<PAGE>
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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 March 31, 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)
<TABLE>
<S> <C>
Delaware 77-0364943
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
</TABLE>
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 April 30, 2000, there were 18,040,791 shares of the Registrant's
Common Stock outstanding.
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<PAGE>
PCTEL, INC.
FORM 10-Q
For the Quarter Ended March 31, 2000
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS............................................ 3
Consolidated Condensed Balance Sheets
as of March 31, 2000 (unaudited) and December 31, 1999.......... 3
Consolidated Condensed Statements of Income (unaudited)
for the three months ended March 31, 2000 and 1999.............. 4
Consolidated Condensed Statements of Cash Flows (unaudited)
for the three months ended March 31, 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........................................... 14
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>
March 31, December 31,
2000 1999
----------- ------------
(unaudited)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................ $ 48,498 $ 44,705
Short-term investments............................... 47,926 53,585
Accounts receivable, net of allowance for doubtful
accounts of $2,503 and $2,213, respectively......... 11,213 6,555
Inventories, net..................................... 5,781 5,741
Prepaid expenses and other assets.................... 2,282 2,422
Deferred tax asset................................... 3,455 3,211
-------- --------
Total current assets............................... 119,155 116,219
PROPERTY AND EQUIPMENT, net............................ 3,949 3,099
GOODWILL AND OTHER INTANGIBLE ASSETS, net.............. 21,928 8,649
DEFERRED TAX ASSET..................................... 2,365 2,365
OTHER ASSETS........................................... 271 273
-------- --------
TOTAL ASSETS....................................... $147,668 $130,605
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable..................................... $ 5,158 $ 7,140
Accrued royalties.................................... 8,288 7,868
Income taxes payable................................. 3,730 3,290
Accrued liabilities.................................. 9,629 8,029
-------- --------
Total current liabilities.......................... 26,805 26,327
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 50,000,000
shares authorized; 17,072,271 and 16,560,335 shares
issued and outstanding at March 31, 2000 and
December 31, 1999, respectively..................... 17 17
Additional paid-in capital........................... 113,727 99,334
Deferred compensation................................ (4,247) (4,856)
Retained earnings.................................... 11,577 9,849
Accumulated other comprehensive loss................. (211) (66)
-------- --------
Total stockholders' equity......................... 120,863 104,278
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $147,668 $130,605
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
PCTEL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except per share information)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
2000 1999
------- -------
(unaudited)
<S> <C> <C>
REVENUES....................................................... $24,121 $15,156
COST OF REVENUES............................................... 12,768 7,926
------- -------
GROSS PROFIT................................................... 11,353 7,230
------- -------
OPERATING EXPENSES:
Research and development..................................... 3,408 2,043
Sales and marketing.......................................... 2,995 2,298
General and administrative................................... 1,765 815
Acquired in-process research and development................. 1,600 --
Amortization of goodwill..................................... 234 --
Amortization of deferred compensation (See Note 5)........... 349 16
------- -------
Total operating expenses................................... 10,351 5,172
------- -------
INCOME FROM OPERATIONS......................................... 1,002 2,058
OTHER INCOME (EXPENSE), NET:
Interest income (expense).................................... 1,381 (337)
------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES....................... 2,383 1,721
PROVISION FOR INCOME TAXES..................................... 655 516
------- -------
NET INCOME..................................................... $ 1,728 $ 1,205
======= =======
Basic earnings per share....................................... $ 0.10 $ 0.49
Shares used in computing basic earnings per share.............. 16,805 2,448
Diluted earnings per share..................................... $ 0.09 $ 0.10
Shares used in computing diluted earnings per share............ 20,288 12,604
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
PCTEL, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
----------------
2000 1999
------- -------
(unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income.................................................. $ 1,728 $ 1,205
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Acquired in-process research and development.............. 1,600 --
Depreciation and amortization............................. 1,096 683
Provision for allowance for doubtful accounts............. 190 364
Provision for excess and obsolete inventories............. 131 163
Increase in deferred tax asset............................ -- (235)
Amortization of deferred compensation..................... 349 16
Changes in operating assets and liabilities, net of
acquisitions:
(Increase) in accounts receivable......................... (4,273) (2,766)
(Increase) in inventories................................. (171) (2,429)
(Increase) decrease in prepaid expenses and other assets.. 148 (64)
Increase (decrease) in accounts payable................... (1,984) 96
Increase in accrued royalties............................. 421 --
Increase in income taxes payable.......................... 440 --
Increase in accrued liabilities........................... 877 2,427
------- -------
Net Cash Provided by (Used in) Operating Activities......... 552 (540)
------- -------
Cash Flows from Investing Activities:
Capital expenditures for property and equipment............. (1,126) (300)
Purchase of Voyager Technologies, net of cash acquired...... (1,493) --
Sale (purchase) of available-for-sale investments........... 5,514 (3,234)
------- -------
Net Cash Provided by (Used in) Investing Activities......... 2,895 (3,534)
------- -------
Cash Flows from Financing Activities:
Proceeds from issuance of preferred stock................... -- 1
Proceeds from issuance of common stock...................... 540 --
Cost incurred related to initial public offering............ (66) --
Cost incurred related to secondary public offering.......... (128) --
Principal payments on notes payable......................... -- (421)
------- -------
Net Cash Provided by (Used in) Financing Activities......... 346 (420)
------- -------
Net increase in cash and cash equivalents................... 3,793 (4,494)
Cash and cash equivalents, beginning of period.............. 44,705 12,988
------- -------
Cash and cash equivalents, end of period.................... $48,498 $ 8,494
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
PCTEL, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED: MARCH 31, 2000
(Information for the three months ended March 31, 2000 and 1999 is 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 months ended
March 31, 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 host signal
processing software architecture utilizes the host PC's central processing
unit to perform digital signal processing and other operations typically
handled by dedicated hardware found in conventional hardware-based modems. Our
host signal processing technology allows the elimination of this dedicated
hardware, lowering costs and 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
PCTEL uses the United States dollar for all its 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 March 31, 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>
PCTEL, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
Cash Equivalents and Short-Term Investments
We divide our financial instruments into two different classifications:
<TABLE>
<C> <S>
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 March 31, 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 recorded a $211,000 unrealized
holding loss as of March 31, 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.
</TABLE>
Inventories
Inventories are stated at the lower of cost or market and include material,
labor and overhead costs. Inventories as of March 31, 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 March 31, 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
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 the end user.
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.
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
7
<PAGE>
PCTEL, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
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.
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 months ended March 31, 2000 and 1999, respectively (in thousands, except
per share data):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
Net income............................................. $ 1,728 $ 1,205
========= =========
Basic earnings per share:
Weighted average common shares outstanding........... 16,805 2,448
--------- ---------
Basic earnings per share............................... $ 0.10 $ 0.49
========= =========
Diluted earnings per share:
Weighted average common shares outstanding........... 16,805 2,448
Weighted average common stock option grants and
outstanding warrants................................ 3,483 1,645
Weighted average preferred stock outstanding......... -- 8,511
--------- ---------
Weighted average common shares and common stock
equivalents outstanding............................. 20,288 12,604
--------- ---------
Diluted earnings per share............................. $ 0.09 $ 0.10
========= =========
</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 percent of total
revenues, are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
Taiwan................................................. 54% 28%
China (Hong Kong)...................................... 44% 36%
Singapore.............................................. -- 3%
Rest of Asia........................................... 2% 32%
--------- ---------
100% 99%
========= =========
</TABLE>
8
<PAGE>
PCTEL, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
Sales to our major customers representing greater than 10% of total
revenues are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
Customer 2000 1999
-------- --------- ---------
(Unaudited)
<S> <C> <C>
A.................................................... 16% 5%
B.................................................... 17% 14%
C.................................................... -- 20%
D.................................................... 40% 31%
</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
March 31, 2000, approximately 73% of gross accounts receivable were
concentrated with three customers. As of March 31, 1999, approximately 59% of
gross accounts receivable were concentrated with three customers.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal use," which we adopted in
fiscal 1999. SOP No. 98-1 requires entities to capitalize certain costs
related to internal-use software once certain criteria has been met. The
adoption did not have a material impact on PCTEL's financial position or
results of operations.
In April 1998, the American Institute of Certified Public Accountants
issued SOP No. 98-5 "Reporting on the Costs of Start-Up Activities," which we
adopted in 1999. It requires that all start-up costs related to new operations
must be expensed as incurred. In addition, all start-up costs that we
previously capitalized must be written off when SOP No. 98-5 is adopted. The
adoption did not have a material impact on our financial position or results
of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," which requires
certain accounting and reporting standards for derivative financial
instruments and hedging activities. It applies for the first quarter beginning
January 1, 2001. Because we do not currently hold any derivative instruments
and do not engage in hedging activities, we do not believe that the adoption
of SFAS No. 133, as amended, will have a material effect on our financial
position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition". SAB 101 summarizes
certain areas of the Staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. PCTEL believes that
its current revenue recognition policies comply with SAB 101.
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 267,687
shares of PCTEL common stock and $2,065,331 of cash in exchange for all shares
of Voyager common stock. In addition,
9
<PAGE>
PCTEL, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
645,157 vested and unvested options to purchase shares of Voyager common stock
were converted into options to purchase PCTEL common stock at the exchange
ratio of 0.07604.
The acquisition was structured as a tax-free reorganization and is being
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
$15.6 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 $14.0 million was attributed to intellectual property ($0.5
million), workforce ($0.3 million) and goodwill ($13.2 million). We have
classified this balance of $15.6 million as goodwill and other intangible
assets, net in the accompanying consolidated balance sheets and are amortizing
it over useful lives of five years on a weighted average basis. We have
included the results of Voyager from the date of acquisition to March 31, 2000
in the consolidated statement of operations.
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 represented 10% 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
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.
10
<PAGE>
PCTEL, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
Approximately $0.5 million, 3% of the purchase price, 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 three months ended
March 31, 2000 and 1999 is presented below (in thousands except per share
data) 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>
Three Months
Ended March 31,
---------------
2000 1999
------- -------
<S> <C> <C>
Revenues.................................................... $24,292 $15,455
Net income.................................................. $ 3,333 $ 1,324
Diluted net income per share................................ $ 0.16 $ 0.11
</TABLE>
4. CONTINGENCIES
As of March 31, 2000 and December 31, 1999, we accrued royalties of
approximately $8.3 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 patent counsel.
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) of 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 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.
11
<PAGE>
PCTEL, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
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 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.
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.
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 the consolidated financial
position, liquidity or results of operations.
5. AMORTIZATION OF DEFERRED COMPENSATION
For the quarters ended March 31, 2000 and 1999, amortization of deferred
compensation (in thousands) relates to the following functional categories:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
2000 1999
--------- ---------
<S> <C> <C>
Research and development................................ $ 79 $ --
Sales and marketing..................................... $ 79 $ 16
General and administrative.............................. $ 188 $ --
Operations.............................................. $ 3 $ --
</TABLE>
12
<PAGE>
PCTEL, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
6. SUBSEQUENT EVENTS
On April 11, 2000, the Company effected its secondary public offering of
common stock. A total of 1,062,500 shares were sold by the Company at a price
of $46.50 per share (including the exercise of the underwriters' over-allotment
option of 412,500 shares). A total of 2,100,000 shares were sold by the selling
stockholders at a price of $46.50 per share. The offering resulted in net
proceeds to the Company of approximately $46.1 million, net of an underwriting
discount of $2.5 million and estimated offering expenses of $0.8 million. The
offering resulted in net proceeds to the selling stockholders of approximately
$92.8 million, net of an underwriting discount of $4.9 million.
13
<PAGE>
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. 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 March 31, 2000, our total headcount increased from 18 to
165. 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 three months ended
March 31, 2000 were $24.1 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, and 100% and 99% for the three months ended March 31, 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. We
provide for estimated sales returns, allowances and discounts related to such
sales at the time of shipment. We recognize revenues from product sales to
distributors only when the distributors have sold the product to the end user.
We recognize revenues from non-recurring engineering contracts as contract
milestones are achieved.
Results of Operations
Three months ended March 31, 2000 and 1999
(All amounts in tables, other than percentages, are in thousands)
Revenues
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------ ------------------
<S> <C> <C>
Revenues............................... $24,121 $15,156
% change from prior period............. 59.2% N/A
</TABLE>
14
<PAGE>
Our revenues primarily consist of product sales of soft modems to board
manufacturers and distributors in Asia. Revenues increased $9.0 million for
the three months ended March 31, 2000 compared to the same period in 1999. The
revenue increase was attributable to unit growth following the implementation
of a new sales channel partners program and to the general acceptance of our
products in the sub-$1,000 PC marketplace. 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 34% from March
31, 1999 to March 31, 2000, mainly due to the elimination of one out of three
chips in the hardware component of the MicroModem product. We believe that
this 33% hardware reduction combined with the downward pricing pressure
commonly seen in the industry resulted in the decreases in the average selling
price of our MicroModem product. However, we believe this decrease has
generated the increase in our market share.
Gross Profit
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------ ------------------
<S> <C> <C>
Gross profit........................... $11,353 $7,230
Percentage of revenues................. 47.1% 47.7%
% change from prior period............. 57.0% N/A
</TABLE>
Cost of revenues consists primarily of chipsets 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, reserves for inventory obsolescence, and
distribution costs. The royalties accrued are our best estimate based on
royalty agreements already signed, negotiations or potential new agreements,
advice from patent counsel and the royalty rates we charge for use of our own
patents.
Gross profit increased $4.1 million for the three months ended March 31,
2000 compared to the same period last year due to increased sales volume. The
increase in gross profit was the direct result of increased revenues,
inventory cost reduction and economies of scale. Gross profit as a percentage
of revenue decreased from 47.7% for the three months ended March 31, 1999 to
47.1% for the three months ended March 31, 2000 because average selling prices
decreased faster than the rate of cost reduction, which adversely impacted our
profit margins.
Research and Development
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------ ------------------
<S> <C> <C>
Research and development............... $3,408 $2,043
Percentage of revenues................. 14.1% 13.5%
% change from prior period............. 66.8% N/A
</TABLE>
Research and development expenses include compensation costs for software
and hardware development, prototyping, certification and pre-production costs.
We expense all research and development costs as incurred.
Research and development expenses increased $1.4 million for the three
months ended March 31, 2000 compared to the same period in 1999 due to the
addition of personnel to develop new products related to the G.Lite, Audio
Modem Riser card and HIDRA projects as well as engineering work related to
v.90 and wireless modems. Research and development headcount increased from 50
to 69 from March 31, 1999 to March 31, 2000. HIDRA is one of our product names
and is also an acronym for High Density Remote Access. As a percentage of
revenues, research and development increased for the three months ended March
31, 2000 due to the increase in engineering staff. Approximately 62% 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.
15
<PAGE>
Sales and Marketing
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------ ------------------
<S> <C> <C>
Sales and marketing.................... $2,995 $2,298
Percentage of revenues................. 12.4% 15.2%
% change from prior period............. 30.4% N/A
</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 revenues.
Marketing costs include promotional goods, trade shows, press tours and
advertisements in trade magazines.
Sales and marketing expenses increased $697,000 but decreased as a
percentage of total net revenue for the three months ended March 31, 2000
compared to the same period in 1999. The increase reflects the addition of
sales and marketing personnel to develop new accounts, support customers, and
to drive new product development and product launches. We also expanded our
sales regions geographically to include Japan and Korea in 1999. Sales and
marketing headcount increased from 39 to 58 from March 31, 1999 to 2000. The
production of collateral sales materials, travel costs, trade shows, sales
programs and press tours also resulted in the increase of the sales and
marketing expenses. In addition, we implemented a new sales forecasting and
tracking system in the third quarter of 1999 in order to manage the increased
sales volume more efficiently.
General and Administrative
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------ ------------------
<S> <C> <C>
General and administrative............. $1,765 $815
Percentage of revenues................. 7.3% 5.4%
% change from prior period............. 116.6% N/A
</TABLE>
General and administrative expenses include costs associated with our
general management and finance functions as well as professional service
charges, such as legal, tax and accounting fees. Other general expenses
include rent, insurance, utilities, travel and other operating expenses to the
extent not otherwise allocated to other functions.
General and administrative expenses increased $950,000 for the three months
ended March 31, 2000 compared to the same period in 1999. The increase was
primarily due to increases in legal expenses and personnel costs. This
increase reflected additional legal costs related to an increased number of
contract negotiations, patent submissions, additional tax planning, as well as
litigation expenses related to the ESS lawsuit. We also incurred additional
expenses related to an increase in personnel. General and administrative
headcount increased from 16 to 38 from March 31, 1999 to March 31, 2000.
Acquired In-Process Research and Development
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------ ------------------
<S> <C> <C>
Acquired in-process research and
development........................ $1,600 $ --
Percentage of Revenues.............. 6.6% N/A
</TABLE>
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 267,687
shares of PCTEL 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 options to
purchase PCTEL common stock at the exchange ratio of 0.07604.
16
<PAGE>
The acquisition was structured as a tax-free reorganization and is being
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, that amount was $15.6
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
$14.0 was attributed to intellectual property ($0.5 million), workforce ($0.3
million) and goodwill ($13.2 million). We have classified this balance of
$15.6 million as goodwill and other intangible assets, net in the accompanying
consolidated balance sheets and are amortizing it over useful lives of five
years on a weighted average basis. We have included the results of Voyager
from the date of acquisition to March 31, 2000 in the consolidated statement
of operations.
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 represented 10% of the
purchase price and was attributed and supported by a discounted probable 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
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, 3% of the purchase price, 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.
17
<PAGE>
Amortization of Deferred Compensation
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------ ------------------
<S> <C> <C>
Amortization of deferred
compensation....................... $349 $16
Percentage of revenues.............. 1.4% 0.1%
</TABLE>
In connection with the grant of stock options to employees, 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 $333,000 for the three
months ended March 31, 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. We expect that the amortization of deferred
compensation to remain at approximately $340,000 per quarter through the third
quarter of 2003, based on option grant activity through March 31, 2000.
Other Income (Expense), Net
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------ ------------------
<S> <C> <C>
Other income (expense), net............ $1,381 $(337)
Percentage of revenues................. 5.7% (2.2)%
% change from prior period............. N/A N/A
</TABLE>
Other income, net, consists of interest income, net of interest expense.
Interest income is expected to fluctuate over time. Other income, net,
increased $1.7 million for the three months ended March 31, 2000 compared to
the same period in 1999 primarily due to interest expense incurred in 1999
related to the loan that we used to acquire Communications Systems Division as
well as interest earned on higher average cash balances.
Provision for Income Taxes
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------ ------------------
<S> <C> <C>
Provision for income taxes............. $655 $516
Effective tax rate..................... 27.5% 30.0%
</TABLE>
Provision for income taxes increased for the three months ended March 31,
2000 over the same period in 1999 due to higher taxable income, while the
effective tax rate decreased from 30% to 27.5%.
We have $5.8 million in deferred tax assets as of March 31, 2000. We
believe that our effective tax rate will be below the statutory tax rate at
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>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------ ------------------
<S> <C> <C>
Net cash provided by (used in)
operating activities................ $ 552 $ (540)
Net cash provided by (used in)
investing activities................ 2,895 (3,534)
Net cash provided by (used in)
financing activities................ 346 (420)
Cash, cash equivalents and short-term
investments at the end of period.... 96,424 8,494
Working capital at the end of
period.............................. 92,350 17,330
</TABLE>
18
<PAGE>
The increase in net cash provided by operating activities for the three
months ended March 31, 2000 compared to same period in 1999 was primarily due
to better collection in accounts receivable due to the use of letters of
credit and higher net income. Net cash provided by investing activities for
the three months ended March 31, 2000 consists of proceeds from maturity of
short-term investments, partially offset by the acquisition of Voyager
Technologies and purchases of property and equipment. Net cash provided by
financing activities for the three months ended March 31, 2000 consisted of
proceeds from issuance of common stock associated with stock option exercises
and purchase of shares through the employee stock purchase plan.
As of March 31, 2000, we had $96.4 million in cash, cash equivalents and
short-term investments and working capital of $92.3 million.
We believe that the 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 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.
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 three months ended March 31, 2000, approximately 73% of our
revenues were generated by three of our customers with one customer
representing 40% 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.
19
<PAGE>
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 100% of our total
revenues for the three months ended March 31, 2000. The predominance of our
sales are in Asia, mostly in Taiwan and China, because our customers are
primarily motherboard or modem manufacturers that are located there. In many
cases, our indirect original equipment manufacturer customers specify that our
products be included on the modem boards or motherboards, the main printed
circuit board containing the central processing unit of a computer system,
that they purchase from board manufacturers, and we sell our products directly
to the board manufacturers for resale to our indirect original equipment
manufacturer customers, 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 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 56% from October 1995 to
March 31, 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
20
<PAGE>
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 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 that we coordinate 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 expect to continue to experience seasonality in
sales of our connectivity products. These seasonal trends materially affect
our quarter-to-quarter operating results. Our revenues are typically higher in
the third and fourth quarters due to the back-to-school and holiday seasons as
well as purchasers of PCs making purchase decisions based on their calendar
year-end budgeting requirements. As a result, we generally expect revenue
levels for the first quarter to be less than those for the preceding quarter.
We are currently expanding our sales in international markets, particularly
in Asia, Europe and South America. 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:
. 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.
21
<PAGE>
We expect that our operating expenses will increase substantially in the
future and these increased expenses may diminish our ability to remain
profitable.
Although we have been profitable in recent years, we may not remain
profitable on a quarterly or annual basis in the future. We anticipate that
our expenses will increase substantially 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.
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 40 patents, a number of which cover technology
that is considered essential for International Telecommunications Union
standard communications solutions, and also have 29 additional patent
applications pending or filed. These patents may never be issued. These
patents, both issued and pending, may not provide
22
<PAGE>
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 lawsuit described elsewhere in
the financial footnotes, 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.
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.
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.
23
<PAGE>
Competition in the connectivity market is intense, and if we are unable to
compete effectively, the demand for, or the prices of, our products may be
reduced.
The connectivity device market is intensely competitive. We may not be able
to compete successfully against current or potential competitors. Our current
competitors include 3Com, Conexant, ESS Technology, Lucent Technologies,
Motorola and SmartLink. We expect competition to increase in the future as
current competitors enhance their product offerings, new suppliers enter the
connectivity device market, new communication technologies are introduced and
additional networks are deployed.
We may in the future also face competition from other suppliers of products
based on host signal processing technology or on new or emerging communication
technologies, which may render our existing or future products obsolete or
otherwise unmarketable. We believe that these competitors may include Alcatel,
Analog Devices, Aware, Broadcom, Efficient Networks, ITeX, Terayon
Communications, Texas Instruments and Virata.
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 maintain "key person" life insurance policies on Peter Chen, our
Chairman and Chief Executive Officer, William Wen-Liang Hsu, our Vice
President, Engineering, and Han Yeh, our Vice President, Technology, in the
face amount of $1 million for each individual. However, these insurance
policies may not adequately compensate us for the loss of services of any of
these individuals.
We intend to hire a significant number of additional engineering, sales,
support, marketing and finance personnel in the future. Competition for
personnel, especially engineers and marketing and sales personnel in Silicon
Valley, is intense. We are particularly dependent on our ability to identify,
attract, motivate and retain qualified engineers with the requisite education,
background and industry experience. As of March 31, 2000, we employed a total
of 69 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.
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<PAGE>
Our acquisition of Voyager Technologies and any future acquisitions may be
difficult to integrate, disrupt our business, dilute stockholder value or
divert management attention.
We acquired Voyager Technologies on February 24, 2000. We are in the
initial stages of integrating Voyager Technologies into PCTEL. We may
encounter problems associated with the integration of Voyager Technologies
including:
. difficulties in assimilation of acquired personnel, operations,
technologies or products,
. unanticipated costs associated with the acquisition,
. diversion of management's attention from other business concerns,
. adverse effects on our existing business relationships with our and
Voyager Technologies' customers, and
. inability to retain employees of Voyager Technologies.
As part of our business strategy, we may in the future seek to acquire or
invest in additional businesses, products or technologies that we believe
could complement or expand our business, augment our market coverage, enhance
our technical capabilities or that may otherwise offer growth opportunities.
These future acquisitions could pose the same risks to our business posed by
the acquisition described above. In addition, we could use substantial
portions of our available cash to pay for future acquisitions. We could also
issue additional securities as consideration for these acquisitions, which
could cause our stockholders to suffer significant dilution.
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 165 at March 31, 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
accounting systems and controls, integrate new personnel and manage expanded
operations.
We rely on independent companies to manufacture, assemble and test our
products. If these companies do not meet their commitments to us, our ability
to sell products to our customers would be impaired.
We do not have our own manufacturing, assembling or testing operations.
Instead, we rely on independent companies to manufacture, assemble and test
the semiconductor chips, which are integral components of our products. Most
of these companies are located outside of the United States. There are many
risks associated with our relationships with these independent companies,
including reduced control over:
. delivery schedules,
. quality assurance,
. manufacturing costs,
. capacity during periods of excess demand, and
. 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
25
<PAGE>
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. We are currently in the process of qualifying a
second source for our data access arrangement chips. Although we believe that
we would be able to qualify an alternative manufacturing source for data
access arrangement chips within a relatively short period of time, this
transition, if necessary, could result in loss of purchase orders or customer
relationships, which could result in decreased revenues.
Undetected software errors or failures found in new products may result in
loss of customers or delay in market acceptance of our products.
Our products may contain undetected software errors or failures when first
introduced or as new versions are released. To date, we have not been made
aware of any significant software errors or failures in our products. However,
despite testing by us and by current and potential customers, errors may be
found in new products after commencement of commercial shipments, resulting in
loss of customers or delay in market acceptance.
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 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
26
<PAGE>
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.
27
<PAGE>
Our stock price may be volatile based on a number of factors, some of which
are not in our control.
The trading price of our common stock has been highly volatile. Our stock
price could be subject to wide fluctuations in response to a variety of
factors, many of which are out of our control, including:
. actual or anticipated variations in quarterly operating results,
. announcements of technological innovations,
. new products or services offered by us or our competitors,
. changes in financial estimates by securities analysts,
. conditions or trends in our industry,
. our announcement of significant acquisitions, strategic partnerships,
joint ventures or capital commitments,
. additions or departures of key personnel, 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.
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
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PCTEL, Inc.
PART II. OTHER INFORMATION
For the Three Months Ended: March 31, 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:
The effective date of PCTEL's registration statement on Form S-1 under the
Securities and Exchange Act of 1933 (No. 333-32570) was April 11, 2000,
relating to our secondary public offering of our common stock. A total of
3,162,500 shares of our common stock were sold at a price of $46.50 per share
to an underwriting syndicate led by Banc of America Securities LLC, Warburg
Dillon Read LLC, PaineWebber Incorporated, Needham & Company, Inc and WR
Hambrecht + Co. PCTEL received aggregate gross proceeds of $49.4 million in
connection with its secondary public offering of 1,062,500 shares. The selling
stockholders of PCTEL received aggregate gross proceeds of $97.7 million from
the 2,100,000 shares sold. Of such amounts, approximately $7.4 million was
paid to the underwriters in connection with underwriting discounts, and
approximately $0.8 million was paid by PCTEL in connection with offering
expenses, including legal, accounting, printing, filing and other fees. None
of the offering proceeds have been used for the construction of plant,
buildings, or facilities or other purchase or installation of machinery or
equipment or for purchases of real estate or the acquisition of other
business. PCTEL is currently investing the net offering proceeds for future
use as additional working capital. Such remaining net proceeds may be used for
general corporate purposes, including working capital, and for potential
investments in and acquisitions of complementary products, technologies or
businesses.
None of the proceeds from the initial public offering have been used for
the construction of plant, buildings, or facilities or other purchase or
installation of machinery or equipment or for purchases of real estate or the
acquisition of other business. $15.5 million of the proceeds were used to
repay bank debt. PCTEL is currently investing the net offering proceeds for
future use as additional working capital. Such remaining net proceeds may be
used for general corporate purposes, including working capital, and for
potential investments in and acquisitions of complementary products,
technologies or businesses.
During the first quarter of 2000, 229,879 shares of stock options were
exercised by employees and 14,370 shares were purchased through employee stock
purchase plan.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES: None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: Non-Applicable.
ITEM 5 OTHER INFORMATION: None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
27.1 Financial Data Schedule
(b) Form 8-K was filed by the Registrant during the three months ended
March 31, 2000 in relation to the acquisition of Voyager Technologies, Inc.
29
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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)
/s/ Andrew Wahl
By: _________________________________
Andrew Wahl
Vice President, Finance and Chief
Financial Officer (principal
financial and accounting officer)
May 15, 2000
30
<PAGE>
EXHIBIT INDEX
27.1 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 48,498
<SECURITIES> 47,926
<RECEIVABLES> 11,213
<ALLOWANCES> 2,503
<INVENTORY> 5,781
<CURRENT-ASSETS> 119,155
<PP&E> 3,949
<DEPRECIATION> 1,592
<TOTAL-ASSETS> 147,668
<CURRENT-LIABILITIES> 26,805
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 120,846
<TOTAL-LIABILITY-AND-EQUITY> 147,668
<SALES> 24,121
<TOTAL-REVENUES> 24,121
<CGS> 12,768
<TOTAL-COSTS> 12,768
<OTHER-EXPENSES> 10,351
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,381
<INCOME-PRETAX> 2,383
<INCOME-TAX> 655
<INCOME-CONTINUING> 1,728
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,728
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.09
</TABLE>
