<PAGE>
As filed with the Securities and Exchange Commission on September 17, 1999
Registration No. 333-84707
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
Amendment No. 1
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.
Wilson Sonsini Goodrich & Rosati Brobeck, Phleger & Harrison LLP
Professional Corporation Spear Street Tower
650 Page Mill Road One Market
Palo Alto, California 94304 San Francisco, California 94105
(650) 493-9300 (415) 442-0900
---------------
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........................ 18
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Consolidated Financial Data..................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 36
Management............................................................... 51
Transactions with Related Parties and Insiders........................... 61
Principal Stockholders................................................... 63
Description of Capital Stock............................................. 65
Shares Eligible for Future Sale.......................................... 67
Underwriting............................................................. 69
Legal Matters............................................................ 71
Experts.................................................................. 71
Where You Can Find Additional Information................................ 71
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. 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
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
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 notes thereto
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
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(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 substantially diminish our operating
results.
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 financial performance
could be adversely affected. 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 been sued by Motorola for patent infringement. If this litigation
resolves unfavorably to us, our business is likely to be harmed.
In September 1998, Motorola, Inc. filed a patent infringement lawsuit
against PC-Tel and another modem manufacturer in the U.S. District Court for
the District of Massachusetts. Substantially all of our revenues to date are
attributable to products which Motorola claims as the basis for its
infringement suit against us. Further, we anticipate that a substantial
proportion of our revenues for the foreseeable future is expected to be
dependent upon sales of these and future products incorporating technology that
Motorola has alleged infringes its patents. 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. We could also be required to pay
substantial monetary damages to Motorola, which are subject to trebling in the
event of a finding by the court of willful infringement. The grant of a
preliminary or permanent injunction could have an adverse effect on our
business, including a substantial reduction in our revenues and income, losses
for an extended period of time and a substantial depletion of our financial
resources. In the event of an injunction, we could attempt to obtain a license
from Motorola to enable us to continue to sell products incorporating the
technology. However, we may not be able to enter into any royalty or licensing
agreements on terms acceptable to us or at all. We could also
7
<PAGE>
attempt to develop a different technology and modify the design of our products
in an effort to avoid infringement of Motorola's patents. However, we are not
currently engaged in any development efforts in this regard, and we cannot be
sure that any efforts would be successful. Even if successful, these efforts
would require a substantial period of time to complete and we cannot be sure
that these efforts would result in competitive products.
Motorola's complaint alleges that we are, and have been, infringing seven
Motorola patents by making, using, offering to sell, selling and/or importing
products that embody or use the inventions claimed in its patents. In addition
to alleging direct infringement, Motorola's complaint includes allegations of
inducing infringement and contributory infringement. Motorola's complaint seeks
damages and also asks the court to award a preliminary and permanent injunction
to prevent us from continuing acts of direct infringement, inducing
infringement and contributory infringement. Motorola's complaint contains a
demand for Motorola's costs, expenses and reasonable attorney's fees and treble
damages for willful infringement. Six of the seven patents asserted by Motorola
relate to communications standards accepted by the International
Telecommunications Union. Any patents incorporating communications standards
accepted by the International Telecommunications Union are required to be made
available for licensing by the holder of the patent on terms that are fair,
reasonable and non-discriminatory. The seventh Motorola patent, entitled
"Processor Modem," allegedly relates to software modem technology. Motorola
subsequently dismissed its Massachusetts lawsuit without prejudice and re-filed
its complaint in the U.S. District Court for the District of Delaware.
We answered Motorola's complaint denying infringement of Motorola's seven
patents and alleging the patents are invalid and unenforceable. We also
asserted counter-claims asserting tort and breach of contract claims and
violations of the antitrust and unfair competition laws. Our counter-claims and
defenses are based in part on Motorola's refusal to license its International
Telecommunications Union-related patents to us at fair, reasonable and non-
discriminatory rates, as required by the International Telecommunications
Union. Our counter-claims also allege that Motorola intentionally interfered
with our actual and potential customer relationships.
In response to Motorola's lawsuit, we filed a patent infringement suit
against Motorola in the U.S. District Court for the District of Delaware. We
have since amended our first complaint against Motorola to include allegations
that Motorola is, and has been, infringing, inducing infringement and
contributorily infringing ten of our patents. In our complaint, we have asked
the court to award similar relief to that requested by Motorola in its lawsuit,
including a preliminary and permanent injunction, damages, costs, expenses,
reasonable attorneys' fees and treble damages for willful infringement. Our ten
patents asserted against Motorola include patents related to International
Telecommunications Union standards, software and other modem technology.
Discovery is underway and trial is set for early 2001 in both Motorola's
lawsuit against us and our lawsuit against Motorola.
Due to the nature of litigation generally and because the lawsuit brought by
Motorola is at an early stage, we cannot ascertain the outcome 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 our litigation with Motorola. However, we
believe, based on our knowledge of the industry, our review of Motorola's six
International Telecommunications Union-related patents and our products, our
involvement in the International Telecommunications Union standards setting
process and our awareness of Motorola's participation in that process, and the
advice of our patent counsel, Knobbe, Martens, Olson & Bear, LLP, that
Motorola's six International Telecommunications Union-related patents asserted
in its lawsuit are not enforceable against us. We also believe, based on our
knowledge of the industry, our review of Motorola's patent related to software
modem technology and our products, and the advice of our patent counsel,
Knobbe, Martens, Olson & Bear, LLP, that Motorola's patent allegedly related to
software modem technology asserted by Motorola in its patent lawsuit against us
is not infringed by us and is invalid. We are vigorously contesting, and intend
to continue to vigorously contest, all of Motorola's claims. Nonetheless, this
litigation could be time consuming and costly, and we will not necessarily
prevail given the inherent uncertainties of litigation.
8
<PAGE>
In connection with the Motorola litigation, we have incurred and expect to
continue to incur substantial legal and other expenses. In addition, the
Motorola litigation has diverted and is expected to continue to divert the
efforts and attention of our management and technical personnel. Accordingly,
whether or not we are ultimately successful on the merits, the expenses and
diversion of resources associated with the Motorola litigation could have a
material adverse effect on our business and operating results. If the Motorola
lawsuit were to be resolved by a settlement, we might be required to make
substantial payments to Motorola or to grant a cross-license to Motorola to
utilize our technology, which could also hurt our business and operating
results.
Our business is exposed to risks because we have significant sales and
operations concentrated in Asia.
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 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,
. 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.
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.
Continuing decreases in the average selling prices of our products could
significantly hurt our operating results.
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, which may harm our
operating results. 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.
9
<PAGE>
Our gross margins may vary based on the mix of sales of our products and
services, and these variations may hurt our quarterly operating results.
We derive a significant portion of our sales from our software-based
connectivity products. We expect margins on newly introduced products generally
to be higher than our existing products. However, due in part to the
competitive pricing pressures that affect our products and in part to
increasing component and manufacturing costs, we expect margins from both
existing and future products to decrease over time. In addition, licensing
revenues from our products historically have provided higher margins than 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 hurt our operating
results.
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 and operating results 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 and operating results 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. If this were to occur, our operating results for the
quarter would be hurt.
10
<PAGE>
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 in the foreseeable future 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.
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 hurt our operating results.
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 revenue growth rates may be adversely affected.
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
hurt our financial results.
We rely heavily on our intellectual property rights which offer only limited
protection against potential infringers. If we cannot protect these rights,
this could hurt our business.
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
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<PAGE>
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 and could diminish our financial results.
In addition to our ongoing patent litigation with Motorola, 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 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.
We have received communications from third parties, including Motorola,
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. Motorola has refused to conduct further negotiations with us to
license its patents and we are in litigation with Motorola in connection with
its patent infringement claims. To date, we have not obtained any licenses from
Lucent, Motorola or Dr. Townshend, because we believe that Lucent, Motorola 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.
Should we cross license our intellectual property in order to obtain licenses,
we may no longer be able to offer a unique product.
In addition, 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 materially hurt our business, financial condition and results of
operations.
In addition, some of our customer agreements include an indemnity clause
that obligates us to defend and pay all damages and costs finally awarded by a
court should third parties assert patent and/or copyright claims against our
customers. As a result, we may be held responsible for infringement claims
asserted against our customers.
We have 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.
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<PAGE>
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, and our
failure to do so will seriously harm our business, operating results and
financial condition. 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.
Compared to us, many of our competitors, including some of those described
above, have:
. longer operating histories than we do with more experience in designing
and selling connectivity products and services,
. greater presence in our connectivity product markets, which can provide
an immediate advantage in connection with new product introductions,
. greater name recognition, which can facilitate customer acceptance of new
products and technologies,
. access to larger customer bases,
. significantly greater financial resources, which could enable a
competitor to significantly reduce the price of new products below
prevailing market rates to capture market share,
. significantly greater research and development and other technical
resources, which may enable a competitor to respond more quickly than we
can to new or emerging technologies and changes in customer requirements,
or to introduce new products that are superior to our products or bundle
modem solutions with its other products, and
. significantly greater sales and marketing resources to devote to the
promotion, sale and support of competitive products.
We believe that the principal competitive factors required by users and
customers in the connectivity product market include compatibility with
industry standards, price, functionality, ease of use and customer service and
support. Although we believe that our products currently compete favorably with
respect to these factors, we may not be able to maintain our competitive
position against current and potential competitors.
In order for us to maintain our profitability and continue to introduce and
develop new products for emerging markets, we must attract and retain our
executive officers and qualified technical, sales, support and other
administrative personnel.
Our past performance has been and our future performance is substantially
dependent on the performance of our current executive officers and certain key
engineering, sales, marketing, financial, technical and customer support
personnel. If we lost the services of one or more of our executives or key
employees, a replacement could be difficult to recruit and our business could
be adversely affected.
In August 1999, we hired William F. Roach as our new President and Chief
Operating Officer. If for any reason Mr. Roach is not successful, our business
may be adversely affected.
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,
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<PAGE>
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 expect competition for qualified personnel to remain
intense, and we may not succeed in attracting or retaining personnel. If we do
not attract qualified personnel, our business would be hurt.
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.
Technical and customer support is also critical to our future success
because our products and the related technologies are rapidly evolving and many
customers require technical support in implementing our products. If we are
unable to provide comprehensive technical support services satisfactory to our
existing and prospective customers, our ability to establish and expand our
presence in the connectivity markets may be adversely affected.
As we continue to develop new products for the emerging broadband and
internet markets, our expanded business focus has also placed greater emphasis
on our need for additional sales and marketing personnel. Hiring additional
personnel in this area will be important for us to effectively achieve customer
acceptance in our targeted markets.
We have experienced significant growth in our business in recent periods and
failure to manage our growth could strain our management and other 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 are subject to risks because 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.
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<PAGE>
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 diminish our operating results.
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.
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
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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 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.
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 business will suffer.
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 business will be hurt.
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 adversely affected.
Our industry is characterized by rapidly changing technologies. If we do not
adapt to these technologies, our products will become obsolete.
The connectivity product market is characterized by rapidly changing
technologies, limited product life cycles and frequent new product
introductions. To remain competitive in this market, we have been required to
introduce many products over a limited period of time. For example, we
introduced a 14.4 Kbps product in 1995, a 28.8 Kbps product in 1996, a 33.6
Kbps product in late 1996, a non-International Telecommunications Union
standard 56 Kbps modem in the second half of 1997 and a v.90 International
Telecommunications Union standard 56 Kbps modem in early 1998. 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, we
will not be able to compete effectively and our financial results will suffer.
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<PAGE>
Our products and those of our customers are subject to government regulations.
Changes in laws or regulations, such as FCC regulations affecting the broadband
market, could negatively affect our ability to develop new technologies or sell
new products.
The jurisdiction of the Federal Communications Commission 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, 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 harm our business and diminish
our operating results and financial condition.
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.
You will experience immediate and substantial dilution in the book value of
your shares.
The initial public offering price is substantially higher than the book
value per share of our outstanding common stock immediately after the offering.
Accordingly, if you purchase common stock in the offering, you will incur
immediate dilution of approximately $11.30 in the book value per share of our
common stock from the price you pay for our common stock. For additional
information on this calculation, see "Dilution."
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 will likely be subject to substantial price and volume fluctuations
due to a number of factors, many of which are beyond our control, which may
lead to losses by investors.
Stock prices and trading volumes for many communications companies fluctuate
widely for a number of reasons, including some reasons that may be unrelated to
their businesses or operating results, such as changes in analysts' estimates,
the presence or absence of short-selling of common stock and events affecting
other companies that the market deems to be comparable. This market volatility,
as well as general domestic or international economic, market and political
conditions, could negatively affect the market price of our common stock
without regard to our operating performance.
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Provisions in our charter documents may inhibit a change of control or a change
of management which may cause the market price for our common stock to fall and
may inhibit a takeover or change in our control that a stockholder may consider
favorable.
Provisions in our charter documents could discourage potential acquisition
proposals and could delay or prevent a change in control transaction that our
stockholders may favor. These provisions could have the effect of discouraging
others from making tender offers for our shares, and as a result, these
provisions may prevent the market price of our common stock from reflecting the
effects of actual or rumored takeover attempts and may prevent stockholders
from reselling their shares at or above the price at which they purchased their
shares. These provisions may also prevent changes in our management that our
stockholders may favor. Our charter documents do not permit stockholders to act
by written consent, do not permit stockholders to call a stockholders meeting
and provide for a classified board of directors, which means stockholders can
only elect, or remove, a limited number of our directors in any given year.
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, uncertainties, and other factors 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 and other factors 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.
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<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
in the foreseeable future.
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CAPITALIZATION
The following table sets forth 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 subject to 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>
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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 subject to
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 sets forth, 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.
21
<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>
22
<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, among other things, 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 upon a "sell through" basis from the distributor 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.
23
<PAGE>
Results of Operations
The following table sets forth 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
$600,000.
24
<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>
- --------------------------------------------------------------------------------
25
<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 of $1.5 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 $300,000, travel costs of $200,000, trade shows and press
tours 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>
- --------------------------------------------------------------------------------
26
<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
27
<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 ten people, or
approximately 63% 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 six people from eight 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.
28
<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>
- --------------------------------------------------------------------------------
29
<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.
30
<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>
31
<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 and other factors are
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.............. 12,988 23,534
Working capital............................................... N/A 18,778
- --------------------------------------------------------------------------------
</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 $18.8 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 16,313
- ------------------------------------------------------------------------------
</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.
32
<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 $18.8 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. We are subject to SFAS No. 133 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
33
<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.
34
<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.
35
<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. 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
36
<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,
37
<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. Asymmetric 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.
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<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
39
<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.
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. 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.
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
40
<PAGE>
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.
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.
41
<PAGE>
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%.
42
<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."
43
<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>
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<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>
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<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,
46
<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
47
<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 most important 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.
48
<PAGE>
Our industry is characterized by frequent litigation regarding patent and
other intellectual property rights. We have been sued by Motorola, Inc. and by
ESS Technology on patent related claims. See "Business--Legal Proceedings" and
"Risk Factors--We have been sued by Motorola for patent infringement. If this
litigation resolves unfavorably to us, our business is likely to be harmed."
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. If we cannot protect these rights,
this could hurt our business."
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,
. 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 with respect to these
factors.
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.
49
<PAGE>
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
We have been sued by Motorola, Inc., for patent infringement in an action
filed in the fall of 1998. See "Risk Factors--We have been sued by Motorola for
patent infringement. If this litigation resolves unfavorably to us, our
business is likely to be harmed."
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, equitable
estoppel, breach of contract mandating specific performance 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. If we cannot protect these
rights, this could hurt our business."
50
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth information with respect to 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, 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
51
<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.
52
<PAGE>
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. 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 in accordance
with our bylaws, and the rights, if any, of an officer under any contract of
employment.
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
53
<PAGE>
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 subject to the terms and conditions.
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, among other things, 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
54
<PAGE>
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 sets forth 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
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.
55
<PAGE>
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 subject to a given
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 sets forth information with respect to 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 within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, 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 within the
meaning of 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 pursuant to 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
57
<PAGE>
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" within the meaning of 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 as to which it 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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<PAGE>
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 of descent and
distribution, 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 as to which it 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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<PAGE>
401(k) Plan
Our 401(k) plan covers all of our employees beginning the first of the month
following the month of their employment. Pursuant to 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.
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<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
I-Chung Yeh................................................. 133,333
Der-Chin Yeh................................................ 66,666
Yan-Chiou Yeh............................................... 26,666
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.
61
<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, pursuant to 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.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth 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 in accordance with 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 subject to 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 and pursuant to
applicable community property laws, each stockholder named in the table has
sole voting and investment power with respect to the shares shown as
beneficially owned by them. 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.
63
<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.
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<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.
65
<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, subject to 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 approved in a
prescribed manner. 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.
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<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 subject
to 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).......... 585,549 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 9,686,807 All shares subject to 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 September 30, 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 subject to 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
67
<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.
Sales under Rule 144 must also comply with certain manner of sale provisions
and 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 pursuant to
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
subject to 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, the personal
circumstances of the sellers and other factors.
180 days following the date of this prospectus, we intend to file a
registration statement on Form S-8 under the Securities Act covering, among
other things, 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.
68
<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 subject to 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.
69
<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 prospectus 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, and
. other factors deemed relevant by us and the underwriters.
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 set forth 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.
70
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby 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 with respect thereto, and are included herein 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 with respect
thereto, and are included herein, 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 with respect to 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 thereto. For further information with respect to 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, in accordance with 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.
71
<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 upon sell-through
from the distributor to the end customer. 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. An initial conference with the Court under Delaware local rule
was held in April 1999 and discovery started in June 1999.
Due to the nature of litigation generally and because the lawsuit brought by
Motorola is at an early stage, management cannot ascertain the availability of
injunctive relief or other equitable remedies or estimate the total expenses,
possible damages or settlement value, if any, that may ultimately be incurred
in connection with Motorola's suit. However, management believes, based on the
advice of legal counsel, that the Company has meritorious defenses to the
allegations contained in Motorola's complaint. This litigation could be time
consuming and costly, and the Company will not necessarily prevail given the
inherent uncertainties of litigation. In the event that the Company does not
prevail in litigation, the Company could be prevented from selling soft modem
products or be required to enter into royalty or licensing agreements or pay
monetary damages. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company or at all. In the event of a
successful claim against the Company, the Company's financial position and
results of operations could be materially adversely affected.
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
F-15
<PAGE>
PC-TEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
. 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
F-16
<PAGE>
PC-TEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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. 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.
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
F-17
<PAGE>
PC-TEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 sets forth 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 respect 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, among other things, 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) thereof,
Regulation D promulgated thereunder or Rule 701 pursuant to
II-1
<PAGE>
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 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.
3.2 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.
- --------
* To be filed by amendment.
+ 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 set forth therein is not applicable or is shown in the
financial statements or notes thereto.
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 pursuant 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 pursuant to 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 17th day of September, 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 September 17, 1999
______________________________________ and Chairman of the Board
(Peter Chen) (Principal Executive
Officer)
* President and Chief September 17, 1999
______________________________________ Operating Officer
(William F. Roach)
/s/ Andrew D. Wahl Vice President, Finance September 17, 1999
______________________________________ and Chief Financial
(Andrew D. Wahl) Officer (Principal
Financial Officer)
* Vice President, September 17, 1999
______________________________________ Engineering Director
(William Wen-Liang Hsu)
* Vice President, Technology September 17, 1999
______________________________________ Director
(Han Yeh)
* Director September 17, 1999
______________________________________
(Richard C. Alberding)
* Director September 17, 1999
______________________________________
(Martin H. Singer)
* Director September 17, 1999
______________________________________
(Wen C. Ko)
* Director September 17, 1999
______________________________________
(Mike Min-Chu Chen)
* Director September 17, 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.
3.2 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.
- --------
* To be filed by amendment
+ Previously filed
<PAGE>
Exhibit 1.1
_________________ Shares
PC-Tel, Inc.
Common Stock
Underwriting Agreement
dated _________, 1999
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----------------
<C> <S> <C>
Section 1. Representations and Warranties of the Company...................................................... 2
(a) Compliance with Registration Requirements................................................. 2
(b) Offering Materials Furnished to Underwriters.............................................. 2
(c) Distribution of Offering Material By the Company.......................................... 3
(d) The Underwriting Agreement................................................................ 3
(e) Authorization of the Common Shares........................................................ 3
(f) No Applicable Registration or Other Similar Rights........................................ 3
(g) No Material Adverse Change................................................................ 3
(h) Independent Accountants................................................................... 3
(i) Preparation of the Financial Statements................................................... 4
(j) Incorporation and Good Standing of the Company and its Subsidiaries....................... 4
(k) Capitalization and Other Capital Stock Matters............................................ 5
(l) Stock Exchange Listing.................................................................... 5
(m) Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required 5
(n) No Material Actions or Proceedings........................................................ 6
(o) Intellectual Property Rights.............................................................. 6
(p) All Necessary Permits, etc................................................................ 6
(q) Title to Properties....................................................................... 6
(r) Tax Law Compliance........................................................................ 7
(s) Company Not an "Investment Company"....................................................... 7
(t) Insurance................................................................................. 7
(u) No Price Stabilization or Manipulation.................................................... 7
(v) Related Party Transactions................................................................ 7
(w) No Unlawful Contributions or Other Payments............................................... 8
(x) Company's Accounting System............................................................... 8
(y) Compliance with Environmental Laws........................................................ 8
(z) Periodic Review of Costs of Environmental Compliance...................................... 9
(aa) ERISA Compliance.......................................................................... 9
(bb) Year 2000................................................................................. 9
Section 2. Purchase, Sale and Delivery of the Common Shares................................................... 10
Section 3. Additional Covenants of the Company................................................................ 12
(a) Representatives' Review of Proposed Amendments and Supplements............................ 12
(b) Securities Act Compliance................................................................. 12
(c) Amendments and Supplements to the Prospectus and Other Securities Act Matters............. 12
</TABLE>
i.
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
(d) Copies of any Amendments and Supplements to the Prospectus................................ 13
(e) Blue Sky Compliance....................................................................... 13
(f) Use of Proceeds........................................................................... 13
(g) Transfer Agent............................................................................ 13
(h) Earnings Statement........................................................................ 13
(i) Periodic Reporting Obligations............................................................ 13
(j) Agreement Not To Offer or Sell Additional Securities...................................... 13
(k) Future Reports to the Representatives..................................................... 14
Section 4. Payment of Expenses................................................................................ 14
Section 5. Section 5. Conditions of the Obligations of the Underwriters...................................... 15
(a) Accountants' Comfort Letter............................................................... 15
(b) Compliance with Registration Requirements; No Stop Order; No Objection from NASD.......... 15
(c) No Material Adverse Change................................................................ 16
(d) Opinions of Counsel for the Company....................................................... 16
(e) Opinion of Counsel for the Underwriters................................................... 16
(f) Officers' Certificate..................................................................... 16
(g) Bring-down Comfort Letter................................................................. 16
(h) Lock-Up Agreement from Securityholders of the Company..................................... 17
(i) Additional Documents...................................................................... 17
Section 6. Reimbursement of Underwriters' Expenses............................................................ 17
Section 7. Effectiveness of this Agreement.................................................................... 17
Section 8. Indemnification.................................................................................... 18
(a) Indemnification of the Underwriter........................................................ 18
(b) Indemnification of the Company, its Directors and Officers................................ 19
(c) Notifications and Other Indemnification Procedures........................................ 20
(d) Settlements............................................................................... 20
Section 9. Contribution....................................................................................... 21
Section 10. Default of One or More of the Several Underwriters................................................. 22
Section 11. Termination of this Agreement...................................................................... 23
Section 12. Representations and Indemnities to Survive Delivery................................................ 23
Section 13. Notices............................................................................................ 23
Section 14. Successors......................................................................................... 24
Section 15. Partial Unenforceability........................................................................... 25
</TABLE>
ii.
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
Section 16. Governing Law Provisions........................................................................... 25
(b) Consent to Jurisdiction................................................................... 25
Section 17. General Provisions................................................................................. 25
</TABLE>
iii.
<PAGE>
Underwriting Agreement
______________, 1999
BANC OF AMERICA SECURITIES LLC
WARBURG DILLON READ LLC
NEEDHAM & COMPANY, INC.
As Representatives of the several Underwriters
c/o BANC OF AMERICA SECURITIES LLC
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
Introductory. PC-Tel, Inc., a Delaware corporation (the "Company),
proposes to issue and sell to the several underwriters named in Schedule A (the
----------
"Underwriters") an aggregate of [___] shares (the "Firm Common Shares") of its
Common Stock, par value $0.001 per share (the "Common Stock"). In addition, the
Company has granted to the Underwriters an option to purchase up to an
additional [___] shares (the "Optional Common Shares") of Common Stock, as
provided in Section 2. The Firm Common Shares and, if and to the extent such
option is exercised, the Optional Common Shares are collectively called the
"Common Shares". Banc of America Securities LLC, Warburg Dillon Read LLC, and
Needham & Company, Inc., have agreed to act as representatives of the several
Underwriters (in such capacity, the "Representatives") in connection with the
offering and sale of the Common Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-[___]), which contains a form of prospectus to be used in connection with
the public offering and sale of the Common Shares. Such registration statement,
as amended, including the financial statements, exhibits and schedules thereto,
in the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including any information deemed to be a
part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434
under the Securities Act, is called the "Registration Statement". Any
registration statement filed by the Company pursuant to Rule 462(b) under the
Securities Act is called the "Rule 462(b) Registration Statement", and from and
after the date and time of filing of the Rule 462(b) Registration Statement the
term "Registration Statement" shall include the Rule 462(b) Registration
Statement. Such prospectus, in the form first used by the Underwriters to
confirm sales of the Common Shares, is called the "Prospectus"; provided,
however, if the Company has, with the consent of Banc of America Securities LLC,
elected to rely upon Rule 434 under the Securities Act, the term "Prospectus"
shall mean the Company's prospectus subject to completion (each, a "preliminary
prospectus") dated [___] (such preliminary prospectus is called the "Rule 434
preliminary prospectus"), together with the applicable term sheet (the "Term
Sheet") prepared
1.
<PAGE>
and filed by the Company with the Commission under Rules 434 and 424(b) under
the Securities Act and all references in this Agreement to the date of the
Prospectus shall mean the date of the Term Sheet. All references in this
Agreement to the Registration Statement, the Rule 462(b) Registration Statement,
a preliminary prospectus, the Prospectus or the Term Sheet, or any amendments or
supplements to any of the foregoing, shall include any copy thereof filed with
the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
System ("EDGAR").
The Company hereby confirms its agreements with the Underwriters as
follows:
Section 1. Representations and Warranties of the Company. The Company
hereby represents, warrants and covenants to each Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has
complied to the Commission's satisfaction with all requests of the
Commission for additional or supplemental information. No stop order
suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement is in effect and no proceedings for such
purpose have been instituted or are pending or, to the best knowledge of
the Company, are contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied in
all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-
T under the Securities Act), was identical to the copy thereof delivered to
the Underwriters for use in connection with the offer and sale of the
Common Shares. Each of the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendment thereto, at the
time it became effective and at all subsequent times, complied and will
comply in all material respects with the Securities Act and did not and
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus, as amended or
supplemented, as of its date and at all subsequent times, did not and will
not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements
thereto, made in reliance upon and in conformity with information relating
to any Underwriter furnished to the Company in writing by the
Representatives expressly for use therein. There are no contracts or other
documents required to be described in the Prospectus or to be filed as
exhibits to the Registration Statement which have not been described or
filed as required.
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to the Representatives three complete manually signed copy of the
Registration
2.
<PAGE>
Statement and of each consent and certificate of experts filed as a part
thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Representatives
have reasonably requested for each of the Underwriters.
(c) Distribution of Offering Material By the Company. The Company
has not distributed and will not distribute, prior to the later of the
Second Closing Date (as defined below) and the completion of the
Underwriters' distribution of the Common Shares, any offering material in
connection with the offering and sale of the Common Shares other than a
preliminary prospectus, the Prospectus or the Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement
of, the Company, enforceable in accordance with its terms, except as rights
to indemnification hereunder may be limited by applicable law or public
policy applicable thereto and except as the enforcement hereof may be
limited by bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles.
(e) Authorization of the Common Shares. The Common Shares to be
purchased by the Underwriters from the Company have been duly authorized
for issuance and sale pursuant to this Agreement and, when issued and
delivered by the Company pursuant to this Agreement, will be validly
issued, fully paid and nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or
debt securities registered for sale under the Registration Statement or
included in the offering contemplated by this Agreement, except for such
rights as have been duly waived.
(g) No Material Adverse Change. Except as otherwise disclosed in the
Prospectus, subsequent to the respective dates as of which information is
given in the Prospectus: (i) there has been no material adverse change, or
any development that could reasonably be expected to result in a material
adverse change, in the condition, financial or otherwise, or in the
earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business, of the Company and its
subsidiaries, considered as one entity (any such change is called a
"Material Adverse Change"); (ii) the Company and its subsidiaries,
considered as one entity, have not incurred any material liability or
obligation, indirect, direct or contingent, not in the ordinary course of
business nor entered into any material transaction or agreement not in the
ordinary course of business; and (iii) there has been no dividend or
distribution of any kind declared, paid or made by the Company or, except
for dividends paid to the Company or other subsidiaries, any of its
subsidiaries on any class of capital stock or repurchase or redemption by
the Company or any of its subsidiaries of any class of capital stock.
(h) Independent Accountants. Arthur Andersen LLP, who have expressed
their opinion with respect to the financial statements (which term as used
in this
3.
<PAGE>
Agreement includes the related notes thereto) filed with the Commission as
a part of the Registration Statement and included in the Prospectus, are
independent public or certified public accountants as required by the
Securities Act.
(i) Preparation of the Financial Statements. The financial
statements filed with the Commission as a part of the Registration
Statement and included in the Prospectus present fairly the consolidated
financial position of the Company and its subsidiaries, and the financial
position of the Communications Systems Division of General DataComm, Inc.
("CSD"), in each case as of and at the dates indicated and the results of
their respective operations and cash flows for the periods specified. Such
financial statements have been prepared in conformity with generally
accepted accounting principles as applied in the United States applied on a
consistent basis throughout the periods involved, except as may be
expressly stated in the related notes thereto. No other financial
statements or supporting schedules are required to be included in the
Registration Statement. The financial data set forth in the Prospectus
under the captions "Prospectus Summary--Summary Consolidated Financial
Data", "Selected Consolidated Financial Data" and "Capitalization" fairly
present the information set forth therein on a basis consistent with that
of the audited financial statements contained in the Registration
Statement. The pro forma consolidated financial statements of the Company
and its subsidiaries and the related notes thereto included under the
caption "Pro Forma Consolidated Financial Statements" and elsewhere in the
Prospectus and in the Registration Statement present fairly the information
contained therein, have been prepared in accordance with the Commission's
rules and guidelines with respect to pro forma financial statements and
have been properly presented on the bases described therein, and the
assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions
and circumstances referred to therein.
(j) Incorporation and Good Standing of the Company and its
Subsidiaries. Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation and has corporate
power and authority to own, lease and operate its properties and to conduct
its business as described in the Prospectus and, in the case of the
Company, to enter into and perform its obligations under this Agreement.
Each of the Company and each subsidiary is duly qualified as a foreign
corporation to transact business and is in good standing in the State of
California and each other jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except for such jurisdictions (other than the State of
California) where the failure to so qualify or to be in good stan ding
would not, individually or in the aggregate, result in a Material Adverse
Change. All of the issued and outstanding capital stock of each subsidiary
has been duly authorized and validly issued, is fully paid and
nonassessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge,
lien, encumbrance or claim. The Company does not own or control, directly
or indirectly, any corporation, association or other entity other than the
subsidiaries listed in Exhibit 21.1 to the Registration Statement.
4.
<PAGE>
(k) Capitalization and Other Capital Stock Matters. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options described in the
Prospectus). The Common Stock (including the Common Shares) conforms in all
material respects to the description thereof contained in the Prospectus.
All of the issued and outstanding shares of Common Stock have been duly
authorized and validly issued, are fully paid and nonassessable and have
been issued in compliance with federal and state securities laws. None of
the outstanding shares of Common Stock were issued in violation of any
preemptive rights, rights of first refusal or other similar rights to
subscribe for or purchase securities of the Company. There are no
authorized or outstanding options, warrants, preemptive rights, rights of
first refusal or other rights to purchase, or equity or debt securities
convertible into or exchangeable or exercisable for, any capital stock of
the Company or any of its subsidiaries other than those accurately
described in the Prospectus. The description of the Company's stock option,
stock bonus and other stock plans or arrangements, and the options or other
rights granted thereunder, set forth in the Prospectus accurately and
fairly presents the information required to be shown with respect to such
plans, arrangements, options and rights.
(l) Stock Exchange Listing. The Common Shares have been approved for
inclusion on the Nasdaq National Market, subject only to official notice of
issuance.
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. Neither the Company nor any of its
subsidiaries is in violation of its charter or by-laws or is in default
(or, with the giving of notice or lapse of time, would be in default)
("Default") under any indenture, mortgage, loan or credit agreement, note,
contract, franchise, lease or other instrument to which the Company or any
of its subsidiaries is a party or by which it or any of them may be bound,
or to which any of the property or assets of the Company or any of its
subsidiaries is subject (each, an "Existing Instrument"), except for such
Defaults as would not, individually or in the aggregate, result in a
Material Adverse Change. The Company's execution, delivery and performance
of this Agreement and consummation of the transactions contemplated hereby
and by the Prospectus (i) have been duly authorized by all necessary
corporate action and will not result in any violation of the provisions of
the charter or by-laws of the Company or any subsidiary, (ii) will not
conflict with or constitute a breach of, or Default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or any of its subsidiaries pursuant to, or require
the consent of any other party to, any Existing Instrument, except for such
conflicts, breaches, Defaults, liens, charges or encumbrances as would not,
individually or in the aggregate, result in a Material Adverse Change and
(iii) will not result in any violation of any law, administrative
regulation or administrative or court decree applicable to the Company or
any subsidiary. No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental or regulatory
authority or agency, is required for the Company's execution, delivery and
performance of this Agreement and consummation of the transactions
contemplated hereby and by the Prospectus, except such as have been
obtained or made by the Company and are in full
5.
<PAGE>
force and effect under the Securities Act, applicable state securities or
blue sky laws and from the National Association of Securities Dealers, Inc.
(the "NASD").
(n) No Material Actions or Proceedings. Except as otherwise
disclosed in the Prospectus, there are no legal or governmental actions,
suits or proceedings pending or, to the best of the Company's knowledge,
threatened (i) against or affecting the Company or any of its subsidiaries,
(ii) which has as the subject thereof any officer or director of, or
property owned or leased by, the Company or any of its subsidiaries or
(iii) relating to environmental or discrimination matters, where in any
such case (A) there is a reasonable possibility that such action, suit or
proceeding might be determined adversely to the Company or such subsidiary
and (B) any such action, suit or proceeding, if so determined adversely,
would reasonably be expected to result in a Material Adverse Change or
adversely affect the consummation of the transactions contemplated by this
Agreement. No material labor dispute with the employees of the Company or
any of its subsidiaries, or with the employees of any principal supplier of
the Company, exists or, to the best of the Company's knowledge, is
threatened or imminent.
(o) Intellectual Property Rights. Except as otherwise disclosed in
the Prospectus, the Company and its subsidiaries own or possess sufficient
trademarks, trade names, patent rights, copyrights, licenses, approvals,
trade secrets and other similar rights (collectively, "Intellectual
Property Rights") reasonably necessary to conduct their businesses as now
conducted; and the expected expiration of any of such Intellectual Property
Rights would not result in a Material Adverse Change. Except as otherwise
disclosed in the Prospectus, neither the Company nor any of its
subsidiaries has received any notice of infringement or conflict with
asserted Intellectual Property Rights of others, which infringement or
conflict, if the subject of an unfavorable decision, would result in a
Material Adverse Change.
(p) All Necessary Permits, etc. The Company and each subsidiary
possess such valid and current certificates, authorizations or permits
issued by the appropriate state, federal or foreign regulatory agencies or
bodies necessary to conduct their respective businesses, except where the
failure to possess such certificates, authorizations or permits would not,
individually or in the aggregate, result in a Material Adverse Change, and
neither the Company nor any subsidiary has received any notice of
proceedings relating to the revocation or modification of, or non-
compliance with, any such certificate, authorization or permit which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, could result in a Material Adverse Change.
(q) Title to Properties. The Company and each of its subsidiaries
has good and marketable title to all the properties and assets reflected as
owned in the financial statements referred to in Section 1(i) above (or
elsewhere in the Prospectus), in each case free and clear of any security
interests, mortgages, liens, encumbrances, equities, claims and other
defects, except those, if any, reflected in the financial statements or
elsewhere in the Prospectus or such as, individually or in the aggregate,
do not materially and adversely affect the value of such property and do
not materially interfere with the use made or proposed to be made of such
property by the Company or such subsidiary. The real property,
improvements, equipment and personal property held under lease by the
6.
<PAGE>
Company or any subsidiary are held under valid and enforceable leases, with
such exceptions as are not material and do not materially interfere with
the use made or proposed to be made of such real property, improvements,
equipment or personal property by the Company or such subsidiary.
(r) Tax Law Compliance. The Company and its subsidiaries have filed
all necessary federal, state and foreign income and franchise tax returns
and have paid all taxes required to be paid by any of them and, if due and
payable, any related or similar assessment, fine or penalty levied against
any of them, except where the failure to file such returns or to pay such
taxes, assessments, fines or penalties would not, individually or in the
aggregate, result in a Material Adverse Change. The Company has made
adequate charges, accruals and reserves in the applicable financial
statements referred to in Section 1(i) above in respect of all federal,
state and foreign income and franchise taxes for all periods as to which
the tax liability of the Company or any of its subsidiaries has not been
finally determined.
(s) Company Not an "Investment Company". The Company has been
advised of the rules and requirements under the Investment Company Act of
1940, as amended (the "Investment Company Act"). The Company is not, and
after receipt of payment for the Common Shares will not be, an "investment
company" within the meaning of Investment Company Act and will conduct its
business in a manner so that it will not become subject to the Investment
Company Act.
(t) Insurance. Each of the Company and its subsidiaries are insured
by recognized, financially sound and reputable institutions with policies
in such amounts and with such deductibles and covering such risks as are
generally deemed adequate and customary for their businesses including, but
not limited to, policies covering real and personal property owned or
leased by the Company and its subsidiaries against theft, damage,
destruction, acts of vandalism and earthquakes. The Company has no reason
to believe that it or any subsidiary will not be able (i) to renew its
existing insurance coverage as and when such policies expire or (ii) to
obtain comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that
would not result in a Material Adverse Change. Neither of the Company nor
any subsidiary has been denied any insurance coverage which it has sought
or for which it has applied.
(u) No Price Stabilization or Manipulation. The Company has not
taken and will not take, directly or indirectly, any action designed to or
that might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock or any security of the
Company to facilitate the sale or resale of the Common Shares.
(v) Related Party Transactions. There are no business relationships
or related-party transactions involving the Company or any subsidiary or
any other person required to be described in the Prospectus which have not
been described as required.
7.
<PAGE>
(w) No Unlawful Contributions or Other Payments. Neither the Company
nor any of its subsidiaries nor, to the best of the Company's knowledge,
any employee or agent of the Company or any subsidiary, has made any
contribution or other payment to any official of, or candidate for, any
federal, state or foreign office in violation of any law or of the
character required to be disclosed in the Prospectus.
(x) Company's Accounting System. The Company maintains a system of
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles as applied in the United States and to
maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with respect
to any differences.
(y) Compliance with Environmental Laws. Except as would not,
individually or in the aggregate, result in a Material Adverse Change (i)
neither the Company nor any of its subsidiaries is in violation of any
federal, state, local or foreign law or regulation relating to pollution or
protection of human health or the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including without limitation, laws and
regulations relating to emissions, discharges, releases or threatened
releases of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum and petroleum products (collectively,
"Materials of Environmental Concern"), or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environment Concern (collectively,
"Environmental Laws"), which violation includes, but is not limited to,
noncompliance with any permits or other governmental authorizations
required for the operation of the business of the Company or its
subsidiaries under applicable Environmental Laws, or noncompliance with the
terms and conditions thereof, nor has the Company or any of its
subsidiaries received any written communication, whether from a
governmental authority, citizens group, employee or otherwise, that alleges
that the Company or any of its subsidiaries is in violation of any
Environmental Law; (ii) there is no claim, action or cause of action filed
with a court or governmental authority, no investigation with respect to
which the Company has received written notice, and no written notice by any
person or entity alleging potential liability for investigatory costs,
cleanup costs, governmental responses costs, natural resources damages,
property damages, personal injuries, attorneys' fees or penalties arising
out of, based on or resulting from the presence, or release into the
environment, of any Material of Environmental Concern at any location
owned, leased or operated by the Company or any of its subsidiaries, now or
in the past (collectively, "Environmental Claims"), pending or, to the best
of the Company's knowledge, threatened against the Company or any of its
subsidiaries or any person or entity whose liability for any Environmental
Claim the Company or any of its subsidiaries has retained or assumed either
contractually or by operation of law; and (iii) to the best of the
Company's knowledge, there are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without
limitation, the release, emission,
8.
<PAGE>
discharge, presence or disposal of any Material of Environmental Concern,
that reasonably could result in a violation of any Environmental Law or
form the basis of a potential Environmental Claim against the Company or
any of its subsidiaries or against any person or entity whose liability for
any Environmental Claim the Company or any of its subsidiaries has retained
or assumed either contractually or by operation of law.
(z) Periodic Review of Costs of Environmental Compliance. In the
ordinary course of its business, the Company conducts a periodic review of
the effect of Environmental Laws on the business, operations and properties
of the Company and its subsidiaries, in the course of which it identifies
and evaluates associated costs and liabilities (including, without
limitation, any capital or operating expenditures required for clean-up,
closure of properties or compliance with Environmental Laws or any permit,
license or approval, any related constraints on operating activities and
any potential liabilities to third parties). On the basis of such review
and the amount of its established reserves, the Company has reasonably
concluded that such associated costs and liabilities would not,
individually or in the aggregate, result in a Material Adverse Change.
(aa) ERISA Compliance. The Company and its subsidiaries and any
"employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or
maintained by the Company, its subsidiaries or their "ERISA Affiliates" (as
defined below) are in compliance in all material respects with ERISA.
"ERISA Affiliate" means, with respect to the Company or a subsidiary, any
member of any group of organizations described in Sections 414(b),(c),(m)
or (o) of the Internal Revenue Code of 1986, as amended, and the
regulations and published interpretations thereunder (the "Code") of which
the Company or such subsidiary is a member. No "reportable event" (as
defined under ERISA) has occurred or is reasonably expected to occur with
respect to any "employee benefit plan" established or maintained by the
Company, its subsidiaries or any of their ERISA Affiliates. No "employee
benefit plan" established or maintained by the Company, its subsidiaries or
any of their ERISA Affiliates, if such "employee benefit plan" were
terminated, would have any "amount of unfunded benefit liabilities" (as
defined under ERISA). Neither the Company, its subsidiaries nor any of
their ERISA Affiliates has incurred or reasonably expects to incur any
liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971,
4975 or 4980B of the Code. Each "employee benefit plan" established or
maintained by the Company, its subsidiaries or any of their ERISA
Affiliates that is intended to be qualified under Section 401(a) of the
Code is so qualified and nothing has occurred, whether by action or failure
to act, which would cause the loss of such qualification.
(bb) Year 2000. All disclosure regarding year 2000 compliance that is
required to be described under the Securities Act (including disclosures
required by Staff Legal Bulletin No. 5) has been included in the
Prospectus. The Company will not incur significant operating expenses or
costs to ensure that its information systems will be year 2000 complaint,
other than as disclosed in the Prospectus.
9.
<PAGE>
Any certificate signed by an officer of the Company and delivered to
the Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
Section 2. Purchase, Sale and Delivery of the Common Shares.
The Firm Common Shares. The Company agrees to issue and sell to the
several Underwriters the Firm Common Shares upon the terms herein set forth. On
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase from the Company the
respective number of Firm Common Shares set forth opposite their names on
Schedule A. The purchase price per Firm Common Share to be paid by the several
- ----------
Underwriters to the Company shall be $[___] per share.
The First Closing Date. Delivery of certificates for the Firm Common
Shares to be purchased by the Underwriters and payment therefor shall be made at
the offices of Banc of America Securities LLC, 600 Montgomery Street, San
Francisco, California (or such other place as may be agreed to by the Company
and the Representatives) at 6:00 a.m. San Francisco time, on [___], 1999 or such
other time and date not later than 10:30 a.m. San Francisco time, on [___], 1999
as the Representatives shall designate by notice to the Company (the time and
date of such closing are called the "First Closing Date"). The Company hereby
acknowledges that circumstances under which the Representatives may provide
notice to postpone the First Closing Date as originally scheduled include, but
are in no way limited to, any determination by the Company or the
Representatives to recirculate to the public copies of an amended or
supplemented Prospectus or a delay as contemplated by the provisions of Section
10.
The Optional Common Shares; the Second Closing Date. In addition, on
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of [___] Optional Common Shares from the Company
at the purchase price per share to be paid by the Underwriters for the Firm
Common Shares. The option granted hereunder is for use by the Underwriters
solely in covering any over-allotments in connection with the sale and
distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) upon notice by the
Representatives to the Company, which notice may be given at any time within 30
days from the date of this Agreement. Such notice shall set forth (i) the
aggregate number of Optional Common Shares as to which the Underwriters are
exercising the option, (ii) the names and denominations in which the
certificates for the Optional Common Shares are to be registered and (iii) the
time, date and place at which such certificates will be delivered (which time
and date may be simultaneous with, but not earlier than, the First Closing Date;
and in such case the term "First Closing Date" shall refer to the time and date
of delivery of certificates for the Firm Common Shares and the Optional Common
Shares). Such time and date of delivery, if subsequent to the First Closing
Date, is called the "Second Closing Date" and shall be determined by the
Representatives and shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. If any Optional Common
Shares are to be purchased, each Underwriter agrees, severally and not jointly,
to purchase the number of Optional Common Shares (subject to such adjustments to
eliminate fractional shares
10.
<PAGE>
as the Representatives may determine) that bears the same proportion to the
total number of Optional Common Shares to be purchased as the number of Firm
Common Shares set forth on Schedule A opposite the name of such Underwriter
----------
bears to the total number of Firm Common Shares. The Representatives may cancel
the option at any time prior to its expiration by giving written notice of such
cancellation to the Company.
Public Offering of the Common Shares. The Representatives hereby advise
the Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Common Shares as
soon after this Agreement has been executed and the Registration Statement has
been declared effective as the Representatives, in their sole judgment, have
determined is advisable and practicable.
Payment for the Common Shares. Payment for the Common Shares shall be
made at the First Closing Date (and, if applicable, at the Second Closing Date)
by wire transfer of immediately available funds to the order of the Company.
It is understood that the Representatives have been authorized, for
their own accounts and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Common Shares and any Optional Common Shares the Underwriters have agreed
to purchase. Banc of America Securities LLC, individually and not as a
Representative of the Underwriters, may (but shall not be obligated to) make
payment for any Common Shares to be purchased by any Underwriter whose funds
shall not have been received by the Representatives by the First Closing Date or
the Second Closing Date, as the case may be, for the account of such
Underwriter, but any such payment shall not relieve such Underwriter from any of
its obligations under this Agreement.
Delivery of the Common Shares. The Company shall deliver, or cause to
be delivered, to the Representatives for the accounts of the several
Underwriters certificates for the Firm Common Shares at the First Closing Date,
against the irrevocable release of a wire transfer of immediately available
funds for the amount of the purchase price therefor. The Company shall also
deliver, or cause to be delivered, to the Representatives for the accounts of
the several Underwriters, certificates for the Optional Common Shares the
Underwriters have agreed to purchase at the First Closing Date or the Second
Closing Date, as the case may be, against the irrevocable release of a wire
transfer of immediately available funds for the amount of the purchase price
therefor. The certificates for the Common Shares shall be in definitive form and
registered in such names and denominations as the Representatives shall have
requested at least two full business days prior to the First Closing Date (or
the Second Closing Date, as the case may be) and shall be made available for
inspection on the business day preceding the First Closing Date (or the Second
Closing Date, as the case may be) at a location in New York City as the
Representatives may designate. Time shall be of the essence, and delivery at the
time and place specified in this Agreement is a further condition to the
obligations of the Underwriters.
Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m.
on the second business day following the date the Common Shares are first
released by the Underwriters for sale to the public, the Company shall deliver
or cause to be delivered, copies of the Prospectus in such quantities and at
such places as the Representatives shall request.
11.
<PAGE>
Section 3. Additional Covenants of the Company. The Company further
covenants and agrees with each Underwriter as follows:
(a) Representatives' Review of Proposed Amendments and Supplements.
During such period beginning on the date hereof and ending on the
later of the First Closing Date or such date, as in the opinion of counsel
for the Underwriters, the Prospectus is no longer required by law to be
delivered in connection with sales by an Underwriter or dealer (the
"Prospectus Delivery Period"), prior to amending or supplementing the
Registration Statement (including any registration statement filed under
Rule 462(b) under the Securities Act) or the Prospectus, the Company shall
furnish to the Representatives for review a copy of each such proposed
amendment or supplement, and the Company shall not file any such proposed
amendment or supplement to which the Representatives reasonably object.
(b) Securities Act Compliance. After the date of this Agreement, the
Company shall promptly advise the Representatives in writing (i) of the
receipt of any comments of, or requests for additional or supplemental
information from, the Commission, (ii) of the time and date of any filing
of any post-effective amendment to the Registration Statement or any
amendment or supplement to any preliminary prospectus or the Prospectus,
(iii) of the time and date that any post-effective amendment to the
Registration Statement becomes effective and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or of any
order preventing or suspending the use of any preliminary prospectus or the
Prospectus, or of any proceedings to remove, suspend or terminate from
listing or quotation the Common Stock from any securities exchange upon
which it is listed for trading or included or designated for quotation, or
of the threatening or initiation of any proceedings for any of such
purposes. If the Commission shall enter any such stop order at any time,
the Company will use its best efforts to obtain the lifting of such order
at the earliest possible moment. Additionally, the Company agrees that it
shall comply with the provisions of Rules 424(b), 430A and 434, as
applicable, under the Securities Act and will use its reasonable efforts to
confirm that any filings made by the Company under such Rule 424(b) were
received in a timely manner by the Commission.
(c) Amendments and Supplements to the Prospectus and Other Securities
Act Matters. If, during the Prospectus Delivery Period, any event shall
occur or condition exist as a result of which it is necessary to amend or
supplement the Prospectus in order to make the statements therein, in the
light of the circumstances when the Prospectus is delivered to a purchaser,
not misleading, or if in the opinion of the Representatives or counsel for
the Underwriters it is otherwise necessary to amend or supplement the
Prospectus to comply with law, the Company agrees to promptly prepare
(subject to Section 3(a) hereof), file with the Commission and furnish at
its own expense to the Underwriters and to dealers, amendments or
supplements to the Prospectus so that the statements in the Prospectus as
so amended or supplemented will not, in the light of the circumstances when
the Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
12.
<PAGE>
(d) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Representatives, without charge, during the
Prospectus Delivery Period, as many copies of the Prospectus and any
amendments and supplements thereto as the Representatives may request.
(e) Blue Sky Compliance. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register the
Common Shares for sale under (or obtain exemptions from the application of)
the state securities or blue sky laws or Canadian provincial Securities
laws of those jurisdictions designated by the Representatives, shall comply
with such laws and shall continue such qualifications, registrations and
exemptions in effect so long as required for the distribution of the Common
Shares. The Company shall not be required to qualify as a foreign
corporation or to take any action that would subject it to general service
of process in any such jurisdiction where it is not presently qualified or
where it would be subject to taxation as a foreign corporation. The Company
will advise the Representatives promptly of the suspension of the
qualification or registration of (or any such exemption relating to) the
Common Shares for offering, sale or trading in any jurisdiction or any
initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any order suspending such qualification,
registration or exemption, the Company shall use its best efforts to obtain
the withdrawal thereof at the earliest possible moment.
(f) Use of Proceeds. The Company shall apply the net proceeds from the
sale of the Common Shares sold by it in the manner described under the
caption "Use of Proceeds" in the Prospectus.
(g) Transfer Agent. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Common Stock.
(h) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month
period ending December 31, 2000 that satisfies the provisions of Section
11(a) of the Securities Act.
(i) Periodic Reporting Obligations. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and
the Nasdaq National Market all reports and documents required to be filed
under the Exchange Act. Additionally, the Company shall report the use of
proceeds from the issuance of the Common Shares as may be required under
Rule 463 under the Securities Act.
(j) Agreement Not To Offer or Sell Additional Securities. During the
period of 180 days following the date of the Prospectus, the Company will
not, without the prior written consent of Banc of America Securities LLC
(which consent may be withheld at the sole discretion of Banc of America
Securities LLC), directly or indirectly, sell, offer, contract or grant any
option to sell, pledge, transfer or establish an open "put equivalent
position" within the meaning of Rule 16a-1(h) under the Exchange Act, or
otherwise dispose of or transfer, or announce the offering of, or file any
registration statement under the Securities Act in respect of, any shares
of Common Stock, options or warrants to
13.
<PAGE>
acquire shares of the Common Stock or securities exchangeable or
exercisable for or convertible into shares of Common Stock (other than as
contemplated by this Agreement with respect to the Common Shares);
provided, however, that the Company may issue shares of its Common Stock or
options to purchase its Common Stock, or Common Stock upon exercise of
options or warrants, pursuant to any stock option, stock bonus or other
stock plan or other arrangement described in the Prospectus, but only if
the holders of such shares, options, or shares issued upon exercise of
such options, agree in writing not to sell, offer, dispose of or
otherwise transfer any such shares or options during such 180 day period
without the prior written consent of Banc of America Securities LLC
(which consent may be withheld at the sole discretion of the Banc of
America Securities LLC).
(k) Future Reports to the Representatives. During the period of five
years hereafter the Company will furnish to Banc of America Securities LLC
at 600 Montgomery Street, San Francisco, CA 94111, Attention: _____,
Warburg Dillon Read LLC at [_____________], Attention: _____, and Needham &
Company, Inc at [_____________], Attention: _____: (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report
of the Company containing the balance sheet of the Company as of the close
of such fiscal year and statements of income, stockholders' equity and cash
flows for the year then ended and the opinion thereon of the Company's
independent public or certified public accountants; (ii) as soon as
practicable after the filing thereof, copies of each proxy statement,
Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report
on Form 8-K or other report filed by the Company with the Commission, the
NASD or any securities exchange; and (iii) as soon as available, copies of
any report or communication of the Company mailed generally to holders of
its capital stock.
Banc of America Securities LLC, on behalf of the several Underwriters,
may, in its sole discretion, waive in writing the performance by the Company of
any one or more of the foregoing covenants or extend the time for their
performance.
Section 4. Payment of Expenses. The Company agrees to pay all costs,
fees and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of
the Company's counsel, independent public or certified public accountants and
other advisors, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus, and
all amendments and supplements thereto, and this Agreement, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Common Shares for offer
and sale under the state securities or blue sky laws or the provincial
securities laws of Canada, and, if requested by the Representatives, preparing
and printing a "Blue Sky Survey" or memorandum, and any supplements thereto,
advising the Underwriters of such
14.
<PAGE>
qualifications, registrations and exemptions, (vii) the filing fees incident to,
and the reasonable fees and expenses of counsel for the Underwriters in
connection with, the NASD's review and approval of the Underwriters'
participation in the offering and distribution of the Common Shares, (viii) the
fees and expenses associated with including the Common Stock on the Nasdaq
National Market, and (ix) all other fees, costs and expenses referred to in Item
13 of Part II of the Registration Statement. Except as provided in this Section
4, Section 6, Section 8 and Section 9 hereof, the Underwriters shall pay their
own expenses, including the fees and disbursements of their counsel.
Section 5. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company set
forth in Section 1 hereof as of the date hereof and as of the First Closing Date
as though then made and, with respect to the Optional Common Shares, as of the
Second Closing Date as though then made, to the timely performance by the
Company of its covenants and other obligations hereunder, and to each of the
following additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, the
Representatives shall have received from Arthur Andersen LLP, independent
public or certified public accountants for the Company, a letter dated the
date hereof addressed to the Underwriters, in form and substance
satisfactory to the Representatives, containing statements and information
of the type ordinarily included in accountant's "comfort letters" to
underwriters, delivered according to Statement of Auditing Standards No. 72
(or any successor bulletin), with respect to the audited and unaudited
financial statements and certain financial information contained in the
Registration Statement and the Prospectus (and the Representatives shall
have received an additional [___] conformed copies of such accountants'
letter for each of the several Underwriters).
(b) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD. For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A under the
Securities Act) in the manner and within the time period required by
Rule 424(b) under the Securities Act; or the Company shall have filed a
post-effective amendment to the Registration Statement containing the
information required by such Rule 430A, and such post-effective
amendment shall have become effective; or, if the Company elected to
rely upon Rule 434 under the Securities Act and obtained the
Representatives' consent thereto, the Company shall have filed a Term
Sheet with the Commission in the manner and within the time period
required by such Rule 424(b);
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement, or any
post-effective
15.
<PAGE>
amendment to the Registration Statement, shall be in effect and no
proceedings for such purpose shall have been instituted or threatened by
the Commission; and
(iii) the NASD shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.
(c) No Material Adverse Change. For the period from and after the
date of this Agreement and prior to the First Closing Date and, with
respect to the Optional Common Shares, the Second Closing Date, in the
judgment of the Representatives there shall not have occurred any Material
Adverse Change.
(d) Opinions of Counsel for the Company. On each of the First
Closing Date and the Second Closing Date the Representatives shall have
received the favorable opinions of Wilson, Sonsini, Goodrich & Rosati,
counsel for the Company, and Knobbe, Martens, Olson & Bear LLP, patent
counsel for the Company, dated as of such Closing Date, the forms of which
are attached as Exhibit A and Exhibit B, respectively, (and the
--------- ---------
Representatives shall have received an additional [___] conformed copies of
such counsels' legal opinions for each of the several Underwriters).
(e) Opinion of Counsel for the Underwriters. On each of the First
Closing Date and the Second Closing Date the Representatives shall have
received the favorable opinion of Brobeck, Phleger & Harrison LLP, counsel
for the Underwriters, dated as of such Closing Date, with respect to the
matters set forth in paragraphs (vii) (with respect to subparagraph (i)
only), (viii), (ix), (x) (xi) and (xiii) (with respect to the captions
"Description of Capital Stock" and "Underwriting" under subparagraph (i)
only), and the next-to-last paragraph of Exhibit A (and the Representatives
---------
shall have received an additional [___] conformed copies of such counsel's
legal opinion for each of the several Underwriters).
(f) Officers' Certificate. On each of the First Closing Date and the
Second Closing Date the Representatives shall have received a written
certificate executed by the Chief Executive Officer or President of the
Company and the Chief Financial Officer or Chief Accounting Officer of the
Company, dated as of such Closing Date, to the effect set forth in
subsection (b)(ii) of this Section 5, and further to the effect that:
(i) for the period from and after the date of this Agreement and
prior to such Closing Date, there has not occurred any Material Adverse
Change;
(ii) the representations, warranties and covenants of the Company
set forth in Section 1 of this Agreement are true and correct with the
same force and effect as though expressly made on and as of such Closing
Date; and
(iii) the Company has complied with all the agreements hereunder
and satisfied all the conditions on its part to be performed or
satisfied hereunder at or prior to such Closing Date.
(g) Bring-down Comfort Letter. On each of the First Closing Date and
the Second Closing Date the Representatives shall have received from Arthur
Andersen LLP,
16.
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independent public or certified public accountants for the Company, a
letter dated such date, in form and substance satisfactory to the
Representatives, to the effect that they reaffirm the statements made in
the letter furnished by them pursuant to subsection (a) of this Section 5,
except that the specified date referred to therein for the carrying out of
procedures shall be no more than three business days prior to the First
Closing Date or Second Closing Date, as the case may be (and the
Representatives shall have received an additional [___] conformed copies of
such accountants' letter for each of the several Underwriters).
(h) Lock-Up Agreement from Securityholders of the Company. On the
date hereof, the Company shall have furnished to the Representatives an
agreement in the form of Exhibit C hereto from each director, officer and
---------
each beneficial owner (other than such owners which the Representatives
have expressly agreed need not provide such agreement) of Common Stock
(as defined and determined according to Rule 13d-3 under the Exchange
Act, except that a one hundred eighty day period shall be used rather
than the sixty day period set forth therein), and such agreement shall be
in full force and effect on each of the First Closing Date and the Second
Closing Date.
(i) Additional Documents. On or before each of the First Closing
Date and the Second Closing Date, the Representatives and counsel for the
Underwriters shall have received such information, documents and opinions
as they may reasonably require for the purposes of enabling them to pass
upon the issuance and sale of the Common Shares as contemplated herein, or
in order to evidence the accuracy of any of the representations and
warranties, or the satisfaction of any of the conditions or agreements,
herein contained.
If any condition specified in this Section 5 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Optional Common Shares, at any time prior
to the Second Closing Date, which termination shall be without liability on the
part of any party to any other party, except that Section 4, Section 6, Section
8 and Section 9 shall at all times be effective and shall survive such
termination.
Section 6. Reimbursement of Underwriters' Expenses. If this Agreement
is terminated by the Representatives pursuant to Section 5, Section 7, Section
10 or Section 11, or if the sale to the Underwriters of the Common Shares on the
First Closing Date is not consummated because of any refusal, inability or
failure on the part of the Company to perform any agreement herein or to comply
with any provision hereof, the Company agrees to reimburse the Representatives
and the other Underwriters (or such Underwriters as have terminated this
Agreement with respect to themselves), severally, upon demand for all out-of-
pocket expenses that shall have been reasonably incurred by the Representatives
and the Underwriters in connection with the proposed purchase and the offering
and sale of the Common Shares, including but not limited to fees and
disbursements of counsel, printing expenses, travel expenses, postage, facsimile
and telephone charges.
Section 7. Effectiveness of this Agreement. This Agreement shall not
become effective until the later of (i) the execution of this Agreement by the
parties hereto and
17.
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(ii) notification by the Commission to the Company and the Representatives of
the effectiveness of the Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated by any
party by notice to each of the other parties hereto, and any such termination
shall be without liability on the part of (a) the Company to any Underwriter,
except that the Company shall be obligated to reimburse the expenses of the
Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b) of
any Underwriter to the Company, or (c) of any party hereto to any other party
except that the provisions of Section 8 and Section 9 shall at all times be
effective and shall survive such termination.
Section 8. Indemnification
(a) Indemnification of the Underwriter. The Company agrees to
indemnify and hold harmless each Underwriter, its officers and employees,
and each person, if any, who controls any Underwriter within the meaning of
the Securities Act and the Exchange Act against any loss, claim, damage,
liability or expense, as incurred, to which such Underwriter or such
controlling person may become subject, under the Securities Act, the
Exchange Act or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of the Company), insofar as
such loss, claim, damage, liability or expense (or actions in respect
thereof as contemplated below) arises out of or is based (i) upon any
untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement, or any amendment thereto, including any
information deemed to be a part thereof pursuant to Rule 430A or Rule 434
under the Securities Act, or the omission or alleged omission therefrom of
a material fact required to be stated therein or necessary to make the
statements therein not misleading; or (ii) upon any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto), or
the omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading; or (iii) in whole or in part
upon any inaccuracy in the representations and warranties of the Company
contained herein; or (iv) in whole or in part upon any failure of the
Company to perform its obligations hereunder or under law; or (v) any act
or failure to act or any alleged act or failure to act by any Underwriter
in connection with, or relating in any manner to, the Common Stock or the
offering contemplated hereby, and which is included as part of or referred
to in any loss, claim, damage, liability or action arising out of or based
upon any matter covered by clause (i) or (ii) above, provided that the
Company shall not be liable under this clause (v) to the extent that a
court of competent jurisdiction shall have determined by a final judgment
that such loss, claim, damage, liability or action resulted directly from
any such acts or failures to act undertaken or omitted to be taken by such
Underwriter through its bad faith or willful misconduct; and to reimburse
each Underwriter and each such controlling person for any and all expenses
(including the fees and disbursements of counsel chosen by Banc of America
Securities LLC) as such expenses are reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that the
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Company shall not be liable for any loss, claim, damage, liability or
expense to the extent, but only to the extent, arising out of or based upon
any untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with written information
furnished to the Company by the Representatives expressly for use in the
Registration Statement, any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto); and provided, further, that with
respect to any preliminary prospectus, the foregoing indemnity agreement
shall not inure to the benefit of any Underwriter from whom the person
asserting any loss, claim, damage, liability or expense purchased Common
Shares, or any person controlling such Underwriter, if copies of the
Prospectus were timely delivered to the Underwriter pursuant to Section 2
and a copy of the Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not
sent or given by or on behalf of such Underwriter to such person, if
required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Common Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such loss, claim, damage, liability or expense. The
indemnity agreement set forth in this Section 8(a) shall be in addition to
any liabilities that the Company may otherwise have.
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold
harmless the Company, each of its directors, each of its officers who
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Securities Act or the Exchange Act,
against any loss, claim, damage, liability or expense, as incurred, to
which the Company, or any such director, officer or controlling person may
become subject, under the Securities Act, the Exchange Act, or other
federal or state statutory law or regulation, or at common law or otherwise
(including in settlement of any litigation, if such settlement is effected
with the written consent of such Underwriter), insofar as such loss, claim,
damage, liability or expense (or actions in respect thereof as contemplated
below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to
the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the
Registration Statement, any preliminary prospectus, the Prospectus (or any
amendment or supplement thereto), in reliance upon and in conformity with
written information furnished to the Company by the Representatives
expressly for use therein; and to reimburse the Company, or any such
director, officer or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer or
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action. The Company hereby acknowledges that the only information that the
Underwriters have furnished to the Company expressly for use in the
Registration Statement, any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto) are the statements set forth in the
table in the first paragraph and the second, seventh, ninth, tenth, twelfth
and
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fourteenth paragraphs under the caption "Underwriting" in the Prospectus;
and the Underwriters confirm that such statements are correct. The
indemnity agreement set forth in this Section 8(b) shall be in addition to
any liabilities that each Underwriter may otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement
thereof, but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party
for contribution or otherwise than under the indemnity agreement contained
in this Section 8 or to the extent it is not prejudiced as a proximate
result of such failure. In case any such action is brought against any
indemnified party and such indemnified party seeks or intends to seek
indemnity from an indemnifying party, the indemnifying party will be
entitled to participate in, and, to the extent that it shall elect, jointly
with all other indemnifying parties similarly notified, by written notice
delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party; provided,
however, if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have
reasonably concluded that a conflict may arise between the positions of the
indemnifying party and the indemnified party in conducting the defense of
any such action or that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall
have the right to select separate counsel to assume such legal defenses and
to otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of such indemnifying party's election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified
party under this Section 8 for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof
unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being
understood, however, that the indemnifying party shall not be liable for
the expenses of more than one separate counsel (together with local
counsel), approved by the indemnifying party (Banc of America Securities
LLC in the case of Section 8(b) and Section 9), representing the
indemnified parties who are parties to such action) or (ii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable
time after notice of commencement of the action, in each of which cases the
fees and expenses of counsel shall be at the expense of the indemnifying
party.
(d) Settlements. The indemnifying party under this Section 8 shall not
be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment
for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party against any loss, claim, damage, liability or expense by
reason of such settlement or judgment. Notwithstanding the foregoing
20.
<PAGE>
sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 8(c) hereof, the indemnifying party
agrees that it shall be liable for any settlement of any proceeding
effected without its written consent if (i) such settlement is entered into
more than 30 days after receipt by such indemnifying party of the aforesaid
request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement, compromise or consent to
the entry of judgment in any pending or threatened action, suit or
proceeding in respect of which any indemnified party is or could have been
a party and indemnity was or could have been sought hereunder by such
indemnified party, unless such settlement, compromise or consent includes
an unconditional release of such indemnified party from all liability on
claims that are the subject matter of such action, suit or proceeding.
Section 9. Contribution.
If the indemnification provided for in Section 8 is for any reason
held to be unavailable to or otherwise insufficient to hold harmless an
indemnified party in respect of any losses, claims, damages, liabilities or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount paid or payable by such indemnified party, as incurred, as
a result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company, on the one hand, and the Underwriters, on the
other hand, from the offering of the Common Shares pursuant to this Agreement or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company, on the one hand, and the Underwriters, on the other hand, in
connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company, on the one hand,
and the Underwriters, on the other hand, in connection with the offering of the
Common Shares pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the Common
Shares pursuant to this Agreement (before deducting expenses) received by the
Company, and the total underwriting discount received by the Underwriters, in
each case as set forth on the front cover page of the Prospectus (or, if Rule
434 under the Securities Act is used, the corresponding location on the Term
Sheet) bear to the aggregate initial public offering price of the Common Shares
as set forth on such cover. The relative fault of the Company, on the one hand,
and the Underwriters, on the other hand, shall be determined by reference to,
among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact or any
such inaccurate or alleged inaccurate representation or warranty relates to
information supplied by the Company, on the one hand, or the Underwriters, on
the other hand, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set
21.
<PAGE>
forth in Section 8(c), any legal or other fees or expenses reasonably incurred
by such party in connection with investigating or defending any action or claim.
The provisions set forth in Section 8(c) with respect to notice of commencement
of any action shall apply if a claim for contribution is to be made under this
Section 9; provided, however, that no additional notice shall be required with
respect to any action for which notice has been given under Section 8(c) for
purposes of indemnification.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall
be required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
Schedule A. For purposes of this Section 9, each officer and employee of an
- ----------
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act shall have the same rights to contribution as the Company.
Section 10. Default of One or More of the Several Underwriters. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Common
Shares that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common Shares set forth opposite their respective names on Schedule A
----------
bears to the aggregate number of Firm Common Shares set forth opposite the names
of all such non-defaulting Underwriters, or in such other proportions as may be
specified by the Representatives with the consent of the non-defaulting
Underwriters, to purchase the Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the Underwriters shall fail or refuse to purchase Common Shares and the
aggregate number of Common Shares with respect to which such default occurs
exceeds 10% of the aggregate number of Common Shares to be purchased on such
date, and arrangements satisfactory to the Representatives and the Company for
the purchase of such Common Shares are not made within 48 hours after such
default, this Agreement shall terminate without liability of any party to any
other party except that the provisions of Section 4, Section 6, Section 8 and
Section 9 shall at all times be effective and shall survive such termination. In
any such case either the Representatives or the Company shall have
22.
<PAGE>
the right to postpone the First Closing Date or the Second Closing Date, as
the case may be, but in no event for longer than seven days in order that the
required changes, if any, to the Registration Statement and the Prospectus or
any other documents or arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
Section 11. Termination of this Agreement. Prior to the First
Closing Date this Agreement may be terminated by the Representatives by notice
given to the Company if at any time (i) trading or quotation in any of the
Company's securities shall have been suspended or limited by the Commission or
by the Nasdaq National Market, or trading in securities generally on either
the Nasdaq Stock Market or the New York Stock Exchange shall have been
suspended or limited, or minimum or maximum prices shall have been generally
established on any of such stock exchanges by the Commission or the NASD; (ii)
a general banking moratorium shall have been declared by any of federal, New
York, Delaware or California authorities; (iii) there shall have occurred any
outbreak or escalation of national or international hostilities or any crisis
or calamity, or any change in the United States or international financial
markets, or any substantial change or development involving a prospective
substantial change in United States' or international political, financial or
economic conditions, as in the judgment of the Representatives is material and
adverse and makes it impracticable to market the Common Shares in the manner
and on the terms described in the Prospectus or to enforce contracts for the
sale of securities; (iv) in the judgment of the Representatives there shall
have occurred any Material Adverse Change; or (v) the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other
calamity of such character as in the judgment of the Representatives may
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured. Any
termination pursuant to this Section 11 shall be without liability on the part
of (a) the Company to any Underwriter, except that the Company shall be
obligated to reimburse the expenses of the Representatives and the
Underwriters pursuant to Sections 4 and 6 hereof, (b) any Underwriter to the
Company, or (c) of any party hereto to any other party except that the
provisions of Section 8 and Section 9 shall at all times be effective and
shall survive such termination.
Section 12. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any
Underwriter or the Company or any of its or their partners, officers or
directors or any controlling person, as the case may be, and will survive
delivery of and payment for the Common Shares sold hereunder and any
termination of this Agreement.
Section 13. Notices. All communications hereunder shall be in
writing and shall be mailed, hand delivered or telecopied and confirmed to the
parties hereto as follows:
23.
<PAGE>
If to the Representatives:
Banc of America Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 913-5558
Attention: Richard A. Smith
with copies to:
Banc of America Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 913-5553
Attention: Jeffrey R. Lapic, Esq.
Brobeck, Phleger & Harrison LLP
One Market
Spear Street Tower
San Francisco, California 94105
Facsimile: (415) 442-1010
Attention: Nora L. Gibson, Esq.
If to the Company:
PC-Tel, Inc.
70 Rio Robles
San Jose, California 95134
Facsimile: (408) 383-0455
Attention: William F. Roach
with a copy to:
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Facsimile: (650) 493-6811
Attention: Douglas H. Collom, Esq.
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
Section 14. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 10 hereof, and to the benefit of the employees, officers
and directors and controlling persons referred to in Section 8 and Section 9,
and in each case their respective successors, and no other person will have
any right or obligation hereunder. The term "successors" shall not include any
24.
<PAGE>
purchaser of the Common Shares as such from any of the Underwriters merely by
reason of such purchase.
Section 15. Partial Unenforceability. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement
shall not affect the validity or enforceability of any other Section,
paragraph or provision hereof. If any Section, paragraph or provision of this
Agreement is for any reason determined to be invalid or unenforceable, there
shall be deemed to be made such minor changes (and only such minor changes) as
are necessary to make it valid and enforceable.
Section 16. Governing Law Provisions. (a) THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby ("Related Proceedings") may be instituted in the federal courts of the
United States of America located in the City and County of San Francisco or
the courts of the State of California in each case located in the City and
County of San Francisco (collectively, the "Specified Courts"), and each party
irrevocably submits to the exclusive jurisdiction (except for proceedings
instituted in regard to the enforcement of a judgment of any such court (a
"Related Judgment"), as to which such jurisdiction is non-exclusive) of such
courts in any such suit, action or proceeding. Service of any process,
summons, notice or document by mail to such party's address set forth above
shall be effective service of process for any suit, action or other proceeding
brought in any such court. The parties irrevocably and unconditionally waive
any objection to the laying of venue of any suit, action or other proceeding
in the Specified Courts and irrevocably and unconditionally waive and agree
not to plead or claim in any such court that any such suit, action or other
proceeding brought in any such court has been brought in an inconvenient
forum.
Section 17. General Provisions. This Agreement constitutes the
entire agreement of the parties to this Agreement and supersedes all prior
written or oral and all contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof. This Agreement may be
executed in two or more counterparts, each one of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the
same instrument. This Agreement may not be amended or modified unless in
writing by all of the parties hereto, and no condition herein (express or
implied) may be waived unless waived in writing by each party whom the
condition is meant to benefit. The Table of Contents and the Section headings
herein are for the convenience of the parties only and shall not affect the
construction or interpretation of this Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in
25.
<PAGE>
order to assure that adequate disclosure has been made in the Registration
Statement, any preliminary prospectus and the Prospectus (and any amendments
and supplements thereto), as required by the Securities Act and the Exchange
Act.
26.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
PC-TEL, INC.
By:__________________________
Peter Chen
Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Representatives in San Francisco, California as of the date first above
written.
BANC OF AMERICA SECURITIES LLC
WARBURG DILLON READ LLC
NEEDHAM & COMPANY, INC.
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By BANC OF AMERICA SECURITIES LLC
By:__________________________
[Name]
[Title]
27.
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm Common Shares
Underwriters to be Purchased
<S> <C>
Banc of America Securities LLC.................. ___
Warburg Dillon Read LLC......................... ___
Needham & Company, Inc.......................... ___
[___]........................................... ___
[___] .......................................... ___
[___]........................................... ___
[___] .......................................... ___
Total....................................... ___
</TABLE>
<PAGE>
EXHIBIT A
The final opinion in draft form should be attached as Exhibit A at the time this
Agreement is executed.
Opinion of Wilson, Sonsini, Goodrich & Rosati, counsel for the
Company, to be delivered pursuant to Section 5(d) of the Underwriting Agreement.
References to the Prospectus in this Exhibit A include any supplements
---------
thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of
Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the
Underwriting Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in the State of California and
in each other jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct
of business, except for such jurisdictions (other than the State of
California) where the failure to so qualify or to be in good standing
would not, individually or in the aggregate, result in a Material Adverse
Change.
(iv) Each significant subsidiary of the Company (as defined in Rule
405 under the Securities Act) has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus and, to the knowledge of such counsel, is
duly qualified as a foreign corporation to transact business and is in
good standing in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or
the conduct of business, except for such jurisdictions where the failure
to so qualify or to be in good standing would not, individually or in the
aggregate, result in a Material Adverse Change.
(v) All of the issued and outstanding capital stock of each such
significant subsidiary of the Company has been duly authorized and
validly issued, is fully paid and non-assessable and is owned by the
Company, directly or through subsidiaries, and to the knowledge of such
counsel, such capital stock is free and clear of any security interest,
mortgage, pledge, lien, encumbrance or any pending or threatened claim.
(vi) The authorized, issued and outstanding capital stock of the
Company (including the Common Stock) conform to the descriptions thereof
set forth in the Prospectus. All of the outstanding shares of Common
Stock have been duly authorized and are validly issued, fully paid and
nonassessable. The form of certificate used to evidence the Common Stock
is in due and proper form and complies with all applicable
A-1
<PAGE>
requirements of the charter and by-laws of the Company and the General
Corporation Law of the State of Delaware. The description of the
Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly presents in
all material respects the information required to be shown with respect
to such plans, arrangements, options and rights.
(vii) No stockholder of the Company or any other person has any
preemptive right, right of first refusal or other similar right to
subscribe for or purchase securities of the Company arising (i) by
operation of the charter or by-laws of the Company or the General
Corporation Law of the State of Delaware or (ii) to the knowledge of such
counsel under any agreement to which the Company is a party.
(viii) The Underwriting Agreement has been duly authorized, executed
and delivered by the Company.
(ix) The Common Shares to be purchased by the Underwriters from the
Company have been duly authorized for issuance and sale pursuant to the
Underwriting Agreement and, when issued and delivered by the Company
pursuant to the Underwriting Agreement against payment of the
consideration set forth therein, will be validly issued, fully paid and
nonassessable.
(x) The Registration Statement and the Rule 462(b) Registration
Statement, if any, has been declared effective by the Commission under
the Securities Act. To our knowledge, no stop order suspending the
effectiveness of either of the Registration Statement or the Rule 462(b)
Registration Statement, if any, has been issued under the Securities Act
and no proceedings for such purpose have been instituted or are pending
or are contemplated or threatened by the Commission. Any required filing
of the Prospectus and any supplement thereto pursuant to Rule 424(b)
under the Securities Act has been made in the manner and within the time
period required by such Rule 424(b).
(xi) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus, and each amendment or supplement
to the Registration Statement and the Prospectus, as of their respective
effective or issue dates (other than the financial statements and
supporting schedules or other financial or statistical data included
therein or in exhibits to or excluded from the Registration Statement, as
to which no opinion need be rendered) comply as to form in all material
respects with the applicable requirements of the Securities Act.
(xii) The Common Shares have been approved for inclusion on the
Nasdaq National Market.
(xiii) The statements (i) in the Prospectus under the captions "Risk
Factors--Shares eligible for sale in the near future may adversely affect
the market price for our common stock," "Risk Factors--Provisions in our
charter documents may inhibit a change of control or change of management
which may adversely affect the market price for our common stock,"
"Management--Incentive Stock Plans," "Management--Employment Agreements,"
"Certain Transactions," "Description of Capital Stock,"
A-2
<PAGE>
"Shares Eligible for Future Sale," and, except for the exclusions as set
forth in the Underwriting Agreement, "Underwriting" and (ii) in Item 14
and Item 15 of the Registration Statement, insofar as such statements
constitute matters of law, summaries of legal matters, the Company's
charter or by-law provisions, documents or legal proceedings, or legal
conclusions, has been reviewed by such counsel and fairly present and
summarize, in all material respects, the matters referred to therein.
(xiv) To the knowledge of such counsel, there are no legal or
governmental actions, suits or proceedings pending or threatened which
are required to be disclosed in the Registration Statement, other than
those disclosed therein.
(xv) To the knowledge of such counsel, there are no Existing
Instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described
or referred to therein or filed as exhibits thereto; and the descriptions
thereof and references thereto are correct in all material respects.
(xvi) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the Company's execution, delivery and performance
of the Underwriting Agreement and consummation of the transactions
contemplated thereby and by the Prospectus, except as required under the
Securities Act, applicable state securities or blue sky laws and from the
NASD.
(xvii) The execution and delivery of the Underwriting Agreement by
the Company and the performance by the Company of its obligations
thereunder (other than performance by the Company of its obligations
under the indemnification section of the Underwriting Agreement, as to
which no opinion need be rendered) (i) have been duly authorized by all
necessary corporate action on the part of the Company; (ii) will not
result in any violation of the provisions of the charter or by-laws of
the Company or any subsidiary; (iii) will not constitute a breach of, or
Default under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
of its subsidiaries pursuant to any material contract which is filed as
an exhibit to the Registration Statement, or (iv) to the knowledge of
such counsel, will not result in any violation of any administrative or
court decree applicable to the Company or any subsidiary.
(xviii) The Company is not, and after receipt of payment for the
Common Shares will not be, an "investment company" within the meaning of
Investment Company Act.
(xix) Except as disclosed in the Prospectus under the caption
"Shares Eligible for Future Sale", to the knowledge of such counsel,
there are no persons with registration or other similar rights to have
any equity or debt securities registered for sale under the Registration
Statement or included in the offering contemplated by the Underwriting
Agreement.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants
for the Company and with
A-3
<PAGE>
representatives of the Underwriters at which the contents of the
Registration Statement and the Prospectus, and any supplements or
amendments thereto, and related matters were discussed and, although such
counsel is not passing upon and does not assume any responsibility for
the accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus (other than as specified above),
and any supplements or amendments thereto, on the basis of the foregoing,
nothing has come to their attention which would lead them to believe that
either the Registration Statement or any amendments thereto, at the time
the Registration Statement or such amendments became effective, contained
an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus, as of its date or at the
First Closing Date or the Second Closing Date, as the case may be,
contained an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading (it
being understood that such counsel need express no belief as to the
financial statements or schedules or other financial or statistical data,
included in the Registration Statement or the Prospectus or any
amendments or supplements thereto).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Delaware, the General Corporation Law of the
State of California or the federal law of the United States, to the extent they
deem proper and specified in such opinion, upon the opinion (which shall be
dated the First Closing Date or the Second Closing Date, as the case may be,
shall be satisfactory in form and substance to the Underwriters, shall expressly
state that the Underwriters may rely on such opinion as if it were addressed to
them and shall be furnished to the Representatives) of other counsel of good
standing whom they believe to be reliable and who are satisfactory to counsel
for the Underwriters; provided, however, that such counsel shall further state
that they believe that they and the Underwriters are justified in relying upon
such opinion of other counsel, and (B) as to matters of fact, to the extent they
deem proper, on certificates of responsible officers of the Company and public
officials.
A-4
<PAGE>
EXHIBIT B
The final opinion in draft form should be attached as Exhibit B at the time this
Agreement is executed.
Opinion of Knobbe, Martens, Olson & Bear LLP, patent counsel for the
Company, to be delivered pursuant to Section 5(d) of the Underwriting Agreement.
References to the Prospectus in this Exhibit B include any supplements
---------
thereto at the Closing Date.
[OPINION TO BE PROVIDED SEPARATELY]
B-1
<PAGE>
EXHIBIT C
July __, 1999
Banc of America Securities LLC
Needham & Company, Inc.
Warburg Dillon Read LLC
As Representatives of the Several Underwriters
c/o Banc of America Securities LLC
600 Montgomery Street
San Francisco, California 94111
Re: PC-Tel, Inc. (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the "Offering") for which you will act as the
representatives of the underwriters. The undersigned recognizes that the
Offering will be of benefit to the undersigned and will benefit the Company by,
among other things, raising additional capital for its operations. The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of Banc of America
Securities LLC (which consent may be withheld in its sole discretion), directly
or indirectly, sell, offer, contract or grant any option to sell (including
without limitation any short sale), pledge, transfer, establish an open "put
equivalent position" within the meaning of Rule 16a-1(h) under the Securities
Exchange Act of 1934, or otherwise dispose of any shares of Common Stock,
options or warrants to acquire shares of Common Stock, or securities
exchangeable or exercisable for or convertible into shares of Common Stock
currently or hereafter owned either of record or beneficially (as defined in
Rule 13d-3 under Securities Exchange Act of 1934, as amended) by the
undersigned, or publicly announce the undersigned's intention to do any of the
foregoing, for a period commencing on the date hereof and continuing through the
close of trading on the date 180 days after the date of the Prospectus. The
undersigned also agrees and consents to the entry of stop transfer instructions
with the Company's transfer agent and registrar against the transfer of shares
of Common Stock or securities convertible into or exchangeable or exercisable
for Common Stock held by the undersigned except in compliance with the foregoing
restrictions.
With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of any Common Stock
owned either of record or beneficially by the undersigned, including any rights
to receive notice of the Offering.
C-1
<PAGE>
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.
- ---------------------------------------
Printed Name of Holder
By:
-----------------------------------
Signature
- ---------------------------------------
Printed Name of Person Signing
(and indicate capacity of person signing if
signing as custodian, trustee, or on behalf
of an entity)
C-2
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
PC-TEL, INC.
PC-Tel, Inc., a corporation organized and existing under the laws of the
State of Delaware (the "Corporation"), hereby certifies that:
A. The name of this Corporation is PC-Tel, Inc.
B. The date of filing of this Corporation's original Certificate of
Incorporation with the Secretary of State of Delaware was July 6, 1998.
C. Pursuant to Sections 242 and 245 of the Delaware General Corporation
law, this Restated Certificate of Incorporation restates, integrates and amends
the provisions of the Corporation's Amended and Restated Certificate of
Incorporation in its entirety as follows:
FIRST: The name of this Corporation is PC-Tel, Inc.
SECOND: The address of the Corporation's registered office in the State
of Delaware is 1209 Orange Street, Wilmington, County of New Castle, Delaware
19801. The name of its registered agent at such address is The Corporation Trust
Company.
THIRD: The purpose of this Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH: This Corporation is authorized to issue two classes of shares to
be designated, respectively, Common Stock and Preferred Stock. The total number
of shares of Common Stock which this corporation is authorized to issue is
100,000,000, with a par value of $0.001, and the total number of shares of
Preferred Stock which this corporation is authorized to issue is 5,000,000, with
a par value of $0.001.
The Preferred Stock may be issued from time to time in one or more series
pursuant to a resolution or resolutions providing for such issue duly adopted by
the Board of Directors (authority to do so being hereby expressly vested in the
Board). The Board of Directors is further authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock and, to fix the number of shares of
any such series of Preferred Stock and the designation of any such series of
Preferred Stock. The Board of Directors is authorized, within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, to increase or
decrease (but not below the number of shares thereof then outstanding) the
number of shares of any such series subsequent to the issue of shares of that
series, to determine the designation of any series, and to fix the number of
shares of any series.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: Elections of directors need not be by written ballot unless a
stockholder demands election by written ballot at the meeting and before voting
begins or unless the Bylaws of the Corporation shall so provide.
<PAGE>
SEVENTH: The management of the business and the conduct of the affairs of
the Corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be
designated in the Bylaws of the Corporation.
The Board of Directors shall be divided into three classes designated
as Class I, Class II, and Class III, respectively. Directors shall be assigned
to each class in accordance with a resolution or resolutions adopted by the
Board of Directors. At the first annual meeting of stockholders following the
date hereof, the term of office of the Class I directors shall expire, and Class
I directors shall be elected for a full term of three years. At the second
annual meeting of stockholders following the date hereof, the term of office of
the Class II directors shall expire, and Class II directors shall be elected for
a full term of three years. At the third annual meeting of stockholders
following the date hereof, the term of office of the Class III directors shall
expire, and Class III directors shall be elected for a full term of three years.
At each succeeding annual meeting of stockholders, directors shall be elected
for a full term of three years to succeed the directors of the class whose terms
expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each
director shall serve until his or her successor is duly elected and qualified or
until his or her death, resignation, or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
Any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal, or other causes shall be filled by
either (i) the affirmative vote of the holders of a majority of the voting power
of the then-outstanding shares of voting stock of the Corporation entitled to
vote generally in the election of directors (the "Voting Stock") voting together
as a single class; or (ii) by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum of the Board
of Directors. Newly created directorships resulting from any increase in the
number of directors shall, unless the Board of Directors determines by
resolution that any such newly created directorship shall be filled by the
stockholders, be filled only by the affirmative vote of the directors then in
office, even though less than a quorum of the Board of Directors. Any director
elected in accordance with the preceding sentence shall hold office for the
remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been elected and qualified.
The affirmative vote of sixty-six and two-thirds percent (66-2/3%) of
the voting power of the then outstanding shares of Voting Stock, voting together
as a single class, shall be required for the adoption, amendment or repeal of
the following sections of the Corporation's Bylaws by the stockholders of the
Corporation: 2.2 (Annual Meeting) and 2.3 (Special Meeting).
No action shall be taken by the stockholders of the Corporation except
at an annual or special meeting of the stockholders called in accordance with
the Bylaws.
EIGHTH: A. To the fullest extent permitted by the Delaware General
Corporation Law as the same exists or as may hereafter be amended, a director of
the Corporation or any subsidiary of the Corporation shall not be personally
liable to the Corporation or its stockholders and shall otherwise be indemnified
by the Corporation for monetary damages for breach of fiduciary duty as a
director of the Corporation, any predecessor of the Corporation or any
subsidiary of the Corporation.
B. The Corporation shall indemnify to the fullest extent permitted
by law any person made or threatened to be made a party to an action or
proceeding, whether criminal, civil, administrative or investigative, by reason
of the fact that he, his testator or intestate is or was a director or officer
of the Corporation, any predecessor of the Corporation or any subsidiary of the
Corporation or serves or served at
-2-
<PAGE>
any other enterprise as a director or officer at the request of the Corporation,
any predecessor to the Corporation or any subsidiary of the Corporation.
C. Neither any amendment nor repeal of this Article EIGHTH, nor
the adoption of any provision of the Corporation's Certificate of Incorporation
inconsistent with this Article EIGHTH, shall eliminate or reduce the effect of
this Article EIGHTH, in respect of any matter occurring, or any action or
proceeding accruing or arising or that, but for this Article EIGHTH, would
accrue or arise, prior to such amendment, repeal, or adoption of an inconsistent
provision.
NINTH: Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any rights of designation of Preferred Stock conferred on
the Board of Directors pursuant to Article FOURTH, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal Article SEVENTH
or this Article NINTH.
TENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, except as provided in Article
NINTH of this Certificate, and all rights conferred upon the stockholders herein
are granted subject to this right.
ELEVENTH: In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, alter, amend
or repeal the Bylaws of the Corporation.
TWELFTH: Meetings of stockholders may be held within or without the
State of Delaware, as the Bylaws may provide. The books of the Corporation may
be kept (subject to any provision contained in the statutes) outside of the
State of Delaware at such place or places as may be designated from time to time
by the Board of Directors or in the Bylaws of the Corporation.
THIRTEENTH: Advance written notice of new business and stockholder
nominations for the election of directors shall be given in the manner and to
the extent provided in the Bylaws of the Corporation.
FOURTEENTH: Stockholders shall not be entitled to cumulative voting rights
for the election of directors, except as may be required by applicable law.
-3-
<PAGE>
This Amended and Restated Certificate of Incorporation has been duly
adopted by the stockholders of the Corporation in accordance with the provisions
of Sections 242 and 245 of the General Corporation Law of the State of Delaware,
as amended.
IN WITNESS WHEREOF, PC-Tel, Inc. has caused this Amended and Restated
Certificate of Incorporation to be signed by Peter Chen, its Chief Executive
Officer, and attested by Andrew Wahl, its Chief Financial Officer, this ____ day
of ________, 1999.
PC-TEL, INC.
___________________________________
Peter Chen, Chief Executive Officer
Attested:
____________________________________
Andrew Wahl, Chief Financial Officer
-4-
<PAGE>
Exhibit 5.1
OPINION OF WILSON SONSINI GOODRICH & ROSATI
September 17, 1999
PC-Tel, Inc.
70 Rio Robles
San Jose, California 95134
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission on August 6, 1999 (Registration No.
333-84707), as amended (the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of up to 4,600,000
shares of your Common Stock, $0.001 par value per share (the "Shares"). The
Shares include an over-allotment option granted to the underwriters of the
offering to purchase up to 690,000 shares. We understand that the Shares are to
be sold to the underwriters of the offering for resale to the public as
described in the Registration Statement. As your legal counsel, we have
examined the proceedings taken, and are familiar with the proceedings proposed
to be taken, by you in connection with the sale and issuance of the Shares to
be sold by you.
It is our opinion that upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Shares, when issued and sold in the manner described in the
Registration Statement, will be legally issued, fully paid and non-assessable.
We are members of the Bar of the State of California only and express no
opinion as to any matter relating to the laws of any jurisdiction other than the
laws of the State of California and the federal laws of the United States.
Without limiting the foregoing, we express no opinion as to the securities laws
of the State of Delaware.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
/s/ WILSON SONSINI GOODRICH & ROSATI
------------------------------------
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<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
September 16, 1999
<PAGE>
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
September 16, 1999
<PAGE>
EXHIBIT 23.4
CONSENT OF KNOBBE, MARTENS, OLSON & BEAR, LLP
As intellectual property counsel, we hereby consent to the use of all
references to our firm included in or made a part of this registration
statement.
/s/ Knobbe, Martens, Olson & Bear, LLP
__________________________________
Newport Beach, California Knobbe, Martens, Olson & Bear, LLP
September 14, 1999
