<PAGE>
As filed with the Securities and Exchange Commission on October 15, 1999
Registration No. 333-84707
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
Amendment No. 3
to
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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PC-Tel, Inc.
(Exact Name of Registrant as Specified in Its Charter)
---------------
Delaware 3661 77-0364943
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or Code Number)
organization)
70 Rio Robles
San Jose, California 95134
(408) 965-2100
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
PETER CHEN
Chief Executive Officer
PC-Tel, Inc.
70 Rio Robles
San Jose, California 95134
(408) 965-2100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
DOUGLAS H. COLLOM, ESQ. NORA L. GIBSON, ESQ.
ROGER E. GEORGE, ESQ. MICHELLE KWAN MONTOYA, ESQ.
DEBORAH M. CHANG, ESQ. TED A. GILMAN, ESQ.
SHELDON J. QUAN, ESQ. Brobeck, Phleger & Harrison LLP
Wilson Sonsini Goodrich & Rosati Spear Street Tower
Professional Corporation One Market
650 Page Mill Road San Francisco, California 94105
Palo Alto, California 94304 (415) 442-0900
(650) 493-9300
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement
---------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to such
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed without +
+notice. PC-Tel, Inc. may not sell these securities until the registration +
+statement filed with the Securities and Exchange Commission is effective. +
+This prospectus is not an offer to sell these securities, and PC-Tel, Inc. is +
+not soliciting offers to buy these securities, in any jurisdiction where the +
+offer or sale of these securities is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Not Complete)
Issued September 17, 1999
4,600,000 Shares
[PCtel LOGO APPEARS HERE}
PC-Tel, Inc.
Common Stock
------------
PC-Tel, Inc. is offering shares of its common stock in an initial public
offering. We estimate that the initial public offering price for our shares
will be between $15.00 and $17.00.
------------
We have applied to have our common stock quoted on the Nasdaq National Market
under the symbol "PCTI."
------------
Investing in the common stock involves a high degree of risk. See "Risk
Factors" beginning on page 7.
------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price........................................... $ $
Discounts and Commissions to Underwriters....................... $ $
Proceeds to PC-Tel, Inc......................................... $ $
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
PC-Tel, Inc. has granted the underwriters the right to purchase up to an
additional 690,000 shares of common stock to cover any over-allotments. The
underwriters can exercise this right at any time within thirty days after the
offering. Banc of America Securities LLC expects to deliver the shares of
common stock to investors on , 1999.
Banc of America Securities LLC
Warburg Dillon Read LLC
Needham & Company, Inc.
------------
The date of this prospectus is , 1999
<PAGE>
Inside front cover
Background of space shot photograph of planet earth and graphic images of
telephone, laptop computer, desktop computer, wireless modem, personal digital
assistant and set-top box. Text caption "High-Speed Personal Connecting
Communications Solutions."
<PAGE>
You should only rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 7
Special Note Regarding Forward Looking Statements........................ 17
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Consolidated Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 35
Management............................................................... 50
Transactions with Related Parties and Insiders........................... 60
Principal Stockholders................................................... 62
Description of Capital Stock............................................. 64
Shares Eligible for Future Sale.......................................... 66
Underwriting............................................................. 68
Legal Matters............................................................ 70
Experts.................................................................. 70
Where You Can Find Additional Information................................ 70
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
PC-Tel, the PC-Tel logo, HSP Modem, MicroModem, HIDRA and LiteSpeed are
trademarks of PC-Tel. Other service marks, trademarks and trade names referred
to in this prospectus are the property of their respective owners.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. You should read the entire prospectus carefully before making an
investment decision.
This prospectus contains forward looking statements, which involve risks and
uncertainties. PC-Tel's actual results could differ materially from those
anticipated in these forward looking statements as a result of the factors
described under "Risk Factors" and elsewhere in this prospectus.
PC-Tel
We are a leading developer and supplier of cost-effective, software-based
connectivity solutions for data transmission in a wide range of communications
environments. Our solutions enable internet access and other communications
applications through existing analog public telephone networks and through
emerging broadband networks, which enhance voice and data capabilities beyond
that which is offered by the existing analog public telephone networks.
Connectivity solutions refer to any method for connecting one circuit, network
or computer to another. We have developed a proprietary software architecture
that is easily upgradeable, minimizing the risk of technological obsolescence.
Our communications products are designed to enable widespread internet access
and other communication applications through desktop PCs, notebook computers,
internet appliances such as set-top boxes and webphones, video game consoles
and remote monitoring devices.
We are a pioneer in developing host signal processing technology, a
proprietary set of algorithms that enables cost-effective, software-based
digital signal processing solutions. Host signal processing technology and the
software architecture on which it is based utilize the computational and
processing resources of a host central processor rather than requiring
additional special-purpose hardware. Based on our own research and testing, the
reduction of hardware components in our host signal processing architecture
reduces space requirements by up to 50% and power requirements by up to 70%
compared to conventional solutions.
Based on our 1998 unit shipments, we believe we are the largest worldwide
producer of soft modems, representing 63% of all soft modems sold that year, as
estimated by the Cahners In-Stat Group. Various original equipment
manufacturers, including Acer, Dell, emachines, Fujitsu and Sharp, have
integrated our soft modems into their products.
In recent years, dramatic increases in business and consumer demand for
multimedia information, entertainment and voice and data communication have
resulted in a corresponding increase in demand for high-speed remote access.
The accelerated growth of content-rich applications, which demand high
bandwidth, has changed the nature of information networks. High-speed
connectivity is now a commonplace requirement for business, government,
academic and home environments. These market trends have resulted in a
significant increase in the demand for connectivity devices. International Data
Corporation estimates that by 2003, the number of internet connectivity devices
in use will grow to over 722 million.
Our host signal processing architecture, which involves running software on
a host computer rather than using dedicated processing hardware, allows us to
quickly and cost-effectively capitalize on this rapid growth in demand for
connectivity devices. We believe that we can use our intellectual property
portfolio to readily adapt to the speed and design requirements of additional
emerging connectivity technologies. For example, we have developed LiteSpeed, a
host signal processing architecture solution, in response to growing market
acceptance of G.Lite, a digital subscriber line technology that enables
downstream data transmission speeds of up to 1.5 Mbps and upstream data
transmission speeds of up to 512 Kbps over existing copper telephone lines.
Downstream transmission refers to the transmission of data from the central
office to the customer premise, and upstream transmission of data refers to the
reverse. By providing connectivity solutions that can be easily adapted to new
standards and protocols, we simplify purchasing decisions and accelerate
deployment times for original equipment manufacturers.
Our principal executive offices are located at 70 Rio Robles, San Jose,
California 95134. Our telephone number is (408) 965-2100.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by PC-Tel.............. 4,600,000 shares
Common stock to be outstanding after this
offering................................... 15,602,078 shares
Use of proceeds............................. $15.7 million of the proceeds
from this offering will be used
to repay bank debt. The
remaining proceeds will be used
for general corporate purposes,
including working capital, and
for potential investments in and
acquisitions of complementary
products, technologies or
businesses.
Proposed Nasdaq National Market symbol...... PCTI
</TABLE>
In addition to the shares of common stock to be outstanding after this
offering, we are obligated to issue shares of our common stock upon exercise of
outstanding options and warrants. As of June 30, 1999, these additional shares
included:
. a total of 3,815,710 shares of common stock that will be issued upon the
exercise of outstanding stock options under our 1995 stock plan and 1997
stock plan at a weighted average exercise price per share of $5.72, and
. a total of 202,417 shares of common stock that will be issued upon the
exercise of outstanding warrants at an exercise price of $8.00 per share.
In addition, during the period between July 1 and August 3, 1999, we granted
additional stock options under our 1997 stock plan for the purchase of 565,390
shares at a weighted average exercise price per share of $10.25. This includes
options to purchase 400,000 shares of common stock granted to William F. Roach,
our President and Chief Operating Officer, who began employment with PC-Tel in
August 1999.
----------------
Please also note that, except where otherwise indicated:
. the information in this prospectus relating to our outstanding shares of
common stock or options or warrants to purchase our common stock is based
upon information as of June 30, 1999,
. the information in this prospectus reflects the conversion of all of our
outstanding shares of preferred stock into 8,510,748 shares of common
stock upon the closing of this offering,
. the information in this prospectus assumes no exercise of the
underwriters' over-allotment option,
. in this prospectus, "PC-Tel," "we," "us" and "our" refer to PC-Tel, Inc.
and its subsidiaries, and
. all shares referred to in this prospectus reflect a 3 for 2 reverse stock
split that we effected on October 4, 1995.
5
<PAGE>
Summary Consolidated Financial Information
You should read the following summary consolidated financial data together
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated financial statements and related notes
included elsewhere in this prospectus. The adjusted balance sheet data as of
June 30, 1999 reflects the application of the net proceeds from the sale of the
4,600,000 shares of common stock offered by PC-Tel at an assumed offering price
of $16.00 per share, after deducting estimated offering expenses and
underwriting discounts and commissions. Had this offering closed on June 30,
1999, $16.0 million of the proceeds would have been used to repay bank debt.
The adjusted balance sheet data as of June 30, 1999 also reflects the write-off
of deferred debt issuance costs and the expense of the prepayment penalty
related to the bank debt.
<TABLE>
<CAPTION>
Period From
February 10,
1994 Six Months Ended
(inception) to Year Ended December 31, June 30,
December 31, -------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
-------------- ------- ------- ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ -- $ 191 $16,573 $24,009 $33,004 $ 12,343 $ 33,046
Gross profit............ -- 85 7,391 11,085 19,126 6,395 16,049
Income (loss) from
operations............. (283) (1,127) 3,882 2,957 228 732 4,454
Net income (loss)....... (280) (1,093) 3,004 2,301 495 683 2,704
Basic earnings per
share.................. $ -- $ -- $ 4.79 $ 1.13 $ 0.21 $ 0.29 $ 1.10
Diluted earnings per
share.................. $ -- $ -- $ 0.29 $ 0.20 $ 0.04 $ 0.06 $ 0.21
Shares used in computing
basic earnings per
share.................. -- -- 627 2,032 2,355 2,320 2,461
Shares used in computing
diluted earnings per
share.................. -- -- 10,280 11,645 12,325 12,400 12,638
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
--------------------
Adjusted for
Actual the offering
------- ------------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and short-term investments............................ $23,534 $74,182
Total assets............................................... 50,483 99,661
Long-term debt, net of current portion..................... 13,630 --
Total stockholders' equity................................. 17,861 83,113
</TABLE>
----------------
See Note 2 of Notes to the Consolidated Financial Statements for an
explanation of the shares used in computing basic earnings per share and shares
used in computing diluted earnings per share in the above table.
6
<PAGE>
RISK FACTORS
Before you invest in our common stock, you should carefully consider the
various risks, including those described below, together with all of the other
information included in this prospectus. Risks and uncertainties not presently
known to us or that we currently consider to be immaterial may also impair our
business operations. If any of these risks actually occur, our business,
financial condition or operating results could be adversely affected. In that
case, the trading price of our common stock could decline and you could lose
all or part of your investment.
Risks Related to Our Business
Our sales are concentrated among a limited number of customers and the loss of
one or more of these customers could cause our sales 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 six months ended June 30, 1999, approximately 81% of our
revenues were generated by five of our customers, and revenues derived from
sales to Talent Trade Asia, TriGem and Silicon Application Corporation
accounted for 42%, 20% and 10%, respectively, of our product sales. For the
year ended December 31, 1998, approximately 60% of our revenues were generated
by five of our customers, and revenues derived from sales to Silicon
Application Corporation, BTC, Askey Computer and Zoltrix accounted for 15%,
13%, 12% and 12%, respectively, of our product sales. These customers may in
the future decide not to purchase our products at all, purchase fewer products
than they did in the past or alter their purchasing patterns, because:
. we do not have any long-term purchase arrangements or contracts with
these or any of our other customers,
. our product sales to date have been made primarily on a purchase order
basis, which permit 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 and operations concentrated in Asia. Continued
political and economic instability in Asia and difficulty in collecting
accounts receivable may make it difficult for us to maintain or increase market
demand for our products.
Our sales to customers located in Asia accounted for 74%, 77% and 76% of our
total revenues in the years ended December 31, 1996, 1997 and 1998,
respectively, and 77% and 99% of total revenues in the six months ended June
30, 1998 and 1999, respectively. The predominance of our sales are 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. Industry
statistics indicate that approximately two thirds of modems manufactured in
Asia are sold back to original equipment manufacturers located in the United
States. Due to the industry-wide concentration of modem manufacturers in Asia,
we believe
7
<PAGE>
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:
. political and economic instability, such as the recent political
instability in Indonesia and the economic turmoil in Japan,
. changes in tariffs, quotas, import restrictions and other trade barriers
which may make our products more expensive compared to our competitors,
. delays in collecting accounts receivable, which we have experienced from
time to time, and
. 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 which
may in turn make it difficult for us to maintain or increase our
revenues.
To successfully expand our sales in Asia and internationally, we must
strengthen foreign operations, hire additional personnel and recruit additional
international distributors and resellers. This will require significant
management attention and financial resources. To the extent that we are unable
to effect these additions in a timely manner, we may not be able to maintain or
increase market demand for our products in Asia and internationally, and our
operating results could be hurt.
The recent earthquake in Taiwan and subsequent aftershocks may cause our
revenues or profitability to decrease.
Because our products are sold to motherboard or modem manufacturer customers
in Taiwan, the recent earthquake in Taiwan may result in less demand for our
products and may cause our revenues to decrease. Our customers who are outside
of Taiwan may also be dependent on other components manufactured in Taiwan. The
recent earthquake may disrupt the operations of our customers' other suppliers
who are located in Taiwan, and may result in a decrease in demand of our
products. We are also dependent on our suppliers who manufacture product
components in Taiwan. The recent earthquake may disrupt the operations of these
suppliers. If they are not able to adequately supply us, we may not be able to
meet the demand for our products. We do not currently believe that the effect
of this earthquake on our business will be material. However, due to the nature
of this disaster and the fact that its full impact on our business has not been
fully evaluated, our sales to customers in Asia may be affected in the next few
quarters.
Continuing decreases in the average selling prices of our products could result
in decreased revenues.
Product sales in the connectivity industry have been characterized by
continuing erosion of average selling prices. Price erosion experienced by any
company can cause revenues and gross margins to decline. The average selling
price of our products has decreased by approximately 40% from October 1995 to
June 30, 1999. We expect this trend to continue.
In addition, we believe that the widespread adoption of industry standards
in the soft modem industry is likely to further erode average selling prices,
particularly for analog modems. Adoption of industry standards is driven by the
market requirement to have interoperable modems. End users need this
interoperability to ensure modems from different manufacturers communicate with
each other without problems. Historically, users have deferred purchasing
modems until these industry standards are adopted. However, once these
standards are accepted, it lowers the barriers to entry and price erosion has
resulted. Decreasing average selling prices in our products could result in
decreased revenues even if the number of units that we sell increases.
Therefore, we must continue to develop and introduce next generation products
with enhanced functionalities that can be sold at higher gross margins. Our
failure to do this could cause our revenues and gross margin to decline.
Our gross margins may vary based on the mix of sales of our products and
services, and these variations may hurt our net income.
We derive a significant portion of our sales from our software-based
connectivity products. We expect margins on newly introduced products generally
to be higher than our existing products. However, due in part to
8
<PAGE>
the competitive pricing pressures that affect our products and in part to
increasing component and manufacturing costs, we expect margins from both
existing and future products to decrease over time. In addition, licensing
revenues from our products historically have provided higher margins than of
our product sales. Changes in the mix of products sold and the percentage of
our sales in any quarter attributable to products as compared to licensing
revenues will cause our quarterly results to vary and could result in a
decrease in net income.
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 higher during the back-
to-school and holiday seasons which fall in the third and fourth calendar
quarters. Revenue in our third and fourth quarters are typically higher
relative to other quarters because many purchasers of PCs make purchase
decisions based on their calendar year-end budgeting requirements. As a result,
we generally expect revenue levels for the first quarter to be less than those
for the preceding quarter.
We are currently expanding our sales in international markets, particularly
in Asia, Europe and South America. We expect our third quarter to reflect the
effects of summer slowing of international business activity and spending
activity generally associated with that time of year, particularly in Europe.
To the extent that our revenues in Asia, Europe or other parts of the world
increase in future periods, we expect our period-to-period revenues to reflect
seasonal buying patterns in these markets.
Any delays in our normally lengthy sales cycles could result in customers
cancelling purchases of our products.
Sales cycles for our products with major customers are lengthy, often
lasting six months or longer. In addition, it can take an additional six months
or more before a customer commences volume production of equipment that
incorporates our products. Sales cycles with our major customers are lengthy
for a number of reasons:
. our original equipment manufacturer customers usually complete a lengthy
technical evaluation of our products, over which we have no control,
before placing a purchase order,
. the commercial integration of our products by an original equipment
manufacturer is typically limited during the initial release to evaluate
product performance, and
. the development and commercial introduction of products incorporating new
technologies frequently are delayed.
A significant portion of our operating expenses is relatively fixed and is
based in large part on our forecasts of volume and timing of orders. The
lengthy sales cycles make forecasting the volume and timing of product orders
difficult. In addition, the delays inherent in lengthy sales cycles raise
additional risks of customer decisions to cancel or change product phases. If
customer cancellations or product changes were to occur, this could result in
the loss of anticipated sales without sufficient time for us to reduce our
operating expenses.
We expect that our operating expenses will increase substantially in the future
and these increased expenses may diminish our ability to remain profitable.
Although we have been profitable in recent years, we may not remain
profitable on a quarterly or annual basis in the future. We anticipate that our
expenses will increase substantially over at least the next three years as we:
. further develop and introduce new applications and functionality for our
host signal processing technology,
. explore emerging product opportunities in digital technologies and
wireless and cable communications,
. expand our distribution channels, both domestically and in our
international markets, and
. pursue strategic relationships and acquisitions.
9
<PAGE>
In order to maintain profitability we will be required to increase our
revenues to meet these additional expenses. Any failure to significantly
increase our revenues as we implement our product, service, distribution and
strategic relationship strategies would result in a decrease in our overall
revenues.
To date, we have principally relied upon our distributor sales organization
for product sales to smaller accounts. Our direct sales efforts have focused
principally on board manufacturers and smaller PC original equipment
manufacturers. To increase penetration of our target customer base, including
large, tier-one original equipment manufacturers, we must significantly
increase the size of our direct sales force and organize and deploy sales teams
targeted at specific domestic tier-one original equipment manufacturer
accounts. If we are unable to expand our sales to additional original equipment
manufacturers, our revenues may not meet analysts' expectations which could
cause our stock price to drop.
We must accurately forecast our customer demand for our modem products. If
there is an unexpected fluctuation in demand for our products, we may incur
excessive operating costs or lose product revenues.
We must forecast and place purchase orders for specialized semiconductor
chips, the application specific integrated circuit, coder/decoder and discrete
access array, or data access arrangement, components of our modem products,
several months before we receive purchase orders from our own customers. This
forecasting and order lead time requirement limits our ability to react to
unexpected fluctuations in demand for our products. These fluctuations can be
unexpected and may cause us to have excess inventory, or a shortage, of a
particular product. In the event that our forecasts are inaccurate, we may need
to write down excess inventory. For example, we were required to write down
inventory in the second quarter of 1996 in connection with a product transition
within our 14.4 Kbps product family. Similarly, if we fail to purchase
sufficient supplies on a timely basis, we may incur additional rush charges or
we may lose product revenues if we are not able to meet a purchase order. These
failures could also adversely affect our customer relations. Significant write-
downs of excess inventory or declines in inventory value in the future could
cause our net income and gross margin to decrease.
We rely heavily on our intellectual property rights which offer only limited
protection against potential infringers. Unauthorized use of our technology may
result in development of products that compete with our products which could
cause our market share and our revenues to be reduced.
Our success is heavily dependent upon our proprietary technology. We rely
primarily on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. These means of protecting our proprietary rights may not be
adequate. We hold a total of 32 patents, a number of which cover technology
that is considered essential for International Telecommunications Union
standard communications solutions, and also have 26 additional patent
applications pending or filed. These patents may never be issued. These
patents, both issued and pending, may not provide sufficiently broad protection
against third party infringement lawsuits or they may not prove enforceable in
actions against alleged infringers. Other than the Motorola and ESS lawsuits
described elsewhere in this prospectus, to date, no material lawsuits relating
to intellectual property have been filed against us.
Despite precautions that we take, it may be possible for unauthorized third
parties to copy aspects of our current or future products or to obtain and use
information that we regard as proprietary. We may provide our licensees with
access to our proprietary information underlying our licensed applications.
Additionally, our competitors may independently develop similar or superior
technology. Finally, policing unauthorized use of software is difficult and
some foreign laws, including those of various countries in Asia, do not protect
our proprietary rights to the same extent as United States laws. Litigation may
be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Litigation could result in substantial costs and
diversion of resources.
We have received, and may receive in the future, communications from third
parties asserting that our products infringe on their intellectual property
rights. These claims could affect our relationships with existing customers and
may prevent potential future customers from purchasing our products or
licensing our
10
<PAGE>
technology. Because we depend upon a limited number of products, any claims of
this kind, whether they are with or without merit, could be time consuming,
result in costly litigation, cause product shipment delays or require us to
enter into royalty or licensing agreements. In the event that we do not prevail
in litigation, we could be prevented from selling our products or be required
to enter into royalty or licensing agreements on terms which may not be
acceptable to us. We could also be prevented from selling our products or be
required to pay substantial monetary damages. Should we cross license our
intellectual property in order to obtain licenses, we may no longer be able to
offer a unique product.
New patent applications may be currently pending or filed in the future by
third parties covering technology that we use currently or may use in the
future. Pending U.S. patent applications are confidential until patents are
issued, and thus it is impossible to ascertain all possible patent infringement
claims against us. We believe that several of our competitors, including
Motorola, Lucent and ESS Technology, may have a strategy of protecting their
market share by filing intellectual property claims against their competitors
and may assert claims against us in the future. The legal and other expenses
and diversion of resources associated with any such litigation could result in
a decrease in our revenues.
In addition, some of our customer agreements include an indemnity clause
that obligates us to defend and pay all damages and costs finally awarded by a
court should third parties assert patent and/or copyright claims against our
customers. As a result, we may be held responsible for infringement claims
asserted against our customers.
If our financial reserves for potential future license fees are less than any
actual fees that we are required to pay, our net income would be reduced.
We have established and recorded on a monthly basis a financial per-unit
reserve for payment of future license fees based upon our estimate as to the
likely amount of the licensing fees that we may be required to pay in the event
that licenses are obtained. We believe that it is typical for participants in
the modem industry to obtain licenses in exchange for grants of cross licenses
rather than for payment of fees and we have based our estimates on our
understanding of the license fee practices of other segments of our industry.
Our reserves may not be adequate because of factors outside of our control and
because these license fee practices in the modern industry may not be
applicable to our experience.
Competition in the connectivity market is intense, and if we are unable to
compete effectively, the demand for, or the prices of, our products may be
reduced.
The connectivity device market is intensely competitive. We may not be able
to compete successfully against current or potential competitors. Our current
competitors include 3Com, Conexant, ESS Technology, Lucent Technologies and
Motorola. Motorola introduced soft modems in the third quarter of 1998 and
Conexant introduced soft modems in the fourth quarter of 1998. We expect
competition to increase in the future as current competitors enhance their
product offerings, new suppliers enter the connectivity device market, new
communication technologies are introduced and additional networks are deployed.
We may in the future also face competition from other suppliers of products
based on host signal processing technology or on new or emerging communication
technologies, which may render our existing or future products obsolete or
otherwise unmarketable. We believe that these competitors may include Alcatel,
Analog Devices, Aware, Broadcom, Com21, Efficient Networks, Orckit, Terayon
Communications and Texas Instruments.
We believe that the principal competitive factors required by users and
customers in the connectivity product market include compatibility with
industry standards, price, functionality, ease of use and customer service and
support. Although we believe that our products currently compete favorably with
respect to these factors, we may not be able to maintain our competitive
position against current and potential competitors.
11
<PAGE>
We recently hired a new President and Chief Operating Officer. If he is not
successful in carrying out his duties, we may not be able to maintain our
current profitability or increase our revenue.
In August 1999, we hired William F. Roach as our new President and Chief
Operating Officer. Mr. Roach must be successfully integrated into our
organizational structure. If for any reason Mr. Roach does not successfully
carry out his duties or lead our organization in an effective manner, we may
not be able to maintain our current profitability or increase our revenue.
In order for us to maintain our profitability and continue to introduce and
develop new products for emerging markets, we must attract and retain our
executive officers and qualified technical, sales, support and other
administrative personnel.
Our past performance has been and our future performance is substantially
dependent on the performance of our current executive officers and certain key
engineering, sales, marketing, financial, technical and customer support
personnel. If we lost the services of one or more of our executives or key
employees, a replacement could be difficult to recruit and we may not be able
to grow our business.
We maintain "key person" life insurance policies on Peter Chen, our Chairman
and Chief Executive Officer, William Wen-Liang Hsu, our Vice President,
Engineering, and Han Yeh, our Vice President, Technology, in the face amount of
$1 million for each individual. However, these insurance policies may not
adequately compensate for the loss of services of any of these individuals.
We intend to hire a significant number of additional engineering, sales,
support, marketing and finance personnel in the future. Competition for
personnel, especially engineers and marketing and sales personnel in Silicon
Valley, is intense. We are particularly dependent on our ability to identify,
attract, motivate and retain qualified engineers with the requisite education,
backgrounds and industry experience. As of June 30, 1999, we employed a total
of 58 people in our engineering department, over half of whom have advanced
degrees. In the past we have experienced difficulty in recruiting qualified
engineering personnel, especially developers, on a timely basis. If we are not
able to hire at the levels that we plan, our ability to continue to develop
products and technologies responsive to our markets will be impaired.
12
<PAGE>
We have experienced significant growth in our business in recent periods and
failure to manage our 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 expansion efforts could be expensive and put a strain on our
management by significantly increasing the scope of their responsibilities and
resources by increasing the number of people using them. We have increased, and
plan to continue to increase, the scope of our operations at a rapid rate. Our
headcount has grown and will continue to grow substantially. At December 31,
1998, we had a total of 95 employees and at June 30, 1999, we had a total of
125 employees. In addition, we expect to continue to hire a significant number
of new employees. To effectively manage our growth, we must maintain and
enhance our financial and accounting systems and controls, integrate new
personnel and manage expanded operations.
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, assembling or testing operations.
Instead, we rely on independent companies to manufacture, assemble and test the
semiconductor chips which are integral components of our products. Most of
these companies are located outside of the United States. There are many risks
associated with our relationships with these independent companies, including
reduced control over:
. delivery schedules,
. quality assurance,
. manufacturing costs,
. capacity during periods of excess demand, and
. availability of 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.
While to date we have not experienced any material problems, 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 a third
party fabrication. The majority of our products and related components are
manufactured by five principal companies: Taiwan Semiconductor Manufacturing
Corporation, ST Microelectronics, Kawasaki/LSI, Silicon Labs and Delta
Integration. We expect to continue to rely upon these third parties for these
services. Currently, the data access arrangement chips used in our soft modem
products are provided by a sole source, Silicon Labs, on a purchase order
basis, and we have only a limited guaranteed supply arrangement under a
contract with our supplier. We are currently in the process of qualifying a
second source for our data access arrangement chips. Although we believe that
we would be able to qualify an alternative manufacturing source for data access
arrangement chips within a relatively short period of time, this transition, if
necessary, could result in loss of purchase orders or customer relationships,
which could result in decreased revenues.
Undetected software errors or failures found in new products may result in loss
of customers or delay in market acceptance of our products.
Our products may contain undetected software errors or failures when first
introduced or as new versions are released. To date, we have not been made
aware of any significant software errors or failures in our products. However,
despite testing by us and by current and potential customers, errors may be
found in new products after commencement of commercial shipments, resulting in
loss of customers or delay in market acceptance.
13
<PAGE>
If we, our key suppliers or our customers fail to be ready for the year 2000
calendar change, our business may be disrupted and our net revenues may
decline.
The Year 2000 issue refers to computer programs which use two digits rather
than four to define a given year and which might read a date using "00" as the
year 1900 rather than the Year 2000. As a result, many companies' systems and
software may need to be upgraded or replaced in order to function correctly
after December 31, 1999.
Our Software. Our connectivity products are incorporated into computer
products of our customers which may not be Year 2000 compliant, or which may be
perceived by their markets as not meeting Year 2000 compliance requirements. As
a result, it is likely that any failure of the computer products into which our
products may be incorporated to be Year 2000 compliant, or any slowdown in the
connectivity markets as a result of Year 2000 compliance concerns, will hurt
our product sales. In addition, we believe that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct or upgrade their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase our products. To the extent Year 2000
issues cause a significant delay in, or cancellation of, decisions to purchase
our products or services, our business would suffer. In the ordinary course of
our business, we test and evaluate our software modems. We believe that our
current products are Year 2000 compliant, meaning that the use or occurrence of
dates on or after January 1, 2000 will not materially affect the performance of
our software products or the ability of our products to transmit data involving
dates.
Third Party Equipment And Software. We use third party equipment and
software that may not be Year 2000 compliant. This equipment and software
includes our key internal systems such as for our internal accounting systems
or controls. If this equipment or software does not operate properly with
regard to the Year 2000, we may incur unexpected expenses to remedy any
problems. These costs may materially adversely affect our business. In
addition, if our key internal systems fail as a result of Year 2000 problems,
we could incur substantial costs and disruption of our business.
Compliance. Despite our current assessment, we may not identify and correct
all significant Year 2000 problems on a timely basis. Year 2000 compliance
efforts may involve significant time and expense and unremediated problems
could harm our business, financial condition and operating results. We
currently do not have any estimate of potential costs related to potential Year
2000 problems. We currently do not have plans to contact our material
customers. We currently have no contingency plans to address the risks
associated with unremediated Year 2000 problems. To date, we have not incurred
any material costs directly associated with Year 2000 compliance efforts,
except for compensation expense associated with salaried employees who have
devoted some of their time to Year 2000 assessment and remediation efforts. We
do not expect the total cost of Year 2000 problems to be material to our
business, financial condition or operating results. However, during the months
prior to the century change, we will continue to evaluate new versions of our
products, new software and information systems provided by third parties and
any new infrastructure systems that we acquire, to determine whether they are
Year 2000 compliant.
14
<PAGE>
Risks Related to Our Industry
If the market for applications using our host signal processing technology does
not grow as we anticipate, or if our products are not accepted in this market,
our revenues may stagnate and may decrease.
Our success depends on the growth of the market for applications using our
host signal processing technology. This market has only recently begun to
develop and may not develop at the growth rates that have been suggested by
industry estimates. Market demand for host signal processing technology depends
primarily upon the cost and performance benefits relative to other competing
solutions. For example, soft modems have only recently begun to gain acceptance
in the modem market. Although we have shipped a significant number of soft
modems since we began commercial sales of these products in October 1995, the
current level of demand for soft modems may not be sustained or may not grow.
If customers do not accept soft modems or the market for soft modems does not
grow, our revenues will decrease.
Further, we are in the process of developing next generation products and
applications which improve and extend upon our host signal processing
technology, such as a G.Lite modem solution, an external modem product and a
remote access solution. If these products are not accepted in our markets when
they are introduced, our revenues and profitability will be negatively
affected.
Our industry is characterized by rapidly changing technologies. If we do not
adapt to these technologies, our products will become obsolete.
The connectivity product market is characterized by rapidly changing
technologies, limited product life cycles and frequent new product
introductions. To remain competitive in this market, we have been required to
introduce many products over a limited period of time. For example, we
introduced a 14.4 Kbps product in 1995, a 28.8 Kbps product in 1996, a 33.6
Kbps product in late 1996, a non-International Telecommunications Union
standard 56 Kbps modem in the second half of 1997 and a v.90 International
Telecommunications Union standard 56 Kbps modem in early 1998. The market for
high speed data transmission is also characterized by several competing
technologies that offer alternative broadband solutions which allow for higher
modem speeds and faster internet access. These competing broadband technologies
include x-digital subscriber line, wireless and cable. However, substantially
all of our current product revenue is derived from sales of analog modems,
which use a more conventional technology. We must continue to develop and
introduce technologically advanced products that support one or more of these
competing broadband technologies. If we are not successful in our response, our
products will become obsolete we will not be able to compete effectively.
Changes in laws or regulations, in particular, future FCC regulations affecting
the broadband market, internet service providers, or the communications
industry could negatively affect our ability to develop new technologies or
sell new products and therefore, reduce our profitability.
The jurisdiction of the Federal Communications Commission, or FCC, extends
to the entire communications industry, including our customers and their
products and services that incorporate our products. Future FCC regulations
affecting the broadband access services industry, our customers or our products
may harm our business. For example, future FCC regulatory policies that affect
the availability of data and internet services may impede our customers'
penetration into their markets or affect the prices that they are able to
charge. In addition, international regulatory bodies are beginning to adopt
standards for the communications industry. Although our business has not been
hurt by any regulations to date, in the future, delays caused by our compliance
with regulatory requirements may result in order cancellations or postponements
of product purchases by our customers, which would reduce our profitability.
15
<PAGE>
Risks Related to this Offering
Substantial future sales of our common stock in the public market may depress
our stock price.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our common stock after this offering could
cause our stock price to fall. In addition, the sale of these shares could
impair our ability to raise capital through the sale of additional stock. You
should read "Shares Eligible for Future Sale" for a full discussion of shares
that may be sold in the public market in the future.
Our current officers and directors will retain a significant portion of our
stock, which may lead to conflicts with other stockholders over corporate
governance.
Upon completion of this offering, our officers, directors and persons or
entities directly related to these individuals will together beneficially own
approximately 37% of the outstanding shares. In particular, WK Technology Funds
owns approximately 17.2% and Peter Chen owns 11.7% of the shares. As a result,
WK Technology Funds and our officers and directors, in general, will be able to
control most matters requiring stockholder approval. These matters would
include the election of our directors and approval of potential mergers,
consolidations or sales of all or substantially all of our assets.
Our stock price may be volatile and you may not be able to resell your shares
at or above the initial public offering price.
There has been no public market for our common stock prior to this offering.
The initial public offering price for our common stock will be determined
through negotiations between the underwriters and us. This initial public
offering price may vary from the market price of our common stock after the
offering. If you purchase shares of common stock, you may not be able to resell
those shares at or above the initial public offering price. The market price of
our common stock may fluctuate significantly in response to many factors, some
of which are beyond our control, including the following:
. actual or anticipated fluctuations in our operating results,
. changes in market valuations of other technology companies in the
communications market,
. announcements by us or our competitors of significant technical
innovations, contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments,
. losses of our major original equipment manufacturer customers or
distributors,
. additions or departures of our key personnel, and
. sales of our common stock in the future.
In addition, the stock market has experienced extreme volatility that often
has been unrelated to the performance of particular companies. These market
fluctuations may cause our stock price to fall regardless of our performance.
You should read the "Underwriting" section for a more complete discussion of
the factors which will be considered in determining the initial public offering
price of our common stock.
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
16
<PAGE>
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.
Upon the closing of the offering, our board of directors will have 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 the our stockholders. As a result, the market price
of the our common stock may drop.
Our securities have no prior market. Our stock price may decline after the
offering which may lead to losses by investors.
The trading market price of our common stock may decline below the initial
public offering price. In addition, an active public market for our common
stock may not develop or be sustained after this offering. Before this
offering, there has not been a public market for our common stock. The initial
public offering price will be determined by negotiations between PC-Tel and the
representatives of the underwriters.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business," contains forward looking statements.
These statements relate to future events or our future financial performance,
and involve known and unknown risks and uncertainties that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward looking statements. These
risks include those listed under "Risk Factors" and elsewhere in this
prospectus. In some cases, you can identify forward looking statements by
terminology such as "may," "will," "should," "expects," "intends," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "continue," or
the negative of these terms or other comparable terminology. These statements
are only predictions. Actual events or results may differ materially. In
evaluating these statements, you should specifically consider various factors,
including the risks outlined under "Risk Factors." These factors may cause our
actual results to differ materially from any forward looking statement.
17
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds of $66,648,000 from the sale
of 4,600,000 shares of common stock based on an assumed initial offering price
of $16.00 per share (or $76,915,000 assuming the underwriters' over-allotment
option of 690,000 shares is exercised in full) after deducting estimated
offering expenses and underwriting discounts and commissions.
The principal purposes of this offering are to obtain additional capital,
create a public market for our common stock and facilitate our future access to
public securities markets.
We currently expect to use $15.7 million of the proceeds of this offering to
repay bank debt. Had this offering closed on June 30, 1999, the amount used to
repay bank debt would have equaled $16.0 million. This debt bears interest at
the bank's prime interest rate plus 0.5%. Absent the prepayment, this debt is
to be repaid in 60 monthly payments ending in January 2004. The prepayment of
this debt will result in a 3% penalty of approximately $455,000, which will be
paid through the application of the net proceeds of this offering. The interest
savings resulting from the prepayment will more than offset the prepayment
penalty. We entered into this debt to fund our acquisition in December 1998 of
Communications Systems Division from General DataComm Inc.
We will use the remaining proceeds from this offering for general corporate
purposes, including working capital. We also may use a portion of the net
proceeds to acquire complementary products, technologies or businesses.
However, we currently have no commitments or agreements and are not involved in
any negotiations for any of these transactions. Pending use of the net proceeds
of this offering, we intend to invest the net proceeds in short-term, interest-
bearing securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends.
18
<PAGE>
CAPITALIZATION
The following table presents our capitalization as of June 30, 1999:
. on an actual basis, and
. on a pro forma basis adjusted to give effect to the receipt by us of the
estimated net proceeds from the sale of 4,600,000 shares of common stock
in this offering at an assumed initial public offering price of $16.00
per share and the repayment of outstanding bank debt for $16.0 million
as of June 30, 1999.
The adjusted balance sheet data as of June 30, 1999 also reflects the write-off
of deferred debt issuance costs and the expense of the prepayment penalty
related to the bank debt.
The outstanding share information in the table excludes, as of June 30, 1999,
3,815,710 shares of common stock underlying outstanding stock options under our
1995 and 1997 stock plans, and 202,417 shares of common stock issuable upon
exercise of outstanding warrants. The outstanding share information in the
table also does not reflect option grants under our 1997 stock plan made during
the period between July 1 and August 3, 1999 for the purchase of 565,390
shares, including an option grant to purchase 400,000 shares of common stock to
Mr. William F. Roach, who became our President and Chief Operating Officer in
August 1999.
<TABLE>
<CAPTION>
June 30, 1999
------------------------------
Pro Forma
After the
Actual Offering
------------- ---------------
(in thousands, except share
and per share data)
<S> <C> <C>
Current portion of long-term debt............... $ 1,847 $ --
------------- -------------
Long-term debt, net of current portion.......... 13,630 --
------------- -------------
Stockholders' equity:
Preferred stock: par value $0.001 per share,
aggregate liquidation preference of $10,015,
9,385,548 shares authorized, 8,510,748 issued
and outstanding, actual; zero shares issued
and outstanding pro forma after the offering.. 9 --
Common stock: par value $0.001 per share,
50,000,000 shares authorized, 2,491,330 issued
and outstanding, actual; 15,602,078 shares
issued and outstanding, pro forma after the
offering...................................... 2 16
Additional paid-in-capital...................... 12,881 79,524
Deferred compensation........................... (2,162) (2,162)
Retained earnings............................... 7,131 5,735
------------- -------------
Total stockholders' equity...................... 17,861 83,113
------------- -------------
Total capitalization............................ $ 33,338 $ 83,113
============= =============
</TABLE>
19
<PAGE>
DILUTION
Net tangible book value per share of common stock represents the amount of
our total tangible assets less total liabilities, divided by the number of
shares of common stock outstanding. Dilution in net tangible book value per
share represents the difference between the amount per share paid by purchasers
of shares of common stock in this offering and the pro forma as adjusted net
tangible book value per share immediately after the completion of this
offering.
Our pro forma net tangible book value as of June 30, 1999 was approximately
$6.7 million, or $0.61 per share of common stock. Pro forma net tangible book
value per share represents total tangible assets less total liabilities,
divided by the number of outstanding shares of common stock. Our pro forma net
tangible book value per share stated here gives effect to the conversion of all
outstanding shares of preferred stock into 8,510,748 shares of common stock
effective immediately upon the closing of this offering. After giving effect to
the sale of the 4,600,000 shares of common stock offered by us at an assumed
initial public offering price of $16.00 per share and after deducting
underwriting discounts and estimated offering expenses, the pro forma as
adjusted net tangible book value at June 30, 1999 would have been approximately
$73.4 million, or approximately $4.70 per share of common stock. This
represents an immediate increase in net tangible book value of $4.09 per share
to existing stockholders and an immediate dilution in net tangible book value
of $11.30 per share to new investors of common stock in this offering. The
following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $16.00
Pro forma net tangible book value per share at June 30, 1999.. $0.61
Increase per share attributable to this offering.............. 4.09
-----
Pro forma as adjusted net tangible book value per share after
this offering................................................ 4.70
------
Dilution per share to new investors........................... $11.30
======
</TABLE>
The table above excludes, as of June 30, 1999, 3,815,710 shares of common
stock at a weighted average exercise price of $5.72 per share covered by
outstanding options under our 1995 and 1997 stock plans, and 202,417 shares of
common stock at an exercise price of $8.00 per share issuable upon exercise of
outstanding warrants.
The following table presents, on a pro forma basis adjusted for the offering
as of June 30, 1999, the differences between the number of shares of common
stock purchased from us, the total consideration paid and the average price per
share paid by existing stockholders and by new investors, before deducting
underwriting discounts and commissions and estimated offering expenses, at an
assumed initial public offering price of $16.00 per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 11,002,078 70.5% $10,156,798 12.1% $ 0.92
New investors.................. 4,600,000 29.5% 73,600,000 87.9% $16.00
---------- ----- ----------- -----
Total........................ 15,602,078 100.0% $83,756,798 100.0%
========== ===== =========== =====
</TABLE>
If the underwriters' over-allotment option is exercised in full, the
percentage of shares of common stock held by existing stockholders after this
offering would be reduced to approximately 67.5% and the number of shares of
common stock held by new investors would increase to 5,290,000 or approximately
32.5% of the total number of shares of common stock outstanding after this
offering.
20
<PAGE>
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 prospectus.
The statement of operations data for the years ended December 31, 1996, 1997
and 1998 and the balance sheet data as of December 31, 1997 and 1998 are
derived from audited financial statements included elsewhere in this
prospectus. The statement of operations data for the period from inception to
December 31, 1994 and year ended December 31, 1995 and the balance sheet data
as of December 31, 1994, 1995 and 1996 are derived from audited financial
statements not included in this prospectus. There was no common stock
outstanding for the period from inception to December 31, 1994 and for the year
ended December 31, 1995. The operating results for the year ended December 31,
1998 includes the $6.1 million write-off of in-process research and development
costs related to PC-Tel's acquisition of CSD in December 1998. The balance
sheet data as of June 30, 1999 and the statement of operations data for the six
months ended June 30, 1998 and 1999 are unaudited, have been prepared on the
same basis as the audited statements and, in the opinion of management, contain
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair representation of PC-Tel's operating results for these periods and
financial condition at this date. The operating results for the six-month
period ended June 30, 1999 are not necessarily indicative of the results to be
expected for any other interim period or any future fiscal year.
<TABLE>
<CAPTION>
Period From Six Months
February 10, 1994 Year Ended December 31, Ended June 30,
(inception) to ---------------------------------------- ----------------
December 31, 1994 1995 1996 1997 1998 1998 1999
----------------- --------- --------- --------- --------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ -- $ 191 $ 16,573 $ 24,009 $ 33,004 $12,343 $33,046
Cost of revenues........ -- 106 9,182 12,924 13,878 5,948 16,997
----- --------- --------- --------- --------- ------- -------
Gross profit............ -- 85 7,391 11,085 19,126 6,395 16,049
----- --------- --------- --------- --------- ------- -------
Operating expenses:
Research and
development........... 198 822 2,152 3,348 4,932 2,455 4,423
Sales and marketing.... 42 275 839 3,168 5,624 2,407 4,945
General and
administrative........ 43 115 477 1,612 2,169 791 2,063
Acquired in-process
research and
development........... -- -- -- -- 6,130 -- --
Amortization of
deferred compensation
expense............... -- -- 41 -- 43 10 164
----- --------- --------- --------- --------- ------- -------
Total operating
expenses............ 283 1,212 3,509 8,128 18,898 5,663 11,595
----- --------- --------- --------- --------- ------- -------
Income (loss) from
operations............. (283) (1,127) 3,882 2,957 228 732 4,454
----- --------- --------- --------- --------- ------- -------
Other income (expense),
net:
Interest income........ 4 35 127 299 504 254 303
Interest expense....... -- -- -- -- (25) (11) (895)
----- --------- --------- --------- --------- ------- -------
Total other income
(expense), net...... 4 35 127 299 479 243 (592)
----- --------- --------- --------- --------- ------- -------
Income (loss) before
provision for income
taxes.................. (279) (1,092) 4,009 3,256 707 975 3,862
Provision for income
taxes.................. 1 1 1,005 955 212 292 1,158
----- --------- --------- --------- --------- ------- -------
Net income (loss)....... $(280) $ (1,093) $ 3,004 $ 2,301 $ 495 $ 683 $ 2,704
===== ========= ========= ========= ========= ======= =======
Basic earnings per
share.................. $ -- $ -- $ 4.79 $ 1.13 $ 0.21 $ 0.29 $ 1.10
===== ========= ========= ========= ========= ======= =======
Diluted earnings per
share.................. $ -- $ -- $ 0.29 $ 0.20 $ 0.04 $ 0.06 $ 0.21
===== ========= ========= ========= ========= ======= =======
Shares used in computing
basic earnings per
share.................. -- -- 627 2,032 2,355 2,320 2,461
Shares used in computing
diluted earnings per
share.................. -- -- 10,280 11,645 12,325 12,400 12,638
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of June 30,
------------------------------------- ---------------
1994 1995 1996 1997 1998 1998 1999
----- ------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and short-term
investments............ $ 594 $ 1,676 $ 5,585 $ 6,685 $12,988 $12,372 $23,534
Working capital......... 702 3,068 6,236 12,840 14,011 13,274 16,361
Total assets............ 747 3,980 14,110 23,148 45,996 25,930 50,483
Long term debt, net of
current portion........ -- 3 5 38 14,709 21 13,630
Total stockholders'
equity................. 746 3,228 6,689 13,610 15,139 14,070 17,861
</TABLE>
21
<PAGE>
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
prospectus. 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, revenue mix and plans for addressing Year 2000 issues. These forward
looking statements include, among others, those statements including the words,
"may," "will," "plans," "seeks," "expects," "anticipates," "intends,"
"believes" and similar language. Our actual results may differ significantly
from those discussed in the forward looking statements. 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 "Risk
Factors" and elsewhere in this prospectus.
Overview
We provide cost-effective software-based connectivity solutions that address
internet access and other communications requirements for existing analog and
emerging broadband networks. Analog networks use the existing copper
infrastructure which provides voice and data services, commonly referred to as
the public telephone network. Broadband networks use communication
infrastructures that enhance voice and data transmission capacity beyond that
which is offered by public telephone networks. Our communications products
enable internet access through desktop PCs, notebook computers and non-PC
devices. From our inception in February 1994 through the end of 1995, we were a
development stage company primarily engaged in product development, product
testing and the establishment of strategic relationships with customers and
suppliers. From 1996 to 1999, our total headcount increased to support
corporate growth from 18 at the end of 1995 to 125 at June 30, 1999. We first
recognized revenues on product sales in the fourth quarter of 1995, and became
profitable in 1996, our first full year of product shipments. Revenues
increased from $16.6 million in 1996 to $24.0 million in 1997 to $33.0 million
in 1998. Revenues for the six months ended June 30, 1999 were $33.0 million.
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 74.4%,
77.1% and 75.9% of our total sales for the years ended 1996, 1997 and 1998,
respectively, and 76.9% and 98.6% for the six months ended June 30, 1998 and
1999, respectively. The predominance of our sales are 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. Industry
statistics indicate that approximately two-thirds of modems manufactured in
Asia are sold back to original equipment manufacturers located in the United
States.
We recognize revenues from product sales to customers upon shipment. We
provide for estimated sales returns, allowances and discounts related to these
sales at the time of shipment. We recognize revenues from product sales to
distributors only when the distributors have sold the product to the end user.
We recognize revenues from non-recurring engineering contracts as contract
milestones are achieved.
In the fourth quarter of 1998, we acquired substantially all of the assets
and selected liabilities of Communications Systems Division of General
DataComm, Inc., for a total purchase price of $17.0 million. We began to
recognize revenues in the three months ended June 30, 1999 from licensing the
patent portfolio that we acquired in this acquisition. These revenues are
recognized based on confirmation from licensees of the royalty payments due to
us.
22
<PAGE>
Results of Operations
The following table presents the results of our operations expressed as a
percentage of total revenues.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................ 55.4 53.8 42.0 48.2 51.4
------- ------- ------- -------- --------
Gross profit.................. 44.6 46.2 58.0 51.8 48.6
------- ------- ------- -------- --------
Operating expenses:
Research and development...... 13.0 13.9 14.9 19.9 13.4
Sales and marketing........... 5.1 13.2 17.0 19.5 15.0
General and administrative.... 2.9 6.7 6.6 6.4 6.2
Acquired in-process research
and development.............. -- -- 18.6 -- --
Amortization of deferred
compensation expense......... 0.2 -- 0.1 0.1 0.5
------- ------- ------- -------- --------
Total operating expenses.... 21.2 33.8 57.2 45.9 35.1
------- ------- ------- -------- --------
Operating income................ 23.4 12.4 0.8 5.9 13.5
------- ------- ------- -------- --------
Other income (expense), net:
Interest income............... 0.8 1.2 1.5 2.1 0.9
Interest expense.............. -- -- (0.1) (0.1) (2.7)
------- ------- ------- -------- --------
Total other income
(expense), net............. 0.8 1.2 1.4 2.0 (1.8)
Income before provision for
income taxes................... 24.2 13.6 2.2 7.9 11.7
Provision for income taxes...... 6.1 4.0 0.6 2.4 3.5
------- ------- ------- -------- --------
Net income...................... 18.1% 9.6% 1.6% 5.5% 8.2%
======= ======= ======= ======== ========
</TABLE>
Six Months Ended June 30, 1998 and 1999
(All amounts in tables, other than percentages, are in thousands)
Revenues
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
June 30,
---------------
1998 1999
------- -------
<S> <C> <C>
Revenues....................................................... $12,343 $33,046
% change from prior period..................................... N/A 167.7%
</TABLE>
- --------------------------------------------------------------------------------
Our historical revenues primarily consisted of product sales of soft modems
to board manufacturers and distributors in Asia. Net revenues include estimated
sales returns and discounts and allowances for bad debts. License fee revenues
during the first six months of 1999 represented less than 1% of total revenues
for the six months ended June 30, 1999.
The 167.7% increase in revenues for the six months ended June 30, 1999 over
the same period in the previous year was attributable to an increase in unit
sales in 1999. We believe that this unit increase was due principally to the
general acceptance of our products in the low cost, or sub-$1,000, PC
marketplace, the increase of market share of our MicroModem product and the
certification by Microsoft of its Windows 98 logo for our products. The benefit
of increased sales volume was partly offset by average selling prices going
down by 50% due to the elimination of an additional major hardware component in
the MicroModem product and sales discounts to customers of approximately
$600,000.
23
<PAGE>
Gross Profit
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------
1998 1999
-------- --------
<S> <C> <C>
Gross profit................................................. $ 6,395 $ 16,049
Percentage of revenues....................................... 51.8% 48.6%
% change from prior period................................... N/A 151.0%
</TABLE>
- --------------------------------------------------------------------------------
Cost of revenues consists primarily of chipsets which we purchase from third
party manufacturers and also includes amortization of intangibles related to
our acquisition of the Communications Systems Division in December 1998,
accrued intellectual property royalties, cost of operations, reserves for
inventory obsolescence and distribution costs. The royalties accrued are our
best estimate based on royalty agreements already signed, or in negotiation, as
well as advice from patent counsel. Upon consummation of the Communications
Systems Division acquisition, we reduced our royalty reserves because we
believe that we can obtain necessary licenses of the patent portfolio in
exchange for grants of cross licenses rather than the payment of fees.
Gross profit increased $9.7 million, or 151.0%, to $16.0 million for the six
months ended June 30, 1999 from $6.4 million for the same period the previous
year. The increase in gross profit was the direct result of increased revenues.
However, as a percentage of revenues, gross profit decreased from 51.8% for the
six months ended June 30, 1998 to 48.6% for the same period in 1999. Average
selling prices decreased faster than the rate of cost reduction, which
adversely affected our gross profit margins. We believe that decreases in the
average selling price of our products through volume discounts have resulted in
our attaining greater market share.
Research and Development
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
Research and development.................................... $ 2,455 $ 4,423
Percentage of revenues...................................... 19.9% 13.4%
% change from prior period.................................. N/A 80.2%
</TABLE>
- --------------------------------------------------------------------------------
Research and development expenses include compensation costs for software
and hardware development, prototyping, certification and pre-production costs.
We expense all research and development costs as incurred.
Research and development expenses increased for the six months ended June
30, 1999 due to the addition of personnel for new product development in the
G.Lite, Modem Riser Card and HIDRA projects and engineering work related to
v.90 modems. HIDRA refers to one of our product names and is also an acronym
for High Density Remote Access. As a percentage of revenues, research and
development decreased for the six months ended June 30, 1999 because revenues
increased proportionally greater than research and development expenses.
Approximately 70% of all research and development expenses are payroll related.
The headcount in this area increased approximately 87% from the same period in
the prior year, which included 18 additional staff members from the
Communications Systems Division acquisition in December 1998. We expect that
our research and development expenses will increase in absolute dollars due to
the anticipated additional headcount and continued efforts in broadband product
development.
Sales and Marketing
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
Sales and marketing......................................... $ 2,407 $ 4,945
Percentage of revenues...................................... 19.5% 15.0%
% change from prior period.................................. N/A 105.4%
</TABLE>
- --------------------------------------------------------------------------------
24
<PAGE>
Sales and marketing expenses consist primarily of personnel costs, sales
commissions and marketing costs. Marketing costs include promotional goods,
trade shows, press tours and advertisements in trade magazines.
Sales and marketing expenses increased $2.5 million for the six months ended
June 30, 1999, but decreased as a percentage of total revenues, compared to the
same period in the prior year. The dollar increase reflects the addition of
sales and marketing personnel and related costs of $1.8 million to develop new
accounts, support customers, and drive new product developments and product
launches. We also expanded our sales regions geographically to include Japan
and Korea. The increase in sales and marketing expenses is also due to
increased governmental telephony certification of our products of $200,000 in
Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the
Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United
Kingdom, the production of sales materials of $100,000, travel costs of
$200,000, and other costs of $200,000.
General and Administrative
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1998 1999
-------- ---------
<S> <C> <C>
General and administrative.................................. $ 791 $ 2,063
Percentage of revenues...................................... 6.4% 6.2%
% change from prior period.................................. N/A 160.8%
- --------------------------------------------------------------------------------
General and administrative expenses include costs associated with our
general management, human resources 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.
These general and administrative expenses increased $1.3 million for the six
months ended June 30, 1999, over the same period in the prior year but
decreased as a percentage of total revenues, compared to the same period in the
prior year. This increase reflected additional legal and professional costs of
$800,000 related to contract negotiations, patent submissions, additional tax
planning, as well as litigation expenses related to the Motorola lawsuit. We
also incurred additional expenses related of $300,000 to the increase in staff.
Amortization of Deferred Compensation Expense
- --------------------------------------------------------------------------------
<CAPTION>
Six Months Ended
June 30,
------------------
1998 1999
-------- ---------
<S> <C> <C>
Amortization of deferred compensation expense............... $10 $164
Percentage of revenues...................................... 0.1% 0.5%
% change from prior period.................................. N/A 1,540%
</TABLE>
- --------------------------------------------------------------------------------
In connection with the grant of stock options to employees, we amortized
$164,000 in deferred compensation for the six months ended June 30, 1999. The
deferred compensation expense related to the grant of stock options to
employees for the six months ended June 30, 1998 was $10,000. We expect that
the deferred compensation expense will increase to approximately $340,000 per
quarter through the third quarter of 2003, based on option grant activity
through August 3, 1999.
Other Income (Expense), Net
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------
1998 1999
-----------------
<S> <C> <C>
Other income (expense), net................................. $ 243 $(592)
Percentage of revenues...................................... 2.0% (1.8)%
% change from prior period.................................. N/A (343.6)%
</TABLE>
- --------------------------------------------------------------------------------
25
<PAGE>
Other income (expense), net, consists of interest income, net of interest
expense. Interest income is expected to fluctuate over time. Interest expense
will continue to consist primarily of interest on capital leases and the $16.3
million loan issued to acquire Communications Systems Division. Other income
(expense), net, decreased $835,000 for the six months ended June 30, 1999 over
the same period for the prior year. The decrease was due primarily to the
interest expense related to the bank loan issued to acquire the Communications
Systems Division. We intend to repay the bank loan following completion of the
offering.
Provision for Income Taxes
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1998 1999
-------- ---------
<S> <C> <C>
Provision for income taxes.................................. $292 $ 1,158
Effective tax rate.......................................... 30.0% 30.0%
% change from prior period.................................. N/A 296.6%
</TABLE>
- --------------------------------------------------------------------------------
Provision for income taxes increased for the six months ended June 30, 1999
over the same period for the prior year due to higher taxable income, while the
effective tax rate remained constant at 30%.
Year Ended December 31, 1996, 1997 and 1998
Revenues
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Revenues............................................. $16,573 $24,009 $33,004
% change from prior period........................... N/A 44.9% 37.5%
- --------------------------------------------------------------------------------
Revenues increased 37.5% for 1998 due to an increase in unit sales over
1997. This unit increase was due principally to acceptance of our products in
the marketplace following the certification by Microsoft of its Windows 95 and
98 logos for our products and the launch of our v.90 soft modem products early
in 1998. The benefit of increased sales volume was partly offset by downward
pressure on prices throughout the industry, where our average selling prices
experienced an overall decrease of 28.5%. Our allowance for doubtful accounts
has increased by 180% from December 31, 1997 to December 31, 1998. This
increase is primarily due to a higher level of sales allowances related to
discounts to our distributors.
Revenues for 1997 increased 44.9% reflecting a doubling in unit sales over
the same period in 1996. This revenue growth was fueled by the introduction of
our K56Flex soft modem in late 1997. The benefit of increased sales volume was
partly offset by downward pressure on prices throughout the industry, where our
average selling prices experienced an overall decrease of 30.8% in 1997.
Gross Profit
- --------------------------------------------------------------------------------
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Gross profit......................................... $7,391 $11,085 $19,126
Percentage of revenues............................... 44.6% 46.2% 58.0%
% change from prior period........................... N/A 50.0% 72.5%
</TABLE>
- --------------------------------------------------------------------------------
Gross profit increased $8.0 million, or 72.5%, for 1998 and increased as a
percentage of revenues to 58.0% from 46.2% in 1997. The increase was due to the
increase in revenues and lower unit costs obtained through volume discounts
from our semiconductor vendors, which were partly offset by declining selling
prices throughout the industry. The increase was also due in part to a $3.0
million reversal in royalty reserves in the fourth quarter of 1998. Upon
consummation of the Communications Systems Division acquisition in December
26
<PAGE>
1998, we reduced our royalty reserves because we believe that in some instances
we can obtain necessary licenses of third party technologies in exchange for
grants of cross licenses of our patent portfolio rather than the payment of
license fees or royalties. Without considering the $3.0 million reversal in
royalty reserves, gross profit as a percentage of revenues would have been
48.9% in 1998.
The increase in gross profit as a percentage of revenues from 1996 to 1997
reflects the change in the mixture of sales toward higher margin modems,
economies of scale and lower reserves required for product obsolescence. The
addition of personnel in the operations area enabled us to focus on better
managing product cost, improving product transition strategies and reducing
inventory levels.
Research and Development
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Research and development................................ $2,152 $3,348 $4,932
Percentage of revenues.................................. 13.0% 13.9% 14.9%
% change from prior period.............................. N/A 55.6% 47.3%
- --------------------------------------------------------------------------------
Research and development expenses increased $1.6 million, or 47.3%, for
1998. The increase was due to the addition of research and development
personnel to facilitate new product development for our v.90, G.Lite and Modem
Riser products.
Research and development expenses increased $1.2 million in 1997, reflecting
the growth in our software development team to facilitate new product
development for our K56Flex and v.90 products.
Sales and Marketing
- --------------------------------------------------------------------------------
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Sales and marketing..................................... $839 $3,168 $5,624
Percentage of revenues.................................. 5.1% 13.2% 17.0%
% change from prior period.............................. N/A 277.6% 77.5%
- --------------------------------------------------------------------------------
Sales and marketing expenses increased $2.5 million for 1998. We continued
to develop our sales organization in 1998 to expand into different distribution
channels, particularly the original equipment manufacturer channel.
Consequently, sales and marketing personnel grew by fourteen people, or
approximately 74% to develop new accounts, support customers and drive new
product developments and product launches. Sales and marketing expenses in 1998
also reflected higher sales commissions and increased promotional activity
including increased spending in trade shows and press tours.
Sales and marketing expenses increased $2.3 million for 1997, reflecting the
addition of sales and marketing personnel of ten people from nine people in
1996 to support customers, develop new accounts and expand our business
geographically. Higher sales and marketing expenses in 1997 also included
increased commission expenses due to higher revenues, increased promotional
activity, the production of sales material and the costs of trade shows and
press tours.
General and Administrative
- --------------------------------------------------------------------------------
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
General and administrative.............................. $477 $1,612 $2,169
Percentage of revenues.................................. 2.9% 6.7% 6.6%
% change from prior period.............................. N/A 237.9% 34.6%
</TABLE>
- --------------------------------------------------------------------------------
General and administrative expenses increased $557,000 for 1998. This
increase reflected additional legal costs related to the negotiation and review
of an increased number of contracts, an increase in patent submissions, tax
planning and litigation expenses related to the Motorola lawsuit.
27
<PAGE>
General and administrative expenses increased $1.1 million for 1997,
reflecting higher costs associated with the expansion of our infrastructure,
including increased personnel required to implement and sustain a financial
reporting structure and increased expenses resulting from the move to a larger
facility.
Acquired In-Process Research and Development
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ------
<S> <C> <C> <C>
Acquired in-process research and development.................. -- -- $6,130
Percentage of revenues........................................ -- -- 18.6%
% change from prior period.................................... N/A -- --
</TABLE>
- --------------------------------------------------------------------------------
Upon completion of our acquisition of the Communications Systems Division in
December 1998, we immediately expensed $6.1 million, representing purchased in-
process technology that had not yet reached technological feasibility and had
no alternative future use. The value assigned to purchased in-process
technology, based on a percentage of completion discounted cash flow method,
was determined by identifying research projects in areas for which
technological feasibility has not been established. Approximately 69% of the
in-process research and development value was attributed to the HIDRA project,
a high density remote access system that will significantly increase the number
of modems within the remote access server by creating multiple ports on each
digital signal processor. Approximately 28% was attributed to the x-digital
subscriber line project, which will allow more than one digital subscriber line
modem per digital signal processing chip. Approximately 3% was attributed to
the industrial modem project, a modem design targeted at the industrial market
for use in transmitting updated information to and from remote sites.
The value was determined by estimating the costs to develop the purchased
in-process technology into commercially viable products, estimating the
resulting net cash flows from the projects, and discounting the net cash flows
back to their present value. The discount rate includes a risk-adjusted
discount rate to take into account the uncertainty surrounding the successful
development of the in-process technology. The valuation includes cash inflows
from in-process technology through 2002 with revenues commencing in 1999 and
increasing significantly in 2000 before declining in 2002. A royalty payment of
3% was assumed from in-process technology to existing technology, based on
management's estimate of a patent license rate. At the date of the acquisition,
management expected to complete the majority of these projects and commence
generating initial revenues in mid-to-late 1999 at an additional research and
development cost of approximately $1.0 million. $8.67 million, 53% of the
purchase price, was attributed to core technology and existing patented
technology, related to the portfolio of patents that address the v.34 (33.6
Kbs) and v.90 (56 Kbs) international modem standards set by the International
Telecommunications Union. The risk-adjusted discount rate applied to the
projects' cash flows was 18% for existing technology and 24% for in-process
technology. Management's cash flow and other assumptions utilized at the time
of acquisition have not materially changed as of June 30, 1999. The HIDRA and
industrial modem projects were approximately 56% complete at the time of the
valuation and the expected timeframe for achieving these product releases was
assumed to be in the second half of 1999. The x-digital subscriber line project
was approximately 56% complete at the time of the valuation and the expected
timeframe for achieving this product release is assumed to be in early 2000.
Significant remaining development efforts must be completed in the next six to
18 months in order for the projects of the Communications Systems Division to
become implemented in a commercially viable timeframe.
Amortization of Deferred Compensation Expense
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Amortization of deferred compensation expense.................. $41 -- $43
Percentage of revenues......................................... 0.2% -- 0.1%
% change from prior period..................................... N/A -- --
</TABLE>
- --------------------------------------------------------------------------------
28
<PAGE>
In connection with the grant of stock options to employees, we amortized
$43,000 in deferred compensation for the year ended December 31, 1998. There
was no deferred compensation expense for the year ended December 31, 1997. The
deferred compensation expense related to the grant of stock options to
employees for the year ended December 31, 1996 was $41,000.
Other Income (Expense), Net
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997 1998
------ ----- -----
<S> <C> <C> <C>
Other income (expense), net............................. $127 $299 $479
Percentage of revenues.................................. 0.8% 1.2% 1.4%
% change from prior period.............................. N/A 135.4% 60.2%
- --------------------------------------------------------------------------------
Other income (expense), net, increased $180,000 for 1998 and $172,000 for
1997. The increase in both years was due to higher average cash balances.
Provision for Income Taxes
- --------------------------------------------------------------------------------
<CAPTION>
1996 1997 1998
------ ----- -----
<S> <C> <C> <C>
Provision for income taxes.............................. $1,005 $ 955 $ 212
Effective tax rate...................................... 25.1% 29.3 % 30.0 %
% change from prior period.............................. N/A (5.0)% (77.8)%
</TABLE>
- --------------------------------------------------------------------------------
Provision for income taxes decreased $743,000, or 77.8%, for 1998 due to
lower gross profits, while the effective tax rate for 1998 remained at 30.0%.
Income taxes remained relatively constant for 1997 and 1996. The lower
effective tax rate for 1996 was due to the benefit realized from net operating
losses carried forward from our inception.
We have deferred tax assets on our balance sheet as of December 31, 1998
amounting to $4.2 million. We believe that our expected effective tax rate will
be below the statutory tax rate due to our research and development tax credits
and the increase in international sales through our wholly owned subsidiaries.
29
<PAGE>
Quarterly Results of Operations
The following table presents our operating results for each of the six
quarters up to and including the period ended June 30, 1999. The information
for each of these quarters is unaudited and has been prepared on the same basis
as the audited financial statements appearing elsewhere in this prospectus. In
the opinion of management, all necessary adjustments consisting only of normal
recurring adjustments, have been included to present fairly the unaudited
quarterly results when read in conjunction with our audited Consolidated
Financial Statements and the related notes appearing elsewhere in this
prospectus. These operating results are not necessarily indicative of the
results of any future period.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1998 1998 1998 1998 1999 1999
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $5,515 $6,828 $9,063 $11,598 $15,156 $17,890
Cost of revenues........ 2,533 3,415 4,902 3,028 7,926 9,071
------ ------ ------ ------- ------- -------
Gross profit........... 2,982 3,413 4,161 8,570 7,230 8,819
------ ------ ------ ------- ------- -------
Operating expenses:
Research and
development........... 1,129 1,326 1,283 1,194 2,043 2,380
Sales and marketing.... 1,068 1,339 1,713 1,504 2,298 2,647
General and
administrative........ 384 407 423 955 815 1,248
Acquired in-process
research and
development........... -- -- -- 6,130 -- --
Amortization of
deferred compensation
expense............... -- 10 17 16 16 148
------ ------ ------ ------- ------- -------
Total operating
expenses............. 2,581 3,082 3,436 9,799 5,172 6,423
------ ------ ------ ------- ------- -------
Operating income
(loss)................. 401 331 725 (1,229) 2,058 2,396
------ ------ ------ ------- ------- -------
Other income (expense),
net:
Interest income........ 106 148 140 110 116 187
Interest expense....... (5) (6) (6) (8) (453) (442)
------ ------ ------ ------- ------- -------
Total other income
(expense), net....... 101 142 134 102 (337) (255)
------ ------ ------ ------- ------- -------
Income (loss) before
provision for income
taxes.................. 502 473 859 (1,127) 1,721 2,141
Provision (benefit) for
income taxes........... 151 141 258 (338) 516 642
------ ------ ------ ------- ------- -------
Net income (loss)....... $ 351 $ 332 $ 601 $ (789) $ 1,205 $ 1,499
====== ====== ====== ======= ======= =======
<CAPTION>
Quarter Ended
---------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1998 1998 1998 1998 1999 1999
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 45.9 50.0 54.1 26.1 52.3 50.7
------ ------ ------ ------- ------- -------
Gross profit........... 54.1 50.0 45.9 73.9 47.7 49.3
------ ------ ------ ------- ------- -------
Operating expenses:
Research and
development........... 20.5 19.4 14.2 10.3 13.5 13.3
Sales and marketing.... 19.4 19.6 18.9 13.0 15.1 14.8
General and
administrative........ 7.0 6.0 4.7 8.2 5.4 7.0
Acquired in-process
research and
development........... 0.0 0.0 0.0 52.9 0.0 0.0
Amortization of
deferred compensation
expense............... -- 0.1 0.1 0.1 0.1 0.8
------ ------ ------ ------- ------- -------
Total operating
expenses............. 46.9 45.1 37.9 84.5 34.1 35.9
------ ------ ------ ------- ------- -------
Operating income
(loss)................. 7.2 4.9 8.0 (10.6) 13.6 13.4
------ ------ ------ ------- ------- -------
Other income (expense),
net:
Interest income........ 1.9 2.2 1.5 1.0 0.8 1.1
Interest expense....... (0.1) (0.1) -- (0.1) (3.0) (2.5)
------ ------ ------ ------- ------- -------
Total other income
(expense), net....... 1.8 2.1 1.5 0.9 (2.2) (1.4)
------ ------ ------ ------- ------- -------
Income (loss) before
provision for income
taxes.................. 9.0 7.0 9.5 (9.7) 11.4 12.0
Provision (benefit) for
income taxes........... 2.7 2.1 2.8 (2.9) 3.4 3.6
------ ------ ------ ------- ------- -------
Net income (loss)....... 6.3% 4.9% 6.7% (6.8)% 8.0% 8.4%
====== ====== ====== ======= ======= =======
</TABLE>
30
<PAGE>
Our quarterly operating results have varied significantly in the past and
may vary significantly in the future depending on a number of factors, many of
which are beyond our control. Our revenues have been negatively affected by
market-wide delays in purchasing activities associated with the anticipated
announcement by the International Telecommunications Union of the v.90 standard
whereas our revenues have been positively affected by the market acceptance of
our soft modems. We have also experienced seasonality in our quarterly
operating results. A detailed discussion of these factors is described under
"Risk Factors" elsewhere in this prospectus. Our gross profit for the fourth
quarter ended December 31, 1998 was favorably impacted by the reversal of $3.0
million in royalty reserves. Without considering the reversal, gross profit as
a percentage of revenues would have been 48.0% in the fourth quarter of 1998.
Liquidity and Capital Resources
Six Months Ended June 30, 1998 and 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Net cash provided by operating activities..................... $ 1,080 $12,262
Net cash used in investing activities......................... (149) (6,980)
Net cash provided by (used in) financing activities........... 4,756 (1,018)
Cash and short-term investments at end of period.............. 12,372 23,534
Working capital............................................... 13,274 16,361
- --------------------------------------------------------------------------------
</TABLE>
The increase in net cash provided by operating activities for the six months
ended June 30, 1999 compared to 1998 was primarily due to better collection in
accounts receivable due to the use of letters of credit and a higher net income
in 1999. Net cash used in investing activities for the six months ended June
30, 1999 reflected the purchases of short-term investments, property and
equipment, while net cash used in financing activities for the six months ended
June 30, 1999 reflected the repayment of principal of the notes payable
arrangements associated with the Communications Systems Division acquisition.
As of June 30, 1999, we had $23.5 million in cash and cash equivalents and
short-term investments and working capital of $16.4 million. As of June 30,
1999, we had outstanding debt of $15.5 million under notes payable arrangements
which we will repay for $15.7 million, including a prepayment penalty,
following the closing of this offering.
Year Ended December 31, 1996, 1997 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Net cash provided by operating activities......... $ 4,753 $ 917 $ 2,719
Net cash provided by (used in) investing
activities....................................... (1,258) 576 (17,344)
Net cash provided by (used in) financing
activities....................................... 414 (393) 20,928
Cash and equivalents at end of period............. 5,585 6,685 12,988
Working capital................................... 6,236 12,840 14,011
- ------------------------------------------------------------------------------
</TABLE>
Since our inception through December 31, 1998, we have funded our operations
primarily through the sale of convertible preferred stock and cash generated
from operations. We received $388,000 and $5.0 million from the sale of
convertible preferred stock in 1996 and 1998, respectively. Net cash provided
by operating activities for 1996, 1997 and 1998 were $4.8 million, $917,000 and
$2.7 million, respectively. The decrease in net cash provided by operating
activities for 1997 compared to 1996 was primarily due to increased working
capital requirements associated with higher revenues as well as lower net
income in 1997. The increase in net cash provided by operating activities for
1998 compared to 1997 was primarily due to higher net income before considering
the write-off of acquired in-process research and development and also
increased accruals.
31
<PAGE>
Net cash provided by (used for) investing activities was $(1.3) million,
$576,000 and $(17.3) million for 1996, 1997 and 1998, respectively. Net cash
provided by investing activities for 1997 reflected proceeds from the sale of
short-term investments, net of purchases of property and equipment, while net
cash used in investing activities for 1998 represented the Communications
Systems Division acquisition, and purchases of property, plant and equipment.
The timing and amount of future capital expenditures will depend primarily on
our growth. Our principal commitments consist of leases for our office
facilities as well as other general obligations under our capital leases. We
anticipate that we will relocate to larger office facilities within the next
six months and we expect to incur additional capital expenditures of
approximately $500,000 per year. We currently have no other material
commitments for capital expenditures.
As of June 30, 1999, we had $23.5 million in cash and cash equivalents and
short-term investments and working capital of $16.4 million. In December 1998,
we became obligated under notes payable in the aggregate principal amount of
$16.3 million in connection with the acquisition of Communications Systems
Division. We intend to repay these notes following the closing of this
offering. In connection with these notes payable, we issued a warrant to
purchase 200,000 shares of Series C preferred stock at an exercise price of
$8.00 per share. The warrants are immediately exercisable and expire ten years
from the date of issuance. The fair value of the warrants at the date of the
issuance was estimated to be $1.4 million. We recorded the fair value of the
warrants as a deferred charge which will be amortized over the term of the
notes.
We believe that the net proceeds from the offering, together with existing
sources of liquidity, will be sufficient to meet our working capital and
anticipated capital expenditure requirements for at least the next 12 months.
Thereafter, we may require additional funds to support our working capital
requirements or for other purposes, and may seek, even before that time, to
raise additional funds through public or private equity or debt financing or
from other sources. Additional financing may not be available at all, and if it
is available, the financing may not be obtainable on terms acceptable to us or
that are not dilutive to our stockholders.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," which we adopted in fiscal 1999. SOP
No. 98-1 requires entities to capitalize certain costs related to internal-use
software once certain criteria has been met. The adoption did not have a
material impact on our financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants issued
SOP No. 98-5 "Reporting on the Costs of Start-Up Activities," which we adopted
in fiscal 1999. SOP No. 98-5 requires that all start-up costs related to new
operations must be expensed as incurred. In addition, all start-up costs that
were previously capitalized must be written off when SOP No. 98-5 is adopted.
The adoption did not have a material impact on our financial position or
results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires certain accounting and reporting standards for derivative financial
instruments and hedging activities. SFAS No. 133 applies for the first quarter
beginning January 1, 2001. Because we do not currently hold any derivative
instruments and do not engage in hedging activities, we do not believe that the
adoption of SFAS No. 133 will have a material impact on our financial position
or results of operations.
Qualitative and Quantitative Disclosures About Market and Interest Rate Risk
We are exposed to minimal market risks. We manage the sensitivity of our
results of operations to these risks by maintaining a conservative investment
portfolio, which is comprised solely of highly-rated, short-term investments.
We do not hold or issue derivative, derivative commodity instruments or other
financial
32
<PAGE>
instruments for trading purposes. We are exposed to currency fluctuations, as
we sell our products internationally. We manage the sensitivity of our
international sales by denominating all transactions in U.S. dollars.
We may be exposed to interest rate risks, as we may use additional financing
to fund additional acquisitions and fund other capital expenditures. The
interest rate that we may be able to obtain on financings will depend on market
conditions at that time and may differ from the rates we have secured in the
past.
Year 2000 Compliance
We have completed our initial assessment of the potential overall impact of
the impending century change on our business, financial condition and operating
results. Based on our current assessment, we believe the current versions of
our products are Year 2000 compliant. However, our products operate in complex
network environments and directly or indirectly interact with a number of other
hardware and software systems that we cannot adequately evaluate for Year 2000
compliance. In a worst case scenario involving the failure of these
environments or systems as a result of Year 2000 problems, our products would
be inoperative and would have no utility to our customers or the users of these
products. Because our products depend upon the communication capabilities of
the devices in which they are used, we would not be able to solve Year 2000
problems affecting these devices. As a result, our business would be dependent
upon the manufacturers of these devices, including our customers, to correct
Year 2000 deficiencies that might arise. The following are summaries of Year
2000 action plans for our material suppliers:
. Silicon Labs' Year 2000 program consists of comprehensive review and
testing of hardware and software used in mission-critical applications,
review of Year 2000 readiness of suppliers of critical materials and
services, and a contingency plan to ensure uninterrupted product delivery
for unforeseen problems that may occur. Their contingency plan involves
building an additional product inventory buffer. The buffer will be
maintained over the year end and then depleted after Silicon Labs has
ascertained that no Year 2000 related supply problems exist. Silicon Labs
has also implemented a verification process where they will review
internal Year 2000 compliance for server hardware, operating systems,
business applications and PC and workstation BIOSes. They will also use
representative test platforms to run existing business applications after
changing system dates to 1/1/00.
. ST Microelectronics has had a top priority project underway since the
second quarter of 1997. Their definition of Year 2000 Compliance means
that the functions, calculations, and other computing processes of each
of their projects perform in a consistent manner regardless of the date
and time on which the processes are actually performed, whether before,
on, or after January 1, 2000, and whether or not the dates are affected
by leap years.
. Taiwan Semiconductor Manufacturing Corporation has completed their Year
2000 compliance testing on their manufacturing equipment, information
technology infrastructure, commercial software, and in-house application.
. Kawasaki/LSI has completed their testing and is Year 2000 compliant.
We may face claims based on Year 2000 problems in other companies' products,
or issues arising from the integration of multiple products within an overall
system. We have not been a party to any litigation or arbitration proceeding
involving our products or services related to Year 2000 compliance issues. We
may in the future be required to defend our products or services in such
proceedings, or to negotiate resolutions of claims based on Year 2000 issues.
We have reviewed our internal management information and other critical
business systems to identify any Year 2000 problems. We also have communicated
with the external vendors that supply us with material software and information
systems and with significant suppliers to determine their Year 2000 readiness.
Based on a review of vendor representations made in letters provided to us by
our vendors and a review of representations made by our vendors at their
individual web sites, we believe that the third-party hardware and software we
use is Year 2000 compliant.
33
<PAGE>
To date, we have not incurred any material costs directly associated with
Year 2000 compliance efforts, except for compensation expense associated with
salaried employees who have devoted some of their time to Year 2000 assessment
and remediation efforts. We do not expect the total cost of Year 2000 problems
to be material to our business, financial condition or operating results.
However, during the months prior to the century change, we will continue to
evaluate new versions of our products, new software and information systems
provided by third parties and any new infrastructure systems that we acquire,
to determine whether they are Year 2000 compliant. Despite our current
assessment, we may not identify and correct all significant Year 2000 problems
on a timely basis. Year 2000 compliance efforts may involve significant time
and expense and unremediated problems could harm our business, financial
condition and operating results. We currently do not have any estimate of
potential costs related to potential Year 2000 problems. We currently have no
contingency plans to address the risks associated with unremediated Year 2000
problems.
34
<PAGE>
BUSINESS
Overview
We are a leading developer and supplier of cost-effective software-based
connectivity solutions. Our solutions enable internet access and other
communications applications through existing analog and emerging broadband
networks. We have developed a proprietary software architecture that
substantially reduces the hardware, space and power requirements of
conventional hardware-based connectivity devices. Our software architecture is
also easily upgradeable, minimizing the risk of technological obsolescence. Our
communications products are designed to enable widespread internet access and
other communication applications through desktop PCs, notebook computers and
non-PC devices.
We are a pioneer in developing host signal processing technology, a
proprietary set of algorithms that enables cost-effective software-based
digital signal processing solutions. Host signal processing technology 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, the reduction of hardware components in our architecture
reduces space requirements by 50% and power requirements by 70% compared to
conventional solutions. The first implementation of our host signal processing
technology was in a software modem, or soft modem, in 1995. Through June 1999,
we have shipped 11.3 million soft modems. Based on our unit shipments in 1998,
we believe we are the largest worldwide producer of soft modems, representing
63% of all soft modems sold that year, as estimated by the Cahners In-Stat
Group. We also believe that in 1998 we sold 6% of all analog modems estimated
by Dataquest to have been 59.1 million units. Various original equipment
manufacturers, including Acer, Dell, emachines, Fujitsu and Sharp, have
integrated our soft modems into their products.
We continue to innovate and expand upon our successful host signal
processing architecture so that we can provide high speed connectivity
solutions for broadband communications, including digital subscriber line,
cable and wireless communications. Broadband communications generally refers to
all communications that have more available communications frequencies than
traditional voice band. The range of frequencies in which each communications
technology operates is called a "band." All data communications on voice band
is banded by 300 Hz on the low end and 3,000 Hz on the high end. Communications
taking place at higher frequencies, with broader bands would be a broadband
communications technology. For example, asynchronous digital subscriber line
uses the same copper wire as base band modems but operates in a frequency band
between 30 Khz and 1.104 Mhz. Not only are the frequencies higher, but the
operating band is much wider (over 1 Mhz compared to 2700 Hz for voice band).
These emerging opportunities include connectivity solutions for client-side
applications, enterprise servers, service providers and industrial markets. We
have extended our host signal processing architecture and have developed a
G.Lite solution, LiteSpeed, that enables downstream broadband data transmission
speeds of up to 1.5 Mbps and upstream broadband data transmission speeds of 512
Kbps over existing copper telephone lines. Downstream broadband data
transmission involves high speed data transmissions from the central office to
the customer's premises. Upstream broadband data transmission involves high
speed data transmissions from the customer's premises to the central office. We
expect to begin shipments of this product in the first half of 2000.
We also have developed an embedded solution for non-PC devices that either
do not use a central processing unit or lack the excess processing capacity
necessary to support our host signal processing solution. These devices include
internet appliances, such as set-top boxes and webphones, video game consoles
and remote monitoring devices. By offering reductions in size, cost and power
consumption, we also believe that this solution is ideal for service providers
and server-side applications such as single and multi-port remote access
servers and concentrators. Server-side applications and devices involve
communication systems or components which affect data transmission services
from the internet service provider or central office.
We enhanced our position as an intellectual property leader with the
acquisition of our Communications Systems Division from General DataComm, Inc.
in the fourth quarter of 1998. As a result of this acquisition and our own
intellectual property development efforts, we hold 32 patents, a number of
which cover technology
35
<PAGE>
that is considered essential for International Telecommunication Union standard
communications solutions. We also have 26 additional patent applications
pending or filed.
Industry Overview
In recent years, dramatic increases in business and consumer demand for
multimedia information, entertainment and voice and data communication have
resulted in a corresponding increase in demand for high speed remote access.
The accelerated growth of content-rich applications, which require high
bandwidth, has changed the nature of information networks. High-speed
connectivity is now a requirement for business, government, academic and home
environments. Businesses, ranging from large and small corporate enterprises to
home offices, are increasingly dependent upon data networks, not only for
communication within the office, but also to exchange information among
corporate sites, remote locations, telecommuters, business partners, suppliers
and customers. Consumers are also increasingly accessing data networks such as
the internet to communicate, collect and publish information and conduct retail
purchases.
These market trends have resulted in a significant increase in the demand
for connectivity devices. International Data Corporation estimates that by
2003, the number of internet connectivity devices will grow to over 722
million.
Analog Connectivity Solutions
Although there has been significant publicity given to broadband
connectivity, the majority of internet access is still through dial-up, or
analog, connections. Analog technology converts digital data into an analog
signal for transmission over telephone networks, and executes the reverse
analog-to-digital signal conversion to enable the host device to receive the
transmitted data. Analog modems, which, according to Dataquest, comprised 90%
of the modem market in 1998, are primarily utilized by PC devices. Dataquest
estimates that 59.1 million analog modems were sold in 1998, and expects this
number to reach 74.8 million units in 2001. Although the number of analog
modems is expected to grow in the near future, new technologies have emerged to
address the volume of bandwidth intensive data and demand for enhanced
multimedia capabilities.
Broadband Connectivity Solutions
The data transmission constraints of copper telephone wires have led the
communications industry to focus on broadband communications. In order to
address the demand for high-speed connectivity, telecommunications service
providers have developed and deployed cost-effective technologies in their
networks. However, the lack of ubiquitous low-cost, high-bandwidth connectivity
from the backbone network to the customer premises has been the underlying
issue preventing the majority of the market from taking advantage of the array
of high-bandwidth network services. Although the broadband access market is
underdeveloped, its potential size has attracted a high level of attention.
Telephone, cable and satellite companies each have different strategies and
capabilities for providing this broadband connectivity to the internet. Each
has its advantages based on price, performance and availability.
Digital Subscriber Line. Digital subscriber lines utilize the ubiquitous,
existing public switched telephone network infrastructure, without the need for
expensive additions and upgrades. Digital subscriber line technologies
dramatically increase the data transmission capacity of standard telephone
lines and are expected to enable a wide range of new services including high
speed internet access and digital television. Most of the businesses and homes
today are connected to the public telephone network by twisted-pair copper
wire. It is estimated that there are nearly 700 million copper wire access
lines in existence today worldwide, and that more than 95% consist of a single
twisted-pair copper wire.
A wide array of digital subscriber line technologies known as x-digital
subscriber line products are rapidly emerging. The "x" in x-digital subscriber
line represents the various kinds of digital subscriber line technologies. Each
type of digital subscriber line technology has distinguishing advantages and
disadvantages,
36
<PAGE>
depending on a variety of bandwidth and deployment features suitable for
different applications. Digital subscriber line technologies are either
symmetric, which deliver the same data rate both downstream and upstream, or
asymmetric, which deliver faster data rates downstream than upstream. The other
distinguishing feature is the data rate itself. Digital subscriber line
technologies allow for the transmission of data at speeds ranging from 128 Kbps
to 52 Mbps depending on the distance between the central office and the
subscriber. Common types of digital subscriber line technologies include:
Asynchronous Digital Subscriber Line. Asynchronous digital subscriber
line allows more bandwidth downstream than upstream. This asymmetry,
combined with "always-on" access, makes asynchronous digital subscriber
line ideal for internet surfing, video-on-demand and remote local area
network access. Users of these applications typically download much more
information than they send. In order to implement an asynchronous digital
subscriber line solution, a splitter, which is a device that separates the
voice signal from the data signal, must be installed both at the head-end
and at the customer's premises. This process of installing splitters for
each subscriber means a service truck needs to be sent to each customer
site in order to initiate service. This process is expensive and time
consuming and ultimately slows the overall service deployment. Asynchronous
digital subscriber line provides speeds up to 8 Mbps downstream and up to 1
Mbps upstream, depending on the line conditions and the length of the loop.
G.Lite. G.Lite is a lower-speed version of asynchronous digital
subscriber line that will eliminate the need for the service provider to
install a splitter at the customer's premises. G.Lite allows for a
downstream data transmission rate of up to 1.5 Mbps and an upstream data
transmission rate of up to 512 Kbps, and is expected to be as simple as the
"plug-and-play" nature of traditional, analog dial-up modems.
Single-Pair High Speed Digital Subscriber Line. Single-pair high speed
digital subscriber line, or synchronous high speed digital subscriber line,
requires only a single copper twisted-pair and has a maximum loop length of
10,000 feet from the telephone company's central office. Synchronous high
speed digital subscriber line can offer symmetrical data transmission rates
of up to 1.544 Mbps. Since synchronous high speed digital subscriber line
uses only one copper twisted-pair, the capacity of existing infrastructure
is greatly increased.
Very-High-Bit-Rate Digital Subscriber Line. Very-high-bit-rate digital
subscriber line, or very high speed digital subscriber line, technology is
the fastest digital subscriber line technology, supporting a maximum
downstream rate of 52 Mbps and an upstream rate of 10 Mbps over a single
copper twisted-pair wire. The one limitation of very high speed digital
subscriber line is that the maximum loop length is only between 1,000 and
4,500 feet from the telephone company's central office.
Wireless. The main alternatives in wireless broadband access are wireless
and broadband satellite. Wireless provides advantages over wireline, the
primary benefits being speed and ease of installation. The strength of wireless
is that it can quickly provide high-speed internet access within a 10, 20 or 35
mile radius depending on the frequency band used. In the next several years,
wireless is expected to help unlock broadband competition thereby enabling new
operators to bypass existing wireline networks and deliver local and long
distance telephone service and internet access services.
Cable Modems. Designed to provide broadband internet access, cable modems
are targeted primarily at the consumer market. Cable lines pass by more than
100 million North American homes, but only 20% of those homes can now get cable
modem service. Cable lines offer downstream transmission speeds of up to 36
Mbps and upstream transmission speeds of up to 10 Mbps. In order to fully
realize the benefits of two way communications, cable operators must upgrade
their networks to improve the provisioning of existing cable services and to
support high-speed data and other new services.
Non-PC Connectivity
While existing internet connectivity devices are primarily PC-based,
development of enabling technologies and the growth in consumer dependence are
spurring the deployment of non-PC devices. These devices include internet
appliances such as set-top boxes and webphones, video game consoles and remote
monitoring devices.
37
<PAGE>
International Data Corporation predicts that as many as 42% of all Internet
access devices will be in the form of non-PC devices by 2001. However, it is
difficult to integrate modem functionality into these compact devices due to
the limited availability of power and space.
Server-Side
As the number of connectivity devices increases, service providers will be
required to increase the number of server-side access ports to ensure
reliability and quality service for their customers. Presently, communications
equipment providers are limited to using either expensive multiport chips or a
single modem port per chip. Internet service providers and other service
providers who locate their server-side equipment at the telephone companies'
central offices do not have the space or power available to accommodate the
expected growth in demand for client-side access. Service providers are
demanding connectivity solutions that increase the density of modem ports per
chip while reducing cost, space and power requirements.
Evolution from Hardware to Software-based Connectivity Solutions
The rapid development of emerging technologies for broadband access combined
with changing industry standards and protocols is driving manufacturers to turn
towards software-based connectivity solutions as opposed to conventional
hardware connectivity solutions. Further, trends such as the acceptance of
alternative access devices, the significant increase in available processing
power, cost reduction pressures and space and power constraints have permitted
software-based products to emerge as viable and cost-effective alternatives.
One of the primary reasons that PC manufacturers have been better able to
utilize software-based solutions has been the dramatic increase in central
processing unit processing power. Prior to the introduction of Intel's 266 MHz
Pentium II processor, most PCs lacked the processing power required to
effectively utilize software-based connectivity solutions. By 1998, a majority
of the PCs shipped were equipped with CPUs equivalent to or exceeding the
processing power of Intel's 350 MHz Pentium II. This significant increase in
processing power is expected to continue into the future as demonstrated by
Intel's announcement of its intention to deliver 1.0 GHz processors by 2001.
With microprocessor performance continuing to rapidly increase, technologies
that support software algorithms running off the central processing unit,
rather than on extraneous hardware, will become increasingly valuable and
feasible.
Another significant trend driving the growth of software-based solutions is
the increasing pressure on original equipment manufacturers to reduce costs.
With the market acceptance of low-cost, or sub-$1,000, PCs and a general
decline in PC selling prices, original equipment manufacturers are demanding
further price reductions, from suppliers of central processing units and
motherboard manufacturers. As a result, central processing unit suppliers and
motherboard manufacturers are increasingly employing software-based solutions
as a cost-effective way to meet these demands. This response eliminates
additional, special purpose hardware and replaces it with integrated software.
As a result, Cahners In-Stat estimates analog soft-modem annual sales will grow
from six million units in 1998 to over 40 million units by 2001.
Software-based solutions are also increasingly utilized to address the power
and space requirements of non-PC devices. The limited availability of power and
space in these devices has hindered the successful integration of hardware-
based modem functionality. Because soft modems shift processing capacity into
software and, thus, significantly reduce power and space constraints, they are
increasingly integrated as a critical part in the development of the non-PC
device market.
PC-Tel Solution
We are a leading developer and supplier of cost-effective software-based
connectivity solutions that address internet access and other communications
through existing analog and emerging broadband networks. These solutions are
based on our proprietary software algorithms which enable the movement of core
signal processing capabilities out of hardware and into software. Our host
signal processing architecture allows us to
38
<PAGE>
develop connectivity solutions that provide significant benefits over
traditional hardware-based solutions, including:
Extensibility and Scaleability. Our host signal processing architecture
allows us to quickly and cost-effectively develop new products to
capitalize on rapidly growing market segments. We believe that we can use
our intellectual property portfolio to readily adapt to the speed and
design requirements of additional emerging connectivity technologies. For
example, in response to growing market acceptance, we have developed a host
signal processing architecture solution for G.Lite, which we call
LiteSpeed, that enables downstream data transmission speeds of up to 1.5
Mbps and upstream data transmission speeds of up to 512 Kbps over existing
copper telephone lines. As the broadband market develops, we believe we can
capitalize on our proprietary technology to continue the cost-effective
migration from hardware into software.
Cost Effectiveness. By shifting the composition of connectivity devices
from hardware into software, we are able to significantly reduce the
hardware required in conventional connectivity solutions. Our proprietary
software-based solution eliminates extraneous hardware and reduces our
customers' manufacturing costs, while still offering superior or comparable
performance. For example, our host signal processing technology eliminates
as much as 40% of the hardware used in conventional connectivity solutions.
By implementing our software architecture, our customers can provide
designs which contain:
. fewer parts, resulting in a lower bill of material cost,
. a smaller footprint solution, resulting in lower cost boards, and
. a lower overhead cost, resulting from our customers' need to manage
fewer parts, smaller inventories and the reduced cost of manufacture.
Upgradeability, Adaptability and Flexibility. The software component of
our architecture is upgradeable, minimizing the risk of technological
obsolescence. By embedding core functionality in software, performance
upgrades and the adaptation to new standards and protocols can be
accomplished quickly and easily through software downloads rather than
through costly replacements of existing hardware. For example, customers
who purchased our 33.6K modems are able to easily upgrade the product to an
International Telecommunications Union-compliant 56K modem through a simple
software download. Ease of upgradeability is of considerable value in the
rapidly changing communications marketplace and a substantial competitive
advantage over conventional connectivity solutions. In addition, our
LiteSpeed digital subscriber line technology will also provide a similar
capability in offering an end-user the ability to easily upgrade to higher
bandwidth services. Further, our G.Lite technology is completely compatible
with analog transmission networks, offering the user complete flexibility
in choosing access technology and transmission speed. By providing
connectivity solutions that can be easily adapted to new standards and
protocols, we reduce interoperability obstacles, which simplifies
purchasing decisions and accelerates deployment times for original
equipment manufacturers. Interoperability obstacles exist because different
manufacturers use different protocols and interfaces for their products.
This variance among manufacturer protocols and interfaces prevents
different manufacturers' products from talking to one another which creates
obstacles to interoperability.
Reduced Space and Power Requirements. Based on our own research and
testing, we believe that the reduction of hardware components enabled by
our host signal processing architecture provides the dual benefits of 50%
reduced space and 70% lower power requirements compared to conventional
solutions. These benefits enable connectivity capabilities in non-PC
devices that are difficult to implement with conventional hardware-based
solutions. In addition, the efficiency of our proprietary algorithms
increases the modem port density per chip in server-side devices, reducing
power requirements and heat generation. Modem port density per chip is the
number of distinct modem processes which can be managed on a single
integrated circuit.
39
<PAGE>
PC-Tel Strategy
PC-Tel's goal is to be the leading provider of cost-effective software-based
connectivity solutions that enable internet access and other communication
applications through existing analog and emerging broadband networks. Key
elements of our strategy include:
Target Emerging High-Growth Communications Technologies. We identify
emerging high-growth communications technologies and develop innovative
software-based connectivity solutions to capitalize on these new market
opportunities as they gain acceptance. Our software-based technology is
extensible, allowing us to quickly and cost-effectively develop new
applications. We have recently leveraged our core technologies to design
and develop a fully functional software-based G.Lite solution, LiteSpeed.
In addition, we are currently developing implementation options for
extending host signal processing technology into the emerging wireless data
network market, which includes devices that offer high speed access to
internet connections as well as wireless connections to computing on
internet devices within homes and businesses. We believe that our
communications technology will enable us to develop significant
applications in the broadband modem markets.
Continue To Enhance Software-Based Solutions. We are committed to
enhancing the scope of our host signal processing technology to further
reduce the number of hardware components in our software-based solutions.
We believe that our success in minimizing the hardware content of our soft
modems will continue to enhance our ability to address emerging markets in
non-PC devices that require smaller designs and reduced power consumption.
This reduction of hardware content provides numerous benefits for our
original equipment manufacturer customers, including:
. reducing costs,
. decreasing board space,
. decreasing inventory,
. minimizing technological obsolescence,
. accelerating time to market, and
. streamlining production flow.
In addition, because of the software-based functionality of our products, we
have developed a core expertise in ensuring the compatibility of our host
signal processing products with multiple operating systems including Linux,
OS/2, Windows 3.1, 95, 98, 2000, NT and CE, and VXWorks.
Enable Migration to Emerging Communications Technologies. We aim to
develop innovative products based on our host signal processing
architecture that enable existing platforms to migrate to emerging
broadband communications technologies. The current level of processing
power available in PCs and non-PC devices does not support the amount of
signal processing calculations required for higher speed broadband
applications without overloading the central processing unit. For these
applications, we have developed an accelerated host signal processing
architecture that adds low-cost, application-specific hardware to
efficiently handle a portion of the signal processing load. Accelerated
host signal processing architecture enables us to deliver an ideal platform
from which to migrate to a full host signal processing solution for next
generation devices.
Extend Our Intellectual Property Leadership Position and Establish
Industry Standards. We are actively extending our intellectual property
position through rapid internal development, strategic acquisitions and
licensing of innovative communications technology. We hold 32 patents, with
an additional 26 patents pending. We are actively pursuing the filing of
additional patent applications to cover our intellectual property
advancements. We believe that these intellectual property advancements will
optimize the performance, efficiency and cost of our software-based
connectivity solutions. Our intellectual property leadership position
allows us to establish industry standards so that we can be well positioned
to implement leading-edge second generation connectivity solutions in
technologies in advance of our competitors.
40
<PAGE>
License Proprietary Digital Signal Processing Solutions. We are
developing and intend to license reference designs for digital signal
processing communications applications in non-PC devices. By using low cost
digital signal processing chips coupled with our software-based technology,
we are providing enhanced throughput and capacity per chip. In addition,
because our digital signal processing algorithms are highly efficient, we
can enable cost savings by reducing space requirements, lowering power
consumption and port density for remote access.
Products
Current Products
In the fourth quarter of 1998, we began shipping our newest product, the
MicroModem. This product integrates our host signal processing technology with
a micro form-factor data access arrangement. Our patented MicroModem features
reduce power and size requirements and replace approximately 90 discrete
hardware components with two mini data access arrangement chips. The MicroModem
has recently been certified as being compatible with the telecommunications
standards of most industrialized countries, allowing original equipment
manufacturers to accomplish seamless global interoperability.
As illustrated in Figure 1, in contrast to the conventional hardware modem,
our host signal processing 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. The universal asynchronous receiver and
transmitter is a device that provides control logic and program registers
required to implement a serial interface to a computer system. A single
proprietary application specific integrated circuit acts as interface between
the analog and digital data. We have further reduced the cost, size and design
effort required for standardized worldwide PC modem use by using an integrated
data access arrangement and a coder/decoder. This integration reduces the
number of components in a conventional data access arrangement by approximately
40%.
41
<PAGE>
FIGURE 1--CONVENTIONAL HARDWARE vs. SOFT MODEM ARCHITECTURE
Schematic with two boxes. Caption is "Modem Evolution". First box describes a
traditional hardware modem, second box describes PCtel's soft modem. Bottom
text caption "CODEC--performs analog-to-digital and digital-to-analog signal
conversions", "DAA--Data Access Arrangement interfaces and protects the modem
with the telecommunications network.", "CONTROLLER--controls data and error
compression function.", "DATAPUMP--performs modulation and demodulation
calculations.", "Memory--handles the data buffering.", "UART--Universal
Asynchronous Receive Transmit synchronizes incoming and outgoing data.",
"INTEGRATED SILICON DAA and CODEC--Direct Access Arrangement interfaces and
protects the modem with the telecommunications network while the coder/decoder
performs analog-to-digital and digital-to-analog conversion."
42
<PAGE>
Next Generation Products
We are currently focusing our design and development efforts in the
following application areas:
<TABLE>
<CAPTION>
Next Generation
Technology Product Description
- -------------------------------------------------------------------------------
<C> <S>
G.Lite We have developed a G.Lite solution, LiteSpeed, to
address the demand for digital subscriber line
connectivity. LiteSpeed uses less space and costs less
than conventional solutions for G.Lite. We expect to
commercially release this product in the first half of
2000.
- -------------------------------------------------------------------------------
USB External Modem We have developed our first external modem, which
connects through the Universal Serial Bus, or USB,
interface. The USB is an open specification developed
to advance the use of peripheral devices with personal
computers. Major PC manufacturers now ship machines
with USB enabled hardware predominantly to Europe due
to the continent's differing telephony standards. We
believe that our external modem will allow us to
capture significant revenue opportunities in the
peripheral device market.
- -------------------------------------------------------------------------------
Home Networking The number of private homes with multiple PCs or
multiple devices, such as printers, scanners and
notebook computers, has reached a critical mass,
driving consumer demand for home networking and shared
internet access. In order to capitalize on this
emerging market opportunity, we are working with a
silicon supplier to include our soft modem on a
processor which will deliver home networking
functionality.
- -------------------------------------------------------------------------------
Industrial Modem We are developing a small hardware platform for the
non-PC market. This platform uses one low cost digital
signal processor and our software performs both the
controller and the digital signal processing
functions. The v.34 version of our industrial modem is
currently being tested.
- -------------------------------------------------------------------------------
Remote Access Solution We are developing a reference design to deliver the
functionality of six modem ports per digital signal
processing chip in a server-side modem solution. Our
innovative design would reduce power, cost and space
requirements to nearly one-sixth of those used today
by providing alternatives to expensive chips or a
single modem port per chip. We intend to license our
design to the leading companies in the growing remote
access solution marketplace, the first version which
will support three modems per DSP and is currently
being tested.
</TABLE>
43
<PAGE>
Emerging Product Opportunities
In addition to our products currently under development, we continue to
explore emerging opportunities in the area of broadband communications.
<TABLE>
<CAPTION>
Emerging
Opportunities Product Description
- -------------------------------------------------------------------------------
<C> <S>
Wireless
- -------------------------------------------------------------------------------
Wireless Protocols Our host signal processing technology can be applied to
various wireless standards. We expect that the wireless
solutions which can take advantage of host signal
processing architecture are optimal for customers with
capacity requirements between 19.2 Kbps today, and up to
10 Mbps in the near future. We are currently developing
software enhancements to our products in order to enable
their use in wireless environments with speeds of up to
384 Kbps by the end of 2000.
- -------------------------------------------------------------------------------
xDSL
- -------------------------------------------------------------------------------
ADSL We expect to begin developing a International
(G.DMT) Telecommunications Union Standard for asynchronous
digital subscriber line using discrete multitone modem in
2000 which will provide downstream transmission speeds of
up to 8 Mbps and upstream transmission speeds of up to 1
Mbps. International Telecommunications Union Standard for
asynchronous digital subscriber line using discrete
multitone, known as DMT, is a full-rate asynchronous
digital subscriber line standard and is being endorsed by
the International Telecommunications Union as a worldwide
standard.
- -------------------------------------------------------------------------------
G.SHDSL Proposed International Telecommunications Union Standard
for synchronous high speed, digital subscriber line
modems will offer both downstream and upstream
transmission speeds of up to 1.5 Mbps. We have initiated
design and simulation studies for this product. These
efforts will position us to pursue the proposed
International Telecommunications Union Standard for
synchronous high speed, digital subscriber line
opportunity as it becomes widely adopted.
- -------------------------------------------------------------------------------
VDSL We intend to develop a very high speed digital subscriber
line modem once very high speed digital subscriber line
technologies become more fully deployed. We expect that
this technology will provide downstream transmission
speeds of up to 52 Mbps and upstream transmission speeds
of up to 10 Mbps.
- -------------------------------------------------------------------------------
Server Side
- -------------------------------------------------------------------------------
VPN Controller Our virtual private network controller project is
expected to enhance HIDRA by integrating additional
functionality to support virtual private networks, or
virtual private network. The key to maximizing the value
of a virtual private network is the ability for companies
to upgrade their virtual private network as their
business needs change.
- -------------------------------------------------------------------------------
VOIP The Voice Over Internet Protocol project is expected to
enhance the HIDRA solution by integrating voice
capability into the HIDRA infrastructure such that HIDRA
will be able to provide voice over internet protocol
gateway functionality. HIDRA will implement voice
compression and packetization along with the signaling
and addressing gateway functions required for a complete
voice over internet protocol solution.
- -------------------------------------------------------------------------------
Cable
- -------------------------------------------------------------------------------
Cable Modem Cable modems connect PCs to the cable network and offer
downstream transmission speeds of up to 36 Mbps and
upstream transmission speeds of up to 10 Mbps. We are
researching cable technology to follow advancements and
will undertake a host signal processing cable modem
development if and when our studies show a significant
advantage over existing technologies.
</TABLE>
44
<PAGE>
Intellectual Property Licensing
We also offer our software-based solutions through intellectual property
licensing and product royalty arrangements. Current licensees of our
intellectual property, principally International Telecommunications Union-
standard technology, include modem and semiconductor manufacturers, such as
Conexant, Texas Instruments and U.S. Robotics, and RISC processor manufacturers
including Hitachi, Intel and NEC.
Customers
We sell our products directly and indirectly to a number of distributors and
customers. The following is a list of our principal distributors and our
representative customers, all of which have either purchased more than $100,000
of our products during fiscal year 1999 or are currently incorporating our
modem products into their product lines. The companies listed in the table
other than those identified as distributors are representative of the various
distribution channels in which we sell our products. Each of the companies
designated with an asterisk is an indirect customer of ours.
<TABLE>
<CAPTION>
Embedded
Modem Board Motherboard PC OEM Systems Systems
Distributors Manufacturers Manufacturers Companies Integrators Integrators
<S> <C> <C> <C> <C> <C>
Golden Way Amigo Asus Acer* Everex* Casio
InnoMicro Askey Computer FIC Dell* MicroCenter* Intel
Silicon
Application Aztech Talent Trade Asia emachines* Mitsuba* NEC
Corporation BTC Fujitsu* Tiny* Yamaha
E-Tech* Mitac*
Zoltrix Sharp*
TriGem
TwinHead*
- -------------------------------------------------------------------------------------
</TABLE>
For the six months ended June 30, 1999, revenues derived from sales to
customers Talent Trade Asia, TriGem and Silicon Application Corporation
accounted for approximately 42%, 20%, and 10%, respectively, of product sales.
For the year ended December 31, 1998, revenues derived from sales to customers
Silicon Application Corporation, BTC, Askey Computer and Zoltrix accounted for
15%, 13%, 12% and 12%, respectively, of our product sales. No other customers
represented more than 10% of our product sales for these periods.
Sales, Marketing and Support
We sell our products directly to modem board and motherboard manufacturers
who assemble and distribute the end product both directly to original equipment
manufacturers and systems integrators and indirectly through distributors. In
the United States, we primarily sell our products through direct sales. In
Taiwan, we sell our products through distributors such as Golden Way and
Silicon Application Corporation, and in Japan, through distributors such as
InnoMicro. 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 that
our products be included on the modem boards or motherboards that they purchase
from board manufacturers.
We employ a direct sales force with a thorough level of technical expertise,
product background and industry knowledge. Our sales force includes a highly
trained team of application engineers to assist customers in designing, testing
and qualifying system designs that incorporate our products. Our sales force
also supports the sales efforts of our distributors. We believe the depth and
quality of our sales support team is critical to:
. achieving design wins,
. improving customers' time to market,
45
<PAGE>
. 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. We market our products directly to both
prospective and existing customers. Additionally, we undertake broad scale
marketing programs in conjunction with key local and global partners. Our
marketing organization also provides a wide range of programs, materials and
events to support the sales organization.
As of June 30, 1999, we employed 54 individuals in sales, marketing and
support and maintained regional sales support operations in Tokyo, Japan,
Taipei, Taiwan and Paris, France.
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 an example of our
commitment to technical leadership, we have developed expertise in the
following major areas:
. Digital Signal Processing Algorithms. This expertise enables us to
recognize ongoing revenue from the licensing of our reference designs, as
well as further optimization for our software digital signal processing
implementations.
. Software Digital Signal Processing. This expertise has allowed us to
provide the modem data pump functionality in the form of software. An
expensive and power consuming digital signal processing chip is no longer
needed.
. Modem Protocol. This expertise has enabled us to develop software
containing the necessary error correction and data compression protocols
such as v.42, v.42bis, MNP 2-5, Soft ATM and SAR.
. Telecommunications Infrastructure Interface. This expertise has allowed
us to develop the software connection to the public telephone network
through relays and the data access arrangement. This portion of the
software also performs the functionality of the universal asynchronous
receiver, transmitter, controller and memory while eliminating
significant amounts of hardware.
. Microsoft Windows Device Drivers. We have developed software expertise in
working within the Windows environment. The interrupt-driven architecture
of Windows operating systems presents many difficulties for software-
based connectivity solutions, including latency and other technical
issues. We have patented these solutions.
. Central Processing Units and Operating Systems. We have demonstrated our
expertise in porting our soft modem solution to all Windows operating
systems, including Windows NT and Windows CE, in addition to other
operating systems, such as OS/2, VXWorks and Linux. We have also ported
our technology to various high performance processor platforms, such as
those from Advanced Micro Devices, ARM, Cyrix, Intel/StrongARM and MIPS.
Expertise in these systems, which are utilized in embedded systems
applications, allows us to integrate our technology into devices such as
internet appliances.
. Host Signal Processing Architecture. We have leveraged our leadership in
host signal processing and extended the architecture to include
innovations such as accelerated host signal processing, which will be
used in our future G.Lite product. This modification delivers maximum
software content along with any required application-specific hardware to
deliver the most cost-effective solution in the market.
These multiple areas of expertise represent distinct disciplines which are
combined in one unique cross-functional development team. Communications
Systems Division, which we acquired in December 1998, provides us with
additional areas of expertise, including the experience of successfully
introducing intellectual property for inclusion into International
Telecommunications Union standards. We believe these technical and
46
<PAGE>
organizational skills provide us significant competitive advantages. As of June
30, 1999, we employed 58 employees in research and development, 36 of whom have
advanced degrees, including nine who have earned PhDs.
Manufacturing
We outsource the manufacturing of our application specific integrated
circuit, coder/decoder and data access arrangement chips to independent
foundries in order to avoid significant fixed overhead, staffing and capital
requirements associated with semiconductor fabrication.
Our primary chipset suppliers are Delta Integration, Kawasaki/LSI, ST
Microelectronics, Silicon Labs and Taiwan Semiconductor Manufacturing
Corporation. The major operations of each of these manufacturers meet ISO-9001
international manufacturing standards. Our data access arrangement chips are
currently purchased from Silicon Labs on a purchase order basis. We have a
limited guaranteed supply of data access arrangement chips through a long-term
contract 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 hold a total of 32 patents and also
have 26 additional patent applications pending or filed. The following table
describes our material patents and their expiration dates:
<TABLE>
<CAPTION>
Patent Expiration
No. Date Effect
- -------------------------------------------------------------------------------
<C> <C> <S>
5,931,950 6/17/2017 This patent relates to circuits and methods for
allowing a computer to enter a power conserving mode
while executing a host signal processing modem.
- -------------------------------------------------------------------------------
5,787,305 7/28/2015 This patent relates to a software emulation of a
universal asynchronous receiver transmitter.
- -------------------------------------------------------------------------------
5,721,830 9/12/2015 This patent relates to circuits and methods for
maintaining a communication link.
- -------------------------------------------------------------------------------
5,822,371 10/13/2017 This patent relates to a type of mapper known as a PAM
mapper used in a modem which is compliant with the
v.90 modem standard.
- -------------------------------------------------------------------------------
5,048,056 6/8/2000 This patent relates to a particular mapping technique
used by a modem which is compliant with the v.34 modem
standard.
- -------------------------------------------------------------------------------
5,291,520 1/13/2002 This patent relates to apparatus and methods for modem
equalization which are used in a modem compliant with
the v.34 modem standard.
- -------------------------------------------------------------------------------
5,465,273 6/24/2004 This patent relates to a type of encoder known as a
trellis encoder which is used in a modem compliant
with the v.34 modem standard.
- -------------------------------------------------------------------------------
5,265,151 7/26/2001 This patent relates to methods and apparatus for
improving the performance of a modem which is
compliant with the v.34 modem standard.
- -------------------------------------------------------------------------------
5,260,971 2/6/2011 This patent relates to apparatus and methods for modem
equalization which are used in a modem compliant with
the v.34 modem standard.
- -------------------------------------------------------------------------------
4,841,561 12/8/1997 This patent relates to methods and apparatus that allow
data communication equipment such as modems to be used
in different countries.
</TABLE>
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.
47
<PAGE>
Our industry is characterized by frequent litigation regarding patent and
other intellectual property rights. We have been sued by ESS Technology on
patent related claims. See "Business--Legal Proceedings." In addition, in
September 1998, Motorola filed a patent infringement lawsuit against us and
another modem manufacturer in the U.S. District Court for the District of
Massachusetts, which suit was subsequently refiled in Delaware. We answered
Motorola's complaint by denying infringement of Motorola's patents. We also
made several counterclaims against Motorola. In addition, we filed a patent
infringement lawsuit against Motorola in the U.S. District Court for the
District of Delaware. In September 1999, we reached a settlement with Motorola
as to all claims raised by both parties. The settlement provides for the cross-
licensing of patented technologies between us and Motorola, a royalty payment
by us to Motorola based on sales of some of our soft modem products and
limitations on the ability of either company to sue the other. We believe the
settlement agreement that we reached with Motorola will have no material effect
on our financial performance or on our competitive position in our industry.
We have received communications from third parties, including Lucent and Dr.
Brent Townshend, claiming to own patent rights in technologies that are part of
communications standards adopted by the International Telecommunications Union,
such as v.90, v.34, v.42bis and v.32bis, and other common communications
standards. These third parties claim that our products utilize these patented
technologies and have requested that we enter into license agreements with
them. At various times we have engaged in negotiations with, and are continuing
to negotiate with, Lucent to obtain licenses under its patents. To date, we
have not obtained any licenses from Lucent or Dr. Townshend, because we believe
that Lucent and Dr. Townshend have requested license fees or cross licenses of
our portfolio of intellectual property on terms that are not fair, reasonable
and nondiscriminatory as required by the International Telecommunications
Union.
In addition, there are numerous risks that result from our reliance on our
proprietary technology in the conduct of our business. See "Risk Factors--We
rely heavily on our intellectual property rights which offer only limited
protection against potential infringers. Unauthorized use of our technology may
result in development of products that compete with our products which could
cause our market share and our revenues to be reduced."
Competition
The connectivity device market is intensely competitive. Our current
competitors include 3Com, Conexant, ESS Technology, Lucent Technologies and
Motorola. Motorola introduced soft modems in the third quarter of 1998 and
Conexant introduced soft modems in the fourth quarter of 1998. We expect
competition to increase in the future as current competitors enhance their
product offerings, new suppliers enter the connectivity device market, new
communication technologies are introduced and additional networks are deployed.
We may in the future also face competition from other suppliers of products
based on host signal processing technology or new or emerging communication
technologies, which may render our existing or future products obsolete or
otherwise unmarketable. We believe that these competitors may include Alcatel,
Analog Devices, Aware, Broadcom, Com21, Efficient Networks, Orckit, Terayon
Communications and Texas Instruments.
Compared to us, many of our competitors, including those described above,
have:
. longer operating histories with more experience in designing and selling
connectivity device products and services,
. greater presence in our connectivity device markets, which can provide an
immediate advantage in marketing new product introductions,
. greater name recognition, which can facilitate customer acceptance of new
products and technologies,
. access to a larger customer base,
. substantially greater financial resources, which could enable a
competitor to significantly reduce the price of new products below
prevailing market rates to capture market share,
48
<PAGE>
. significantly greater research and development and other technical
resources, which may enable a competitor to respond more quickly to new
or emerging technologies and changes in customer requirements, or to
introduce new products that are superior to our products, and
. significantly greater sales and marketing resources to devote to the
promotion, sale and support of competitive products which could be
deployed to overcome business challenges.
We believe that the principal competitive factors required by users and
customers in the connectivity device market include compatibility with industry
standards, price, functionality, ease of use and customer service and support.
We believe that our products currently compete favorably in these areas.
Employees
As of June 30, 1999, we employed 125 people full-time, including 54 in sales
and marketing, 58 in research and development, and 13 in general and
administrative functions. Over 50% of our employees have advanced degrees, with
10 having earned doctoral level degrees. None of our employees is represented
by a labor union. We consider our employee relations to be good.
Properties
Our administrative offices are located in San Jose, California, where we
currently lease approximately 32,000 square feet under a lease that expires in
2001. We anticipate that we will relocate our administrative offices to larger
office facilities within the next six months. Our Communications System
Division is located in Waterbury, Connecticut, where we currently lease
approximately 6,000 square feet under a lease that expires in 2001. We also
have a sales support office in Taipei, Taiwan, where we lease approximately
3,000 square feet under a lease which expires in 2002. We also have a sales
support office in Tokyo, Japan, where we lease approximately 700 square feet
under a lease on a month to month basis.
Legal Proceedings
In April 1999, ESS Technology Inc. filed a complaint against us in the U.S.
District Court for the Northern District of California, alleging that we failed
to grant licenses for some of our International Telecommunications Union-
related patents to ESS on fair, reasonable and non-discriminatory terms. ESS's
complaint includes claims based on antitrust law, patent misuse, breach of
contract and unfair competition. In its complaint, ESS also seeks a declaration
that some of our International Telecommunications Union-related patents are
unenforceable and that we should be ordered by the court to grant a license to
ESS on fair, reasonable and non-discriminatory terms.
Due to the nature of litigation generally and because the lawsuit brought by
ESS is at an early stage, we cannot ascertain the outcome of the final
resolution of the lawsuit, the availability of injunctive relief or other
equitable remedies, or estimate the total expenses, possible damages or
settlement value, if any, that we may ultimately incur in connection with ESS's
suit. This litigation could be time consuming and costly, and we will not
necessarily prevail given the inherent uncertainties of litigation. However, we
believe that we have valid defenses to this litigation, including the fact that
other companies license these International Telecommunications Union-related
patents from us on the same terms that are being challenged by ESS. We believe
that it is unlikely this litigation will have a material adverse effect on our
financial condition or results of operations. We are vigorously contesting, and
intend to continue to vigorously contest, all of ESS's claims. See "Risk
Factors--We rely heavily on our intellectual property rights which offer only
limited protection against potential infringers. Unauthorized use of our
technology may result in development of products that compete with our products
which could cause our market share and our revenues to be reduced."
49
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table presents information regarding the executive officers
and directors of PC-Tel as of August 2, 1999.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Peter Chen............... 44 Chief Executive Officer, Chairman of the Board
William F. Roach......... 55 President and Chief Operating Officer
Andrew D. Wahl........... 50 Vice President, Finance, Chief Financial Officer
Steve Manuel............. 34 Vice President, Marketing
Frank Reo................ 54 Vice President, Business Development
William Wen-Liang Hsu.... 44 Vice President, Engineering, Secretary, Director
Han Yeh.................. 45 Vice President, Technology, Director
Derek S. Obata........... 41 Vice President, Sales
Richard C.
Alberding(1)(2)......... 68 Director
Martin H. Singer(2)...... 48 Director
Wen C. Ko................ 50 Director
Giacomo Marini(1)........ 47 Director
Mike Min-Chu Chen........ 50 Director
</TABLE>
- --------
(1)Member of audit committee
(2)Member of compensation committee
Mr. Peter Chen co-founded PC-Tel in March 1994 and has served as Chief
Executive Officer and Chairman of the Board, since PC-Tel's inception. Mr. Chen
is also the cousin of one of our directors, Dr. Mike Min-Chu Chen. Mr. Chen has
over 14 years experience in data communications and modem development at
Digicom Systems, Inc. (a company which he co-founded), Cermetek, Inc., and
Anderson-Jacobson, Inc., all data communications companies. Mr. Chen has a
Bachelor of Science in Control Engineering from National Chiao-Tung University,
Taiwan, and holds a Master of Science in Electrical Engineering from Arizona
State University.
Mr. William F. Roach has been the President and the Chief Operations Officer
of PC-Tel since August 1999. From January 1997 until joining PC-Tel, Mr. Roach
served as a Senior Vice President, Worldwide Sales and Marketing for Maxtor
Corporation, a data storage company, from November 1996 to January 1997 as
Executive Vice President for Worldwide Marketing for Wyle Electronics, an
electronic component distribution company, and from September 1989 to December
1996, as Executive Vice President, Worldwide Sales, for Quantum Corporation, a
data storage company. Mr. Roach received a Bachelor of Science in Industrial
Economics from Purdue University.
Mr. Andrew D. Wahl has been the Vice President of Finance and Chief
Financial Officer of PC-Tel since January 1997. From March 1995 to April 1996,
Mr. Wahl served as Chief Financial Officer and, from April 1996 to January
1997, as President and Chief Executive Officer for Designs for Education, Inc.,
an apparel company. From April 1993 to March 1995, Mr. Wahl served as Chief
Financial and Operations Officer for StarBase Corporation, an object-oriented
database developer. Prior to that, Mr. Wahl held various senior positions in
general management, finance and management consulting. Mr. Wahl received a
Bachelor of Arts in Political Science from Villanova University and a Master in
Business Administration in Accounting from Rutgers University.
Mr. Steve Manuel has been Vice President of Marketing of PC-Tel since
September 1997. Prior to that, Mr. Manuel served as Vice President of Sales
between January 1997 and September 1997. From March 1992 to June 1995, he
worked at Logitech, Inc., a computer input devices company, where he served as
the Strategic Original Equipment Manufacturer Account Development Manager and
the Director of Original Equipment
50
<PAGE>
Manufacturer Sales and Marketing for the Imaging Division from June 1995 to
January 1997. At Logitech, Inc., Mr. Manuel was initially responsible for
worldwide account management for numerous original equipment manufacturer
customers, and later worldwide sales and sales strategy development and
implementation. Mr. Manuel received an Associate of Science from Control Data
Institute.
Mr. Frank V. Reo has been PC-Tel's Vice President of Business Development
since February 1998. From February 1993 to February 1998, Mr. Reo served
initially as Manager and later as Director of Business Development for the
modem group at Cirrus Logic, a semiconductor company. In this position, he was
responsible for product marketing, business development and applications
engineering. Mr. Reo is a graduate in electronic engineering from Philco
Technical Institute, Philadelphia.
Mr. William Wen-Liang Hsu co-founded PC-Tel and has served as the Vice
President of Engineering and a director since its inception in March 1994. From
August 1988 to March 1994, Mr. Hsu served in various positions with Sierra
Semiconductor, a semiconductor company, including Engineering Director. At
Sierra Semiconductor, Mr. Hsu managed a development group, and was responsible
for digital signal processing firmware development for modem products with
data, fax and voice features. Mr. Hsu received a Bachelor of Science in
Communication Engineering from National Chiao-Tung University, Taiwan, and a
Master of Science in Computer Engineering from Oregon State University.
Mr. Han Yeh co-founded PC-Tel and has served as the Vice President of
Technology and a director since its inception in March 1994. Mr. Yeh was a
staff engineer at Sierra Semiconductor, a semiconductor company, from September
1993 to March 1994. Mr. Yeh holds a Bachelor of Science in Control Engineering
from National Chiao-Tung University, Taiwan, and a Master of Science in
Electrical Engineering from New York State University at Stony Brook.
Mr. Derek S. Obata has been Vice President of Sales for PC-Tel since April
1998. From August 1997 until joining PC-Tel, Mr. Obata was an independent
consultant providing strategic planning, business development, marketing and
sales support to emerging high technology companies. Mr. Obata served from
February 1996 to July 1997 as Vice President, Worldwide Sales for Network
Peripherals Incorporated, a networking company, and from September 1992 to
September 1995 as Vice President, Worldwide Sales at Ministor Peripherals
Corporation, a data storage company. Prior to this period, Mr. Obata served in
a number of sales and sales management positions with Conner Peripherals and
Seagate Technologies, which are data storage companies. Mr. Obata holds a
Bachelor of Science in Engineering Sciences from the University of California,
Berkeley.
Mr. Richard C. Alberding has been a director of PC-Tel since August 1999.
Mr. Alberding retired from the Hewlett-Packard Company, a computer, peripherals
and measurement products company, in June 1991, serving at that time as an
Executive Vice President with responsibility for worldwide company sales,
support and administration activities for measurement and computation products,
as well as all corporate level marketing activities. Mr. Alberding is a
director of Digital Link Corporation, Digital Microwave Corporation (which
included a nine month period as interim Chairman/CEO), JLK Direct Distribution
Inc., Paging Network, Inc., Sybase Inc. and Walker Interactive Systems. Mr.
Alberding holds a Bachelor of Arts in Business Administration/Marketing from
Augusta College in Rock Island, Illinois, and an Associate of Science in
Electrical Engineering from DeVry Technical Institute in Chicago.
Dr. Martin H. Singer has been a director of PC-Tel since August 1999. Since
December 1998, Dr. Singer has been President and CEO of SAFCO Technologies,
Inc., a wireless communications company. From November 1994 to December 1997,
Dr. Singer served as Vice-President and General Manger 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.
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Mr. Wen C. Ko has been a director for PC-Tel since May 1999. Since 1990, Mr.
Ko has served as Chairman of seven WK Investment Funds, which are high-tech
venture capital investment companies, and during April 1992 to April 1995 as
Chairman of Taipei Venture Capital Association. Prior to this, Mr. Ko served in
a number of positions including Chairman & President and Computer Country
Manager at Hewlett Packard Taiwan Ltd., a computation and communication system
manufacturer and Research & Development Manager at International Business
Machines, an information system technology company. Mr. Ko holds a Bachelor of
Science in Electrical Engineering from National Cheng Kung University, Taiwan,
and a Master of Science in System Science from Michigan State University.
Mr. Giacomo Marini has been a director of PC-Tel since October 1996. Since
March 1995 Mr. Marini has served as President of MK Group LLC, a private
investment and management consulting company that invests in and advises high
technology companies, and from February 1998 to February 1999 as Interim Chief
Executive Officer at FutureTel, Inc., a digital video company. From August 1993
to February 1995, Mr. Marini served as President and Chief Executive Officer of
No Hands Software, Inc., an electronic publishing software company. He is
currently on the board of various private companies. He holds a Computer
Science Laureate Degree from the University of Pisa, Italy.
Dr. Mike Min-Chu Chen has been a director of PC-Tel since February 1994 and
is the cousin of our Chief Executive Officer and Chairman of the Board, Peter
Chen. Dr. Chen has been the Chairman and Vice President of business development
of FaxTel, Inc. since August 1998. From May 1985 to August 1998, Dr. Chen
served as the Executive Vice President, Chief Executive Officer and Director of
C & C International Services, Inc., an engineering and procurement service
company. From March 1987 to August 1998, Dr. Chen served as Executive Vice
President, Chief Executive Officer and Director of Act Engineering, Inc., an
engineering design and trading company. From December 1996 to February 1997,
Dr. Chen served as director of ERT Holding, Inc., a company engaged in the
environmental rubber recycling manufacturing business, and served as President
of International Operations from December 1996 to February 1997 and then as
Chairman from February 1997 to October 1997. He is currently on the board of
various private companies. Dr. Chen holds a Bachelor of Science in Naval
Architecture from National Taiwan Ocean University, a Master in Science in
Mechanical Engineering and Naval Architecture from National Taiwan University,
Taiwan, and a Doctorate in Ocean Engineering from Oregon State University.
Board Composition
Our board of directors currently consists of eight members. Upon completion
of this offering, our bylaws will provide for a classified board of directors
consisting of three classes of directors, each serving staggered three-year
terms. As a result, a portion of our board of directors will be elected each
year. Class I directors' terms will expire at the annual meeting of
stockholders to be held in 2000, Class II directors' terms will expire at the
annual meeting of stockholders to be held in 2001 and Class III directors'
terms will expire at the annual meeting of stockholders to be held in 2002. The
Class I directors will be Peter Chen and Han Yeh, the Class II directors will
be Wen C. Ko, Richard C. Alberding and William Wen-Liang Hsu, and the Class III
directors will be Mike Min-Chu Chen, Giacomo Marini and Martin H. Singer. At
each annual meeting of stockholders held after the initial classification, the
successors to directors whose terms will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. In addition, our bylaws provide that the authorized number
of directors may be changed by an amendment to the bylaws, duly adopted by the
board of directors or by the stockholders or by a duly adopted amendment to the
certificate of incorporation. Any additional directorships resulting from an
increase in the number of directors will be distributed among the three classes
so that, as nearly as possible, each class will consist of one-third of the
total number of directors. This classification of the board of directors may
delay or prevent a change in control of our company or in our management.
Executive officers are appointed by the board of directors under our bylaws,
and the rights, if any, of an officer under any contract of employment.
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Board Committees
We established an audit committee and a compensation committee in August
1999. The audit committee consists of Giacomo Marini and Richard C. Alberding.
The audit committee reviews our internal accounting procedures and consults
with and reviews the services provided by our independent accountants. The
compensation committee consists of Richard C. Alberding and Martin H. Singer.
The compensation committee reviews and recommends to the board of directors the
compensation and benefits of all our officers and directors, including stock
compensation and loans, and establishes and reviews general policies relating
to the compensation and benefits of our employees.
Compensation Committee Interlocks and Insider Participation
Prior to establishing the compensation committee, the board of directors as
a whole performed the functions delegated to the compensation committee. No
member of the board of directors or the compensation committee serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of our board of
directors or compensation committee.
Director Compensation
We do not pay our directors cash compensation for their service as members
of the board of directors, although they are reimbursed for expenses in
connection with attendance at board and committee meetings. Under our 1998
director option plan, non employee directors automatically receive stock option
grants.
Limitations On Directors' Liability And Indemnification
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders,
. acts of omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
. unlawful payments of dividends or unlawful stock repurchases or
redemptions, or
. any transaction from which the director derived an improper personal
benefit.
The limitations of liability do not apply to liabilities arising under the
federal securities laws and do not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and officers and may indemnify our employees and other agents to
the fullest extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in their capacity as an officer, director, employee or other
agent, regardless of whether the bylaws would permit indemnification.
We have entered into agreements to indemnify our directors, executive
officers and controller, in addition to the indemnification provided for in our
bylaws. These agreements primarily provide for indemnification of our
directors, executive officers and controller for judgment, fines, settlement
amounts and expenses, including attorneys' fees incurred by the director,
executive officer or controller in any action or proceeding, including any
action by or in the right of PC-Tel, arising out of the person's services as a
director, executive officer or controller of us, any of our subsidiaries or any
other company or enterprise to which the person provides services at our
request. We believe that these provisions and agreements are necessary to
attract and retain qualified persons as directors and executive officers.
The limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty and may
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reduce the likelihood of derivative litigation against our directors and
officers, even though a derivative action, if successful, might otherwise
benefit us and our stockholders. A stockholder's investment in us may be
adversely affected to the extent we pay the costs of settlement or damage
awards against our directors and officers under these indemnification
provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees in which indemnification is sought, nor
are we aware of any threatened litigation that may result in claims for
indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of us under the
foregoing provisions or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission this indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Executive Compensation
The following table presents the compensation earned, awarded or paid for
services rendered to us in all capacities for the fiscal year ended December
31, 1998, by our Chief Executive Officer and our four next most highly
compensated executive officers who earned more than $100,000 in salary and
bonus during the fiscal year ended December 31, 1998 whom we refer to in this
prospectus collectively as the named executive officers:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------------- ------------
All Other Securities
Annual Underlying All Other
Salary ($) Bonus ($) Compensation ($) Options (#) Compensation ($)
---------- --------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Peter Chen.............. $173,750 $56,316 -- 125,000 $102(1)
Chief Executive Officer
and Chairman
Andrew D. Wahl.......... 136,500 31,833 -- 15,000 288(1)
Vice President, Finance
and Chief Financial
Officer
William Wen-Liang Hsu... 136,876 31,244 -- 90,000 102(1)
Vice President,
Engineering and
Secretary
Han Yeh................. 136,876 31,244 -- 90,000 174(1)
Vice President,
Technology
Derek S. Obata.......... 105,192 68,641 -- 195,000 72(1)
Vice President, Sales
</TABLE>
- --------
(1) Consists of premiums paid by us for term life insurance.
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OPTION GRANTS DURING LAST FISCAL YEAR
The following table shows information regarding stock options granted to the
named executive officers during the fiscal year ended December 31, 1998. The
potential realizable value is based on the assumption that our common stock
appreciates at the annual rate shown, compounded annually, from the date of
grant until the expiration of the ten-year term. These numbers are calculated
based on Securities and Exchange Commission requirements and do not reflect
projections or estimates of future stock price growth. Potential realizable
values are computed by:
. Multiplying the number of shares of common stock underlying each option
by the exercise price,
. Assuming that the total stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table for the entire
ten-year term of the option, and
. Subtracting from that result the total option exercise price.
Actual gains, if any, on stock option exercises will be dependent on the
future performance of the common stock. The percentage of total options is
based on an aggregate of 1,393,900 options granted by us during the fiscal year
ended December 31, 1998, to our employees, directors and consultants, including
the named executive officers. Options were granted with an exercise price equal
to the fair market value of our common stock, as determined in good faith by
our board of directors.
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------
Potential Realizable
% of Total Value at Assumed
Number of Options Annual Rates of
Securities Granted to Exercise Stock Appreciation
Underlying Employees Price for Option Term
Options During Per Expiration ---------------------
Name Granted (#) Period Share* Date 5% ($) 10% ($)
- ---- ----------- ---------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Peter Chen.............. 125,000(1) 8.97% $7.45 1/30/08 585,658 1,484,173
Andrew D. Wahl.......... 15,000(2) 1.08% $7.45 2/27/08 70,279 178,101
William Wen-Liang Hsu... 90,000(3) 6.46% $7.45 1/30/08 421,674 1,068,604
Han Yeh................. 90,000(4) 6.46% $7.45 1/30/08 421,674 1,068,604
Derek S. Obata.......... 130,000(5) 9.33% $7.45 3/31/08 609,084 1,543,540
65,000(6) 4.66% $4.85+ 4/30/08 198,259 502,427
</TABLE>
- --------
* Unless otherwise noted, the per share exercise price of stock option grants
is the fair market value of our common stock on the date of grant. In
determining the fair market value of our common stock for the purpose of
establishing the exercise price of stock option grants, the board of
directors in each case took into consideration a number of factors,
including principally our operating results and financial condition at the
time of stock option grant, key developments affecting our business and,
where relevant, the most recent price of our preferred stock in connection
with financing transactions with independent investors.
+ The fair market value of our common stock on the date of grant was $7.45;
however, our board of directors granted these options with an exercise price
per share of $4.85. We have taken a compensation charge for the difference
between the fair market value and the exercise price per share for these
options which will be expensed ratably over the life of the option.
(1) As of June 30, 1999, 44,271 shares of the option to purchase 125,000 shares
of common stock have vested. The options for Mr. Chen vested as to 25% on
January 2, 1999, and the balance vests in a series of monthly installments
over the next three years of service.
(2) As of June 30, 1999, 5,000 shares of the option to purchase 15,000 shares
of common stock have vested. The options for Mr. Wahl vested as to 25% on
February 1, 1999, and the balance vests in a series of monthly installments
over the next three years of service.
(3) As of June 30, 1999, 31,875 shares of the option to purchase 90,000 shares
of common stock have vested. The options for Mr. Hsu vested as to 25% on
January 2, 1999, and the balance vests in a series of monthly installments
over the next three years of service.
(4) As of June 30, 1999, 31,875 shares of the option to purchase 90,000 shares
of common stock have vested. The options for Mr. Yeh vested as to 25% on
January 2, 1999, and the balance vests in a series of monthly installments
over the next three years of service.
(5) As of June 30, 1999, 32,500 shares of the option to purchase 130,000 shares
of common stock have vested. The options for Mr. Obata vested as to 25% on
April 20, 1999, and the balance vests in a series of yearly installments
over the next three years of service.
(6) As of June 30, 1999, 18,958 shares of the non-qualified option to purchase
65,000 shares of common stock have vested. The shares for Mr. Obata under
this option vests five years from the anniversary date of the grant (April
20, 2003) or vesting may accelerate for a portion of the options based on a
performance based vesting schedule.
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<PAGE>
AGGREGATE OPTION EXERCISES DURING LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table presents information regarding the named executive
officers concerning option exercises for the year ended December 31, 1998 and
exercisable and unexercisable options held as of December 31, 1998. The value
of unexercised in-the-money options is based on a price of $9.25 per share, the
fair market value of our stock on December 31, 1998 as determined by our board
of directors, minus the per share exercise price, multiplied by the number of
shares underlying the option. As of June 30, 1999, no options to purchase our
common stock granted since January 1, 1998 have been exercised by the named
executive officers.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities Underlying In-the-Money Options at
Options at December 31, 1998 December 31, 1998
----------------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
--------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Peter Chen.............. 87,502 162,498 $767,830 $554,045
Derek S. Obata.......... -- 195,000 -- 520,000
Andrew D. Wahl.......... 62,292 82,708 498,336 568,664
Han Yeh................. 45,000 135,000 394,875 556,875
William Wen-Liang Hsu... 45,000 135,000 394,875 556,875
</TABLE>
Incentive Stock Plans
1995 Stock Plan
Our 1995 stock plan provides for the granting to employees of incentive
stock options under Section 422 of the most recent Internal Revenue Code of
1986, or the Code, and for the granting to employees and consultants of
nonstatutory stock options. The maximum aggregate number of shares which may be
optioned and sold under the 1995 stock plan is 3,200,000 shares of common
stock. As of December 31, 1998, options to purchase an aggregate of 662,753
shares of common stock were outstanding under the 1995 stock plan, with a
weighted average exercise price of $0.234. The board of directors has
determined that no further options will be granted under the 1995 stock plan
after this offering. The 1995 stock plan provides that in the event of a merger
of our company with or into another corporation, or the sale of substantially
all of our assets, each outstanding option will be assumed or substituted for
by the successor corporation. If the successor corporation refuses to assume or
substitute for the options, the options will terminate as of the closing of the
merger or sale of assets.
1997 Stock Plan
Our 1997 stock plan, which we amended and restated on August 3, 1999,
provides for the granting to employees of incentive stock options under Section
422 of the Code, and for the granting to employees and consultants of
nonstatutory stock options and stock purchase rights. The 1997 stock plan was
originally approved by the board of directors and stockholders in November 1996
and was amended by our board of directors and stockholders in August 1999. As
of December 31, 1998, options to purchase an aggregate of 2,422,555 shares of
common stock were outstanding under the 1997 stock plan with a weighted price
of $5.575. Unless terminated sooner, the 1997 stock plan will terminate
automatically in 2007. A total of 5,500,000 shares of common stock are
currently reserved for issuance under the 1997 stock plan, plus annual
increases equal of the lesser of:
. 700,000 shares,
. 4% of the outstanding shares on such date, or
. a lesser amount determined by the board.
The 1997 stock plan may be administered by the board of directors or a
committee of the board. The board of directors or committee of the board has
the power to determine the terms of the options or stock purchase rights
granted, including the exercise price, the number of shares for each option or
stock purchase
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right, the exercisability of the options or stock purchase rights granted, and
the form of consideration payable upon the exercise. In addition, the board of
directors or committee of the board has the authority to amend, suspend or
terminate the 1997 stock plan, provided that this action may not affect any
share of common stock previously issued and sold or any option previously
granted under the 1997 stock plan.
Options and stock purchase rights granted under the 1997 stock plan are not
generally transferable by the optionee, and each option and stock purchase
right is exercisable during the lifetime of the optionee only by the optionee.
Options granted under the 1997 stock plan must generally be exercised within
three months of the end of optionee's status as an employee or consultant of
our company, or within twelve months after the optionee's termination by death
or disability, but in no event later than the expiration of the option's ten
year term. The exercise price of all incentive stock options granted under the
1997 stock plan must be at least equal to 100% of the fair market value of the
common stock on the date of grant. The exercise price of nonstatutory stock
options and stock purchase rights granted under the 1997 stock plan is
determined by the board of directors or a committee of the board, but with
respect to nonstatutory stock options intended to qualify as "performance based
compensation" under Section 162(m) of the Code, the exercise price must at
least be equal to 100% of the fair market value of the common stock on the date
of grant. For any participant who owns stock possessing more than 10% of the
voting power of all classes of our outstanding capital stock, the exercise
price of any incentive stock option granted must equal at least 110% of the
fair market value on the grant date and the term of the incentive stock option
must not exceed five years. The term of all other options granted under the
1997 stock plan may not exceed ten years.
The 1997 stock plan provides that in the event of a merger of our company
with or into another corporation, a sale of substantially all of our assets,
each option or right shall be assumed or an equivalent option or right
substituted by the successor corporation. If the outstanding options or rights
are not assumed or substituted as described in the preceding sentence, the
board of directors or a committee of the board shall provide for the optionee
to have the right to exercise the option or stock purchase right as to all of
the optioned stock, including shares which would not otherwise be exercisable
for a period of fifteen days from the date of the notice, and the option or
stock purchase right will terminate upon the expiration of the period.
1998 Employee Stock Purchase Plan
Our 1998 employee stock purchase plan was adopted by the board of directors
in May 1998 but will not become effective until the closing date of this
offering. A total of 800,000 shares of common stock has been reserved for
issuance under the 1998 employee stock purchase plan, plus annual increases
equal to the lesser of:
. 350,000 shares,
. 2% of the outstanding stock on such date, or
. a lesser amount determined by the board of directors.
The 1998 employee stock purchase plan, which is intended to qualify under
Section 423 of the Code, contains successive six-month offering periods. The
offering periods generally start on the first trading day on or after February
15 and August 15 of each year, except for the first offering period which
commences on the first trading day on or after the effective date of this
offering and ends on the last trading day on or before February 14, 2000.
Employees are eligible to participate if they are customarily employed by us
or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However any employee who:
. immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
. whose rights to purchase stock under all employee stock purchase plans of
our company accrues at a rate which exceeds $25,000 worth of stock for
each calendar year
may not be granted an option to purchase stock under the 1998 employee stock
purchase plan.
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The 1998 employee stock purchase plan permits participants to purchase
common stock through payroll deductions of up to 15% of the participant's
compensation. The maximum number of shares a participant may purchase during a
single offering period is 2,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the 1998 employee stock purchase plan is 85% of either the fair
market value of the common stock at the beginning or end of the offering period
whichever is lower. Participants may end their participation at any time during
an offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with us.
Rights granted under the 1998 employee stock purchase plan are not
transferable by a participant other than by will, the laws governing transfer
upon a participant's death, or as otherwise provided under the 1998 employee
stock purchase plan. The 1998 employee stock purchase plan provides that, in
the event of a merger of our company with or into another corporation or a sale
of substantially all of our assets, each outstanding option may be assumed or
substituted for by the successor corporation. If the successor corporation
refuses to assume or substitute for the outstanding options, the offering
period then in progress will be shortened and a new exercise date, before the
date of the proposed sale or merger, will be set. The 1998 employee stock
purchase plan will terminate in 2008. The board of directors has the authority
to amend or terminate the 1998 employee stock purchase plan, except that this
action may not adversely affect any outstanding rights to purchase stock under
the 1998 employee stock purchase plan.
1998 Director Option Plan
Non employee directors are entitled to participate in the 1998 director
option plan. The 1998 director option plan was adopted by the board of
directors in May 1998, but it will not become effective until the closing date
of this offering. The 1998 director option plan has a term of ten years, unless
terminated sooner by the board of directors. A total of 200,000 shares of
common stock have been reserved for issuance under the 1998 director option
plan.
The 1998 director option plan provides for the automatic grant of options to
purchase 15,000 shares of common stock to each new non employee director upon
election to the board of directors. Options to purchase 15,000 shares will vest
one-third on each anniversary of its date of grant until the option is fully
vested, provided that the optionee continues to serve as a director on these
dates. After the initial 15,000 share option is granted to the non employee
director, he or she shall automatically be granted an option to purchase 7,500
shares on January 1 of each year, if on this date he or she shall have served
on the board of directors for at least six months. The 7,500 share options
shall vest completely on the anniversary of their date of grant, provided that
the optionee continues to serve as a director on these dates. All of the
options granted under the 1998 director option plan shall have a term of 10
years. 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.
The 1998 director option plan provides that in the event of a merger of our
company with or into another corporation, a sale of substantially all of our
assets, each option or right shall be assumed or an equivalent option or right
substituted by the successor corporation. If the outstanding options or rights
are not assumed or substituted as described in the preceding sentence, the
board of directors or a committee of the board shall provide for the optionee
to have the right to exercise the option or stock purchase right as to all of
the optioned stock, including shares which would not otherwise be exercisable
for a period of thirty days from the date of the notice, and the option or
stock purchase right will terminate upon the expiration of the period. Options
granted under the 1998 director option plan must be exercised within three
months of the end of the optionee's tenure as a director of our company, or
within twelve months after the director's termination by death or disability,
but in no event later than the expiration of the option's ten year term. No
option granted under the 1998 director option plan is transferable by the
optionee other than by will or the laws of descent and distribution, and each
option is exercisable, during the lifetime of the optionee, only by the
optionee.
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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 compenation to the 401(k) plan up to
the statutorily prescribed annual limit, which was $10,000 in 1998.
Contributions by employees to the 401(k) plan, and income earned on plan
contributions, are not taxable to employees until withdrawn. Further,
contributions by PC-Tel, if any, will be deductible by PC-Tel, when made.
Participating employees vest in employer contributions over five years at a
rate of 20% for each year of service. There have been no employer contributions
to the 401(k) plan during the year.
Employment Agreements and Change of Control Arrangements
We require each of our employees to enter into confidentiality agreements
prohibiting the employee from disclosing any of our confidential or proprietary
information. In addition, the agreements generally provide that upon
termination the employee will not solicit our employees. At the time of
commencement of employment, our employees also generally sign offer letters
specifying basic terms and conditions of employment. In general, our employees
do not have any written employment agreements with us.
We entered into an agreement on March 31, 1998 with Derek S. Obata which
provides that his employment is at-will, he will receive an annual salary of
$150,000, plus commissions, and that in the event of a change in control of our
company, he will be entitled to one year severance pay.
We entered into an agreement on July 20, 1999 with William F. Roach. The
agreement provides that his employment will be at-will and his annual salary
will be initially set at $250,000 per year with an annual bonus of $150,000
payable upon our achieving quarterly net income targets.
In addition, the agreement provides for Mr. Roach to be granted an option to
purchase 400,000 shares of our common stock which vests according to the
following schedule: 30% at the end of his first year of employment, 25% in
years two and three and 20% in year four. Vesting after the twelfth month of
employment is on a monthly basis. If this offering should take place within the
first year of his employment, 50% of his first year's options will vest at the
time of the offering, and the remaining 50% of his first year's options will
vest upon reaching the completion of his twelfth month of employment. In
addition, if his employment is terminated for any reason, other than for cause,
he will be entitled to one year of severance. If the termination occurs within
the first year of employment, he will be entitled to exercise his entire first
year stock options.
59
<PAGE>
TRANSACTIONS WITH RELATED PARTIES AND INSIDERS
Since January 1, 1995, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we were or are to be
a party in which the amount exceeds $60,000, and in which any director,
executive officer, holder of more than 5% of our common stock or any member of
the immediate family of any of the foregoing persons had or will have a direct
or indirect material interest other than compensation agreements and other
agreements, which are described under "Management," and the transactions
described below.
Transactions with Directors, Executive Officers and 5% Stockholders
Series A preferred stock. Between February 10, 1994 and March 14, 1995, we
sold 4,413,333 shares of our common stock at a price per share between $0.10
and $0.30. On May 9, 1995, we effected a recapitalization of our outstanding
stock converting each share of common stock into one share of Series A
preferred stock. On June 29, 1995, we sold 222,222 shares of our Series A
preferred stock at a price per share of $0.30. The following table lists the
number of shares of Series A preferred stock sold to our directors, executive
officers or 5% stockholders (and any members of the immediate family of these
persons):
<TABLE>
<CAPTION>
Shares of
Series A
preferred stock
Purchaser purchased
--------- ---------------
<S> <C>
Peter & Sophia Chen......................................... 666,666
Han Yeh..................................................... 280,000
Mike Min-Chu Chen........................................... 666,666
Wen-Liang Hsu............................................... 200,000
Steel Su.................................................... 800,000
Ming-Hsiung Michael Ho...................................... 106,666
</TABLE>
Series B preferred stock. Between October 18, 1995 and January 10, 1996, we
sold 3,250,000 shares of our Series B preferred stock at a price per share of
$1.20. The following table lists the number of shares of Series B preferred
stock sold to our directors, executive officers or 5% stockholders (and any
members of the immediate family of these persons):
<TABLE>
<CAPTION>
Shares of
Series B
preferred stock
Purchaser purchased
--------- ---------------
<S> <C>
WK Technology Fund.......................................... 555,800
WK Technology Fund II....................................... 402,500
WK Technology Fund III...................................... 958,366
</TABLE>
Series C preferred stock. On February 4, 1998, we sold 625,200 shares of our
Series C preferred stock at a price per share of $8.00. The sale of Series C
preferred stock included the sale of 125,000 shares of Series C preferred stock
to WK Technology Funds, which is a holder of more than 5% of our common stock.
In addition, Wen C. Ko, one of our directors, is Chairman of WK Technology
Fund, WK Technology Fund II and WK Technology Fund III.
Employment Agreements with Executive Officers
We entered into an agreement on March 31, 1998 with Derek S. Obata which
provides that his employment is at-will and he will receive an annual salary of
$150,000, plus commissions.
60
<PAGE>
We entered into an agreement on July 20, 1999 with William F. Roach. The
agreement provides that his employment will be at-will and his annual salary
will be initially set at $250,000 per year with an annual bonus of $150,000
payable upon our achieving quarterly net income targets.
In addition, the agreement provides for Mr. Roach to be granted an option to
purchase 400,000 shares at an exercise price of $10.25 per share of our common
stock which vests according to the following schedule: 30% at the end of his
first year of employment, 25% in years two and three and 20% in year four.
Vesting after the twelfth month of employment is on a monthly basis. If this
offering should take place within the first year of his employment, 50% of his
first year's options will vest at the time of the offering, and the remaining
50% of his first year's options will vest upon reaching the completion of his
twelfth month of employment. In addition, if his employment is terminated for
any reason, other than for cause, he will be entitled to one year of severance.
If the termination occurs within the first year of employment, he will be
entitled to exercise his entire first year stock options.
Loan to Executive Officer
On August 3, 1999, our board authorized an unsecured loan to William F.
Roach, our President and Chief Operating Officer, by a full-recourse promissory
note, for a principal amount of $54,000 with a per annum interest rate of 8%.
The promissory note shall become immediately due and payable upon the earlier
of:
. one year from the date the promissory note is executed, or
. the termination of Mr. Roach's employment with us.
Other Transactions
Steel Su, a holder of more than 5% of our common stock and a member of our
board of directors from March 1995 until November 1997, served as the President
of BTC, a significant customer. For the years ended December 31, 1995, 1996,
1997 and 1998, the revenues generated from BTC were approximately $99,000,
$1,660,000, $2,153,000 and $4,953,000, respectively.
Indemnification
We have entered into indemnification agreements with each of our directors,
officers and controller. These indemnification agreements will require us to
indemnify our officers to the fullest extent permitted by Delaware law.
All future transactions, including any loans from us to our officers,
directors, principal stockholders or affiliates, will be approved by a majority
of the board of directors or, if required by law, a majority of disinterested
stockholders, and will be on terms no less favorable to us than could be
obtained from unaffiliated third parties.
61
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the beneficial
ownership of our common stock as of June 30, 1999, and as adjusted to reflect
the sale of our common stock offered by this prospectus, by:
. each of the individuals listed on the "Summary Compensation Table" above,
. each of our directors,
. each person (or group of affiliated persons) who is known by us to own
beneficially 5% or more of our common stock, and
. all current directors and executive officers as a group.
Beneficial ownership is determined according to the rules of the Securities
and Exchange Commission. In computing the number of shares beneficially owned
by a person and the percentage ownership of that person, shares of common stock
underlying options held by that person that are currently exercisable or
exercisable within 60 days of June 30, 1999 are considered outstanding. These
shares, however, are not considered outstanding for the purposes of computing
the percentage ownership of each other person.
Except as indicated in the footnotes to this table, each stockholder named
in the table has sole voting and investment power regarding the shares shown as
beneficially owned by them. This table also includes shares owned by a spouse
as community property. Percentage of ownership is based on 11,002,078 shares of
common stock outstanding on June 30, 1999 and 15,602,078 shares of common stock
outstanding after completion of this offering. This table assumes no exercise
of the underwriters' over-allotment option. Unless otherwise indicated, the
address of each of the individuals named below is: c/o PC-Tel, Inc., 70 Rio
Robles, San Jose, California 95134.
<TABLE>
<CAPTION>
Beneficial Ownership Prior to
Offering
--------------------------------
Percent
Shares Issuable Beneficially
Number of pursuant to Owned
Shares Options Exercisable -----------------
Beneficially within 60 days of Before After
Name and Address of Beneficial Owner Owned June 30, 1999 Offering Offering
- ------------------------------------ ------------ ------------------- -------- --------
<S> <C> <C> <C> <C>
5% Stockholders
Entities affiliated with the WK Technology
Funds(1)...................................... 1,916,666 16,146 17.5% 12.4%
10th Floor, 115, Sec. 3 Ming Sheng East Road
Taipei, Taiwan 23136
Steel Su....................................... 583,333 16,146 5.4 3.8
Directors and Executive Officers
Peter Chen(2).................................. 589,999 136,981 6.5 4.6
Andrew D. Wahl................................. -- 89,583 * *
Steve Manuel................................... -- 55,417 * *
William Wen-Liang Hsu(3)....................... 453,333 95,625 5.0 3.5
Han Yeh(4)..................................... 593,333 95,625 6.2 4.4
Derek S. Obata................................. -- 54,167 * *
Frank Reo...................................... -- 32,500 * *
Mike Min-Chu Chen(5)........................... 216,666 16,146 2.1 1.5
Giacomo Marini................................. 12,800 13,346 * *
Richard C. Alberding........................... -- -- * *
William F. Roach .............................. -- -- * *
Martin H. Singer............................... -- -- * *
Wen C. Ko(1)................................... 1,916,666 16,146 17.5 12.4
All directors and executive officers as a group
(13 persons).................................. 3,782,797 605,536 37.8 27.1
</TABLE>
- --------
*Less than 1% of the outstanding shares of common stock.
62
<PAGE>
(1) Includes 555,800 shares held by WK Technology Fund, 402,500 shares held by
WK Technology Fund II, and 958,366 shares held by WK Technology Fund III.
Wen C. Ko is one of our directors and is Chairman of the WK Technology
Funds. Mr. Ko disclaims beneficial ownership of the shares held by WK
Technology Fund, WK Technology Fund II, and WK Technology Fund III, except
to the extent of his pecuniary interest therein.
(2) Includes 240,666 shares held by Mr. Chen with his wife as community
property, 333,333 shares owned by himself individually, and 8,000 shares
held by each of his minor children living at home, Robert and Michael
Chen. Mr. Chen disclaims beneficial ownership of the shares held by his
children, except to the extent of his pecuniary interest therein.
(3) Includes 285,300 shares held by the William Wen-Liang Hsu and Rai-Yun Lee
Family Trust, a revocable trust, over which shares Mr. Hsu has joint
dispositive power, 123,700 shares held by himself personally, 20,830 held
by each of his children living at home, Frederick and Joanne Hsu and 2,673
shares held by Hui-Ju Wang, Mr. Hsu's mother. Mr. Hsu disclaims the
beneficial ownership of the shares held by his children and mother, except
to the extent of his pecuniary interest therein.
(4) Includes 577,333 shares owned by Mr. Yeh individually. Additionally
includes 16,000 shares held by Emily C. Yeh, a minor daughter who lives in
Mr. Yeh's home. Mr. Yeh disclaims beneficial ownership of the shares held
by Emily G. Yeh, except to the extent of his pecuniary interest therein.
(5) Includes 193,966 shares owned by Mr. Chen individually. Additionally
includes 11,350 shares held by each of his children living at home. Mr.
Chen disclaims beneficial ownership of the shares held by his children,
except to the extent of his pecuniary interest therein.
63
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Upon completion of the offering we will be authorized to issue 50,000,000
shares of common stock, $0.001 par value, and 5,000,000 shares of undesignated
preferred stock, $0.001 par value. The following is a summary description of
our capital stock.
Common Stock
As of June 30, 1999, there were 2,491,330 shares of common stock outstanding
which were held of record by 163 stockholders, as adjusted to reflect the
conversion of all outstanding shares of preferred stock upon closing of this
offering.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. The holders of common stock are
entitled to receive their proportionate share of the dividends, if any, as may
be declared from time to time by the board of directors out of funds legally
available for that purpose. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of PC-Tel, the holders of common stock
are entitled to their proportionate share of all assets remaining after payment
of liabilities, after taking into consideration the prior distribution rights
of preferred stock, if any, then outstanding. The common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock to be issued upon the closing of this offering will be
fully paid and nonassessable.
Preferred Stock
Immediately prior to this offering, our certificate of incorporation
provided for three series of preferred stock, Series A preferred stock of which
4,635,548 shares were issued and outstanding, Series B preferred stock, of
which 3,250,000 shares were issued and outstanding, and Series C preferred
stock, of which 625,200 shares were issued and outstanding. Upon the closing of
this offering, each outstanding share of Series A preferred stock, Series B
preferred stock, and Series C preferred stock will automatically convert into
one share of common stock.
Upon the closing of this offering, the board of directors will be
authorized, without stockholder approval, from time to time to issue up to an
aggregate of 5,000,000 shares of preferred stock, $0.001 par value per share,
in one or more series, each of the series to have such rights and preferences,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, as shall be determined by the board of
directors. The rights of the holders of common stock will be affected by, and
may be adversely affected by, the rights of holders of any preferred stock that
may be issued in the future. Issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for
others to acquire, or of discouraging others from attempting to acquire, a
majority of the outstanding voting stock of PC-Tel. We have no present plans to
issue any shares of preferred stock.
Warrants
At June 30, 1999, there were warrants outstanding to purchase a total of
200,000 shares of Series C preferred stock and 2,417 shares of common stock.
Upon the closing of this offering, the warrants to purchase 200,000 shares of
Series C preferred stock will become exercisable for an aggregate of 200,000
shares of common stock and will expire on December 31, 2008, unless earlier
exercised. The warrants to purchase 2,417 shares of common stock will expire on
February 4, 2001, unless earlier exercised. All warrants may be exercised on a
"net" basis. If a warrant is exercisable on a "net" basis, instead of paying
the exercise price in cash, the holder may instruct us to retain a number of
shares that has a fair market value at the time of exercise equal to the
aggregate exercise price.
64
<PAGE>
Registration Rights
The holders of 3,875,200 shares of common stock, and the holders of warrants
to purchase 200,000 shares of common stock or their permitted transferees, are
entitled to rights to register their shares under the Securities Act at any
time after 180 days following the closing of this offering. These rights are
provided under the terms of an agreement between us and the holders of
registrable securities. The holders of at least 30% of the registrable
securities then outstanding may require, on two occasions beginning after the
date of this prospectus, that we use our best efforts to register the
registrable securities for public resale. If we register any of our securities
either for our own account or for the account of other security holders, the
holders of registrable securities are entitled to include their shares of
common stock in the registration, depending on the ability of the underwriters
to limit the number of shares included in the offering. The holders of
registrable securities may also require us to register all or a portion of
their registrable securities on Form S-3 when use of the form becomes available
to us, provided that the proposed aggregate selling price (net of any
underwriters' discounts and expenses of sale) is at least $1.0 million. All
registration expenses must be borne by us and all selling expenses relating to
registrable securities must be borne by the holders of the securities being
registered.
Delaware Anti-Takeover Law and Charter and Bylaw Provisions
Provisions of Delaware law and our certificate of incorporation and bylaws
could make it more difficult to acquire us by means of a tender offer, a proxy
contest or otherwise and the removal of incumbent officers and directors. These
provisions, summarized below, are expected to discourage types of coercive
takeover practices and inadequate takeover bids and to encourage persons
seeking to acquire control of us to first negotiate with us. We believe that
the benefits of increased protection of our potential ability to negotiate with
the proponent of an unfriendly or unsolicited proposed to acquire or
restructure us outweigh the disadvantages of discouraging takeover or
acquisition proposals because negotiation of these proposals could result in an
improvement of their terms.
We must comply with Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested stockholder, unless the "business combination" or the transaction
in which the person became an interested stockholder is permitted under Section
203. Generally, a "business combination" would include a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the interested
stockholder. An "interested stockholder" would include a person who, together
with affiliates and associates, owns (or within three years prior to the
determination of interested stockholder status, did own) 15% or more of a
corporation's voting stock. The existence of this provision would be expected
to have an anti-takeover effect for transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Upon the closing of this offering, our certificate of incorporation and
bylaws will require that any action required or permitted to be taken by our
stockholders must be effected at a duly called annual or special meeting of the
stockholders and may not be effected by a consent in writing. In addition, upon
the close of this offering, special meetings of our stockholders may be called
only by the board of directors or some of our officers. Our certificate of
incorporation and bylaws also provide that, effective upon the closing of this
offering, our board of directors will be divided into three classes, with each
class serving staggered three-year terms. These provisions may have the effect
of deterring hostile takeovers or delaying changes in control or management of
PC-Tel.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Norwest Bank
Minnesota, N.A. Its address is 161 North Concord Exchange, St. Paul, Minnesota,
55075 and its telephone number at this location is (615) 450-4189.
65
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and a
significant public market for the common stock may not develop or be sustained
after this offering. Future sales of substantial amounts of common stock
(including shares issued upon exercise of outstanding options and warrants) in
the public market following this offering could adversely affect market prices
prevailing from time to time and could impair our ability to raise capital
through sale of our equity securities. As described below, no shares currently
outstanding will be available for sale immediately after this offering because
of contractual restrictions on resale. Sales of substantial amounts of our
common stock in the public market after the restrictions lapse could adversely
affect the prevailing market price and our ability to raise equity capital in
the future.
Upon completion of this offering we will have outstanding 15,602,078 shares
of common stock (based upon shares outstanding as of June 30, 1999), assuming
no exercise of the underwriters' over-allotment option and no exercise of
outstanding options or warrants that do not expire prior to completion of this
offering. Of these shares, the 4,600,000 shares sold in this offering will be
freely tradable without restriction under the Securities Act except for any
shares purchased by "affiliates" of PC-Tel as that term is defined in Rule 144
under the Securities Act.
The remaining 11,002,078 shares of common stock, and common stock
equivalents of 202,417 shares, held by existing stockholders were issued and
sold by us in reliance on exemptions from the registration requirements of the
Securities Act. 10,256,807 shares eligible for sale under Rule 144 are covered
by lock-up agreements with the underwriters that provide that we and those
holders of stock and options may not dispose of or hedge any common stock or
securities convertible into or exchangeable for shares of common stock. These
restrictions will be in effect for a period of 180 days after the date of this
prospectus. At any time and without notice, Banc of America Securities LLC may,
in its sole discretion, release all or some of the securities from these lock-
up agreements. In addition, holders of stock options could exercise these
options and sell some of the shares issued upon exercise as described below:
<TABLE>
<CAPTION>
Approximate
Shares Eligible
Relevant Dates for Future Sale Comment
------------------------------ --------------- ------------------------------------------
<S> <C> <C>
On effective date(1).......... 541,549 Shares sold in this offering and eligible
for sale under Rule 144(k)
90 days after effective 159,722 Additional shares eligible for sale under
date(2)...................... Rules 144 and 701
180 days after effective 9,730,807 All shares under lock-up released;
date(2)...................... additional shares eligible for sale under
Rules 144 and 701
More than 181 days after ef- 570,000 Additional shares becoming eligible for
fective date(2).............. sale under Rule 144 more than 180 days
after the effective date
</TABLE>
--------
(1) Assumes no exercise of the underwriters' over-allotment option.
(2) Assumes an effective date of October 15, 1999.
In addition, as of June 30, 1999, there were outstanding options and
warrants to purchase 4,018,127 shares of common stock. All these options and
warrants are under lock-up agreements.
Rule 144
In general, under Rule 144, an affiliate of PC-Tel, or person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for
at least one year, will be entitled to sell in any three-month period a number
of shares that does not exceed the greater of:
. 1% of the then outstanding shares of common stock (approximately 15,804
shares immediately after this offering), or
66
<PAGE>
. the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the SEC.
Rule 144 also restricts the manner in which securities can be sold. Sales
under Rule 144 must also comply with notice requirements and to the
availability of current public information about PC-Tel.
Rule 144(k)
Under Rule 144(k), a person who is not considered to have been one of our
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an "affiliate," is
entitled to sell these shares without complying with the manner of sale, notice
filing, volume limitation or notice provisions of Rule 144. Therefore, unless
otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
Rule 701
Rule 701 permits resale of shares in reliance upon Rule 144 but without
compliance with the holding period requirement, of Rule 144. Any employee,
officer or director of or consultant to PC-Tel who purchased shares by a
written compensatory plan or contract may be entitled to rely on the resale
provision of Rule 701. Rule 701 permits affiliates to sell their Rule 701
shares under Rule 144 without complying with the holding period requirements of
Rule 144. Rule 701 further provides that non-affiliates may sell these shares
in reliance on Rule 144 without having to comply with the holding period,
public information, volume limitation or notice provisions of Rule 144. All
holders of Rule 701 shares are required to wait until 90 days after the date of
this Prospectus before selling such shares. However, all Rule 701 shares are
under lock-up agreements and will only become eligible for sale at the earlier
of the expiration of the 180-day lock-up agreements or no sooner than 90 days
after the offering upon obtaining the prior written consent of Banc of America
Securities LLC.
We are unable to estimate the number of shares that will be sold under Rule
144, as this will depend on the market price for the common stock and the
personal circumstances of the sellers.
180 days following the date of this prospectus, we intend to file a
registration statement on Form S-8 under the Securities Act covering shares of
common stock covered by outstanding options under the 1995 stock plan, the 1997
stock plan, the 1998 director option plan and the 1998 employee stock purchase
plan. Based on the number of shares covered by outstanding options as of
September 30, 1999 and currently reserved for issuance under the incentive
plans, the registration statement would cover approximately 9,700,000 shares.
The registration statement will automatically become effective upon filing.
Accordingly, shares registered under the registration statement will, after
complying with Rule 144 volume limitations applicable to affiliates of PC-Tel,
be available for sale in the open market immediately after the 180-day lock-up
agreements expire.
Registration Rights
Also beginning six months after the date of this offering, holders of
3,875,200 shares of common stock, as converted, and the holders of warrants to
purchase 200,000 shares of common stock, as converted, or their permitted
transferees will be entitled to specific rights to register these shares for
sale in the public market. See "Description of Capital Stock--Registration
Rights." Registration of these shares under the Securities Act would result in
these shares becoming freely tradable without restriction under the Securities
Act (except for shares purchase by affiliates) immediately upon the
effectiveness of the registration.
67
<PAGE>
UNDERWRITING
We are offering the shares of common stock described in this prospectus
through a number of underwriters. Banc of America Securities LLC, Warburg
Dillon Read LLC and Needham & Company, Inc., are the representatives of the
underwriters. We have entered into an underwriting agreement with the
representatives. According to the terms and conditions of the underwriting
agreement, we have agreed to sell to the underwriters, and each of the
underwriters has agreed to purchase, the number of shares of common stock
listed next to its name in the following table:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Banc of America Securities LLC.....................................
Warburg Dillon Read LLC............................................
Needham & Company, Inc.............................................
---------
Total............................................................ 4,600,000
=========
</TABLE>
The underwriters initially will offer shares to the public at the price
specified on the cover page of this prospectus. The underwriters may allow to
some dealers a concession of not more than $ per share. The underwriters
also may allow, and any other dealers may reallow, a concession of not more
than $ per share to some other dealers. If all the shares are not sold at
the initial public offering price, the underwriters may change the offering
price and the other selling terms. The common stock is offered under a number
of conditions, including:
. receipt and acceptance of our common stock by the underwriters, and
. the right to reject orders in whole or in part.
We have granted an option to the underwriters to buy up to 690,000
additional shares of common stock. These additional shares would cover sales of
shares by the underwriters which exceed the number of shares specified in the
table above. The underwriters have 30 days to exercise this option. If the
underwriters exercise this option, they will each purchase additional shares
approximately in proportion to the amounts specified in the table above.
We, all our stockholders and all of our officers and directors have entered
into lock-up agreements with the underwriters. Under those agreements, we and
those holders of stock and options may not dispose of or hedge any common stock
or securities convertible into or exchangeable for shares of common stock.
These restrictions will be in effect for a period of 180 days after the date of
this prospectus. At any time and without notice, Banc of America Securities LLC
may, in its sole discretion, release all or some of the securities from these
lock-up agreements.
We will indemnify the underwriters against some liabilities, including some
liabilities under the Securities Act. If we are unable to provide this
indemnification, we will contribute to payments the underwriters may be
required to make in respect of those liabilities.
The shares of common stock have been approved for listing on the Nasdaq
National Market under the symbol "PCTI."
In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include:
. short sales,
. stabilizing transactions, and
. purchase to cover positions created by short sales.
68
<PAGE>
Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in this offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while this offering
is in progress.
The underwriters also may impose a penalty bid. This means that if the
representatives purchase shares in the open market in stabilizing transactions
or to cover short sales, the representatives can require the underwriters that
sold those shares as part of this offering to repay the underwriting discount
received by them.
The underwriters may engage in activities that stabilize, maintain or
otherwise affect the price of the common stock, including:
. over-allotment,
. stabilization,
. syndicate covering transactions, and
. imposition of penalty bids.
As a result of these activities, the price of the common stock may be higher
than the price that otherwise might exist in the open market. If the
underwriters commence these activities, they may discontinue them at any time.
The underwriters may carry out these transactions on the Nasdaq National
Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed 5%
of the total number of shares of common stock offered by this prospectus.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be negotiated between us and the
underwriters. Among the factors to be considered in the negotiations are:
. our history and prospects, and the history and prospects of the industry
in which we compete,
. our past and present financial performance,
. an assessment of our management,
. the present state of our development,
. our prospects for future earnings,
. the prevailing market conditions of the applicable U.S. securities market
at the time of this offer,
. market valuations of publicly traded companies that we and the
underwriters believe to be comparable to us.
The underwriters have reserved up to 200,000 shares of the common stock to
be sold in this offering for sale to some of our employees, directors and their
associates, and to other individuals or companies who have commercial
arrangements or personal relationships with us. Through this directed share
program, we intend to ensure that those individuals and companies that have
supported us, or who are in a position to support us in the future, have the
opportunity to purchase our common stock at the same price that we are offering
our shares to the general public. We do not currently expect that more than
approximately 750 individuals (including our employees, directors and their
associates) and companies will participate in the directed share program.
Prospective participants will not receive any investment materials other than a
copy of this prospectus, and will be permitted to participate in this offering
at the initial public offering price presented on the cover page of this
prospectus. No commitment to purchase shares by any participant in the directed
share program will be accepted until after the registration statement of which
this prospectus is a part is effective and an initial public offering price has
been established. The number of shares available for sale to the general public
will be reduced by the number of shares sold through the directed share
program.
69
<PAGE>
LEGAL MATTERS
The validity of the common stock offered will be passed upon for us by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters will be passed upon for the underwriters by
Brobeck, Phleger & Harrison LLP, San Francisco, California. Certain legal
matters related to intellectual property will be passed on for PC-Tel by
Knobbe, Martens, Olson & Bear, LLP, Newport Beach, California.
EXPERTS
The consolidated financial statements and schedules of PC-Tel, Inc. included
in this prospectus and elsewhere in the registration statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports, and are included in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements of the Communications Systems Division, a division
of General DataComm, Inc. included in this prospectus and elsewhere in the
registration statement have been audited by PricewaterhouseCoopers LLP,
independent public accountants, as indicated in their report, and are included
in reliance upon the authority of said firm as experts in giving said report.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission, Washington, D.C., a
registration statement on Form S-1 under the Securities Act regarding the
shares of common stock sold in this offering. This prospectus does not contain
all the information in the registration statement and the exhibits and
schedules. For further information regarding PC-Tel and our common stock, we
refer you to the registration statement and to the exhibits and schedules that
were filed with the registration statement. Statements contained in this
prospectus as to the contents of any contract or other document that is filed
as an exhibit to the registration statement are not necessarily complete, and
we refer you to the full text of the contract or other document filed as an
exhibit to the registration statement. A copy of the registration statement may
be inspected by anyone without charge at the Public Reference Section of the
Securities and Exchange Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of all or any portion of the
registration statement may be obtained from the Public Reference Section of the
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of prescribed fees. The Securities and Exchange Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Securities and Exchange Commission. The address of the site is
http://www.sec.gov.
Upon completion of this offering, PC-Tel must comply with the information
and periodic reporting requirements of the Securities Exchange Act of 1934,
and, according to the requirements of the Securities Exchange Act of 1934, will
file periodic reports, proxy statements and other information with the
Securities and Exchange Commission. These periodic reports, proxy statements
and other information will be available for inspection and copying at the
regional offices, public reference facilities and web site of the Securities
and Exchange Commission referred to above.
70
<PAGE>
PC-TEL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PC-Tel, Inc.
Report of Independent Public Accountants............................... F-2
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statements of Stockholders' Equity........................ F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to the Consolidated Financial Statements......................... F-7
Communications Systems Division, a division of General DataComm, Inc.
Report of Independent Public Accountants............................... F-23
Balance Sheets......................................................... F-24
Statements of Income and Divisional Equity............................. F-25
Statements of Cash Flows............................................... F-26
Notes to Financial Statements.......................................... F-27
Unaudited Pro Forma Condensed Combined Statement of Operations of PC-Tel,
Inc. and Communications Systems Division
Pro Forma Condensed Combined Statement of Operations for the Year Ended
December 31, 1998 (unaudited)......................................... F-32
Notes to Pro Forma Condensed Combined Statement of Operations
(unaudited) .......................................................... F-34
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PC-Tel, Inc.:
We have audited the accompanying consolidated balance sheets of PC-Tel,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and
1998 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PC-Tel,
Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
San Jose, California
March 4, 1999
F-2
<PAGE>
PC-TEL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
---------------
June 30, 1999
Pro Forma
June Stockholders'
30, Equity
1997 1998 1999 (Note 8)
------- ------- ------- -------------
(unaudited)
ASSETS
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............ $ 6,685 $12,988 $17,252
Short-term investments............... -- -- 6,282
Accounts receivable, net of allowance
for doubtful accounts of $604,
$1,689 and $3,382, respectively..... 6,058 12,931 5,516
Subscriptions receivable............. 5,002 -- --
Inventories.......................... 989 2,073 3,590
Prepaid expenses and other assets.... 926 264 472
Deferred tax asset................... 2,680 1,903 2,241
------- ------- -------
Total current assets............... 22,340 30,159 35,353
PROPERTY AND EQUIPMENT, net............ 713 1,042 1,475
GOODWILL AND OTHER INTANGIBLE ASSETS,
net................................... -- 10,812 9,730
DEFERRED TAX ASSET..................... -- 2,302 2,417
OTHER ASSETS........................... 95 1,681 1,508
------- ------- -------
$23,148 $45,996 $50,483
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.... $ -- $ 1,640 $ 1,847
Accounts payable..................... 1,577 5,155 3,564
Accrued royalties.................... 6,505 5,144 6,516
Income taxes payable................. -- 1,207 2,044
Accrued liabilities.................. 1,418 3,002 5,021
------- ------- -------
Total current liabilities.......... 9,500 16,148 18,992
------- ------- -------
LONG-TERM DEBT, net of current
portion............................... 38 14,709 13,630
------- ------- -------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value;
aggregate liquidation preference of
$10,015 as of December 31, 1998 and
June 30, 1999
Authorized--9,385,548
Outstanding--7,885,548, 8,510,748,
8,510,748 and 0 shares pro forma,
respectively; subscribed--625,200,
0, 0 and 0 shares pro forma,
respectively....................... 9 9 9 $ --
Common stock, $0.001 par value
Authorized--50,000,000
Outstanding--2,208,990, 2,412,247,
2,491,330 and 11,002,078 shares pro
forma, respectively................ 2 2 2 11
Additional paid-in capital........... 9,667 10,915 12,881 12,881
Deferred compensation................ -- (214) (2,162) (2,162)
Retained earnings.................... 3,932 4,427 7,131 7,131
------- ------- ------- -------
Total stockholders' equity......... 13,610 15,139 17,861 17,861
------- ------- ------- -------
$23,148 $45,996 $50,483 $50,483
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
PC-TEL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended December 31, June 30,
----------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES............................ $16,573 $24,009 $33,004 $12,343 $33,046
COST OF REVENUES.................... 9,182 12,924 13,878 5,948 16,997
------- ------- ------- ------- -------
GROSS PROFIT........................ 7,391 11,085 19,126 6,395 16,049
------- ------- ------- ------- -------
OPERATING EXPENSES:
Research and development.......... 2,152 3,348 4,932 2,455 4,423
Sales and marketing............... 839 3,168 5,624 2,407 4,945
General and administrative........ 477 1,612 2,169 791 2,063
Acquired in-process research and
development (Note 4)............. -- -- 6,130 -- --
Amortization of deferred
compensation..................... 41 -- 43 10 164
------- ------- ------- ------- -------
Total operating expenses........ 3,509 8,128 18,898 5,663 11,595
------- ------- ------- ------- -------
INCOME FROM OPERATIONS.............. 3,882 2,957 228 732 4,454
------- ------- ------- ------- -------
OTHER INCOME (EXPENSE), NET:
Interest income................... 127 299 504 254 303
Interest expense.................. -- -- (25) (11) (895)
------- ------- ------- ------- -------
Total other income (expense),
net............................ 127 299 479 243 (592)
------- ------- ------- ------- -------
INCOME BEFORE PROVISION FOR INCOME
TAXES.............................. 4,009 3,256 707 975 3,862
PROVISION FOR INCOME TAXES.......... 1,005 955 212 292 1,158
------- ------- ------- ------- -------
NET INCOME.......................... $ 3,004 $ 2,301 $ 495 $ 683 $ 2,704
======= ======= ======= ======= =======
Basic earnings per share............ $ 4.79 $ 1.13 $ 0.21 $ 0.29 $ 1.10
Diluted earnings per share.......... $ 0.29 $ 0.20 $ 0.04 $ 0.06 $ 0.21
Shares used in computing basic
earnings per share................. 627 2,032 2,355 2,320 2,461
Shares used in computing diluted
earnings per share................. 10,280 11,645 12,325 12,400 12,638
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PC-TEL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
(Accumulated
Preferred Stock Common Stock Additional Deficit)/
---------------- ---------------- Paid-In Deferred Retained
Shares Amount Shares Amount Capital Compensation Earnings Total
--------- ------ --------- ------ ---------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1995................... 7,562,208 $ 8 -- $-- $ 4,593 $ -- $(1,373) $ 3,228
Issuance of Series B
convertible preferred
stock for cash at
$1.20 per share....... 323,340 -- -- -- 388 -- -- 388
Issuance of common
stock on exercise of
stock options......... -- -- 1,454,999 1 27 -- -- 28
Stock compensation
expense for stock
option grants......... -- -- -- -- 41 -- -- 41
Net income............. -- -- -- -- -- -- 3,004 3,004
--------- --- --------- --- ------- ------- ------- -------
BALANCE, DECEMBER 31,
1996................... 7,885,548 8 1,454,999 1 5,049 -- 1,631 6,689
Subscription for Series
C convertible
preferred stock for
cash at $8.00 per
share, net of issuance
costs of $406......... 625,200 1 -- -- 4,595 -- -- 4,596
Issuance of common
stock on exercise of
stock options......... -- -- 753,991 1 23 -- -- 24
Net income............. -- -- -- -- -- -- 2,301 2,301
--------- --- --------- --- ------- ------- ------- -------
BALANCE, DECEMBER 31,
1997................... 8,510,748 9 2,208,990 2 9,667 -- 3,932 13,610
Issuance costs for
Series C convertible
preferred stock....... -- -- -- -- (44) -- -- (44)
Deferred compensation
expense for stock
option grants......... -- -- -- -- 257 (257) -- --
Stock compensation
expense for stock
option grants......... -- -- -- -- -- 43 -- 43
Issuance of common
stock on exercise of
stock options......... -- -- 203,257 -- 34 -- -- 34
Issuance of Series C
convertible stock
warrants in
conjunction with notes
payable............... -- -- -- -- 1,350 -- -- 1,350
Costs incurred related
to initial public
offering.............. -- -- -- -- (349) -- -- (349)
Net income............. -- -- -- -- -- -- 495 495
--------- --- --------- --- ------- ------- ------- -------
BALANCE, DECEMBER 31,
1998................... 8,510,748 9 2,412,247 2 10,915 (214) 4,427 15,139
Deferred compensation
expense for stock
option grants
(unaudited)........... -- -- -- -- 2,112 (2,112) -- --
Stock compensation
expense for option
grants (unaudited).... -- -- -- -- -- 164 -- 164
Issuance of common
stock on exercise of
stock options
(unaudited)........... -- -- 79,083 -- 10 -- -- 10
Costs incurred related
to initial public
offering (unaudited).. -- -- -- -- (156) -- -- (156)
Net income
(unaudited)........... -- -- -- -- -- -- 2,704 2,704
--------- --- --------- --- ------- ------- ------- -------
BALANCE, JUNE 30, 1999
(unaudited)............ 8,510,748 $ 9 2,491,330 $ 2 $12,881 $(2,162) $ 7,131 $17,861
========= === ========= === ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PC-TEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING AC-
TIVITIES:
Net income.................... $ 3,004 $ 2,301 $ 495 $ 683 $ 2,704
Adjustments to reconcile net
income to net cash provided
by operating activities:
Acquired in-process research
and development.............. -- -- 6,130 -- --
Depreciation and
amortization................. 59 193 303 139 1,350
Amortization of deferred debt
costs........................ -- -- -- -- 152
Increase in allowance for
doubtful accounts............ 70 534 1,085 484 1,693
Increase in inventory
reserves..................... 1,514 488 330 146 525
Stock compensation expense for
stock option grants.......... 41 -- 43 10 164
Changes in assets and
liabilities, net of
acquisitions:
(Increase) decrease in
accounts receivable......... (2,247) (4,363) (8,391) (3,196) 5,722
(Increase) decrease in
inventories................. (1,850) 869 (1,352) (135) (2,042)
(Increase) decrease in
prepaid expenses and other
assets...................... (16) (975) 598 685 (190)
Increase in deferred tax
asset....................... (2,489) (191) (1,525) (73) (453)
Increase in accounts payable
and accrued liabilities..... 1,053 1,170 5,157 516 428
Increase (decrease) in
accrued royalties........... 2,531 3,974 (1,361) 1,758 1,372
Increase (decrease) in income
taxes payable............... 2,532 (2,532) 1,207 63 837
Increase (decrease) in
deferred revenue............ 551 (551) -- -- --
------- ------- -------- -------- --------
Net cash provided by
operating activities........ 4,753 917 2,719 1,080 12,262
------- ------- -------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment.................... (310) (427) (512) (149) (698)
Proceeds from sale of
available-for-sale
investments.................. -- 1,003 -- -- 3,254
Purchase of available-for-sale
investments.................. (948) -- -- -- (9,536)
Purchase of Communications
Systems Division, net of cash
acquired..................... -- -- (16,832) -- --
------- ------- -------- -------- --------
Net cash provided by (used
in) investing activities.... (1,258) 576 (17,344) (149) (6,980)
------- ------- -------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from notes payable... -- -- 16,313 -- --
Principal payments on notes
payable...................... -- -- -- -- (859)
Proceeds from issuance of
preferred stock.............. 388 -- 5,002 5,002 --
Costs incurred related to
issuance of preferred stock.. -- (406) (44) -- --
Costs incurred related to
proposed initial public
offering..................... -- -- (349) (262) (156)
Proceeds from issuance of
common stock................. 28 24 34 30 10
Principal payments on capital
lease obligations............ (2) (11) (28) (14) (13)
------- ------- -------- -------- --------
Net cash provided by (used
in) financing activities.... 414 (393) 20,928 4,756 (1,018)
------- ------- -------- -------- --------
Net increase in cash and cash
equivalents................. 3,909 1,100 6,303 5,687 4,264
CASH AND CASH EQUIVALENTS,
beginning of period........... 1,676 5,585 6,685 6,685 12,988
------- ------- -------- -------- --------
CASH AND CASH EQUIVALENTS, end
of period..................... $ 5,585 $ 6,685 $ 12,988 $ 12,372 $ 17,252
======= ======= ======== ======== ========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for interest........ $ -- $ -- $ 25 $ 11 $ 895
Cash paid for income taxes.... $ 961 $ 4,372 $ 462 $ 317 $ 775
Property and equipment
acquired under capital
leases....................... $ 7 $ 67 $ -- $ -- $ --
Issuance of warrants for
preferred and common stock... $ -- $ -- $ 1,400 $ 50 $ --
Increases to deferred
compensation................. $ -- $ -- $ 257 $ -- $ 2,112
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
PC-TEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information relating to the six months ended June 30, 1998 and June 30, 1999
is unaudited)
DECEMBER 31, 1998
1. ORGANIZATION AND OPERATIONS OF THE COMPANY:
PC-Tel, Inc. ("the Company") is a corporation that was originally
incorporated in California in February 1994. In July 1998, the Company
reincorporated in Delaware and this reincorporation has been reflected
retroactively in the accompanying consolidated financial statements. The
Company is a leading provider of software based connectivity solutions to
individuals and businesses worldwide. The Company designs, develops, produces
and markets advanced software-based high performance, low cost modems that are
flexible and upgradeable, with functionality that can include data/fax
transmission at various speeds, video conferencing and telephony features. The
Company's host signal processing software architecture utilizes the host PC's
central processing unit to perform digital signal processing and other
operations typically handled by dedicated hardware found in conventional
hardware-based modems. The Company's host signal processing technology allows
the elimination of this dedicated hardware, lowering costs and enhancing
capabilities.
The Company is subject to certain risks including, but not limited to,
competition from larger, more established companies, reliance on a limited
number of customers, dependence on new product introductions, short product
life cycles, the Company's ability to develop and bring to market new products
on a timely basis, volatility of the industry including technical obsolescence,
dependence on key employees and the ability to attract and retain additional
qualified personnel to manage the anticipated growth of the Company.
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 period.
Actual results could differ from those estimates.
Consolidation and Foreign Currency Translation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after elimination of intercompany accounts
and transactions. The functional currency of the Company's subsidiaries is the
United States dollar, accordingly, all translation gains and losses resulting
from transactions denominated in currencies other than United States dollars
are included in net income. As of December 31, 1998, the Company has
subsidiaries in the Cayman Islands and Japan.
Cash and Cash Equivalents
For the purposes of the consolidated balance sheets and the consolidated
statements of cash flows, the Company considers all highly liquid debt
instruments or money-market type funds with an original maturity of three
months or less to be cash equivalents.
Short-Term Investments
At June 30, 1999, short-term investments consist of U.S. Government
investments with an original maturity of approximately four months and a
certificate of deposit with an original maturity in excess of three months.
These short-term investments are classified as available-for-sale and are
recorded at their fair value. If
F-7
<PAGE>
PC-TEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
material, any unrealized gains or losses would be classified as Other
Comprehensive Income in the accompanying statement of stockholders' equity. As
of June 30, 1999, the cost and fair value of the short-term investments were
not materially different.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash investments and trade receivables. The
Company has cash investment policies that limit its investments to short-term,
low-risk investments. With respect to trade receivables, the Company's
customers are concentrated in the personal computer industry and modem board
manufacturer industry segment and in certain geographic locations. The Company
actively markets and sells products in Asia. The Company performs ongoing
evaluations of its customers' financial conditions and generally requires no
collateral. As of December 31, 1997, approximately 55% of gross accounts
receivable was concentrated with three customers. As of December 31, 1998,
approximately 54% of gross accounts receivable was concentrated with three
customers. As of June 30, 1999, approximately 48% of gross accounts receivable
was concentrated with three customers.
Inventories
Inventories are stated at the lower of cost or market and include material,
labor and overhead costs. Inventories at December 31, 1997 and 1998 and June
30, 1999 were composed of finished goods only. Inventories included certain
finished goods that were in excess of the Company's expected requirements and
the excess amounts were fully reserved as of December 31, 1997, 1998 and June
30, 1999. Due to competitive pressures and technological innovation, it is
possible these estimates could change in the near term.
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. Assets acquired under capital leases are recorded at the present
value of the related lease obligations and are depreciated on a straight-line
basis over the shorter of the estimated useful life or lease term. Included in
property and equipment are assets acquired under capital lease obligations with
an original cost of approximately $74,000. Accumulated amortization on the
leased assets was approximately $6,000 and $22,000 as of December 31, 1997 and
1998, respectively. Leasehold improvements are amortized over the corresponding
lease term.
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998 June 30, 1999
----- ------ -------------
(unaudited)
<S> <C> <C> <C>
Computer and office equipment................. $ 868 $1,296 $1,962
Furniture and fixtures........................ 119 264 271
Leasehold improvements........................ 6 55 72
----- ------ ------
Total property and equipment.............. 993 1,615 2,305
Less: Accumulated depreciation and
amortization................................. (280) (573) (830)
----- ------ ------
Property and equipment, net............... $ 713 $1,042 $1,475
===== ====== ======
</TABLE>
F-8
<PAGE>
PC-TEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounting for Impairment of Long-Lived Assets
The Company assesses the need to record impairment losses on long-lived
assets used in operations when indicators of impairment are present. On an on-
going basis, management reviews the value and period of amortization or
depreciation of long-lived assets, including costs in excess of net assets of
businesses acquired. During this review, the significant assumptions used in
determining the original cost of long-lived assets are reevaluated. Although
the assumptions may vary from transaction to transaction, they generally
include revenue growth, operating results, cash flows and other indicators of
value. Management then determines whether there has been a permanent impairment
of the value of long-lived assets by comparing future estimated undiscounted
cash flows to the asset's carrying value. If the estimated future undiscounted
cash flows exceed the carrying value of the asset, a loss is recorded as the
excess of the asset's carrying value over fair value. To date, the Company has
not needed to record any impairment losses on long-lived assets.
Software Development Costs
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The
Company's products include a software component. The Company has expensed all
software development costs to date, and substantially all development costs
have been incurred prior to the Company's products attaining technological
feasibility.
Revenue Recognition
Revenues consist primarily of sales of products to original equipment
manufactures ("OEMs") and distributors. Revenues from sales to OEMs are
recognized upon shipment. The Company provides for estimated sales returns and
allowances related to sales to OEMs at the time of shipment. Revenues from
sales to distributors are made under agreements allowing price protection and
rights of return on unsold products. In the fourth quarter of 1998, the Company
began to record revenue relating to sales to distributors only when the
distributors have sold the product to the end user. Prior to this change, the
Company recognized revenues upon shipment to distributors, net of reserves for
estimated returns and price protection arrangements. While the Company's
previous method of accounting was in accordance with generally accepted
accounting principles, the Company believes that the new method is preferable.
In the opinion of management, the new revenue recognition method better
reflects the economics of the transaction and provides a better measure of
operating results. In accordance with Accounting Principles Board Opinion No.
20, "Accounting Changes", ("APB No. 20"), the cumulative effect of changing the
Company's revenue recognition policies related to sales to distributors was not
material to the Company's financial statements.
The Company has also generated revenues from engineering contracts. Revenues
from engineering contracts are recognized as contract milestones are achieved.
Royalty revenue is recognized when confirmation of royalties due to the Company
is received from licensees.
Stock-Based Compensation
The Company accounts for stock based compensation in accordance with SFAS
No. 123 "Accounting for Stock-Based Compensation." SFAS No. 123 permits the use
of either a fair value based method or the method defined in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees",
("APB No. 25"), to account for stock-based compensation arrangements. Companies
that elect to employ the valuation method provided in APB No. 25 are required
to disclose the pro forma net income (loss) that would have resulted from the
use of the fair value based method. Under APB 25, if the exercise price of the
Company's
F-9
<PAGE>
PC-TEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
employee stock options equals or exceeds the fair value of the underlying stock
on the date of grant as determined by Company's board of directors, no
compensation expense is recognized. The Company has elected to continue to
determine the value of stock-based compensation arrangements under the
provisions of APB No. 25 and, accordingly, it has included the pro forma
disclosures required under SFAS No. 123 in Note 8.
Earnings Per Share
The Company computes earnings per share in accordance with SFAS No. 128,
"Earnings Per Share". SFAS No. 128 requires companies to compute net income per
share under two different methods, basic and diluted, and present per share
data for all periods in which a statement of operations is presented. Basic
earnings per share is computed by dividing net income per share by the weighted
average number of shares of common stock outstanding.
Diluted earnings per share is computed using the weighted average number of
common stock and common stock equivalents outstanding during the period. Common
stock equivalents consist of preferred stock using the "if converted" method
and stock options and warrants using the treasury stock method. Preferred
stock, common stock options and warrants are excluded from the computation of
diluted earnings per share if their effect is anti-dilutive.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin
No. 98, convertible preferred stock and common stock issued or granted for
nominal consideration prior to the anticipated effective date of the proposed
initial public offering must be included in the calculation of basic and
diluted net income per common share as if they had been outstanding for all
periods presented. To date, the Company has not had any issuances or grants for
nominal consideration.
The following table provides a reconciliation of the numerators and
denominators used in calculating basic and diluted earnings per share for the
three years ended December 31, 1998 and for the six months ended June 30, 1998
and June 30, 1999, respectively (in thousands, except per share data):
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended December 31, June 30,
----------------------- ---------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net income............................. $ 3,004 $ 2,301 $ 495 $ 683 $ 2,704
======= ======= ======= ======= =======
Basic earnings per share:
Weighted average common shares
outstanding......................... 627 2,032 2,355 2,320 2,461
------- ------- ------- ------- -------
Basic earnings per share............... $ 4.79 $ 1.13 $ 0.21 $ 0.29 $ 1.10
======= ======= ======= ======= =======
Diluted earnings per share:
Weighted average common shares
outstanding......................... 627 2,032 2,355 2,320 2,461
common stock option grants and
outstanding warrants................ 1,848 1,727 1,518 1,687 1,666
Weighted average preferred stock
outstanding......................... 7,805 7,886 8,452 8,393 8,511
------- ------- ------- ------- -------
Total weighted average common shares
and common stock equivalents........ 10,280 11,645 12,325 12,400 12,638
------- ------- ------- ------- -------
Diluted earnings per share............. $ 0.29 $ 0.20 $ 0.04 $ 0.06 $ 0.21
======= ======= ======= ======= =======
</TABLE>
F-10
<PAGE>
PC-TEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income." Comprehensive income is to include amounts which have
been previously excluded from net income and reflected instead in stockholders'
equity. For all periods presented, comprehensive income is the same as reported
net income.
The Cost of Computer Software Developed or Obtained for Internal Use
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which the Company adopted in
fiscal 1999. SOP No. 98-1 requires entities to capitalize certain costs related
to internal-use software once certain criteria has been met. The adoption did
not have a material impact on the Company's financial position or results of
operations.
Costs of Start-Up Activities
In April 1998, the American Institute of Certified Public Accountants issued
SOP No. 98-5 "Reporting on the Costs of Start-Up Activities," which the Company
adopted in fiscal 1999. SOP No. 98-5 requires that all start-up costs related
to new operations must be expensed as incurred. In addition, all start-up costs
that were previously capitalized must be written off when SOP No. 98-5 is
adopted. The adoption did not have a material impact on the Company's financial
position or results of operations.
Proposed Initial Public Offering
The Board of Directors has approved a plan to file a registration statement
with the Securities and Exchange Commission to register shares of its common
stock in connection with a proposed initial public offering ("IPO"). Costs
incurred by the Company related to the IPO have been recorded within the
consolidated statements of stockholders' equity. If the Company is not able to
complete the IPO, these capitalized costs would be expensed in the consolidated
statements of operations.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires certain accounting and reporting standards for derivative financial
instruments and hedging activities. The Company becomes subject to SFAS No. 133
for the first quarter beginning after January 1, 2001. Because the Company does
not currently hold any derivative instruments and does not engage in hedging
activities, the adoption of SFAS No. 133 is not expected to have a material
impact on the financial position or results of operations of the Company.
3. RISKS AND UNCERTAINTIES:
For the year ended December 31, 1998, the Company's purchases of integrated
circuits were primarily concentrated with a limited number of vendors. If these
vendors were unable to provide integrated circuits in a timely manner and the
Company was unable to find alternative vendors, the Company's business,
operating results and financial condition could be adversely affected.
The majority of the Company's 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 the Company's operating
results.
F-11
<PAGE>
PC-TEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. ACQUISITIONS:
Communications Systems Division
On December 22, 1998, the Company acquired substantially all of the assets
and certain of the liabilities of Communications Systems Division ("CSD"), a
division of General DataComm, Inc., for a total purchase price of approximately
$17 million. The acquisition, which was accounted for as a purchase, was paid
for in cash and financed primarily with notes payable. In conjunction with the
acquisition, the Company and one of its wholly owned subsidiaries entered into
Notes Payable arrangements for approximately $16.3 million (Note 5). The
consolidated statement of operations for the year ended December 31, 1998,
includes the results of operations of CSD from the date of acquisition. The
excess purchase price over the net tangible assets acquired was $16.8 million
of which $6.1 million was allocated to in-process research and development and
$10.7 million was allocated to other intangible assets. Amounts allocated to
other intangible assets (classified as Goodwill and Other Intangible Assets,
net in the accompanying consolidated balance sheets) include patents and
intellectual property of $8.7 million, work force of $1.3 million and goodwill
of $671,000, all of which are being amortized over their useful lives which was
five years on a weighted average basis. The allocation of purchase price is a
preliminary estimate by management and is subject to further adjustment.
Upon completion of the CSD acquisition, the Company immediately expensed
$6.1 million representing purchased in-process technology that had not yet
reached technological feasibility and had no alternative future use. The $6.1
million expensed as in-process research and development represented 37% of the
purchase price and was attributed and supported by a discounted probable cash
flow analysis that identified revenue on a project by project basis. The
following three in-process projects existed at CSD as of the acquisition date:
HIDRA (High Density Remote Access System), Industrial Modems, and xDSL (Digital
Subscriber Line) project. The value assigned to purchased in-process
technology, based on a percentage of completion discounted cash flow method,
was determined by identifying research projects in areas for which
technological feasibility has not been established.
Approximately $8.7 million, 53% of the purchase price, was attributed to
core technology and existing patented technology, related to the portfolio of
patents that address the v.34 (33.6 Kbs) and v.90 (56 Kbs) international modem
standards set by the International Telecommunications Union ("ITU"). The
portfolio is comprised of over 36 patents and filings, including four v.34
patents and two v.90 patents, which are required by the ITU standard, and three
v.90 patents considered very important in the manufacture of the v.90 modem.
The value was determined by estimating the costs to develop the purchased
in-process technology into commercially viable products, estimating the
resulting net cash flows from such projects and discounting the net cash flows
back to their present value. Approximately 69% of the in-process research and
development value was attributed to the HIDRA project, which is focused on
increasing the number of modems within the RAS (Remote Access Server). This
technology will represent a migration of the single and dual DSP (Digital
Signal Processing) platforms to enable higher density modems for central site
applications. Specifically, CSD is working to create three modem ports on each
DSP through the use of software. The xDSL (Digital Subscriber Line), which
represents 28% of the in-process research and development value, will encompass
a variety of DSL systems covering speeds from 53 Mbps down to 128 Kbps. Similar
to the HIDRA concept, CSD was working on an xDSL product technology that will
allow more than one DSL modem per DSP chip, thus attempting to optimize
transmission speeds. Industrial Modems, which represents approximately 3% of
the in-process research and development value, is an offshoot of the HIDRA
project. Based on the same architectural foundation as the HIDRA, Industrial
Modems are targeted at the industrial market for use in transmitting updated
information to and from remote sites.
The discount rate includes a risk adjusted discount rate to take into
account the uncertainty surrounding the successful development of the purchased
in-process technology. The risk-adjusted discount rate applied to the projects'
cash flows was 18% for existing technology and 24% for the in-process
technology. Based upon
F-12
<PAGE>
PC-TEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assessment of each in-process project's development stage, including relative
difficulty of remaining development milestones, it was determined that
application of a 24% discount rate was appropriate for all three acquired in-
process projects. The valuation includes cash inflows from in-process
technology through 2002 with revenues commencing in 1999 and increasing
significantly in 2000 before declining in 2002. A royalty payment of 3% was
assumed from in-process technology to existing technology, based on
management's estimate of a patent license rate. The High Density Remote Access
System and industrial modem projects were approximately 56% complete at the
time of the valuation and the expected timeframe for achieving these product
releases was assumed to be in the second half of 1999. The DSL project was
approximately 56% complete at the time of the valuation and the expected time
frame for achieving this product release is assumed to be in early 2000. The
percentage complete calculations for all projects were estimated based on
research and development expenses incurred to date and management estimates of
remaining development costs. Significant remaining development efforts must be
completed in the next 6 to 18 months in order for CSD's projects to become
implemented in a commercially viable timeframe. Management's cash flow and
other assumptions utilized at the time of acquisition do not materially differ
from historical pricing/licensing, margin, and expense levels of the CSD group
prior to acquisition.
If these projects are not successfully developed, the Company's future
revenue and profitability may be adversely affected. Additionally, the value of
other intangible assets acquired may become impaired.
The unaudited pro forma financial information for the years ended December
31, 1997 and 1998 is presented below as if CSD had been acquired on January 1,
1997. Pro forma net income excludes the write-off of acquired in-process
research and development of $6.1 million.
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------
1997 1998
------- -------
<S> <C> <C>
Revenues.................................................. $28,573 $35,632
Net income................................................ $ 2,272 $ 2,978
Diluted net income per share.............................. $ 0.20 $ 0.24
</TABLE>
5. NOTES PAYABLE:
On December 22, 1998, the Company and one of its wholly owned subsidiaries,
each entered into a note payable arrangement ("the Notes Payable") with a bank.
The Notes Payable are for a total amount of $16.3 million. The Notes Payable
bear interest at the bank's prime interest rate plus 0.5% (8.25% at
December 31, 1998) and are subject to certain financial and non-financial
covenants. In addition, the bank received a primary security interest in all
assets, including intellectual property, of the Company. The Notes Payable are
to be repaid in 59 equal monthly installments of approximately $258,000 and a
final payment of approximately $5.9 million in January 2004. The Company will
be required to pay a 3% penalty if the Notes Payable are paid prior to
maturity. No payments on the Notes Payable were required to be made by December
31, 1998.
As of December 31, 1998, the aggregate principal maturities of the Notes
Payable are as follows (in thousands):
<TABLE>
<S> <C>
1999.............................................................. $1,614
2000.............................................................. 1,936
2001.............................................................. 2,111
2002.............................................................. 2,291
2003.............................................................. 2,489
2004.............................................................. 5,882
</TABLE>
F-13
<PAGE>
PC-TEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the Notes Payable, the Company issued a warrant to
purchase 200,000 shares of Series C preferred stock at an exercise price of
$8.00 per share. The warrants are immediately exercisable and expire ten years
from the date of issuance. The fair value of the warrants at the date of the
issuance was estimated to be approximately $1.4 million using the Black-Scholes
option pricing model. The Company has recorded the fair value of the warrants
as a deferred charge which will be amortized over the term of the Notes
Payable.
6. COMMITMENTS AND CONTINGENCIES:
The Company leases its facilities under operating leases which expire
through September 2001. In addition, the Company leases certain of its
equipment under capital leases. As of December 31, 1998, the future minimum
lease commitments under all leases were as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
1999..................................................... $29 $ 647
2000..................................................... 4 517
2001..................................................... 4 62
2002..................................................... 3 --
--- ------
Total minimum lease payments............................. 40 $1,226
======
Less: Amounts representing interest...................... (4)
---
Present value of minimum lease payments.................. $36
===
</TABLE>
Rent expense under operating leases for the years ended December 31, 1996,
1997 and 1998 was approximately $139,000, $248,000 and $364,000, respectively.
In June 1998, the Company entered into a two year volume purchase agreement
with Silicon Labs, which included a minimum purchase amount of 600,000 chipsets
for the year ended December 31, 1998. For the year ended December 31, 1998, the
Company exceeded the minimum purchase amount from Silicon Labs. There was no
minimum purchase amount for the year ended December 31, 1999.
As of December 31, 1997 and 1998, the Company has accrued royalties of
approximately $6.5 million and $5.1 million, respectively. The Company has
entered into royalty agreements in fiscal 1998 and continues to negotiate
royalty agreements with several other third parties. Accordingly, the Company
has accrued its best estimate of the amount of royalties payable based on
royalty agreements already signed or in negotiation, as well as advice from
patent counsel. Should the final agreements result in royalty rates
significantly different from these assumptions, the Company's business,
operating results and financial condition could be materially and adversely
affected. During 1998, the Company reversed $3.0 million of accrued royalties.
Upon consummation of the Communications Systems Division acquisition in
December 1998, the Company reduced their royalty reserves because they believe
that in some instances they can obtain necessary licenses of third party
technologies in exchange for grants of cross licenses of their patent portfolio
rather than the payment of license fees or royalties.
During 1998, Motorola, Inc. ("Motorola") filed an action for patent
infringement against the Company (and one other defendant) of seven Motorola
patents. In its complaint, Motorola seeks damages for the Company's alleged
infringement, including treble damages for the Company's alleged willful
infringement and an injunction against the Company. Motorola is also seeking
attorney's fees and costs.
The Company filed an answer to Motorola's complaint denying infringement of
the seven asserted Motorola patents and asserted that each patent is invalid or
unenforceable. In addition, the Company asserted
F-14
<PAGE>
PC-TEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
counterclaims and declaratory relief for invalidity and/or unenforceability and
noninfringements of each of the seven asserted Motorola patents. By its
counterclaims, the Company seeks compensatory and punitive damages, an
injunction against Motorola, and an award of treble damages for Motorola's
violation of the Federal and state antitrust laws, and for violation of
Massachusetts General Law. The Company also seeks its costs and attorney's fees
in this action. In September 1999, the Company reached a settlement with
Motorola as to all claims raised by both parties. The settlement requires the
Company to make royalty payments to Motorola based on unit volume. As part of
the settlement, the Company granted a cross-license to Motorola to utilize
portions of the Company's technology and Motorola granted the Company a cross-
license to utilize portions of their technology. This settlement did not have a
material effect on the Company's financial position or operating results.
7. PREFERRED STOCK:
Series A convertible preferred stock ("Series A"), Series B convertible
preferred stock ("Series B") and Series C convertible preferred stock ("Series
C") consist of the following, net of issuance costs (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
June 30,
1997 1998 1999
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Series A:
$0.001 par value; Authorized--4,635,548
Outstanding--4,635,548 shares; liquidation pref-
erence of $1,113................................ $ 5 $ 5 $ 5
Series B:
$0.001 par value; Authorized--3,250,000
Outstanding--3,250,000 shares; liquidation pref-
erence of $3,900................................ 3 3 3
Series C:
$0.001 par value; Authorized--1,500,000
Outstanding or subscribed--625,200 shares;
liquidation preference of $5,002................ 1 1 1
------ ------ ---
$ 9 $ 9 $ 9
====== ====== ===
</TABLE>
The Series C preferred stock was subscribed as of December 31, 1997 and was
subsequently issued, and payment was received, in February 1998. Accordingly, a
subscription receivable of approximately $5.0 million was recorded as a current
asset at December 31, 1997 in the accompanying consolidated balance sheets.
The rights, restrictions and preferences of the Series A, Series B and
Series C (collectively "convertible preferred stock") are as follows:
. In the event of any liquidation, dissolution or winding up of the
Company, either voluntary or involuntary, the holders of Series C shares
shall be entitled to receive $8.00 per share, prior and in preference to
any distribution of the assets or surplus funds to the holders of Series
A, Series B and common stock, plus all declared but unpaid dividends on
each share of Series C. After payment of the full amount due to the
holders of Series C, the holders of Series A and Series B shall be
entitled to receive, prior to any distribution of the Company's assets or
property to the holders of common stock, the amount of $0.24 and $1.20
per share, respectively, plus all declared but unpaid dividends on each
share of Series A and Series B. The Series A and Series B shall rank on
parity as to the receipt of any respective preferential amount for Series
A and Series B shares. After payment of the full amount to Series A,
Series B and Series C shareholders, the holders of common stock shall be
entitled to receive an amount per share equal to $82,000 divided by the
number of common shares outstanding at the time of distribution
(excluding shares of common then issuable upon conversion of the
convertible preferred stock). Any remaining assets shall be distributed
ratably to the holders of convertible preferred stock and common stock,
each share of preferred being treated as the number of shares of common
into which it could then be converted.
F-15
<PAGE>
PC-TEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. Each share of convertible preferred stock is convertible, at the option
of the shareholder, into one share of common stock, subject to
adjustments to prevent dilution as provided in the respective stock
agreements.
. The holders of convertible preferred stock are entitled to the number of
votes equal to the number of shares of common stock into which each share
of convertible preferred stock could be converted.
. Each share of convertible preferred stock will automatically convert into
common stock in the event of the closing of an underwritten public
offering of the Company's common stock from which the Company receives
gross proceeds in excess of $15,000,000 and for which the offering price
is not less than $16.00 per share.
. Each convertible preferred stock shareholder is entitled to receive
annual dividends at a rate of $0.019 per Series A share, $0.096 per
Series B share and $0.64 per Series C share when, and if, declared by the
Board of Directors. No dividends shall be paid on shares of Series A or
Series B or common stock until total dividends have been paid, declared
or set apart for Series C shareholders. Series A, Series B and Series C
shareholders shall receive dividends prior to payment of dividends on
common stock. Dividends are non-cumulative. No dividends have been
declared to date.
8. COMMON STOCK:
As of June 30, 1999, the Company had reserved shares of its common stock for
future issuance as follows (unaudited):
<TABLE>
<S> <C>
Conversion of Series A preferred stock............................ 4,635,548
Conversion of Series B preferred stock............................ 3,250,000
Conversion of Series C preferred stock............................ 625,200
Conversion of Series C and common stock warrants.................. 202,417
1995 and 1997 Stock Option Plans.................................. 4,208,670
Director Option Plan and Employee Stock Purchase Plan............. 1,000,000
----------
13,921,835
==========
</TABLE>
Unaudited Pro Forma Stockholders' Equity
The Board of Directors have authorized the filing of a registration
statement with the Securities and Exchange commission to register shares of its
common stock in connection with a proposed initial public offering ("IPO"). If
the IPO is consummated under the terms presently anticipated, all of the
currently outstanding preferred stock will be converted into 8,510,748 shares
of common stock upon the closing of the IPO. The effect of the conversion has
been reflected as unaudited pro forma stockholders' equity in the accompanying
balance sheet as of June 30, 1999.
Stock Option Plans
The Company has two stock option plans, the 1995 Stock Option Plan ("1995
Plan") and the 1997 Stock Option Plan ("1997 Plan"). Under the 1995 Plan and
the 1997 Plan, the Board of Directors may grant to employees and consultants
options and/or purchase rights to purchase the Company's common stock at terms
and prices determined by the Board of Directors. The number of authorized
shares available for issuance under
F-16
<PAGE>
PC-TEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the 1995 Plan was 3,200,000. As of December 31, 1998, the number of shares that
remain available to be granted under the 1995 Plan is 152,673. The number of
authorized shares available for issuance under the 1997 Plan is 3,500,000. As
of December 31, 1998, the number of shares that remain available to be granted
under the 1997 Plan is 1,049,772.
In May 1998, the Board of Directors approved an increase in the number of
authorized shares available for issuance under the 1997 Plan to 4,500,000
shares of common stock. The increase to 4,500,000 shares was approved by the
stockholders in June 1998. In August 1999, the Board of Directors and the
stockholders approved the amendment and restatement of the 1997 Plan and
approved an additional increase in the number of authorized shares available
for issuance under the 1997 Plan to 5,500,000 shares of common stock. The
number of authorized shares under the 1997 Plan will increase annually by an
amount equal to the lesser of (i) 700,000 shares, (ii) 4% of the outstanding
shares on such date or (iii) a lesser amount determined by the Board of
Directors. The exercise price and vesting of all grants are to be determined by
the Board of Directors. The exercise price of incentive stock options cannot be
less than the fair market value of the common stock on the grant date, as
determined by the Board of Directors. The fair market value of the common stock
is determined by the Company's Stock Plan Committee, a committee within the
Board of Directors. In determining the fair market value of the Company's
common stock, the Stock Plan Committee in each case took into consideration a
number of factors, including the Company's operating results and financial
condition at the time of each stock option grant, key developments affecting
the Company's business and, where relevant, the most recent price of the
Company's preferred stock in connection with financing transactions with
independent investors. Options granted under the 1997 Plan expire 10 years from
the date of grant. The 1997 Plan will terminate in 2007.
1998 Director Option Plan ("Directors Plan")
The Directors Plan will not become effective until the effectiveness of the
proposed initial public offering. A total of 200,000 shares of common stock
have been reserved for issuance under the Directors Plan. The 1998 Director's
Plan provides for the automatic grant of 15,000 shares of common stock to each
new non-employee director upon election to the Board of Directors. The 15,000
share options will vest one-third as of each anniversary of its date of grant
until the option is fully vested, provided that the optionee continues to serve
as a director on such dates. After the initial 15,000 share option is granted
to the non-employee director, he or she shall automatically be granted an
option to purchase 7,500 shares each year on January 1, if on such date he or
she shall have served on the Board of Directors for at least six months. The
7,500 share options shall vest completely on the anniversary of their date of
grant, provided that the optionee continues to serve as a director on such
dates. All of the options granted under the 1998 Director's Plan shall have a
term of 10 years. 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.
Employee Stock Purchase Plan ("Purchase Plan")
In May 1998, a total of 800,000 shares of common stock were reserved for
future issuance under the 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. The Purchase Plan
will enable eligible employees to purchase common stock at the lower of 85% of
the fair market value of the Company's common stock on the first or last day of
each six-month offering period. The first offering period will begin upon the
closing date of the proposed initial public offering. The Purchase Plan will
terminate in 2008.
F-17
<PAGE>
PC-TEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Nonqualified options granted under the 1995 Plan and 1997 Plan must be
issued at a price equal to at least 85% of the fair market value of the
Company's common stock at the date of grant. The options 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 stock
option agreement, and vest over a vesting schedule determined by the Board of
Directors. Options issued to consultants and non-employees are expensed in the
period in which the services were provided.
Deferred Compensation
In connection with the grant of certain stock options to employees during
fiscal 1998 and the six months ended June 30, 1999, the Company recorded
deferred compensation of $257,000 and $2.1 million, respectively, representing
the difference between the estimated fair value of the common stock for
accounting purposes and the option exercise price of such options at the date
of grant. Such amount is presented as a reduction of stockholders' equity and
is amortized ratably over the vesting period of the applicable options. The
fair value of options issued to consultants and other non-employees are
expensed in the period in which the services are provided. During 1996, the
Company granted options to purchase shares of common stock at an exercise price
below the fair value of the Company's common stock at the date of grant.
Compensation expense of $41,000 was recognized in relation to those grants in
the year ended December 31, 1996. The amortization expense relates to options
awarded to employees in all operating expense categories. The amortization of
deferred compensation has not been separately allocated to these categories.
The amount of deferred compensation expense to be recorded in future periods
could decrease if options for which accrued but unvested compensation has been
recorded are forfeited.
Valuation of Stock Options
Pro forma information regarding net income and net income per share is
required by SFAS No. 123 and has been determined as if the Company had
accounted for its stock options under the fair value method of SFAS No. 123.
The fair value for the stock options was estimated at the date of grant using
the Black-Scholes option pricing model with the following assumptions for
fiscal years 1996, 1997 and 1998: risk-free interest rates in the range of 5.2%
to 6.5%; dividend yields of zero; an estimated volatility factor of the market
price of the Company's common stock in the range of 40% to 55%; and an expected
life of the option of six months after vest date. The weighted-average
estimated fair value of options granted during fiscal 1996, 1997 and 1998 was
$0.37, $2.32 and $3.43 per share, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility and
expected option life. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting periods. The Company's
pro forma net income (loss) would have been approximately $3.0 million, $2.0
million and $(984,000) for fiscal years 1996, 1997 and 1998, respectively. Pro
forma diluted net income (loss) per share would have been $0.29, $0.17 and
($0.42) for fiscal years 1996, 1997 and 1998, respectively.
F-18
<PAGE>
PC-TEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes stock option activity under the 1995 Plan and
1997 Plan:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------
Options Weighted Average
Available Shares Exercise Price
---------- ---------- ----------------
<S> <C> <C> <C>
Balance, December 31, 1995........ 437,003 2,762,997 $0.02
Granted......................... (674,670) 674,670 $0.26
Exercised....................... -- (1,454,999) $0.02
Forfeited....................... 237,667 (237,667) $0.05
---------- ---------- -----
Balance, December 31, 1996........ -- 1,745,001 $0.12
Authorized...................... 1,500,000 --
Granted......................... (1,172,830) 1,172,830 $2.32
Exercised....................... -- (753,991) $0.03
Forfeited....................... 95,590 (95,590) $0.91
---------- ---------- -----
Balance, December 31, 1997........ 422,760 2,068,250 $1.36
Authorized...................... 2,000,000 -- --
Granted......................... (1,393,900) 1,393,900 $8.13
Exercised....................... -- (203,257) $0.17
Forfeited....................... 173,585 (173,585) $2.52
---------- ---------- -----
Balance, December 31, 1998........ 1,202,445 3,085,308 $4.43
Granted (unaudited)............. (893,193) 893,193 $9.83
Exercised (unaudited)........... -- (79,083) $0.12
Forfeited (unaudited)........... 83,708 (83,708) $7.18
---------- ---------- -----
Balance, June 30, 1999
(unaudited)...................... 392,960 3,815,710 $5.72
========== ========== =====
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- ---------------------------
Number Weighted- Number
Outstanding at Average Weighted- Exercisable Weighted-
Range of December 31, Remaining Average Exercise December 31, Average
Exercise Prices 1998 Contractual Life (Years) Price 1998 Exercise Price
- --------------- -------------- ------------------------ ---------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$0.02-$0.12 389,583 7.09 $0.07 307,832 $0.05
$0.48-$0.48 528,000 8.00 $0.48 283,190 $0.48
$1.25-$2.00 423,200 8.10 $1.40 197,721 $1.39
$2.35-$3.50 244,000 8.33 $3.01 99,968 $3.00
$4.50-$4.85 87,500 9.12 $4.76 8,438 $4.50
$7.45-$9.25 1,413,025 9.32 $8.24 30,355 $7.45
--------- -------
3,085,308 $4.43 927,504
========= =======
</TABLE>
Warrants
In connection with the issuance of the Series C preferred stock, the Company
issued warrants to a Company advisor to acquire 31,260 shares of common stock
at $6.96 per share. The warrants expired unexercised in February 1999. The fair
value of this warrant at the date of issuance was $50,000 and this amount has
been included as an issuance cost of the Series C preferred stock. The Company
also issued warrants to acquire 2,417 shares of common stock at $8.00 in
February 1998. The warrants expire in February 2001 and the fair value at the
date of issuance was not material. See Note 5 for warrants to purchase 200,000
shares of Series C preferred stock issued in conjunction with the Company's
Notes Payable arrangements.
F-19
<PAGE>
PC-TEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. INCOME TAXES:
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 requires that deferred taxes be
calculated using an asset and liability approach under which deferred income
taxes are provided based upon enacted tax laws and rates applicable to the
periods in which the taxes become payable.
The domestic and foreign components of income before provision for income
taxes were as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
-------- ------- --------
<S> <C> <C> <C>
Domestic........................................ $ 4,009 $ 2,438 ($1,390)
Foreign......................................... -- 818 2,097
-------- ------- --------
$ 4,009 $ 3,256 $ 707
======== ======= ========
The provision for income taxes consisted of the following (in thousands):
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
-------- ------- --------
<S> <C> <C> <C>
Current:
Federal....................................... $ 2,848 $ 827 $ 1,188
State......................................... 646 237 482
Foreign....................................... -- 82 67
-------- ------- --------
3,494 1,146 1,737
-------- ------- --------
Deferred:
Federal....................................... (2,152) (240) (942)
State......................................... (337) 49 (583)
-------- ------- --------
(2,489) (191) (1,525)
-------- ------- --------
$ 1,005 $ 955 $ 212
======== ======= ========
The provision for income taxes differs from the amount computed by applying
the Federal statutory income tax rate as follows (in thousands):
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
-------- ------- --------
<S> <C> <C> <C>
Provision at Federal statutory rate............. $ 1,403 $ 1,140 $ 247
State income tax, net of Federal benefit........ 241 95 25
Change in valuation allowance................... (577) -- --
Foreign taxes in excess of statutory rate....... -- 82 67
R & D credit.................................... -- (224) (310)
Other........................................... (62) (138) 183
-------- ------- --------
$ 1,005 $ 955 $ 212
======== ======= ========
</TABLE>
F-20
<PAGE>
PC-TEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The net deferred tax asset consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
------ ------
<S> <C> <C>
Accrued royalties............................................. $2,070 $1,152
Inventory reserve............................................. 58 262
California income tax payable................................. 82 --
Other cumulative temporary differences........................ 470 489
Deferred amortization of purchased assets..................... -- 2,302
------ ------
$2,680 $4,205
====== ======
</TABLE>
Other cumulative temporary differences consist of items currently deductible
for financial reporting purposes, but not for tax purposes. These items are
primarily estimated reserves and accruals. The realization of the deferred tax
asset is dependent on generating sufficient taxable income in future years.
Although realization is not assured, management believes it is more likely than
not that the deferred tax asset will be realized. The amount of the deferred
tax asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during future years is reduced.
10. RELATED PARTY TRANSACTIONS:
The President of a significant customer of the Company was a member of the
Company's Board of Directors from inception to November 1, 1997. For the years
ended December 31, 1996 and 1997, revenues generated from sales to this related
party customer were approximately $1.7 million and $2.2 million, respectively.
11. INDUSTRY SEGMENT, CUSTOMER AND GEOGRAPHIC INFORMATION:
Effective January 1, 1998, the Company adopted SFAS No. 131, ("SFAS 131")
"Disclosures About Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for business segments of a company and related
disclosures. The Company is organized based upon the nature of the products it
offers. Under this organizational structure, the Company operates in one
segment, that segment being software-based modems using host signal processing
technology. The Company markets its products worldwide through its sales
personnel, independent sales representatives and distributors.
The Company's sales to customers outside of the United States, as a percent
of total revenues, are as follows:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
--------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Taiwan................... 37% 46% 48% 62% 21%
China (Hong Kong)........ 15% 20% -- -- 47%
Singapore................ 19% 9% -- -- 2%
Rest of Asia............. 3% 2% 28% 15% 29%
Other.................... 9% 2% 1% 3% --
------- ------- ------- -------- --------
83% 79% 77% 80% 99%
======= ======= ======= ======== ========
</TABLE>
F-21
<PAGE>
PC-TEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Sales to major customers representing greater than 10% of total revenues are
as follows:
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
--------------------------- -----------------
Customer 1996 1997 1998 1998 1999
-------- ------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
A, related party (See
Note 10)................ 10% 9% 13% 5% --
B........................ 16% 4% 12% 21% 6%
C........................ 5% 6% 15% 11% 10%
D........................ 22% 20% 4% 15% 1%
E........................ 13% -- -- -- --
F........................ -- 18% 12% 12% 3%
G........................ -- -- 8% -- 20%
H........................ -- -- 3% -- 42%
</TABLE>
As of December 31, 1997, the Company's long-lived assets were primarily
located in the United States. The Company's long-lived assets, comprising
primarily intangible assets, by geographic region as of December 31, 1998 and
June 30, 1999 are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(unaudited)
<S> <C> <C>
United States....................................... $5,357 $5,314
Cayman Islands...................................... $8,178 $7,399
</TABLE>
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management of
General DataComm, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of income and divisional equity and of cash flows present fairly, in all
material respects, the financial position of the Communications Systems
Division, a division of General DataComm, Inc., at September 30, 1998 and
1997, and the results of its operations and its cash flows for each of the
years then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards 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 audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Stamford, Connecticut
December 15, 1998
F-23
<PAGE>
COMMUNICATIONS SYSTEMS DIVISION
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
-------------
1998 1997
------ ------
(in
thousands)
<S> <C> <C>
ASSETS
Assets:
Fixed assets, net.............................................. $ 119 $ 117
Capitalized software........................................... 1,993 1,359
Security deposit and accrued interest.......................... 8 --
Patents........................................................ -- --
------ ------
Total assets................................................. $2,120 $1,476
====== ======
LIABILITIES
Liabilities:
Income taxes payable........................................... $ 568 $ 940
Deferred income tax liabilities................................ 251 535
------ ------
Total liabilities............................................ 819 1,475
------ ------
Divisional Equity................................................ 1,301 1
------ ------
Total liabilities and divisional equity...................... $2,120 $1,476
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
COMMUNICATIONS SYSTEMS DIVISION
STATEMENTS OF INCOME AND DIVISIONAL EQUITY
<TABLE>
<CAPTION>
For the years
ended
September 30,
--------------
1998 1997
------ -------
(in thousands)
<S> <C> <C>
Licensing revenues.............................................. $3,531 $ 4,564
Operating expenses:
General and administrative.................................... 135 83
Selling and marketing......................................... 174 146
Research and development...................................... 1,209 685
------ -------
1,518 914
Net income before income taxes.................................. 2,013 3,650
Income tax provision............................................ 819 1,475
------ -------
Net income.................................................... 1,194 2,175
Divisional equity at beginning of year.......................... 1 133
Cash transfer from (to) parent.................................. 106 (2,307)
------ -------
Divisional equity at end of year.............................. $1,301 $ 1
====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
COMMUNICATIONS SYSTEMS DIVISION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years
ended
September 30,
---------------
1998 1997
------ -------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $1,194 $ 2,175
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation expense...................................... 78 62
Increase in security deposit.............................. (8) --
(Decrease) increase in income taxes payable............... (372) 940
(Decrease) increase in deferred income taxes.............. (284) 526
------ -------
Net cash provided by operating activities............... 608 3,703
------ -------
Cash flows from investing activities:
Acquisition of property, plant and equipment................ (80) (37)
Capitalized software development costs...................... (634) (1,359)
------ -------
Net cash used in investing activities................... (714) (1,396)
Net cash borrowed from (transferred to) GDC................. 106 (2,307)
------ -------
Net increase in cash and cash equivalents............... -- --
Cash and cash equivalents at beginning of year................ -- --
------ -------
Cash and cash equivalents at end of year...................... $ -- $ --
====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
COMMUNICATIONS SYSTEMS DIVISION
NOTES TO FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Communications Systems Division (the "Company") is a division of General
DataComm, Inc., which is a subsidiary of General DataComm Industries, Inc.
("GDC"). The Company, which is principally comprised of scientists and
engineers, develops, patents and licenses advanced modem and access
technologies.
Basis of Presentation
The Company's balance sheets and statements of operations include assets,
liabilities, revenues and expenses that are specifically identifiable to the
Company. In addition, GDC provides certain services, as discussed in Note 6,
which are allocated to the Company.
Cash
All cash balances are transferred to GDC as they arise.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated or
amortized using the straight-line method over their estimated useful lives.
Capitalized Software Development Costs
Software development costs are capitalized for those products that have met
the requirements of technological feasibility. When the products under
development begin to be sold, such capitalized costs will be amortized on a
product-by-product basis over the estimated economic life of the product. No
amortization was recorded in either fiscal 1998 or fiscal 1997 as the products
in development had reached the technological feasibility stage but had not
reached the marketability stage. Unamortized costs are reviewed for
recoverability and, if necessary, are adjusted so as not to exceed estimated
net realizable value.
Patents
The Company holds various technology patents. The third party cost of these
patents has been fully amortized. Registration costs are expensed as incurred.
Revenue Recognition
The Company has entered into numerous technology licensing agreements
whereby licensees pay the Company fees for the use or sale of specific patented
technology. Technology licensing fee revenue is recognized in the period
received, or alternatively, may be accrued when readily determinable.
Income Taxes
Income taxes are calculated in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." This
statement requires that deferred income taxes reflect the impact of temporary
differences in bases of assets and liabilities recognized for financial
reporting purposes and amounts recognized for tax purposes. As a division, the
Company is included in the consolidated income tax returns of GDC, however, the
Company's provision for income taxes has been calculated on a separate return
basis.
F-27
<PAGE>
COMMUNICATIONS SYSTEMS DIVISION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Employee Benefits and Incentive Plans
The Company's employees participate in plans for post-retirement benefits,
post-employment benefits, stock option plans, and retirement savings and
deferred profit sharing plans, which are sponsored by GDC. No assets,
liabilities or expenses have been reflected in the balance sheets and
statements of operations related to the post-retirement and post-employment
plans, as it is not practical to segregate these amounts.
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
reporting periods presented. Actual results could differ from those estimates.
For example, the markets the Company is involved in are characterized by
intense competition, rapid technological development and frequent new product
introductions, all of which could impact the future value of the Company's
capitalized software.
2. Property, Plant and Equipment
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
September
30,
--------- Estimated
1998 1997 Useful Life
---- ---- -------------
<S> <C> <C> <C>
Test equipment and fixtures, office equipment...... $651 $578 2 to 10 years
Less: accumulated depreciation................... 532 461
---- ----
$119 $117
==== ====
</TABLE>
Depreciation expense amounted to $78 and $62 in fiscal 1998 and 1997,
respectively.
3. Income Taxes
For purposes of the financial statements, income taxes are provided on a
stand-alone basis as if the Company is a separate entity.
The provision for income taxes consists of the following amounts:
<TABLE>
<CAPTION>
September
30,
-----------
1998 1997
---- ------
<S> <C> <C>
Current:
State.......................................................... $146 $ 246
Federal........................................................ 422 694
---- ------
568 940
Deferred:
State.......................................................... $ 66 $ 144
Federal........................................................ 185 391
---- ------
251 535
---- ------
Total provision.............................................. $819 $1,475
==== ======
</TABLE>
F-28
<PAGE>
COMMUNICATIONS SYSTEMS DIVISION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences which give rise to deferred income
tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
September
30,
------------
1998 1997
----- -----
<S> <C> <C>
Deferred income tax assets:
Property, plant and equipment............................... $ 3 $ 8
Deferred income tax liabilities:
Capitalized software........................................ (254) (543)
----- -----
Net deferred income tax liabilities....................... $(251) $(535)
===== =====
</TABLE>
4. Operating Leases
GDC entered into an operating lease on June 1, 1998 to provide separate
facilities for the operation of the Company. Such lease expires in May 2001.
The lease contains renewal options and provisions for payment by the lessee of
executory costs (taxes, maintenance and insurance).
The following is a schedule of the future minimum payments under the lease
as of September 30, 1998:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1999 $50
2000 50
2001 33
</TABLE>
Rent expense under the lease was $17 for the year ended September 30, 1998.
Prior to June 1, 1998, the operations of the Company were conducted in
facilities shared with other GDC operations. The amounts allocated by GDC,
which are included in the statements of income, were $74 and $100 for
September 30, 1998 and 1997, respectively.
5. Employment Incentive Plans
Stock Option Plans
Officers and key employees of GDC may be granted incentive stock options at
an exercisable price equal to or greater than the market price on the date of
grant and non-incentive stock options at an exercisable price equal to or less
than the market price on the date of grant. While individual options can be
issued under various provisions, most options, once granted, generally vest in
increments of 25% per year over a four-year period and expire within ten
years.
F-29
<PAGE>
COMMUNICATIONS SYSTEMS DIVISION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following summarizes activity related to the Company in fiscal 1997 and
1998 under these stock option plans:
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise Price
------- --------------
<S> <C> <C>
Options outstanding, September 30, 1996 (10,497
exercisable)..................................... 79,747 $6.49
Options granted................................... 86,530 7.44
Options exercised................................. -- --
Options cancelled or expired...................... (53,890) 6.50
------- -----
Options outstanding, September 30, 1997 (20,097
exercisable)..................................... 112,387 6.60
Options granted................................... 85,750 4.32
Options exercised................................. -- --
Options cancelled or expired...................... (11,450) 7.14
------- -----
Options outstanding, September 30, 1998 (30,632
exercisable)..................................... 186,687 $6.96
======= =====
</TABLE>
The following summarizes additional information related to the Company
regarding options outstanding and exercisable options as of September 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding at September Options Exercisable at
30, 1998 September 30, 1998
----------------------------------- Weighted ------------------------
Weighted Average Weighted
Number Average Contractual Average
Exercise of Exercise Life Number Contractual
Prices Shares Price (Years) of Shares Price
-------- ------- -------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
$ 3.38-$ 4.81 65,947 $ 3.81 9.47 197 $ 4.81
$ 5.25-$ 6.75 89,540 6.34 7.98 19,035 5.63
$ 7.31-$ 9.63 25,700 8.95 7.46 9,900 6.83
$10.00-$15.50 5,500 10.92 7.69 1,500 11.83
------- ------ ---- ------ ------
186,687 $ 6.96 8.43 30,632 $ 6.96
</TABLE>
The weighted average option price of exercisable options was $6.96 and $6.60
at September 30, 1998 and 1997, respectively. All options granted during the
two fiscal years ended September 30, 1998 were granted at an option price equal
to fair market value at date of grant.
Employee Retirement Savings and Deferred Profit Sharing Plan
Under the retirement savings provisions of GDC's retirement plan established
under Section 401(k) of the Internal Revenue Code, employees are generally
eligible to contribute to the plan after three months of continuous service, in
amounts determined by the plan. GDC contributes an additional 50 percent of the
employee contribution up to certain limits (not to exceed 2 percent of total
eligible compensation). Employees become fully vested in GDC's contributions
after three years of continuous service, death, disability or upon reaching age
65. The amounts contributed related to the Company's employees for the years
ended September 30, 1998 and 1997 were $28 and $33, respectively.
The deferred profit sharing provisions of the plan include retirement and
other related benefits for substantially all of GDC's full-time employees.
Contributions under the plan are funded annually and are based, at a minimum,
upon a formula measuring profitability in relation to revenues. Additional
amounts may be contributed at the discretion of GDC. There were no such
contributions for fiscal 1998 or 1997.
F-30
<PAGE>
COMMUNICATIONS SYSTEMS DIVISION
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Related Party Transactions and Net Equity
The Company is comprised of intellectual property and property, plant and
equipment and certain employees that GDC has contributed to the business. All
of the Company's cash transactions are managed by GDC. All intercompany
accounts which represent all contributed property and the net amounts funded by
GDC to date are included in divisional equity.
In addition, in fiscal 1998 and fiscal 1997, the Company performed product
development work on behalf of GDC. The cost of such work, estimated to be $434
and $480, respectively in fiscal 1998 and fiscal 1997, has been excluded from
the operating costs included in the Company's statements of income, as these
costs have been fully reimbursed by GDC.
GDC provides accounting, treasury, tax and audit, legal, medical and risk
insurance services and various other services to the Company. An allocation
related to these costs has been made and is included in the statements of
income.
General and Administrative expenses of $110 an $58 at September 30, 1998 and
September 30, 1997, respectively, and selling and marketing expenses of $174
and $146 at September 30, 1998 and September 30, 1997, respectively, were
allocated to the Company based on the actual salaries and benefits for
corporate administrative, sales and marketing, and legal employees as well as
an administrative assistant. These actual expenses were adjusted for the
employees' percent of time dedicated to the Company.
Certain research and development costs included in expenses and capitalized
software were allocated from GDC. These consist of the allocated time of one
corporate employee and administrative assistant adjusted for the percent of
time each dedicated to managing the Company. This allocation amounted to $91
and $66 at September 30, 1998 and September 30, 1997, respectively. In
addition, rent and utility costs of $73 and $80 at September 30, 1998 and
September 30, 1997, respectively, were allocated based on actual cost for a GDC
facility similar in size and geographic location. Other technology support
costs were allocated based on headcount and amounted to $107 and $124 at
September 30, 1998 and September 30, 1997, respectively.
F-31
<PAGE>
PC-TEL, INC. AND COMMUNICATIONS SYSTEMS DIVISION
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(unaudited)
In December 1998, PC-Tel, Inc. (the "Company" or "PC-Tel") completed the
acquisition of substantially all the assets and certain liabilities of
Communications Systems Division, a division of General DataComm, Inc., a
Delaware corporation ("CSD"). CSD develops patents and licenses advanced modem
and access technologies. The acquisition of CSD has been accounted for as a
purchase.
The accompanying pro forma condensed combined statement of operations for
PC-Tel's fiscal year ended December 31, 1998 assumes that the acquisition took
place as of January 1, 1998, and combines PC-Tel's statement of operations for
the year ended December 31, 1998 and CSD's statement of operations for its
fiscal year ended September 30, 1998. No pro forma condensed balance sheet is
required as the acquisition of CSD took place in December 1998 and is already
reflected in PC-Tel's consolidated balance sheet as of December 31, 1998,
included elsewhere in this Prospectus. The pro forma condensed combined
statement of operations for the year ended December 31, 1998 does not include
the effect of any nonrecurring charges directly attributable to the
acquisition.
The purchase price allocation reflected in the accompanying pro forma
condensed combined statement of operations has been prepared on an estimated
basis. The effects resulting from any differences in the final allocation of
the purchase price are not expected to have a material effect on the Company's
financial statements.
The accompanying pro forma condensed combined statement of operations should
be read in conjunction with the historical financial statements and related
notes thereto for both PC-Tel and CSD, which are included in this Prospectus.
F-32
<PAGE>
PC-TEL, INC. AND COMMUNICATIONS SYSTEMS DIVISION
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
---------------------------------------------
Historical Historical Pro Forma Pro Forma
PC-Tel CSD(a) Adjustments Combined
---------- ---------- ----------- ---------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES........................ $33,004 $3,531 $ (903)(b) $35,632
COST OF REVENUES................ 13,878 -- (2,162)(c) 16,040
------- ------ -------
GROSS PROFIT.................... 19,126 3,531 19,592
------- ------ -------
OPERATING EXPENSES:
Research and development...... 4,932 1,209 6,141
Sales and marketing........... 5,624 174 5,798
General and administrative.... 2,169 135 2,304
Acquired in-process research
and development.............. 6,130 -- (6,130)(d) --
Amortization of deferred
compensation................. 43 -- 43
------- ------ -------
Total operating expenses.... 18,898 1,518 14,286
------- ------ -------
INCOME FROM OPERATIONS.......... 228 2,013 5,306
------- ------ -------
OTHER INCOME (EXPENSE), net:
Interest income............... 504 -- 504
Interest expense.............. (25) -- (1,530)(e) (1,555)
------- ------ -------
Total other income
(expense), net............. 479 -- (1,051)
------- ------ -------
INCOME BEFORE PROVISION FOR
INCOME TAXES................... 707 2,013 4,255
PROVISION FOR INCOME TAXES...... 212 819 246 (f) 1,277
------- ------ -------
NET INCOME...................... $ 495 $1,194 $ 2,978
======= ====== =======
BASIC NET INCOME PER SHARE...... $ 0.21 $ 1.26
======= =======
DILUTED NET INCOME PER SHARE.... $ 0.04 $ 0.24
======= =======
SHARES USED IN COMPUTING BASIC
EARNINGS PER SHARE............. 2,355 2,355
SHARES USED IN COMPUTING DILUTED
EARNINGS PER SHARE............. 12,325 12,325
</TABLE>
F-33
<PAGE>
PC-TEL, INC. AND COMMUNICATIONS SYSTEMS DIVISION
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(unaudited)
Note 1. Pro Forma Adjustments
Certain pro forma adjustments have been made to the accompanying pro forma
condensed combined statement of operations as described below:
(a) Includes CSD's historical condensed statement of operations for the
year ended September 30, 1998.
(b) Reflects the elimination of revenues from licensing arrangements
between the Company and CSD.
(c) Reflects the amortization of goodwill and other intangibles acquired
of $10.8 million for CSD which will be amortized on a straight line basis
over their estimated weighted average useful lives of five years.
(d) Eliminates the acquired in-process research and development expense
of approximately $6.1 million, as the charge is a non-recurring expense
that arises from the acquisition of CSD.
(e) Reflects the interest expense and amortization of deferred finance
charges on the debt incurred for the CSD acquisition.
(f) Reflects adjustment to record a provision for income taxes in
accordance with PC-Tel's effective tax rate for fiscal 1998.
F-34
<PAGE>
Inside back cover
Background of space shot of planet earth. Text captions "PCtel Technology for
connectivity," "Broadband," "Wireless," "Remote Access," "Analog," and
"solutions"
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,600,000 Shares
[ PCtel Logo appears here ]
----------------
Prospectus
, 1999
----------------
Banc of America Securities LLC
Warburg Dillon Read LLC
Needham & Company, Inc.
Until , 1999, all dealers that buy, sell or trade the common stock
may be required to deliver a prospectus, regardless of whether they are
participating in this offering. This is in addition to the dealers' obligation
to deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table presents the costs and expenses, other than
underwriting discounts and commissions, payable by PC-Tel in connection with
the sale of common stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee................................................ $ 23,530
NASD filing fee..................................................... 9,000
Nasdaq National Market listing fee.................................. 90,000
Printing and engraving costs........................................ 150,000
Legal fees and expenses............................................. 790,000
Accounting fees and expenses........................................ 300,000
Blue sky fees and expenses.......................................... 15,000
Transfer agent and registrar fees................................... 17,000
Directors and officers insurance.................................... 300,000
Miscellaneous expenses.............................................. 105,470
----------
Total............................................................. $1,800,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors, officers and controller provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article Ninth of our amended and restated certificate of incorporation
provides for the indemnification of directors and officers to the fullest
extent permissible under Delaware law.
Article VI of our bylaws provides for the indemnification of officers,
directors and third parties acting on behalf of PC-Tel if the person acted in
good faith and in a manner reasonably believed to be in and not opposed to our
best interest, and, with regard to any criminal action or proceeding, the
indemnified party had no reason to believe his or her conduct was unlawful.
We have entered into indemnification agreements with our directors and
executive officers, in addition to indemnification provided for in our bylaws,
and intended to enter into indemnification agreements with any new directors
and executive officers in the future. The indemnification agreements may
require us to indemnify our directors and officers against certain liability
that may arise by reason of their status or service as directors and officers
(other than liabilities arising from willful misconduct of culpable nature),
to advance their expenses incurred as a result of any proceeding against them
as to which they could be indemnified, and to obtain directors and officers'
insurance, if available on reasonable terms.
Reference is also made to Section 8 of the Underwriting Agreement contained
in Exhibit 1.1 hereto, indemnifying officers and directors of PC-Tel against
certain liabilities.
Item 15. Recent Sales of Unregistered Securities
Since inception, we have issued unregistered securities to a limited number
of persons, as described below. None of these transactions involved any
underwriters, underwriting discounts or commissions, or any public offering,
and we believe that each transaction was exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) of the Securities
Act, Regulation D promulgated under the Securities Act or Rule 701 under
compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients of securities in each transaction represented
their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof, and
appropriate legends were
II-1
<PAGE>
affixed to the share certificates and instruments issued in the transactions.
All recipients had adequate access, through their relationships with us, to
information about us.
1. On or about February 10, 1994, we issued 2,800,000 shares of our
common stock at a per share price of $0.15 for an aggregate purchase price
of $420,000 to our founders and certain individuals with whom we had a pre-
existing business or personal relationship.
2. On or about November 4, 1994, we issued 1,613,333 shares of our
common stock at a per share price of $0.375 for an aggregate purchase price
of $605,000 to certain individuals with whom we had a pre-existing business
or personal relationship.
3. On May 9, 1995, we effected a recapitalization of our outstanding
stock with our then current stockholders by which each share of our common
stock was converted into one (1) share of Series A preferred stock and
through which we received no consideration.
4. On June 29, 1995, we sold 222,222 shares of our Series A preferred
stock at a per share price of $0.45 for an aggregate purchase price of
$100,000 to certain individuals with whom we had a pre-existing business or
personal relationship.
5. Between October 18, 1995 and on or about January 10th of 1996, we
sold 3,250,000 shares of our Series B preferred stock at a per share price
of $l.20 to certain individuals with whom we had a pre-existing business or
personal relationship.
6. On October 4, 1995, we effected, by amendment to our articles of
incorporation, a 3 for 2 reverse stock split of our then outstanding
capital stock.
7. On February 4, 1998 we sold 625,200 shares of our Series C preferred
stock at a per share price of $8.00 for an aggregate purchase price of
$5,00l,600 to certain accredited investors, as that term is defined under
Rule 50l of the Securities Act. State Street Securities, Needham & Company,
Inc. and Beckman White & Reed acted as placement agents for us and, as
partial consideration for services performed, Beckman White & Reed received
a one-year warrant to purchase 31,260 shares of our common stock at an
exercise price of $6.96 per share and State Street Securities, Edward
Gibstein, Mitchell Segal, and Irving Minnaker each received three-year
warrants to purchase an aggregate of 2,417 shares of our common stock at an
exercise price of $8.00.
8. On December 31, 1998 we issued ten (10) year warrants to purchase an
aggregate of 200,000 shares of our Series C preferred stock at an exercise
price of $8.00 to Pentech Financial Services, Inc. and PFF Bank & Trust,
Inc. in connection with the Communications Systems Division acquisition
from General DataCom, Inc.
9. From inception to December 3l, 1998, we issued and sold an aggregate
of 2,412,247 shares of our common stock to employees, consultants, and
directors for an aggregate consideration of $83,421 pursuant to exercise of
options granted under our 1995 stock plan, 1997 stock plan, and our 1997
stock plan as amended August 3, 1999.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
+1.1 Form of Underwriting Agreement.
+3.1 Amended and Restated Certificate of Incorporation of the Registrant,
as currently in effect.
3.1.1 Certificate of Amendment to the Certificate of Incorporation of
the Registrant, as currently in effect.
+3.2 Form of Amended and Restated Certificate of Incorporation of the
Registrant to be filed after the closing of the offering made under
this Registration Statement.
+3.3 Amended and Restated Bylaws of the Registrant.
II-2
<PAGE>
4.1 Specimen common stock certificate.
+4.2 Warrant to purchase shares of Series C preferred stock of the
Registrant issued to Pentech Financial Services, Inc.
+4.3 Warrant to purchase shares of Series C preferred stock of the
Registrant issued to PFF Bank and Trust, Inc.
+4.4 Warrant to purchase shares of common stock of the Registrant issued
to Edward Gibstein.
+4.5 Warrant to purchase shares of common stock of the Registrant issued
to Irving Minnaker.
+4.6 Warrant to purchase shares of common stock of the Registrant issued
to Mitchell Segal.
+4.7 Warrant to purchase shares of common stock of the Registrant issued
to State Street Securities, Inc.
+4.8 Amended and Restated Rights Agreement dated December 31, 1997.
+4.9 Addendum to the Amended and Restated Rights Agreement by and between
the Registrant and PFF Bank and Trust, Inc. dated February 1, 1999.
+4.10 Addendum to the Amended and Restated Rights Agreement by and between
the Registrant and Pentech Financial Services, Inc. dated February
1, 1999.
+5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
+10.1 Form of Indemnification Agreement between PC-Tel and each of its
directors and officers.
+10.2 1995 Stock Option Plan and form of agreements thereunder.
+10.3 1997 Stock Option Plan, as amended and restated, August 3, 1999, and
form of agreements thereunder.
+10.4 1998 director option plan and form of agreements thereunder.
+10.5 1998 employee stock purchase plan and form of agreements thereunder.
+10.6 Employment offer letter between Derek S. Obata and the Registrant
dated March 31, 1998.
+10.7 Employment offer letter between William F. Roach and the Registrant
dated July 19, 1999.
+10.8 Sublease between KLA-Tencor Corporation and the Registrant dated
September 24, 1998.
+10.9 Commercial Security Agreement by and between the Registrant and PPF
Bank and Trust and related documents.
+10.10 Asset Purchase Agreement by and among PC-Tel, Inc., PC-Tel Global
Technologies, Ltd. And General Datacomm, Inc. dated as of December
22, 1998.
+10.11 Escrow Agreement by and between the Registrant and General DataComm,
Inc. dated December 22, 1998.
+10.12 Bonus Pool Disbursement Agreement by and between the Registrant and
General DataComm, Inc. dated December 22, 1998.
+10.13 Form of Acquisition Bonus Agreement by and between the Registrant
and General DataComm, Inc. dated on December 22, 1998.
+10.14 Direct Sales Agreement by and between PC-Tel Global Technologies,
Ltd. and Kawasaki LSI U.S.A. dated December 4, 1998.
+10.15 Volume Purchase Agreement dated June 1, 1998 by and between Silicon
Laboratories, Inc. and the Registrant.
+21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.2 Consent of PricewaterhouseCoopers, Independent Accountants.
II-3
<PAGE>
+23.3 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
+23.4 Consent of Knobbe, Martens, Olson & Bear, LLP.
+24.1 Power of Attorney (see Pages II-5 and II-6).
+27.1 Financial Data Schedule.
- --------
+ Previously filed.
(b) Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts and Reserves (included on
pages S-1 and S-2 of this registration statement).
Schedules not listed above have been omitted because the information
required to be presented is not applicable or is shown in the financial
statements or related notes.
Item 17. Undertakings
We hereby undertake to provide to the Underwriters at the closing specified
in the Underwriting Agreement certificates in the denominations and registered
in the names as required by the Underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant according to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission this indemnification
is against public policy as expressed in the Securities Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against these liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer, or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by director, officer or controlling person in connection with the
securities being registered hereunder, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether the
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of the issue.
We hereby undertake that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of the securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Santa Clara,
State of California, on the 15th day of October, 1999.
PC-Tel, Inc.
*
By: _________________________________
Peter Chen, Chief Executive
Officer and Chairman
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chief Executive Officer October 15, 1999
______________________________________ and Chairman of the Board
(Peter Chen) (Principal Executive
Officer)
* President and Chief October 15, 1999
______________________________________ Operating Officer
(William F. Roach)
/s/ Andrew D. Wahl Vice President, Finance October 15, 1999
______________________________________ and Chief Financial
(Andrew D. Wahl) Officer (Principal
Financial Officer)
* Vice President, October 15, 1999
______________________________________ Engineering Director
(William Wen-Liang Hsu)
* Vice President, Technology October 15, 1999
______________________________________ Director
(Han Yeh)
* Director October 15, 1999
______________________________________
(Richard C. Alberding)
* Director October 15, 1999
______________________________________
(Martin H. Singer)
* Director October 15, 1999
______________________________________
(Wen C. Ko)
* Director October 15, 1999
______________________________________
(Mike Min-Chu Chen)
* Director October 15, 1999
______________________________________
(Giacomo Marini)
</TABLE>
/s/ Andrew D. Wahl
*By:
______________________________
(Andrew D. Wahl)
Attorney-In-Fact
II-5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To PC-Tel, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of PC-Tel, Inc. (a Delaware corporation) included in
this Registration Statement and have issued our report thereon dated March 4,
1999. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying schedule is the
responsibility of the Company's management and is presented for the purpose 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 audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth herein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
San Jose, California
March 4, 1999
S-1
<PAGE>
PC-TEL, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Charged
Beginning of Costs and Against Balance at
Description Period Expenses Revenues Deductions End of Period
----------- ------------ ---------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1996:
Allowance for doubtful
accounts............. $ -- $ 70 $ -- $ -- $ 70
Inventory reserves.... $ -- $1,514 $ -- $ -- $1,514
Accrued royalties..... $ -- $2,531 $ -- $ -- $2,531
Year Ended December 31,
1997:
Allowance for doubtful
accounts............. $ 70 $ -- $ 534 $ -- $ 604
Inventory reserves.... $1,514 $ 488 $ -- $ -- $2,002
Accrued royalties..... $2,531 $3,974 $ -- $ -- $6,505
Year Ended December 31,
1998:
Allowance for doubtful
accounts............. $ 604 $ -- $3,356 $(2,271) $1,689
Inventory reserves.... $2,002 $ 330 $ -- $ -- $2,332
Accrued royalties..... $6,505 $1,639 $ -- $(3,000)(a) $5,144
</TABLE>
- --------
(a) Represents a reversal of $3.0 million in accrued royalties in the fourth
quarter of 1998, upon consummation of the acquisition of Communications
Systems Division. The Company believes that in some instances they can
obtain necessary licenses of third party technologies in exchange for
grants of cross licenses of their patent portfolio rather than payment of
license fees or royalties.
S-2
<PAGE>
EXHIBIT INDEX
Number Description
------ -----------
+1.1 Form of Underwriting Agreement.
+3.1 Amended and Restated Certificate of Incorporation of the Registrant,
as currently in effect.
3.1.1 Certificate of Amendment to the Certificate of Incorporation of the
Registrant, as currently in effect.
+3.2 Form of Amended and Restated Certificate of Incorporation of the
Registrant to be filed after the closing of the offering made under
this Registration Statement.
+3.3 Amended and Restated Bylaws of the Registrant.
4.1 Specimen common stock certificate.
+4.2 Warrant to purchase shares of Series C preferred stock of the
Registrant issued to Pentech Financial Services, Inc.
+4.3 Warrant to purchase shares of Series C preferred stock of the
Registrant issued to PFF Bank and Trust, Inc.
+4.4 Warrant to purchase shares of common stock of the Registrant issued
to Edward Gibstein.
+4.5 Warrant to purchase shares of common stock of the Registrant issued
to Irving Minnaker.
+4.6 Warrant to purchase shares of common stock of the Registrant issued
to Mitchell Segal.
+4.7 Warrant to purchase shares of common stock of the Registrant issued
to State Street Securities, Inc.
+4.8 Amended and Restated Rights Agreement dated December 31, 1997.
+4.9 Addendum to the Amended and Restated Rights Agreement by and between
the Registrant and PFF Bank and Trust, Inc. dated February 1, 1999.
+4.10 Addendum to the Amended and Restated Rights Agreement by and between
the Registrant and Pentech Financial Services, Inc. dated February 1,
1999.
+5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
+10.1 Form of Indemnification Agreement between PC-Tel and each of its
directors and officers.
+10.2 1995 Stock Option Plan and form of agreements thereunder.
+10.3 1997 Stock Option Plan, as amended and restated, August 3, 1999, and
form of agreements thereunder.
+10.4 1998 director option plan and form of agreements thereunder.
+10.5 1998 employee stock purchase plan and form of agreements thereunder.
+10.6 Employment offer letter between Derek S. Obata and the Registrant
dated March 31, 1998.
+10.7 Employment offer letter between William F. Roach and the Registrant
dated July 19, 1999.
+10.8 Sublease between KLA-Tencor Corporation and the Registrant dated
September 24, 1998.
+10.9 Commercial Security Agreement by and between the Registrant and PPF
Bank and Trust and related documents.
+10.10 Asset Purchase Agreement by and among PC-Tel, Inc., PC-Tel Global
Technologies, Ltd. And General Datacomm, Inc. dated as of December
22, 1998.
+10.11 Escrow Agreement by and between the Registrant and General DataComm,
Inc. dated December 22, 1998.
+10.12 Bonus Pool Disbursement Agreement by and between the Registrant and
General DataComm, Inc. dated December 22, 1998.
+10.13 Form of Acquisition Bonus Agreement by and between the Registrant
and General DataComm, Inc. dated on December 22, 1998.
<PAGE>
EXHIBIT INDEX
Number Description
------ -----------
+10.14 Direct Sales Agreement by and between PC-Tel Global Technologies,
Ltd. and Kawasaki LSI U.S.A. dated December 4, 1998.
+10.15 Volume Purchase Agreement dated June 1, 1998 by and between Silicon
Laboratories, Inc. and the Registrant.
+21.1 The subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.2 Consent of PricewaterhouseCoopers, Independent Accountants.
+23.3 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
+23.4 Consent of Knobbe, Martens, Olson & Bear, LLP.
+24.1 Power of Attorney (see Pages II-5 and II-6).
+27.1 Financial Data Schedule.
- --------
+ Previously filed
<PAGE>
EXHIBIIT 3.1.1
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION OF
PC-TEL, INC.
The undersigned, Peter Chen and Andrew Wahl, hereby certify that:
1. They are the duly elected and acting Chief Executive Officer, Chairman
and Vice President, Finance, Chief Financial Officer, respectively, of PC-Tel,
Inc., a Delaware corporation, which was originally incorporated in the State of
Delaware on July 6, 1998.
2. Paragraph (b) of Section 4, Article IV of the Amended and Restated
Certificate of Incorporation is hereby amended and restated in its entirety to
read as follows:
"Article IV
Section 4
(b) Automatic Conversion. Each share of Preferred shall automatically be
--------------------
converted into shares of Common at the effective Conversion Price for each
such series upon (i) the closing of a firm commitment underwritten public
offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended (the "Act"), covering the offer and sale
of Common to the public at an aggregate gross offering price of not less
than Fifteen Million Dollars ($15,000,000) and a price per share to the
public equal to or greater than Twelve Dollars ($12.00), as adjusted for
subsequent stock splits, stock dividends and combinations, or (ii) the
receipt of the corporation of the affirmative vote at a duly noticed
shareholders meeting or pursuant to a duly solicited written consent of the
holders of more than a majority of the Series A Preferred, a majority of
the Series B Preferred and a majority of the Series C Preferred, each
voting as a separate series. In the event of the automatic conversion of
the Preferred upon a public offering as aforesaid, the person(s) entitled
to receive the Common Stock issuable upon such conversion of Preferred
shall not be deemed to have converted such Preferred until immediately
prior to the closing of such sale of securities."
****
3. The Board of Directors has duly approved the foregoing Amendment.
<PAGE>
4. The foregoing Amendment has been duly approved by the required vote of
stockholders in accordance with Sections 242 of the Delaware General Corporation
Law. The total number of outstanding shares of Common Stock of this corporation
is 2,491,330 shares. The total number of outstanding shares of Preferred of
this corporation is 8,510,748 shares. The number of shares voting in favor of
the amendment equaled or exceeded the vote required. The percentage vote
required was a majority of the outstanding shares of Common Stock, a majority of
the outstanding shares of Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock, voting as a separate class.
The undersigned further certify under penalty of perjury that they have
read the foregoing Amendment and know the contents thereof, and that the
statements therein are true.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this certificate at San
Jose, California on September 10, 1999.
/s/ Peter Chen
-----------------------
Peter Chen
Chief Executive Officer and Chairman
/s/ Andrew Wahl
-----------------------
Andrew Wahl
Vice President, Finance and
Chief Financial Officer
<PAGE>
EXHIBIT 4.1
PCTEL
[LOGO APPEARS HERE] [LOGO APPEARS HERE]
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE CUSIP 89325Q 10 5
THIS CERTIFIES THAT
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $0.001 PAR VALUE, OF
================================ PCTEL, Inc. ===================================
transferable on the books of the Corporation by the holder hereof in
person or by duly authorized attorney upon surrender of this certificate
property endorsed. This certificate is not valid until countersigned by the
Transfer Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
DATED:
/s/ Wen-Liang Hsu /s/ Peter C. Chen
Vice President of Engineering Chairman and Chief Executive Officer
and Secretary
(PCTEL CORPORATE SEAL)
COUNTERSIGNED AND REGISTERED:
NORWEST BANK MINNESOTA, N.A.,
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
PC-TEL, Inc.
The Corporation will furnish to any stockholder, upon request and
without charge, a statement of the powers, designations, preferences, and
relative participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights, insofar as the same shall have been fixed, and of the
authority of the Board of Directors to designate any preferences, rights and
limitations of any wholly unissued series. Any such request should be directed
to the Secretary of the Corporation at the principal office of the Corporation.
The following abbreviatuins, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws of regulations:
<TABLE>
<CAPTION>
<S> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- Custodian
TEN ENT -- as tenants by the entireties ------------- -------------
JT TEN -- as joint tenants with right of (CUST) (MINOR)
survivorship and not as tenants under Uniform Gifts to Minors
in common Act
--------------------------------
UNIF TRF MIN ACT -- Custodian (until age )
--------- -------
(CUST)
-------------under Uniform Transfers
(Minor)
to Minors Act
-----------------------
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
---------------------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------------
| |
| |
--------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
(PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------------------------------------------------------------------
of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
Attorney
- ----------------------------------------------------------------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises.
Dated
------------------------------------
X
-------------------------------------------------------------------
X
-------------------------------------------------------------------
NOTICE, THE SIGNATURE(S) TO THE ASSIGNMENT MUST CORRESPOND WITH THE NAME(S)
AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
-----------------------------------------------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEE BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP
IN AN APPROVED MEDALLION SIGNATURE GUARANTEE PROGRAM, PURSUANT TO S.E.C. RULE 17Ad-15.
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
San Jose, California
October 15, 1999
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Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated December 15, 1998, relating to the financial statements and
financial statement schedules of the Technology Alliance Group Division of
General DataComm, Inc., which appear in such Registration Statement. We also
consent to the reference to us under the heading "Experts" and "Selected
Financial Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Stamford, CT
October 14, 1999
