- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM 10-K
<Table>
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</Table>
COMMISSION FILE NUMBER 000-27115
PCTEL, INC.
(Exact Name of Business Issuer as Specified in Its Charter)
<Table>
DELAWARE 77-0364943
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
8725 W. HIGGINS ROAD, SUITE 400, 60631
CHICAGO IL (Zip Code)
(Address of Principal Executive Office)
</Table>
(773) 243-3000
(Registrant's Telephone Number, Including Area Code)
---------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.001 Par Value Per Share.
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Indicate by 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.
Indicate by a check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]
As of June 28, 2002, the last business day of Registrant's most recently
completed second fiscal quarter, there were 20,146,748 shares of Registrant's
common stock outstanding, and the aggregate market value of such shares held by
non-affiliates of Registrant (based upon the closing sale price of such shares
on the Nasdaq National Market on June 28, 2002) was approximately $187,364,756.
Shares of Registrant's common stock held by each executive officer and director
and by each entity that owns 5% or more of Registrant's outstanding common stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 25, 2003, the number of shares of the Registrant's common stock
outstanding was 19,542,702.
Certain sections of Registrant's definitive Proxy Statement relating to its
Annual Stockholders' Meeting to be held on June 3, 2003 are incorporated by
reference into Part III of this Annual Report on Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PCTEL, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
PAGE
----
PART I
Item 1 Business.................................................... 1
Item 2 Properties.................................................. 7
Item 3 Legal Proceedings........................................... 7
Item 4 Submission of Matters to a Vote of Security Holders......... 8
Item 4A Executive Officers of the Registrant........................ 8
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 9
Item 6 Selected Consolidated Financial Data........................ 10
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
Item 7A Quantitative and Qualitative Disclosures about Market
Risk........................................................ 35
Item 8 Financial Statements and Supplementary Data................. 36
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 67
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 67
Item 11 Executive Compensation...................................... 67
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 67
Item 13 Certain Relationships and Related Transactions.............. 67
Item 14 Controls and Procedures..................................... 68
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 68
Signatures............................................................ 72
Certificates.......................................................... 74
</Table>
i
PART I
ITEM 1: BUSINESS
This report 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, among 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 to place undue reliance on these
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. 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
29 of the section of this report entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and elsewhere in, or
incorporated by reference into, this report.
OVERVIEW AND RECENT DEVELOPMENTS
We are a leading developer and supplier of cost-effective Internet access
solutions. Today our products enable high-speed Internet connections through
analog networks as well as public access Wireless Local Area Networks (WLAN).
Additionally, we are developing new technologies and products to address ease of
use issues related to wireless local area networks for both traveling and home
users.
On March 12, 2003, PCTEL, Inc, completed its asset acquisition of Dynamic
Telecommunications, Inc., ("DTI"). DTI is a supplier of software-defined radio
technology deployed in high-speed wireless scanning receivers, multi-protocol
collection and analysis systems, interference measurement systems and radio
frequency command and control software solutions. PCTEL intends to use the
acquired assets to continue to operate and grow the business of DTI and to
expand its presence in the wireless access markets.
In May 2002, we acquired the assets of cyberPIXIE, Inc. ("cyberPIXIE"), a
wireless access provider. The acquisition of cyberPIXIE is consistent with our
strategy and permits us to participate in a new emerging market. As a result of
the acquisition, we obtained products and technology that will enable roaming
between and among 802.11 wireless and cellular networks.
We are a pioneer in developing HSP (host signal processing) 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, we
believe 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. Various original equipment manufacturers, including
Hewlett Packard, Dell, Fujitsu, NEC and 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
wireless local area network markets; and
- Is compatible with multiple operating systems, including but not limited
to Windows (95, 98, 2000, NT, XP) and Linux.
1
CORPORATE BACKGROUND
We were incorporated in California in 1994 and reincorporated in Delaware
in 1998. Our principal executive offices are located at 8725 W. Higgins Road,
Suite 400, Chicago, Illinois 60631. Our telephone number at that address is
(773) 243-3000. Our web site is www.pctel.com. The contents of our web site are
not incorporated by reference into this Annual Report on Form 10-K.
PRODUCTS
Analog Modem Products
Our HSP modem offering is a mature product. Competitors have over time
matched the significant cost advantages that we innovated in this area. As a
result, the soft modem business has taken on a commodity characteristic. There
is very little product differentiation and the industry generally competes on
price and to a lesser extent, customer service.
Our current HSP modem roadmap delivers cost reduced product for both
AC-link and PCI format modems for PC-OEM qualifications in 2003. We have
undertaken a strategic initiative to reduce the number of software code bases
required to satisfy various customer and technology requirements. This
initiative is expected to be substantially complete in the first half of 2003.
We expect to realize significant product maintenance cost savings as a result of
this activity.
CURRENT PRODUCTS
MicroModem(TM). The MicroModem integrates our HSP technology with a micro
form-factor, silicon DAA (data access arrangement). In contrast to a
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 silicon 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 MDC.
Lansis(TM). Lansis is a combination HSP modem and LAN (local area network)
solution. It allows PC original equipment manufacturers ("OEMs") to implement a
solution for LAN connectivity with the same performance as more expensive
branded CardBus and Personal Computer Memory Card International Association
(PCMCIA) cards. Combined with V.92 modem functionality, it provides a
cost-effective alternative to provide modem and network connectivity to the PC
customer.
Solsis II. Solsis is our 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 HSP solution. Solsis operates on Texas
Instruments DSPs (digital signal processing); targeted for Internet appliances,
such as set-top boxes, game consoles and other Internet access devices. In the
fourth quarter of 2001, we began to ship the second generation of our Solsis
embedded solution that utilizes a two-chip solution versus the previous
five-chip version. This further reduces the cost and power consumption for these
non-PC Internet appliances. Solsis II utilizes the new TI TMS320C54V90 DSP,
integrating all modem functions into the DSP except the line side DAA chip.
In the second quarter of 2002 we completed development of our Solsis
solution and shifted to a software-licensing model with two partners. In this
model, PCTEL receives royalty revenue for each unit shipped by these partners.
2
WLAN Products
Our WLAN products are offered as the Segue(TM) product line. This suite of
products provides both client and infrastructure solutions for public WLAN
environments. Client products enable public WLAN access and ease of use across a
wide range of Microsoft operating systems. The infrastructure products enable
cost effective "hot spot" deployments within the constraints of widely
recognized networking and security standards. Customers for our WLAN products
are not typically individual end-users, but Internet access service providers
such as WISPs (Wireless ISPs), cellular carriers, or other service aggregators.
CURRENT PRODUCTS
Segue(TM) Roaming Client. The Segue(TM) Roaming Client is a PC-based
application developed to allow users to easily locate and connect to WLAN and
Wireless WAN (GPRS, CDMA 1x or other 2.5G cellular networks) data networks. The
Segue(TM) Roaming Client provides the following benefits over "browser only"
type solutions currently available today:
- Consistent look and feel regardless of operating system platform
- Easily branded to match customer identity
- Automatic presentation of user credentials dependant on network being
accessed
- Easy location of WLAN networks utilizing an integrated database
- Service Provider control of customer experience by "pushing"
configuration, hot spot location, and other data to the client
- User or Service Provider prioritization of network connection choices
(between multiple WLANs and/or WWANs)
The Segue(TM) Roaming Client currently supports over 50 different models of
WLAN cards from leading manufacturers, such as Cisco, Agere, Linksys, D-Link,
and Melco. The client supports 2.5G PCMCIA cards from Novatel Wireless and
Sierra Wireless for WWAN access. The client supports Win98, WinME, Win2K and XP
Microsoft operating systems. Product supporting for the PocketPC operating
system was released in March 2003.
Segue(TM) Network Gateway. The Segue(TM) Network Gateway provides carriers
with a cost-effective, straightforward process for deploying new 802.11 hot
spots and a simple means for bringing existing hot spots under their service
umbrella. The Segue(TM) Network Gateway can support multiple access points at
each hot spot and ensure that only authorized users gain access to the hot spot
resources. The product is designed to be centrally administered, eliminating the
need for local support and maintenance. Network reporting features can easily
relay status of any device on the network to a centralized SNMP management tool
such as HP Openview or Tivoli. In addition, all configuration and software
updates can be handled centrally.
Segue(TM) Network Controller. The Segue(TM) Network Controller provides
user identification and billing solution for carriers and their subscribers. In
industry standard terms, this element performs the AAA-broker function
(Authentication, Authorization, and Accounting). This solution integrates a
network of hot spot gateways with the service provider's backend systems. It
also supports the authentication of roaming users from any authorized provider.
The Segue(TM) Network Controller can be configured to proxy authentication
requests to the RADIUS- or LDAP-compliant authentication systems of any other
cooperating provider. Using RADIUS accounting, the Segue(TM) Network Controller
can relay usage information to the RADIUS-compliant systems of roaming partners.
With this capability users can enjoy a single bill for access, regardless of the
specific hot spots from which they have chosen to connect. The product serves as
the platform for central management of the Segue(TM) Network Gateways connected
to this controller. With this capability, hot spot operators can make
network-wide changes from a single console and have them propagated across the
network rather than configuring each gateway directly. The controller also
supports applications that enable subscriber provisioning and accounting plan
configuration (pre-paid services, single use sessions, etc.) activities.
3
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 many
companies in the communications industry, such as Conexant, ESS Technology,
Smart Link and others, who use ITU standard technology.
In addition, we are developing wireless spread spectrum intellectual
property technologies, which may be patentable. Once developed, we intend to
file patents covering such technologies.
CUSTOMERS
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 and game console makers. We sell
directly to OEMs and indirectly through a number of distributors.
Our WLAN products are targeted for operators of public WLAN service
deployments. We currently sell directly to cellular carriers and infrastructure
suppliers and indirectly to WISPs through a small number of Value Added
Resellers (VARs).
For the year ended December 31, 2002, approximately 71% of our revenues
were generated by three of our Taiwanese customers, with Lite-On Technology
Corporation (GVC Corporation) representing 25%, Askey Computer representing 23%
and Prewell International representing 23% of revenues. 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, Lite-On
Technology Corporation (GVC Corporation) representing 22% and Askey Computer
representing 10% of revenues.
SALES, 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
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 design wins,
- Improving customers' time to market,
- Maintaining a high level of customer satisfaction, and
- 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. Our marketing organization also provides a wide
range of programs, materials and events to support the sales organization.
As of December 31, 2002, we employed 29 individuals in sales, marketing and
support and maintained regional sales support operations in Tokyo, Japan,
Taipei, Taiwan, Seoul, Korea and Paris, France.
4
BACKLOG
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 a meaningful indicator of future revenues.
RESEARCH 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, 2002, we employed 47 employees in research and
development.
MANUFACTURING
We procure DAA chips from Silicon Laboratories, Inc. of Austin, Texas on a
purchase order basis. We have 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.
LICENSES, 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 have over 80 patents granted or
pending addressing both essential ITU and non-essential technologies that are
relevant to our analog modem technology. 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 3Com, Padcom, Syndia and Unisys, and
may receive communications from other third parties in the future, claiming to
own patent rights in technologies that are part of communications standards
adopted by the ITU, such as V.90, V.34, V.42bis and V.32bis, and other common
communications technologies, including soft modems and wireless LANs. These
third parties claim that our products utilize their patented technologies and
have requested that we enter into license agreements with them.
During 2002, we settled patent infringement litigation against ESS
Technology and have licensed certain Townshend V.90 patents.
In addition, there are numerous risks that result from our reliance on our
proprietary technology in the conduct of our business. See "Factors That May
Affect Our Business, Financial Condition, and Future Operating Results,"
beginning on page 26 of this Annual Report on Form 10-K.
COMPETITION
The Internet access device market is intensely competitive. Our current
competitors include Agere Systems, Broadcom, Conexant, ESS Technology and
SmartLink. With the maturing of standards and cost demands of customers, the
analog modem market has taken on commodity characteristics where price is the
dominant basis of competition.
5
The current trend in the PC marketplace is for increasing integration at
the motherboard level. Typical solutions today already integrate Ethernet
adapters on the motherboard for cost advantages. In line with this trend, we may
in the future also face competition from predominantly Taiwan based core logic
chipset suppliers that will integrate modem functionality with PC core logic and
audio subsystems. We believe that these competitors may include Intel, Realtek
Semiconductor Corporation, Acer Laboratories Inc., and Silicon Integrated
Systems among others.
With our WLAN products, our competition varies based on product offering.
Competitors for our Segue(TM) Roaming Client range from operating system
suppliers such as Apple or Microsoft (which offers a level of WLAN client
support through its Windows XP offering) to WLAN NIC suppliers (that bundle
minimal clients with their hardware offering) to service aggregators that
provide a client as part of their service offering such as GRIC, iPASS, and
Boingo. We are unique in that many of these competitors are potential customers
for our branded client offering. There are few "client only" competitors in the
WLAN space.
We compete favorably in the client space as a result of our support for a
wide variety of client hardware devices, down level operating system support,
and the ability to easily brand products to end user requirements.
For our infrastructure offering, there are many competitors offering
products supporting similar customers. These competitors are Aptilo, Cisco,
Colubris, Nokia, Nomadix, and Pronto. We compete on the basis of price, our
unique features (such as centralized manageability and ease of deployment), and
system level capabilities made possible by solutions utilizing both our client
and infrastructure components.
EMPLOYEES
As of December 31, 2002, we employed 111 people full-time, including 29 in
sales and marketing, 47 in research and development, and 35 in general and
administrative functions. None of our employees are represented by a labor
union. We consider our employee relations to be good.
RECENT DEVELOPMENTS
On March 5, 2003, we filed in the U.S. District Court for the Northern
District of California a patent infringement lawsuit against 3Com Corporation.
Our lawsuit against 3Com Corporation alleges infringement by 3Com Corporation of
one of our patents and asks for a declaratory judgment that certain 3Com patents
are invalid and not infringed. On March 4, 2003, 3Com filed in the U.S. District
Court for the Northern District of Illinois a patent infringement lawsuit
against us claiming that our HSP modem products infringe certain 3Com patents,
and amended its complaint to ask for a declaratory judgment that one of our
patents is invalid and not infringed. The patents that are the subject of 3Com's
amended complaint and our complaint are the same patents. We believe that we
have meritorious claims and defenses in our dispute with 3Com. However, because
the action is still in its early stages, we are not able to predict the outcome
at this time.
On March 12, 2003, PCTEL, Inc. completed its asset acquisition of Dynamic
Telecommunications, Inc., ("DTI"). DTI is a supplier of software-defined radio
technology deployed in high-speed wireless scanning receivers, multi-protocol
collection and analysis systems, interference measurement systems and radio
frequency command and control software solutions. In connection with the
acquisition, PCTEL, DTI, PCTEL Maryland, Inc., a wholly-owned subsidiary of
PCTEL, and DTI Holdings, Inc., the sole shareholder of DTI, entered into an
Asset Purchase Agreement dated as of March 12, 2003 (the "Purchase Agreement")
under which PCTEL Maryland acquired substantially all of the assets of DTI,
including intellectual property, receivables, property and equipment and other
tangible and intangible assets used in DTI's business. PCTEL intends to use the
acquired assets to continue to operate and grow the business of DTI and to
expand its presence in the wireless access markets.
In exchange for the acquired assets, PCTEL paid DTI $10 million in cash. In
addition, DTI may be entitled to earn-out payments if PCTEL Maryland meets
specified financial targets in fiscal years 2003 and 2004.
6
WEB SITE POSTINGS
We make our annual report on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, and amendments to such reports, available free of
charge through our web site as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the United States
Securities and Exchange Commission, at the following address: www.pctel.com. The
information in, or that can be accessed through, our web site is not part of
this report.
ITEM 2: PROPERTIES
In August 2002, we entered into an operating lease for our new headquarter
facilities in Chicago, Illinois. This office building is 12,624 square feet and
the lease expires in August 2007. In October 2002, we entered into an operating
lease in Milpitas, California, to be used as an engineering office. This office
building is 18,072 square feet and the lease expires September 2007. In
addition, we have a subsidiary office in Waterbury, Connecticut, an engineering
office in Taipei, Taiwan, and sales support offices in Tokyo, Japan, Taipei,
Taiwan and Paris, France. We believe that we have adequate space for our current
needs.
ITEM 3: LEGAL PROCEEDINGS
Ronald H. Fraser v. PC-Tel, Inc., Wells Fargo Shareowner Services, Wells Fargo
Bank Minnesota, N.A.
On March 19, 2002, plaintiff Ronald H. Fraser filed a complaint in Santa
Clara County (California) Superior Court for breach of contract and declaratory
relief against us, and for breach of contract, conversion, negligence and
declaratory relief against our transfer agent, Wells Fargo Bank Minnesota, N.A.
The Complaint seeks compensatory damages allegedly suffered by Mr. Fraser as a
result of the tax liability from failure to facilitate a transaction by Mr.
Fraser during a secondary offering on April 14, 2000. In July 2002, we responded
to the complaint, denying Mr. Fraser's claims and asserting numerous affirmative
defenses. Wells Fargo and the Company have each filed cross-complaints against
the other for indemnity. Discovery is underway. No trial date has been set. We
believe that we have meritorious defenses and intend to vigorously defend the
action.
Litigation with 3Com
On March 5, 2003, we filed in the U.S. District Court for the Northern
District of California a patent infringement lawsuit against 3Com Corporation.
Our lawsuit against 3Com Corporation alleges infringement by 3Com Corporation of
one of our patents and asks for a declaratory judgment that certain 3Com patents
are invalid and not infringed. On March 4, 2003, 3Com filed in the U.S. District
Court for the Northern District of Illinois a patent infringement lawsuit
against us claiming that our HSP modem products infringe certain 3Com patents,
and amended its complaint to ask for a declaratory judgment that one of our
patents is invalid and not infringed. The patents that are the subject of 3Com's
amended complaint and our complaint are the same patents. We believe that we
have meritorious claims and defenses in our dispute with 3Com. However, because
the action is still in its early stages, we are not able to predict the outcome
at this time.
7
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No stockholder votes took place during the fourth quarter of the year ended
December 31, 2002.
ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to our executive
officers as of March 25, 2003:
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
Martin H. Singer........ 51 Chief Executive Officer, Chairman of the Board
John Schoen............. 47 Chief Operating Officer, Chief Financial Officer and
Secretary
Jeffrey A. Miller....... 47 Vice President, Product Management and New Development
Biju Nair............... 37 Vice President, Product Development
Carlton Aihara.......... 45 Vice President, Global Sales
Mark Wilson............. 51 Vice President, Licensing Programs
</Table>
Dr. Martin H. Singer has been our Chief Executive Officer and Chairman of
the Board since October 17, 2001. Prior to that, Dr. Singer served as our
Non-Executive Chairman of the Board since February 2001 and a director for the
Company since August 1999. From October 2000 to May 2001, Dr. Singer 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 November 12, 2001. Prior to that, Mr. Schoen was
Business Development Manager at Agilent Technologies. From May 1999 to July
2001, Mr. Schoen served as Chief Operating Officer and Chief Financial Officer
of SAFCO Technologies, Inc. before its acquisition by Agilent Technologies Inc.
Prior to this period, Mr. Schoen held various financial positions for over 19
years in Motorola Inc., including Controller of its Wireless Access Business
Development Division. Mr. Schoen received a Bachelor of Science in Accounting
from DePaul University and is a Certified Public Accountant.
Mr. Jeffrey A. Miller has been our Vice President of Product Management &
New Technology since September of 2002. Mr. Miller was Vice President of
Engineering from November 2001 until his appointment to Vice President of
Product Management & New Technology. Prior to that, Mr. Miller was Functional
Manager of Wireless Optimization Products, 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. From
September 1992 to January 1998, Mr. Miller was a Principal Consultant with
Malcolm, Miller & Associates providing consulting services to wireless network
operators and infrastructure suppliers. From 1978 through September of 1992, Mr.
Miller held various technical and management positions at Motorola, Inc.'s
Cellular Infrastructure Group. Mr. Miller received a Bachelor of Science in
Computer Science from University of Illinois.
Mr. Carlton Aihara has been our Vice President of Global Sales since April
2002. Mr. Aihara joined PCTEL as Director of Northern Asia sales in 1998, prior
to PCTEL's successful initial public offering. In 2001, Mr. Aihara was promoted
to Vice President, Asia Pacific, responsible for PCTEL's Asia Pacific sales.
Before joining PCTEL, Mr. Aihara was with Adaptec, Incorporated, where he was
Senior Manager of Sales for Adaptec's peripheral technology division IC
products. He was based in Japan, responsible for Northern Asia sales which
included Japan and Korea. Prior to Adaptec, Mr. Aihara held various sales
management
8
positions with Sandisk Corporation and Epson's Semiconductor group. Mr. Aihara
has also held engineering, marketing, and sales positions at Oki Semiconductor,
USA, Inc. and Fairchild Semiconductor, a Schlumberger Company. Mr. Aihara holds
a BSEE from the University of California at Berkeley
Mr. Biju Nair joined PCTEL in January of 2002. After helping to jump start
PCTEL's Wireless Business, Biju took over responsibilities as the Vice President
of Product Development. Prior to joining PCTEL, Biju served from July 2000 to
January 2002 as the Global Manager of Wireless Planning, Design and Management
solutions at Agilent Technologies. Prior to its acquisition by Agilent
Technologies, Biju served from April 1994 to July 2000 as Vice President and
General Manager of Global Software Products at SAFCO Technologies in Chicago. In
that capacity, he designed OPAS, the industry's leading wireless post processing
software and led the company's launch of its VoicePrint test and measurement
product. Biju holds B.S and M.S degrees in Electronics and Computer Engineering
and an advanced degree in Computer Science from Illinois Institute of Technology
in Chicago. Biju is the author of numerous publications for the wireless
industry and has presented technical papers at major wireless seminars and
panels.
Mr. Mark D. Wilson has been our Vice President, Licensing Programs since
the position was established in April 2002. Previously, Mr. Wilson was our Vice
President of Marketing since joining the company in July 2000. Before joining
us, Mr. Wilson served from September 1999 to June 2000 as director of product
management for privately-held NARUS, Inc., a leading provider of Internet
business infrastructure 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 (May 1997 -- September 1999). 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 earned in 1978 and a B.S. in Electrical
Engineering from the University of Massachusetts earned in 1973.
PART II
ITEM 5: MARKET 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.
<Table>
<Caption>
HIGH LOW
------ ------
FISCAL 2003:
Through March 25, 2003.................................... $ 9.30 $ 6.27
FISCAL 2002:
Fourth Quarter............................................ $ 7.87 $ 4.58
Third Quarter............................................. $ 6.75 $ 4.60
Second Quarter............................................ $ 8.94 $ 6.00
First Quarter............................................. $10.70 $ 7.68
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
</Table>
9
The closing sale price of our common stock as reported on the NASDAQ
National Market on March 25, 2003 was $9.30 per share. As of that date there
were 85 holders of record of our common stock.
DIVIDENDS
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.
ITEM 6: SELECTED CONSOLIDATED 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, 2002, 2001 and
2000 and the balance sheet data as of December 31, 2002 and 2001 are derived
from audited financial statements included elsewhere in this Form 10-K. The
statement of operations data for the years ended December 31, 1999 and 1998 and
the balance sheet data as of December 31, 2000, 1999 and 1998 are derived from
audited financial statements not included in this Form 10-K. For the year ended
December 31, 2002, operating results include a $7.2 million provision for
inventory recovery and $0.9 million in restructuring charge. For the year ended
December 31, 2001, operating results include $10.9 million provision for
inventory losses, $3.8 million in restructuring charge and $16.8 million of
impairment of goodwill and intangible assets charge 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.
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
acquisition of 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.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------------------
2002 2001 2000 1999 1998
------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................... $48,779 $ 40,971 $97,183 $76,293 $33,004
Cost of revenues............................ 27,841 27,899 53,940 39,428 13,878
Inventory losses (recovery)................. (7,221) 10,920 -- -- --
------- -------- ------- ------- -------
Gross profit................................ 28,159 2,152 43,243 36,865 19,126
------- -------- ------- ------- -------
Operating expenses:
Research and development.................. 9,977 11,554 14,130 10,317 4,932
Sales and marketing....................... 7,668 10,926 14,293 10,523 5,624
General and administrative................ 5,453 14,023 8,058 5,459 2,169
Acquired in-process research and
development............................ 102 -- 1,600 -- 6,130
Amortization of goodwill and intangible
assets................................. 88 3,068 2,638 -- --
Impairment of goodwill and intangible
assets................................. -- 16,775 -- -- --
Restructuring charges..................... 850 3,787 -- -- --
Amortization of deferred stock
compensation........................... 687 1,081 1,308 790 43
------- -------- ------- ------- -------
Total operating expenses.......... 24,825 61,214 42,027 27,089 18,898
------- -------- ------- ------- -------
Income (loss) from operations............... 3,334 (59,062) 1,216 9,776 228
Other income, net........................... 3,254 6,154 7,288 271 479
------- -------- ------- ------- -------
</Table>
10
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------------------
2002 2001 2000 1999 1998
------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income (loss) before provision for income
taxes..................................... 6,588 (52,908) 8,504 10,047 707
Provision for income taxes.................. 435 5,311 2,366 3,014 212
------- -------- ------- ------- -------
Net income (loss) before extraordinary
loss...................................... 6,153 (58,219) 6,138 7,033 495
Extraordinary loss, net of income taxes..... -- -- -- (1,611) --
------- -------- ------- ------- -------
Net income (loss)........................... $ 6,153 $(58,219) $ 6,138 $ 5,422 $ 495
======= ======== ======= ======= =======
Basic earnings (loss) per share before
extraordinary loss........................ $ 0.31 $ (3.02) $ 0.34 $ 1.33 $ 0.21
Basic earnings (loss) per share after
extraordinary loss........................ $ -- $ -- $ -- $ 1.03 $ --
Shares used in computing basic earnings
(loss) per share.......................... 19,806 19,275 18,011 5,287 2,355
Diluted earnings (loss) per share before
extraordinary loss........................ $ 0.31 $ (3.02) $ 0.30 $ 0.48 $ 0.04
Diluted earnings (loss) per share after
extraordinary loss........................ $ -- $ -- $ -- $ 0.37 $ --
Shares used in computing diluted earnings
(loss) per share.......................... 20,004 19,275 20,514 14,666 12,325
</Table>
<Table>
<Caption>
DECEMBER 31,
--------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................. $111,391 $125,628 $118,380 $98,290 $12,988
Working capital........................... 106,618 104,521 130,911 89,892 14,011
Total assets.............................. 129,426 140,183 192,956 130,605 45,996
Long term debt, net of current portion.... -- -- -- -- 14,709
Total stockholders' equity................ 112,553 107,761 159,847 104,278 15,139
</Table>
ITEM 7: 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 "Risks Related to
Our Business" and elsewhere in this Form 10-K.
OVERVIEW AND RECENT DEVELOPMENTS
We provide cost-effective software-based communications solutions that
address high-speed Internet connectivity requirements for existing and emerging
technologies. Our communications products enable
11
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-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.
Our strategy is to broaden product offerings that enable cost-effective
access in both wired and wireless environments. In May 2002, we acquired the
assets of cyberPIXIE, Inc. ("cyberPIXIE"), a wireless access provider. The
acquisition of cyberPIXIE is consistent with our strategy and permits us to
participate in a new emerging market. As a result of the acquisition, we
obtained products and technology that will enable roaming between and among
802.11 wireless and cellular networks.
Our wireless product portfolio consists of both PC client and network
infrastructure products branded as our Segue(TM) product line. Our wireless
client product is a PC based software solution that facilitates roaming and
connection to wireless networks. These networks may be public wireless local
area network ("WLAN") hot spots, and cellular data networks (wireless wide area
networks), as well as private enterprise and home WLANs. Our client products are
offered as custom branded offerings associated with a particular carrier and
typically includes carrier specific "service finder" location databases. Our
client product offers a superior end user experience while simultaneously
reducing the costs associated with typical end user support problems that our
product addresses.
Our infrastructure products consist of software programs and third party
computing platforms (embedded or PC servers) that enable the deployment of
public WLANs. Our gateway product aggregates WLAN traffic from multiple access
points, supports proprietary end user features, provides location specific
content, and supports industry standard RADIUS compliant end user authentication
and accounting. Our WLAN controller further aggregates gateway traffic and
provides storage for end user databases, subscription plans, and central control
of gateway management functions.
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 86%, 91% and 91% of our
total sales for the years ended 2002, 2001, and 2000, respectively. The
predominance of our sales is in Asia because our customers are primarily
motherboard and modem manufacturers, and the 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.
The economic downturn that began in 2000 and has continued throughout 2001
and 2002 has adversely affected our business and operating results. In
particular, since the fourth quarter of 2000, our customers, primarily our PC
motherboard and distribution manufacturers, have been adversely impacted by
significantly lower PC demand which has, in turn, lowered demand for our
products. As a result, our revenues decreased from $97.2 million in 2000 to
$41.0 million in 2001 and $48.8 million in 2002. Partly as a consequence of the
economic slowdown, during 2001, we reduced our headcount from 198 personnel at
the end of 2000 to 108 at the end of 2001. We further reduced our headcount in
2002 by an additional 27 persons.
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.
Continuing decreases in the average selling prices of our products will result
in decreased revenue as well.
As of December 31, 2002, we have $53.0 million in cash and cash
equivalents. In addition, at December 31, 2002, we have $58.4 million in
short-term investments, that potentially subject us to credit and market risks.
To mitigate credit risk related to short-term investments, we have an investment
policy to preserve the value of capital and generate interest income from these
investments without undue exposure to
12
risk fluctuations by investing in highly rated, short-term investments. Market
risk is the potential loss due to the change in value of a financial instrument
due to interest rates or equity prices. Our investment policy is to stipulate
short durations, limiting interest rate exposure. We maintain our portfolio of
cash equivalents and short-term investments in a variety of securities,
including both government and corporate obligations with ratings of A or better
and money market funds.
CRITICAL ACCOUNTING POLICIES
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 affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the 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 the preparation of its consolidated financial statements.
REVENUE RECOGNITION
Revenues consist primarily of sales of products to original equipment
manufacturers ("OEMs") and distributors. Revenues from sales to customers are
recognized upon shipment when title and risk of loss passes to the customers,
when the price is fixed or determinable and when there is evidence of an
arrangement, unless we have future obligations or have to obtain customer
acceptance, in which case revenue is deferred until such obligations have been
satisfied or customer acceptance has been achieved. We provide for estimated
sales returns and customer rebates related to sales to OEMs at the time of
shipment. Customer rebates are recorded against revenues. As of December 31,
2002 and 2001, we have an allowance for customer rebates recorded against
accounts receivable of $95,000 and $200,000, respectively, and accrued customer
rebates of $1.7 million and $2.1 million, respectively, presented as current
accrued 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 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.
Royalty revenue is recognized when confirmation of royalties due to us is
received from licensees or for non-refundable minimal royalty agreements, over
the period that the Company provides support to the customer and where we offer
extended payment terms, as payments are received. Furthermore, revenues from
technology licenses are recognized after delivery has occurred, the amount is
fixed or determinable and collection is reasonably assured. To the extent there
are extended payment terms on these contracts, revenue is recognized as the
payments become due and the cancellation privilege lapses. To date, we have not
offered post-contract customer support.
In instances where the Company provides non-recurring engineering services
to customers, the Company recognizes revenue as the services are completed,
using the percentage of completion basis of accounting in accordance with
Statement of Position 81-1, "Accounting for Performance and Construction Type
Contracts."
INVENTORY WRITE-DOWNS AND RECOVERIES
Inventories are stated at the lower of cost or market and include material,
labor and overhead costs. Inventories as of December 31, 2002 and 2001 were
composed of finished goods and work-in-process only. We regularly monitor
inventory quantities on hand. Based on our current estimated requirements, it
was
13
determined that there was excess inventory and those excess amounts were fully
reserved as of December 31, 2002 and 2001. Due to competitive pressures and
technological innovation, it is possible that these estimates could increase in
the near term.
Due to the changing market conditions, the recent economic downturn and
technological innovations, inventory write-downs 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 expected introduction of new products in 2002, we
wrote down excess inventories to net realizable value based on forecasted demand
and firm purchase order commitments from our major suppliers. Actual demand may
differ from forecasted demand and such difference may have a material effect on
our financial position and results of operations.
For the year ended December 31, 2002, we did not record any additional
inventory write-downs. We sold part of the written down inventories and
recovered $7.2 million of the former write-downs for the year ended December 31,
2002. As of December 31, 2002, the cumulative write-down for excess inventory on
hand was $2.1 million.
Our products may attract static electricity charges over time and have a
limited shelf life. Accordingly, in addition to the write-down of excess
inventory, we also provide a reserve against obsolete inventory. As of December
31, 2001, the cumulative write-down for obsolete inventory on hand was $1.4
million. In 2002, we scrapped the entire balance of these obsolete inventories.
ACCRUED ROYALTIES
We record an accrual for estimated future royalty payments for relevant
technology of others used in our product offerings in accordance with SFAS No.
5, "Accounting for Contingencies." The estimated royalties accrual reflects
management's broader litigation and cost containment strategies, which may
include alternatives such as entering into cross-licensing agreements, cash
settlements and/or ongoing royalties based upon our judgment that such
negotiated settlements would allow management to focus more time and financial
resources on the ongoing business. Accordingly, the royalties accrual reflects
estimated costs of settling claims rather than continuing to defend our legal
positions and is not intended to be, nor should it be interpreted as, an
admission of infringement of intellectual property, valuation of damages
suffered by any third parties or any specific terms that management has
predetermined to agree to in the event of a settlement offer. We have accrued
our best estimate of the amount of royalties payable for royalty agreements
already signed, agreements that are in negotiation and unasserted but probable
claims of others using advice from third party technology advisors and
historical settlement rates. Should a review of our estimated royalty result in
a conclusion that a lower accrual is necessary, then there would be a positive
effect on earnings.
As of December 31, 2002 and 2001, we had accrued royalties of approximately
$3.7 million and $12.3 million, respectively. However, the amounts accrued may
be inadequate and we may be required to take additional charges if royalty
payments are settled at a higher rate than expected, based on our experience of
royalty rates normally charged by licensors in our industry. In addition,
settlement arrangements may require royalties for both past and future sales of
the associated products. If this is the case our gross margins will decrease on
these future product sales. On March 19, 2002, Townshend entered into a
settlement agreement with us, which settled the Federal Court Action and State
Court Action. The settlement agreement required us to make a cash royalty
payment on March 19, 2002, of $14.3 million related to past liability and
prepayment of future royalties due to reserves which had been established in
prior periods in anticipation of settlement. As of December 31, 2002, we have
classified the prepayment as other assets, of which $1.1 million represents the
current portion and $2.3 million represents the long-term portion.
INCOME TAXES
We provide for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 requires an asset and liability
based approach in accounting for income taxes. Deferred income tax assets and
liabilities are recorded based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates.
Valuation allowances are provided against assets which are not likely to be
realized.
14
We currently have subsidiaries in Japan, France, Taiwan and Yugoslavia as
well as branch offices in Taiwan and Korea. The complexities brought on by
operating in several different tax jurisdictions inevitably lead to an increased
exposure to worldwide taxes. Should review of our tax fillings and such reviews
result in unfavorable adjustments to our tax returns, our operating results and
financial position could be materially and adversely affected.
As part of the process of preparing our consolidated financial statements,
we are required to estimate our income taxes, which involves estimating our
actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities. Significant
management judgment is required to assess the likelihood that our deferred tax
assets will be recovered from future taxable income. We maintain a full
valuation allowance against our deferred tax assets. In the event we were to
determine that we would be able to realize our deferred tax assets in the future
in excess of its net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(ALL AMOUNTS IN TABLES, OTHER THAN PERCENTAGES, ARE IN THOUSANDS)
REVENUES
<Table>
<Caption>
2002 2001 2000
------- ------- -------
Revenues -- Product..................................... $43,652 $39,626 $92,933
Revenues -- Royalty and Licensing....................... $ 5,127 $ 1,345 $ 4,250
Total Revenues.......................................... $48,779 $40,971 $97,183
% change from prior period -- Product................... 10.2% (57.4)% 23.0%
% change from prior period -- Royalty and Licensing..... 281.2% (68.4)% 487.0%
Total % change from prior period........................ 19.1% (57.8)% 27.4%
</Table>
Our revenues primarily consist of product sales of soft modems to board
manufacturers and distributors in Asia. Product Revenues increased $4.0 million
for the year ended December 31, 2002 from 2001. The revenue increase was
primarily due to stronger modem sales, in particular, one of our major customers
significantly increased purchases in the second half of the year. Software and
licensing revenues amounted to $5.1 million for the year ended December 31,
2002, compared with $1.3 million for 2001. Licensing revenue includes $2.8
million from the settlement of the ESS litigation as well as $1.6 million from
another large customer.
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 caused by poor economic conditions.
Additionally, the decrease in sales revenues was due to a 9% decrease in average
selling prices. Software and licensing revenues amounted to $1.3 million for the
year ended December 31, 2001, compared with $4.3 million for 2000.
GROSS PROFIT
<Table>
<Caption>
2002 2001 2000
-------- ------ -------
Gross profit -- Product.................................. $ 23,032 $ 807 $38,993
Gross profit -- Royalty and Licensing.................... 5,127 1,345 4,250
Total Gross profit....................................... $ 28,159 $2,152 $43,243
Percentage of revenues................................... 57.7% 5.3% 44.5%
% change from prior period............................... 1,208.5% (95.0)% 17.3%
</Table>
Cost of revenues consists primarily of chipsets we purchase from third
party manufacturers and also includes accrued intellectual property royalties,
cost of operations and distribution costs. Provision for inventory losses are
also included in the determination of gross profit.
15
Product gross profit increased $22.2 million for the year ended December
31, 2002 compared to the prior year primarily as a result of the provision for
inventory losses of $10.9 million recorded in 2001, an inventory recovery of
$7.2 million recognized in the year ended December 31, 2002 and the elimination
of goodwill amortization of $1.7 million resulting from write-off of goodwill
arising from the acquisition of the Communications Systems Division ("CSD").
These improvements in gross profit were partially offset by decreasing average
selling prices commonly seen in the industry. Gross profit as a percentage of
product revenues increased from 5.3% for the year ended December 31, 2001 to
57.7% for the year ended December 31, 2002 for the same reasons. Gross profit
from licensing and royalty revenue increased $3.8 million for the year ended
December 31, 2002 from 2001 due to increased royalty and licensing revenue in
2002 compared with 2001. As a percentage of revenues, we expect gross profit to
decrease in the next year as a result of the decreasing average selling prices
commonly seen in the industry. In addition, the fixed portion of our costs as a
percentage of revenue decreased as a result of the benefit of restructuring
activities commenced in 2001 and the increase in revenues.
Gross profit decreased $41.1 million for the year ended December 31, 2001
compared to the same period in 2000 primarily due to decreased sales revenues
and the provision for inventory losses of $10.9 million recorded in 2001. Gross
profit as a percentage of product 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.
RESEARCH AND DEVELOPMENT
<Table>
<Caption>
2002 2001 2000
------ ------- -------
Research and development................................. $9,977 $11,554 $14,130
Percentage of revenues................................... 20.5% 28.2% 14.5%
% change from prior period............................... (13.7)% (18.2)% 37.0%
</Table>
Research and development expenses include costs for software and hardware
development, prototyping, certification and pre-production costs. We expense all
research and development costs as incurred.
For the year ended December 31, 2002, total research and development costs
incurred were $10.0 million, compared to $11.6 and $14.1 million for 2001 and
2000, respectively. Research and development expenses decreased by $1.6 million
for the year ended December 31, 2002 compared to 2001 primarily because of
decreased personnel expenses resulting from the reductions in force that
occurred throughout fiscal year 2001 and the savings from the closure of the
Connecticut engineering center in June 2002. This decrease in research in
development expenses was offset by our expansion of research and development
efforts in wireless products and utilities. In 2002, we closed down our
Connecticut engineering center which focused on embedded products and shifted
our research and development efforts to wireless products and utilities. As a
percentage of revenues, research and development costs decreased for the year
ended December 31, 2002 for the same reasons as above as well as due to our
higher revenues in fiscal 2002. As a percentage of revenues, we expect research
and development costs to remain the same in 2003 as we continue to invest in the
development of wireless products and utilities.
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 and 2002.
16
SALES AND MARKETING
<Table>
<Caption>
2002 2001 2000
------ ------- -------
Sales and marketing...................................... $7,668 $10,926 $14,293
Percentage of revenues................................... 15.7% 26.7% 14.7%
% change from prior period............................... (29.8)% (23.6)% 35.8%
</Table>
Sales and marketing expenses consist primarily of personnel costs, sales
commissions and marketing costs. Sales commissions payable to our distributors
are recognized as expenses 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 costs,
publication/graphics costs, public relations and trade shows.
Sales and marketing expenses decreased $3.3 million for the year ended
December 31, 2002 compared to 2001. The decrease in spending is primarily due to
decreased personnel expenses as a result of the reductions in force that
occurred in fiscal year 2001 and the second quarter of 2002. As a percentage of
revenues, we expect sales and marketing costs to remain the same in 2003.
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 and to 29 at December 31, 2002.
GENERAL AND ADMINISTRATIVE
<Table>
<Caption>
2002 2001 2000
------ ------- ------
General and administrative................................ $5,453 $14,023 $8,058
Percentage of revenues.................................... 11.2% 34.2% 8.3%
% change from prior period................................ (61.1)% 74.0% 47.6%
</Table>
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 include
rent, insurance, utilities, travel and other operating expenses to the extent
not otherwise allocated to other functions.
General and administrative expenses decreased $8.6 million for the year
ended December 31, 2002 compared to 2001. The decrease was primarily due to
decreased legal costs associated with the patent infringement litigation against
Smart Link, ESS Technology and Dr. Brent Townshend which were settled in May
2001, February 2002 and March 2002, respectively, offset by an increase in
headcount from 31 in 2001 to 35 in 2002. As a percentage of revenues, we expect
general and administrative costs to remain relatively the same in 2003. However,
should any new litigation arise in 2003, our legal costs and general and
administrative expenses could significantly increase.
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 and offset by the reduction in headcount to 31
from 47.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
<Table>
<Caption>
2002 2001 2000
---- ---- ------
Acquired in-process research and development................ $102 $-- $1,600
Percentage of revenues...................................... 0.0% -- 1.7%
</Table>
17
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. During 2002, we expensed in process
technology of $0.1 million in connection with our acquisition of cyberPIXIE.
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS
<Table>
<Caption>
2002 2001 2000
---- ------ ------
Amortization of goodwill and intangible assets.............. $88 $3,068 $2,638
Percentage of revenues...................................... 0.2% 7.5% 2.7%
</Table>
Amortization of goodwill and intangible assets decreased from $3.1 million
for the year ended December 31, 2001 to $88,000 for the year ended December 31,
2002. In prior years, we purchased assets or businesses that resulted in the
creation of 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
our long-lived assets, including intangibles acquired from CSD, Voyager and
BlueCom, and recorded impairment charges totaling $16.8 million. As a result of
the impairment charges, the carrying value of the related goodwill was reduced
to approximately $0.4 million. Additionally, effective January 1, 2002, we have
adopted the provisions of SFAS No. 142, "Goodwill and Other Intangibles," under
which goodwill is no longer being amortized but rather tested for impairment at
least annually.
In May 2002, we acquired the assets of cyberPIXIE for a total of $1.6
million in cash. The Company followed the guidance of SFAS 141 for this
acquisition. The purchase price of $1.6 million was allocated to the tangible
and identifiable assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition as determined by an independent
valuation firm. We attributed $0.1 million to in-process research and
development and $0.9 million to developed technology. We expensed in-process
research and development and amortize the developed technology. The $0.9 million
excess of the purchase price over the fair value of the net identifiable assets
was allocated to goodwill.
On December 14, 2000, we completed the acquisition of BlueCom. The
acquisition was accounted for under the purchase method of accounting. The
difference of $1.1 million by which the purchase price exceeded tangible and
identifiable intangible assets was allocated to goodwill.
On February 24, 2000, we completed the acquisition of Voyager. The
acquisition was structured as a tax-free reorganization and was accounted for
under the purchase method of accounting. We attributed $1.6 million of the
purchase price to in-process research and development, which we expensed
immediately, $0.5 million to intellectual property and $0.3 million to
workforce, both of which are being amortized. The difference by which the
purchase price exceeded the fair value of the tangible and identifiable
intangible assets acquired was $16.2 million and was allocated goodwill.
Goodwill was being amortized in 2001 and 2000, prior to our adoption of SFAS
142.
IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
<Table>
<Caption>
2002 2001 2000
---- ------- ----
Impairment of goodwill and intangible assets................ $-- $16,775 $--
Percentage of revenues...................................... -- 40.9% --
</Table>
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 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
18
fair value was based on anticipated future cash flows discounted at a rate
commensurate with the risk involved. We determined the goodwill and intangible
assets acquired from Voyager, as a result of the recent corporate restructuring
and reorganization, 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 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
<Table>
<Caption>
2002 2001 2000
---- ------ ----
Restructuring charges....................................... $850 $3,787 $--
Percentage of revenues...................................... 1.7% 9.2% --
</Table>
During 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 two restructuring program and included a reduction in
worldwide headcount of 64 employees. 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.
In June 2002, we further reduced worldwide headcount by 20 employees
(consisting of 13 research and development employees, 5 sales and marketing
employees and 2 general and administrative employees). In September 2002, we
announced our intention to move our corporate headquarters to Chicago, Illinois.
As a result of the move, 5 general and administrative employees were replaced,
resulting in additional severance and employment related costs. Additionally, in
the fourth quarter of 2002, we further reduced our headcount by 7 research and
development employees. The relocation and restructuring resulted in additional
charges of $928,000 consisting of severance, employment related costs and costs
related to closure of excess facilities. Net restructuring charges for year
ended December 31, 2002 was $850,000.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
<Table>
<Caption>
2002 2001 2000
------ ------ ------
Amortization of deferred stock compensation................ $ 687 $1,081 $1,308
Percentage of revenues..................................... 1.4% 2.6% 1.3%
% change from prior period................................. (36.4)% (17.4)% 65.6%
</Table>
In connection with the grant of restricted stock to employees' in 2002 and
2001 we recorded deferred stock compensation of $3.7 million and $1.8 million,
respectively, representing the fair value of our common stock on the date the
restricted stock was granted. There was no grant of restricted stock to
employees in 2000. Such amounts are presented as a reduction of stockholders'
equity and are amortized ratably over the vesting period of the applicable
shares.
In connection with the grant of stock options to employees prior to our
initial public offering in 1999, we recorded deferred stock compensation of $5.4
million representing the difference between the exercise price and deemed fair
value of our common stock on the date these stock options were granted. Such
amount is presented as a reduction of stockholders' equity and is amortized
ratably over the vesting period of the applicable options.
The amortization of deferred stock compensation decreased $394,000 for the
year ended December 31, 2002 compared to 2001 primarily due to the termination
of employees in 2002, offset by additional expenses related to the restricted
stock grants in 2001 and 2002. We expect the amortization of deferred stock
compensation to be approximately $300,000 per quarter through 2003 and
decreasing thereafter, based on restricted stock grants and stock option grants
through December 31, 2002. The amount of deferred stock
19
compensation expense to be recorded in future periods could decrease if options
for which accrued but unvested compensation has been recorded are forfeited. If
we grant additional restricted stock, the amortization of deferred compensation
will increase.
The amortization of deferred stock compensation decreased $227,000 for the
year ended December 31, 2001 compared to the year ended 2000 primarily due to
the termination of employees in 2001 and the corresponding reversal of the
remaining deferred stock compensation balance. This decrease was offset by the
additional expense related to the restricted stock grants in 2001.
In 2003 and in future years, amortization of deferred stock compensation
that will be recorded assuming no terminations would be as follows:
AMORTIZATION OF DEFERRED STOCK COMPENSATION
<Table>
<Caption>
DECEMBER 31,
---------------------------
2006 2005 2004 2003
---- ---- ---- ------
Amortization of deferred stock compensation............ $568 $597 $682 $1,069
</Table>
OTHER INCOME, NET
<Table>
<Caption>
2002 2001 2000
------ ------ ------
Other income, net.......................................... $3,254 $6,154 $7,288
Percentage of revenues..................................... 6.7% 15.0% 7.5%
</Table>
Other income, net, consists of interest income, net of interest expense of
$131,000 in 2000. Interest income is expected to fluctuate over time. Interest
income decreased $2.9 million for year ended December 31, 2002 compared to 2001
primarily due to lower average cash balances and the decrease in interest rates
in 2002.
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
and lower average cash balances in 2001.
PROVISION FOR INCOME TAXES
<Table>
<Caption>
2002 2001 2000
---- ------ ------
Provision for income taxes.................................. $435 $5,311 $2,366
Effective tax rate.......................................... 7% (10)% 28%
</Table>
The realization of deferred tax assets is dependent on future
profitability. During the third quarter of 2001, we recorded $5.3 million of
provision for income taxes to establish valuation allowances against deferred
tax assets in accordance with the provisions of FASB No. 109, "Accounting for
Income Taxes" as a result of uncertainties regarding realizability.
Our effective tax rate was below the statutory tax rate of 35% during 2002
primarily due to the recognition of benefits relating to various tax deductible
accruals, reserves and net operating losses previously unrecognized as well as
tax credit for research and development activities in the amounts of $2,368K and
$560K, respectively. The negative tax rate for the year ended December 31, 2001
is primarily attributable to the establishment of a valuation allowance against
our net deferred tax assets.
20
LIQUIDITY AND CAPITAL RESOURCES
<Table>
<Caption>
2002 2001 2000
-------- -------- --------
Net cash provided by (used in) operating
activities......................................... $ (8,645) $ 4,343 $ (5,215)
Net cash provided by (used in) investing
activities......................................... 26,164 5,626 (47,236)
Net cash provided by financing activities............ (2,961) 3,027 33,143
Cash, cash equivalents and short-term investments at
the end of year.................................... 111,391 125,628 118,380
Working capital at the end of year................... 106,618 104,521 130,911
</Table>
The net cash used in operating activities of $8.6 million for the year
ended December 31, 2002 was primarily attributable to a decrease in accrued
royalties of $8.7 million primarily attributable to the $14.3 million settlement
payment in relation to the litigation with Dr. Brent Townshend in March 2002, a
decrease in accrued liabilities of $4.3 million attributable to adverse
inventory commitments and lower legal expenses, an increase in accounts
receivable of $2.2 million attributable to high levels of shipments toward the
end of 2002, compared with 2001, an increase in prepaid expenses and other
assets of $2.7 million attributable to the settlement with Dr. Townshend which
included prepaid of future royalty obligations and an increase in accounts
payable of $3.4 million, attributable to increase inventory needs due to higher
level of shipments, partially offset by net income of $6.2 million, depreciation
and amortization of $2 million a tax benefit from stock options exercised of $1
million and a decrease of inventories of $1.9 million, attributable to improved
management of inventory levels.
The net cash provided by operating activities of $4.3 million for the year
ended December 31, 2001 was primarily attributable to a decrease in accounts
receivable of $22.7 million attributable to improved collection management, an
add-back for the non-cash impairment of goodwill and intangible assets of $16.8
million, depreciation and amortization of $6.7 million, a decrease of
inventories of $10.4 million attributable to reduced revenue levels a decrease
in deferred tax assets of $5.2 million and increase of taxes payable of $2.2
million, amortization of stock based compensation of $1 million, and tax
benefits from stock option exercises of $1.5 million, partially offset by net
losses of $58.2 million, a decrease in accounts payable of $4.2 million
attributable to the timing of payments to vendors.
The net cash used in operating activities of $5.2 million for the year
ended December 31, 2000 was primarily attributable to an increase in accounts
receivable of $20.6 million caused by a large increase in revenue and an
increase in inventories of $8.9 million attributable to inventory requirements
to meet the higher revenue levels.
Net cash provided by investing activities for the year ended December 31,
2002 consists primarily of proceeds from the sales and maturities of short-term
investments of $78.2 million, net of purchases of short-term investments of
$49.9 million, purchases of cyberPIXIE of $1.6 million and purchases of property
and equipment of $0.6 million. Net cash provided by financing activities for the
year ended December 31, 2002 consists of proceeds from the issuance of common
stock associated with stock option exercises and from share purchases through
the employee stock purchase plan, offset by shares repurchased by the Company.
In August 2002, the Board of Directors authorized the repurchase of up to
1,000,000 shares of our common stock. During the three months ended December 31,
2002, we repurchased 775,800 shares of our outstanding common stock for
approximately $5.3 million. The Company completed the stock repurchase in
February 2003. The repurchased shares are retired immediately after the
repurchases.
In February 2003, PCTEL extended its stock repurchase program and announced
its intention to repurchase up to one million additional shares on the open
market from time to time. The Company's repurchase activities will be at
management's discretion based on market conditions and the price of the
Company's common stock. As of March 2003, we repurchased 261,200 shares of our
common stock for approximately $1.9 million.
As of December 31, 2002, we had $111.7 million in cash, cash equivalents
and short-term investments and working capital of $106.6 million. Accounts
receivable, as measured in days sales outstanding, was 30 days at December 31,
2002 compared to 34 days in December 31, 2001. The decrease in days sales
outstanding from December 31, 2001 to 2002 was primarily due to the continued
cash collection efforts throughout 2002.
21
The decrease in net cash provided by operating activities for the year
ended December 31, 2001 compared to 2000 was primarily due to 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 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.
We believe that our existing sources of liquidity, consisting of cash,
short-term investments and cash from operations, will be sufficient to meet our
working capital needs for the foreseeable future. We will continue to evaluate
opportunities for development of new products and potential acquisitions of
technologies or businesses that could complement our business. We may use
available cash or other sources of funding for such purposes. However, possible
investments in or acquisitions of complementary businesses, products or
technologies, or cash settlements resulting from new litigation, may require us
to use our existing working capital or to seek additional financing. In
addition, if the current economic downturn prolongs, we will need to continue to
expend our cash reserves to fund our operations. As of December 31, 2002, we
have non-cancelable operating leases for office facilities of $3.1 million
through 2007, unpaid restructuring (termination compensation) of $106,000
through the first half of 2003 and no outstanding firm inventory purchase
contract commitments with our major suppliers.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following summarizes our contractual obligations under operating leases
for office facilities through 2007 and operating leases for equipment through
2005 and the effect such obligations are expected to have on our liquidity and
cash flow in future periods. Our aggregate future minimum rental payments under
these leases at December 31, 2002, are as follows (in thousands):
<Table>
2003........................................................ $ 958
2004........................................................ 671
2005........................................................ 600
2006........................................................ 611
2007........................................................ 427
------
Future minimum lease payments............................... $3,267
======
</Table>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, "Accounting for Exit or Disposal Activities"'. SFAS No. 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for under EITF No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
scope of SFAS No. 146 also includes costs related to terminating a contract that
is not a capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 will be effective for exit or
disposal activities that are initiated after December 31, 2002 and early
application is encouraged. We will adopt SFAS No. 146 on January 1, 2003. The
provisions of EITF No. 94-3 shall continue to apply for an exit activity
initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the
adoption of SFAS No. 146. The effect on adoption of SFAS No. 146 will change, on
a prospective basis, the timing of when restructuring charges are recorded from
a commitment date approach to when the liability is incurred.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosures about the guarantees that an entity has
issued, including a reconciliation
22
of changes in the entity's product warranty liabilities. The initial recognition
and initial measurement provisions of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. Adoption of this standard did not have a material impact on
the Company's financial position, results of operations, or cash flows.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. We are currently
assessing the impact of FIN 46 on our consolidated financial statements.
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables."
EITF Issue No. 00-21 provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or rights
to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company believes that the adoption of this standard will have no material impact
on its financial position, results of operations, or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure ("SFAS 148"). SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation" to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of Statement No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. Generally the provisions of SFAS 148 are
effective for financial statements for fiscal years ending after December 15,
2002. The Company anticipates that it will continue to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Adoption of this standard did not have a material impact on the Company's
financial position, results of operations, or cash flows.
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
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. We believe that the
average selling price of our products is likely to continue to decline in the
future due principally to competitive pressure. This pricing pressure will
likely reduce our gross margins, adversely affect our operating results and may
result in the decrease in the price of our stock.
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
23
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 margins to decline.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND SUCCESSFULLY INTRODUCE
NEW AND ENHANCED PRODUCTS, PARTICULARLY, WIRELESS PRODUCTS AND TECHNOLOGY, THAT
MEET THE NEEDS OF OUR CUSTOMERS AND ACHIEVE BROAD MARKET ACCEPTANCE.
Our revenue depends on our ability to anticipate our customers' needs and
develop products that address those needs. In particular, our future success
will depend on our ability to introduce new products for the wireless market,
anticipate improvements and enhancements in wireless technology and in WLAN
standards, and to develop products that are competitive in the rapidly changing
wireless market. Introduction of new products and product enhancements will
require coordination of our efforts with those of our suppliers and
manufacturers to rapidly achieve volume production. If we fail to coordinate
these efforts, develop product enhancements or introduce new products that meet
the needs of our customers as scheduled, our revenues may be reduced and our
business may be harmed. We may not be successful in timely introducing new
wireless products as a result of our relative inexperience in developing,
marketing, selling and supporting these products. We cannot assure you that
product introductions will meet the anticipated release schedules or that our
wireless products will be competitive in the market. Furthermore, given the
emerging nature of the wireless market, there can be no assurance our products
and technology will not be rendered obsolete by alternative or competing
technologies. If we are unable to successfully compete in a particular market
with internally developed products, we may have to license technology from other
businesses or acquire other businesses as an alternative to internal research
and development.
OUR BUSINESS AND OUR ABILITY TO GROW REVENUES HAVE BEEN ADVERSELY IMPACTED BY
THE ECONOMIC SLOWDOWN AND RELATED UNCERTAINTIES AFFECTING MARKETS IN WHICH WE
OPERATE.
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 2001 and
2002 were negatively affected. Because we expect PC demand to continue to be
weak for the foreseeable term, we expect our revenues and earnings to remain at
the same level in 2003 as a result of the adverse economic environment.
Adverse economic conditions worldwide have contributed to a technology
industry slowdown, particularly a rapid deterioration in the demand for PCs, and
have impacted our business, resulting in:
- reduced demand for most of our products,
- increased price competition for our products,
- increased risk of excess and obsolete inventories,
- excess facilities and manufacturing capacity, and
- higher overhead costs, as a percentage of revenues.
Recent political and social turmoil in many parts of the world, including
actual incidents and potential future acts of terrorism and the current war in
Iraq, may continue to put pressure on global economic conditions. These
political, social and economic conditions and uncertainties make it extremely
difficult for PCTEL and for our customers to accurately forecast and plan future
business activities and 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 for our products from our own
customers. This forecasting and order lead time requirement limits our ability
to react to 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. This reduced predictability challenges our ability to
operate profitably and to increase revenues. In particular, it is difficult to
develop and implement strategies, sustainable business models and efficient
operations, and it is difficult for us to effectively manage outsourced
relationships. If the current economic or market conditions continue or further
deteriorate, there could be additional material adverse impact on our financial
position, revenues, results of operations and cash flow.
24
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 expected introduction of
new products later in 2002, we wrote down inventories to net realizable value
based on forecasted demand and firm purchase order commitments from our major
suppliers in 2001. Actual demand may differ from forecasted demand and such
difference may have a material effect on our financial position and result of
operations. For the year ended December 31, 2002, we did not record any
additional inventory write-downs. We sold part of the written down inventories
and recovered $7.2 million of the former write-downs for the year ended December
31, 2002. As of December 31, 2002, the cumulative write-down for excess
inventory on hand was $2.1 million.
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, 2002, approximately 80% of our
revenues were generated by four of our customers, representing 25%, 23%, 23% and
9% of revenues, respectively. All of 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, among other reasons:
- we do not currently 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.
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 86% of our total
revenues for the year ended December 31, 2002. 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,
25
- 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.
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 resources. This will require management to effectively manage
significant technological advancement within reduced budgets.
COMPETITION WITHIN THE CONNECTIVITY AND WIRELESS NETWORKING INDUSTRIES IS
INTENSE AND IS EXPECTED TO INCREASE SIGNIFICANTLY. OUR FAILURE TO COMPETE
SUCCESSFULLY COULD MATERIALLY HARM OUR PROSPECTS AND FINANCIAL RESULTS.
The connectivity device and wireless markets are intensely competitive. We
may not be able to compete successfully against current or potential
competitors. Our current competitors include Agere Systems, Broadcom, 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 and wireless markets, new communication technologies are
introduced and as additional networks are deployed. In addition, our client
software competes with software developed internally by Network Interface Card
(NIC) vendors, service providers for local 802.11 networks, and with software
developed by large systems integrators. Increased competition could adversely
affect our business and operating results through pricing pressures, the loss of
market share and other factors. The principal competitive factors affecting
wireless markets include the following:
- maintaining effective data throughput and coverage area, interference
immunity and network security and scalability,
- keeping product costs low while, at the same time, increasing roaming
capability, decreasing power consumption and the size of products and
improving product reliability, ease of use, brand recognition and product
features and applications,
- integration with existing technology,
- maintaining industry standards and obtaining product certifications as
wireless networks continue to become more sophisticated,
- decreasing product time to market,
- complying with changes to government regulations with respect to each
country served and related to the use of radio spectrum, and
- obtaining favorable OEM relationships, marketing alliances, effective
distribution channels.
We could, in the future, be at a disadvantage to competitors in both the
wireless and broadband markets that have broader distribution channels, brand
recognition, extensive patent portfolios and more diversified product lines,
particularly 3Com, Alcatel, Analog Devices, GlobespanVirata, Intersil and
Proxim. Additionally, numerous companies have announced their intention to
develop competing products in the connectivity products market, including
several companies offering low-price WLAN products. Competitors in the market
for products and technology that enable roaming between and among 802.11
wireless and cellular networks include Aptilo, Boingo, BVRP, Cisco, Colubris,
Funk, GRIC, IBM, iPass, ipUnplugged, Microsoft, NetnearU, Nokia, Nomadix, Pronto
Networks, Sierra Wireless and Starfish. We could also face future competition
from companies that offer alternative communications solutions, or from large
computer
26
companies, PC peripheral companies and other large networking equipment
companies. Furthermore, we could face competition from certain of our customers,
which have, or could acquire, wireless engineering and product development
capabilities, or might elect to offer competing technologies. We can offer no
assurance that we will be able to compete successfully against these competitors
or that the competitive pressures we face will not adversely affect our business
or operating results.
Many of our present and potential competitors have substantially greater
financial, marketing, technical and other resources with which to pursue
engineering, manufacturing, marketing, and distribution of their products. These
competitors may succeed in establishing technology standards or strategic
alliances in the connectivity device and wireless markets, obtain more rapid
market acceptance for their products, or otherwise gain a competitive advantage.
We can offer no assurance that we will succeed in developing products or
technologies that are more effective than those developed by our competitors.
Furthermore, we compete with companies that have high volume manufacturing and
extensive marketing and distribution capabilities that we do not possess. We can
offer no assurance that we will be able to compete successfully against existing
and new competitors as the connectivity wireless markets evolve and the level of
competition increases.
OUR BUSINESS WILL DEPEND ON RAPIDLY EVOLVING TELECOMMUNICATIONS AND INTERNET
INDUSTRIES.
Our future success is dependent upon the continued growth of the data
communications and wireless industries, particularly with regard to Internet
usage. The global data communications and Internet industries are evolving
rapidly and it is difficult to predict potential growth rates or future trends
in technology development. We cannot assure you that the deregulation,
privatization and economic globalization of the worldwide telecommunications
market that has resulted in increased competition and escalating demand for new
technologies and services will continue in a manner favorable to us or our
business strategies. In addition, there can be no assurance that the growth in
demand for wireless and Internet services, and the resulting need for high speed
or enhanced data communications products and wireless systems, will continue at
its current rate or at all.
OUR REVENUE MAY DECLINE AND OUR ABILITY TO GROW OUR BUSINESS MAY BE THREATENED
IF THE DEMAND FOR WIRELESS SERVICES IN GENERAL AND WLAN PRODUCTS IN PARTICULAR
DOES NOT CONTINUE TO GROW.
Our success in the wireless market is dependent on the continued trend
toward wireless telecommunications and data communications services. If the rate
of growth slows and service providers reduce their capital investments in
wireless infrastructure or fail to expand into new geographic markets, our
revenue may decline. Wireless access solutions are unproven in the marketplace
and some of the wireless technologies have only been commercially introduced in
the last few years. We only began offering wireless products in the second
quarter of fiscal 2002. If wireless access technology turns out to be unsuitable
for widespread commercial deployment, we may not be able to generate enough
sales to achieve and grow our business. We have listed below some of the factors
that we believe are key to the success or failure of wireless access technology:
- reliability and security of wireless access technology and the perception
by end-users of its reliability and security,
- capacity to handle growing demands for faster transmission of increasing
amounts of data, voice and video,
- the availability of sufficient frequencies for network service providers
to deploy products at commercially reasonable rates,
- cost-effectiveness and performance compared to wire line or other high
speed access solutions, whose prices and performance continue to improve,
- suitability for a sufficient number of geographic regions, and
- availability of sufficient site locations for wireless access.
The factors listed above influence our customers' purchase decisions when
selecting wireless versus other high speed access technology. For example,
because of the frequency with which individuals using cellular phones experience
fading or a loss of signal, customers often have the perception that all
wireless technologies
27
will have the same reliability constraints even though the wireless technology
underlying wireless access products does not have the same problems as cellular
phones. In some geographic areas, because of adverse weather conditions that
affect wireless transmissions, but not wire line technologies, wireless products
are not as successful as wire line technology. In addition, future legislation,
legal decisions and regulation relating to the wireless telecommunications
industry may slow or delay the deployment of wireless networks.
Wireless access solutions, including WLANs, compete with other high-speed
access solutions such as digital subscriber lines, cable modem technology, fiber
optic cable and other high-speed wire line and satellite technologies. If the
market for our wireless solutions fails to develop or develops more slowly than
we expect due to this competition, our sales opportunities will be harmed. Many
of these alternative technologies can take advantage of existing installed
infrastructure and are generally perceived to be reliable and secure. As a
result, they have already achieved significantly greater market acceptance and
penetration than wireless access technologies. Moreover, current wireless access
technologies have inherent technical limitations that may inhibit their
widespread adoption in many areas.
We expect wireless access technologies to face increasing competitive
pressures from both current and future alternative technologies. In light of
these factors, many service providers may be reluctant to invest heavily in
wireless access solutions, including WLANs. If service providers do not continue
to establish WLAN "hot spots," we may not be able to generate sales for our WLAN
products and our revenue may decline.
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 of or, in extreme cases,
prohibit 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
government certifications, individual Internet service providers 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.
OUR GROSS MARGINS MAY VARY BASED ON THE MIX OF SALES OF OUR PRODUCTS AND
LICENSES OF OUR INTELLECTUAL PROPERTY, AND THESE VARIATIONS MAY CAUSE OUR NET
INCOME TO DECLINE.
We derive a significant portion of our sales from our software-based
connectivity products. We expect gross margins on newly introduced products
generally to be higher than our existing products. However, due in part to the
competitive pricing pressures that affect our products and in part to increasing
component and manufacturing costs, we expect gross margins from both existing
and future products to decrease over time. In addition, licensing revenues from
our intellectual property historically have provided higher margins than our
product sales. Changes in the mix of products sold and the percentage of our
sales in any quarter attributable to products as compared to licensing revenues
could cause our quarterly results to vary and could result in a decrease in
gross margins and net income.
WE MAY NEVER ACHIEVE THE ANTICIPATED BENEFITS FROM OUR ACQUISITION OF DYNAMIC
TELECOMMUNICATIONS, INC.
We acquired Dynamic Telecommunications, Inc. in March 2003 as part of our
continuing efforts to expand our wireless business and product offerings. We may
experience difficulties in achieving the anticipated benefits of our acquisition
of Dynamic Telecommunications. Dynamic Telecommunication's business utilizes
software-defined radio technology to optimize and plan wireless networks. This
acquisition represents a significant expansion of and new direction for our
wireless business. Potential risks with this acquisition include:
- possible impairment of relationships with employees and customers as a
result of the acquisition of Dynamic Telecommunications;
28
- successfully developing and marketing security-related applications for
the software-defined radio technology of Dynamic Telecommunications;
- inability to retain key employees of Dynamic Telecommunications;
- diversion of management's attention from other business concerns;
- impairment of assets related to resulting goodwill, and reductions in our
future operating results from amortization of intangible assets; and
- difficulties in assimilation of acquired personnel, operations,
technologies or products.
Furthermore, under the asset purchase agreement, PCTEL has an obligation to pay
additional consideration to Dynamic Telecommunications if the business of
Dynamic Telecommunications meets specified revenue targets. Any such earn-out
payments may be paid, at our option, in cash or a combination of cash and our
common stock. If the earn-out payments are paid in common stock, this would
dilute our existing stockholders.
WE MAY EXPERIENCE INTEGRATION OR OTHER PROBLEMS WITH POTENTIAL ACQUISITIONS,
WHICH COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS OR RESULTS OF OPERATIONS. NEW
ACQUISITIONS COULD DILUTE THE INTERESTS OF EXISTING STOCKHOLDERS, AND THE
ANNOUNCEMENT OF NEW ACQUISITIONS COULD RESULT IN A DECLINE IN THE PRICE OF OUR
COMMON STOCK.
We may in the future make acquisitions of, or large investments in,
businesses that offer products, services, and technologies that we believe would
complement our products or services, including wireless products and technology.
We may also make acquisitions of, or investments in, businesses that we believe
could expand our distribution channels. Even if we were to announce an
acquisition, we may not be able to complete it. Additionally, any future
acquisition or substantial investment would present numerous risks, including:
- difficulty in integrating the technology, operations or work force of the
acquired business with our existing business,
- disruption of our on-going business,
- difficulty in realizing the potential financial or strategic benefits of
the transaction,
- difficulty in maintaining uniform standards, controls, procedures and
policies,
- possible impairment of relationships with employees and customers as a
result of integration of new businesses and management personnel, and
- impairment of assets related to resulting goodwill, and reductions in our
future operating results from amortization of intangible assets.
We expect that future acquisitions could provide for consideration to be
paid in cash, shares of our common stock, or a combination of cash and our
common stock. If consideration for a transaction is paid in common stock, this
would further dilute our existing stockholders.
OUR REVENUES MAY FLUCTUATE EACH QUARTER DUE TO BOTH DOMESTIC AND INTERNATIONAL
SEASONAL TRENDS.
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 back-to-school and holiday purchases as well as
purchase decisions made based on the calendar year-end budgeting requirements of
purchasers of our products.
We are currently expanding our sales in international markets, particularly
in Asia. To the extent that our revenues in Asia or other parts of the world
increase in future periods, we expect our period-to-period revenues to reflect
seasonal buying patterns in these markets.
29
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. We expect sales cycles for our wireless products to
be lengthy as well. Sales cycles with our major customers are lengthy for a
number of reasons, including:
- 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 COMPANIES WHO MAY INFRINGE UPON OUR INTELLECTUAL PROPERTY.
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 have over 80 patents granted or pending addressing both essential
International Telecommunications Union and non-essential technologies. Pending
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 the 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.
In recent years, there has been significant litigation in the United States
involving intellectual property rights, including rights of companies in our
industry. We have from time to time in the past received correspondence from
third parties alleging that we infringe the third party's intellectual property
rights. We expect these claims to increase as our intellectual property
portfolio becomes larger. Intellectual property claims against us, and any
resulting lawsuit, may result in our incurring significant expenses and could
subject us to significant liability for damages and invalidate what we currently
believe are our proprietary rights. These lawsuits, regardless of their merits
or success, would likely be time-consuming and expensive to resolve and
30
could divert management's time and attention. Any potential intellectual
property litigation against us could also force us to do one or more of the
following:
- cease selling, incorporating or using products or services that
incorporate the infringed intellectual property,
- obtain from the holder of the infringed intellectual property a license
to sell or use the relevant technology, which license may not be
available on acceptable terms, if at all, or
- redesign those products or services that incorporate the disputed
intellectual property, which could result in substantial unanticipated
development expenses.
- the recent patent lawsuit with 3Com.
If we are subject to a successful claim of infringement and we fail to
develop non-infringing intellectual property or license the infringed
intellectual property on acceptable terms and on a timely basis, our revenues
could decline or our expenses could increase.
We may in the future initiate claims or litigation against third parties
for infringement of our intellectual property rights or to determine the scope
and validity of our proprietary rights or the proprietary rights of our
competitors. These claims could also result in significant expense and the
diversion of technical and management personnel's attention.
WE HAVE ACCRUED FOR NEGOTIATED LICENSE FEES AND ESTIMATED ROYALTY SETTLEMENTS
RELATED TO EXISTING AND PROBABLE CLAIMS OF PATENT INFRINGEMENT. IF THE ACTUAL
SETTLEMENTS EXCEED THE AMOUNTS ACCRUED, ADDITIONAL LOSSES COULD BE SIGNIFICANT,
WHICH WOULD ADVERSELY AFFECT FUTURE OPERATING RESULTS.
We recorded an accrual for estimated future royalty payments for relevant
technology of others used in our product offerings in accordance with SFAS No.
5, "Accounting for Contingencies." The estimated royalties accrual reflects
management's broader litigation and cost containment strategies, which may
include alternatives such as entering into cross-licensing agreements, cash
settlements and/or ongoing royalties based upon our judgment that such
negotiated settlements would allow management to focus more time and financial
resources on the ongoing business. Accordingly, the royalties accrual reflects
estimated costs of settling claims rather than continuing to defend our legal
positions, and is not intended to be, nor should it be interpreted as, an
admission of infringement of intellectual property, valuation of damages
suffered by any third parties or any specific terms that management has
predetermined to agree to in the event of a settlement offer. We have accrued
our best estimate of the amount of royalties payable for royalty agreements
already signed and unasserted, but probable, claims of others using advice from
third party technology advisors and historical settlements. Should the final
license agreements result in royalty rates significantly higher than our current
estimates, our business, operating results and financial condition could be
materially and adversely affected.
IN ORDER FOR US TO OPERATE AT A PROFITABLE LEVEL AND CONTINUE TO INTRODUCE AND
DEVELOP NEW PRODUCTS FOR EMERGING MARKETS, WE MUST ATTRACT AND RETAIN OUR
EXECUTIVE OFFICERS AND QUALIFIED TECHNICAL, SALES, SUPPORT AND OTHER
ADMINISTRATIVE PERSONNEL.
Our past performance has been and our future performance is substantially
dependent on the performance of our current executive officers and certain key
engineering, sales, marketing, financial, technical and customer support
personnel. If we lose the services of our executives or key employees,
replacements could be difficult to recruit and, as a result, we may not be able
to grow our business.
Competition for personnel, especially qualified engineering personnel, is
intense. We are particularly dependent on our ability to identify, attract,
motivate and retain qualified engineers with the requisite education, background
and industry experience. As of December 31, 2002, 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.
31
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 BE
PROFITABLE.
In 2001, we reduced our workforce by 90 employees. In 2002, we further
reduced our workforce by 27 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 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,
our profitability and our ability to attract and retain other employees.
WE HAVE PUT IN PLACE COST REDUCTION PROGRAMS TO REDUCE OUR EXPENSES FOR THE HOST
SIGNAL PROCESSING BUSINESSES. WE MAY HAVE TO CONTINUE TO REDUCE OUR EXPENSES IN
THIS BUSINESS, WHICH MAY HINDER OUR ABILITY TO BECOME PROFITABLE.
As part of the cost reduction programs put in place on the HSP business in
2001 and 2002, we reduced our workforce by 90 employees in 2001 and an
additional 27 employees in 2002. If economic conditions and the PC market do not
improve, we may need to continue to reduce expenses relating to the host signal
processing business. 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 become profitable.
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 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, ADMTek and Silicon Laboratories Inc. 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 Laboratories, 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 Laboratories. We have no guaranteed supply or long-term
contract agreements with any of our other 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. In addition, many of the potential
alternative sources of components for our products that could potentially
provide us with components have existing relationships with our competitors or
potential competitors and may be unwilling to enter into agreements with us. If
our
32
relationship with Silicon Laboratories, or any relationship we enter in the
future with other manufacturers, is impaired for competitive reasons or
otherwise, this could prevent us from being able to deliver our products, damage
our customer relationships and materially adversely affect our operating results
and financial condition.
UNDETECTED SOFTWARE ERRORS OR FAILURES FOUND IN NEW PRODUCTS MAY RESULT IN A
LOSS OF CUSTOMERS OR A DELAY IN MARKET ACCEPTANCE OF OUR PRODUCTS.
Our products may contain undetected software errors or failures when first
introduced or as new versions are released. To date, we have not been made aware
of any significant software errors or failures in our products. However, despite
testing by us and by current and potential customers, errors may be found in new
products after commencement of commercial shipments, resulting in loss of
customers or delay in market acceptance.
OUR FINANCIAL POSITION AND RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED IF
TAX AUTHORITIES CHALLENGE US AND THE TAX CHALLENGES RESULT IN UNFAVORABLE
OUTCOMES.
We currently have subsidiaries in Japan, France, Taiwan and Yugoslavia as
well as branch offices in Taiwan and Korea. The complexities resulting from by
operating in several different tax jurisdictions inevitably leads to an
increased exposure to worldwide tax challenges
OUR CALIFORNIA FACILITIES AND THE FACILITIES OF SOME OF THE INDEPENDENT
COMPANIES UPON WHICH WE RELY TO MANUFACTURE, ASSEMBLE AND TEST OUR PRODUCTS ARE
LOCATED IN REGIONS THAT ARE SUBJECT TO EARTHQUAKES AND OTHER NATURAL DISASTERS.
Our California facilities are located near major earthquake fault lines. If
there is a major earthquake or any other natural disaster in a region where one
of our facilities is located, it could significantly disrupt our operations in
that region. In addition, some of the independent companies upon which we rely
to manufacture substantially all of our products are located outside of the
United States in places that have experienced significant earthquakes in the
past and could be subject to additional earthquakes. Any earthquake or other
natural disaster in regions where the companies that manufacture, assemble and
test our products are located could materially disrupt production capabilities
and could result in our experiencing a significant delay in delivery, or
substantial shortage, of our products.
RISKS RELATED TO OUR INDUSTRY
IF THE MARKET FOR PRODUCTS USING OUR HOST SIGNAL PROCESSING 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 products using
our host signal processing, or 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 soft modems since we began commercial sales of these products, the current
level of demand for soft modems may not continue or increase. Further, our
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.
IF THE WIRELESS MARKET DOES NOT GROW AS WE ANTICIPATE, OR IF OUR WIRELESS
PRODUCTS ARE NOT ACCEPTED IN THESE MARKETS, OUR REVENUES MAY BE ADVERSELY
AFFECTED.
Our future success depends on market demand and growth patterns for
products using wireless technology. Our wireless products may not be successful
as a result of the following reasons:
- intense competition in the wireless market,
- our relative inexperience in developing, marketing, selling and
supporting these products, and
- inability of these products to complement our legacy business.
33
If these new wireless products are not accepted in the markets as they are
introduced, our revenues and profitability will be negatively affected.
OUR INDUSTRY IS CHARACTERIZED BY RAPIDLY CHANGING TECHNOLOGIES. IF WE ARE NOT
SUCCESSFUL IN RESPONSE TO RAPIDLY CHANGING TECHNOLOGIES, OUR PRODUCTS MAY BECOME
OBSOLETE AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
The Internet access business is characterized by rapidly changing
technologies, short product life cycles and frequent new product introductions.
To remain competitive, we have successfully introduced several new products with
advanced technologies since PCTEL was founded. 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 us 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.
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.
34
In addition, the NASDAQ National Market, where many publicly held
telecommunications companies, including PCTEL, are traded, often experiences
extreme price and volume fluctuations. These fluctuations often have been
unrelated or disproportionate to the operating performance of these companies.
In the past, following periods of volatility in the market price of an
individual company's securities, securities class action litigation often has
been instituted against that company. This type of litigation, if instituted,
could result in substantial costs and a diversion of management's attention and
resources.
PROVISIONS IN OUR CHARTER DOCUMENTS MAY INHIBIT A CHANGE OF CONTROL OR A CHANGE
OF MANAGEMENT WHICH MAY CAUSE THE MARKET PRICE FOR OUR COMMON STOCK TO FALL AND
MAY INHIBIT A TAKEOVER OR CHANGE IN OUR CONTROL THAT A STOCKHOLDER MAY CONSIDER
FAVORABLE.
Provisions in our charter documents could discourage potential acquisition
proposals and could delay or prevent a change in control transaction that our
stockholders may favor. These provisions could have the effect of discouraging
others from making tender offers for our shares, and as a result, these
provisions may prevent the market price of our common stock from reflecting the
effects of actual or rumored takeover attempts and may prevent stockholders from
reselling their shares at or above the price at which they purchased their
shares. These provisions may also prevent changes in our management that our
stockholders may favor. Our charter documents do not permit stockholders to act
by written consent, do not permit stockholders to call a stockholders meeting,
and provide for a classified board of directors, which means stockholders can
only elect, or remove, a limited number of our directors in any given year.
Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock in one or more series. The board of directors can fix the price,
rights, preferences, privileges and restrictions of this preferred stock without
any further vote or action by our stockholders. The rights of the holders of our
common stock will be affected by, and may be adversely affected by, the rights
of the holders of any preferred stock that may be issued in the future. Further,
the issuance of shares of preferred stock may delay or prevent a change in
control transaction without further action by our stockholders. As a result, the
market price of our common stock may drop.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks. We manage the sensitivity of our results of
operations to credit risks and interest rate risk by maintaining a conservative
investment portfolio which is comprised solely of highly-rated, short-term
investments. We have investments in both fixed rate and floating rate interest
earning instruments. Fixed rate securities may have their fair market value
adversely impacted based on the duration of such investments if interest rates
rise, while floating rate securities and the reinvestment of funds from matured
fixed rate securities may produce less income than expected if interest rates
fall. Due in part to these factors, our future investment income may fall short
of expectations. The primary objective of our investment activities is to
preserve principal while at the same time maximizing yields without
significantly increasing risk. To achieve this objective, we maintain our
portfolio of cash equivalents, short-term and long-term investments in a variety
of securities, including both government and corporate obligations with ratings
of A or better, and money market funds. We have accumulated a $263,000
unrealized holding gain as of December 31, 2002. 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. Our exposure to foreign
exchange rate fluctuations arises in part from translation of the financial
statements of foreign subsidiaries into U.S. dollars in consolidation. As
exchange rates vary, these results, when translated, may vary from expectations
and adversely impact overall expected profitability. The effect of foreign
exchange rate fluctuations for the years ended December 31, 2002 and 2001 was
$35,000 and $0, respectively.
35
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PCTEL, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
Report of Independent Accountants........................... 37
Report of Independent Public Accountants.................... 38
Consolidated Balance Sheets as of December 31, 2002 and
2001...................................................... 39
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000.......................... 40
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2002, 2001 and 2000.............. 41
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000.......................... 42
Notes to the Consolidated Financial Statements.............. 43
Schedule II Valuation and Qualifying Accounts............... 71
</Table>
36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of PCTEL, Inc.:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of PCTEL, Inc. and its subsidiaries at December 31, 2002, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion. The financial statements of
PCTEL, Inc. as of December 31, 2001, and for each of the two years in the period
ended December 31, 2001, were audited by other independent accountants who have
ceased operations. Those independent accountants expressed an unqualified
opinion on those financial statements in their report dated January 22, 2002.
(except with respect to the matters discussed in Note 11, as to which the date
was March 27, 2002)
As discussed in Note 2 to the Consolidated Financial Statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill in
accordance with Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets".
PRICEWATERHOUSECOOPERS LLP
San Jose, California
February 10, 2003, except as to note 16, which is as of March 21, 2003
37
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. THE DISCLOSURES IN NOTES
11 REFERRED TO IN THE ARTHUR ANDERSEN REPORT BELOW ARE INCLUDED IN NOTE 12 IN
THE FISCAL 2002 CONSOLIDATED FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PCTEL, Inc.:
We have audited the accompanying consolidated balance sheets of PCTEL, Inc.
(a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000 and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 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 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, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United 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 22, 2002
(except with respect to the matters
discussed in Note 11, as to which
the date is March 27, 2002)
38
PCTEL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 52,986 $ 38,393
Restricted cash........................................... 347 0
Short-term investments.................................... 58,405 87,235
Accounts receivable, net of allowance for doubtful
accounts of $368 and $787, respectively................ 5,379 2,849
Inventories, net.......................................... 1,115 2,870
Prepaid expenses and other assets......................... 5,144 5,055
Deferred tax asset........................................ -- 400
-------- --------
Total current assets.............................. 123,376 136,802
PROPERTY AND EQUIPMENT, net................................. 1,532 2,769
GOODWILL, net............................................... 1,255 384
OTHER INTANGIBLE ASSETS, net................................ 365 0
OTHER ASSETS................................................ 2,898 228
-------- --------
TOTAL ASSETS................................................ $129,426 $140,183
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,498 $ 4,944
Accrued royalties......................................... 3,658 12,343
Income taxes payable...................................... 6,289 5,573
Accrued compensation and benefits......................... 2,077 983
Accrued inventory purchase commitments.................... -- 2,325
Accrued customer rebates.................................. 1,724 2,051
Accrued restructuring..................................... 338 1,426
Other accrued liabilities................................. 1,174 2,636
-------- --------
Total current liabilities......................... 16,758 32,281
Long-term accrued liabilities............................. 115 141
-------- --------
Total liabilities................................. 16,873 32,422
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 50,000,000 shares
authorized, 19,927,616 and 19,665,486 shares issued and
outstanding at December 31, 2002 and 2001,
respectively........................................... 20 20
Additional paid-in capital................................ 152,272 150,319
Deferred stock compensation............................... (3,958) (1,158)
Retained earnings (deficit)............................... (36,079) (42,232)
Accumulated other comprehensive income.................... 298 812
-------- --------
Total stockholders' equity........................ 112,553 107,761
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $129,426 $140,183
======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
39
PCTEL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-----------------------------
2002 2001 2000
-------- -------- -------
REVENUES -- PRODUCT......................................... $ 43,652 $ 39,626 $92,933
REVENUES -- ROYALTY AND LICENSING........................... 5,127 1,345 4,250
-------- -------- -------
TOTAL REVENUES.............................................. 48,779 40,971 97,183
-------- -------- -------
COST OF REVENUES -- PRODUCT................................. 27,841 27,899 53,940
INVENTORY LOSSES (RECOVERY)................................. (7,221) 10,920 --
-------- -------- -------
GROSS PROFIT................................................ 28,159 2,152 43,243
-------- -------- -------
OPERATING EXPENSES:
Research and development.................................. 9,977 11,554 14,130
Sales and marketing....................................... 7,668 10,926 14,293
General and administrative................................ 5,453 14,023 8,058
Acquired in-process research and development.............. 102 -- 1,600
Amortization of goodwill and intangible assets............ 88 3,068 2,638
Impairment of goodwill and intangible assets.............. -- 16,775 --
Restructuring charges..................................... 850 3,787 --
Amortization of deferred stock compensation............... 687 1,081 1,308
-------- -------- -------
Total operating expenses............................... 24,825 61,214 42,027
-------- -------- -------
INCOME (LOSS) FROM OPERATIONS............................... 3,334 (59,062) 1,216
-------- -------- -------
OTHER INCOME, NET:
Interest expense.......................................... -- -- (131)
Interest income........................................... 3,254 6,154 7,419
-------- -------- -------
Total other income, net................................ 3,254 6,154 7,288
-------- -------- -------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES............. 6,588 (52,908) 8,504
PROVISION FOR INCOME TAXES.................................. 435 5,311 2,366
-------- -------- -------
NET INCOME (LOSS)........................................... $ 6,153 $(58,219) $ 6,138
======== ======== =======
Basic earnings (loss) per share before extraordinary loss... $ 0.31 $ (3.02) $ 0.34
Shares used in computing basic earnings (loss) per share.... 19,806 19,275 18,011
Diluted earnings (loss) per share before extraordinary
loss...................................................... $ 0.31 $ (3.02) $ 0.30
Shares used in computing diluted earnings (loss) per
share..................................................... 20,004 19,275 20,514
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
40
PCTEL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<Table>
<Caption>
ACCUMULATED
COMMON STOCK ADDITIONAL DEFERRED RETAINED OTHER TOTAL
--------------- PAID-IN STOCK EARNINGS COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) INCOME (LOSS) EQUITY
------ ------ ---------- ------------ --------- ------------- -------------
BALANCE, DECEMBER 31, 1999.............. 16,560 17 99,334 (4,856) 9,849 (66) 104,278
Reversal of deferred stock
compensation for terminated
employees........................... -- -- (654) 654 -- -- --
Amortization of deferred stock
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 to acquire
businesses.......................... 249 -- 14,640 -- -- -- 14,640
Costs incurred related to initial
public offering..................... -- -- (337) -- -- -- (337)
Costs incurred related to secondary
offering............................ -- -- (677) -- -- -- (677)
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
Reversal of deferred stock
compensation for terminated
employees........................... -- -- (1,572) 1,572 -- -- --
Extended vesting for ex-officers...... -- -- 12 -- -- -- 12
Amortization of deferred stock
compensation........................ -- -- -- 1,081 -- -- 1,081
Issuance of common stock on exercise
of stock options.................... 620 1 2,208 -- -- -- 2,209
Issuance of restricted common stock... 235 -- 1,776 (1,776) -- -- --
Issuance of common stock from purchase
of ESPP shares...................... 107 -- 818 -- -- -- 818
Cancellation of restricted common
stock............................... (115) -- (859) 859 -- -- --
Tax benefit from stock option
exercises........................... -- -- 1,475 -- -- -- 1,475
Net loss.............................. -- -- -- -- (58,219) -- (58,219)
Unrealized gain on available-for-sale
securities.......................... -- -- -- -- -- 538 538
------ --- -------- ------- -------- ----- --------
BALANCE, DECEMBER 31, 2001.............. 19,665 20 150,319 (1,158) (42,232) 812 107,761
Reversal of deferred stock
compensation for terminated
employees........................... -- -- (92) 92 -- -- --
Extended vesting for ex-officers...... -- -- 11 (11) -- -- --
Amortization of deferred stock
compensation........................ -- -- -- 687 -- -- 687
Issuance of common stock on exercise
of stock options.................... 423 -- 2,202 -- -- -- 2,202
Issuance of restricted common stock... 547 1 3,688 (3,689) -- -- --
Issuance of common stock from purchase
of ESPP shares...................... 87 -- 489 -- -- -- 489
Cancellation of restricted common
stock............................... (19) -- (121) 121 -- -- --
Tax benefit from stock options
exercises........................... -- -- 1,057 -- -- -- 1,057
Common stock buyback.................. (775) (1) (5,281) -- -- -- (5,282)
Net loss.............................. -- -- -- -- 6,153 -- 6,153
Change in cumulative translation
adjustment.......................... -- -- -- -- -- 35 35
Unrealized loss on available-for-sale
securities.......................... -- -- -- -- -- (549) (549)
------ --- -------- ------- -------- ----- --------
BALANCE, DECEMBER 31, 2002.............. 19,928 $20 $152,272 $(3,958) $(36,079) $ 298 $112,553
====== === ======== ======= ======== ===== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
41
PCTEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
-------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 6,153 $(58,219) $ 6,138
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........................... 2,069 6,731 6,441
Impairment of goodwill and intangible assets............ -- 16,775 --
Loss on disposal/sale of property and equipment......... 243 574 --
Provision for (recovery of) allowance for doubtful
accounts............................................... (357) (1,574) 3,677
Write-down for (recovery of) excess and obsolete
inventories............................................ (184) 452 918
Decrease in deferred tax asset.......................... 400 5,255 165
Amortization of deferred stock compensation............. 676 1,081 1,308
Stock compensation expense.............................. 11 12 --
Tax benefit from stock option exercises................. 1,057 1,475 --
Changes in operating assets and liabilities, net of
acquisitions:
(Increase) decrease in accounts receivable.............. (2,173) 22,745 (20,627)
(Increase) decrease in inventories...................... 1,938 10,426 (8,924)
Increase in prepaid expenses and other assets........... (2,709) (704) (1,872)
Increase (decrease) in accounts payable................. (3,446) (4,197) 1,952
Increase (decrease) in accrued royalties................ (8,685) 687 3,788
Increase in income taxes payable........................ 717 2,156 127
Increase (decrease) in other accrued liabilities........ (4,329) 527 94
Increase (decrease) in long-term accrued liabilities.... (26) 141 --
-------- -------- ---------
Net cash provided by (used in) operating activities... (8,645) 4,343 (5,215)
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment........... (582) (702) (3,044)
Proceeds from disposal of property and equipment.......... 71 74 --
Purchase of available-for-sale investments................ (49,924) (75,808) (109,611)
Proceeds from sales and maturities of available-for-sale
investments............................................. 78,205 82,094 70,553
Purchase of businesses, net of cash acquired.............. (1,606) (32) (5,134)
-------- -------- ---------
Net cash provided by (used in) investing activities... 26,164 5,626 (47,236)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of notes payable....................... (24) -- --
Proceeds from issuance of common stock.................... 2,692 3,027 34,157
Payments for repurchase of common stock................... (5,282) -- --
Increase in restricted cash............................... (347)
Costs incurred related to initial public offering......... -- -- (337)
Costs incurred related to secondary public offering....... -- -- (677)
-------- -------- ---------
Net cash provided (used in) by financing activities... (2,961) 3,027 33,143
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ 14,558 12,996 (19,308)
Cumulative translation adjustment........................... 35 -- --
Cash and cash equivalents, beginning of year................ 38,393 25,397 44,705
-------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 52,986 $ 38,393 $ 25,397
======== ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.................................... $ -- $ -- $ --
Cash paid for income taxes................................ $ 110 $ 297 $ 2,047
Increases (decreases) to deferred stock compensation,
net..................................................... $ 3,487 $ 655 $ (654)
Acquisition of businesses for stock....................... $ -- $ -- $ 14,640
Issuance of restricted common stock, net of
cancellations........................................... $ 3,568 $ 917 $ --
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
42
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED: DECEMBER 31, 2002
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
We were originally incorporated in California in February 1994, and in July
1998, we reincorporated in Delaware. 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-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.
Our strategy is to broaden product offerings that enable cost-effective
access in both wired and wireless environments. In May 2002, we acquired the
assets of cyberPIXIE, a wireless access provider. The acquisition of cyberPIXIE
is consistent with our strategy and permits us to participate in a new emerging
market. As a result of the acquisition, we obtained products and technology that
will enable roaming between and among 802.11 wireless and cellular networks.
Our wireless product portfolio consists of both PC client and network
infrastructure products branded as our Segue(TM) product line. Our wireless
client product is a PC based software solution that facilitates roaming and
connection to wireless networks. These networks may be public wireless local
area network ("WLAN") hotspots, and cellular data networks (wireless wide area
networks), as well as private enterprise and home WLANs. Our client products are
offered as custom branded offerings associated with a particular carrier and
typically includes carrier specific'service finder' location databases. Our
client product offers a superior end user experience while simultaneously
reducing the costs associated with typical end user support problems that our
product addresses.
Our infrastructure products consist of software programs and third party
computing platforms (embedded or PC servers) that enable the deployment of
public WLANs. Our gateway product aggregates WLAN traffic from multiple access
points, supports proprietary end user features, provides location specific
content, and supports industry standard RADIUS compliant end user authentication
and accounting. Our WLAN controller further aggregates gateway traffic and
provides storage for end user databases, subscription plans, and central control
of gateway management functions.
We are subject to certain risks including the impact of the continued
economic slowdown, concentration of sales among a limited number of customers,
continuing decreases in the average selling prices of our products,
concentration of sales in Asia, the Company's ability to develop and
successfully introduce new and enhanced products such as wireless products, the
outcome of 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 periods
reported. Actual results could differ from those estimates.
43
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
BASIS OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION
We use the United States dollar as the functional currency for our
financial statements, including the financial statements of our subsidiaries in
foreign countries, with the exception of our Japanese subsidiary for which the
functional currency is the Japanese Yen. 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. Translation gains (losses)
of our Japanese subsidiary are recorded in accumulated other comprehensive
income as a component of stockholders' equity. All gains and losses resulting
from other transactions originally in foreign currencies and then translated
into U.S. dollars are included in net income. At December 31, 2002 the
cumulative translation adjustment was $35,000. As of December 31, 2002, we had
subsidiaries in Japan, France, Taiwan and Yugoslavia. These consolidated
financial statements include the accounts of PCTEL and our subsidiaries after
eliminating intercompany accounts and transactions.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
We divide our financial instruments into three different classifications.
Cash equivalents: Are money market and debt instruments that mature
within 90 days after we originally purchase them.
Restricted cash: Is a certificate of deposit that supports a
stand-by letter of credit in connection with
facilities lease obligations and is restricted
for use by the Company.
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.
As of December 31, 2002, short-term investments
consisted of high-grade corporate securities with
maturity dates of approximately five months to
two years.
These investments are recorded at current fair
market value 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 $263,000 unrealized holding gain as
of December 31, 2002. Realized gains and losses
and declines in value of securities judged to be
other than temporary are included in interest
income (expense) and have not been significant to
date. Interest and dividends of all securities
are included in interest income.
The carrying amounts reported for cash equivalents and short-term
investments are considered to approximate fair values based upon the short
maturities of these financial statements.
CONCENTRATIONS OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES
Financial instruments that potentially subject us to credit risk consist
primarily of short-term investments and trade receivables.
44
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
To mitigate credit risk related to short-term investments, we maintain our
portfolio of cash equivalents and short-term investments with reputable
financial institutions and in a variety of securities, including both government
and corporate obligations with ratings of A or better and money market funds.
For trade receivables, credit risk is the potential for a loss due to a
customer not meeting its payment obligations. Our customers are concentrated in
the personal computer industry and modem board manufacturer industry segment and
in certain geographic locations. Estimates are used in determining an allowance
for amounts which we may not be able to collect based on current trends, the
length of time receivables are past due and historical collection experience.
Provisions for and recovery of bad debts are recorded against revenue in our
consolidated statements of operations.
We perform ongoing evaluations of our customers' credit limits financial
condition and generally require no collateral. As of December 31, 2002, three
customers accounted for approximately 33%, 30% and 21% of gross accounts
receivable, respectively. As of December 31, 2001, two customers accounted for
approximately 48% and 22% of gross accounts receivable.
For the years ended December 31, 2002, 2001 and 2000, 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 materially 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 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. In addition, continuing
decreases in the average selling prices of our products could affect our
revenues and 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, 2002 and 2001 were
composed of finished goods only. We regularly monitor inventory quantities on
hand. 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, 2002 and 2001. Due to competitive pressures and technological innovation, it
is possible that these estimates could increase in the near term.
For the year ended December 31, 2002, we did not record any additional
inventory write-downs. We sold part of the written down inventories and
recovered $7.2 million of the former write-downs for the year ended December 31,
2002. As of December 31, 2002, the allowance for inventory losses was $2.1
million.
PREPAID AND OTHER ASSETS
Prepaid and other assets are stated at cost and are amortized over their
useful lives (up to one year) of the assets.
45
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
Prepaid and other assets consists of the following (in thousands):
<Table>
<Caption>
DECEMBER 31,
---------------
2002 2001
------ ------
Prepaid expenses............................................ $2,453 $1,015
Interest income receivable.................................. 966 1,414
Income tax receivable....................................... 1,725 2,083
Other receivables........................................... 0 543
------ ------
Prepaid and other assets.......................... $5,144 $5,055
====== ======
</Table>
PROPERTY 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):
<Table>
<Caption>
DECEMBER 31,
---------------
2002 2001
------ ------
Computer and office equipment............................... $5,724 $5,528
Furniture and fixtures...................................... 271 333
Leasehold improvements...................................... 100 341
------ ------
Total property and equipment...................... 6,095 6,202
Less: Accumulated depreciation and amortization............. (4,563) (3,433)
------ ------
Property and equipment, net....................... $1,532 $2,769
====== ======
</Table>
SOFTWARE DEVELOPMENT COSTS
We account for software development costs in accordance with 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 RECOGNITION
Revenues consist primarily of sales of products to original equipment
manufacturers ("OEMs") and distributors. Revenues from sales to customers are
recognized upon shipment when title and risk of loss passes to the customers,
when the price is fixed or determinable and when there is evidence of an
arrangement, unless we have future obligations or have to obtain customer
acceptance, in which case revenue is deferred until such obligations have been
satisfied or customer acceptance has been achieved. We provide for estimated
sales returns and customer rebates related to sales to OEMs at the time of
shipment. Customer rebates are recorded against revenues. Once the gross amount
has been collected, the accrued customer rebate is then reclassified to accrued
liabilities. As of December 31, 2002 and 2001, we have an allowance for customer
rebates recorded against accounts receivable of $95,000 and $200,000,
respectively, and accrued customer rebates of $1.7 million and $2.1 million,
respectively, presented as current accrued 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.
46
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
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.
Royalty revenue is recognized when confirmation of royalties due to us is
received from licensees or for non-refundable minimal royalty agreements, over
the period that the Company provides support to the customer and where we offer
extended payment terms, as payments are received. Furthermore, revenues from
technology licenses are recognized after delivery has occurred, the amount is
fixed or determinable and collection is reasonably assured. To the extent there
are extended payment terms on these contracts, revenue is recognized as the
payments become due and the cancellation privilege lapses. To date, we have not
offered post-contract customer support.
In instances where the Company provides non-recurring engineering services
to customers, the Company recognizes revenue as the services are completed,
using the percentage of completion basis of accounting in accordance with
Statement of Position 81-1, "Accounting for Performance and Construction Type
Contracts."
INCOME TAXES
We provide for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 requires an asset and liability
based approach in accounting for income taxes. Deferred income tax assets and
liabilities are recorded based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates.
Valuation allowances are provided against assets which are not likely to be
realized.
STOCK-BASED COMPENSATION
We use the intrinsic value method of Accounting Principles Board Opinion
No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and its
interpretations in accounting for our employee stock options Pro forma
information regarding net income (loss) and net income (loss) per share as if we
recorded compensation expense based on the fair value of stock-based awards have
been presented in accordance with Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure"
and are as follows for the years ended December 31, 2002, 2001 and 2000 (in
thousands, except per share data):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------
2002 2001 2000
------ -------- --------
Net (loss) income -- as reported....................... $6,153 $(58,219) $ 6,138
Add: Stock-based employee compensation expense included
in reported net income............................... 687 1,081 1,308
Deduct: Stock-based employee compensation expense
determined under fair value based method for all
awards............................................... 2,966 7,509 17,600
Net (loss) income -- as adjusted....................... $3,874 $(64,647) $(10,154)
Net (loss) income per share -- basic as reported....... $ 0.31 $ (3.02) $ 0.34
Net (loss) income per share -- basic as adjusted....... $ 0.19 $ (3.35) $ (0.56)
Net (loss) income per share -- diluted as reported..... $ 0.31 $ (3.02) $ 0.30
Net (loss) income per share -- diluted as adjusted..... $ 0.19 $ (3.35) $ (0.56)
</Table>
47
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes option pricing model as prescribed by SFAS 123
using the following assumptions:
<Table>
<Caption>
STOCK OPTIONS ESPP
------------------ ------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Dividend yield......................... None None None None None None
Expected volatility.................... 55% 75% 75% 55% 75% 75%
Risk-free interest rate................ 2.4% 3.9% 5.0% 1.2% 1.8% 5.7%
Expected life (in years)............... 2.75 3.25 3.25 0.5 0.5 0.5
</Table>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility and expected option life. Because our employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate the existing models may not necessarily provide a reliable
single measure of the fair value of our employee stock options. Based on the
Black-Scholes option pricing model, the weighted average estimated fair value of
employee stock option grants was $3.78 for 2002, $4.11 for 2001 and $16.96 for
2000. Restricted stock awards are recorded at the fair market value of the stock
on the date of grant and is expensed over the vesting period.
EARNINGS PER SHARE
We compute earnings per share in accordance with SFAS No. 128, "Earnings
Per Share". SFAS No. 128 requires companies to compute net income per share
under two different methods, basic and diluted, and present per share data for
all periods in which statements of operations are presented. Basic earnings per
share is computed by dividing net income by the weighted average number of
shares of common stock outstanding, less shares subject to repurchase. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common stock and common stock equivalents outstanding. Common stock
equivalents consist of stock options and warrants using the treasury stock
method. Common stock options and warrants are excluded from the computation of
diluted earnings per share if their effect is anti-dilutive. The weighted
average common stock option grants excluded from the calculations of diluted net
loss per share were 200,000 for both the years ended December 31, 2002 and 2001.
48
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
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, 2002, 2001 and 2000, respectively (in thousands, except
per share data):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------
2002 2001 2000
------- -------- -------
Net income (loss)...................................... $ 6,153 $(58,219) $ 6,138
======= ======== =======
Basic earnings (loss) per share:
Weighted average common shares outstanding........... 19,947 19,298 18,011
Less: Weighted average shares subject to
repurchase........................................ (141) (23) (--)
------- -------- -------
Weighted average common shares outstanding........... 19,806 19,275 18,011
------- -------- -------
Basic earnings (loss) per share........................ $ 0.31 $ (3.02) $ 0.34
======= ======== =======
Diluted earnings (loss) per share:
Weighted average common shares outstanding........... 19,806 19,275 18,011
Weighted average shares subject to repurchase........ 141 -- --
Weighted average common stock option grants and
outstanding warrants.............................. 57 -- 2,503
Weighted average common shares and common stock
equivalents outstanding........................... 20,004 19,275 20,514
------- -------- -------
Diluted earnings (loss) per share...................... $ 0.31 $ (3.02) $ 0.30
======= ======== =======
</Table>
GOODWILL AND OTHER INTANGIBLE ASSETS DISCLOSURE
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No.'s 141 and 142, "Business Combinations" and "Goodwill and Other Intangible
Assets", respectively. SFAS No. 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method. SFAS No. 142
supersedes Accounting Principles Board Opinion ("APB") No. 17 and addresses the
financial accounting and reporting standards for goodwill and intangible assets
subsequent to their initial recognition. SFAS No. 142 requires that goodwill no
longer be amortized. It also requires that goodwill and other intangible assets
be tested for impairment at least annually and whenever events or circumstances
occur indicating that goodwill might be impaired. Additionally, an acquired
intangible asset should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented, or exchanged,
regardless of the acquirer's intent to do so. We adopted SFAS No. 142 on January
1, 2002 at which time we ceased amortization of goodwill. The provisions of SFAS
No. 142 are effective for fiscal years beginning after December 15, 2001 and
must be applied to all goodwill and other intangible assets that are recognized
in an entity's balance sheet at the beginning of that fiscal year.
If amortization expenses related to goodwill that is no longer amortized
had been excluded from operating expenses for the years ended December 31, 2001
and 2000, diluted earnings per share would have increased by $0.22 and $0.23,
respectively.
49
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
The changes in the carrying amount of goodwill as of December 31, 2002 and
2001 were as follows:
<Table>
<Caption>
ACCUMULATED
GOODWILL AMORTIZATION GOODWILL, NET
-------- ------------ -------------
(IN THOUSANDS)
Balance at December 31, 2000...................... $ 27,212 $(6,836) $ 20,376
Goodwill from prior acquisitions................ 235 -- 235
Goodwill amortization........................... -- (4,297) (4,297)
Goodwill impairment............................. (27,015) 11,085 (15,930)
-------- ------- --------
Balance at December 31, 2001...................... 432 (48) 384
Goodwill from acquisition....................... 871 -- 871
-------- ------- --------
Balance at December 31, 2002...................... $ 1,303 $ (48) $ 1,255
======== ======= ========
</Table>
The following table reflects the adjusted net income and net income per
share as if SFAS No. 142 had been effective as of January 1, 2000:
<Table>
<Caption>
DECEMBER 31,
------------------
2001 2000
-------- -------
Net income (loss):
Reported net income (loss)................................ $(58,219) $ 6,138
Goodwill amortization (see note below).................... 4,297 4,800
-------- -------
Adjusted net income (loss)................................ $(53,922) $10,938
======== =======
Basic income (loss) per share:
Reported net income (loss)................................ $ (3.02) $ 0.34
Goodwill amortization..................................... 0.22 0.27
-------- -------
Adjusted net income (loss)................................ $ (2.80) $ 0.61
======== =======
Diluted income (loss) per share:
Reported net income (loss)................................ $ (3.02) $ 0.30
Goodwill amortization..................................... 0.22 0.23
-------- -------
Adjusted net income (loss)................................ $ (2.80) $ 0.53
======== =======
</Table>
For the years ended December 31, 2001 and 2000, goodwill amortization of
$4.3 million and $4.8 million, respectively, included $1.7 million and $2.2
million of goodwill amortization classified as cost of revenues in the
Consolidated Statements of Operations.
50
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
COMPREHENSIVE INCOME
The following table provides the calculation of other comprehensive income
for the years ended December 31, 2002, 2001 and 2000 (in thousands):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------
2002 2001 2000
------ -------- ------
Net income (loss)........................................ $6,153 $(58,219) $6,138
Other comprehensive income:
Cumulative translation adjustment...................... 35 -- --
Unrealized gains (loss) on available-for-sale
securities.......................................... (549) 538 340
------ -------- ------
Comprehensive income (loss).............................. $5,639 $(57,681) $6,478
====== ======== ======
</Table>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The scope of SFAS No. 146 also includes
costs related to terminating a contract that is not a capital lease and
termination benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. SFAS No. 146 will
be effective for exit or disposal activities that are initiated after December
31, 2002 and early application is encouraged. We will adopt SFAS No. 146 on
January 1, 2003. The provisions of EITF No. 94-3 shall continue to apply for an
exit activity initiated under an exit plan that met the criteria of EITF No.
94-3 prior to the adoption of SFAS No. 146. The effect on adoption of SFAS No.
146 will change, on a prospective basis, the timing of when restructuring
charges are recorded from a commitment date approach to when the liability is
incurred.
In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 45 ("FIN45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires that a liability be recorded in the guarantor's balance
sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures
about the guarantees that an entity has issued, including a reconciliation of
changes in the entity's product warranty liabilities. The initial recognition
and initial measurement provisions of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. Adoption of this standard did not have a material impact on
the Company's financial position, results of operations, or cash flows.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the
51
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
first interim or annual period beginning after June 15, 2003. We are currently
assessing the impact of FIN 46 on our consolidated financial statements.
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables."
EITF Issue No. 00-21 provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or rights
to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company believes that the adoption of this standard will have no material impact
on its financial position, results of operations, or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure ("SFAS 148"). SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation" to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of Statement No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. Generally the provisions of SFAS 148 are
effective for financial statements for fiscal years ending after December 15,
2002. The Company anticipates that it will continue to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Adoption of this standard did not have a material impact on the Company's
financial position, results of operations, or cash flows.
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, 2002
and 2001. The following table presents the estimated fair value breakdown of
investment securities by major security type (in thousands):
<Table>
<Caption>
DECEMBER 31,
-----------------
2002 2001
------- -------
U.S. Government obligations................................. $30,738 $ 6,899
Corporate bonds............................................. 27,667 80,336
------- -------
Total short-term investments.............................. $58,405 $87,235
======= =======
</Table>
As of December 31, 2002, $26.1 million of the short-term investments have
maturity dates of less than one year and $32.3 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 at any
time.
3. ACQUISITIONS
CyberPIXIE, Inc.
In May 2002, we acquired the assets of Chicago-based cyberPIXIE for a total
of $1.6 million in cash, including acquisition costs of $224,000. The
acquisition was accounted for under the purchase method of accounting and the
results of operations of cyberPIXIE were included in our financial statements
from May 22, 2002, the date of acquisition. The purchase price of $1.6 million
was allocated to the tangible and identifiable intangible assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition as determined by an independent valuation firm. We attributed
$183,000 to net assets acquired, $102,000 to in-process research and development
and $452,000 to developed technology. The $863,000 excess of the purchase price
over the fair value of the net tangible and identifiable intangible assets was
allocated to
52
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
goodwill. We expensed in-process research and development and amortize the
developed technology over its useful life of three years.
The pro forma data has not been disclosed because the amounts are not
material.
BlueCom Technology Corp.
In December 2000, we acquired BlueCom, a Taiwanese Company specializing in
the innovation, development and marketing of MMX Signal Processing (MSP)
technology for a total consideration of $2.0 million; 11,245 shares of our
common stock and $1,557,770 of cash. The acquisition was accounted for under the
purchase method of accounting. The purchase price of BlueCom was allocated based
upon the estimated fair value of the assets acquired and liabilities assumed,
which approximated book value of $170,000. The purchase consideration exceeded
the net tangible assets acquired by $2.0 million which was attributed to
goodwill ($1,124,000) and other intangible assets, a covenant not to compete
($656,000). Goodwill and other intangible assets were amortized over useful
lives of two to five years prior to the impairment recorded in the fourth
quarter of 2001. We have included the results of BlueCom from the date of
acquisition in the consolidated statements of operations.
Voyager Technologies, Inc.
In February 2000, we acquired Voyager, a provider of personal connectivity
and Internet access technology, for 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. The acquisition was accounted for under the
purchase method of accounting.
The following table summarizes the components of the total purchase price
and the allocation (in thousands).
<Table>
Fair value of 237,272 shares of our common stock............ $11,814
Fair value of options for 49,056 shares of our common
stock..................................................... 2,504
Cash........................................................ 2,065
Settlement of outstanding claim............................. 1,500
Acquisition costs........................................... 687
-------
Total purchase price...................................... 18,570
Net assets acquired......................................... 762
In-process research and development......................... 1,600
Intellectual property....................................... 500
Assembled workforce......................................... 300
-------
Goodwill.................................................... $15,408
=======
</Table>
Purchased in-process research and development was expensed immediately. We
were amortizing goodwill over its useful life of five years prior to the
impairment recorded in the third quarter of 2001. We have included the results
of Voyager from the date of acquisition 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
53
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
claim was settled for $1.5 million which 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-average estimated fair value of these options was $51.05 per share.
The unaudited pro forma financial information for the year ended December
31, 2000 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.
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2000
------------
Revenues.................................................... $97,785
Net income.................................................. $ 7,668
Diluted net income per share................................ $ 0.37
</Table>
4. INVENTORY LOSSES AND RECOVERY
Due to the changing market conditions, economic downturn and estimated
future requirements, inventory write downs of $10.9 million were recorded in the
second half of 2001. Of the $10.9 million, $2.3 million related to firm purchase
order commitments with our major suppliers and the remaining $8.6 million
related to excess inventory on hand or disposed. For the year ended December 31,
2002, we did not record any additional inventory write-downs having sold part of
the written down inventories and recovered $7.2 million of the former
write-downs for the year ended December 31, 2002. As of December 31, 2002, the
cumulative write down for excess inventory on hand was $2.1 million. As of
December 31, 2002 and 2001, the cumulative write down for obsolete inventory on
hand was $0 and $1.4 million, respectively.
5. IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
Due to the economic downturn, we evaluated the recoverability of the
long-lived assets, including intangibles, acquired from CSD, Voyager and
BlueCom. 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," and recorded impairment charges totaling $16.8 million. We estimated the
expected future cash flow of the business and determined that CSD's estimated
future undiscounted cash flows were less than 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 and
BlueCom, as a result a recent corporate restructuring and reorganization during
2001, we determined that there were no future cash flows expected from these
businesses. Accordingly, during the third quarter of 2001, we wrote off the
carrying value of Voyager's and BlueCom's long-lived assets, primarily goodwill,
resulting in charges of approximately $11.1 million and $1.2 million,
respectively.
54
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
6. RESTRUCTURING CHARGES
2001 Restructuring
On February 8, 2001, we announced a series of actions to streamline support
for our voiceband business and sharpen our focus on emerging growth sectors.
These measures were part of a restructuring program and included a reduction in
worldwide headcount of a total of 22 employees (consisting 7 research and
development employees, 9 sales and marketing employees and 6 general and
administrative employees), a hiring freeze and cost containment programs. On May
1, 2001, we announced a new business structure to provide for greater focus on
our activities with a significantly reduced workforce. A total of 42 positions
were eliminated as part of this reorganization (consisting of 13 research and
development, 12 sales and marketing and 17 general and administrative
positions). In the fourth quarter of 2001, a total of 26 positions (consisting
of 7 research and development, 8 sales and marketing and 11 general and
administrative positions) were eliminated to further focus our business. In the
aggregate, 90 positions were eliminated during the year ended December 31, 2001.
The restructuring resulted in $3.8 million of charges for the year ended
December 31, 2001, consisting of severance and employment related costs of $2.5
million and costs related to closure of excess facilities as a result of the
reduction in force of $1.3 million.
As of December 31, 2002, approximately $2.4 million of termination
compensation and related benefits had been paid to terminated employees. As of
December 31, 2002, approximately $1.2 million of lease payments and related
costs had been paid to the landlord for the excess facilities. The remaining
accrual balance of $141,000 will be paid monthly through February 2003.
2002 Restructuring
In the quarter ended June 30, 2002, we further eliminated 20 positions
(consisting of 13 research and development, 5 sales and marketing and 2 general
and administrative positions). In September 2002, we announced our intention to
relocate our headquarters and finance functions to Chicago, Illinois. As a
result of the move, 5 general and administrative positions were replaced in
December 2002 and we further eliminated 7 research and development positions. In
the aggregate, 27 positions were eliminated during the year ended December 31,
2002. The restructuring resulted in $928,000 of charges for the year ended
December 31, 2002, consisting of severance and employment related costs of
$688,000 and costs related to closure of excess facilities as a result of the
reduction in force of $240,000.
As of December 31, 2002, approximately $582,000 of termination compensation
and related benefits had been paid to terminated employees. The remaining
accrual balance of $106,000 will be paid on various dates extending through
February 2003. As of December 31, 2002, approximately $119,000 of lease payments
and related costs had been paid to the landlord for the excess facilities. The
remaining accrual balance of $121,000 will be paid monthly through May 2004.
55
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
The combined effect of the two restructurings is:
<Table>
<Caption>
ACCRUAL ACCRUAL
BALANCE AT BALANCE AT
DECEMBER 31, RESTRUCTURING DECEMBER 31,
2001 CHARGES PAYMENTS 2002
------------ ------------- -------- ------------
Severance and employment related
costs............................... $ 579 $610 $1,083 $106
Costs for closure of excess
facilities.......................... 988 240 966 262
------ ---- ------ ----
$1,567 $850 $2,049 $368
====== ==== ====== ====
Amount included in long-term
liabilities......................... $ 30
====
Amount included in short-term
liabilities......................... $338
====
</Table>
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):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------
2002 2001 2000
------- -------- ------
Domestic................................................ $(7,603) $(12,508) $1,320
Foreign................................................. 14,191 (40,400) 7,184
------- -------- ------
$ 6,588 $(52,908) $8,504
======= ======== ======
</Table>
Our provision for income taxes consisted of the following (in thousands):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------
2002 2001 2000
------ ------- -------
Current:
Federal................................................... $(168) $ -- $2,125
State..................................................... 23 -- 291
Foreign................................................... 180 56 29
----- ------ ------
35 56 2,445
----- ------ ------
Deferred (Benefit):
Federal................................................... 400 4,527 (69)
State..................................................... -- 728 (10)
----- ------ ------
400 5,255 (79)
----- ------ ------
$ 435 $5,311 $2,366
===== ====== ======
</Table>
56
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
A reconciliation of the provision for income taxes at the Federal statutory
rate compared to our effective tax rate is as follows (in thousands):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------
2002 2001 2000
------ -------- ------
Provision (benefit) at Federal statutory rate (35%)...... $2,306 $(18,518) $2,976
State income tax, net of Federal benefit................. 23 -- 492
R&D credit............................................... (560) -- (661)
Goodwill amortization/impairment......................... -- 4,152 --
Deferred tax asset valuation............................. (2,368) 5,011 --
Foreign income/(loss) taxed at different rates........... 651 16,313 29
Other.................................................... 383 (1,647) (470)
------ -------- ------
$ 435 $ 5,311 $2,366
====== ======== ======
</Table>
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):
<Table>
<Caption>
DECEMBER 31,
----------------
2002 2001
------ -------
Accrued royalties........................................... $1,480 $ 992
Inventory reserve........................................... 869 62
Net operating loss carryforwards............................ 8 1,517
Research and development credit carryforwards............... 1,258 1,400
Other cumulative temporary differences...................... 2,072 1,647
Deferred amortization of purchased assets................... 2,431 2,593
------ -------
8,118 8,211
Valuation allowance......................................... (8,118) (7,811)
------ -------
Net deferred tax asset.................................... $ -- $ 400
====== =======
</Table>
At December 31, 2002, we have federal and California research and
development credit carryforwards of approximately $0.5 million and $1.1 million,
respectively. These credits begin to expire in 2020 for federal purposes and can
be carried forward indefinitely for California purposes.
As of December 31, 2002, we had a full valuation allowance against our
deferred tax assets due to the uncertainty surrounding the realization of such
assets. Management evaluates on a periodic basis the recoverability of deferred
tax assets and the need for a valuation allowance. At such time as it is
determined that it is more likely than not that the deferred tax assets are
realizable, the valuation allowance will be reduced.
8. PREFERRED 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,
2002 and 2001, no shares of preferred stock were outstanding.
57
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
9. COMMON STOCK
SECONDARY PUBLIC OFFERINGS
On April 11, 2000, we effected our 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 ISSUANCE
As of December 31, 2002, we had reserved shares of common stock for future
issuance as follows:
<Table>
1995, 1997 and 2001 Stock Option Plans...................... 5,899,347
1998 Director Option Plan................................... 200,000
Employee Stock Purchase Plan................................ 1,600,513
---------
Total shares reserved....................................... 7,699,860
=========
</Table>
STOCK OPTION PLANS
1995 Plan, 1997 Plan, and 2001 Plan
In March 1995, the Board of Directors adopted and approved the 1995 Stock
Option Plan ("1995 Plan"). Under the 1995 Plan, the Board may grant to
employees, directors and consultants options 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, 2002, 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 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 that increased the number of authorized shares of
our common stock we may issue under the 1997 Plan to 5,500,000. We will further
increase annually the number of shares we are 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 of incentive stock options granted under the
1997 Plan may not be less than the fair market value of the common stock on the
grant date. Nonqualified stock options granted under the 1997 Plan must be at a
price equal to at least 85% of the fair market value of our common stock at the
date of grant. Options 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. The 1997 Plan will terminate in 2007. As of December 31, 2002, of the
total 7,562,413 shares authorized under the 1997 Plan, 964,204 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
58
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
related stock option agreement. The 2001 Plan will terminate in 2011. As of
December 31, 2002, of the total 750,000 shares authorized under the 2001 Plan,
473,178 remain available for issuance.
The following table summarizes stock option activity under the 1995 Plan,
1997 Plan and 2001 Plan as of December 31, 2002:
<Table>
<Caption>
OPTIONS OUTSTANDING
-----------------------------
WEIGHTED AVERAGE
OPTIONS AVAILABLE SHARES EXERCISE PRICE
----------------- ---------- ----------------
Balance, December 31, 1999................ 1,496,245 4,445,522 $ 7.74
Authorized.............................. 662,413 --
Granted................................. (2,494,196) 2,494,196 $32.70
Exercised............................... -- (1,163,365) $ 3.94
Cancelled............................... 771,257 (771,257) $21.66
---------- ---------- ------
Balance, December 31, 2000................ 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
Cancelled............................... 1,949,304 (1,949,304) $20.87
Repurchased............................. 115,000 -- --
---------- ---------- ------
Balance, December 31, 2001................ 1,203,333 4,947,095 $14.76
Authorized.............................. 700,000 --
Granted................................. (2,346,200) 2,346,200 $ 6.04
Exercised............................... -- (970,081) $ 2.27
Cancelled............................... 2,017,281 (2,017,281) $17.64
Repurchased............................. 19,000 -- --
---------- ---------- ------
Balance, December 31, 2002................ 1,593,414 4,305,933 $11.46
========== ==========
</Table>
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, 2002, 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 options 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 first
year 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 shall 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
59
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
10 years. As of December 31, 2002, of the total 200,000 shares authorized for
issuance, we have remaining 87,500 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 52,500 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. For the year ended December 31, 2002, there were grants of 75,000
options at a weighted average exercise price of $8.43 and cancellations of
22,500 options at a weighted average exercise price of $25.95 under the
Directors Plan. As of December 31, 2002, 112,500 options were outstanding at a
weighted average exercise price of $11.66.
The following table summarizes information about stock options outstanding
under the 1995 Plan, 1997 Plan, 2001 Plan, Directors Plan and Executive Options
at December 31, 2002:
<Table>
<Caption>
OPTIONS OUTSTANDING
----------------------------- OPTIONS EXERCISABLE
WEIGHTED- ------------------------------
NUMBER AVERAGE NUMBER
OUTSTANDING AT REMAINING WEIGHTED- EXERCISABLE WEIGHTED-
RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 2002 LIFE EXERCISE PRICE 2002 EXERCISE PRICE
- --------------- -------------- ----------- -------------- ------------ --------------
$0.48 -- $7.17 635,542 8.76 $ 6.70 230,279 $ 6.53
$7.20 -- $7.80 475,287 8.77 $ 7.47 109,668 $ 7.52
$7.95 -- $7.95 965,892 9.20 $ 7.95 182,156 $ 7.95
$7.97 -- $8.00 640,611 8.76 $ 7.98 264,411 $ 7.98
$8.07 -- $10.03 821,091 8.14 $ 9.37 327,472 $ 9.43
$10.25 -- $16.00 641,701 6.61 $11.18 596,513 $11.06
$17.00 -- $59.00 538,309 7.39 $32.69 370,417 $33.25
--------- ---------
4,718,433 8.30 $11.25 2,080,916 $13.40
========= =========
</Table>
As of December 31, 2001, there were 2,043,124 options exercisable at a
weighted average exercise price of $16.21 and as of December 31, 2000, there
were 1,549,717, options exercisable at a weighted average exercise price of
$7.03. Each option has a contractual life of ten years.
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, 2002, the number of authorized shares available for
issuance under the Purchase Plan was 1,831,207 and we have remaining 1,600,513
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
60
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
presented as a reduction of stockholders' equity and is amortized ratably over
the vesting period of the applicable options through the second quarter of 2003.
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 through the fourth
quarter of 2003.
In connection with the grant of restricted stock to employees in March
2002, we recorded deferred stock compensation of $374,000, 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 through March 2005.
In connection with the grant of restricted stock to employees in December
2002, we recorded deferred stock compensation of $3.3 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 through October 2008.
For the years ended December 31, 2002, 2001 and 2000, amortization of
deferred stock compensation (in thousands) relates to the following functional
categories:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------
2002 2001 2000
----- ------- -------
Research and development.................................... $152 $ 116 $ 285
Sales and marketing......................................... 153 195 302
General and administrative.................................. 382 770 721
---- ------ ------
$687 $1,081 $1,308
==== ====== ======
</Table>
Rescission of Stock Option Exercise
In December 2000, an employee and the 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.
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.
10. STOCK REPURCHASES:
In August 2002, the Board of Directors authorized the repurchase of up to
1,000,000 shares of our common stock. During the three months ended December 31,
2002, we repurchased 775,800 shares of our outstanding common stock for
approximately $5.3 million. The Company completed the stock repurchase in
February 2003. The repurchased shares are retired immediately after the
repurchases.
61
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
PCTEL extended its stock repurchase program and announced its intention to
repurchase up to one million additional shares on the open market from time to
time. The Company's repurchase activities will be at management's discretion
based on market conditions and the price of the Company's common stock. As of
March 2003, we repurchased 261,200 shares of our common stock for approximately
$1.9 million.
11. LEASE COMMITMENTS:
We entered into an operating lease for our facilities in Milpitas,
California in September 1999. The lease expired in February 2003. In October
2002, we entered into an operating lease in Milpitas, California as the current
Milpitas facilities will expire February 2003 and we did not intend to renew the
expiring lease. The new lease expires in September, 2007. This lease expires
September 2007. Additionally, we have facilities in Japan, Taiwan, Yugoslavia
and France. In August 2002, we entered into an operating lease for our new
headquarter facilities in Chicago, Illinois. The lease expires in August 2007.
We have non-cancelable operating leases for office facilities through 2007
and operating leases for equipment through 2005. Our future minimum rental
payments under these leases at December 31, 2002, are as follows (in thousands):
<Table>
2003........................................................ $ 958
2004........................................................ 671
2005........................................................ 600
2006........................................................ 611
2007........................................................ 427
------
Future minimum lease payments............................... $3,267
======
</Table>
Our rent expense under operating leases for the years ended December 31,
2002, 2001 and 2000 was approximately $874,000, $1,166,000 and $1,422,000,
respectively.
12. CONTINGENCIES:
We record an accrual for estimated future royalty payments for relevant
technology of others used in our product offerings in accordance with SFAS No.
5, "Accounting for Contingencies." The estimated royalties accrual reflects
management's broader litigation and cost containment strategies, which may
include alternatives such as entering into cross-licensing agreements, cash
settlements and/or ongoing royalties based upon our judgment that such
negotiated settlements would allow management to focus more time and financial
resources on the ongoing business. We have accrued our estimate of the amount of
royalties payable for royalty agreements already signed, agreements that are in
negotiation and unasserted but probable claims of others using advice from third
party technology advisors and historical settlements. Should the final license
agreements result in royalty rates significantly greater than our current
estimates, our business, operating results and financial condition could be
materially and adversely affected.
As of December 31, 2002 and 2001, we had accrued royalties of approximately
$3.7 million and $12.3 million, respectively. Of these amounts, approximately
$450,000 and $42,000 represent amounts accrued based upon signed royalty
agreements as of December 31, 2002 and 2001, respectively. The remainder of
accrued royalties represents management's best estimate within a range of
possible settlements as of each date presented. While management is unable to
estimate the maximum amount of the range of possible settlements, it is possible
that actual settlements could exceed the amounts accrued as of each date
presented.
We have from time to time in the past received correspondence from third
parties, and may receive communications from additional third parties in the
future, asserting that our products infringe on their
62
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
intellectual property rights, that our patents are unenforceable or that we have
inappropriately licensed our intellectual property to third parties. We expect
these claims to increase as our intellectual property portfolio becomes larger.
These claims could affect our relationships with existing customers and may
prevent potential future customers from purchasing our products or licensing our
technology. Intellectual property claims against us, and any resulting lawsuit,
may result in our incurring significant expenses and could subject us to
significant liability for damages and invalidate what we currently believe are
our proprietary rights. These lawsuits, regardless of their success, would
likely be time-consuming and expensive to resolve and could divert management's
time and attention. In addition, any claims of this kind, whether they are with
or without merit, could cause product shipment delays or require us to enter
into royalty or licensing agreements. In the event that we do not prevail in
litigation, we could be prevented from selling our products or be required to
enter into royalty or licensing agreements on terms which may not be acceptable
to us. We could also be prevented from selling our products or be required to
pay substantial monetary damages. Should we cross license our intellectual
property in order to obtain licenses, we may no longer be able to offer a unique
product. To date, we have not obtained any licenses from 3Com and the other
companies whom we have received communication from. As of December 31, 2002, no
material lawsuits relating to intellectual property were filed against us.
Ronald H. Fraser v. PC-Tel, Inc., Wells Fargo Shareowner Services, Wells Fargo
Bank Minnesota, N.A.
On March 19, 2002, plaintiff Ronald H. Fraser filed a complaint in Santa
Clara County (California) Superior Court for breach of contract and declaratory
relief against us, and for breach of contract, conversion, negligence and
declaratory relief against our transfer agent, Wells Fargo Bank Minnesota, N.A.
The Complaint seeks compensatory damages allegedly suffered by Mr. Fraser as a
result of the tax liability from failure to facilitate a transaction by Mr.
Fraser during a secondary offering on April 14, 2000. In July 2002, we responded
to the complaint, denying Mr. Fraser's claims and asserting numerous affirmative
defenses. Wells Fargo and the Company have each filed cross-complaints against
the other for indemnity. Discovery is underway. No trial date has been set. We
believe that we have meritorious defenses and intend to vigorously defend the
action.
13. INDUSTRY SEGMENT, CUSTOMER AND GEOGRAPHIC INFORMATION:
We operate in one segment, that segment being solutions that enable
connectivity. We market our products worldwide through our sales personnel,
independent sales representatives and distributors.
Our sales to customers outside of the United States, as a percent of total
revenues, are as follows:
<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
------------------
2002 2001 2000
---- ---- ----
Taiwan...................................................... 61% 40% 53%
China (Hong Kong)........................................... 23% 48% 34%
Rest of Asia................................................ 2% 3% 4%
Europe...................................................... 1% 6% --%
Other....................................................... 1% 1% 1%
-- -- --
88% 98% 92%
== == ==
</Table>
63
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
Sales to our major customers representing greater than 10% of total
revenues are as follows:
<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
------------------
CUSTOMER 2002 2001 2000
- -------- ---- ---- ----
Askey....................................................... 23% 10% 15%
Lite-on Technology (GVC).................................... 25% 22% 13%
Prewell..................................................... 23% 47% 32%
-- -- --
71% 79% 60%
== == ==
</Table>
As of December 31, 2002, our long-lived assets were primarily located in
the United States. Our long-lived assets by geographic region as of December 31,
2002 and 2001 are as follows:
<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
---------------
2002 2001
------ ------
United States............................................... $3,120 $2,985
Cayman Islands.............................................. $ -- $ 195
Other....................................................... $ 49 $ 201
</Table>
14. RELATED PARTY TRANSACTIONS:
For the year ended December 31, 2001, we paid a total of $210,000 to Dr.
Martin H. Singer and John Schoen our executive officers, prior to their
appointment, for consulting services. Dr. Martin H. Singer, an executive officer
served as a member of our Board of Directors during the period in which
consulting fees were paid to him.
15. 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 $227,441 in employer contributions to the
401(k) plan for the year ended December 31, 2002. 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.
16. SUBSEQUENT EVENTS
In February 2003, PCTEL extended its stock repurchase program and announced
its intention to repurchase up to one million additional shares on the open
market from time to time. The Company's repurchase activities will be at
management's discretion based on market conditions and the price of the
Company's common stock. As of March 2003, we repurchased 261,200 shares of our
common stock for approximately $1.9 million.
On March 5, 2003, we filed in the U.S. District Court for the Northern
District of California a patent infringement lawsuit against 3Com Corporation.
Our lawsuit against 3Com Corporation alleges infringement by 3Com Corporation of
one of our patents and asks for a declaratory judgment that certain 3Com patents
are invalid and not infringed. On March 4, 2003, 3Com filed in the U.S. District
Court for the Northern District of Illinois a patent infringement lawsuit
against us claiming that our HSP modem products infringe certain 3Com patents,
and amended its complaint to ask for a declaratory judgment that one of our
patents is invalid and not infringed. The patents that are the subject of 3Com's
amended complaint and our complaint are the
64
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
same patents. We believe that we have meritorious claims and defenses in our
dispute with 3Com. However, because the action is still in its early stages, we
are not able to predict the outcome at this time.
On March 12, 2003, PCTEL, Inc, completed its asset acquisition of Dynamic
Telecommunications, Inc., ("DTI"). DTI is a supplier of software-defined radio
technology deployed in high-speed wireless scanning receivers, multi-protocol
collection and analysis systems, interference measurement systems and radio
frequency command and control software solutions. In connection with the asset
acquisition, PCTEL, DTI, PCTEL Maryland, Inc., a wholly-owned subsidiary of
PCTEL, and DTI Holdings, Inc., the sole shareholder of DTI, entered into an
Asset Purchase Agreement dated as of March 12, 2003 (the "Purchase Agreement")
under which PCTEL Maryland acquired substantially all of the assets of DTI,
including intellectual property, receivables, property and equipment and other
tangible and intangible assets used in DTI's business. PCTEL intends to use the
acquired assets to continue to operate and grow the business of DTI and to
expand its presence in the wireless access markets.
In exchange for the acquired assets, PCTEL paid DTI $10 million in cash out
of its working capital. In addition, DTI may be entitled to earn-out payments if
PCTEL Maryland meets specified financial targets in fiscal years 2003 and 2004.
17. QUARTERLY DATA (UNAUDITED)
<Table>
<Caption>
QUARTERS ENDED,
---------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
2002 2002 2002 2002
------------- ------------- -------------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues..................................... $10,342 $ 9,557 $12,548 $16,332
Gross profit................................. 5,116 5,542 8,862 8,639
Income (loss) from operations................ (559) (1,044) 2,925 2,012
Income (loss) before provision for income
taxes...................................... 494 (107) 3,566 2,635
Net income (loss)............................ 462 (138) 3,214 2,615
Basic earnings (loss) per share.............. $ 0.02 $ (0.01) $ 0.16 $ 0.13
Shares used in computing basic earnings
(loss) per share........................... 19,720 19,933 19,972 19,599
Diluted earnings (loss) per share............ $ 0.02 $ (0.01) $ 0.16 $ 0.13
Shares used in computing diluted earnings
(loss) per share........................... 19,997 19,933 20,139 19,740
</Table>
65
PCTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2002
<Table>
<Caption>
QUARTERS ENDED,
---------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, 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........................... 18,997 19,206 19,414 19,494
</Table>
66
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Arthur Andersen LLP was previously our independent accountant.
Representatives for Arthur Andersen LLP are not available to provide the
consents required for the inclusion of their report on our consolidated
financial statements for the years ended December 31, 2001 and 2000 included in
this Form 10-K, and we have dispensed with the requirement to file their consent
in reliance upon Rule 437a of the Securities Act of 1933. Because Arthur
Andersen LLP has not consented to the inclusion of their report in this Form
10-K, investors will not be able to recover against Arthur Andersen LLP under
Section 11 of the Securities Act of 1933 for any untrue statements of material
fact contained in the consolidated financial statements audited by Arthur
Andersen LLP that are incorporated by reference or any omissions to state a
material fact required to be stated therein.
Information regarding changes in accountants is incorporated by reference
to the Current Reports on Forms 8-K filed on May 15, 2002 and May 21, 2002.
For the two years prior to our engagement of PricewaterhouseCoopers LLP as
our independent auditors, we did not consult with PricewaterhouseCoopers LLP
regarding the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on PCTEL's consolidated financial statements. Additionally,
PricewaterhouseCoopers LLP did not audit our consolidated financial statements
for the two most recent fiscal years ended December 31, 2001.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning our directors is
incorporated by reference to the sections entitled "Proposal One -- Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance"
contained in our Proxy Statement related to our 2002 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 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 4A of this Report in the
section captioned "Business -- Executive Officers of the Registrant".
ITEM 11: EXECUTIVE 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 our Proxy
Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information concerning the security ownership of certain beneficial owners
and management as well as equity compensation plans, is incorporated by
reference to the information set forth in the sections entitled "Information
Concerning Solicitation and Voting Security Ownership of Certain Beneficial
Owners and Management" and "Equity Compensation Plan Information" contained in
our Proxy Statement.
ITEM 13: CERTAIN 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.
67
ITEM 14: CONTROLS AND PROCEDURES
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Within the 90 days prior to the filing of this Annual Report on Form 10-K
(the "Evaluation Date"), we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer
and our Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Exchange Act). Based upon that evaluation, our
Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures are effective to ensure that material
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission rules and
forms. It should be noted, however, that the design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.
(B) CHANGES IN INTERNAL CONTROLS.
Subsequent to the Evaluation Date, there have been no significant changes
in our internal controls or in other factors that could significantly affect
these controls to the date of their last evaluation.
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS
Refer to the financial statements filed as a part of this Report under "Item
8 -- Financial Statements and Supplementary Data".
(2) FINANCIAL 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, 2002. 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.
(3) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 (a) Asset Purchase Agreement dated March 12, 2003, by and among
PCTEL, Inc., PCTEL Maryland, Inc., DTI Holdings, Inc. and
Dynamic Telecommunications, Inc.
2.2 * Registration Rights Agreement dated March 12, 2003, by and
between PCTEL, Inc. and Dynamic Telecommunications, Inc.
3.1 (b) Amended and Restated Certificate of Incorporation of the
Registrant, as currently in effect.
3.3 (c) 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
</Table>
68
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.16 (d) Sublease 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+ (c) Management Retention Agreement between Martin H. Singer and
the Registrant, dated November 15, 2001
10.18+ (c) Form of Management Retention Agreement for PCTEL Inc.'s Vice
Presidents
10.23 (e) 2001 Nonstatutory Stock Option Plan and form of agreements
thereunder
10.24+ (c) Employment Agreement between Martin H. Singer and the
Registrant, dated October 17, 2001
10.25+ (c) Employment Agreement between Jeffrey A. Miller and the
Registrant, dated November 7, 2001
10.26+ (c) Employment Agreement between John Schoen and the Registrant,
dated November 12, 2001
10.32 (f) Stock Option Agreement of Jeffrey A. Miller, dated November
15, 2001
10.33 (f) Stock Option Agreement of John Schoen, dated November 15,
2001
10.35 (g) Lease agreement dated July 30, 2002 between PCTEL, Inc. and
ASP Wheelie, LLC for an office building located at O'Hare
Plaza, 8725 West Higgins Road, Chicago, IL 60631
10.36 * Lease agreement between PCTEL, Inc. and Adaptec, Inc. dated
November 5, 2002 for an office building located at 631 South
Milpitas Boulevard, Milpitas, CA 95035
10.37+ * Executive Deferred Compensation Plan
10.38+ * Executive Deferred Stock Plan
21.1 * List of Subsidiaries of the Registrant
23.1 * Consent of PricewaterhouseCoopers LLP, Independent
Accountants
99.1 * Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
</Table>
- ---------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 15(c) of Form 10-K.
(a) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Current Report on Form 8-K dated March 12, 2003.
(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. 333-84707).
(c) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Annual Report on Form 10-K for fiscal year ended December
31, 2001.
(d) 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.
(e) Incorporated by reference herein to the Registrant's Registration Statement
of Form S-8 filed on October 3, 2001 (Registration Statement No.333-70886).
(f) Incorporated by reference herein to the Registrant's Registration Statement
of Form S-8 filed on December 14, 2001 (Registration Statement
No.333-75204).
(g) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Quarterly Report on Form 10-Q for quarter ended September
30, 2002.
69
(B) REPORTS ON FORM 8-K
None.
(C) EXHIBITS
See Item 15(a)(3) above.
(D) FINANCIAL STATEMENT SCHEDULES
See Item 15(a)(2) above.
70
PCTEL, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<Table>
<Caption>
BALANCE
AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND AGAINST END OF
DESCRIPTION OF YEAR EXPENSES REVENUE DEDUCTIONS YEAR
- ----------- --------- ---------- ------- ---------- -----------------
Year Ended December 31, 2000:
Allowance for doubtful accounts.... $2,213 $ -- $ 3,677 $ (847) $5,043
Allowance for customer rebates..... 3,016 -- 12,999 (9,169) 6,846
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
Year Ended December 31, 2002:
Allowance for doubtful accounts.... $ 787 $ -- $ (357) $ (62) $ 368
Allowance for customer rebates..... 184 -- 373 (462) 95
</Table>
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
PCTEL, Inc.
A Delaware Corporation
(Registrant)
/s/ MARTIN H. SINGER
--------------------------------------
Martin H. Singer
Chairman of the Board and
Chief Executive Officer
Dated: March 31, 2003
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Martin H. Singer and John Schoen, and
each of them, his true and lawful attorneys-in-fact and agents, each with full
power of substitution and re-substitution, to sign any and all amendments
(including post-effective amendments) to this Annual Report on Form 10-K and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents, or their substitute or substitutes, or any of them, shall do
or cause to be done by virtue hereof.
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.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MARTIN H. SINGER Chairman of the Board, Chief March 31, 2003
------------------------------------------------ Executive Officer (Principal
(Martin H. Singer) Executive Officer) and Director
/s/ JOHN SCHOEN Chief Operating Officer and Chief March 31, 2003
------------------------------------------------ Financial Officer (Principal
(John Schoen) Financial and Accounting Officer)
/s/ RICHARD C. ALBERDING Director March 31, 2003
------------------------------------------------
(Richard C. Alberding)
/s/ RICHARD GITLIN Director March 31, 2003
------------------------------------------------
(Richard Gitlin)
/s/ BRIAN J. JACKMAN Director March 31, 2003
------------------------------------------------
(Brian J. Jackman)
</Table>
72
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GIACOMO MARINI Director March 31, 2003
------------------------------------------------
(Giacomo Marini)
/s/ JOHN SHEEHAN Director March 31, 2003
------------------------------------------------
(John Sheehan)
/s/ CARL A. THOMSEN Director March 31, 2003
------------------------------------------------
(Carl A. Thomsen)
</Table>
73
CERTIFICATIONS
I, Martin H. Singer, certify that:
1. I have reviewed this annual report on Form 10-K of PCTEL, Inc.:
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
/s/ MARTIN H. SINGER
--------------------------------------
Martin H. Singer
Chief Executive Officer
Date: March 31, 2003
74
I, John Schoen, certify that:
1. I have reviewed this annual report on Form 10-K of PCTEL, Inc.:
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
/s/ JOHN SCHOEN
--------------------------------------
John Schoen
Chief Operating Officer and Chief
Financial Officer
Date: March 31, 2003
75
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 (a) Asset Purchase Agreement dated March 12, 2003, by and among
PCTEL, Inc., PCTEL Maryland, Inc., DTI Holdings, Inc. and
Dynamic Telecommunications, Inc.
2.2 (a) Registration Rights Agreement dated March 12, 2003, by and
between PCTEL, Inc. and Dynamic Telecommunications, Inc.
3.1 (b) Amended and Restated Certificate of Incorporation of the
Registrant, as currently in effect.
3.3 (c) 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
10.16 (d) Sublease 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+ (c) Management Retention Agreement between Martin H. Singer and
the Registrant, dated November 15, 2001
10.18+ (c) Form of Management Retention Agreement for PCTEL Inc.'s Vice
Presidents
10.23 (e) 2001 Nonstatutory Stock Option Plan and form of agreements
thereunder
10.24+ (c) Employment Agreement between Martin H. Singer and the
Registrant, dated October 17, 2001
10.25+ (c) Employment Agreement between Jeffrey A. Miller and the
Registrant, dated November 7, 2001
10.26+ (c) Employment Agreement between John Schoen and the Registrant,
dated November 12, 2001
10.32 (f) Stock Option Agreement of Jeffrey A. Miller, dated November
15, 2001
10.33 (f) Stock Option Agreement of John Schoen, dated November 15,
2001
10.35 (g) Lease agreement dated July 30, 2002 between PCTEL, Inc. and
ASP Wheelie, LLC for an office building located at O'Hare
Plaza, 8725 West Higgins Road, Chicago, IL 60631
10.36 * Lease agreement between PCTEL, Inc. and Adaptec, Inc. dated
November 5, 2002 for an office building located at 631 South
Milpitas Boulevard, Milpitas, CA 95035
10.37+ * Executive Deferred Compensation Plan
10.38+ * Executive Deferred Stock Plan
21.1 * List of Subsidiaries of the Registrant
23.1 * Consent of PricewaterhouseCoopers LLP, Independent
Accountants Certification of Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
99.1 * Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
</Table>