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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
Form 10-Q/A
(Amendment No. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 000-27115
PCTEL, INC.
(Exact Name of Business Issuer as Specified in Its Charter)
Delaware 77-0364943
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
8725 W. Higgins Road, Suite 400, Chicago IL 60631
(Address of Principal Executive Office) (Zip Code)
(773) 243-3000
(Registrant's Telephone Number, Including Area Code)
---------------
Indicate by 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 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 May 3, 2004, there were 20,937,359 shares of the Registrant's Common Stock
outstanding.
EXPLANATORY NOTE
This Form 10-Q/A is being filed for the sole purpose of correcting a
typographical error that appeared in our Form 10-Q filed on May 10, 2004, in
Part I. Financial Information, Item 1. Financial Statements under the heading
"Industry Segment, Customer and Geographic Information." The results of
operations by segment table for the three months ended March 31, 2003 that
appeared under this heading included amounts under the column heading
"Elimination" that should have been included under the column heading "Modems."
================================================================================
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PCTEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE INFORMATION)
MARCH 31, DECEMBER 31,
2004 2003
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 95,996 $ 106,007
Restricted cash 278 278
Short-term investments 11,156 19,177
Accounts receivable, net of allowance for doubtful accounts of 5,792 3,630
$153 and $50, respectively
Inventories, net 3,082 1,267
Prepaid expenses and other assets 3,207 1,929
----------- ----------
Total current assets 119,511 132,288
PROPERTY AND EQUIPMENT, net 4,572 1,197
GOODWILL 11,335 5,561
OTHER INTANGIBLE ASSETS, net 10,329 4,140
OTHER ASSETS 60 55
----------- ----------
TOTAL ASSETS $ 145,807 $ 143,241
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 859 $ 333
Accrued royalties 3,213 3,208
Income taxes payable 5,456 7,359
Deferred revenue 2,370 2,960
Accrued liabilities 6,507 5,739
----------- ----------
Total current liabilities 18,405 19,599
Long-term liabilities 736 736
----------- ----------
Total liabilities 19,141 20,335
----------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 100,000,000 shares authorized, 20,816,095 and
20,145,824 issued and outstanding at March 31, 2004 and
December 31, 2003, respectively 21 20
Additional paid-in capital 162,146 155,548
Deferred stock compensation (4,910) (2,552)
Accumulated deficit (30,669) (30,201)
Accumulated other comprehensive income 78 91
----------- ----------
Total stockholders' equity 126,666 122,906
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 145,807 $ 143,241
=========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
PCTEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
THREE MONTHS ENDED
MARCH 31,
2004 2003
-------- --------
REVENUES $ 10,690 $ 13,082
COST OF REVENUES 3,769 7,907
INVENTORY RECOVERY -- (1,348)
-------- --------
GROSS PROFIT 6,921 6,523
-------- --------
OPERATING EXPENSES:
Research and development 2,030 2,118
Sales and marketing 2,934 2,261
General and administrative 3,176 1,852
Amortization of other intangible assets 711 99
Acquired in-process research and development -- 1,100
Restructuring charges (51) 155
Gain on sale of assets and related royalties (500) --
Amortization of deferred compensation 310 299
-------- --------
Total operating expenses 8,610 7,884
-------- --------
LOSS FROM OPERATIONS (1,689) (1,361)
OTHER INCOME, NET 239 495
-------- --------
LOSS BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (1,450) (866)
PROVISION (BENEFIT) FOR INCOME TAXES (982) 64
-------- --------
NET LOSS $ (468) $ (930)
======== ========
Basic earnings (loss) per share $ (0.02) $ (0.05)
Shares used in computing basic earnings (loss) per share 19,901 19,238
Diluted earnings (loss) per share $ (0.02) $ (0.05)
Shares used in computing diluted earnings (loss) per share 19,901 19,238
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
PCTEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
------------------------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (468) $ (930)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 939 400
In-process research and development -- 1,100
Gain (loss) on disposal/sale of fixed assets -- (12)
Recovery of allowance for doubtful accounts -- (127)
Amortization of deferred compensation 310 299
Changes in operating assets and liabilities:
Decrease in accounts receivable 322 1,092
(Increase) decrease in inventories 33 (772)
(Increase) decrease in prepaid expenses and other assets (1,147) 744
Increase (decrease) in accounts payable (182) 996
(Decrease) in accrued royalties (4) (128)
(Decrease) in income taxes payable (1,924) (120)
Increase (decrease) in deferred revenue (590) 4
(Decrease) in accrued liabilities (1,022) (73)
Increase in long-term liabilities -- 273
Tax benefit from stock option exercises 433 --
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (3,300) 2,746
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (443) (120)
Proceeds on sale of property and equipment 3 113
Sales of available-for-sale investments 8,006 15,049
Purchase of assets/business, net of cash acquired (17,777) (10,762)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (10,211) 4,280
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 3,498 865
Payments for repurchase of common stock -- (3,361)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,498 (2,496)
--------- ---------
Net increase (decrease) in cash and cash equivalents (10,013) 4,530
Cumulative translation adjustment 2 (3)
Cash and cash equivalents, beginning of period 106,007 52,986
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 95,996 $ 57,513
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
PCTEL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 2004 (UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by PCTEL, Inc. (unless otherwise noted, "PCTEL", the "Company", "we",
"us" or "our" refers to PCTEL, Inc.), pursuant to the laws and regulations of
the Securities and Exchange Commission for the requirements of Form 10-Q.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the disclosures are adequate to make the information not
misleading. The condensed balance sheet as of December 31, 2003 has been derived
from the audited financial statements as of that date, but does not include all
disclosures required by generally accepted accounting principles. These
financial statements and notes should be read in conjunction with the audited
financial statements and notes thereto included in our Annual Report on Form
10-K filed with the Securities and Exchange Commission.
The unaudited condensed financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of financial position, results of operations and cash flows for the
periods indicated. The results of operations for the three months ended March
31, 2004 are not necessarily indicative of the results that may be expected for
future periods or the year ending December 31, 2004.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities 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.
INVENTORIES
Inventories are stated at the lower of cost or market and include
material, labor and overhead costs using the FIFO method of costing. Inventories
at March 31, 2004 and December 31, 2003 consist of the following (in thousands):
MARCH 31, DECEMBER 31,
2004 2003
------- -------
Raw Materials $ 572 $ 780
Work in process 64 5
Sub assemblies 578 527
Finished Goods 2,033 10
------- -------
Sub-total $ 3,247 $ 1,322
------- -------
Allowance (165) (55)
------- -------
Total inventories $ 3,082 $ 1,267
------- -------
EARNINGS PER SHARE
We compute earnings per share in accordance with SFAS No. 128, "Earnings
Per Share". SFAS No. 128 requires companies to compute net income per share
under two different methods, basic and diluted, and present per share data for
all periods in which statements of operations are presented. Basic earnings per
share is computed by dividing net income by the weighted average number of
shares of common stock outstanding, less shares subject to repurchase. Diluted
earnings per share are computed by dividing net income by the weighted average
number of common stock and common stock equivalents outstanding. Common stock
equivalents consist of stock options using the treasury stock method. Common
stock options are excluded from the computation of diluted earnings per
5
share if their effect is anti-dilutive.
The following table provides a reconciliation of the numerators and
denominators used in calculating basic and diluted earnings per share for the
three months ended March 31, 2004 and 2003, respectively (in thousands, except
per share data):
THREE MONTHS ENDED
MARCH 31,
-----------------------
2004 2003
---- ----
(UNAUDITED)
Numerator:
Net loss $ (468) $ (930)
======== ========
Denominator:
Basic earnings (loss) per share:
Weighted average common shares outstanding 20,532 19,833
Less: Weighted average shares subject to repurchase (631) (595)
-------- --------
Weighted average common shares outstanding 19,901 19,238
-------- --------
Basic earnings (loss) per share $ (0.02) $ (0.05)
======== ========
Diluted earnings (loss) per share:
Weighted average common shares outstanding 19,901 19,238
Weighted average shares subject to repurchase -* -*
Weighted average common stock option grants -* -*
-------- --------
Weighted average common shares and common stock equivalents outstanding 19,901 19,238
-------- --------
Diluted earnings (loss) per share $ (0.02) $ (0.05)
======== ========
* These amounts have been excluded since the effect is anti-dilutive.
STOCK-BASED COMPENSATION
The Company accounts for its stock option plans using Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees",
whereby compensation cost for stock options is measured as the excess, if any,
of the fair market value of a share of the Company's stock at the date of the
grant over the amount that must be paid to acquire the Stock. SFAS No. 123,
"Accounting for Stock-Based Compensation", issued subsequent to APB No. 25 - and
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure", defines a fair value based method of accounting for employee
stock options, but allows companies to continue to measure compensation cost for
employees using the intrinsic value method of APB No. 25. The following table
illustrates the 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 in accordance with Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" for the three months ended March 31, 2004 and 2003 (in thousands,
except per share data):
THREE MONTHS ENDED
MARCH 31,
------------------------
2004 2003
---- ----
Net loss -- as reported ....................................... $ (468) $ (930)
Add: Stock-based employee compensation ........................ 310 299
Expense included in reported net loss
Deduct: Stock-based employee compensation expense determined
under fair value based method for all awards.................. 1,489 782
Net loss --as adjusted ........................................ $ (1,647) $ (1,413)
Net (loss) income per share--basic as reported ................ $ (0.02) $ (0.05)
Net (loss) income per share--basic as adjusted ................ $ (0.08) $ (0.07)
Net (loss) income per share--diluted as reported .............. $ (0.02) $ (0.05)
Net (loss) income per share--diluted as adjusted .............. $ (0.08) $ (0.07)
These costs may not be representative of the total effects on pro forma reported
income (loss) for future years. Factors that may also impact disclosures in
future years include the attribution of the awards to the service period, the
vesting period of stock awards, timing of additional grants of stock option
awards and the number of shares granted for future awards.
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes option-
6
pricing model as prescribed by SFAS 123 using the following assumptions:
STOCK OPTIONS EMPLOYEE STOCK PURCHASE PLAN
-------------------- ----------------------------
2004 2003 2004 2003
---- ---- ---- ----
Dividend yield None None None None
Expected volatility 46% 55% 46% 55%
Risk-free interest rate 2.1% 2.4% 1.0% 1.1%
Expected life (in years) 3.07 2.75 0.5 0.5
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility and
expected option life. Because our employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate the
existing models may not necessarily provide a reliable single measure of the
fair value of our employee stock options. Restricted stock awards are recorded
at the fair market value of the stock on the date of grant and are expensed over
the vesting period.
INDUSTRY SEGMENT, CUSTOMER AND GEOGRAPHIC INFORMATION
In 2003 the company operated as a single segment. In January 2004, with
the acquisition of MAXRAD and revenue traction in our Segue product line, the
company began operating in four distinct segments. They are the Software
segment, represented by the Segue product line, the Test segment, represented by
the DTI product line, the Antenna segment, represented by the MAXRAD product
line, and the Licensing segment. In 2003, the company also had a modem product
line which it sold to Conexant in May of that year.
The results of operations by segment are as follows:
SOFTWARE TEST ANTENNA LICENSING MODEMS ELIMINATION CONSOLIDATED
-------- ---- ------- --------- ------ ----------- ------------
Revenue, three months ended March 31, 2004 $ 1,118 $ 2,367 $ 5,112 $ 2,103 $ (10) $10,690
Gross Profit $ 1,085 $ 1,616 $ 2,137 $ 2,086 $ (3) $ 6,921
Operating Expenses $ 8,610
Operating (Loss) $(1,689)
SOFTWARE TEST ANTENNA LICENSING MODEMS ELIMINATION CONSOLIDATED
-------- ---- ------- --------- ------ ----------- ------------
Revenue, three months ended March 31, 2003 $ 122 $ 567 $ 1,913 $ 10,480 $ 13,082
Gross Profit $ 109 $ 437 $ 1,913 $ 4,064 $ 6,523
Operating Expenses $ 7,884
Operating (Loss) $ (1,361)
The Company's chief operating decision maker (CEO) uses only the above
measures in deciding how to allocate resources and assess performance among the
segments.
Our sales to customers outside of the United States, as a percent of total
revenues, are as follows:
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
---- ----
(UNAUDITED)
Taiwan 2% 63%
China -% 21%
Japan 1% 2%
Rest of Asia 2% 2%
Europe 10% -%
Central and Latin America 6% -%
Canada 5% -%
-- --
Total 26% 88%
== ==
Sales to our major customers representing greater than 10% of total
revenues are as follows:
7
THREE MONTHS ENDED
MARCH 31,
CUSTOMER 2004 2003
-------------------------------------------------- ---- --
(UNAUDITED)
Askey -% 21%
Lite-on Technology (GVC) -% 22%
Prewell -% 21%
---- --
Total -% 64%
==== ==
COMPREHENSIVE INCOME
The following table provides the calculation of other comprehensive income
for the three months ended March 31, 2004 and 2003 (in thousands):
THREE MONTHS ENDED
MARCH 31,
--------------------
2004 2003
---- ----
(UNAUDITED)
Net loss $ (468) $ (930)
Other comprehensive income:
Unrealized gains (loss) on available-for-sale securities (15) (121)
Cumulative translation adjustment 2 (3)
------- -------
Comprehensive income (loss) $ (481) $(1,054)
======= =======
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51." FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46 is effective immediately for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after December
15, 2003. In December 2003, the Financial Accounting Standards Board issued
Interpretation 46R (FIN 46R), a revision to Interpretation 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46R clarifies some of the
provisions of FIN 46 and exempts certain entities from its requirements. FIN 46R
is effective at the end of the first interim period ending after March 15, 2004.
Adoption of this standard did not have a material impact on the Company's
financial position, results of operations, or cash flows.
3. ACQUISITION
On January 2, 2004, we completed our acquisition of MAXRAD, Inc. MAXRAD is
a manufacturer of wireless communications antennas for broadband wireless,
in-building wireless and land mobile radio applications. In connection with the
acquisition, we, MAXRAD, and the shareholders of MAXRAD and certain other
parties entered into a Securities Purchase Agreement, dated as of January 2,
2004, pursuant to which we acquired all of the outstanding capital stock of
MAXRAD.
In exchange for the outstanding capital stock of MAXRAD, we paid $18.2
million, net of cash acquired of $2.4 million, out of our available working
capital.
The purchase price of $18.2 million in cash, of which $0.4 million was
paid in April 2004, was allocated $5.5 million to net assets acquired, $0.9
million to the covenant not to compete, $1.3 million to core technology, $3.2
million to customer lists, $1.4 million to trademarks and $0.1 million to other
intangible assets, net, in the accompanying consolidated balance sheets. The
$5.8 million excess of the purchase price over the fair value of the net
tangible and intangible assets was allocated to goodwill, which is deductible
for tax purposes. We will amortize the covenant not to compete over two years
and other intangible assets over an estimated useful life of six and eight
years.
The unaudited pro forma effect of the financial results of PCTEL as if the
acquisition had taken place on January 1, 2003 is as follows:
8
THREE MONTHS ENDED
MARCH 31, 2003
--------------
REVENUES $ 17,187
LOSS FROM OPERATIONS (464)
NET LOSS $ (535)
========
Basic earnings (loss) per share $ (0.03)
Shares used in computing basic earnings (loss) per share 19,238
Diluted earnings (loss) per share $ (0.03)
Shares used in computing diluted earnings (loss) per share 19,238
4. 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. The Company adopted SFAS No. 142
on January 1, 2002 at which time the Company ceased amortization of goodwill.
The provisions of SFAS No. 142 are effective for fiscal years beginning after
December 15, 2001 and must be applied to all goodwill and other intangible
assets that are recognized in an entity's balance sheet at the beginning of that
fiscal year.
The changes in the carrying amount of goodwill and other intangible assets
as of March 31, 2004 were as follows (in thousands):
GOODWILL, NET
-------------
Balance at December 31, 2003 $ 5,561
Goodwill from the acquisition of MAXRAD 5,774
----------
Balance at March 31, 2004 $ 11,335
==========
INTANGIBLE ASSETS MARCH 31, 2004 DECEMBER 31, 2003
----------------- -------------- -----------------
Developed technology-cyberPIXIE $ 452 $ 452
Other intangible assets-DTI 4,600 4,600
Patents 300 300
Other intangible assets-MAXRAD 5,500 --
Trademark-MAXRAD 1,400 --
--------- ---------
$ 12,252 $ 5,352
========= =========
Less: Accumulated amortization $ (1,923) $ (1,212)
========= =========
Net intangible assets $ 10,329 $ 4,140
========= =========
5. RESTRUCTURING CHARGES
2003 Restructuring
In May 2003, the Company completed the sale of certain of its assets to
Conexant relating to a component of PCTEL's HSP modem product line. As a result
of the disposition, 29 employees were transferred to Conexant. An additional 26
employees, both foreign and domestic, were terminated along with the related
facilities closures. The total restructuring aggregated $3.3 million consisting
of severance and employment related costs of $1.7 million and costs related to
closure of excess facilities as a result of the reduction in force of $1.6
million.
As of March 31, 2004, approximately $1.5 million of termination
compensation and related benefits had been paid to terminated employees and
approximately $0.5 million of lease payments and related costs had been paid to
9
the landlord for the excess facilities. As of March 31, 2004, the remaining
accrual balance of $1.3 million restructuring will be paid monthly through
January 2006. The following analysis sets forth the rollforward of this charge:
ACCRUAL ACCRUAL
BALANCE AT BALANCE AT
DECEMBER 31, RESTRUCTURING MARCH 31,
2003 CHARGES PAYMENTS 2004
---- ------- -------- ----
Severance and employment related costs $ 633 $ (101) $ 291 $ 241
Costs for closure of excess facilities 977 50 1 1,026
-------- ------- ------ --------
$ 1,610 $ (51) $ 292 $ 1,267
======== ======= ====== ========
Amount included in long-term liabilities $ 648
========
Amount included in short-term liabilities $ 619
========
6. 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 March 31, 2004 and December 31, 2003, we accrued royalties of
approximately $3.2 million. 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.
As part of the acquisition of DTI there is an earn-out over two years if
certain milestones are achieved. At PCTEL's option, DTI could be paid in PCTEL
stock or cash. For the year ended December 31, 2003, DTI earned $1.5 million
cash payout that was paid on May 4, 2004. The Company is estimating the 2004 DTI
earn-out to be $1.5 to $2.2 million.
We have from time to time in the past received correspondence from third
parties, and may receive communications from additional third parties in the
future, asserting that our products infringe on their intellectual property
rights, that our patents are unenforceable or that we have inappropriately
licensed our intellectual property to third parties. We expect these claims to
increase as our intellectual property portfolio becomes larger. These claims
could affect our relationships with existing customers and may prevent potential
future customers from purchasing our products or licensing our technology.
Intellectual property claims against us, and any resulting lawsuit, may result
in our incurring significant expenses and could subject us to significant
liability for damages and invalidate what we currently believe are our
proprietary rights. These lawsuits, regardless of their success, would likely be
time-consuming and expensive to resolve and could divert management's time and
attention. In addition, any claims of this kind, whether they are with or
without merit, could cause product shipment delays or require us to enter into
royalty or licensing agreements. In the event that we do not prevail in
litigation, we could be prevented from selling our products or be required to
enter into royalty or licensing agreements on terms, which may not be acceptable
to us. We could also be prevented from selling our products or be required to
pay substantial monetary damages. Should we cross license our intellectual
property in order to obtain licenses, we may no longer be able to offer a unique
product. To date, we have not obtained any licenses from 3Com and the other
companies from whom we have received communications.
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 ("Fraser") filed a Verified
Complaint (the "Complaint") in Santa Clara County (California) Superior Court
for breach of contract and declaratory relief against the Company, and for
breach of contract, conversion, negligence and declaratory relief against the
Company's transfer agent, Wells Fargo
10
Bank Minnesota, N.A ("Wells Fargo"). The Complaint seeks compensatory damages
allegedly suffered by Fraser as a result of the sale of certain stock by Fraser
during a secondary offering on April 14, 2000. Wells Fargo filed a Verified
Answer to the Complaint on June 12, 2002. On July 10, 2002, the Company filed a
Verified Answer to the Complaint, denying Fraser's claims and asserting numerous
affirmative defenses. Wells Fargo and the Company have each filed
Cross-complaints against the other for indemnity. On November 18, 2002, the
parties conducted mediation but were unable to reach a settlement.
Trial of this matter had been set for January 12, 2004, however, the trial
date was vacated in light of the amended complaint filed by Fraser following his
motion for leave to amend heard on December 9, 2003. The Company intends to
re-file its Motion for Summary Judgment or, alternatively, Summary Adjudication,
against Fraser. Trial is now scheduled for September 20, 2004. We believe that
we have meritorious defenses and intend to vigorously defend the action. Because
the action is still in its early stages, we are not able to predict the outcome
at this time.
Litigation with U.S. Robotics
On May 23, 2003, we filed in the U.S. District Court for the Northern
District of California a patent infringement lawsuit against U.S. Robotics
Corporation claiming that U.S. Robotics has infringed one of our patents. U.S.
Robotics filed its answer and counterclaim asking for a declaratory judgment
that the claims of the patent are invalid and not infringed. This case has been
consolidated for claims construction discovery with the litigation against 3Com
Corporation, and Agere Systems and Lucent Technologies. Claims construction
discovery under the Patent Local Rules is underway, and a status conference is
set for May 11, 2004. No trial date has been set. We believe we have meritorious
claims and defenses. However, because the action is still in its early stages,
we are not able to predict the outcome at this time.
Litigation with Broadcom
On May 23, 2003, we filed in the U.S. District Court for the Northern
District of California a patent infringement lawsuit against Broadcom
Corporation claiming that Broadcom has infringed four of our patents. Broadcom
filed its answer and counterclaim asking for a declaratory judgment that the
claims of the four patents are invalid and/or unenforceable, and not infringed
by Broadcom. In December 2003, the parties entered into a settlement agreement
which was favorable to the Company, and on January 6, 2004, the Court granted
the parties' stipulated request that all claims and counterclaims in the
Broadcom action be dismissed with prejudice.
Litigation with Agere and Lucent
On May 23, 2003, we filed in the U.S. District Court for the Northern
District of California a patent infringement lawsuit against Agere Systems and
Lucent Technologies claiming that Agere has infringed four of our patents and
that Lucent was infringing three of our patents. Agere and Lucent filed their
answers to our complaint. Agere filed a counterclaim asking for a declaratory
judgment that the claims of the four patents are invalid, unenforceable and not
infringed by Agere. We filed our reply to Agere's counterclaim in August 2003.
This case has been consolidated for claims construction discovery with the
litigation against U.S. Robotics Corporation and 3Com Corporation. Claims
construction discovery under the Patent Local Rules is underway, and a status
conference is set for May 11, 2004. No trial date has been set. We believe we
have meritorious claims and defenses. However, because the action is still in
its early stages, we are not able to predict the outcome at this time.
Litigation with 3Com
In March 2003, each of 3Com Corporation and the Company filed a patent
infringement lawsuit against the other. The suits are pending in the U.S.
District Court for the Northern District of California. Our lawsuit alleges
infringement of one of our patents and asks for a declaratory judgment that
certain 3Com patents are invalid and not infringed by the Company. 3Com is
alleging that our HSP modem products infringed certain 3Com patents and asks for
a declaratory judgment that our patent is invalid and not infringed by 3Com. No
trial date has been set. The case has been consolidated for claims construction
discovery with the litigation against U.S. Robotics Corporation, Agere Systems
and Lucent Technologies. Claims construction discovery under the Patent Local
Rules is underway, and a status conference is set for May 11, 2004. We believe
we have meritorious claims and defenses. However, because the action is still in
its early stages, we are not able to predict the outcome at this time.
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Further, in May 2003, the Company filed a complaint against 3Com in the
Superior Court of the State of California for the County of Santa Clara under
California's Unfair Competition Act. In December 2003, the Company voluntarily
dismissed the action without prejudice. On December 15, 2003, 3Com filed an
action against the Company seeking a declaratory judgment that 3Com has not
violated the California Unfair Competition Act. On January 7, 2004, the parties
filed a stipulation dismissing 3Com's declaratory judgment action without
prejudice. No related claims with respect to the California Unfair Competition
Act are currently pending between the parties.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ -----------
31.1 Certification of Principal Executive Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
32 Certification of Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
We furnished a report on Form 8-K dated February 5, 2004 announcing our
financial results fourth fiscal quarter and its fiscal year ended December 31,
2003. Such report was "furnished" but not "filed" with the SEC.
We filed a report on Form 8-K dated January 2, 2004 announcing our acquisition
of MAXRAD, Inc.
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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
Date: May 14, 2004
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