PC TEL INC - Quarter Report: 2010 September (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-27115

PCTEL, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		77-0364943
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
471 Brighton Drive, Bloomingdale, IL (Address of Principal Executive Office)		60108 (Zip Code)

(630) 372-6800
(Registrant’s Telephone Number, Including Area Code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ No o

     Indicate by check mark whether the registrant has submitted electronically and on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

o Large accelerated filer		þ Accelerated filer		o Non-accelerated filer		o Smaller reporting company
				(do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Title				Outstanding
Common Stock, par value $.001 per share				18,471,163 as of November 1, 2010

 

 

PCTEL, INC.
Form 10-Q
For the Quarterly Period Ended September 30, 2010

TABLE OF CONTENTS

		Page
PART I FINANCIAL INFORMATION			3
Item 1 Financial Statements (unaudited)			3
Condensed Consolidated Balance Sheets			3
Condensed Consolidated Statements of Operations			4
Condensed Consolidated Statements of Cash Flows			5
Notes to the Condensed Consolidated Financial Statements			6
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3 Quantitative and Qualitative Disclosures about Market Risk			34
Item 4 Controls and Procedures			34
PART II OTHER INFORMATION			34
Item 1 Legal Proceedings			34
Item 1A Risk Factors			34
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 3 Defaults Upon Senior Securities			34
Item 4 Removed and Reserved			35
Item 5 Other Information			35
Item 6 Exhibits			35
Signatures			36
EX-31.1
EX-31.2
EX-32.1

PART I – FINANCIAL INFORMATION

Item 1: Financial Statements

PCTEL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

		(unaudited)
		September 30,				December 31,
		2010				2009
ASSETS
Cash and cash equivalents		$	27,051			$	35,543
Short-term investment securities			38,073				27,896
Accounts receivable, net of allowance for doubtful accounts of $133 and $89 at September 30, 2010 and December 31, 2009, respectively			12,367				9,756
Inventories, net			10,064				8,107
Deferred tax assets, net			1,023				1,024
Prepaid expenses and other assets			3,760				2,541
Total current assets			92,338				84,867
Property and equipment, net			11,330				12,093
Long-term investment securities			6,559				12,135
Other intangible assets, net			10,602				9,241
Deferred tax assets, net			8,818				9,947
Other noncurrent assets			1,062				935
TOTAL ASSETS		$	130,709			$	129,218
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable		$	4,745			$	2,192
Accrued liabilities			5,997				3,786
Total current liabilities			10,742				5,978
Long-term liabilities			2,317				2,172
Total liabilities			13,059				8,150
Stockholders’ equity:
Common stock, $0.001 par value, 100,000,000 shares authorized, 18,504,358 and 18,494,499 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively			18				18
Additional paid-in capital			137,459				138,141
Accumulated deficit			(19,874	)			(17,122	)
Accumulated other comprehensive income			47				31
Total stockholders’ equity			117,650				121,068
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	130,709			$	129,218

The accompanying notes are an integral part of these consolidated financial statements.

PCTEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
REVENUES		$	17,314			$	13,709			$	50,694			$	41,216
COST OF REVENUES			10,301				7,283				28,348				22,061
GROSS PROFIT			7,013				6,426				22,346				19,155
OPERATING EXPENSES:
Research and development			2,955				2,673				9,128				8,010
Sales and marketing			2,548				1,845				7,332				5,841
General and administrative			2,171				2,169				7,648				7,245
Amortization of other intangible assets			742				553				2,281				1,660
Restructuring charges			95				—				585				494
Impairment of goodwill			—				—				—				1,485
Loss on sale of product lines and related note receivable			—				—				—				454
Royalties			—				—				—				(400	)
Total operating expenses			8,511				7,240				26,974				24,789
OPERATING LOSS			(1,498	)			(814	)			(4,628	)			(5,634	)
Other income, net			77				375				323				742
LOSS BEFORE INCOME TAXES			(1,421	)			(439	)			(4,305	)			(4,892	)
Provision (benefit) for income taxes			(492	)			316				(1,553	)			(981	)
NET LOSS		$	(929	)		$	(755	)		$	(2,752	)		$	(3,911	)
Basic Earnings per Share:
Net Loss		$	(0.05	)		$	(0.04	)		$	(0.16	)		$	(0.22	)
Diluted Earnings per Share:
Net Loss		$	(0.05	)		$	(0.04	)		$	(0.16	)		$	(0.22	)
Weighted average shares — Basic			17,360				17,559				17,463				17,573
Weighted average shares — Diluted			17,360				17,559				17,463				17,573

The accompanying notes are an integral part of these consolidated financial statements.

PCTEL, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
(in thousands)

		Nine Months Ended
		September 30,
		2010				2009
Operating Activities:
Net loss			(2,752	)		$	(3,911	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			3,945				3,321
Impairment charge			—				1,485
Gain on bargain purchase of acquisition			(54	)			—
Stock based compensation			3,475				2,670
Gain on sale of assets and related royalties			—				(400	)
Loss on disposal/sale of property and equipment			(16	)			34
Restructuring costs			178				166
Loss on sale of product lines and related note receivable			—				454
Payment of withholding tax on stock based compensation			(809	)			(767	)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable			(2,435	)			2,842
Inventories			(1,738	)			2,238
Prepaid expenses and other assets			(1,341	)			(456	)
Accounts payable			2,219				(1,173	)
Income taxes payable			(261	)			(143	)
Other accrued liabilities			1,240				(2,402	)
Deferred tax assets			(166	)			421
Deferred revenue			715				(15	)
Net cash provided by operating activities			2,200				4,364
Investing Activities:
Capital expenditures			(885	)			(948	)
Proceeds from disposal of property and equipment			10				—
Purchase of investments			(22,252	)			(21,290	)
Redemptions/maturities of short-term investments			17,650				18,633
Proceeds on sale of assets and related royalties			—				400
Purchase of assets/businesses, net of cash acquired			(2,109	)			(2,260	)
Net cash used in investing activities			(7,586	)			(5,465	)
Financing Activities:
Proceeds from issuance of common stock			468				427
Payments for repurchase of common stock			(3,588	)			(1,515	)
Net cash used in financing activities			(3,120	)			(1,088	)
Net decrease in cash and cash equivalents			(8,506	)			(2,189	)
Effect of exchange rate changes on cash			14				19
Cash and cash equivalents, beginning of year			35,543				44,766
Cash and Cash Equivalents, End of Period		$	27,051			$	42,596

The accompanying notes are an integral part of these consolidated financial statements.

PCTEL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended September 30, 2010 (Unaudited)
(in thousands except per share data and as otherwise noted)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the audited consolidated financial statements and footnotes thereto included in the company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Nature of Operations

PCTEL focuses on wireless broadband technology related to propagation and optimization. The company designs and develops software-based radios for wireless network optimization and develops and distributes innovative antenna solutions. The company’s scanning receivers, receiver-based products and interference management solutions are used to measure, monitor and optimize cellular networks. The company’s antenna solutions address public safety, military, and government applications; supervisory control and data acquisition (“SCADA”), health care, energy, smart grid and agricultural applications; indoor wireless, wireless backhaul, and cellular applications. The company’s portfolio includes a broad range of antennas for worldwide interoperability for microwave access (“WiMAX”), land mobile radio (“LMR”) antennas, and global positioning systems (“GPS”) antennas that serve innovative applications in telemetry, radio frequency identification (“RFID”), Wi-Fi, fleet management, and mesh networks. PCTEL’s products are sold worldwide through direct and indirect channels. The company supplies its products to public and private carriers, wireless infrastructure providers, wireless equipment distributors, value added resellers (“VARs”) and other original equipment manufacturers (“OEMs”).

On January 12, 2010, the company acquired all of the outstanding shares of Sparco Technologies, Inc. (“Sparco”), a San Antonio, Texas based company that specializes in selling value-added Wireless Local Area Network (“WLAN”) products and services to the enterprise, education, hospitality, and healthcare markets. Sparco’s product line includes antennas for WLAN, National Electrical Manufacturers Association (“NEMA”) enclosures and mounting accessories, site survey tools, and amplifiers. With this acquisition, the company extended its product offering, channel penetration and technology base in wireless enterprise products. In July 2010, the company established a plan to integrate the Sparco operations in its Bloomingdale, Illinois location. The company completed this integration in the third quarter 2010.

On December 30, 2009, the company acquired all of the assets related to the scanning receiver business from Ascom Network Testing, Inc. (“Ascom”). This business was a small part of Comarco’s Wireless Test Solutions (“WTS”) segment, a business that Ascom acquired in 2009. Under the agreement, the company will continue to supply both its scanning receivers and the WTS scanning receivers to the newly formed Ascom that consolidated the testing businesses for mobile telecom carriers of Ascom. The company accounted for this purchase of assets as a business combination.

On December 9, 2009, the company acquired from Wider Networks, Inc. (“Wider”) its interference management patents as well as the exclusive distribution rights for Wider’s interference management products as part of a settlement agreement. The settlement agreement provided for a purchase of assets in the form of patented technology, trade names and trademarks, and exclusive distribution rights. The settlement gives the company another interference management product, suitable for certain markets, to distribute alongside its CLARIFY^® product.

On January 5, 2009, the company acquired all of the outstanding share capital of Wi-Sys Communications, Inc. (“Wi-Sys”). During the second quarter 2009, the company exited the Canadian facility of Wi-Sys and fully integrated the Wi-Sys product lines into the company’s antenna product operations in Bloomingdale, Illinois. During 2009, the company incurred a restructuring charge of $0.2 million for employee severance, lease termination costs, and disposition of assets related to the Wi-Sys integration.

Basis of Consolidation and Foreign Currency Translation

The condensed consolidated balance sheet as of September 30, 2010 and the condensed consolidated statements of operations and cash flows for the three and nine months ended September 30, 2010 and 2009 are unaudited and reflect all adjustments of a normal recurring nature that are, in the opinion of management, necessary for a fair presentation of the interim period financial statements. The interim condensed consolidated financial statements are derived from the audited financial statements as of December 31, 2009.

The condensed consolidated financial statements include the accounts of the company and its subsidiaries. All intercompany accounts and transactions have been eliminated. The unaudited interim condensed consolidated financial statements of the company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. The significant accounting policies followed by the company are set forth within the company’s Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Form 10-K”). There were no changes in the company’s significant accounting policies during the nine months ended September 30, 2010. In addition, the company reaffirms the use of estimates in the preparation of the financial statements as set forth in the 2009 Form 10-K. These interim condensed consolidated financial statements should be read in conjunction with the company’s audited consolidated financial statements and notes thereto included in the 2009 Form 10-K. The results for the operations for the period ended September 30, 2010 may not be indicative of the results to be expected for the period ending December 31, 2010.

The company is exposed to foreign currency fluctuations due to its foreign operations and international sales. The functional currency for the company’s foreign operations is predominantly the applicable local currency. Accounts of foreign operations are translated into U.S. dollars using the exchange rate in effect at the applicable balance sheet date for assets and liabilities and average monthly rates prevailing during the period for revenue and expense accounts. Adjustments resulting from translation are included in accumulated other comprehensive income, a separate component of shareholders’ equity. Gains and losses resulting from other transactions originally in foreign currencies and then translated into U.S. dollars are included in net loss. Net foreign exchange gains (losses) resulting from foreign currency transactions included in other income, net were $0 in the three months ended September 30, 2010 and 2009. Net foreign exchange losses resulting from foreign currency transactions included in other income, net were $23 and $34 for the nine months ended September 30, 2010 and 2009, respectively.

Fair Value of Financial Instruments

Cash and cash equivalents are measured at fair value and short-term investments are recognized at amortized cost in the company’s financial statements. Accounts receivable and other investments are financial assets with carrying values that approximate fair value due to the short-term nature of these assets. Accounts payable are financial liabilities with carrying values that approximate fair value due to the short-term nature of these liabilities.

The company follows fair value accounting which establishes a fair value hierarchy that requires the company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instruments categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement.

There are three levels of inputs that may be used to measure fair value:

Level 1: inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities.

Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

2. Recent Accounting Pronouncements

Recently Adopted Accounting Guidance

In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for the company with the reporting period beginning January 1, 2010. Adoption of this new guidance did not have a material impact on the company’s consolidated financial statements.

In June 2009, the FASB issued amendments to the accounting rules for Variable Interest Entities (“VIEs”) and for transfers of financial assets. The new guidance for VIEs eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary. In addition, qualifying special purpose entities (“QSPEs”) are no longer exempt from consolidation under the amended guidance. The amendments also limit the circumstances in which a financial asset, or a portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented, and/or when the transferor has continuing involvement with the transferred financial asset. The company adopted these amendments for interim and annual reporting periods beginning on January 1, 2010. The adoption of these amendments did not have a material impact on the company’s consolidated financial statements.

Recent Accounting Guidance Not Yet Adopted

In October 2009, the FASB issued changes to revenue recognition for multiple-deliverable arrangements. These changes require separation of consideration received in such arrangements by establishing a selling price hierarchy (not the same as fair value) for determining the selling price of a deliverable, which will be based on available information in the following order: vendor-specific objective evidence, third-party evidence, or estimated selling price; eliminate the residual method of allocation and require that the consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the arrangement to each deliverable on the basis of each deliverable’s selling price; require that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis; and expand the disclosures related to multiple-deliverable revenue arrangements. The company will adopt these changes on the effective date of January 1, 2011. The company does not expect the adoption of these changes to have a material impact on its consolidated financial statements.

3. Balance Sheet Data

Cash and Cash equivalents

At September 30, 2010, cash and cash equivalents included bank balances and investments with original maturities less than 90 days. At September 30, 2010 and December 31, 2009, the company’s cash equivalents were invested in highly liquid AAA money market funds that are required to comply with Rule 2a-7 of the Investment Company Act of 1940. Such funds utilize the amortized cost method of accounting, seek to maintain a constant $1.00 per share price, and are redeemable upon demand. The company restricts its investments in AAA money market funds to those invested 100% in either short term U.S. Government Agency securities, or bank repurchase agreements collateralized by these same securities. The fair values of these money market funds are established through quoted prices in active markets for identical assets (Level 1 inputs). The cash in the company’s U.S. banks is fully insured by the Federal Deposit Insurance Corporation due to the balances being below the maximum insured amounts.

The company had $0.6 million and $0.9 million of cash equivalents in foreign bank accounts at September 30, 2010 and December 31, 2009, respectively. As of September 30, 2010, the company has no intentions of repatriating the cash in its foreign bank accounts. If the company decides to repatriate the cash in the foreign bank accounts, it may experience difficulty in repatriating this cash in a timely manner. The company may also be exposed to foreign currency fluctuations and taxes if it repatriates these funds.

Investments

At September 30, 2010 and December 31, 2009, the company’s short-term and long-term investments consisted of pre-refunded municipal bonds, U.S. Government Agency bonds, and AA or higher rated corporate bonds all classified as held-to-maturity.

At September 30, 2010, the company has invested $34.4 million in pre-refunded municipal bonds and U.S. Government Agency bonds and $10.3 million in AA or higher rated corporate bonds. The income and principal from the pre-refunded municipal bonds are secured by an irrevocable trust of U.S Treasury securities. The bonds, classified as short-term investments, have original maturities greater than 90 days and mature in less than one year. The company classified $6.6 million as long-term investment securities because the original maturities were greater than one year. Of this total, $4.3 million mature in 2011, and $2.3 million mature in 2012. The company’s bonds are recorded at the purchase price and carried at amortized cost. Approximately 22% of the company’s bonds were protected by bond default insurance at September 30, 2010.

At December 31, 2009, the company had $35.1 million invested in pre-refunded municipal bonds and U.S. Government Agency bonds and $4.9 million in AA or higher rated corporate bonds, and classified $12.1 million as long-term investment securities because the original maturities were greater than one year.

The company’s financial assets are measured at fair value on a recurring basis. At September 30, 2010, all of the company’s financial assets were able to be measured with Level 1 inputs.

The fair value measurements of the financial assets at September 30, 2010 and December 31, 2009 were as follows:

		Quoted at Prices in Active Markets
		for Identical Assets (Level 1)
		September 30,				December 31,
		2010				2009
Cash equivalents		$	25,660			$	34,933
Bonds:
Short-term			38,021				28,330
Long-term			6,549				11,878
Total		$	70,230			$	75,141

The fair value amounts above are based on prices in active markets for identical assets (Level 1 inputs). The fair value of the financial assets at September 30, 2010 in the table above was less than the book values and the fair value of the financial assets at December 31, 2009 exceeded the book values of these financial assets. The net unrealized gains/(losses) were approximately ($0.1) million and $0.2 million at September 30, 2010 and December 31, 2009, respectively.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at invoiced amount with standard net terms that range between 30 and 60 days. The company extends credit to its customers based on an evaluation of a company’s financial condition and collateral is generally not required. The company maintains an allowance for doubtful accounts for estimated uncollectible accounts receivable. The allowance is based on the company’s assessment of known delinquent accounts, historical experience, and other currently available evidence of the collectability and the aging of accounts receivable. The company’s allowance for doubtful accounts was $0.1 million at September 30, 2010 and December 31, 2009, respectively. The provision for doubtful accounts is included in sales and marketing expense in the condensed consolidated statements of operations. There were no unbilled receivables at September 30, 2010 or December 31, 2009.

Inventories

Inventories are stated at the lower of cost or market and include material, labor and overhead costs using the FIFO method of costing. Inventories as of September 30, 2010 and December 31, 2009 were composed of raw materials, sub-assemblies, finished goods and work-in-process. The company had consigned inventory with customers of $0.7 million and $0.6 million at September 30, 2010 and December 31, 2009, respectively. The company records allowances to reduce the value of inventory to the lower of cost or market, including allowances for excess and obsolete inventory. The allowance for inventory losses was $1.3 million and $1.2 million at September 30, 2010 and December 31, 2009, respectively.

Inventories consisted of the following at September 30, 2010 and December 31, 2009:

		September 30,				December 31,
		2010				2009
Raw materials		$	7,011			$	5,836
Work in process			680				390
Finished goods			2,373				1,881
Inventories, net		$	10,064			$	8,107

Prepaid and other current assets

Prepaid assets are stated at cost and are amortized over their useful lives (up to one year) of the assets.

Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. The company depreciates computers over three years, office equipment, manufacturing and test equipment, and motor vehicles over five years, furniture and fixtures over seven years, and buildings over 30 years. Leasehold improvements are amortized over the shorter of the corresponding lease term or useful life. Gains and losses on the disposal of property and equipment are included in operating expenses in the condensed consolidated statements of operations. Maintenance and repairs are expensed as incurred.

Property and equipment consists of the following at September 30, 2010 and December 31, 2009:

		September 30,				December 31,
		2010				2009
Building		$	6,207			$	6,207
Computers and office equipment			4,591				4,013
Manufacturing and test equipment			7,516				7,300
Furniture and fixtures			1,115				1,104
Leasehold improvements			174				166
Motor vehicles			27				27
Total property and equipment			19,630				18,817
Less: Accumulated depreciation and amortization			(10,070	)			(8,494	)
Land			1,770				1,770
Property and equipment, net		$	11,330			$	12,093

Goodwill

In January 2009, the company recorded goodwill of $1.1 million related to the acquisition of Wi-Sys. In March 2009, the company recorded goodwill impairment of $1.5 million because of the company’s low market capitalization. The impairment represented the full amount of the goodwill from the Wi-Sys acquisition and $0.4 million remaining from the company’s Licensing unit. The company’s goodwill balance was $0 on the condensed consolidated balance sheets at September 30, 2010 and December 31, 2009, respectively.

Intangible Assets

The company amortizes intangible assets with finite lives on a straight-line basis over the estimated useful lives, which range from one to eight years. The summary of other intangible assets, net as of September 30, 2010 and December 31, 2009 are as follows:

		September 30,												December 31,
		2010												2009
						Accumulated				Net Book								Accumulated				Net Book
		Cost				Amortization				Value				Cost				Amortization				Value
Customer contracts and relationships		$	16,763			$	8,259			$	8,504			$	13,413			$	6,612			$	6,801
Patents and technology			6,409				5,939				470				6,409				5,718				691
Trademarks and trade names			2,628				1,991				637				2,361				1,746				615
Other, net			2,675				1,684				991				2,651				1,517				1,134
		$	28,475			$	17,873			$	10,602			$	24,834			$	15,593			$	9,241

The $1.3 million increase in intangible assets at September 30, 2010 compared to December 31, 2009 reflects the addition of approximately $3.6 million for the acquisition of Sparco in January 2010 minus amortization of approximately $2.3 million for the nine months ended September 30, 2010. See Note 4 for information related to the Sparco acquisition.

Liabilities

Accrued liabilities consist of the following at September 30, 2010 and December 31, 2009:

		September 30,				December 31,
		2010				2009
Inventory receipts		$	1,460			$	1,135
Payroll, bonuses, and other employee benefits			1,362				415
Paid time off			834				777
Deferred revenues			724				9
Warranties			233				228
Due to Wider			199				194
Due to Sparco shareholders			198				—
Restructuring			178				—
Professional fees			139				199
Due to Ascom			99				97
Employee stock purchase plan			95				207
Other			476				525
Total		$	5,997			$	3,786

Long-term liabilities consist of the following at September 30, 2010 and December 31, 2009:

		September 30,				December 31,
		2010				2009
Executive deferred compensation plan		$	1,093			$	928
Income taxes			798				798
Due to Wider			198				189
Deferred rent			112				163
Due to Ascom			98				94
Deferred revenues			18				—
		$	2,317			$	2,172

4. Acquisitions

Acquisition of Sparco Technologies, Inc.

On January 12, 2010, the company acquired all of the outstanding share capital of Sparco pursuant to a Share Purchase Agreement among PCTEL, Sparco, and David R. Dulling, Valerie Dulling, Chris Cooke, and Glenn Buckner, the holders of the outstanding share capital of Sparco. Sparco is a San Antonio, Texas based company that specializes in selling value-added WLAN products and services to the enterprise, education, hospitality, and healthcare markets. Sparco’s product line includes antennas for WLAN, NEMA enclosures and mounting accessories, site survey tools, and amplifiers. With this acquisition, the company extended its product offering, channel penetration and technology base in wireless enterprise products. Sparco revenues were approximately $2.8 million for the year ended December 31, 2009. The revenues and expenses of Sparco from the date of acquisition are included in the company’s financial results in the three and nine months ended September 30, 2010. The pro-forma affect on the financial results of the company as if the acquisition had taken place on January 1, 2009 is not significant.

Sparco has one location in San Antonio, Texas and leases a single facility with a term through September 2010 that was extended through December 2010. In July 2010, the company established a plan to integrate the Sparco operations into the company’s Bloomingdale, Illinois location. The company completed this integration in the third quarter 2010. The company will move the Sparco sales employees to a new leased facility in the first quarter 2011.

The consideration for Sparco was $2.5 million, consisting of $2.4 million in cash consideration and $0.1 million related to the company’s outstanding receivable balance from Sparco at the date of acquisition. Of the $2.4 million cash consideration, $2.1 million was payable to the Sparco shareholders and $0.3 million was used to discharge outstanding debt liabilities At September 30, 2010, approximately $0.2 million was due to the former Sparco shareholders, consisting of the final payment due related to the purchase price and an amount owed related to the opening cash balance. The $0.2 million due to the former Sparco shareholders is included in accrued liabilities at September 30, 2010.

The cash consideration paid in connection with the acquisition was provided from the company’s existing cash. The acquisition related costs for the Sparco purchase were not significant to the company’s consolidated financial statements.

The consideration was allocated based on fair value: $1.1 million to net tangible liabilities, $3.3 million to customer relationships, $0.3 million to trade names and other intangible assets. The fair value of the net assets acquired exceeded the total investment by $54. This $54 gain on the bargain purchase of Sparco was recorded in other income, net in the condensed consolidated statements of operations. There was no goodwill recorded with this transaction. The consideration was determined based on the fair value of the intangible assets modeled at the time of the negotiation, which were updated at the time of closing. The consideration was determined based on the fair value of the intangible assets modeled at the time of the negotiation. An immaterial bargain purchase amount resulted from the process of validating the company’s initial fair value model assumptions with actual performance information from the first quarter of operations. The intangible assets will be amortized for book purposes, but are not deductible for tax purposes. The weighted average amortization period of the intangible assets acquired is 6.0 years. The company estimated the fair value (and remaining useful lives) of the assets and liabilities.

The following is the allocation of the purchase price for Sparco:

Current assets:
Cash		$	91
Accounts receivable			269
Prepaids and other assets			5
Inventories			205
Fixed assets			10
Deferred tax assets			53
Total current assets			633
Intangible assets:
Customer relationships			3,350
Trade names			268
Backlog			12
Non-compete			11
Total intangible assets			3,641
Total assets			4,274
Current liabilities:
Accounts payable			326
Accrued liabilities			46
Total current liabilities			372
Long term liabilities:
Deferred tax liabilities			1,347
Total long term liabilities			1,347
Total liabilities			1,719
Net assets acquired		$	2,555

Purchase of assets from Ascom Network Testing, Inc.

On December 30, 2009, the company entered into and closed an Asset Purchase Agreement (the “Ascom APA”) with Ascom Network Testing, Inc. (“Ascom”). Under the terms of the Ascom APA, the company acquired all of the assets related to Ascom’s scanning receiver business (“WTS scanning receivers”). The WTS scanning receiver business was a small part of Comarco’s WTS segment, a business that Ascom acquired in 2009. The WTS scanning receiver business has been integrated with the company’s scanning receiver operations in Germantown, Maryland. The WTS scanning receivers augment the company’s scanning receiver product line.

The parties also concurrently entered into a Transition Services Agreement (“TSA”). The TSA provided for Ascom to manufacture and assemble the scanner receiver products until the Ascom operations are integrated with the company’s own operations in its Germantown,

Maryland facility. The TSA period was from the date of the acquisition for a minimum period of nine months. The TSA was completed in August 2010. Per the Ascom APA, the company will fund the development of compatibility between its scanning receivers and Ascom’s benchmarking solution. WTS scanning receiver revenues for the year ended December 31, 2009 were approximately $1.4 million. The pro-forma affect on the financial results of the company as if the acquisition had taken place on January 1, 2009 is not significant.

The total cash consideration for the scanning receiver assets was $4.3 million paid at the close of the transaction and $0.2 million payable in two equal installments in December 2010 and December 2011. The cash consideration paid in connection with the acquisition was provided from the company’s existing cash. The $0.1 million fair value of the installment payment due in December 2010 is included in accrued liabilities at September 30, 2010 and December 31, 2009, respectively, and the $0.1 million fair value of the payment due in December 2011 is included in long-term liabilities at September 30, 2010 and December 31, 2009, respectively. The payments of $0.2 million are based upon achievement of certain revenue objectives. The company included the future payments due in the purchase price because it believes that the achievement of these objectives is more likely than not. The acquisition related costs for the Ascom purchase were not significant to the company’s consolidated financial statements.

The purchase price of $4.5 million for the scanning receiver assets of Ascom was allocated based on fair value: $0.3 million to net tangible assets, $3.8 million to customer relationships, $0.3 million to core technology and trade names, and $0.1 million to other intangible assets. The technology includes $0.2 million of in-process R&D related to long term evolution (“LTE”) scanner development. The projects related to the in-process research and development were completed in the third quarter of 2010. The tangible assets include inventory and warranty obligations. There was no goodwill recorded from this acquisition. The intangible assets are being amortized for book purposes and are tax deductible. The weighted average book amortization period of the intangible assets acquired is 5.7 years. The company estimated the fair value (and remaining useful lives) of the assets and liabilities.

The following is the allocation of the purchase price for Ascom:

Current assets:
Inventory		$	248
Intangible assets:
Core technology			254
Customer relationships			3,833
Trade names			52
Other, net			130
Total intangible assets			4,269
Total assets			4,517
Current liabilities:
Warranty accrual			26
Total current liabilities			26
Net assets acquired		$	4,491

Separately, the companies renewed their existing supply agreement through December 30, 2014, which remained non-exclusive. Under the agreement, the company will continue to supply both the PCTEL scanning receivers and the WTS scanning receivers to the newly formed Ascom Network Testing Division that consolidated the testing businesses for mobile telecom carriers of Ascom.

Acquisition of Wi-Sys Communications, Inc.

On January 5, 2009, the company acquired all of the outstanding share capital of Wi-Sys pursuant to a Share Purchase Agreement dated January 5, 2009 among PCTEL, Gyles Panther and Linda Panther, the holders of the outstanding share capital of Wi-Sys. The total consideration for Wi-Sys was $2.1 million paid at the close of the transaction and $0.2 million additional due to the shareholders based on the final balance sheet at December 31, 2008. The $0.2 million additional consideration was paid in cash in July 2009. The cash consideration paid in connection with the acquisition was provided from the company’s existing cash. The company incurred acquisition costs of approximately $0.1 million related to Wi-Sys. The pro-forma affect on the financial results of the company as if the acquisition had taken place on January 1, 2009 is not significant.

Wi-Sys manufactured products for GPS, terrestrial and satellite communication systems, including programmable GPS receivers and high performance antennas in Ottawa, Canada. The Wi-Sys antenna product line augments the company’s GPS antenna product line. Wi-Sys revenues for the year ended December 31, 2008 were approximately $2.2 million. The revenues and expenses for Wi-Sys are included in the company’s financial results for the year ended December 31, 2009.

The purchase price of $2.3 million for the assets of Wi-Sys was allocated based on fair value: $0.8 million to tangible assets and $0.4 million to liabilities assumed, $0.7 million to customer relationships, and $0.1 million to core technology and trade names. The $1.1 million excess of the purchase price over the fair value of the net tangible and intangible assets was allocated to goodwill. The goodwill was impaired for book purposes in the first quarter 2009. The goodwill is deductible for tax purposes. The intangible assets will be amortized for book and are tax deductible. The weighted average book amortization period of the intangible assets acquired is 5.5 years. The company estimated the fair value (and remaining useful lives) of the assets and liabilities.

The following is the allocation of the purchase price for Wi-sys:

Current assets:
Cash		$	59
Accounts receivable			319
Inventory			294
Prepaid expenses and other assets			90
Total current assets			762
Fixed assets, net			69
Intangible assets:
Core technology			37
Customer relationships			730
Trade names			18
Goodwill			1,101
Total intangible assets			1,886
Total assets			2,717
Current liabilities:
Accounts payable			139
Accrued liabilities			36
Total current liabilities			175
Deferred tax liabilities			223
Total liabilities			398
Net assets acquired		$	2,319

In March 2009, the company recorded goodwill impairment of $1.5 million. The impairment charge included the $1.1 million recorded for the Wi-Sys acquisition. See the goodwill section in Note 3 for further discussion of the goodwill impairment.

In the second quarter 2009, the company closed the Ottawa, Canada location and integrated the operations into the company’s Bloomingdale, Illinois location. None of the Wi-Sys employees were retained by the company. The company incurred expenses related to employee severance, lease termination, and other shut down costs associated with the Wi-Sys restructuring. See Note 9 related to Restructuring.

5. Settlement with Wider Networks LLC

On December 9, 2009, the company settled its intellectual property dispute with Wider. The settlement agreement provided for a purchase of assets in the form of patented technology, trade names and trademarks, and exclusive distribution rights. The settlement gives the company another interference management product, suitable for certain markets, to distribute along side CLARIFY^®. The company paid cash consideration of $0.8 million at the close of the transaction and will pay an additional $0.4 million in two equal installments in December 2010 and December 2011, respectively. The $0.2 million fair value of the installment payment due in December 2010 is included in accrued liabilities at September 30, 2010 and December 31, 2009, respectively, and the $0.2 million fair value of the payment due in December 2011

is included in long-term liabilities at September 30, 2010 and December 31, 2009, respectively. The fair value of the elements in the settlement agreement is approximately $1.2 million. The $1.2 million fair value of the assets purchased from Wider was allocated: $1.0 million to distribution rights and $0.2 million to core technology and trade names. The intangible assets are being amortized for book purposes and are tax deductible. The weighted average book amortization period of the intangible assets acquired is 5.7 years. The company estimated the fair value (and remaining useful lives) of the assets.

The following is the fair value of the assets acquired from Wider:

Intangible assets:
Distribution rights, net		$	1,013
Core technology			127
Trade name			31
Total intangible assets		$	1,171

6. Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Basic Earnings Per Share computation:
Numerator:
Net loss		$	(929	)		$	(755	)		$	(2,752	)		$	(3,911	)
Denominator:
Common shares outstanding			17,360				17,559				17,463				17,573
Basic loss per share		$	(0.05	)		$	(0.04	)		$	(0.16	)		$	(0.22	)
Diluted Earnings Per Share computation:
Numerator:
Net loss		$	(929	)		$	(755	)		$	(2,752	)		$	(3,911	)
Denominator:
Common shares outstanding			17,360				17,559				17,463				17,573
Restricted shares subject to vesting			*				*				*				*
Common stock option grants			*				*				*				*
Diluted loss per share		$	(0.05	)		$	(0.04	)		$	(0.16	)		$	(0.22	)

7. Stock-Based Compensation

The condensed consolidated statements of operations include $1.0 million and $3.5 million of stock compensation expense for the three and nine months ended September 30, 2010, respectively. Stock compensation expense for the three months ended September 30, 2010 consists of $0.7 million for restricted stock awards, $0.1 million for performance share awards, $0.1 million for stock option and stock purchase plan expenses and $0.1 million for stock bonuses. Stock compensation expense for the nine months ended September 30, 2010 consists of $2.6 million for restricted stock awards, $0.3 million for performance share awards, $0.2 million for stock option and stock purchase plan expenses, and $0.4 million for stock bonuses.

The condensed consolidated statements of operations include $0.7 million and $2.7 million of stock compensation expense for the three and nine months ended September 30, 2009, respectively. Stock compensation expense for the three months ended September 30, 2009 consists of $0.7 million of restricted stock awards and $0.1 million for stock option and stock purchase plan expenses offsetting $0.1 million expense

reversal for stock bonuses. Stock compensation expense for the nine months ended September 30, 2009 consists of $2.4 million for restricted stock awards and $0.3 million for stock option expense and stock purchase plan expenses.

The company did not capitalize any stock compensation expense during the three and nine months ended September 30, 2010 or 2009, respectively.

Total stock-based compensation is reflected in the condensed consolidated statements of operations as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Cost of revenues		$	81			$	71			$	337			$	258
Research and development			164				146				518				490
Sales and marketing			238				112				719				399
General and administrative			485				374				1,901				1,523
Total		$	968			$	703			$	3,475			$	2,670

Restricted Stock – Serviced Based

The company grants restricted shares as employee incentives as permitted under the company’s 1997 Stock Plan, as amended and restated (“1997 Stock Plan”). In connection with the grant of restricted stock to employees, the company records deferred stock compensation representing the fair value of the common stock on the date the restricted stock is granted. Stock compensation expense is recorded ratably over the vesting period of the applicable shares. These grants vest over various periods, but typically vest over four years.

For the three months ended September 30, 2010, the company did not issue any restricted shares and recorded cancellations of 45,050 shares with grant date fair value of $0.3 million. For the nine months ended September 30, 2010, the company issued 743,250 shares of restricted stock with grant date fair value of $4.6 million and recorded cancellations of 122,800 shares with grant date fair value of $0.7 million.

For the three months ended September 30, 2010, 84,825 restricted shares vested with grant date fair value of $0.7 million and intrinsic value of $0.4 million. For the nine months ended September 30, 2010, 419,025 restricted shares vested with grant date fair value of $2.9 million and intrinsic value of $2.4 million.

For the three months ended September 30, 2009, the company issued 3,000 shares of restricted stock with grant date fair value of $17 and recorded cancellations of 14,305 shares with grant date fair value of $74. For the nine months ended September 30, 2009, the company issued 580,350 shares of restricted stock with grant date fair value of $2.4 million and recorded cancellations of 35,255 shares with grant date fair value of $0.3 million.

For the three months ended September 30, 2009, 10,675 restricted shares vested with grant date fair value of $116 and intrinsic value of $69. For the nine months ended September 30, 2009, 235,149 restricted shares vested with grant date fair value of $2.1 million and intrinsic value of $1.6 million.

At September 30, 2010, total unrecognized compensation expense related to restricted stock was approximately $5.4 million, net of forfeitures to be recognized through 2014 over a weighted average period of 1.7 years.

The following table summarizes restricted stock activity for the nine months ended September 30, 2010:

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Unvested Restricted Stock Awards — December 31, 2009			1,146,431			$	6.14
Shares awarded			743,250				6.19
Shares vested			(419,025	)			7.00
Shares cancelled			(122,800	)			5.65
Unvested Restricted Stock Awards — September 30, 2010			1,347,856			$	5.95

Stock Options

The company may grant stock options to purchase the company’s common stock. The company issues stock options with exercise prices no less than the fair value of the company’s stock on the grant date. Employee options contain gradual vesting provisions, whereby 25% vest one year from the date of grant and thereafter in monthly increments over the remaining three years. The Board of Director options vest on the first anniversary of the grant year. Stock options may be exercised at any time within ten years of the date of grant or within ninety days of termination of employment, or such shorter time as may be provided in the related stock option agreement. Presently, directors receive only service-based restricted awards for incentive purposes, but certain new employees receive stock option awards.

The fair value of each unvested option was estimated on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility and expected option life. Because the company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models may not necessarily provide a reliable single measure of the fair value of the employee stock options.

The company issued 10,200 and 18,700 stock options during the three and nine months ended September 30, 2010, respectively. There were no exercises of options during the three months ended September 30, 2010. The company received $5 in proceeds from the exercise of 781 options during the nine months ended September 30, 2010. During the three and nine months ended September 30, 2010, respectively, 131,652 and 571,463 options were either forfeited or expired.

The company did not issue stock options and there were no stock option exercises during the three and nine months ended September 30, 2009. During the three and nine months ended September 30, 2009, respectively, 51,347 and 82,466 options were either forfeited or expired.

The company calculated the fair value of each employee stock purchase grant on the date of grant using the Black-Scholes option-pricing model using the following assumptions:

		September 30,
		2010				2009
Weighted average fair value of options granted		$	2.64			$	—
Dividend yield			None				—
Risk-free interest rate			0.6	%			—
Expected volatility			50	%			—
Expected life (in years)			5.1				—

As of September 30, 2010, the unrecognized compensation expense related to the unvested portion of the company’s stock options was approximately $55, net of estimated forfeitures to be recognized through 2014 over a weighted average period of 1.4 years

The range of exercise prices for options outstanding and exercisable at September 30, 2010 was $5.50 to $12.16. The following table summarizes information about stock options outstanding under all stock plans at September 30, 2010:

						Options Outstanding												Options Exercisable
										Weighted
										Average				Weighted-								Weighted
		Range of				Number				Contractual Life				Average				Number				Average
		Exercise Prices				Outstanding				(Years)				Exercise Price				Exercisable				Exercise Price
		$	5.50 — $7.20				218,970				4.65			$	6.86				189,414			$	6.96
			7.27 — 7.84				191,686				2.17				7.52				189,738				7.52
			7.85 — 8.00				195,916				2.27				7.95				195,916				7.95
			8.07 — 8.76				186,249				4.77				8.56				183,780				8.56
			8.84 — 9.16				284,127				4.73				9.09				284,127				9.09
			9.19 — 10.25				189,983				4.94				9.70				179,416				9.70
			10.46 — 10.65				34,608				5.46				10.56				33,996				10.56
			10.70 — 10.70				100,000				3.26				10.70				100,000				10.70
			10.72 — 11.38				218,870				3.37				11.12				218,870				11.12
			11.55 — 12.16				86,900				2.71				11.82				86,900				11.82
		$	5.50 — $12.16				1,707,309				3.83			$	9.03				1,662,157			$	9.08

The intrinsic value and contractual life of the options outstanding and exercisable at September 30, 2010 were as follows:

		Weighted Average
		Contractual Life
		(years)				Intrinsic Value
Options Outstanding			3.83			$	3
Options Exercisable			3.70			$	0

The intrinsic value is based on the share price of $6.14 at September 30, 2010.

The following table summarizes the stock option activity for the nine months ended September 30, 2010:

						Weighted
						Average
		Options				Exercise
		Outstanding				Price
Outstanding at December 31, 2009			2,260,853			$	9.80
Granted			18,700				6.12
Exercised			(781	)			6.16
Expired or Cancelled			(560,791	)			12.03
Forfeited			(10,672	)			8.70
Outstanding at September 30, 2010			1,707,309			$	9.03
Exercisable at September 30, 2010			1,662,157			$	9.08

Performance Units

The company grants performance units to certain executive officers. Shares are earned upon achievement of defined performance goals such as revenue and earnings. Certain performance units granted are subject to a service period before vesting. The company recorded expense

for the performance units in the three and nine months ended September 30, 2010 based on estimated achievement of the performance goals. The fair value of the performance units issued is based on the company’s stock price on the date the performance units are granted.

During the three months ended September 30, 2010, the company did not award any performance units and did not record any cancellations of performance units. During the nine months ended September 30, 2010, the company granted 100,000 performance units with a grant date fair value of $0.6 million and cancelled 11,830 performance units with a grant date fair value of $0.1 million. No performance shares vested during the three or nine months ended September 30, 2010.

During the three and nine months ended September 30, 2009, the company did not issue any performance units and did not record any cancellations of performance units. During the three months ended September 30, 2009, no performance shares vested. During the nine months ended September 30, 2009, 10,342 performance shares vested with a grant date fair value of $82 and intrinsic fair value of $50.

As of September 30, 2010, the unrecognized compensation expense related to the unvested portion of the company’s performance units was approximately $0.6 million, to be recognized through 2016 over a weighted average period of 2.3 years

The following table summarizes the performance share activity during the nine months ended September 30, 2010:

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Unvested Performance Units — December 31, 2009			86,002			$	9.65
Units awarded			100,000				6.22
Units vested			—				—
Units cancelled			(11,830	)			9.52
Unvested Performance Units — September 30, 2010			174,172			$	7.69

Restricted Stock Units

The company grants restricted stock units as employee incentives as permitted under the company’s 1997 Stock Plan. Employee restricted stock units are time-based awards and are amortized over the vesting period. At the vesting date, these units are converted to shares of common stock. These units vest over various periods, but typically vest over four years. The fair value of the restricted stock units issued is based on the company’s stock price on the date the restricted stock units are granted.

No time-based restricted stock units were granted in the three months ended September 30, 2010. The company granted 6,000 time-based restricted stock units with a grant date fair value of $37 to employees during the nine months ended September 30, 2010.

No time-based restricted stock units were granted in the three months ended September 30, 2009. The company granted 26,350 time-based restricted stock units with a grant date fair value of $179 to employees during the nine months ended September 30, 2009.

As of September 30, 2010, the unrecognized compensation expense related to the unvested portion of the company’s restricted stock units was approximately $47, to be recognized through 2014 over a weighted average period of 2.0 years

The following table summarizes the restricted stock unit activity during the nine months ended September 30, 2010:

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Unvested Restricted Stock Units — December 31, 2009			2,500			$	5.86
Units awarded			6,000				6.22
Units vested			—				—
Units cancelled			—				—
Unvested Restricted Stock Units — September 30, 2010			8,500			$	6.11

Employee Stock Purchase Plan (“ESPP”)

The ESPP enables eligible employees to purchase common stock at the lower of 85% of the fair market value of the common stock on the first or last day of each offering period. Each offering period is six months. The company received proceeds of $0.2 million from the issuance of 44,360 shares under the ESPP in February 2010 and received proceeds of $0.2 million from the issuance of 42,350 shares under the ESPP in February 2009. The company received proceeds of $0.2 million from the issuance of 49,296 shares under the Purchase Plan in August 2010 and received proceeds of $0.2 million from the issuance of 51,551 shares under the Purchase Plan in August 2009.

Based on the 15% discount and the fair value of the option feature of this plan, this plan is considered compensatory. Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model.

The company calculated the fair value of each employee stock purchase grant on the date of grant using the Black-Scholes option-pricing model using the following assumptions:

		September 30,
		2010				2009
Dividend yield			None				None
Risk-free interest rate			0.4	%			0.6	%
Expected volatility			49	%			47	%
Expected life (in years)			0.5				0.5

The risk-free interest rate was based on the U.S. Treasury yields with remaining term that approximates the expected life of the shares granted. The company uses a dividend yield of “None” in the valuation model for shares related to the Purchase Plan. The company has only paid one cash dividend in its history which was paid in May 2008. This special dividend was a partial distribution of the proceeds received from the sale of the company’s Mobility Solutions Group in January 2008. The company does not anticipate the payment of regular dividends in the future. The company calculates the volatility based on a five-year historical period of the company’s stock price. The expected life used is based on the length of the offering period.

Short Term Bonus Incentive Plan (“STIP”)

For the company’s 2008 and 2009 STIP, bonuses were paid in the company’s common stock to executives and in cash to non-executives. The shares earned under the plan were issued in the first quarter following the end of the fiscal year. In February 2010, the company issued 2,873 shares, net of shares withheld for payment of withholding tax, under the 2009 STIP. In February 2009, the company issued 90,173 shares, net of shares withheld for payment of withholding tax, under the 2008 STIP. For the 2010 STIP, executive bonuses earned will be paid 50% in cash and 50% in shares of the company’s common stock, and all non-executive bonuses will be paid in cash.

Board of Director Equity Awards

Beginning in 2009, the Board of Directors elected to receive their annual equity award in the form of shares of the company’s stock or in shares of vested restricted stock units. These shares and restricted stock units are awarded annually in June. During the nine months ended September 30, 2010, 27,971 shares were awarded that vested immediately and 16,099 vested restricted stock units were awarded. During the nine months ended September 30, 2009, 21,326 shares were awarded that vested immediately and 22,458 vested restricted stock units were awarded.

Employee Withholding Taxes on Stock Awards

For ease in administering the issuance of stock awards, the company holds back shares of vested restricted stock awards and short-term incentive plan stock awards for the value of the statutory withholding taxes. The company paid $0.8 million for withholding taxes related to stock awards during each of the nine months ended September 30, 2010 and 2009.

Stock Repurchases

The company repurchases shares of common stock under share repurchase programs authorized by the Board of Directors. All share repurchase programs are announced publicly. On November 21, 2008, the Board of Directors authorized the repurchase of shares up to a value of $5.0 million. At December 31, 2009, approximately $2.5 million in share value could still be purchased under this plan. In August 2010, the company reached the authorized value of $5.0 million under the November 2008 program. On August 4, 2010, the Board of Directors authorized the repurchase of shares up to an additional value of $5.0 million. As of September 30, 2010, the company has $3.9 million remaining under the August 2010 program.

The company repurchased 375,644 shares at an average price of $6.09 during the three months ended September 30, 2010, and repurchased 591,139 shares at an average price of $6.07 during the nine months ended September 30, 2010.

The company repurchased 152,747 shares at an average price of $6.12 during the three months ended September 30, 2009, and the company repurchased 271,251 shares at an average price of $5.58 during the nine months ended September 30, 2009.

Authorized Shares

On June 15, 2010, the company’s stockholders approved the amendment and restatement of the 1997 Stock Plan to, among other things increase the number of shares of common stock authorized for issuance under the 1997 Stock Plan. The company registered an additional 1,700,000 shares of its common stock under a Registration Statement on Form S-8 filed with the SEC on July 20, 2010.

8. Comprehensive Income

The following table provides the calculation of other comprehensive income for the three and nine months ended September 30, 2010 and 2009:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net loss		$	(929	)		$	(755	)		$	(2,752	)		$	(3,911	)
Foreign currency translation adjustments			21				(4	)			16				20
Unrealized gain on investments			—				(167	)			—				122
Total comprehensive loss		$	(908	)		$	(926	)		$	(2,736	)		$	(3,769	)

9. Restructuring

The company incurred restructuring expenses of $0.1 million and $0.6 million for the three and nine months ended September 30, 2010, respectively. The company incurred restructuring expense of $0.1 million for the shutdown of Sparco operations in the third quarter 2010 and $0.5 million for its functional organization restructuring plan in the second quarter 2010. The company incurred restructuring expenses of $0 and $0.5 million for the three and nine months ended September 30, 2009, respectively. The restructuring liability was $0.2 million and $0 at September 30, 2010 and December 31, 2009, respectively.

2010 Restructuring Plans

Shutdown of Sparco operations

During the third quarter 2010, the company shutdown its Sparco operations in San Antonio, Texas and integrated these activities in its facility in Bloomingdale, Illinois. The restructuring plan consisted of the elimination of five positions. The company incurred restructuring expense of $0.1 million for severance, payroll benefits, and relocation costs. The company will move the Sparco sales employees to a new leased facility in the first quarter 2011.

Functional reorganization

During the second quarter 2010, the company reorganized from a business unit structure to a more streamlined functional organizational structure to implement the company’s mission. Jeff Miller, who previously led the company’s Antenna Products Group, was assigned to the position of Senior Vice President, Sales and Marketing. Tony Kobrinetz joined the company in April 2010 as Vice President, Technology and Operations. A restructuring plan was established to reduce the overhead and operating costs associated with operating distinct groups. The restructuring plan consisted of the elimination of nine positions. The company incurred restructuring expense of $0.5 million, which consisted of severance, payroll related benefits and placement services.

The following table summarizes the restructuring activity related to all plans during 2010 and the status of the reserves at September 30, 2010:

		Accrual												Accrual
		Balance at												Balance at
		December 31,				Restructuring				Cash				September 30,
		2009				Expense				Payments				2010
Severance and employment related costs		$	—			$	527			$	(397	)		$	130
Relocation Costs			—				58				(10	)			48
		$	—			$	585			$	(407	)		$	178

2009 Restructuring Plans

The restructuring expense incurred for the nine months ended September 30, 2010 includes $0.3 million for Bloomingdale antenna restructuring and $0.2 million for Wi-Sys restructuring. In order to reduce costs with the antenna operations in the Bloomingdale, Illinois location, the company terminated thirteen employees during the three months ended March 31, 2009 and terminated five additional employees during the three months ended June 30, 2009. The company recorded $0.3 million in restructuring expense for severance payments for these eighteen employees. During the second quarter of 2009, the company exited its Ottawa, Canada location related to the Wi-Sys acquisition and integrated their operations in its Bloomingdale, Illinois location. The restructuring expense of $0.2 million relates to employee severance, lease termination, and other shutdown costs.

10. Commitments and Contingencies

Leases

The company has operating leases for office facilities through 2013 and office equipment through 2014. The future minimum rental payments under these leases at September 30, 2010, are as follows:

Year		Amount
2010		$	164
2011			643
2012			639
2013			125
2014			11
Future minumum lease payments		$	1,582

The company does not have any capital leases.

Warranty Reserve and Sales Returns

The company allows its major distributors and certain other customers to return unused product under specified terms and conditions. The company accrues for product returns based on historical sales and return trends. The company’s allowance for sales returns was $0.2 million at September 30, 2010 and December 31, 2009, respectively.

The company offers repair and replacement warranties of primarily two years for antennas products and one year for scanners and receivers. The company’s warranty reserve is based on historical sales and costs of repair and replacement trends. The warranty reserve was $0.2 million at September 30, 2010 and December 31, 2009, respectively, and is included in accrued liabilities in the accompanying condensed consolidated balance sheets.

Changes in the warranty reserves during the nine months ended September 30, 2010 and 2009 were as follows:

		Nine Months Ended
		September 30,
		2010				2009
Beginning balance		$	228			$	193
Provisions for warranty			60				53
Consumption of reserves			(55	)			(57	)
Ending balance		$	233			$	189

11. Income Taxes

The company recorded an income tax benefit of $0.5 million and $1.6 million in the three and nine months ended September 30, 2010. This tax benefit for the nine months ended September 30, 2010 differs from the statutory rate of 35% by approximately 1% because of permanent tax differences and state and foreign taxes.

The company recorded a net income tax provision of $0.3 million and net income tax benefit of $1.0 million in the three and nine months ended September 30, 2009, respectively. The effective tax rate for the nine months ended September 30, 2009 differed from the statutory rate of 35% by approximately 15% because of permanent tax differences, foreign taxes and from revisions to the tax rates due to changes in income projections.

Significant management judgment is required to assess the likelihood that the company’s deferred tax assets will be recovered from future taxable income. The company maintains a valuation allowance of $0.6 million against deferred tax assets because of uncertainties regarding whether they will be realized.

The company’s gross unrecognized tax benefit was $1.1 million both at September 30, 2010 and December 31, 2009.

The company files a consolidated federal income tax return, income tax returns with various states, and foreign income tax returns in various foreign jurisdictions. The company’s federal and state income tax years with limited exceptions, are closed through 2007. The company does not believe that any of its tax positions will significantly change within the next twelve months.

The company classifies interest and penalties associated with the uncertain tax positions as a component of income tax expense. The company’s income tax expense for interest includes $20 and $0 for the nine months ended September 30, 2010 and 2009, respectively.

12. Customer and Geographic Information

The company operates in one segment and there are no operating segments aggregated for reporting purposes.

The company’s revenues to customers outside of the United States, as a percent of total revenues for the three and nine months ended September 30, 2010 and 2009, are as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
Region		2010				2009				2010				2009
Europe, Middle East, & Africa			22	%			26	%			24	%			25	%
Asia Pacific			10	%			9	%			10	%			15	%
Other Americas			10	%			8	%			8	%			7	%
Total Foreign sales			42	%			43	%			42	%			47	%

Revenue from the company’s major customers representing 10% or more of total revenues for the three and nine months ended September 30, 2010 and 2009 were as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
Customer		2010				2009				2010				2009
Ascom			7	%			9	%			8	%			10	%

Ascom, from which the company acquired scanning receiver assets in December 2009, continues to purchase scanning receiver products from the company. Ascom acquired Comarco’s WTS business in January 2009. Comarco’s scanning receiver business was a small part of Comarco’s WTS segment.

13. Benefit Plans

Employee Benefit Plans

The company’s 401(k) plan covers all of the U.S. employees beginning the first of the month following the month they begin their employment. Under this plan, employees may elect to contribute up to 15% of their current compensation to the 401(k) plan up to the statutorily prescribed annual limit. The company may make discretionary contributions to the 401(k) plan. The company made employer contributions of $136 and $132 to the 401(k) plan for the three months ended September 30, 2010 and 2009, respectively. The company made employer contributions of $406 and $407 to the 401(k) plan for the nine months ended September 30, 2010 and 2009, respectively. The company also contributes to various retirement plans for foreign employees. The company made contributions to these plans of $22 and $16 for the three months ended September 30, 2010 and 2009, respectively. The company made contributions to these plans of $58 and $45 for the nine months ended September 30, 2010 and 2009, respectively.

Executive Deferred Compensation Plan

The company provides an Executive Deferred Compensation Plan for executive officers and senior managers. Under this plan, the executives may defer up to 50% of salary and 100% of cash bonuses. In addition, the company provides a 4% matching cash contribution which vests over three years subject to the executive’s continued service. The executive has a choice of investment alternatives from a menu of mutual funds. The plan is administered by the Compensation Committee and an outside party tracks investments and provides the executives with quarterly statements showing relevant contribution and investment data. Upon termination of employment, death, disability or retirement, the executive will receive the value of his or her account in accordance with the provisions of the plan. Upon retirement, the executive may request to receive either a lump sum payment, or payments in annual installments over 15 years or over the lifetime of the participant with 20 annual payments guaranteed. The deferred compensation obligation included in Long-Term Liabilities in the condensed consolidated balance sheets was $1.1 million at September 30, 2010 and $0.9 million at December 31, 2009. The company funds the obligation related to the Executive Deferred Compensation Plan with corporate-owned life insurance policies. The cash surrender value of these policies was $1.0 million and $0.9 million at September 30, 2010 and December 31, 2009, respectively. The cash surrender value of such policies is included in Other Non-Current Assets in the condensed consolidated balance sheets.

14. Stockholders’ Equity

The following table is a summary of the activity in stockholders’ equity during the nine months ended September 30, 2010 and 2009:

		Nine Months Ended
		September 30,
		2010				2009
Number of common shares outstanding:
Balance at beginning of period			18,494				18,236
Common stock repurchases			(591	)			(271	)
Stock-based compensation, net of taxes			601				693
Balance at end of period			18,504				18,658
Common stock:
Balance at beginning of period		$	18			$	18
Common stock repurchases		$	(1	)		$	(1	)
Stock-based compensation, net of taxes			1				1
Balance at end of period		$	18			$	18
Additional paid-in capital:
Balance at beginning of period		$	138,141			$	137,930
Stock-based compensation, net of taxes			3,135				2,330
Common stock repurchases			(3,588	)			(1,515	)
Tax effect from stock-based compensation			(229	)			(192	)
Balance at end of period		$	137,459			$	138,553
Accumulated deficit:
Balance at beginning of period		$	(17,122	)		$	(12,639	)
Net loss			(2,752	)			(3,911	)
Balance at end of period		$	(19,874	)		$	(16,550	)
Accumulated other comprehensive income:
Balance at beginning of period		$	31			$	9
Foreign translation			16				20
Unrealized gain on investments			—				122
Balance at end of period		$	47			$	151
Total stockholders’ equity		$	117,650			$	122,172

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 consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and in conjunction with the consolidated financial statements for the year ended December 31, 2009 contained in our Annual Report on Form 10-K filed with the SEC on March 16, 2010. Except for historical information, the following discussion contains forward-looking statements that involve risks and uncertainties, including statements regarding our anticipated revenues, profits, costs, expenses and revenue mix. These forward-looking statements include, among others, those statements including the words “may,” “will,” “plans,” “seeks,” “expects,” “anticipates,” “intends,” “believes” and words of similar import. Such statements 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.

Introduction

PCTEL focuses on wireless broadband technology related to propagation and optimization. We design and develop software-based radios for wireless network optimization and develop and distribute innovative antenna solutions. Our scanning receivers, receiver-based products and interference management solutions are used to measure, monitor and optimize cellular networks. Our antenna solutions address public safety, military, and government applications; Supervisory Control and Data Acquisition (“SCADA”), health care, energy, smart grid and agricultural applications; indoor wireless, wireless backhaul, and cellular applications. Our portfolio includes a broad range of antennas for worldwide interoperability for microwave access (“WiMAX”), land mobile radio (“LMR”) antennas, and global positioning systems (“GPS”) antennas that serve innovative applications in telemetry, radio frequency identification (“RFID”), Wi-Fi, fleet management, and mesh networks. PCTEL’s products are sold worldwide through direct and indirect channels. We supply our products to public and private carriers, wireless infrastructure providers, wireless equipment distributors, value added resellers (“VARs”) and other original equipment manufacturers (“OEMs”).

We have an intellectual property portfolio related to antennas, the mounting of antennas, and scanning receivers. These patents are being held for defensive purposes and are not part of an active licensing program.

On January 12, 2010, we acquired Sparco Technologies, Inc. (“Sparco”), a San Antonio, Texas based company that specializes in selling value-added Wireless Local Area Network (“WLAN”) products and services to the enterprise, education, hospitality, and healthcare markets. Sparco’s product line includes antennas for WLAN, National Electrical Manufacturers Association (“NEMA”) enclosures and mounting accessories, site survey tools, and amplifiers. With this acquisition, we extended our product offering, channel penetration and technology base in wireless enterprise products. In July 2010, we established a plan to integrate the Sparco operations in our Bloomingdale, Illinois location. We completed this integration in the third quarter 2010.

On December 30, 2009 we acquired all of the assets related to the scanning receiver business from Ascom Network Testing, Inc (“Ascom”). This business was a small part of Comarco’s WTS scanning receivers segment, a business that Ascom acquired in 2009. Under the agreement, we will continue to supply both our scanning receivers and the WTS scanning receivers to the newly formed Ascom that consolidated the testing businesses for mobile telecom carriers of Ascom.

On December 9, 2009, we acquired from Wider Networks, its interference management patents as well as the exclusive distribution rights for Wider’s interference management products as part of a settlement agreement. The settlement agreement provided for a purchase of assets in the form of patented technology, trade names and trademarks, and exclusive distribution rights. The settlement gives us another interference management product, suitable for certain markets, to distribute along side our CLARIFY^® product.

On January 5, 2009, we acquired all of the outstanding share capital of Wi-Sys Communications Inc. (“Wi-Sys”), a Canadian manufacturer of products for GPS, terrestrial and satellite communication systems, including programmable GPS receivers and high performance antennas. The Wi-Sys product line augments our GPS antenna product line. During the second quarter 2009, we exited the Wi-Sys Canadian facility and fully integrated the Wi-Sys product lines into our antenna product operations in Bloomingdale, Illinois. During 2009 we incurred a restructuring charge of $0.2 million for employee severance, lease termination costs, and asset dispositions related to the integration.

While we have both scanning receiver and antenna product lines, we operate in one business segment. The product lines share sufficient management and resources that the financial reporting upon which the Chief Operating Decision Maker (“CODM”) relies upon for allocating resources and assessing performance, is based on company-wide data. Beginning in 2009, we re-evaluated the internal financial reporting process in which the CODM no longer reviews the financial information for Licensing, a reporting segment that licensed an intellectual property portfolio in the area of analog modem technology. As of June 30, 2009, the revenues and cash flows associated with this reporting segment were substantially complete.

Current Economic Environment

Economic conditions have negatively impacted several elements of our business and have resulted in us facing one of the most challenging periods in our history. While we have seen a rebound in some of our addressable markets, if the economic recovery is slow to occur in certain elements of our business, our financial condition and results of operations could be further materially and adversely affected.

Results of Operations
Three and nine months ended September 30, 2010 and 2009
(in thousands except as otherwise noted)

Revenues

		Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
		September 30, 2010				September 30, 2009				September 30, 2010				September 30, 2009
Revenue		$	17,314			$	13,709			$	50,694			$	41,216
Percent change from year ago period			26.3	%			(31.8	)%			23.0	%			(29.7	)%

Revenues increased 26.3% in the three months ended September 30, 2010 and 23.0% in the nine months ended September 30, 2010 compared to the same periods in 2009. In the three months ended September 30, 2010 versus the comparable period in the prior year, approximately 26% of the percentage change was attributable to antennas and approximately -1% of the percentage change was attributable to scanning receivers. In the nine months ended September 30, 2010 versus the comparable period in the prior year, approximately 21% of the increase was attributable to antennas and 2% was attributable to scanning receivers. Revenue from our acquisitions as well as organic growth contributed to the increases in revenue in both the three and nine months ended September 30, 2010. The improvement in antenna revenues for the three and nine months ended September 30, 2010 compared to the same periods in 2009 reflects significantly stronger volume in our targeted vertical markets. Antenna sales improved to both our large distributors and to OEM resellers of our antennas. In the three months ended September 30, 2010, our scanning receiver revenues saw a modest decline in sales through its OEM test and measurement resellers compared with the same period in 2009, which decline was primarily related to the delay in commercial deployment of long term evolution (“LTE”) equipment.

Gross Profit

		Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
		September 30, 2010				September 30, 2009				September 30, 2010				September 30, 2009
Gross profit		$	7,013			$	6,426			$	22,346			$	19,155
Percentage of revenue			40.5	%			46.9	%			44.1	%			46.5	%
Percent of revenue change from year ago period			(6.4	)%			(0.7	)%			(2.4	)%			(1.3	)%

Gross margin of 40.5% in the three months ended September 30, 2010 was 6.4% lower than the comparable period in fiscal 2009. Gross margin of 44.1% in the nine months ended September 30, 2010 was 2.4% lower than the comparable period in fiscal 2009. Approximately 4% of the percentage change in the three months ended September 30, 2010 versus the comparable period in the prior year was related to the relative revenue performance of our lower margin antenna products versus our higher margin scanning receiver products, with the remaining 2% as a result of pricing pressure experienced in the OEM scanning receiver channel. For the nine months ended September 30, 2010, approximately 2% of the percentage change is related to the relative revenue performance of our lower margin antenna products versus our higher margin scanning receiver products.

Research and Development

		Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
		September 30, 2010				September 30, 2009				September 30, 2010				September 30, 2009
Research and development		$	2,955			$	2,673			$	9,128			$	8,010
Percentage of revenues			17.1	%			19.5	%			18.0	%			19.4	%
Percent change from year ago period			10.5	%			3.2	%			14.0	%			8.4	%

Research and development expenses increased approximately $0.3 million and $1.1 million for the three and nine months ended September 30, 2010, respectively, compared to the comparable periods in 2009. The increases are related to investments in scanning receiver development. For the three months ended September 30, 2010 compared to the same period in 2009, approximately one-third of the increase is related to the acquisition of the Ascom scanning receiver business. For the nine months ended September 30, 2010 compared to the same period in 2009, approximately one-half of the increase is related to the acquisition of the Ascom scanning receiver business. The remainder for each period is attributable to continued investment in the new scanning receiver platform which is in beta stage and being evaluated by key customers. We anticipate that this investment will moderate over the next three quarters.

Sales and Marketing

		Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
		September 30, 2010				September 30, 2009				September 30, 2010				September 30, 2009
Sales and marketing		$	2,548			$	1,845			$	7,332			$	5,841
Percentage of revenues			14.7	%			13.5	%			14.5	%			14.2	%
Percent change from year ago period			38.1	%			(27.4	)%			25.5	%			(28.6	)%

Sales and marketing expenses include costs associated with the sales and marketing employees, sales representatives, product line management, and trade show expenses.

Sales and marketing expenses increased approximately $0.7 million and $1.5 million for the three and nine months ended September 30, 2010, respectively, compared to the same periods in fiscal 2009. The increases for each period were due to investments in ongoing Sparco operations, investments in reaching vertical markets, and commissions and variable compensation related to higher revenues.

General and Administrative

		Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
		September 30, 2010				September 30, 2009				September 30, 2010				September 30, 2009
General and administrative		$	2,171			$	2,169			$	7,648			$	7,245
Percentage of revenues			12.5	%			15.8	%			15.1	%			17.6	%
Percent change from year ago period			0.1	%			(17.2	)%			5.6	%			(13.5	)%