<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 000-27115
PCTEL, Inc.
(Exact Name of Business Issuer as Specified in Its Charter)
Delaware 77-0364943
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
1331 California Circle, Milpitas, CA 95035
(Address of Principal Executive Office) (Zip Code)
(408) 965-2100
(Registrant's Telephone Number, Including Area Code)
-------------
Indicate by checkmark whether the Registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [_]
As of October 31, 2000, there were 18,571,654 shares of the Registrant's Common
Stock outstanding.
================================================================================
1
<PAGE>
PCTEL, Inc.
Form 10-Q
For the Quarter Ended September 30, 2000
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. Financial Information
ITEM 1 Financial Statements
Consolidated Condensed Balance Sheets
as of September 30, 2000 (unaudited) and December 31, 1999 3
Consolidated Condensed Statements of Operations (unaudited)
for the three and nine months ended September 30, 2000 and 1999 4
Consolidated Condensed Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2000 and 1999 5
Notes to the Consolidated Condensed Financial Statements (unaudited) 6
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 28
PART II. Other Information
ITEM 1 Legal Proceedings 29
ITEM 2 Changes in Securities and Use of Proceeds 29
ITEM 3 Defaults upon Senior Securities 29
ITEM 4 Submission of Matters to a Vote of Security Holders 29
ITEM 5 Other Information 29
ITEM 6 Exhibits and Reports on Form 8-K 29
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PCTEL, Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share information)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 76,488 $ 44,705
Short-term investments 55,211 53,585
Accounts receivable, net 18,168 6,555
Inventories, net 8,771 5,741
Prepaid expenses and other assets 1,829 2,422
Deferred tax asset 3,455 3,211
------------ -------------
Total current assets 163,922 116,219
PROPERTY AND EQUIPMENT, net 4,557 3,099
GOODWILL AND OTHER INTANGIBLE ASSETS, net 21,408 8,649
DEFERRED TAX ASSET 2,365 2,365
OTHER ASSETS 340 273
------------ -------------
TOTAL ASSETS $ 192,592 $ 130,605
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,634 $ 7,140
Accrued royalties 10,827 7,868
Income taxes payable 4,251 3,290
Accrued liabilities 10,181 8,029
------------ -------------
Total current liabilities 32,893 26,327
------------ -------------
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 50,000,000 shares authorized; 18,540,805
and 16,560,335 shares issued and outstanding at September 30, 2000 and
December 31,1999, respectively 19 17
Additional paid-in capital 145,287 99,334
Deferred compensation (3,325) (4,856)
Retained earnings 17,746 9,849
Accumulated other comprehensive loss (28) (66)
------------ -------------
Total stockholders' equity 159,699 104,278
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 192,592 $ 130,605
============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
3
<PAGE>
PCTEL, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
REVENUES $ 28,885 $ 20,190 $ 80,529 $ 53,236
COST OF REVENUES 15,314 10,440 42,678 27,437
----------- ----------- ----------- ------------
GROSS PROFIT 13,571 9,750 37,851 25,799
----------- ----------- ----------- ------------
OPERATING EXPENSES:
Research and development 3,900 2,732 11,609 7,155
Sales and marketing 3,660 2,609 10,385 7,554
General and administrative 2,191 1,571 5,669 3,634
Acquired in-process research and development - - 1,600 -
Amortization of goodwill 811 - 1,827 -
Amortization of deferred compensation (See Note 5) 320 287 997 451
----------- ----------- ----------- ------------
Total operating expenses 10,882 7,199 32,087 18,794
----------- ----------- ----------- ------------
INCOME FROM OPERATIONS 2,689 2,551 5,764 7,005
OTHER INCOME, net:
Interest income (expense), net 2,008 (155) 5,166 (747)
----------- ----------- ----------- ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,697 2,396 10,930 6,258
PROVISION FOR INCOME TAXES 1,319 717 3,033 1,875
----------- ----------- ----------- ------------
NET INCOME $ 3,378 $ 1,679 $ 7,897 $ 4,383
=========== =========== =========== ============
Basic earnings per share $ 0.18 $ 0.67 $ 0.45 $ 1.78
Shares used in computing basic earnings per share 18,441 2,512 17,745 2,462
Diluted earnings per share $ 0.16 $ 0.12 $ 0.38 $ 0.34
Shares used in computing diluted earnings per share 20,561 13,438 20,638 12,858
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
4
<PAGE>
PCTEL, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
2000 1999
-------------- ---------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 7,897 $ 4,383
Adjustments to reconcile net income to net cash
provided by operating activities:
Acquired in-process research and development 1,600 -
Depreciation and amortization 4,610 2,029
Amortization of deferred debt costs - 233
Provision for allowance for doubtful accounts 902 3,915
Provision for excess and obsolete inventories 276 5
Increase in deferred tax asset - (634)
Amortization of deferred compensation 997 451
Changes in operating assets and liabilities, net of acquisitions:
(Increase) decrease in accounts receivable (11,940) 2,969
(Increase) in inventories (3,305) (2,616)
(Increase) decrease in prepaid expenses and other assets 533 (1,230)
(Decrease) increase in accounts payable 492 (932)
Increase in accrued royalties 2,959 1,990
Increase in income taxes payable 960 506
Increase in accrued liabilities 1,429 3,900
------------- --------------
Net Cash Provided by Operating Activities 7,410 14,969
------------- --------------
Cash Flows from Investing Activities:
Capital expenditures for property and equipment (2,563) (1,251)
Purchase of Voyager Technologies, net of cash acquired (3,648) -
Sale (purchase) of available-for-sale investments, net (1,587) (7,056)
------------- --------------
Net Cash Used in Investing Activities (7,798) (8,307)
------------- --------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 33,181 163
Costs incurred related to issuance of common stock (1,010) (468)
Principal payments on capital lease obligations - (24)
Principal payments on notes payable - (1,310)
------------- --------------
Net Cash Provided by (Used in) Financing Activities 32,171 (1,639)
------------- --------------
Net increase in cash and cash equivalents 31,783 5,023
Cash and cash equivalents, beginning of period 44,705 12,988
------------- --------------
Cash and cash equivalents, end of period $ 76,488 $ 18,011
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
5
<PAGE>
PCTEL, Inc.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
================================================================================
1. BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by
PCTEL, Inc. (the "Company" or "PCTEL"), pursuant to the laws and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
disclosures are adequate to make the information not misleading. The condensed
balance sheet as of December 31, 1999 has been derived from the audited
financial statements as of that date, but does not include all disclosures
required by generally accepted accounting principles. These financial statements
and notes should be read in conjunction with the audited financial statements
and notes thereto, included in PCTEL's Registration Statement on Form S-1 and
annual report on Form 10-K filed with the Securities and Exchange Commission.
The unaudited condensed financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of financial position, results of operations and cash flows for the
periods indicated. The results of operations for the three and nine months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for future quarters or the year ending December 31, 2000.
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations of the Company
PCTEL 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.
We are a leading provider of software-based high speed connectivity
solutions to individuals and businesses worldwide. We design, develop, produce
and market advanced software-based high performance, low cost modems that are
flexible and upgradable, with functionality that can include data/fax
transmission at various speeds, and telephony features. Our soft modem products
consist of a hardware chip set containing a proprietary host signal processing
software architecture which allows for the utilization of the computational and
processing resources of a host central processor, effectively replacing
special-purpose hardware required in conventional hardware-based modems.
Together, the combination of the chip set and software drivers are a component
part within a computer which allows for telecommunications connectivity. By
replacing hardware with a software solution, our host signal processing
technology lowers costs while enhancing capabilities.
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
We use the United States dollar for our financial statements, even for our
subsidiaries in foreign countries. All gains and losses resulting from
transactions originally in foreign currencies and then translated into US
dollars are included in net income. As of September 30, 2000, PCTEL had
subsidiaries in the Cayman Islands and Japan. These consolidated financial
statements include the accounts of PCTEL and our subsidiaries after eliminating
intercompany accounts and transactions.
6
<PAGE>
Cash Equivalents and Short-Term Investments
We divide our financial instruments into two different classifications:
Cash equivalents: are debt instruments that mature within three
months after we purchase them.
Short-term investments: are marketable debt instruments that
generally mature between three months and two
years from the date we purchase them. All of
our short-term investments are classified as
current assets and available-for-sale because
they are marketable and we have the option to
sell them before they mature.
As of September 30, 2000, short-term
investments consisted of high-grade corporate
securities with maturity dates of
approximately five months to two years.
These investments are recorded at market
price and any unrealized holding gains and
losses (based on the difference between
market price and book value) are reflected as
other comprehensive income/loss in the
stockholders' equity section of the balance
sheet. We have accumulated a $28,000
unrealized holding loss as of September 30,
2000. Realized gains and losses and declines
in value of securities judged to be other
than temporary are included in interest
income and have not been significant to date.
Interest and dividends of all securities are
included in interest income.
Inventories
Inventories are stated at the lower of cost or market and include material,
labor and overhead costs. Inventories as of September 30, 2000 and December 31,
1999 were composed of finished goods only. Based on our current estimated
requirements, it was determined that there was excess inventory and those excess
amounts were fully reserved as of September 30, 2000 and December 31, 1999. Due
to competitive pressures and technological innovation, it is possible that these
estimates could change in the near term.
Revenue Recognition
Revenues consist primarily of sales of products to original equipment
manufacturers ("OEMs") and distributors. Revenues from sales to OEMs are
recognized upon shipment. We provide for estimated sales returns and rebate
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. We record revenue relating to sales to
distributors only when the distributors have sold the product to end users.
Customer payment terms generally range from letters of credit collectible upon
shipment to open account payable 60 days after shipment.
We also generate 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 PCTEL is
received from licensees. Furthermore, revenues from technology licenses are
recognized after delivery has occurred and the amount is fixed and determinable,
generally based upon the contract's nonrefundable payment terms. To the extent
there are extended payment terms on these contracts, revenue is recognized as
the payments become due and the cancellation privilege lapses. To date, the
Company has not offered post-contract customer support.
Earnings Per Share
We compute earnings per share in accordance with SFAS No. 128, "Earnings
Per Share". SFAS No. 128 requires companies to compute net income per share
under two different methods, basic and diluted, and present per share data for
all periods in which a statement of operations is presented. Basic earnings per
share is computed by dividing net income by the weighted average number of
shares of common stock outstanding. Diluted earnings per share is computed by
dividing net income by the weighted average number of common stock and common
stock equivalents outstanding. Common stock equivalents consist of preferred
stock using the "if converted" method and stock options and warrants using the
treasury stock method. Preferred stock, common stock options and warrants are
excluded from the computation of diluted earnings per share if their effect is
anti-dilutive.
7
<PAGE>
Based on SEC Staff Accounting Bulletin No. 98, preferred and common stock
issued or granted for below fair market value (nominal consideration) prior to
the IPO must be included in the earnings per share calculation as if they had
been outstanding the entire period. We have never issued or granted this type of
stock.
The following table provides a reconciliation of the numerators and
denominators used in calculating basic and diluted earning per share for the
three and nine months ended September 30, 2000 and 1999, respectively (in
thousands, except per share information):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
2000 1999 2000 1999
----------- --------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income $ 3,378 $ 1,679 $ 7,897 $ 4,383
========== ========= ========== ==========
Basic earnings per share:
Weighted average common shares outstanding 18,441 2,512 17,745 2,462
---------- --------- ---------- ----------
Basic earnings per share $ 0.18 $ 0.67 $ 0.45 $ 1.78
========== ========= ========== ==========
Diluted earnings per share:
Weighted average common shares outstanding 18,441 2,513 17,745 2,462
Weighted average common stock option grants and 2,120 2,414 2,893 1,885
outstanding warrants
Weighted average preferred stock outstanding - 8,511 - 8,511
---------- --------- ---------- ----------
Weighted average common shares and common stock
equivalents outstanding 20,561 13,438 20,638 12,858
---------- --------- ---------- ----------
Diluted earnings per share $ 0.16 $ 0.12 $ 0.38 $ 0.34
========== ========= ========== ==========
</TABLE>
Industry Segment, Customer and Geographic Information
We are organized based upon the nature of the products we offer. Under this
organizational structure, we operate in one segment, that segment being
software-based modems using host signal processing technology. We market our
products worldwide through our sales personnel, independent sales
representatives and distributors.
Our sales to customers outside of the United States, as a percentage of
revenues are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
2000 1999 2000 1999
------- ------- ------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Taiwan 50% 22% 53% 28%
China (Hong Kong) 32 74 35 51
Rest of Asia 4 3 4 19
------ ------ ------ -------
86% 99% 92% 98%
====== ====== ====== =======
</TABLE>
8
<PAGE>
Sales to our major customers representing greater than 10% of revenues are
as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
Customer 2000 1999 2000 1999
-------- ---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
A 16% 12% 13% 9%
B 8% --% 11% --%
C 32% 65% 33% 51%
</TABLE>
Our customers are concentrated in the personal computer industry and modem
board manufacturer industry segment and in certain geographic locations. We
actively market and sell products in Asia. We perform ongoing evaluations of our
customers' financial condition and generally require no collateral. As of
September 30, 2000, approximately 73% of gross accounts receivable were
concentrated with five customers. As of September 30, 1999, approximately 82% of
gross accounts receivable were concentrated with five customers.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition". In June 2000, the
SEC deferred the adoption date for SAB 101 until our fourth quarter ended
December 31, 2000. SAB 101 summarizes certain areas of the Staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The Company has not quantified the effect of SAB 101 on
its financial position or results of operations and has not yet determined the
timing and method of adoption.
In March 2000, the FASB issued Financial Standards Board Interpretation
(FIN) No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25." FIN 44 addresses the
application of APB 25 to clarify, among other issues, (a) the definition of
employee for purposes of applying APB 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998 or
January 12, 2000. To the extent FIN 44 covers events occurring during the period
after December 15, 1998 or January 12, 2000, but before the effective date of
July 1, 2000, the effects of applying the interpretation will be recognized on a
prospective basis from July 1, 2000. The Company adopted FIN 44 in July 2000 and
this adoption did not have a material effect on its financial position or
results of operations.
3. ACQUISITIONS:
Voyager Technologies, Inc.
On February 24, 2000, we completed the acquisition of Voyager Technologies,
Inc., ("Voyager"), a provider of personal connectivity and internet access
technology. Under the terms of the Agreement and Plan of Reorganization (the
"Merger Agreement"), the former shareholders of Voyager received 237,272 shares
of our common stock and $2,065,331 of cash in exchange for all shares of Voyager
common stock. In addition, 645,157 vested and unvested options to purchase
shares of Voyager common stock were converted into 49,056 options to purchase
our common stock at the exchange ratio of 0.07604. Included in the 237,272
shares are 82,419 restricted shares of common stock issued to a Voyager
shareholder. These shares are not subject to forfeiture under any circumstances
and, thus, were considered in the determination of the purchase price at the
date of acquisition.
The purchase price of Voyager was allocated based upon the estimated fair
value of the assets acquired and liabilities assumed, which approximated book
value. The following table summarizes the components of the total purchase price
and the allocation (in thousands, except share amounts).
9
<PAGE>
<TABLE>
<S> <C>
Fair value of 237,272 shares of our common stock $ 11,802
Fair value of options for 49,056 shares of our common stock 2,504
Cash 2,065
Settlement of outstanding claim 1,500
Acquisition costs 699
---------------
Estimated total purchase price 18,570
Less: Net assets acquired (762)
---------------
Estimated acquired intangibles $ 17,808
===============
</TABLE>
The acquisition was structured as a tax-free reorganization and was
accounted for under the purchase method of accounting. Under this method, if the
purchase price exceeds the net tangible assets acquired, the difference is
recorded as excess purchase price. In this circumstance, the difference was
$17.8 million. We attributed $1.6 million of the excess purchase price to
in-process research and development, which we expensed immediately, and the
balance of $16.2 million was attributed to intellectual property ($0.5 million),
workforce ($0.3 million) and goodwill ($15.4 million). We have classified this
balance of $16.2 million as goodwill and other intangible assets, net, in the
accompanying consolidated balance sheets and are amortizing it over useful lives
of five years. We have included the results of Voyager from the date of
acquisition to September 30, 2000 in the consolidated condensed statements of
operations.
In addition to the 237,272 shares of our common stock issued to the
shareholders of Voyager, 30,415 additional shares of common stock were held in
an escrow account pending resolution of an outstanding claim. These shares had
been treated as contingent consideration and were not initially recognized as
purchase price due to the uncertainty of how the claim would be resolved. In May
2000, the outstanding claim was settled for $1.5 million which resulted in the
return of the stock held in escrow to the Company. No amount was initially
recorded for the now-unissued stock while in escrow, however, the $1.5 million
outstanding claim settlement was recognized as additional purchase price in the
quarter ended June 30, 2000.
As part of the acquisition, we granted 49,056 vested and unvested options
to purchase our common stock upon conversion of the outstanding Voyager options,
based on the exchange ratio of 0.07604. The fair value of these options was
determined using the Black-Scholes option pricing model and the following
assumptions: risk-free interest rate of 5.50%; dividend yields of zero; an
estimated volatility factor of the market price of the our common stock of 75%;
and an expected life between three to six months after vest date. The
weighted-average estimated fair value of these options was $51.05 per share.
In addition, total estimated acquisition costs were $699,000, as reflected
in the above table.
Upon completion of the Voyager acquisition, we immediately expensed $1.6
million representing purchased in-process technology that had not yet reached
technological feasibility and had no alternative future use. The $1.6 million
expensed as in-process research and development was approximately 9% of the
purchase price and was attributed and supported by a discounted cash flow
analysis that identified revenue and costs on a project by project basis. The
value assigned to purchased in-process technology, based on a percentage of
completion discounted cash flow method, was determined by identifying research
projects in areas for which technological feasibility has not been established.
The following in-process projects existed at Voyager as of the acquisition date:
Bluetooth, HomeRF, Direct Sequence Cordless, Bluetooth/HomeRF Combo,
Bluetooth/HomeRF/Direct Sequence, Wireless Gas Tank Sensor, Wireless GPS and
Wireless Industrial Garage Door Opener projects.
The value of in-process research and development was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from such
projects and discounting the net cash flows back to their present value. The
discount rate includes a risk adjusted discount rate to take into account the
uncertainty surrounding the successful development of the purchased in- process
technology. The risk-adjusted discount rate applied to the projects' cash flows
was 15% for existing technology and 20% for the in-process technology. Based
upon assessment of each in-process project's development stage, including
relative difficulty of remaining development milestones, it was determined that
application of a 20% discount rate was appropriate for all acquired in-process
projects. The valuation includes cash inflows from in- process technology
through 2005 with revenues commencing in 2000 and increasing significantly in
2001 before declining in 2005. The projected total revenue of Voyager was broken
down to revenue attributable to the in-process technologies, existing
technologies, core technology and future technology. The revenue attributable to
core technology was determined based on the extent to which the in-process
technologies rely on the already developed
10
<PAGE>
intellectual property. The Bluetooth and HomeRF projects were approximately 25%
complete at the time of the valuation and the expected timeframe for achieving
these product releases was assumed to be in the second half of 2000. The Direct
Sequence Cordless project was approximately 65% complete at the time of the
valuation and the expected time frame for achieving this product release was
assumed to be in the second half of 2000. The Bluetooth/HomeRF Combo and
Bluetooth/HomeRF/Direct Sequence projects were approximately 10% complete at the
time of the valuation and the expected timeframe for achieving these product
releases was assumed to be in the second half of 2000 and the first half of
2000, respectively. The Wireless Gas Tank Sensor and the Wireless Industrial
Garage Door Opener projects were approximately 70% complete at the time of the
valuation and the expected time frame for achieving these product releases was
assumed to be 2001. The Wireless GPS was approximately 50% complete at the time
of the valuation and the expected time frame for achieving this product release
was assumed to be in the second half of 2000. The percentage complete
calculations for all projects were estimated based on research and development
expenses incurred to date and management estimates of remaining development
costs. Significant remaining development efforts must be completed in the next 6
to 18 months in order for Voyager's projects to become implemented in a
commercially viable timeframe. Management's cash flow and other assumptions
utilized at the time of acquisition do not materially differ from historical
pricing/licensing, margin, and expense levels of the Voyager group prior to
acquisition.
Approximately $0.5 million was attributed to core wireless technology and
royalty revenue associated with the Wireless Water Meter Reading Device project.
If these projects are not successfully developed, our future revenue and
profitability may be adversely affected. Additionally, the value of other
intangible assets acquired may become impaired.
The unaudited pro forma financial information for the nine months ended
September 30, 2000 and 1999 is presented below (in thousands except per share
information) as if Voyager had been acquired on January 1. Pro forma net income
excludes the write-off of acquired in-process research and development of $1.6
million.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Revenues $ 80,700 $ 54,108
Net income $ 9,502 $ 4,605
Diluted net income per share $ 0.46 $ 0.36
</TABLE>
4. CONTINGENCIES:
As of September 30, 2000 and December 31, 1999, we had accrued royalties of
approximately $10.8 million and $7.9 million, respectively. We entered into
royalty agreements in fiscal 1999 and 1998 and continue to negotiate royalty
agreements with several other third parties. Accordingly, we have accrued our
best estimate of the amount of royalties payable based on royalty agreements
already signed or in negotiation, as well as advice from third party technology
advisors. Should the final agreements result in royalty rates significantly
different from these assumptions, our business, operating results and financial
condition could be materially and adversely affected.
During 1998, Motorola, Inc. ("Motorola") filed an action for patent
infringement against us (and one other defendant) related to seven Motorola
patents. In its complaint, Motorola was seeking damages for our alleged
infringement, including treble damages for our alleged willful infringement and
an injunction against us. Motorola was also seeking attorney's fees and costs.
We filed an answer to Motorola's complaint denying infringement of the
seven asserted Motorola patents and asserted that each patent is invalid or
unenforceable. In addition, we asserted counterclaims and declaratory relief for
invalidity and/or unenforceability and noninfringements of each of the seven
asserted Motorola patents. By our counterclaims, we were seeking 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. We were also seeking our costs and
attorney's fees in this action. In September 1999, we reached a settlement with
Motorola as to all claims raised by both parties. The settlement requires us to
make royalty payments to Motorola based on unit volume. As part of the
settlement, we granted a cross-license to Motorola to utilize
11
<PAGE>
portions of our technology and Motorola granted us a cross-license to utilize
portions of their technology. This settlement did not have a material effect on
our financial position or operating results.
On April 9, 1999, ESS Technology Inc. filed a complaint against us in the
U.S. District Court for the Northern District of California, alleging that we
failed to grant licenses for some of our International Telecommunications
Union-related patents to ESS on fair, reasonable and non-discriminatory terms.
ESS's complaint includes claims based on antitrust law, patent misuse, breach of
contract and unfair competition. In its complaint, ESS also seeks a declaration
that some of our International Telecommunications Union-related patents are
unenforceable and that we should be ordered by the court to grant a license to
ESS on fair, reasonable and non-discriminatory terms.
We filed an answer to ESS's complaint by moving to dismiss on the basis
that ESS had not alleged facts sufficient to state a legal claim. ESS responded
by amending its complaint to include additional factual and legal allegations
and filing an opposition to the motion to dismiss. On August 2, 1999, the Court
denied our motion to dismiss as moot in view of ESS's amended complaint.
On August 12, 1999, we filed a motion to dismiss ESS's amended complaint.
On November 4, 1999, the United States District Court in San Jose, California,
granted a dismissal of the antitrust and state unfair competition claims, ruling
that ESS had failed to allege injury to competition in the market for modems.
The Court allowed the specific performance of contract claim to stand, ruling
that the license terms granted to other market participants would provide a
sufficient basis for defining contractual terms that could be applied to ESS.
The Court also denied the motion with respect to dismissal of the declaratory
relief claims, holding that they were sufficiently ripe for adjudication. The
Court granted ESS leave to again amend its complaint, which it did on November
24, 1999, by filing a second amended complaint. On January 14, 2000, we filed a
motion to dismiss the second amended complaint. ESS filed its opposition to the
motion on January 21, 2000 and we filed our reply on January 28, 2000. On
February 11, 2000, the Court heard oral argument on our motion to dismiss the
second amended complaint. On February 14, 2000, the Court dismissed ESS's
complaint and gave ESS twenty days to amend its complaint. In particular, the
Court stated that ESS must allege the relevant geographic market and product
market in the complaint. In response to the Court's February 14, 2000 order, ESS
filed its third amended complaint on March 6, 2000.
On March 15, 2000, we filed a motion to dismiss ESS's third amended
complaint. ESS responded on March 31, 2000 and we filed reply papers on April 6,
2000. A case management conference was held on April 21, 2000. The motion was
denied on July 3, 2000. The judge ordered that discovery proceed only on the
issue of whether we license our patents on a reasonable and non-discriminatory
basis. This initial discovery period is scheduled to end on April 13, 2001,
pursuant to a stipulation and order in the case. During this period of time, the
parties will disclose experts and exchange expert reports on the above issue. A
case management conference is scheduled to be held on April 20, 2001.
On August 7, 2000, PCTEL filed counterclaims alleging that ESS infringes
the five PCTEL patents that are the subject of ESS's complaint. In addition, on
October 3, 2000, the parties stipulated to permit us to amend our counterclaims
to include claims that ESS infringes three additional PCTEL patents. Our eight
patent infringement claims will be litigated, if necessary, only after the issue
of whether we license our patents on a reasonable and non-discriminatory basis
is resolved.
Due to the nature of litigation generally and because the lawsuit brought
by ESS is still in the pleading 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 position or results of operations. We are vigorously contesting, and
intend to continue to vigorously contest, all of ESS's claims.
On August 9, 2000, we filed a complaint for patent infringement in the
United States District Court, District of Delaware against Smart Link Ltd. and
Smart Link Technologies, Inc. (collectively, "Smart Link"). Our complaint
alleges that Smart Link infringed four of our patents. On August 18, 2000, we
amended our complaint to claim that Smart Link's infringement was willful.
12
<PAGE>
On September 18, 2000, Smart Link answered our amended complaint and
counterclaimed against us. Smart Link's answer denied our allegations of
infringement. Smart Link's counterclaims seek declaratory relief that the
asserted PCTEL patents are invalid and not infringed. Smart Link also
counterclaims for tortuous interference with a business relation. On October 10,
2000, we replied to Smart Link's counterclaims and moved to strike portions of
Smart Link's answer.
On August 25, 2000, Smart Link Ltd. filed a complaint in the United States
District Court, District of Massachusetts. Smart Link Ltd.'s complaint alleges
that we infringe two of Smart Link Ltd.'s patents. On October 11, 2000, we
answered Smart Link Ltd.'s complaint and counterclaimed against Smart Link Ltd.
and Smart Link Technologies, Inc. Our answer denies Smart Link Ltd.'s
allegations of infringement. Our counterclaims seek declaratory relief that the
asserted Smart Link patents are invalid and not infringed. Our counterclaims
also allege that Smart Link infringes one of our patents.
Due to the nature of litigation generally and because the lawsuits brought
by Smart Link are still in the pleading stage, we cannot ascertain the outcome
of the final resolution of the lawsuits, 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 Smart
Link's lawsuits. These litigations could be time consuming and costly, and we
will not necessarily prevail given the inherent uncertainties of litigations. We
believe that it is unlikely these litigations will have a material adverse
effect on our financial position or results of operations. We are vigorously
contesting, and intend to continue to vigorously contest, all of Smart Link's
claims.
On September 14, 2000, we filed a complaint Under Section 337 of the Tariff
Act of 1930, as Amended with the United States International Trade Commission
("ITC"). Our complaint requested that the ITC commence an investigation into
whether Smart Link and ESS are engaged in unfair trade practices by selling for
importation into the United States, directly or indirectly importing into the
United States, or selling in the United States after importation devices which
infringe our patents. Four of our patents are asserted against Smart Link and
two of those four patents are asserted against ESS. A supplemental complaint was
filed on October 3, 2000.
On October 11, 2000, the ITC voted to institute an investigation into our
complaint. On October 18, 2000, notice of the ITC investigation was published in
the Federal Register. ESS responded to our complaint on October 31, 2000. Smart
Link has until November 7, 2000 to respond to our complaint. Discovery is
currently underway. By order of the administrative law judge, the ITC
investigation is to be completed by December 18, 2001.
We are contesting the case vigorously and intend to continue to do so. We
are not able to predict the outcome of this matter.
PCTEL is subject to various claims which arise in the normal course of
business. In the opinion of management, the ultimate disposition of these claims
will not have a material adverse effect on our financial position, liquidity or
results of operations.
5. AMORTIZATION OF DEFERRED COMPENSATION:
In connection with the grant of stock options to employees prior to our
initial public offering, we have recorded deferred compensation representing the
difference between the exercise price and deemed fair market value of our common
stock on the date these stock options were issued.
For the quarters and nine months ended September 30, 2000 and 1999,
amortization of deferred compensation (in thousands) relates to the following
functional categories:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ------------------------------------
2000 1999 2000 1999
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Research and development $ 70 $ 79 $ 222 $ 143
Sales and marketing 73 79 229 154
General and administrative 177 129 546 154
------------ ------------ ------------- ------------
$ 370 $ 287 $ 997 $ 451
============ ============ ============= ============
</TABLE>
13
<PAGE>
6. COMMON STOCK
On April 11, 2000, the Company effected its secondary public offering of
common stock. A total of 2,750,000 shares were sold at a price of $46.50 per
share; 650,000 shares were sold by the Company and 2,100,000 shares were sold by
selling stockholders of the Company. The offering resulted in net proceeds to
the Company and the selling stockholders of approximately $27.9 million and
$92.8 million, respectively, net of an underwriting discount of $6.4 million and
estimated offering expenses of $0.8 million.
14
<PAGE>
PCTEL, Inc.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
================================================================================
The following information should be read in conjunction with the condensed
interim financial statements and the notes thereto included in Item 1 of this
Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in PCTEL's Prospectus filed with
the Securities and Exchange Commission on April 11, 2000. Certain statements
contained in this Quarterly Report on Form 10-Q, including, without limitation,
statements containing the words "believes", "anticipates", "estimates",
"expects", and words of similar import, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. You
should not place undue reliance on these forward-looking statements. Our actual
results could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks faced by us described below and
elsewhere in this Quarterly Report, and in other documents we file with the SEC.
Overview
We provide cost-effective software-based communications solutions that
address high speed internet connectivity requirements for existing and emerging
technologies. Our communications products enable internet access through PCs and
alternative internet access devices. Our soft modem products consist of a
hardware chip set containing a proprietary host signal processing software
architecture which allows for the utilization of the computational and
processing resources of a host central processor, effectively replacing
special-purpose hardware required in conventional hardware-based modems.
Together, the combination of the chip set and software drivers are a component
part within a computer which allows for telecommunications connectivity. By
replacing hardware with a software solution, our host signal processing
technology lowers costs while enhancing capabilities.
From our inception in February 1994 through the end of 1995, we were a
development stage company primarily engaged in product development, product
testing and the establishment of strategic relationships with customers and
suppliers. From December 31, 1995 to September 30, 2000, our total headcount
increased from 18 to 188. We first recognized revenue on product sales in the
fourth quarter of 1995, and became profitable in 1996, our first full year of
product shipments. Revenues increased from $16.6 million in 1996 to $24.0
million in 1997, $33.0 million in 1998 and $76.3 million in 1999. Revenues for
the nine months ended September 30, 2000 were $80.5 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 99%, 76% and 77% of our
total sales for the years ended 1999, 1998 and 1997, respectively, 92% and 98%
for the nine months ended September 30, 2000 and 1999, respectively, and 86% and
99% for the three months ended September 30, 2000 and 1999, respectively. The
predominance of our sales is in Asia because our customers are primarily
motherboard and modem manufacturers, and the majority of these manufacturers are
located in Asia. In many cases, our indirect original equipment manufacturer
customers specify that our products be included on the modem boards or
motherboards that they purchase from the board manufacturers, and we sell our
products directly to the board manufacturers for resale to our indirect original
equipment manufacturer customers, both in the United States and internationally.
Industry statistics indicate that approximately two-thirds of modems
manufactured in Asia are sold in North America.
We recognize revenues from product sales to customers upon shipment, except
sales to distributors which are recognized only when distributors have sold the
product to the end user. We provide for estimated sales returns and rebate
allowances related to sales to OEMs at the time of shipment . We recognize
revenues from non-recurring engineering contracts as contract milestones are
achieved. Revenues from technology licenses are recognized after delivery has
occurred and the amount is fixed and determinable, generally based upon the
contract's nonrefundable payment terms. To the extent there are extended payment
terms on these contracts, revenue is recognized as the payments become due and
the cancellation privilege lapses. To date, the Company has not offered post-
contract customer support. Customer payment terms generally range from letters
of credit collectible upon shipment to open account payable 60 days after
shipment.
15
<PAGE>
Results of Operations
Three and nine months ended September 30, 2000 and 1999 (All amounts in tables
are in thousands, except percentages)
<TABLE>
<CAPTION>
Revenues
------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Revenues............................... $ 28,885 $ 20,190 $ 80,529 $ 53,236
% change from year ago period.......... 43.1% 51.3%
------------------------------------------------------------------------------------------------------------------------
</TABLE>
Our revenues primarily consist of product sales of soft modems to board
manufacturers and distributors in Asia. Revenues increased $8.7 million for the
three months ended September 30, 2000 compared to the same period in 1999.
Revenues for the nine months ended September 30, 2000 increased $27.3 million
compared to the same period in 1999. These increases were attributable to
increased units sold to tier-one OEMs such as Compaq Corporation, Intel
Corporation, Fujitsu Limited and NEC Corporation and to a lesser extent,
increased license revenues recognized in the three months ended September 30,
2000. The increase in sales volume was partly offset by downward pressure on
average selling prices and sales discounts to customers. Our average selling
prices decreased from September 30, 1999 to September 30, 2000, mainly due to
the downward pricing pressure which is commonly seen in the industry. However,
we believe this decrease in selling prices has generated the increase in sales
volume.
Gross Profit
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Gross profit............................. $ 13,571 $ 9,750 $ 37,851 $ 25,799
Percentage of revenues................... 47.0% 48.3% 47.0% 48.5%
% change from year ago period............ 39.2% 46.7%
------------------------------------------------------------------------------------------------------------------------
</TABLE>
Cost of revenues consists primarily of chip sets we purchase from third
party manufacturers and also includes amortization of intangibles related to the
Communications Systems Division acquisition, accrued intellectual property
royalties, cost of operations, provision for inventory obsolescence and
distribution costs.
Gross profit increased $3.8 million for the three months ended September
30, 2000 compared to the same period last year due to increased volume,
partially offset by a decline in the per-unit average gross profit. Gross profit
as a percentage of revenue decreased from 48.3% for the three months ended
September 30, 1999 to 47.0% for the three months ended September 30, 2000
because of a shift to higher volume, lower margin sales to OEMs and, generally,
average selling prices decreased faster than the rate of cost reductions. On the
other hand, higher-margin license revenues favorably impacted gross margins
during the quarter, partially offsetting the decrease from average selling
prices.
Gross profit increased $12.1 million for the nine months ended September
30, 2000 over the same period in 1999 but decreased as a percentage of revenue
from 48.5% to 47.0% for primarily the same reasons discussed above.
Research and Development
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Research and development.................... $ 3,900 $ 2,732 $ 11,609 $ 7,155
Percentage of revenues...................... 13.5% 13.5% 14.4% 13.4%
% change from year ago period............... 42.8% 62.3%
------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
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 $1.2 million for the three
months ended September 30, 2000 compared to the same period in 1999 as we
continue to invest heavily in the development of the G.Lite, G.DMT, wireless and
embedded modems, as well as a V.92 upgrade. Research and development headcount
increased from 64 to 73 from September 30, 1999 to September 30, 2000. As a
percentage of revenues, research and development expenses remained at the same
level for the three months ended September 30, 2000 compared to the same period
in 1999.
Research and development expenses increased $4.5 million for the nine
months ended September 30, 2000 compared to the same period in 1999 for the same
reasons discussed above. Approximately 66% of all research and development
expenses are payroll related. We expect that our research and development
expenses will increase because we intend to hire additional personnel and
continue to develop new products, although our research and development
expenses as a percentage of revenues is expected to decrease as our revenues are
expected to increase at a greater rate than our expenses.
Sales and Marketing
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Sales and marketing......................... $ 3,660 $ 2,609 $ 10,385 $ 7,554
Percentage of revenues...................... 12.7% 12.9% 12.9% 14.2%
% change from year ago period............... 40.3% 37.5%
------------------------------------------------------------------------------------------------------------------------
</TABLE>
Sales and marketing expenses consist primarily of personnel costs, sales
commissions and marketing costs. Sales commissions payable to our distributors
are recognized when our products are "sold through" from the distributors to end
users so that the commission expense is matched with related recognition of
revenues. Marketing costs include promotional goods, public relations and trade
shows.
Sales and marketing expenses increased $1.1 million but decreased slightly
as a percentage of revenues for the three months ended September 30, 2000
compared to the same period in 1999. The increase reflects the increased costs
to support higher sales and the addition of sales and marketing personnel to
develop new accounts and drive new product development and product launches.
Sales and marketing headcount increased from 48 to 65 from September 30, 1999 to
2000. The production of collateral sales materials, travel costs, public
relation costs, trade shows, sales programs and press tours also increased from
a year ago.
Sales and marketing expenses increased $2.8 million but decreased as a
percentage of revenues for the nine months ended September 30, 2000 compared to
the same period in the prior year. The increase in expenses is due to the
increase in headcount, as well as the production of collateral sales materials,
additional travel costs, public relation costs, trade shows, sales programs and
press tour.
General and Administrative
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
--------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
General and administrative.................. $ 2,191 $ 1,571 $ 5,669 $ 3,634
Percentage of revenues...................... 7.6% 7.8% 7.0% 6.8%
% change from year ago period............... 39.4% 56.0%
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
General and administrative expenses include costs associated with our
general management and finance functions as well as professional service
charges, such as legal, tax and accounting fees. Other general expenses
17
<PAGE>
include rent, insurance, utilities, travel and other operating expenses to the
extent not otherwise allocated to other functions.
General and administrative expenses increased $620,000 for the three months
ended September 30, 2000 compared to the same period in 1999 and $2.0 million
for the nine months ended September 30, 2000 compared to the same period in
1999. The increase was primarily due to our increase in staffing and related
infrastructure to support our continued growth and the increased legal costs
associated with the patent infringement litigation against Smart Link and ESS.
As a percentage of revenues, general and administrative expenses remained
approximately at the same level for the three and nine months ended September
30, 2000 compared to the same periods in 1999. General and administrative
headcount increased from 17 to 32 from September 30, 1999 to September 30, 2000.
Acquired In-Process Research and Development
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Acquired in-process research and development $ -- $ -- $ 1,600 $ --
Percentage of revenues...................... -- % -- % 2.0% -- %
----------------------------------------------------------------------------------------------------------------------
</TABLE>
As explained in Note 3 of the consolidated condensed financial statements,
on February 24, 2000, we completed the acquisition of Voyager Technologies,
Inc., ("Voyager"), a provider of personal connectivity and internet access
technology. It was determined that $1.6 million of the purchase price was
related to in-process research and development, which was immediately expensed
in the first quarter of 2000.
Amortization of Deferred Compensation
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Amortization of deferred compensation ...... $ 320 $ 287 $ 997 $ 451
Percentage of revenues...................... 1.1% 1.4% 1.2% 0.8%
% change from year ago period............... 11.5% 121.1%
----------------------------------------------------------------------------------------------------------------------
</TABLE>
In connection with the grant of stock options to employees prior to our
initial public offering, we have recorded deferred compensation representing the
difference between the exercise price and deemed fair market value of our common
stock on the date these stock options were issued.
The amortization of deferred compensation increased $33,000 for the three
months ended September 30, 2000 compared to the same period in 1999 primarily
due to a higher deemed fair market value of our stock and additional stock
options granted to new employees prior to the initial public offering.
The amortization of deferred compensation increased $546,000 for the nine
months ended September 30, 2000 compared to the same period in 1999 for the
reasons discussed above. We expect that the amortization of deferred
compensation to remain at approximately $320,000 per quarter through the third
quarter of 2003.
Other Income, Net
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Other income (expense), net................. $ 2,008 $ (155) $ 5,166 $ (747)
Percentage of revenues...................... 7.0% (0.8)% 6.4% (1.4)%
% change from year ago period............... N/A N/A
----------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
Other income, net, consists of interest income, net of interest expense.
Interest income is expected to fluctuate over time. Other income, net, increased
$2.2 million for the three months ended September 30, 2000 compared to the same
period in 1999 primarily due to interest earned from the proceeds from the
initial public offering and secondary public offering proceeds and the
elimination of interest expense on the loan that we used to acquire
Communications Systems Division.
Other income, net, increased $5.9 million for the nine months ended
September 30, 2000 compared to the same period in 1999 primarily for the same
reasons discussed above.
Provision for Income Taxes
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Provision for income taxes.................. $ 1,319 $ 717 $ 3,033 $ 1,875
Effective tax rate.......................... 28.1% 30.0% 27.7% 30.0%
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
Provision for income taxes increased for the three months ended September
30, 2000 over the same period in 1999 due to higher taxable income. The
effective tax rate decreased from 30.0% a year ago to 28.1%
We have $5.8 million in deferred tax assets as of September 30, 2000. We
believe that our effective tax rate will continue to be below the statutory tax
rate of 35% due to international sales and profits through our wholly owned
subsidiaries, which are taxed at rates below the statutory tax rate in the U.S.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Nine Months Nine Months
Ended Ended
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Net cash provided by operating activities...................................... $ 7,410 $ 14,969
Net cash used in investing activities.......................................... $ (7,798) $ (8,307)
Net cash provided by (used in) financing activities............................ $ 32,171 $ (1,639)
Cash, cash equivalents and short-term investments at the end of period......... $ 131,699 $ 25,067
Working capital at the end of period........................................... $ 131,029 $ 16,827
--------------------------------------------------------------------------------------------------------------------
</TABLE>
For the nine months ended September 30, 2000, net cash provided by
operating activities was $7.4 million. Net cash used in investing activities for
the nine months ended September 30, 2000 consists of the acquisition of Voyager
Technologies, purchases of property and equipment and purchase of short-term
investments. Net cash provided by financing activities for the nine months ended
September 30, 2000 consisted of proceeds from issuance of common stock
associated with the secondary public offering and proceeds from stock option
exercises and shares issued through the employee stock purchase plan.
As of September 30, 2000, we had $131.7 million in cash, cash equivalents
and short-term investments, and working capital of $131.0 million.
Accounts receivable, as measured in days sales outstanding ("DSO"), were 57
days at September 30, 2000 compared to 26 days at December 31, 1999. Collection
terms on our sales to tier one customers are generally due 60 days after
shipment, which is standard for our industry. As sales to tier one customers
increase, we expect DSO to increase as compared to prior periods where sales to
smaller customers with payment terms of 45 days or less were proportionately
greater. However, DSO at December 31, 1999 was abnormally low primarily due to
increased cash collection efforts prior to the year-end holiday period,
partially offset by the increase in sales to tier one customers.
We believe that our 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 we 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.
19
<PAGE>
Factors Affecting Operating Results
This quarterly report on Form 10-Q contains forward-looking statements
which involve risks and uncertainties. Our actual results could differ
materially from those anticipated by such forward-looking statements as a result
of certain factors including those set forth below.
Risks Related to Our Business
Our sales are concentrated among a limited number of customers and the loss of
one or more of these customers could cause our revenues to decrease.
Our sales are concentrated among a limited number of customers. If we were
to lose one or more of these customers, or if one or more of these customers
were to delay or reduce purchases of our products, our sales revenues may
decrease. For the nine months ended September 30, 2000, approximately 71% of our
revenues were generated by five of our customers with one customer representing
33% of revenues. These customers may in the future decide not to purchase our
products at all, purchase fewer products than they did in the past or alter
their purchasing patterns, because:
. we do not have any long-term purchase arrangements or contracts with
these or any of our other customers,
. our product sales to date have been made primarily on a purchase order
basis, which permit our customers to cancel, change or delay product
purchase commitments with little or no notice and without penalty, and
. many of our customers also have pre-existing relationships with
current or potential competitors which may affect our customers'
purchasing decisions.
We expect that a small number of customers will continue to account for a
substantial portion of our revenues for at least the next 12 to 18 months and
that a significant portion of our sales will continue to be made on the basis of
purchase orders.
We have significant sales and operations concentrated in Asia. Continued
political and economic instability in Asia and difficulty in collecting accounts
receivable may make it difficult for us to maintain or increase market demand
for our products.
Our sales to customers located in Asia accounted for 92% of our total
revenues for the nine months ended September 30, 2000. The predominance of our
sales is in Asia, mostly in Taiwan and China, because our customers are
primarily motherboard or modem manufacturers that are located there. In many
cases, our indirect original equipment manufacturer customers specify that our
products be included on the modem boards or motherboards, the main printed
circuit board containing the central processing unit of a computer system, that
they purchase from board manufacturers, and we sell our products directly to the
board manufacturers for resale to our indirect original equipment manufacturer
customers, both in the United States and internationally. Due to the industry
wide concentration of modem manufacturers in Asia, we believe that a high
percentage of our future sales will continue to be concentrated with Asian
customers. As a result, our future operating results could be uniquely affected
by a variety of factors outside of our control, including:
. political and economic instability,
. changes in tariffs, quotas, import restrictions and other trade
barriers which may make our products more expensive compared to our
competitors' products,
. delays in collecting accounts receivable, which we have experienced
from time to time, and
. fluctuations in the value of Asian currencies relative to the U.S.
dollar, which may make it more costly for us to do business in Asia
which may in turn make it difficult for us to maintain or increase our
revenues.
To successfully expand our sales in Asia and internationally, we must
strengthen foreign operations, hire additional personnel and recruit additional
international distributors and resellers. This will require significant
management attention and financial resources. To the extent that we are unable
to effect these additions in a timely
20
<PAGE>
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 result
in decreased revenues.
Product sales in the connectivity industry have been characterized by
continuing erosion of average selling prices. Price erosion experienced by any
company can cause revenues and gross margins to decline. The average selling
price of our products has decreased by approximately 65% from October 1995 to
September 30, 2000. We expect this trend to continue.
In addition, we believe that the widespread adoption of industry standards
in the soft modem industry is likely to further erode average selling prices,
particularly for analog modems. Adoption of industry standards is driven by the
market requirement to have interoperable modems. End users need this
interoperability to ensure modems from different manufacturers communicate with
each other without problems. Historically, users have deferred purchasing modems
until these industry standards are adopted. However, once these standards are
accepted, it lowers the barriers to entry and price erosion results. Decreasing
average selling prices in our products could result in decreased revenues even
if the number of units that we sell increases. Therefore, we must continue to
develop and introduce next generation products with enhanced functionalities
that can be sold at higher gross margins. Our failure to do this could cause our
revenues and gross margin to decline.
Our gross margins may vary based on the mix of sales of our products and
services, and these variations may hurt our net income.
We derive a significant portion of our sales from our software-based
connectivity products. We expect margins on newly introduced products generally
to be higher than our existing products. However, due in part to the competitive
pricing pressures that affect our products and in part to increasing component
and manufacturing costs, we expect margins from both existing and future
products to decrease over time. In addition, licensing revenues from our
products historically have provided higher margins than our product sales.
Changes in the mix of products sold and the percentage of our sales in any
quarter attributable to products as compared to licensing revenues will cause
our quarterly results to vary and could result in a decrease in gross margins
and net income.
Our future success depends on our ability to develop and successfully introduce
new and enhanced products that meet the needs of our customers.
Our future success depends on our ability to anticipate our customers'
needs and develop products that address those needs. Introduction of new
products and product enhancements will require coordination of our efforts with
those of our suppliers to rapidly achieve volume production. If we fail to
coordinate these efforts, develop product enhancements or introduce new products
that meet the needs of our customers as scheduled, our revenues may be reduced
and our business may be harmed. We cannot assure you that product introductions
will meet the anticipated release schedules.
Our revenues may fluctuate each quarter due to both domestic and international
seasonal trends.
We have experienced and continue to experience seasonality in sales of our
connectivity products. These seasonal trends materially affect our
quarter-to-quarter operating results. Our revenues are typically higher in the
third and fourth quarters due to the back-to-school and holiday seasons as well
as purchasers of PCs making purchase decisions based on their calendar year-end
budgeting requirements.
We are currently expanding our sales in international markets, particularly
in Asia, Europe and South America. To the extent that our revenues in Asia,
Europe or other parts of the world increase in future periods, we expect our
period-to-period revenues to reflect seasonal buying patterns in these markets.
Any delays in our normally lengthy sales cycles could result in customers
canceling purchases of our products.
Sales cycles for our products with major customers are lengthy, often
lasting six months or longer. In addition, it can take an additional six months
or more before a customer commences volume production of equipment that
incorporates our products. Sales cycles with our major customers are lengthy for
a number of reasons:
21
<PAGE>
. our original equipment manufacturer customers usually complete a
lengthy technical evaluation of our products, over which we have no
control, before placing a purchase order,
. the commercial integration of our products by an original equipment
manufacturer is typically limited during the initial release to
evaluate product performance, and
. the development and commercial introduction of products incorporating
new technologies frequently are delayed.
A significant portion of our operating expenses is relatively fixed and is
based in large part on our forecasts of volume and timing of orders. The lengthy
sales cycles make forecasting the volume and timing of product orders difficult.
In addition, the delays inherent in lengthy sales cycles raise additional risks
of customer decisions to cancel or change product phases. If customer
cancellations or product changes were to occur, this could result in the loss of
anticipated sales without sufficient time for us to reduce our operating
expenses.
We expect that our operating expenses will increase substantially in the future
and these increased expenses may diminish our ability to remain profitable.
Although we have been profitable in recent years, we may not remain
profitable on a quarterly or annual basis in the future. We anticipate that our
expenses will increase substantially over at least the next three years as we:
. further develop and introduce new applications and functionality for
our host signal processing technology,
. conduct research and development and 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 result in a decrease in our overall
profitability.
To date, we have principally relied upon our distributor sales organization
for product sales to smaller accounts. Our direct sales efforts have focused
principally on board manufacturers and smaller PC original equipment
manufacturers. To increase penetration of our target customer base, including
large, tier-one original equipment manufacturers, we must significantly increase
the size of our direct sales force and organize and deploy sales teams targeted
at specific domestic tier-one original equipment manufacturer accounts. If we
are unable to expand our sales to additional original equipment manufacturers,
our revenues may not meet analysts' expectations which could cause our stock
price to drop.
We must accurately forecast our customer demand for our 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, such as the application specific integrated circuit, coder/decoder and
discrete access array, or data access arrangement, components of our modem
products, several months before we receive purchase orders from our own
customers. This forecasting and order lead time requirement limits our ability
to react to unexpected fluctuations in demand for our products. These
fluctuations can be unexpected and may cause us to have excess inventory, or a
shortage, of a particular product. In the event that our forecasts are
inaccurate, we may need to write down excess inventory. For example, we were
required to write down inventory in the second quarter of 1996 in connection
with a product transition within our 14.4 Kbps product family. Similarly, if we
fail to purchase sufficient supplies on a timely basis, we may incur additional
rush charges or we may lose product revenues if we are not able to meet a
purchase order. These failures could also adversely affect our customer
relations. Significant write-downs of excess inventory or declines in inventory
value in the future could cause our net income and gross margin to decrease.
We rely heavily on our intellectual property rights which offer only limited
protection against potential infringers. Unauthorized use of our technology may
result in development of products that compete with our products which could
cause our market share and our revenues to be reduced.
22
<PAGE>
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 43 patents, a number of which cover technology that
is considered essential for International Telecommunications Union standard
communications solutions, and also have 27 additional patent applications
pending or filed. These patents may never be issued. These patents, both issued
and pending, may not provide sufficiently broad protection against third party
infringement lawsuits or they may not prove enforceable in actions against
alleged infringers.
Despite precautions that we take, it may be possible for unauthorized third
parties to copy aspects of our current or future products or to obtain and use
information that we regard as proprietary. We may provide our licensees with
access to our proprietary information underlying our licensed applications.
Additionally, our competitors may independently develop similar or superior
technology. Finally, policing unauthorized use of software is difficult, and
some foreign laws, including those of various countries in Asia, do not protect
our proprietary rights to the same extent as United States laws. Litigation may
be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Litigation could result in substantial costs and
diversion of resources.
We have received, and may receive in the future, communications from third
parties asserting that our products infringe on their intellectual property
rights, that our patents are unenforceable or that we have inappropriately
licensed our intellectual property to third parties. These claims could affect
our relationships with existing customers and may prevent potential future
customers from purchasing our products or licensing our technology. Because we
depend upon a limited number of products, any claims of this kind, whether they
are with or without merit, could be time consuming, result in costly litigation,
cause product shipment delays or require us to enter into royalty or licensing
agreements. In the event that we do not prevail in litigation, we could be
prevented from selling our products or be required to enter into royalty or
licensing agreements on terms which may not be acceptable to us. We could also
be prevented from selling our products or be required to pay substantial
monetary damages. Should we cross license our intellectual property in order to
obtain licenses, we may no longer be able to offer a unique product. Other than
the ESS Technology and Smart Link lawsuits described elsewhere in the notes to
the financial statements, no material lawsuits relating to intellectual property
are currently filed against us.
New patent applications may be currently pending or filed in the future by
third parties covering technology that we use currently or may use in the
future. Pending U.S. patent applications are confidential until patents are
issued, and thus it is impossible to ascertain all possible patent infringement
claims against us. We believe that several of our competitors, including Lucent,
Motorola and Texas Instruments, may have a strategy of protecting their market
share by filing intellectual property claims against their competitors and may
assert claims against us in the future. The legal and other expenses and
diversion of resources associated with any such litigation could result in a
decrease in our revenues and profitability.
In addition, some of our customer agreements include an indemnity clause
that obligates us to defend and pay all damages and costs finally awarded by a
court should third parties assert patent and/or copyright claims against our
customers. As a result, we may be held responsible for infringement claims
asserted against our customers.
If our financial reserves for potential future license fees are less than any
actual fees that we are required to pay, our net income would be reduced.
We have established and recorded on a monthly basis a 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 modem industry may not be applicable to our experience.
Competition in the connectivity market is intense, and if we are unable to
compete effectively, the demand for, or the prices of, our products may be
reduced.
23
<PAGE>
The connectivity device market is intensely competitive. We may not be able
to compete successfully against current or potential competitors. Our current
competitors include Conexant, ESS Technology, Lucent Technologies, Motorola,
Smart Link, Broadcom, Texas Instrument, Centillium Communications, Metalink,
Globespan and Virata. 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, Efficient Networks, IteX and Terayon Communications.
As a result of our February 2000 acquisition of Voyager Technologies, we
anticipate that we will enter the markets for wireless Internet connectivity and
wireless home networking. These markets are intensely competitive. We believe
that our future competitors in these markets may include Aironet, Breezecom,
Conexant, Lucent, Intersil, Motorola, Proxim and Symbol Technologies.
We believe that the principal competitive factors required by users and
customers in the connectivity product market include compatibility with industry
standards, price, functionality, ease of use and customer service and support.
Although we believe that our products currently compete favorably with respect
to these factors, we may not be able to maintain our competitive position
against current and potential competitors.
In order for us to maintain our profitability and continue to introduce and
develop new products for emerging markets, we must attract and retain our
executive officers and qualified technical, sales, support and other
administrative personnel.
Our past performance has been and our future performance is substantially
dependent on the performance of our current executive officers and certain key
engineering, sales, marketing, financial, technical and customer support
personnel. If we lose the services of one or more of our executives or key
employees, a replacement could be difficult to recruit and we may not be able to
grow our business.
We intend to hire a significant number of additional engineering, sales,
support, marketing and finance personnel in the future. Competition for
personnel, especially engineers and marketing and sales personnel in Silicon
Valley, is intense. We are particularly dependent on our ability to identify,
attract, motivate and retain qualified engineers with the requisite education,
background and industry experience. As of September 30, 2000, we employed a
total of 73 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.
We have experienced significant growth in our business in recent periods and
failure to manage our growth could strain our management, financial and
administrative resources.
Our ability to successfully sell our products and implement our business
plan in rapidly evolving markets requires an effective management planning
process. Future expansion efforts could be expensive and put a strain on our
management by significantly increasing the scope of their responsibilities and
resources by increasing the number of people using them. We have increased, and
plan to continue to increase, the scope of our operations at a rapid rate. Our
headcount has grown and will continue to grow substantially. Our headcount
increased from 95 at December 31, 1998 to 188 at September 30, 2000. 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
human resources systems and controls, integrate new personnel and manage
expanded operations.
We rely on independent companies to manufacture, assemble and test our products.
If these companies do not meet their commitments to us, our ability to sell
products to our customers would be impaired.
We do not have our own manufacturing, assembly or testing operations.
Instead, we rely on independent companies to manufacture, assemble and test the
semiconductor chips, which are integral components of our products. Most of
these companies are located outside of the United States. There are many risks
associated with our relationships with these independent companies, including
reduced control over:
24
<PAGE>
. delivery schedules,
. quality assurance,
. manufacturing costs,
. capacity during periods of excess demand, and
. access to process technologies.
In addition, the location of these independent parties outside of the
United States creates additional risks resulting from the foreign regulatory,
political and economic environments in which each of these companies exists.
Further, some of these companies are located near earthquake fault lines. While
we have not experienced any material problems to date, failures or delays by our
manufacturers to provide the semiconductor chips that we require for our
products, or any material change in the financial arrangements we have with
these companies, could have an adverse impact on our ability to meet our
customer product requirements.
We design, market and sell application specific integrated circuits and
outsource the manufacturing and assembly of the integrated circuits to third
party fabricators. The majority of our products and related components are
manufactured by 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. Although we believe that we would be able to qualify an
alternative manufacturing source for data access arrangement chips within a
relatively short period of time, this transition, if necessary, could result in
loss of purchase orders or customer relationships, which could result in
decreased revenues.
Undetected software errors or failures found in new products may result in loss
of customers or delay in market acceptance of our products.
Our products may contain undetected software errors or failures when first
introduced or as new versions are released. To date, we have not been made aware
of any significant software errors or failures in our products. However, despite
testing by us and by current and potential customers, errors may be found in new
products after commencement of commercial shipments, resulting in loss of
customers or delay in market acceptance.
Risks Related to Our Industry
If the market for applications using our host signal processing technology does
not grow as we anticipate, or if our products are not accepted in this market,
our revenues may stagnate or decrease.
Our success depends on the growth of the market for applications using our
host signal processing technology. Market demand for host signal processing
technology depends primarily upon the cost and performance benefits relative to
other competing solutions. This market has only recently begun to develop and
may not develop at the growth rates that have been suggested by industry
estimates. Although we have shipped a significant number of soft modems since we
began commercial sales of these products in October 1995, the current level of
demand for soft modems may not be sustained or may not grow. If customers do not
accept soft modems or the market for soft modems does not grow, our revenues
will decrease.
Further, we are in the process of developing next generation products and
applications which improve and extend upon our host signal processing
technology, such as a G.Lite modem solution and a remote access solution. If
these products are not accepted in our markets when they are introduced, our
revenues and profitability will be negatively affected.
Our industry is characterized by rapidly changing technologies. If we do not
adapt to these technologies, our products will become obsolete.
The connectivity product market is characterized by rapidly changing
technologies, limited product life cycles and frequent new product
introductions. To remain competitive in this market, we have been required to
introduce
25
<PAGE>
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 digital subscriber line, wireless and
cable. However, substantially all of our current product revenue is derived from
sales of analog modems, which use a more conventional technology. We must
continue to develop and introduce technologically advanced products that support
one or more of these competing broadband technologies. If we are not successful
in our response, our products will become obsolete and we will not be able to
compete effectively.
Changes in laws or regulations, in particular, future FCC regulations affecting
the broadband market, internet service providers, or the communications industry
could negatively affect our ability to develop new technologies or sell new
products and therefore, reduce our profitability.
The jurisdiction of the Federal Communications Commission, or FCC, extends
to the entire communications industry, including our customers and their
products and services that incorporate our products. Future FCC regulations
affecting the broadband access services industry, our customers or our products
may harm our business. For example, future FCC regulatory policies that affect
the availability of data and internet services may impede our customers'
penetration into their markets or affect the prices that they are able to
charge. In addition, international regulatory bodies are beginning to adopt
standards for the communications industry. Although our business has not been
hurt by any regulations to date, in the future, delays caused by our compliance
with regulatory requirements may result in order cancellations or postponements
of product purchases by our customers, which would reduce our profitability.
Risks Related to our Common Stock
Substantial future sales of our common stock in the public market may depress
our stock price.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our common stock could cause our stock price to
fall.
Provisions in our charter documents may inhibit a change of control or a change
of management which may cause the market price for our common stock to fall and
may inhibit a takeover or change in our control that a stockholder may consider
favorable.
Provisions in our charter documents could discourage potential acquisition
proposals and could delay or prevent a change in control transaction that our
stockholders may favor. These provisions could have the effect of discouraging
others from making tender offers for our shares, and as a result, these
provisions may prevent the market price of our common stock from reflecting the
effects of actual or rumored takeover attempts and may prevent stockholders from
reselling their shares at or above the price at which they purchased their
shares. These provisions may also prevent changes in our management that our
stockholders may favor. Our charter documents do not permit stockholders to act
by written consent, do not permit stockholders to call a stockholders meeting
and provide for a classified board of directors, which means stockholders can
only elect, or remove, a limited number of our directors in any given year.
Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock in one or more series. The board of directors can fix the price,
rights, preferences, privileges and restrictions of this preferred stock without
any further vote or action by our stockholders. The rights of the holders of our
common stock will be affected by, and may be adversely affected by, the rights
of the holders of any preferred stock that may be issued in the future. Further,
the issuance of shares of preferred stock may delay or prevent a change in
control transaction without further action by our stockholders. As a result, the
market price of our common stock may drop. The board of directors has not
elected to issue additional shares of preferred stock since the initial public
offering on October 19, 1999.
Our stock price may be volatile based on a number of factors, some of which are
not in our control.
The trading price of our common stock has been highly volatile. Our stock
price could be subject to wide fluctuations in response to a variety of factors,
many of which are out of our control, including:
26
<PAGE>
. actual or anticipated variations in quarterly operating results,
. announcements of technological innovations,
. new products or services offered by us or our competitors,
. changes in financial estimates by securities analysts,
. conditions or trends in our industry,
. our announcement of significant acquisitions, strategic partnerships,
joint ventures or capital commitments,
. additions or departures of key personnel, and
. sales of common stock by us or our stockholders.
In addition, the Nasdaq National Market, where many publicly held
telecommunications companies, including our company, are traded, often
experiences extreme price and volume fluctuations. These fluctuations often have
been unrelated or disproportionate to the operating performance of these
companies. The trading prices of many technology companies continue to trade at
multiples of earnings or revenues which are substantially above historic levels.
These trading prices and multiples may not be sustainable. These broad market
and industry factors may seriously harm the market price of our common stock,
regardless of our actual operating performance. In the past, following periods
of volatility in the market price of an individual company's securities,
securities class action litigation often has been instituted against that
company. This type of litigation, if instituted, could result in substantial
costs and a diversion of management's attention and resources.
27
<PAGE>
PCTEL, Inc.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
================================================================================
We are exposed to minimal market risks. We manage the sensitivity of our
results of operations to these risks by maintaining a conservative investment
portfolio, which is comprised solely of high-grade securities. We do not hold or
issue derivative, derivative commodity instruments or other financial
instruments for trading purposes. We are exposed to currency fluctuations, as we
sell our products internationally. We manage the sensitivity of our
international sales by denominating all transactions in U.S. dollars.
We may be exposed to interest rate risks, as we may use additional
financing to fund additional acquisitions and fund other capital expenditures.
The interest rate that we may be able to obtain on financings will depend on
market conditions at that time and may differ from the rates we have secured in
the past.
28
<PAGE>
PCTEL, Inc.
Part II. Other Information
For the Three and Nine months Ended September 30, 2000
================================================================================
Item 1 Legal Proceedings:
See Note 4 of Notes to the Consolidated Condensed Financial
Statements.
Item 2 Changes in Securities and Use of Proceeds: None.
Item 3 Defaults upon Senior Securities: None.
Item 4 Submission of Matters to a Vote of Security Holders: None.
Item 5 Other Information: None.
Item 6 Exhibits and Reports on Form 8-K:
(a) Exhibits
Exhibit
Number Description
------ -----------
27.1 Financial Data Schedule for the nine months ended
September 30, 2000.
________________
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PCTEL, Inc.
A Delaware Corporation
(Registrant)
November 14, 2000 /s/ Andrew Wahl
-------------------------------------------
Andrew Wahl
Vice President, Finance and Chief Financial
Officer (principal financial and accounting
officer)
30
<PAGE>
EXHIBIT INDEX
27.1 Financial Date Schedule
31
