin, and expense
levels of the Voyager group prior to acquisition.
Approximately $0.5 million was attributed to core wireless technology and
royalty revenue associated with the Wireless Water Meter Reading Device project.
If these projects are not successfully developed, our future revenue and
profitability may be adversely affected. Additionally, the value of other
intangible assets acquired may become impaired.
The unaudited pro forma financial information for the years ended December
31, 2000 and 1999 is presented below (in thousands except per share information)
as if Voyager and BlueCom had been acquired on January 1. The pro forma
information does not purport to be indicative of what would have occurred had
the acquisitions been made as of those dates or of results that may occur in the
future. Pro forma net income excludes the write-off of acquired in-process
research and development of $1.6 million.
Year Ended DecemberYEARS ENDED
DECEMBER 31,
-----------------------------------------------------
2000 1999
---------------- ----------------------- -------
Revenues $ 97,785 $ 77,792Revenues.................................................... $97,785 $77,792
Net incomeincome.................................................. $ 7,668 $ 5,616
Diluted net income per shareshare................................ $ 0.37 $ 0.38
4. INVENTORY LOSSES
Due to the changing market conditions, recent economic downturn and
estimated future requirements, inventory valuation charges 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
44
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2001
$8.6 million related to excess inventory on hand or disposed. As of December 31,
2001 and 2000, the allowance for obsolete inventory was $1.4 million and $2.5
million, respectively.
5. IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
On December 22, 1998, we acquired substantially all of the assets and
assumed certain of the liabilities of CSD, a division of General DataComm, Inc.,
for a total purchase price of approximately $17 million. Of the excess purchase
price of $16.8 million, we attributed $10.7 million as goodwill and other
intangible assets.
On February 24, 2000, we completed the acquisition of Voyager, a provider
of personal connectivity and Internet access technology, for a total purchase
price of approximately $18.6 million. Of the excess purchase price of $17.8
million, we attributed $16.2 million as goodwill and other intangible assets.
On December 14, 2000, we completed the acquisition of BlueCom, one of
Taiwan's industry leaders in the innovation, development and marketing of MSP
technology, for a total purchase price of approximately $1.9 million. The excess
purchase price of $1.8 million was attributed to goodwill and other intangible
assets.
In the second half of 2001, pursuant to SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," we
evaluated the recoverability of the long-lived assets, including intangibles,
acquired from CSD, Voyager and BlueCom, and recorded impairment charges totaling
$16.8 million. Due to the recent economic downturn, we determined that CSD's
estimated future undiscounted cash flows were below the carrying value of CSD's
long-lived assets. Accordingly, during the third quarter of 2001, we adjusted
the carrying value of CSD's long-lived assets, primarily goodwill, to their
estimated fair value of approximately $0.4 million, resulting in an impairment
charge of approximately $4.5 million. The estimated fair value was based on
anticipated future cash flows discounted at a rate commensurate with the risk
involved. In regards to the goodwill and intangible assets acquired from
Voyager, as a result of the recent corporate restructuring and reorganization,
we determined that there are no future cash flows expected from this business.
Accordingly, during the third quarter of 2001, we wrote off the carrying value
of Voyager's long-lived assets, primarily goodwill, resulting in an impairment
charge of approximately $11.1 million. In regards to the goodwill and intangible
assets acquired from BlueCom, as a result of the recent corporate restructuring
and reorganization, we determined that there are no future cash flows expected
from this business. Accordingly, during the fourth quarter of 2001, we wrote off
the carrying value of BlueCom's long-lived assets, resulting in an impairment
charge of approximately $1.2 million.
6. RESTRUCTURING CHARGES
On February 8, 2001, we announced a series of actions to streamline support
for our voiceband business and sharpen our focus on emerging growth sectors.
These measures were part of a restructuring program to return the company to
profitability and operational effectiveness and included a reduction in
worldwide headcount 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. 13 research and development, 12 sales and marketing and 17
general and administrative positions were eliminated as part of this
reorganization. In the fourth quarter of 2001, 7 research and development, 8
sales and marketing and 11 general and administrative positions were eliminated
to further focus our business. In total, 90 positions were eliminated during the
year ended December 31, 2001. The restructuring resulted in $3.8 million charges
for the year ended December 31, 2001, consisting of severance and employment
related
45
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2001
costs of $2.5 million and costs related to closure of excess facilities of $1.3
million as a result of the reduction in force. The following analysis sets forth
the significant components of this charge:
ACCRUAL ACCRUAL
BALANCE AT BALANCE AT
DECEMBER 31, RESTRUCTURING DECEMBER 31,
2000 CHARGE PAYMENTS 2001
------------ ------------- -------- ------------
Severance and employment related
costs............................... $ -- $2,475 $1,896 $ 579
Costs for closure of excess
facilities.......................... -- 1,312 324 988
------ ------ ------ ------
$ -- $3,787 $2,220 $1,567
====== ====== ====== ======
Amount included in long-term
liabilities......................... $ 141
======
Amount included in short-term
liabilities......................... $1,426
======
Total severance and employment related costs of $2.5 million consisted of
termination compensation and related benefits. Total costs for closure of excess
facilities of $1.3 million consisted of future minimum lease payments and
related costs on the excess and unused facilities as a result of our down
sizing. We are in the process of locating a tenant to sublease the excess
facilities for the remainder of the lease term. As of December 31, 2001,
approximately $1.9 million of termination compensation and related benefits had
been paid to terminated employees. The remaining accrual balance of $579,000
will be paid on various dates extending through October 2002. As of December 31,
2001, approximately $324,000 of lease payments and related costs had been paid
to the landlord for the excess facilities. The remaining accrual balance of
$988,000 will be paid monthly through February 2003.
7. INCOME TAXES
We utilize the liability method of accounting for income taxes in
accordance with SFAS No. 109 "Accounting for Income Taxes". Under this method,
deferred taxes are determined based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates.
The domestic and foreign components of our income (loss) before provision
for income taxes and extraordinary loss were as follows (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------
2001 2000 1999
-------- ------ -------
Domestic................................................ $(12,508) $1,320 $ 2,151
Foreign................................................. (40,400) 7,184 7,896
-------- ------ -------
$(52,908) $8,504 $10,047
======== ====== =======
46
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2001
Our provision for income taxes consisted of the following (in thousands):
YEARS ENDED DECEMBER 31,
-------------------------
2001 2000 1999
------ ------ -------
Current:
Federal................................................. $ -- $2,125 $ 4,039
State................................................... -- 291 346
Other................................................... 56 29 --
------ ------ -------
56 2,445 4,385
------ ------ -------
Deferred (Benefit):
Federal................................................. 4,527 (69) (1,213)
State................................................... 728 (10) (158)
------ ------ -------
5,255 (79) (1,371)
------ ------ -------
$5,311 $2,366 $ 3,014
====== ====== =======
A reconciliation of the provision for income taxes at the Federal statutory
rate compared to our effective tax rate is as follows (in thousands):
YEARS ENDED DECEMBER 31,
--------------------------
2001 2000 1999
-------- ------ ------
Provision (benefit) at Federal statutory rate (35%)...... $(18,518) $2,976 $3,516
State income tax, net of Federal benefit................. -- 492 127
Foreign taxes in excess of statutory rate................ 56 29 --
R&D credit............................................... -- (661) (651)
Goodwill amortization/impairment......................... 4,152 -- --
Deferred tax asset valuation............................. 5,011 -- --
Foreign income/(loss) taxed at lower rate................ 16,257 -- --
Other.................................................... (1,647) (470) 22
-------- ------ ------
$ 5,311 $2,366 $3,014
======== ====== ======
47
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2001
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Our net deferred tax
asset consists of the following (in thousands):
DECEMBER 31,
----------------
2001 2000
------- ------
Accrued royalties........................................... $ 992 $ 997
Inventory reserve........................................... 62 208
Net operating loss carryforwards............................ 1,517 --
Research and development credit carryforwards............... 1,400 --
Other cumulative temporary differences...................... 1,647 2,026
Deferred amortization of purchased assets................... 2,593 2,424
------- ------
8,211 5,655
Valuation allowance......................................... (7,811) --
------- ------
Net deferred tax asset.................................... $ 400 $5,655
======= ======
As of December 31, 2001, we have federal and California net operating loss
carryforwards of approximately $4 million and $2 million, respectively, to
offset future taxable income. These carryforwards expire on various dates
through 2021.
Other cumulative temporary differences consist of items currently
deductible for financial reporting purposes, but not for tax purposes. These
items are primarily estimated reserves and accruals. The realization of the
deferred tax asset is dependent on generating sufficient taxable income in
future years. During the third quarter of 2001, we recorded $5.3 million of
provision for income taxes to establish valuation allowances against deferred
tax assets as a result of uncertainties regarding realizability. After the
establishment of the valuation allowances, we have $400,000 in net deferred tax
assets as of December 31, 2001.
8. PREFERRED STOCK
Following the closing of our IPO in October 1999, 4,635,548 shares of
Series A convertible preferred stock, 3,250,000 shares of Series B convertible
preferred stock and 625,200 shares of Series C convertible preferred stock were
automatically converted into 8,510,748 shares of common stock. We are authorized
to issue up to 5,000,000 shares of preferred stock in one or more series, each
with a par value of $0.001 per share. As of December 31, 20002001 and 1999,2000, no
shares of preferred stock were outstanding.
46
5. INCOME TAXES
We utilize the liability method of accounting for income taxes in accordance
with SFAS No. 109 "Accounting for Income Taxes". Under this method, deferred
taxes are determined based on the differences between the financial statement
and tax bases of assets and liabilities using enacted tax rates.
The domestic and foreign components of our income before provision for income
taxes were as follows (in thousands):
Year Ended December 31,
------------------------------------------
2000 1999 1998
------ ------- --------
Domestic $1,320 $ 2,151 $(1,390)
Foreign 7,184 7,896 2,097
------ ------- -------
$8,504 $10,047 $ 707
====== ======= =======
Our provision for income taxes consisted of the following (in thousands):
Year Ended December 31,
--------------------------------------------
2000 1999 1998
------ ------- -------
Current:
Federal $2,125 $ 4,039 $ 1,188
State 291 346 482
Other 29 -- 67
------ ------- -------
2,445 4,385 1,737
------ ------- -------
Deferred (Benefit):
Federal (69) (1,213) (942)
State (10) (158) (583)
------ ------- -------
(79) (1,371) (1,525)
------ ------- -------
$2,366 $ 3,014 $ 212
====== ======= =======
A reconciliation of the provision for income taxes at the Federal statutory
rate compared to our effective tax rate is as follows (in thousands):
Year Ended December 31,
--------------------------------------------
2000 1999 1998
------ ------ -----
Provision at Federal statutory rate $2,976 $3,516 $ 247
State income tax, net of Federal benefit 492 127 25
Foreign taxes in excess of statutory rate 29 -- 67
R&D credit (661) (651) (310)
Other (470) 22 183
------ ------ -----
$2,366 $3,014 $ 212
====== ====== =====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Our net deferred tax
asset consists of the following (in thousands):
Year Ended December 31,
-------------------------------
2000 1999
---------- ---------
Accrued royalties $ 997 $ 990
Inventory reserve 208 206
Other cumulative temporary differences 2,026 1,964
Deferred amortization of purchased assets 2,424 2,416
------ ------
$5,655 $5,576
====== ======
Other cumulative temporary differences consist of items currently deductible
for financial reporting purposes, but not for tax purposes. These items are
primarily estimated reserves and accruals. The realization of the deferred tax
asset is dependent on generating sufficient taxable income in future years.
Although realization is not assured, we believe it is more likely than not that
all of the deferred tax asset will be realized. The amount of the deferred tax
47
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during future years are reduced.
6.9. COMMON STOCK
Initial Public OfferingINITIAL AND SECONDARY PUBLIC OFFERINGS
On October 19, 1999, we completed itsour IPO of common stock. A total of
5,290,000 shares were sold at a price of $17.00 per share (including the
exercise of the underwriters' over-allotment option of 690,000 shares). We
received net proceeds of approximately $82.5 million.
Upon closing of the
offering, all outstanding shares of convertible preferred stock were
automatically converted into 8,510,748 shares of common stock.
Secondary Public Offering
On April 11, 2000, we effected itsour secondary public offering of common
stock. A total of 2,750,000 shares were sold at a price of $46.50 per share;
650,000 shares were sold by us and 2,100,000 shares were sold by our selling
stockholders. The offering resulted in net proceeds to us and the selling
stockholders of approximately $28.0 million and $92.8 million, respectively, net
of an underwriting discount of $6.4 million and offering expenses of $0.7
million.
Common Stock Reserved for Future Issuance48
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2001
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
As of December 31, 2000,2001, we had reserved shares of common stock for future
issuance as follows:
Stock options under
1995, 1997 and 2001 Stock Option Plans...................... 6,150,428
1998 Director Option Plan................................... 200,000
Employee Stock Purchase Plan................................ 1,337,362
---------
Total shares reserved....................................... 7,687,790
=========
STOCK OPTION PLANS
1995 andPlan, 1997 Stock Option Plans 5,440,815
Director Option Plan 177,500
Employee Stock Purchase Plan 1,094,665
---------
Total shares reserved 6,712,980
=========
Stock Option Plans
1995 Stock Option Plan, and 19972001 Plan
In March 1995, the Board of Directors adopted and approved the 1995 Stock
Option Plan ("1995 Plan" and "1997 Plan"). Under the 1995 Plan, and 1997 Plan, the Board of Directors may grant to
employees, directors and consultants options and/or purchase rights to purchase our common stock at
terms and prices determined by the Board. No further options will be granted
under the 1995 Plan. However, all outstanding options under the 1995 Plan remain
in effect. The 1995 Plan will terminate in 2005. As of December 31, 2001, of the
total 3,200,000 shares authorized under the 1995 Plan, 156,032 shares remain
available for issuance.
In November 1996, the Board of Directors.Director adopted and approved the 1997 Stock
Option Plan ("1997 Plan"). Under the 1997 Plan, the Board may grant to
employees, directors and consultants options to purchase our common stock and/or
stock purchase rights at terms and prices determined by the Board. In August
1999, the Board of Directors and our stockholders approved an amendment and
restatement of the 1997 Plan and approved an additional increase
inthat increased the number of authorized shares of
our common stock we canmay issue under the 1997 Plan to 5,500,000
shares of common stock.5,500,000. We will further
increase annually the number of authorized shares we canare authorized to issue under the 1997
Plan by an amount equal to the lesser of (i) 700,000 shares, (ii) 4% of the
outstanding shares on such date or (iii) a lesser amount determined by the Board
of Directors. The exercise price and vesting of all grants are to be determined by the Board of Directors. The
exercise price of incentive stock options cannotgranted under the
1997 Plan may not be less than the fair market value of the common stock on the
grant date. OptionsNonqualified stock options granted under the 1997 Plan expire 10 years from the date of grant. Nonqualified options granted under the
1995 Plan and 1997 Plan must be issued at a
price equal to at least 85% of the fair market value of our common stock at the
date of grant. The optionsOptions granted under the 1997 Plan may be exercised at any time
within ten years of the date of grant or within ninety days of termination of
employment, or such shorter time as may be provided in the related stock option
agreement, and vest over a vesting schedule determined by the
Board of Directors.agreement. The 1997 Plan will terminate in 2007. The number of authorized shares available for issuance under the 1995 Plan was
3,200,000. As of December 31, 2000,2001, of the
total 3,200,0006,862,413 shares authorized
for issuance, we have remaining 156,032 shares that we can grant under the 1995
Plan. The number of authorized shares available for issuance under the 1997 Plan, was 6,162,413.627,653 shares remain
available for issuance.
In August 2001, the Board of Directors adopted and approved the 2001
Nonstatutory Stock Option Plan ("2001 Plan"). Under the 2001 Plan, the Board may
grant to employees and consultants options to purchase our common stock at terms
and prices determined by the Board. The 2001 Plan does not apply to directors
and officers. Options granted under the 2001 Plan may be exercised at any time
within ten years from the date of grant or within ninety days of termination of
employment, or such shorter time as may be provided in the related stock option
agreement. The 2001 Plan will terminate in 2011. As of December 31, 2000,2001, of the
total 6,162,413750,000 shares authorized for issuance, we have remaining 279,687 shares that we can grant under the 1997
Plan. We have reserved 5,440,815 shares of common stock2001 Plan, 419,648 remain available
for future issuance
under the 1995 and 1997 plans.issuance.
49
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2001
The following table summarizes stock option activity under the 1995 Plan,
1997 Plan and 1997 Plan:
48
2001 Plan as of December 31, 2001:
Options Outstanding
---------------------------------------
Options Weighted Average
Available Shares Exercise Price
-----------------------------------------------------------------------OPTIONS OUTSTANDING
-----------------------------
WEIGHTED AVERAGE
OPTIONS AVAILABLE SHARES EXERCISE PRICE
----------------- ---------- ----------------
Balance, December 31, 1997 422,760 2,068,250 $ 1.36
Authorized....................................... 2,000,000 --
Granted.......................................... (1,393,900) 1,393,900 $ 8.13
Exercised........................................ -- (203,257) $ 0.17
Canceled......................................... 173,585 (173,585) $ 2.52
-----------------------------------------------------------------------
Balance, December 31, 19981998................ 1,202,445 3,085,308 $ 4.43
Authorized.......................................Authorized.............................. 2,000,000 --
Granted..........................................Granted................................. (1,818,492) 1,818,492 $12.11
Exercised........................................Exercised............................... -- (345,986) $ 1.15
Canceled.........................................Canceled................................ 112,292 (112,292) $ 7.72
--------------------------------------------------------------------------------- ---------- ------
Balance, December 31, 19991999................ 1,496,245 4,445,522 $ 7.74
Authorized.......................................Authorized.............................. 662,413 --
Granted..........................................Granted................................. (2,494,196) 2,494,196 $32.70
Exercised........................................Exercised............................... -- (1,163,365) $ 3.94
Canceled.........................................Canceled................................ 771,257 (771,257) $21.66
--------------------------------------------------------------------------------- ---------- ------
Balance, December 31, 20002000................ 435,719 5,005,096 $18.92
=====================================================Authorized.............................. 1,450,000 --
Granted................................. (2,746,690) 2,746,690 $ 7.71
Exercised............................... -- (855,387) $ 2.58
Canceled................................ 1,949,304 (1,949,304) $20.87
Repurchased............................. 115,000 -- --
---------- ---------- ------
Balance, December 31, 2001................ 1,203,333 4,947,095 $14.76
========== ==========
In 2001, in connection with the hiring and appointment of two executive
officers of the Company, we granted an aggregate amount of 300,000 options at
$8.00 per share outside of any stock option plan, pursuant to individual stock
option agreements. As of December 31, 2001, all of the 300,000 options are
outstanding.
1998 Director Option Plan ("Directors Plan")
Our Directors Plan became effective following our IPO in October 1999. We
have reserved a total of 200,000 shares of common stock that we can issue under
our Directors Plan. Under our 1998 Directors Plan, any new non-employee director
elected to the Board of Directors automatically receives a grant of 15,000
shares of common stock. The 15,000 share options will vest one-third as of each
anniversary of its date of grant until the option is fully vested, provided that
the optionee continues to serve as a director on such dates. After the initial
15,000 share option isoptions are granted to the non-employee director, he or she shall
automatically be granted an option to purchase 7,500 shares each year on January
1, if on such date he or she shall have served on the Board of Directors for at
least six months. The 7,500 share options shall vest completely on the
anniversary of their date of grant, provided that the optionee continues to
serve as a director on such dates. The exercise price of all options isshall be
100% of the fair market value per share of the common stock, generally
determined with reference to the closing price of the common stock as reported
on the Nasdaq National Market on the date of grant. All of the options granted
under our 1998 Directors Plan have a term of 10 years. As of December 31, 2000,2001,
of the total 200,000 shares authorized for issuance, we have remaining 177,500140,000
shares that we can grant under the Directors Plan. For the year ended December
31, 2000, we granted 22,500 options at a weighted average exercise price of
$59.00 under the Directors Plan and all 22,500 options were outstanding as of
December 31, 2000. For the year ended December 31, 2001, there were grants of
50
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2001
59,500 options at a weighted average exercise price of $8.46 and cancellations
of 15,000 options at a weighted average exercise price of $33.92 under the
Directors Plan. As of December 31, 2001, 60,000 options were outstanding at a
weighted average exercise price of $21.05.
The following table summarizes information about stock options outstanding
under the 1995 Plan, 1997 Plan, and2001 Plan, Directors Plan and Executive Options
at December 31, 2000:2001:
Options Outstanding Options Exercisable
-------------------------------------- -------------------------------------------
Weighted- Number
Number Average Weighted- Exercisable Weighted-
Range of Outstanding at Remaining Average DecemberOPTIONS OUTSTANDING
----------------------------- OPTIONS EXERCISABLE
WEIGHTED- ------------------------------
NUMBER AVERAGE NUMBER
OUTSTANDING AT REMAINING WEIGHTED- EXERCISABLE WEIGHTED-
RANGE OF DECEMBER 31, Average
Exercise Prices DecemberCONTRACTUAL AVERAGE DECEMBER 31, 2000 Contractual Life Exercise Price 2000 Exercise PriceAVERAGE
EXERCISE PRICES 2001 LIFE EXERCISE PRICE 2001 EXERCISE PRICE
- ---------------- ----------------- ---------------- ---------------- ------------------ ---------------------------------- -------------- ----------- -------------- ------------ --------------
$0.02 - $3.00 547,599 5.86-- $7.17 864,456 8.58 $ 1.02 509,3715.80 196,132 $ 0.94
$3.50 -2.04
$7.45 605,762 7.20-- $7.97 879,184 8.40 $ 7.15 365,0377.77 362,716 $ 7.29
$8.75 - $10.06 574,610 7.817.54
$8.00 -- $9.25 819,696 8.59 $ 9.34 232,9948.66 199,148 $ 9.299.18
$9.52 -- $10.05 683,337 9.11 $ 9.96 150,926 $ 9.93
$10.25 --- $10.25 910,151 8.48758,703 7.51 $10.25 334,788496,075 $10.25
$10.56 - $26.75 829,934 9.30 $20.84 92,156 $16.00
$27.56 - $33.63 767,340 9.44 $31.87 -- $$32.25 590,417 8.36 $24.40 264,437 $23.41
$33.50 -- $35.88 - $59.00 792,200 9.19 $43.80 15,371 $44.60711,302 8.25 $40.39 373,690 $41.17
--------- ---------
5,027,596 $19.10 1,549,7175,307,095 8.40 $14.44 2,043,124 $16.21
========= =========
49
As of December 31, 2000, there were 1,549,717 options exercisable at a
weighted average exercise price of $7.03 and as of December 31, 1999, there were
1,531,816 options exercisable at a weighted average exercise price of $3.82.
Employee Stock Purchase Plan ("Purchase Plan")
In May 1998, we reserved a total of 800,000 shares of common stock for
future issuance under our Purchase Plan, plus annual increases equal to the
lesser of (i) 350,000 shares (ii) 2% of the outstanding shares on such date or
(iii) a lesser amount determined by the Board of Directors. Our Purchase Plan
will enable eligible employees to purchase common stock at the lower of 85% of
the fair market value of our common stock on the first or last day of each
offering period. Each offering period is six months except for the first
offering period which began on October 19, 1999 following the initial public
offering and ended on February 14, 2000. The Purchase Plan will terminate in
2008. As of December 31, 2000,2001, the number of authorized shares available for
issuance under the Purchase Plan was 1,131,2071,481,207 and we have remaining 1,094,6651,337,362
shares that we can issue under the Purchase Plan.
Deferred Stock Compensation
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 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 connection with the grant of 235,000 shares of restricted common stock
to employees in 2001 through our 1997 Plan, we recorded deferred stock
compensation of $1.8 million representing the fair value of our common stock on
the date the restricted stock was granted. Such amount is presented as a
reduction of stockholders' equity and is amortized ratably over the three year
vesting period of the applicable shares.
51
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2001
Subsequent to the issuance of the restricted stock, employee terminations
resulted in the cancellation of 115,000 shares and reversal of $859,000 from
deferred stock compensation. Of the remaining 120,000 shares of restricted
common stock, 15,000 shares vest out of the repurchase option three years after
date of issuance, 52,500 shares vest out of the repurchase option on December
31, 2002 and the balance on December 31, 2003. As of December 31, 2001, all of
the remaining 120,000 shares are subject to repurchase by us. 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.
For the yearyears ended December 31, 2001, 2000 and 1999, amortization of
deferred stock compensation (in thousands) relates to the following functional
categories:
Year Ended DecemberYEARS ENDED DECEMBER 31,
------------------------------------------------------------------
2001 2000 1999
------------------ ------------------------- ------- -----
Research and developmentdevelopment.................................... $ 116 $ 285 $ 222$222
Sales and marketingmarketing......................................... 195 302 234
General and administrativeadministrative.................................. 770 721 334
------------------ ------------------------ ------ ----
$1,081 $1,308 $ 790
================== ==================$790
====== ====== ====
Rescission of Stock Option Exercise
In December 2000, an employee and usthe Company mutually agreed to rescind an
option exercise to purchase 30,000 shares of common stock which occurred in
January 2000. There was no effect on our financial position or results of
operations for the year ended December 31, 2000 as a result of this rescission.
Valuation of Stock Options
Under SFAS No. 123, we are required to present pro forma information
regarding net income and net income per share as if we had accounted for our
stock options under the fair value method. The fair value for the stock options
was estimated at the date of grant using the Black-Scholes option pricing model
with the following assumptions for fiscal years 2001, 2000 1999 and 1998:1999: risk-free
interest rates in the range of 4.7%2.2% to 6.5%; dividend yields of zero; an
estimated volatility factor of the market price of our common stock in the range
of 55% to 75%; and an expected life between three to six months after vest date.
The weighted-average estimated fair value of options granted during fiscal 2001,
2000 and 1999 was $4.11, $16.96 and 1998 was $16.96, $6.88 and $3.43 per share, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility and expected option life. Because our employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in our opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of our employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting periods. Our pro forma
net income (loss) would have been approximately $(64.6) million, $(10.2) mil1ion,million
and $1.6 million and
$(984,000) for fiscal years 2001, 2000 1999 and 1998,1999, respectively. Pro forma
diluted net income (loss) per share would have been $(0.56)$(3.35), $0.11$(0.50) and $(0.42)$0.11
for fiscal years 2001, 2000 and 1999, and 1998, respectively.
Warrants
5052
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2001
WARRANTS
In February 1998, in connection with the issuance of Series C preferred
stock, we issued warrants to purchase 2,417 shares of common stock at $8.00 per
share. In 1999, a portion of these warrants were exercised to purchase 1,354
shares of common stock. The remaining warrants were exercised in 2000. In
December 1998, in connection with the notes payable arrangement to acquire
Communications Systems Division ("CSD"), a division of General DataComm, Inc.,
we issued a warrant to purchase 200,000 shares of Series C preferred stock at
$8.00 per share which was converted to a warrant to purchase common stock at the
time of the IPO. This warrant was exercised in 2000 through a net exercise
settlement.
7.10. LEASE ARRANGMENTS:COMMITMENTS:
We entered into an operating lease for our facilities in Milpitas,
California in September 1999. The lease expires in February 2003. Additionally,
we have facilities in Waterbury, Connecticut, Japan, Taiwan, Korea and Korea.France.
We have non-cancelable operating leases for office facilities through 2003
and operating leases for equipment through 2004.2005. Our future minimum rental
commitmentspayments under these leases at December 31, 2000,2001, are as follows (in thousands):
2001 $1,263
2002 1,196
2003 300
2004 42
20052002........................................................ $1,376
2003........................................................ 386
2004........................................................ 76
2005........................................................ 2
------
Future minimum lease payments $2,803payments............................... $1,840
======
Our rent expense under operating leases for the years ended December 31,
2001, 2000 1999 and 19981999 was approximately $1,166,000, $1,422,000, and $985,000,
and $364,000,
respectively.
8.11. 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 different than our current
estimates, our business, operating results and financial condition could be
materially and adversely affected.
As of December 31, 20002001 and 1999,2000, we had accrued royalties of approximately
$11.7$12.3 million and $7.9$11.7 million, respectively. Of these amounts, approximately
$42,000 and $1.2 million and $700,000 represent amounts accrued based upon signed royalty
agreements as of December 31, 20002001 and 1999,2000, respectively. The remainder of
accrued royalties represents management's best estimate within a range of
possible settlement losses as of each date presented. While management is unable
to estimate the maximum amount of the range of possible settlement losses, it is
possible that actual losses could exceed the amounts accrued as of each date
presented.
DuringWe have received communications from Agere Systems and 3Com, and may
receive communications from other third parties in the future, asserting that
our products infringe on their intellectual property rights,
53
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2001
that our patents are unenforceable or that we have inappropriately licensed our
intellectual property to third parties. These claims could affect our
relationships with existing customers and may prevent potential future customers
from purchasing our products or licensing our technology. Because we depend upon
a limited number of products, any claims of this kind, whether they are with or
without merit, could be time consuming, result in costly litigation, 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 Agere Systems and 3Com. Other than the ESS
Technology and Dr. Townshend lawsuits described below, no material lawsuits
relating to intellectual property are currently filed against us.
PCTEL, Inc. v. Brent Townshend
In September 1998 Motorola, Inc. ("Motorola")and May 1999, Dr. Brent Townshend alleged by letter that
our products infringe a number of patents owned by him and that we owed him
royalties. In May 2001, we filed an actiona complaint against Townshend in the U.S.
District Court for the Northern District of California, contending that
Townshend's ITU-related patents are invalid, void, unenforceable and/or not
infringed. Our complaint also contends that Townshend's patents are already
licensed to us.
In September 2001, Townshend answered and filed a motion to dismiss the
complaint. Townshend also asserted counter-claims for patent infringement
against us (and one other defendant) related to seven Motorola
patents. In its complaint, Motorola was seeking damages for our alleged
infringement, including treble damages for our alleged willful infringement and
an injunction against us. Motorola was also seeking attorney's fees and costs.
We filed an answer to Motorola's complaint denying infringement of the seven
asserted Motorola patents and asserted that each patent is invalid or
unenforceable. In addition, we asserted counterclaims and declaratory relief for
invalidity and/or unenforceability and noninfringements of each of the seven
asserted Motorola patents. By our counterclaims, we were seeking compensatorydamages. Townshend sought exemplary and punitive damages an injunctionand
asked that damages be increased three times the amount found or assessed,
alleging willful infringement. Townshend's answer also sought costs, fees,
interest and restitution. In January 2002, Townshend's motion to dismiss was
denied.
In September 2001, on behalf of ourselves and the general public, we filed
a complaint against Motorola,Townshend and an award of treble
damagesothers in the California Superior Court for
Motorola's violationunfair competition in the marketplace. This Superior Court action was stayed,
pending resolution of the Federal and state antitrust laws, and
for violation of Massachusetts
51
General Law. We were also seeking our costs and attorney's fees in this action.
In September 1999, we reachedU.S. District Court litigation.
On March 19, 2002, Townshend entered into a settlement agreement with Motorola as to all claims raised
by both parties.us,
which settled the Federal Court Action and State Court Action. Under the
Settlement Agreement, the terms of the settlement are confidential. The
settlement requiresSettlement Agreement required us to make a cash royalty paymentspayment on March 19,
2002 of $14.3 million related to Motorola
based on unit volume. As partpast liability and prepayment of the settlement, we granted a cross-license to
Motorola to utilize portions of our technology and Motorola granted us a cross-
license to utilize portions of their technology. This settlement did not have a
material effect on our financial position or operating results.
On April 9, 1999,future
liabilities.
ESS Technology, Inc. ("ESS")v. PCTEL, Inc.
In April 1999, ESS filed a complaint against us in the U.S. District Court
for the Northern District of California, alleging that we failed to grant
licenses for some of our International Telecommunications Union-related patents
to ESS on fair, reasonable and non-discriminatory terms. ESS's complaint
includes claims based on antitrust law, patent misuse, breach of contract and
unfair competition. In its complaint, ESS also seeks a declaration that some of
our International Telecommunications Union-related patents are unenforceable and
that we should be ordered by the court to grant a license to ESS on fair,
reasonable and non-discriminatory terms.
We filed an answer to ESS's complaint by moving to dismissentered into a settlement agreement with ESS on February 5, 2002, which
settled this litigation matter and the basis thatlitigation matter involving ESS had not alleged facts sufficient to state a legal claim. ESS responded by
amending its complaint to include additional factual and legal allegations and
filing an opposition to the motion to dismiss. On August 2, 1999, the Court
denied our motion to dismiss as mootpending
in view of ESS's amended complaint.
On August 12, 1999, we filed a motion to dismiss ESS's amended complaint. On
November 4, 1999, the United States District Court in San Jose, California,
granted a dismissalInternational Trade Commission described below. The
settlement required ESS to make an initial license payment of the antitrust$2.0 million and
state unfair competition claims, ruling
that ESS had failedfuture royalty payments to allege injury to competition in the market for modems.
The Court allowed the specific performance of contract claim to stand, ruling
that the license terms granted to other market participants would provide a
sufficient basis for defining contractual terms that could be applied to ESS.
The Court also denied the motion with respect to dismissal of the declaratory
relief claims, holding that they were sufficiently ripe for adjudication. The
Court granted ESS leave to again amend its complaint, which it did on November
24, 1999, by filing a second amended complaint.
On January 14, 2000, we filed a motion to dismiss the second amended
complaint. ESS filed its opposition to the motion on January 21, 2000 and we
filed our reply on January 28, 2000. On February 11, 2000, the Court heard oral
argument on our motion to dismiss the second amended complaint. On February 14,
2000, the Court dismissed ESS's complaint and gave ESS twenty days to amend its
complaint. In particular, the Court stated that ESS must allege the relevant
geographic market and product market in the complaint. In response to the
Court's February 14, 2000 order, ESS filed its third amended complaint on March
6, 2000.
On March 15, 2000, we filed a motion to dismiss ESS's third amended complaint.
ESS responded on March 31, 2000 and we filed reply papers on April 6, 2000. A
case management conference was held on April 21, 2000. The motion was denied on
July 3, 2000. The judge ordered that discovery proceed onlyus based on the issueterms under the settlement agreement.
54
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2001
In the Matter of whether we license our patents on a reasonableCertain HSP Modems, Software and non-discriminatory basis.
This initial discovery period is currently scheduled to end on August 10, 2001.
During this period of time,Hardware Components Thereof,
and Products Containing the parties will disclose experts and exchange
expert reports on the above issue. A further case management conference is
scheduled to be held on August 24, 2001.
On August 7, 2000, we filed counterclaims alleging that ESS infringes our five
patents that are the subject of ESS's complaint.Same.
In addition, on October 3,
2000, the parties stipulated to permit us to amend our counterclaims to include
claims that ESS infringes three of our additional patents. Six of our eight
patents asserted against ESS are International Telecommunications Union-related
patents. These infringement claims will be litigated, if necessary, only after
the issue of whether we license our patents on a reasonable and non-
discriminatory basis is resolved. The other two patents asserted against ESS
are not related to International Telecommunications Union standards.
Due to the nature of litigation generally, we cannot ascertain the outcome of
the final resolution of the lawsuit, the availability of injunctive relief or
other equitable remedies, or estimate the total expenses, possible damages or
settlement value, if any, that we may ultimately incur in connection with ESS's
suit. This litigation could be time consuming and costly, and we will not
necessarily prevail given the inherent uncertainties of litigation. However, we
believe that we have valid defenses to this litigation, including the fact that
other companies license these International Telecommunications Union-related
patents from us on the same terms that are being challenged by ESS. We believe
that it is unlikely this litigation will have a material adverse effect on our
financial position or results of operations and, accordingly, have not accrued
any amounts in the financial statements related to this claim.
52
We are vigorously contesting, and intend to continue to vigorously contest, all
of ESS's claims. We are vigorously litigating, and intend to continue to
vigorously litigate our claims against ESS.
On August 9,September 2000, we filed a complaint for patent infringement in the United
States District Court, District of Delaware against Smart Link Ltd. and Smart
Link Technologies, Inc. (collectively, "Smart Link"). Our complaint alleges that
Smart Link infringed four of our patents. On August 18, 2000, we amended our
complaint to claim that Smart Link's infringement was willful.
On September 18, 2000, Smart Link answered our amended complaint and
counterclaimed against us. Smart Link's answer denied our allegations of
infringement. Smart Link's counterclaims seek declaratory relief that our
asserted patents are invalid and not infringed. Smart Link also counterclaims
for tortious interference with a business relation. On October 10, 2000, we
replied to Smart Link's counterclaims and moved to strike portions of Smart
Link's answer, which resulted in Smart Link agreeing to withdraw the offending
portions of the answer. On January 12, 2001, the parties exchanged initial
disclosures and discovery is underway. On March 5, 2001, we filed a motion in
this case to amend our complaint to withdraw one patent already asserted against
Smart Link and assert a new patent against Smart Link. If our motion is
granted, the number of patents asserted against Smart Link will remain at four
patents. Smart Link's response to this motion was due on March 19, 2001. The
judge has scheduled this case for trial beginning on January 22, 2002.
Due to the nature of litigation generally, we cannot ascertain the outcome of
the final resolution of this lawsuit. This litigation could be time consuming
and costly, and we will not necessarily prevail given the inherent uncertainties
of litigation. We believe that it is unlikely this litigation will have a
material adverse effect on our financial position or results of operations and,
accordingly, have not accrued any amounts in the financial statements related to
this lawsuit. We are vigorously litigating, and intend to continue to vigorously
litigate, our claims against Smart Link.
On August 25, 2000, Smart Link Ltd. filed a complaint against us in the United
States District Court, District of Massachusetts, alleging that we infringe two
of Smart Link Ltd.'s patents.
On October 11, 2000, we answered Smart Link Ltd.'s complaint and
counterclaimed against Smart Link Ltd. and Smart Link Technologies, Inc. Our
answer denies Smart Link Ltd.'s allegations of infringement. Our counterclaims
seek declaratory relief that the asserted Smart Link patents are invalid and not
infringed. Our counterclaim also alleges that Smart Link infringes one of our
patents.
The parties are to exchange initial disclosures and a case management
conference was held on March 23, 2001.
Due to the nature of litigation generally, we cannot ascertain the outcome of
the final resolution of this lawsuit, the availability of injunctive relief or
other equitable remedies, or estimate the total expenses, possible damages or
settlement value, if any, that we may ultimately incur in connection with this
lawsuit. This litigation could be time consuming and costly, and we will not
necessarily prevail given the inherent uncertainties of litigation. We believe
that it is unlikely this litigation will have a material adverse effect on our
financial position or results of operations and, accordingly, have not accrued
any amounts in the financial statements related to this claim. We are vigorously
contesting, and intend to continue to vigorously contest, all of Smart Link's
claims.
On September 15, 2000, we filed a complaint Underunder Section 337 of the Tariff Act
of 1930, as Amendedamended, with the United States International Trade Commission
("ITC").Commission. Our
complaint requested that the ITC commence an investigation into whether Smart
Link and ESS are engaged in unfair trade practices by selling for importation
into the United States, directly or indirectly importing into the United States,
or selling in the United States after importation devices which infringe our
patents.
Four of our patents were asserted against Smart Link and
two of those four patents were asserted against ESS. A supplemental complaint
was filedentered into a settlement agreement with us on October 3, 2000. On February 5, 2001, we filed a motion to reduce
the number of patents asserted againstMay 17, 2001. The
settlement requires Smart Link from four patents to three
patents. This motion was granted February 16, 2001.
On October 11, 2000,make royalty payments to us based on the ITC voted to institute an investigation into our
complaint. On October 18, 2000, notice ofterms
under the ITC investigation was published
in the Federal Register. Smart Link and ESS filed their responses to our
complaint and the notice of investigation on November 13, 2000 and October 31,
2000, respectively. Discovery is currently underway. By order of the
administrative law judge, the ITC investigation is to be completed by
53
December 18, 2001.
Due to the nature of litigation generally, we cannot ascertain the outcome of
the final resolution of this lawsuit. This litigation could be time consuming
and costly, and we willsettlement agreement. The settlement did not necessarily prevail given the inherent uncertainties
of litigation. We believe that it is unlikely this litigation will have a material adverse effect on
our financial position or operating results.
The hearing in this investigation against ESS took place from July 17, 2001
to July 27, 2001. In October 2001, the administrative law judge issued an
initial determination, which found that ESS infringes one of our key patents.
We entered into a settlement agreement and cross-license with ESS on
February 5, 2002, which settled this litigation matter and the litigation matter
between ESS and us pending in the United States District Court described above.
The settlement required ESS to make an initial license payment of $2.0 million
and future royalty payments to us based on the terms under the settlement
agreement. On February 22, 2002, ESS and us jointly filed a motion for
termination on the basis of the settlement agreement and on March 13, 2002, the
ITC granted the motion for termination.
Based on the settlements discussed above in the quarter ending March 31,
2002 and the settlement record within the modem industry, management has
re-evaluated its best estimate of accrued royalties, within a range of possible
settlement losses. We have concluded that these settlements do not have a
significant impact on our results of operations and,
accordingly, have not accrued any amounts in the financial statements related to
this lawsuit. We are vigorously litigating, and intend to continue to vigorously
litigate, our claims against Smart Link and ESS.operations.
We are subject to various other claims which arise in the normal course of
business. In the opinion of management, the ultimate disposition of these claims
will not have a material adverse effect on our financial position, liquidity or
results of operations.
9.12. INDUSTRY SEGMENT, CUSTOMER AND GEOGRAPHIC INFORMATION:
We are organized based upon the nature of the products we offer. Under this
organizational structure, we operate in one segment, that segment being
software-based modems using host signal processing technology. 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:
Year Ended DecemberYEARS ENDED
DECEMBER 31,
---------------------------------------------------
2001 2000 1999
1998
------- ------- ------------ ---- ----
Taiwan 53 % 35 % 48 %Taiwan...................................................... 40% 53% 35%
China (Hong Kong) 34 % 47 % - %
Singapore 1 % 1 % - %........................................... 48% 34% 47%
Rest of Asia 3 Asia................................................ 3% 4% 17%
Europe...................................................... 6% --% 16 --%
28 Other....................................................... 1% 1% --%
Other 1 - 1 %
------- ------- --------
92 % 99 % 77 %
======= ======= ========-- -- --
98% 92% 99%
== == ==
55
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2001
Sales to our major customers representing greater than 10% of total
revenues are as follows:
Year Ended DecemberYEARS ENDED
DECEMBER 31,
-----------------------------------------------------
Customer------------------
CUSTOMER 2001 2000 1999
1998- -------- -------- -------- ------------ ---- ----
A 15 % 13 % 12 %
B 8 % 7 % 15 %
C - % 3 % 12 %
D 13 % 1 % - %
E 32 % 47 % 3 %
F, related party - % 1 % 13 %
-------- -------- --------
68 % 72 % 55 %
======== ======== ========A........................................................... 10% 15% 13%
B........................................................... 22% 13% 1%
C........................................................... 47% 32% 47%
-- -- --
79% 60% 61%
== == ==
Our customers are concentrated in the personal computer industry and modem
board manufacturer industry segment and in certain geographic locations. We
actively market and sell products in Asia. We perform ongoing evaluations of
our customers' financial condition and generally require no collateral.
As of December 31, 2000, approximately 64% of gross accounts receivable were
concentrated with four customers. As of December 31, 1999, approximately 60% of
gross accounts receivable were concentrated with three customers.
As of December 31, 2000,2001, our long-lived assets were primarily located in
the United States. Our long-lived assets comprising primarily intangible assets,
by geographic region as of December 31,
20002001 and 19992000 are as follows:
Year Ended DecemberYEARS ENDED
DECEMBER 31,
------------------------------------------
2001 2000
1999------ ------- --------
United StatesStates............................................... $2,985 $21,258
$5,251
Cayman IslandsIslands.............................................. $ 195 $ 5,138
$6,731
OtherOther....................................................... $ 206201 $ 39206
54
10.13. RELATED PARTIES
The President of a significant customer of ours was a member of our Board of
Directors from inception to November 1, 1997. For the years ended December 31,
2000, 1999 and 1998, revenues generated from sales to this related party
customer were approximately $0.1 million, $0.8 million and $5.0 million,
respectively. Sales to this related party were generally made on the same terms
and conditions as sales to unrelated customers.PARTY TRANSACTIONS:
Included in prepaid expenses and other assets as of December 31, 2000 and 1999 are
amounts due from management. These promissory notes are due within a year and
bear interest at 8.0% per annum. The balance receivable as of December 31, 2001
and 2000 is $0 and 1999 is $90,995, and $141,273, respectively.
11.For the year ended December 31, 2001, we paid a total of $210,000 to two of
our executive officers, prior to their appointment, for consulting services. One
of the executive officers served as a member of our Board of Directors during
the period in which consulting fees were paid to him.
14. 401(k) PLAN
Our 401(k) plan covers all of our employees beginning the first of the
month following the month of their employment. Under this plan, employees may
elect to contribute up to 15% of their current compensation to the 401(k) plan
up to the statutorily prescribed annual limit. We may make discretionary
contributions to the 401(k). We made $191,215 in employer contributions to the
401(k) plan for the year ended December 31, 2001. We made $224,969 in employer
contributions to the 401(k) plan for the year ended December 31, 2000.
We did not make any employer
contributions to the 401(k) plan for the year ended December56
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 1999.
12. SUBSEQUENT EVENT
On February 8, 2001
we announced a series of actions to streamline support
for our legacy voiceband business and sharpen our focus on broadband, embedded
and wireless sectors. These measures were part of a restructuring program to
return the company to profitability and operational effectiveness and included
an 11 percent reduction in staff worldwide, a hiring freeze and cost containment
programs.
13.15. QUARTERLY DATA (Unaudited)(UNAUDITED)
Quarter Ended,
------------------------------------------------------------------------
Mar.QUARTERS ENDED,
------------------------------------------
MAR. 31, JuneJUNE 30, Sept.SEPT. 30, Dec.DEC. 31,
2001 2001 2001 2001
-------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues.............................................. $16,451 $12,255 $ 4,738 $ 7,527
Gross profit (loss)................................... 5,118 3,356 (11,620) 5,298
Loss from operations.................................. (5,756) (8,374) (37,571) (7,361)
Loss before provision for income taxes................ (3,994) (6,670) (36,162) (6,082)
Net loss.............................................. (2,896) (7,784) (41,436) (6,103)
Basic earnings (loss) per share....................... $ (0.15) $ (0.41) $ (2.13) $ (0.31)
Shares used in computing basic earnings (loss) per
share............................................... 18,973 19,206 19,414 19,494
Diluted earnings (loss) per share..................... $ (0.15) $ (0.41) $ (2.13) $ (0.31)
Shares used in computing diluted earnings (loss) per
share............................................... 18,973 19,206 19,414 19,494
QUARTERS ENDED,
------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
2000 2000 2000 2000
--------------- --------------- --------------- ---------------
(in thousands, except per share data)-------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RevenuesRevenues............................................... $24,121 $27,523 $28,885 $16,654
Gross profitprofit........................................... 11,353 12,927 13,571 5,392
Income (loss) from operationsoperations.......................... 1,002 2,073 2,689 (4,548)
Income (loss) before provision for income taxestaxes........ 2,383 3,850 4,697 (2,426)
Net income (loss)...................................... 1,728 2,791 3,378 (1,759)
Basic earnings (loss) per shareshare........................ $ 0.10 $ 0.16 $ 0.18 $ (0.09)
Shares used in computing basic earnings (loss) per
shareshare................................................ 16,805 17,989 18,441 18,755
Diluted earnings (loss) per shareshare...................... $ 0.09 $ 0.14 $ 0.16 $ (0.09)
Shares used in computing diluted earnings (loss) per
shareshare................................................ 20,288 20,588 20,561 18,755
55
Quarter Ended,
-------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999
--------------- --------------- --------------- ----------------
(in thousands, except per share data)
Revenues $15,156 $17,890 $20,190 $23,057
Gross profit 7,230 8,819 9,750 11,066
Income from operations 2,058 2,396 2,551 2,771
Income before provision for income taxes 1,721 2,141 2,396 3,789
Net income before extraordinary loss 1,205 1,499 1,679 2,650
Net income 1,205 1,499 1,679 1,039
Basic earnings per share before extraordinary loss $ 0.49 $ 0.61 $ 0.67 $ 0.20
Basic earnings per share after extraordinary loss $ 0.49 $ 0.61 $ 0.67 $ 0.08
Shares used in computing basic earnings per share 2,448 2,475 2,512 13,545
Diluted earnings per share before extraordinary loss $ 0.10 $ 0.12 $ 0.12 $ 0.14
Diluted earnings per share after extraordinary loss $ 0.10 $ 0.12 $ 0.12 $ 0.15
Shares used in computing diluted earnings per share 12,604 12,685 13,438 18,903
56
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
================================================================================
None.
57
PartITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
================================================================================
ItemITEM 10: Directors and Executive Officers of the RegistrantDIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning our directors is
incorporated by reference to the sections captionedentitled "Proposal One --- Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance"
contained in our Proxy Statement related to our 20012002 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission wihtinwithin 120
days of the end of our fiscal year pursuant to general instruction G(3) of Form
10-K (the "Proxy Statement"). Certain information required by this item
concerning executive officers is set forth in Item I of this Report in the
section captioned "Business --- Executive Officers."
ItemOfficers".
ITEM 11: Executive CompensationEXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
sections captioned "Executive Compensation and Other Matters" and "Report of the
Compensation Committee of the Board of Directors" contained in theour Proxy
Statement.
ItemITEM 12: Security Ownership of Certain Beneficial Owners and ManagementSECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the security ownership of certain beneficial owners
and management is incorporated by reference to the section entitled "Security"Information
Concerning Solicitation and Voting Security Ownership of Certain Beneficial
Owners and Management" contained in our Proxy Statement.
ItemITEM 13: Certain Relationships and Related TransactionsCERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships is incorporated by reference
to the section entitled "Transactions with Related Parties and Insiders"
contained in our Proxy Statement.
PartPART IV
ItemITEM 14: Exhibits, Financial Statement Schedules and Reports on FormEXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(A) (1) Financial StatementsFINANCIAL STATEMENTS
Refer to the financial statements filed as a part of this Report under "Item
8 --- Financial Statements and Supplementary Data".
(2) Financial Statement SchedulesFINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as a part of this Report
under "Schedule II" immediately preceding the signature page: Schedule
II --- Valuation and Qualifying Accounts for the three fiscal years ended
December 31, 2000.2001. All other schedules called for by Form 10-K are omitted
because they are inapplicable or the required information is shown in the
financial statements, or notes thereto, included herein.
58
(3) Exhibits (numbered in accordance with ItemEXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 of RegulationOF REGULATION S-K)
Exhibit
Number DescriptionEXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1 (b) Form of Underwriting Agreement
2.1 (d) Agreement and Plan of Reorganization, dated February 23, 2000 by and among PCTEL, Inc., Voyager
Technologies, Inc., VT Acquisition Corp. and certain shareholders of Voyager Technologies, Inc.
3.1 (b) Amended and Restated Certificate of Incorporation of the
Registrant, as currently in effect
3.2 (b) Form of Amended and Restated Certificate of Incorporation of the Registrant to be filed after the
closing of the offering made under this Registration Statement
3.3 (b)(a) Amended and Restated Bylaws of the Registrant
4.1 (b) Specimen common stock certificate
4.2 (b) Warrant to purchase shares of Series C preferred stock of the Registrant issued to Pentech Financial
Services, Inc.
4.3 (b) Warrant to purchase shares of Series C preferred stock of the Registrant issued to PFF Bank and
Trust, Inc.
4.4 (b) Warrant to purchase shares of common stock of the Registrant issued to Edward Gibstein
4.5 (b) Warrant to purchase shares of common stock of the Registrant issued to Irving Minnaker
4.6 (b) Warrant to purchase shares of common stock of the Registrant issued to Mitchell Segal
4.7 (b) Warrant to purchase shares of common stock of the Registrant issued to State Street Securities, Inc.
4.8 (b) Amended and Restated Rights Agreement dated December 31, 1997
4.9 (b) Addendum to the Amended and Restated Rights Agreement by and between the Registrant and PFF Bank and
Trust, Inc. dated February 1, 1999
4.10 (b) Addendum to the Amended and Restated Rights Agreement by and between the Registrant and Pentech
Financial Services, Inc. dated February 1, 1999
4.11 (e) Registration Rights Agreement, dated as of February 24, 2000, made by and among PCTEL and the
shareholders of Voyager Technologies, Inc.
10.1 (b) Form of Indemnification Agreement between PCTEL and each of
its directors and officers
10.2 (b) 1995 Stock Option Plan and form of agreements thereunder
10.3 (b) 1997 Stock Plan, as amended and restated, August 3, 1999,
and form of agreements thereunder
10.4 (b) 1998 Director Option Plan and form of agreements thereunder
10.5 (b) 1998 employee stock purchase planEmployee Stock Purchase Plan and form of agreements
thereunder
10.6 (b) Employment offer letter between Derek S. Obata and the Registrant dated March 31, 1998
10.7 (b) Employment offer letter between William F. Roach and the Registrant dated July 19, 1999
10.8 (b) Sublease between KLA-Tencor Corporation and the Registrant dated September 24, 1998
10.9 (b) Commercial Security Agreement by and between the Registrant and PPF Bank and Trust and related
documents
10.10 (b) Asset Purchase Agreement by and among PCTEL, Inc., PCTEL Global Technologies, Ltd. And General
DataComm, Inc. dated as of December 22, 1998
10.11 (b) Escrow Agreement by and between the Registrant and General DataComm, Inc. dated December 22, 1998
10.12 (b) Bonus Pool Disbursement Agreement by and between the Registrant and General DataComm, Inc. dated
December 22, 1998
10.13 (b) Form of Acquisition Bonus Agreement by and between the Registrant and General DataComm, Inc. dated
on December 22, 1998
10.14 (b) Direct Sales Agreement by and between PCTEL Global
Technologies, Ltd. and Kawasaki LSI U.S.A. dated December 4,
1998
10.15 (b) Volume Purchase Agreement dated June 1, 1998 by and between Silicon Laboratories, Inc. and the
Registrant
10.16 (c) Lease agreement dated September 17, 1999 between PCTEL, Inc. and Sun Microsystems,
Inc. dated September 17, 1999 for an office building located
at 1331 California Circle, Milpitas, CA 95035
10.17 (a) Form of Management Retention Agreement for PCTEL Inc.'s Chief Executive Officerbetween Martin H. Singer and
the Registrant, dated November 15, 2001
10.18 (a) Form of Management Retention Agreement for PCTEL Inc.'s Vice
Presidents
10.19 (a) Severance Agreement and Release between Peter Chen and the
Registrant, dated March 11, 2001
10.20 (e) Consigned Inventory Agreement with Bell Microproducts Inc.
10.21 (e) Non-Executive Chairman of the Board Agreement with Martin
Singer, dated February 16, 2001
10.22 (f) Consulting Agreement with Martin Singer, Non-Executive
Chairman of the Board, dated May 6, 2001
10.23 (g) 2001 Nonstatutory Stock Option Plan and form of agreements
thereunder
10.24 (a) Employment agreement between Martin H. Singer and the
Registrant, dated October 17, 2001
10.25 (a) Employment agreement between Jeffrey A. Miller and the
Registrant, dated November 7, 2001
10.26 (a) Employment agreement between John Schoen and the Registrant,
dated November 12, 2001
10.27 (a) Severance Agreement and Release between Thomas A. Capizzi
and the Registrant, dated July 24, 2001
10.28 (a) Severance Agreement and Release between Steve J. Manuel and
the Registrant, dated July 25, 2001
10.29 (a) Severance Agreement and Release between William F. Roach and
the Registrant, dated October 22, 2001
10.30 (a) Severance Agreement and Release between Navin Rao and the
Registrant, dated December 21, 2001
10.31 (a) Severance Agreement and Release between Terry Huang and the
Registrant, dated May 1, 2001
10.32 (h) Stock Option Agreement of Jeffrey A. Miller, dated November
15, 2001
between PCTEL, Inc. and Peter Chen10.33 (h) Stock Option Agreement of John Schoen, dated November 15,
2001
21.1 (a) List of Subsidiaries of the Registrant
23.1 (a) Consent of Arthur Andersen LLP, Independent Public
Accountants
- ---------------------99.0 (a) Representation letter to the Securities and Exchange
Commission
59
- ---------------
(a) Filed herewith.
(b) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Registration Statement on Form S-1 (Registration Statement
No. 333-94707).
(c) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
(d) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's CurrentAnnual Report on Form 8-K filed on March 10,10-K for the year ended December 31,
2000.
(e) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Registration Statement on Form S-1 (Registration
Statement No. 333-32570).
(b) Reports on Form 8-K
We filed a CurrentQuarterly Report on Form 10-Q for the quarter ended March
31, 2001.
(f) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2001.
(g) Incorporated by reference herein to the Registrant's Registration Statement
of Form S-8 filed on October 3, 2001 (Registration Statement No.333-70886).
(h) Incorporated by reference herein to the Registrant's Registration Statement
of Form S-8 filed on December 14, 2001 (Registration Statement
No.333-75204).
(B) REPORTS ON FORM 8-K
in March 2000 in connection with our
acquisition of Voyager Technologies, Inc.
(c) ExhibitsNone.
(C) EXHIBITS
See Item 14(a)(3) above.
(d) Financial Statement Schedules(D) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2) above.
5860
PCTEL, INC.
-----------
ScheduleSCHEDULE II --Valuation and Qualifying Accounts
------------------------------------------------- VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged Balance at
Beginning Costs and against End of
Description of Year Expenses Revenue Deductions PeriodBALANCE
AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND AGAINST END OF
DESCRIPTION OF YEAR EXPENSES REVENUE DEDUCTIONS YEAR
- ----------- -------------------- ---------- ------- ---------- ----------
Year Ended December 31, 1998:
Allowance for doubtful
accounts $ 308 $ -- $ 465 $ (25) $ 748
Allowance for price
discounts $ 296 $ -- $ 4,215 $(3,571) $ 940
Inventory reserves $ 2,002 $ 330 $ -- $ -- $ 2,332
Accrued royalties $ 6,505 $1,639 $ -- $(3,000) (a) $ 5,144
Year Ended December 31, 1999:
Allowance for doubtful accountsaccounts......... $ 748 $ -- $ 1,674 $ (209) $ 2,213$2,213
Allowance for price
discountscustomer rebates.......... $ 940 $ -- $ 4,400 $(2,324) $ 3,016
Inventory reserves $ 2,332 $1,121$3,016
Accrued restructuring................... $ -- $(1,832) $ 1,621
Accrued royalties $ 5,144 $3,861 $ -- $(1,137) $ 7,868-- $ -- $ --
Year Ended December 31, 2000:
Allowance for doubtful accounts $ 2,213accounts......... $2,213 $ -- $ 3,677 $ (847) $ 5,043$5,043
Allowance for price
discounts $ 3,016customer rebates.......... $3,016 $ -- $12,999 $(9,169) $ 6,846
Inventory reserves $ 1,621 $ 918$6,846
Accrued restructuring................... $ -- $ -- $ 2,539
Accrued royalties $ 7,868 $4,475-- $ -- $ (687) $11,656--
Year Ended December 31, 2001:
Allowance for doubtful accounts......... $5,043 $ -- $(1,574) $(2,682) $ 787
Allowance for customer rebates.......... $6,846 $ -- $ 2,421 $(4,241) $ 184
Accrued restructuring................... $ -- $3,787 $ -- $ 2,220 $1,567
________________________
a) Represents a reversal of $3.0 million in accrued royalties in the
fourth quarter of 1998, upon consummation of the acquisition of
Communications Systems Division. We believe that in some instances
they can obtain necessary licenses of third party technologies in
exchange for grants of cross licenses of their patent portfolio
rather than payment of license fees or royalties.
5961
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
A Delaware Corporation
(Registrant)
/s/ William F. Roach
-------------------------------------------
William F. RoachMARTIN H. SINGER
--------------------------------------
Martin H. Singer
Chairman of the Board and
Chief Executive Officer
and
Director
Dated: March 28, 2001April 1, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- ---------------------------------------------- ------------------------------------------ ----------------------SIGNATURE TITLE DATE
--------- ----- ----
/s/ William F. RoachMARTIN H. SINGER Chairman of the Board, Chief April 1, 2002
------------------------------------------------ Executive Officer and March 28, 2001
- ------------------------------------- Director
(William F. Roach) (Principal
(Martin H. Singer) Executive Officer) and Director
/s/ Andrew D. Wahl Vice President, FinanceJOHN SCHOEN Chief Operating Officer and Chief March 28, 2001
- -------------------------------------April 1, 2002
------------------------------------------------ Financial Officer (Principal
(John Schoen) Financial
(Andrew D. Wahl) and Accounting Officer)
/s/ RICHARD C. ALBERDING Director April 1, 2002
------------------------------------------------
(Richard C. Alberding)
/s/ MIKE MIN-CHU CHEN Director April 1, 2002
------------------------------------------------
(Mike Min-Chu Chen)
/s/ PETER CHEN Director April 1, 2002
------------------------------------------------
(Peter Chen)
/s/ BRIAN J. JACKMAN Director April 1, 2002
------------------------------------------------
(Brian J. Jackman)
/s/ GIACOMO MARINI Director April 1, 2002
------------------------------------------------
(Giacomo Marini)
/s/ CARL A. THOMSEN Director April 1, 2002
------------------------------------------------
(Carl A. Thomsen)
62
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 (b) Amended and Restated Certificate of Incorporation of the
Registrant, as currently in effect
3.3 (a) Amended and Restated Bylaws of the Registrant
4.1 (b) Specimen common stock certificate
10.1 (b) Form of Indemnification Agreement between PCTEL and each of
its directors and officers
10.2 (b) 1995 Stock Option Plan and form of agreements thereunder
10.3 (b) 1997 Stock Plan, as amended and restated, August 3, 1999,
and form of agreements thereunder
10.4 (b) 1998 Director Option Plan and form of agreements thereunder
10.5 (b) 1998 Employee Stock Purchase Plan and form of agreements
thereunder
10.14 (b) Direct Sales Agreement by and between PCTEL Global
Technologies, Ltd. and Kawasaki LSI U.S.A. dated December 4,
1998
10.16 (c) Lease agreement between PCTEL, Inc. and Sun Microsystems,
Inc. dated September 17, 1999 for an office building located
at 1331 California Circle, Milpitas, CA 95035
10.17 (a) Management Retention Agreement between Martin H. Singer and
the Registrant, dated November 15, 2001
10.18 (a) Form of Management Retention Agreement for PCTEL Inc.'s Vice
Presidents
10.19 (a) Severance Agreement and Release between Peter Chen and the
Registrant, dated March 11, 2001
10.20 (e) Consigned Inventory Agreement with Bell Microproducts Inc.
10.21 (e) Non-Executive Chairman of the Board Agreement with Martin
Singer, dated February 16, 2001
10.22 (f) Consulting Agreement with Martin Singer, Non-Executive
Chairman of the Board, dated May 6, 2001
10.23 (g) 2001 Nonstatutory Stock Option Plan and March 28,form of agreements
thereunder
10.24 (a) Employment agreement between Martin H. Singer and the
Registrant, dated October 17, 2001
- ------------------------------------- Director
(Martin H. Singer)
/s/ Richard C. Alberding Director March 28,10.25 (a) Employment agreement between Jeffrey A. Miller and the
Registrant, dated November 7, 2001
- -------------------------------------
(Richard C. Alberding)
/s/ Peter Chen Director March 28,10.26 (a) Employment agreement between John Schoen and the Registrant,
dated November 12, 2001
- -------------------------------------
(Peter Chen)
/s/ Wen C. Ko Director March 28,10.27 (a) Severance Agreement and Release between Thomas A. Capizzi
and the Registrant, dated July 24, 2001
- -------------------------------------
(Wen C. Ko)
/s/ Giacomo Marini Director March 28,10.28 (a) Severance Agreement and Release between Steve J. Manuel and
the Registrant, dated July 25, 2001
- -------------------------------------
(Giacomo Marini)
/s/ Mike Min-Chu Chen Director March 28,10.29 (a) Severance Agreement and Release between William F. Roach and
the Registrant, dated October 22, 2001
- -------------------------------------
(Mike Min-Chu Chen)10.30 (a) Severance Agreement and Release between Navin Rao and the
Registrant, dated December 21, 2001
10.31 (a) Severance Agreement and Release between Terry Huang and the
Registrant, dated May 1, 2001
10.32 (h) Stock Option Agreement of Jeffrey A. Miller, dated November
15, 2001
10.33 (h) Stock Option Agreement of John Schoen, dated November 15,
2001
21.1 (a) List of Subsidiaries of the Registrant
23.1 (a) Consent of Arthur Andersen LLP, Independent Public
Accountants
99.0 (a) Representation letter to the Securities and Exchange
Commission
60
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(a) Filed herewith.
(b) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Registration Statement on Form S-1 (Registration Statement
No. 333-94707).
(c) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
(d) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Annual Report on Form 10-K for the year ended December 31,
2000.
(e) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 2001.
(f) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2001.
(g) Incorporated by reference herein to the Registrant's Registration Statement
of Form S-8 filed on October 3, 2001 (Registration Statement No.333-70886).
(h) Incorporated by reference herein to the Registrant's Registration Statement
of Form S-8 filed on December 14, 2001 (Registration Statement
No.333-75204).