UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

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PCTEL, INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

 

Tuesday, June 5, 2007

10:00 a.m.

 

 

To Our Stockholders:

 

The 2007 annual meeting of stockholders of PCTEL, Inc., a Delaware corporation, will be held on Tuesday, June 5, 2007 at 10:00 a.m. local time at our headquarters, located at 8725 West Higgins Road, Suite 400, Chicago, Illinois 60631 for the following purposes:

 

1. To elect two Class II directors whose terms will expire at the 2010 annual meeting of stockholders;

 

2. To approve the amendment and restatement of the 1998 Employee Stock Purchase Plan;

 

3. To approve the adoption of the Executive Compensation Plan; and

 

4. To ratify the appointment of Grant Thornton LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2007;

 

5. To transact such other business as may properly come before the meeting or any adjournment or postponement thereof.

 

The foregoing items of business are more fully described in the proxy statement accompanying this notice. Only stockholders of record at the close of business on April 17, 2007 are entitled to notice of and to vote at the meeting.

 

All stockholders are cordially invited to attend the meeting in person. However, to assure your representation at the meeting, you are urged to deliver your proxy by telephone or the Internet or to mark, sign, date and return the enclosed proxy as promptly as possible in the postage-prepaid envelope enclosed for that purpose. Any stockholder attending the meeting may vote in person even if he or she has previously returned a proxy.

 

Sincerely,

 

Martin H. Singer

Chief Executive Officer and

Chairman of the Board of Directors

 

Chicago, Illinois

April 27, 2007

 

 

PCTEL, INC.

8725 West Higgins Road, Suite 400

Chicago, Illinois 60631

 

 

PROXY STATEMENT FOR THE

2007 ANNUAL MEETING OF STOCKHOLDERS

 

 

GENERAL INFORMATION

 

The board of directors of PCTEL, Inc. is soliciting proxies for the 2007 annual meeting of stockholders. This proxy statement contains important information for you to consider when deciding how to vote on the matters brought before the meeting. Please read it carefully.

 

Our board of directors has set April 17, 2007 as the record date for the meeting. Stockholders of record at the close of business on April 17, 2007 are entitled to vote at and attend the meeting, with each share entitled to one vote. There were 22,422,009 shares of our common stock outstanding on the record date. On the record date, the closing price of our common stock on the Nasdaq Global Market was $10.82 per share.

 

This proxy statement is being mailed on or about April 27, 2007 to stockholders entitled to vote at the meeting.

 

In this proxy statement:

 

 

QUESTIONS AND ANSWERS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We shall provide without charge to each stockholder solicited by these proxy solicitation materials a copy of our Annual Report on Form 10-K, together with the financial statements and financial statement schedules required to be filed with the Annual Report, upon written request sent to PCTEL, Inc., 8725 West Higgins Road, Suite 400, Chicago, Illinois 60631, Attn: John W. Schoen, Chief Financial Officer.

 

Deadline for Receipt of Stockholder Proposals and Nominations for 2008 Annual Meeting of Stockholders

 

Stockholders are entitled to present proposals for action and director nominations at the 2008 annual meeting of stockholders only if they comply with the applicable requirements of the proxy rules established by the Securities Exchange Commission and the applicable provisions of our bylaws. Stockholders must ensure that such proposals and nominations are received by our Corporate Secretary at the following address: 8725 West Higgins Road, Suite 400, Chicago, Illinois 60631, Attn: Corporate Secretary, on or prior to the deadline for receiving such proposals and nominations.

 

Proposals for the 2008 annual meeting of stockholders that are intended to be considered for inclusion in the proxy statement and form of proxy relating to such meeting must be received no later than December 28, 2007, and must comply with the procedures of Rule 14a-8 under the Securities Exchange Act of 1934 (the “Exchange Act”) and the provisions of our bylaws.

 

If a stockholder intends to submit a proposal or director nomination for consideration at our 2008 annual meeting of stockholders outside the procedures of Rule 14a-8 under the Exchange Act, the stockholder must comply with the requirements of our bylaws and we are not required to include such proposal or nomination in the proxy statement and form of proxy relating to such meeting. Our bylaws contain an advance notice provision that requires stockholders to submit a written notice containing certain information not less than 120 days prior to the date of our proxy statement for the previous year’s annual meeting of stockholders. For purposes of the 2008 annual meeting of stockholders, this means that such proposals or nominations must also be received by December 28, 2007. A copy of the relevant bylaw provision is available upon written request to our Corporate Secretary at the address provided above.

 

The attached proxy card grants the proxy holders discretionary authority to vote on any business raised at the annual meeting. If you fail to comply with the advance notice provisions set forth above in submitting a proposal or nomination for the 2008 annual meeting of stockholders, the proxy holders will be allowed to use their discretionary voting authority if such proposal or nomination is raised at that meeting.

 

SUMMARY OF PROPOSALS

 

The board of directors has included four proposals on the agenda for our 2007 annual meeting of stockholders. The following is a brief summary of the matters to be considered and voted upon by our stockholders.

 

Election of Directors

 

We have a classified board of directors that currently consists of seven directors. Each director serves a three-year term. The first proposal on the agenda for our annual meeting is the election of two Class II directors to serve until our 2010 annual meeting of stockholders. Our board of directors has nominated Richard C. Alberding and Carl A. Thomsen to serve as our Class II directors. Additional information about the election of directors and a brief biography of each nominee begins on page 6.

 

Our board of directors recommends a vote “FOR” each of the two nominees.

 

Approval of Amendment and Restatement of 1998 Employee Stock Purchase Plan

 

The second proposal is the approval of the amendment and restatement of our 1998 Employee Stock Purchase Plan. More information about this proposal begins on page 14.

 

Our board of directors recommends a vote “FOR” the approval of the amendment and restatement of our 1998 Employee Stock Purchase Plan.

 

Approval of Adoption of the Executive Compensation Plan

 

The third proposal is the approval of the adoption of the Executive Compensation Plan. We are required to submit the Executive Compensation Plan for stockholder approval so that the plan may qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). This qualification provides us with a federal income tax deduction for this compensation. More information about this proposal begins on page 20.

 

Our board of directors recommends a vote “FOR” the approval of the adoption of the Executive Compensation Plan.

 

Ratify Appointment of our Independent Registered Public Accounting Firm

 

The fourth proposal is the ratification of the appointment of Grant Thornton LLP as our independent registered public accounting firm. More information about this proposal begins on page 24.

 

Our board of directors recommends a vote “FOR” the ratification of the appointment of Grant Thornton LLP as our independent registered public accounting firm.

 

Other Matters

 

Other than the proposals listed above, our board of directors does not currently intend to present any other matters to be voted on at the meeting. Our board of directors is not currently aware of any other matters that will be presented by others for action at the meeting. However, if other matters are properly presented at the meeting and you have signed and returned your proxy card or voted on the Internet or by telephone, the proxies will have discretion to vote your shares on these matters to the extent authorized under the Exchange Act.

 

PROPOSAL #1

 

ELECTION OF DIRECTORS

 

Classification of Board of Directors

 

We have a classified board of directors currently consisting of two Class I directors, Brian J. Jackman and John R. Sheehan, whose terms will expire at our 2009 annual meeting of stockholders; two Class II directors, Richard C. Alberding and Carl A. Thomsen, whose terms are expiring at this 2007 annual meeting of stockholders; and three Class III directors, Giacomo Marini, Martin H. Singer and Steven D. Levy, whose terms will expire at our 2008 annual meeting of stockholders. At each annual meeting of stockholders, certain directors are elected for a term of three years to succeed those directors whose terms expire on the annual meeting dates.

 

Nominees

 

On the recommendation of the board of directors, the nominees for election at the 2007 annual meeting of stockholders as Class II directors are Richard C. Alberding and Carl A. Thomsen. If elected, Messrs. Alberding and Thomsen will continue as directors, and their terms will expire at the annual meeting of stockholders in 2010.

 

The proxy holders may not vote the proxies for a greater number of persons than the number of nominees named. Unless otherwise instructed, the proxy holders will vote the proxies received by them for our two Class II director nominees. In the event that either of our nominees is unable or declines to serve as a director at the time of the annual meeting, the proxies will be voted for any nominee who shall be designated by the present board of directors to fill the vacancy. We are not aware that either of our nominees will be unable or will decline to serve as a director.

 

Vote Required and Board of Directors’ Recommendation

 

If a quorum is present and voting, the two nominees receiving the highest number of votes will be elected to the board of directors. Abstentions and “broker non-votes” are not counted in the election of directors.

 

Our board of directors has unanimously approved the director nominees and recommends that stockholders vote “FOR” the election of the director nominees listed above.

 

Directors and Nominees

 

The following table sets forth certain information regarding our current directors and nominees for directors to be elected at our 2007 annual meeting of stockholders:

 

 

Mr. Jackman has been a director since February 2002. Mr. Jackman is currently the President of The Jackman Group, Inc., a management consulting company that he formed in 2005. In September 2001, Mr. Jackman retired from Tellabs, a communications company that he had been with since 1982. Mr. Jackman served as President, Global Systems and Technology, and Executive Vice President of Tellabs since 1998, and he was President of Tellabs Operations from 1993 to 1998. Mr. Jackman held various management positions in sales and marketing for IBM from 1965 to 1982. He is currently on the boards of directors of Open Text, Inc., an enterprise content management solutions company, and Keithley Instruments, a test and measurement equipment company. In addition, Mr. Jackman serves on the board of trustees of Gannon University. Mr. Jackman holds a bachelor of arts degree in English literature from Gannon University in Erie, Pennsylvania and a master degree in business administration from Penn State University.

 

Mr. Sheehan has been a director since October 2002. Mr. Sheehan has served as a senior consultant in the London Perret Roche Group in Red Bank, New Jersey since October 2001. He began his career at Bell Laboratories in 1962. In his 33 years at Bell Laboratories, Western Electric and AT&T, he worked in senior positions in development, manufacturing, strategic planning and general management of business units. Since leaving AT&T in 1996, Mr. Sheehan has held senior management positions in three startup companies. Mr. Sheehan received a bachelor of science degree in electrical engineering from Drexel University and a master of science degree in electrical engineering from New York University.

 

Mr. Alberding has been a director since August 1999. Mr. Alberding retired from Hewlett-Packard, then a computer, peripherals and measurement products company, in June 1991, serving at that time as an Executive Vice President with responsibility for worldwide company sales, support and administration activities for measurement and computation products, as well as all corporate level marketing activities. Mr. Alberding is a director of Sybase, Inc., an enterprise software company. Mr. Alberding holds a bachelor of arts degree in business administration and marketing from Augustana College, and an associate of science degree in electrical engineering from DeVry Technical Institute in Chicago.

 

Mr. Thomsen has been a director since March 2001. Recently, Mr. Thomsen retired from Stratex Networks, Inc., a provider of wireless transmission solutions. Mr. Thomsen served as Senior Vice President, Chief Financial Officer and Corporate Secretary at Stratex Networks, Inc. (now a part of Harris Stratex Networks, Inc.) from 1995 to

2007. Mr. Thomsen holds a bachelor of science degree in business administration from Valparaiso University and a master degree in business administration from the University of Michigan. He is also a certified public accountant.

 

Mr. Levy has been a director since March 2006.  Mr. Levy most recently served as a Managing Director and Global Head of Communications Technology Research at Lehman Brothers from July 1998 until September 2005. Before joining Lehman Brothers, Mr. Levy was a Director of Telecommunications Research at Salomon Brothers from March 1997 to July 1998, a Managing Director and Head of the Communications Research Team at Oppenheimer & Co. from July 1994 to March 1997, and a senior communications analyst at Hambrecht & Quist from July 1986 to July 1994. Mr. Levy is also currently a member of the board of directors of Zhone Technologies, a broadband equipment vendor. Mr. Levy holds a master degree in business administration and a bachelor of science degree in materials engineering from Rensselaer Polytechnic Institute.

 

Mr. Marini has been a director since October 1996.  Mr. Marini has been the founder and Managing Director of Noventi (formerly CIR Ventures), a Silicon Valley-based early-stage technology venture capital firm, since March 2002. Since March 1995 he has served as Chairman of Marini Group LLC, a private investment company. Mr. Marini also served as interim Chief Executive Officer of FutureTel, a digital video capture company and as President and Chief Executive Officer of No Hands Software, an electronic publishing software company. Prior to this, Mr. Marini was the co-founder, Executive Vice President and Chief Operating Officer of Logitech, a computer peripherals company. Previously he held technical and management positions with Olivetti and IBM. He currently serves on the boards of several private companies. Mr. Marini holds a computer science laureate degree from the University of Pisa, Italy.

 

Mr. Singer has been our Chief Executive Officer and Chairman of the Board since October 2001. Prior to that, Mr. Singer served as our non-executive Chairman of the Board from February 2001 until October 2001, and he has been a director since August 1999. From October 2000 to May 2001, Mr. Singer was an independent consultant. From December 1997 to August 2000, Mr. Singer served as President and Chief Executive Officer of SAFCO Technologies, a wireless communications company. He left SAFCO in August 2000 after its sale to Agilent Technologies. From September 1994 to December 1997, Mr. Singer served as Vice President and General Manager of the wireless access business development division for Motorola, a communications equipment company. Prior to this period, Mr. Singer held senior management and technical positions in Motorola, Tellabs, AT&T and Bell Labs. Mr. Singer holds a bachelor of arts degree in psychology from the University of Michigan, and a master of arts degree and a Ph.D. in experimental psychology from Vanderbilt University. Mr. Singer currently serves as the Chairman of the Midwest council of the AeA (American Electronics Association). He is also on the advisory board for the Master of Management & Manufacturing program at Northwestern University (Kellogg) and serves on the standing advisory group for the Public Company Accounting Oversight Board, the organization established to manage the implementation of the Sarbanes-Oxley Act of 2002. Mr. Singer has seven patents in telecommunications.

 

CORPORATE GOVERNANCE

 

Board and Committee Meetings

 

Our board of directors held a total of five meetings during fiscal 2006. The board of directors currently has an audit committee, a compensation committee and a nominating and governance committee. The members of each of the committees are listed in the table below. Each member of the audit committee, compensation committee and nominating and governance committee meets the Nasdaq independence requirements. The board of directors has determined that Mr. Thomsen qualifies as an “audit committee financial expert” as defined under the rules and regulations of the SEC, and that all members of our audit committee meet the Nasdaq financial literacy requirements. During our last fiscal year, with the exception of Messrs. Levy and Jackman, each of our directors attended at least 75% of the total number of meetings of the board of directors and any committee on which such director served. Mr. Levy joined the board of directors in March 2006 and attended at least 75% of the meetings of the board of directors and the audit committee held thereafter. Mr. Jackman was unable to attend some of the

meetings held in fiscal 2006 due to an accident followed by a period of physical rehabilitation. Mr. Jackman has since fully recovered and is currently fulfilling all of his duties on the board of directors and its committees.

 

 

A copy of each of the charters for our committees of the board of directors is available on our website located at www.pctel.com. They may be found on the website in “Corporate Governance” under “Investor Relations.”

 

Mr. Jackman is currently the lead independent director of our board of directors. As lead independent director, his principal responsibilities are (i) working with the Chairman and Chief Executive Officer and the other members of the board of directors to set the agenda for each meeting of the board of directors, (ii) serving as a liaison for communications between our board of directors and the Chief Executive Officer, (iii) acting as the chair for executive sessions held at regularly scheduled meetings of the board of directors, and (iv) consulting with our General Counsel regarding communications received from our stockholders.

 

Independence

 

Currently our board of directors has seven members. Our board of directors recently determined that the six non-employee directors are “independent directors” based on the Nasdaq and SEC standards for independence. Only independent directors may serve on our audit, compensation and nominating and governance committees.

 

In determining the independence of our directors, the board of directors affirmatively decides whether a non-employee director has a relationship that would interfere with that director’s exercise of independent judgment in

carrying out the responsibilities of being a director. In coming to that decision, the board of directors is informed of the Nasdaq and SEC rules that disqualify a person from being considered as independent, considers the responses to an annual questionnaire from each director and reviews the applicable standards with each member of the board of directors.

 

In making decisions about independence, the board of directors in March 2007 reviewed a separate transaction that it determined did not affect the independence of Mr. Sheehan, the director involved. Mr. Sheehan is evaluating the formation of a possible business partnership with a long term business acquaintance that our company has recently engaged to provide management consulting advice in the area of customer acquisition and satisfaction. The acquaintance will be paid a customary project-based consulting fee for his services, and although Mr. Sheehan will participate in the consulting discussions with the acquaintance and members of our management, he will receive no remuneration for his involvement. Mr. Sheehan has no current business affiliation with the acquaintance, and the project is anticipated to conclude before the end of 2007. Our board of directors has indicated to Mr. Sheehan that it will continue to assess the nature and scope of the consulting engagement, and its potential impact on his independence, at subsequent meetings of the board of directors.

 

Director Nomination Process

 

Stockholder Recommendations and Nominations.

 

It is the policy of our nominating and governance committee to consider director candidates recommended by our stockholders holding on the date of submission of such recommendation at least 1% of the then outstanding shares of our common stock continuously for at least 12 months prior to such date.

 

Stockholders desiring to recommend a candidate for election to the board of directors should send their recommendation in writing to the attention of our Corporate Secretary, at our offices located at 8725 West Higgins Road, Suite 400, Chicago, Illinois 60631. This written recommendation must include the information and materials required by our bylaws as well as the candidate’s name, home and business contact information, detailed biographical data, relevant qualifications, a signed letter from the candidate confirming willingness to serve, information regarding any relationships between the candidate and PCTEL within the last three years and evidence of the required ownership of our common stock by the recommending stockholder. A copy of the relevant bylaw provision is available upon written request to our Corporate Secretary at the address provided above.

 

In accordance with the advance notice provision in our bylaws, director nominations to be considered at the next annual meeting of stockholders must be received not less than 120 days prior to the date of our proxy statement for the previous year’s annual meeting of stockholders. For purposes of our 2008 annual meeting of stockholders, director nominations must be received by December 28, 2007.

 

Identifying and Evaluating Nominees for Director.

 

The nominating and governance committee uses the following procedures for identifying and evaluating any individual recommended or offered for nomination to the board of directors:

 

 

 

The nominating and governance committee requires the following minimum qualifications to be satisfied by any candidate recommended or offered for nomination to the board of directors:

 

 

 

Compensation of Directors

 

Cash and Stock Compensation.  Our non-employee directors currently receive a yearly cash retainer of $12,500 and shares of restricted common stock equivalent to $4,000. They also receive $2,500 per board meeting attended (unless the board meeting is conducted by teleconference, in which case directors receive $1,000 for each such telephonic meeting in which they participate) and $1,000 per committee meeting attended. In addition, our non-employee directors annually receive additional shares of restricted stock as set forth below:

 

 

All of the shares of restricted common stock received by our non-employee directors vest six months after the date of grant, provided that the individual continues to serve as a director on such date. The number of shares granted is based on the total dollar value divided by the per share closing price of our stock on the date of grant.

 

Our 1997 Stock Plan provides for the non-discretionary, automatic grant of options to each of our non-employee directors. Each new non-employee director is automatically granted an option to purchase 15,000 shares on the date on which such person first becomes a director. These initial grants vest over a period of three years, with one-third of the number of shares granted vesting on each anniversary of the date of grant, provided that the optionee continues to serve as a director on these dates. Furthermore, each non-employee director is automatically granted an additional option to purchase 10,000 shares of common stock on January 1 of each year, provided that he or she has served on the board of directors for at least six months. These subsequent grants vest fully on the first anniversary of the date of grant, provided that the optionee continues to serve as a director on such date. Under the terms of our 1997 Stock Plan, the exercise price of options granted to non-employee directors must be 100% of the fair market value of our common stock on the last trading day preceding the date of grant.

 

Deferred Compensation Plan.  Our non-employee directors are eligible to participate in the Board of Directors Deferred Compensation Plan. The principal purpose of the Directors Deferred Compensation Plan is to provide additional retirement benefits and income tax deferral opportunities for our non-employee directors. The Directors Deferred Compensation Plan permits the deferral of cash compensation that would otherwise be received by the non-employee directors for their service on our board of directors. Compensation that is deferred under the Directors Deferred Compensation Plan will be paid out by us upon the termination of a non-employee director’s service on the board of directors. If such termination occurs after the non-employee director has reached the age of 55, such non-employee director may elect to receive the deferred compensation in a lump sum, annually over 15 years, or over the lifetime of the non-employee director in 20 annual payments.

 

Reimbursements.  In addition, each of our non-employee directors is reimbursed for all reasonable out of pocket expenses incurred in connection with his service on our board of directors.

 

Directors Compensation for the Fiscal Year Ended December 31, 2006

 

 

 

 

Stockholder Communications with the Board of Directors

 

Stockholders who wish to communicate directly with our independent directors may do so by sending an e-mail message to Varda Goldman, our Vice President and General Counsel, at generalcounsel@pctel.com. Mrs. Goldman monitors these communications, consults with Mr. Jackman, our current lead independent director, and provides a summary of all received messages to the board of directors at its regularly scheduled meetings. Where the nature of the communication warrants, Mrs. Goldman may determine to obtain more immediate attention of the appropriate committee or independent director of the board of directors, of independent advisors or of our management. Mrs. Goldman may decide in her judgment whether a response to any stockholder communication is necessary.

 

Attendance at the Annual Meeting of Stockholders

 

All directors are welcome to attend the 2007 annual meeting of stockholders and it is expected that our lead independent director will be in attendance at every annual meeting of stockholders. At the 2006 annual meeting of stockholders, Mr. Singer was in attendance.

 

Code of Ethics

 

We adopted the PCTEL, Inc. Code of Ethics for Principal Executives and Key Financial Officers (“Code of Ethics”). The Code of Ethics applies to the principal executive financial officer, the principal accounting officer or controller and persons performing similar functions and responsibilities who shall be identified by the audit committee from time to time.

 

The Code of Ethics is available on our website, located at www.pctel.com. It may be found at the website as follows:

 

1. From the main web page, click on “Investor Relations,”

 

2. Next, click on “Corporate Governance,”

 

3. Finally, click on “Financial Code of Ethics.”

 

We intend to satisfy the disclosure requirement required under Form 8-K regarding an amendment to, or waiver from, a provision of the Code of Ethics by posting such information on our website.

 

Compensation Committee Interlocks and Insider Participation

 

During fiscal 2006, neither Richard C. Alberding, John R. Sheehan, nor Brian J. Jackman were officers or employees of PCTEL while they served as members of the compensation committee. In addition, no executive officer of PCTEL served as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee.

 

PROPOSAL #2

 

APPROVAL OF THE 1998 EMPLOYEE STOCK PURCHASE PLAN AS
AMENDED AND RESTATED

 

The stockholders are being asked to approve the amendment and restatement of the 1998 Employee Purchase Plan (the “Purchase Plan”). The board of directors initially approved the Purchase Plan in May 1998. The board of directors has approved an amendment and restatement of the Purchase Plan, subject to approval from the stockholders at this 2007 annual meeting. If the stockholders approve the amendment and restatement of the Purchase Plan, it will replace the current version of our Purchase Plan, effective as of the offering period commencing on the first trading day on or after August 15, 2007. If the stockholders do not approve the Purchase Plan, the current Purchase Plan will remain in effect and will expire in May 2008. Approval of the Purchase Plan requires the affirmative vote of the holders of a majority of the shares of our common stock that are present in person or by proxy and entitled to vote at this 2007 annual meeting.

 

The board of directors believes that the Purchase Plan is an important component of our total employee benefit package and that it is in the best interest of PCTEL and our stockholders for the stockholders to approve the proposed amendment and restatement of the Purchase Plan.

 

Our named executive officers and employee directors have an interest in this proposal because they are eligible to participate in the Purchase Plan.

 

Purposes and Effects of the Proposal

 

Encouraging employees to acquire equity ownership in PCTEL assures a closer alignment of the interests of participating employees in the Purchase Plan with those of our stockholders. The proposed adjustments to the Purchase Plan will enable us to continue to use the Purchase Plan as a valuable tool for attracting and retaining key personnel and aligning the interests of Purchase Plan participants with those of our stockholders.

 

Changes Being Made to the Plan

 

The following is a summary of some of the changes being made to the Purchase Plan:

 

 

 

The board of directors believes strongly that the approval of the amended and restated Purchase Plan is essential to our continued success. In particular, we believe that our employees are our most valuable assets and that the options permitted under the Purchase Plan are vital to our ability to attract and retain outstanding and highly skilled individuals in the extremely competitive labor markets in which we compete. Such awards also are crucial to our ability to motivate employees to achieve our goals.

 

Vote Required and Recommendation

 

The affirmative vote of the holders of a majority of the shares of our common stock present or represented by proxy and entitled to vote at the annual meeting will be required to approve this proposal.

 

Our board of directors recommends that stockholders vote “FOR” the adoption of the 1998 Employee Stock Purchase Plan, as amended and restated.

 

Description of the 1998 Employee Stock Purchase Plan, as amended and restated.

 

The following is a summary of the principal features of the amended and restated Purchase Plan and its operation. The summary is qualified in its entirety by reference to the Purchase Plan itself set forth in Appendix A.

 

General.  The Purchase Plan was amended and restated by the board of directors in March 2007, subject to stockholder approval at this 2007 annual meeting. The purpose of the Purchase Plan is to provide employees with an opportunity to purchase shares of our common stock through accumulated payroll deductions. As of April 17, 2007, approximately 320 employees would be eligible to participate in the Purchase Plan.

 

Shares Available for Issuance.  If our stockholders approve this proposal, the maximum number of shares of our common stock which will be made available for sale under the Purchase Plan will be 750,000 shares.

 

Administration.  The board of directors or a committee appointed by the board of directors (referred to herein as the “Administrator”) administers the Purchase Plan. The Administrator has full and exclusive discretionary authority to construe, interpret and apply the terms of the Purchase Plan, to determine eligibility and to adjudicate all disputed claims filed under the Purchase Plan. The Administrator’s findings, decisions, and determinations are final and binding upon all parties. The Administrator may adopt rules or procedures relating to the operation and administration of the Purchase Plan to accommodate the specific requirements of local laws and procedures and for jurisdictions outside the United States.

 

Eligibility.  Each of our employees or the employees of our designated subsidiaries who is a common law employee and whose customary employment with us or one of our designated subsidiaries is at least 20 hours per week and more than five months in a calendar year is eligible to participate in the Purchase Plan; except that no employee will be granted an option under the Purchase Plan (i) to the extent that, immediately after the grant, such employee would own 5% or more of the total combined voting power of all classes of our capital stock or the capital stock of one of our designated subsidiaries, or (ii) to the extent that his or her rights to purchase stock under all of our employee stock purchase plans accrues at a rate which exceeds $25,000 worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year.

 

Offering Period.  The Purchase Plan has consecutive offering periods that begin approximately every six months commencing on the first trading day on or after February 15 and terminating on the last trading day of the offering period ending on August 14 and commencing on the first trading day on or after August 15 and terminating on the last trading day of the offering period ending on February 14. The Administrator has the power to change the commencement date and/or the duration of future offering periods without stockholder approval if such change is announced prior to the scheduled beginning of the first offering period to be affected.

 

Participation.  To participate in the Purchase Plan, an eligible employee must authorize payroll deductions pursuant to the Purchase Plan. Such payroll deductions may not exceed 15% of a participant’s compensation during the offering period; provided, however, that should a payday occur on an exercise date, a participant will have the payroll deductions made on such day applied to his or her account under the subsequent offering period. Once an employee becomes a participant in the Purchase Plan, the employee automatically will participate in each successive offering period until the employee withdraws from the Purchase Plan or the employee’s employment with us or one of our designated subsidiaries terminates. At the beginning of each offering period, each participant automatically is granted an option to purchase shares of our common stock. The option expires at the end of the offering period or upon termination of employment, whichever is earlier, but is exercised at the end of each offering period to the extent of the payroll deductions accumulated during such offering period. During an offering period, a participant may discontinue his or her participation in the Purchase Plan, and may decrease or increase the rate of payroll deductions in an offering period within limits set by the Administrator.

 

Purchase Price.  The purchase price of shares of our common stock under the Purchase Plan will be determined by the Administrator on a uniform and nondiscriminatory basis prior to an offering date, subject to compliance with Section 423 of the Code. Unless and until the Administrator determines otherwise, shares of our common stock may be purchased under the Purchase Plan at a purchase price equal to 85% of the lesser of the fair market value of the common stock on (i) the first day of the offering period, or (ii) the last day of the offering period. The fair market value of our common stock on any relevant date will be the closing price per share as reported on the Nasdaq Global Select Market, the Nasdaq Global Market or the Nasdaq Capital Market of the Nasdaq Stock Market (or closing bid if no sales were reported), as quoted on such exchange or reported in The Wall Street Journal.

 

Payment of Purchase Price.  The number of shares of our common stock that a participant may purchase in each offering period will be determined by dividing the total amount of payroll deductions withheld from the participant’s compensation during that offering period by the purchase price; provided, however, that a participant may not purchase more than 2,000 shares each offering period.

 

Payroll Deductions.  All payroll deductions made for a participant are credited to the participant’s account under the Purchase Plan, are withheld in whole percentages only and are included with our general funds. Funds received by us pursuant to exercises under the Purchase Plan are also used for general corporate purposes. A participant may not make any additional payments into his or her account.

 

Option Exercise.  Unless a participant withdraws from the Purchase Plan or an employee’s employment terminates with us or our designated subsidiary, a participant’s option for the purchase of shares is exercised automatically on each exercise date, and the maximum number of full shares subject to the option will be purchased for the participant at the applicable purchase price with his or her accumulated payroll deduction. No fractional shares may be purchased and any accumulated payroll deductions not sufficient to purchase a full share is retained in the participant’s account for the subsequent offering period. Any funds left over in a participant’s account after the purchase date will be returned to the participant. During a participant’s lifetime, a participant’s option to purchase shares is exercisable only by him or her.

 

If the Administrator determines that, on a given exercise date, the number of shares of common stock with respect to which options are to be exercised may exceed (i) the number of shares of common stock that were available for sale under the Purchase Plan on the offering date of the applicable offering period, or (ii) the number of shares of common stock available for sale under the Purchase Plan on such exercise date, the administrator may in its sole discretion provide that we will make a pro rata allocation of the shares of common stock available for purchase on such offering date or exercise date, as applicable, in as uniform a manner as will be practicable and as it will determine in its sole discretion to be equitable among all participants exercising options to purchase common stock on such exercise date, and either (x) continue all offering periods then in effect or (y) terminate any or all offering periods then in effect. We may make a pro rata allocation of the shares available on the offering date of any applicable offering period, notwithstanding any authorization of additional shares for issuance under the Purchase Plan by our stockholders subsequent to such offering date.

 

Withdrawal; Termination of Employment.  A participant may generally withdraw all, but not less than all, the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Purchase Plan at any time by submitting written notice to us or by following an electronic or other withdrawal procedure prescribed by the Administrator. All of the participant’s payroll deductions credited to his or her account will be paid as promptly as practicable after receipt of notice of withdrawal, the participant’s option for the offering period will be automatically terminated, and no further payroll deductions will be made for the offering period. If a participant withdraws from an offering period, payroll deductions will not resume at the beginning of the succeeding offering period unless the participant re-enrolls in the Purchase Plan. A participant’s withdrawal from an offering period will not have any effect upon his or her eligibility to participate in any similar plan which may be adopted by us or in succeeding offering periods. If a participant fails to remain as our employee or an employee of our designated subsidiary, or ceases to meet the Purchase Plan eligibility requirements, he or she is deemed to withdraw from the Purchase Plan.

 

Changes in Capitalization.  In the event that any dividend or other distribution (whether in the form of cash, common stock, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of common stock or other of our securities, or other change in our corporate structure affecting the common stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Purchase Plan, then the Administrator will adjust the number and class of common stock which may be delivered under the Purchase Plan, the purchase price per share and the number of shares of common stock covered by each option under the Purchase Plan which has not yet been exercised, and the maximum number of shares a participant can purchase during an offering period.

 

Dissolution or Liquidation.  In the event of our proposed dissolution or liquidation, the Administrator will shorten any offering periods then in progress by setting a new exercise date and any offering periods will end on the new exercise date. The new exercise date will be prior to the dissolution or liquidation. If the Administrator shortens any offering periods then in progress, the Administrator will notify each participant in writing, at least ten business days prior to the new exercise date, that the exercise date has been changed to the new exercise date and that the option will be exercised automatically on the new exercise date, unless the participant has already withdrawn from the offering period.

 

Change in Control.  In the event of a merger or “change in control,” as defined in the Purchase Plan, each outstanding option under the Purchase Plan will be assumed or an equivalent option will be substituted by such successor corporation or a parent or subsidiary of such successor corporation. In the event the successor corporation refuses to assume or substitute for the options, the Administrator will shorten any offering periods then in progress by setting a new exercise date and any offering periods will end on the new exercise date. The new exercise date will be prior to the merger or change in control. If the Administrator shortens any offering periods then in progress, the Administrator will notify each participant in writing prior to the new exercise date, that the exercise date has been changed to the new exercise date and that the option will be exercised automatically on the new exercise date, unless the participant has already withdrawn from the offering period.

 

Amendment or Termination.  The Administrator may at any time amend, suspend or terminate the Purchase Plan. If the Purchase Plan is terminated, the Administrator, in its discretion, may elect to terminate all outstanding

offering periods either immediately or upon completion of the purchase of shares of common stock on the next exercise date (which may be sooner than originally scheduled, if determined by the Administrator in its discretion), or may elect to permit offering periods to expire in accordance with their terms (and subject to any adjustments). If the offering periods are terminated prior to expiration, all amounts then credited to participants’ accounts which have not been used to purchase shares of common stock will be returned to the participants (without interest, except as otherwise required under local laws) as soon as administratively practicable.

 

Without stockholder approval and without regard to whether any participant rights may be considered to have been adversely affected, the administrator is entitled to: (i) change the offering periods; (ii) limit the frequency and/or number of changes in the amount withheld during an offering period; (iii) establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars; (iv) permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in our processing of properly completed withholding elections; (v) establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of common stock for each participant properly correspond with amounts withheld from the participant’s compensation; and (vi) establish such other limitations or procedures as the Administrator determines in its sole discretion advisable which are consistent with the Purchase Plan.

 

In the event the Administrator determines that the ongoing operation of the Purchase Plan may result in unfavorable financial accounting consequences, the board of directors may, in its discretion, without stockholder approval or the consent of any participant, and to the extent necessary or desirable, modify, amend or terminate the Purchase Plan to reduce or eliminate such accounting consequences, including but not limited to: (i) amending the Purchase Plan to conform with the safe harbor definition under Statement of Financial Accounting Standards 123(R), including with respect to an offering period underway at the time; (ii) altering the purchase price for any offering period including an offering period underway at the time of the change in purchase price; (iii) shortening any offering period by setting a new exercise date or terminating any outstanding offering period and returning contributions made through such date to participant, including an offering period underway at the time of the Administrator action; (iv) allocating shares; (v) reducing the maximum percentage of compensation a participant may elect to set aside as payroll deductions; and (vi) reducing the maximum number of shares of common stock a participant may purchase during any offering period.

 

Number of Awards Granted to Certain Individuals and Groups

 

Given that the number of shares that may be purchased under the Purchase Plan is determined, in part, on the fair market value of our common stock at the beginning of an offering period and at the end of such offering period, and given that participation in the Purchase Plan is voluntary on the part of employees, the actual number of shares that may be purchased by any individual is not determinable. For illustrative purposes, the following table sets forth (i) the number of shares of our common stock that were purchased during the last fiscal year under the Purchase Plan, (ii) the average price per share paid for such shares, and (iii) the fair market value at the date of purchase.

 

Certain Federal Tax Aspects

 

The following brief summary of the effect of federal income taxation upon the participant and us with respect to the shares purchased under the Purchase Plan does not purport to be complete, and does not discuss the tax consequences of a participant’s death or the income tax laws of any state or foreign country in which the participant may reside.

 

The Purchase Plan, and the right of participants to make purchases thereunder, is intended to qualify under the provisions of Sections 421 and 423 of the Code. Under these provisions, no income will be taxable to a participant until the shares purchased under the Purchase Plan are sold or otherwise disposed of. Upon sale or other disposition of the shares, the participant will generally be subject to tax in an amount that depends upon the holding period. If the shares are sold or otherwise disposed of more than two years from the first day of the applicable offering period and one year from the applicable date of purchase, the participant will recognize ordinary income measured as the lesser of (i) the excess of the fair market value of the shares at the time of such sale or disposition over the purchase price, or (ii) an amount equal to 15% of the fair market value of the shares as of the first day of the applicable offering period. Any additional gain will be treated as long term capital gain. If the shares are sold or otherwise disposed of before the expiration of these holding periods, the participant will recognize ordinary income generally measured as the excess of the fair market value of the shares on the date the shares are purchased over the purchase price. Any additional gain or loss on such sale or disposition will be long term or short-term capital gain or loss, depending on how long the shares have been held from the date of purchase.

 

We generally are not entitled to a deduction for amounts taxed as ordinary income or capital gain to a participant except to the extent of ordinary income recognized by participants upon a sale or disposition of shares prior to the expiration of the holding periods described above.

 

THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION UPON PARTICIPANTS AND US UNDER THE PURCHASE PLAN. IT DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX CONSEQUENCES OF A PARTICIPANT’S DEATH OR THE PROVISIONS OF THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE PARTICIPANT MAY RESIDE.

 

PROPOSAL #3

 

APPROVAL OF THE EXECUTIVE COMPENSATION PLAN

 

In March 2007, our compensation committee unanimously approved the Executive Compensation Plan (the “Bonus Plan”) and directed that the Bonus Plan be submitted to stockholders at this 2007 annual meeting. If approved by our stockholders, the plan will be effective commencing with our 2007 fiscal year. If not approved by our stockholders, the awards that have been made under the Bonus Plan will be void.

 

The purpose of the Bonus Plan is to motivate certain executives to perform to the best of their abilities and to achieve our objectives. It is designed to govern our annual Short Term Incentive Plan to permit the payment of bonuses (whether paid in cash or in shares of our common stock) to such executives under a structure that complies with Section 162(m) of the Code. If the Bonus Plan is approved by our stockholders, it will permit the bonus awards to be paid to these executives beginning with the 2007 performance year to qualify as “performance-based” compensation under Section 162(m) of the Code.

 

Vote Required and Recommendation

 

The affirmative vote of the holders of a majority of the shares of our common stock present or requested by proxy and entitled to vote of the annual meeting will be required to approve this proposal.

 

Our board of directors recommends that stockholders vote “FOR” the approval of the Executive Compensation Plan.

 

Summary of the Executive Compensation Plan

 

The following is a summary of the principal features of the Bonus Plan and its operation. The summary is qualified in its entirety by reference to the Bonus Plan itself set forth in Appendix B.

 

Eligibility.  Participants in the Bonus Plan are the chief executive officer, executive officers and key employees who are chosen each year solely at the discretion of the compensation committee for any given Bonus Plan year. The executive officers selected by the compensation committee to receive awards under the Bonus Plan based on 2007 performance goals consist of Messrs. Singer, Schoen, Miller, Nair and Deppe. Because our executive officers are eligible to receive awards under the Bonus Plan, our executive officers have an interest in this proposal. No person is automatically entitled to participate in the Bonus Plan in any Bonus Plan year. We may also pay discretionary bonuses, or other types of compensation, outside of the Bonus Plan.

 

Purpose.  The purpose of the Bonus Plan is to motivate the participants to perform to the best of their abilities and to achieve our objectives and to reward them when those objectives are satisfied. It is designed to govern our annual Short Term Incentive Plan to permit the payment of bonuses to such participants under a Section 162(m)-compliant structure. If the Bonus Plan is approved by our stockholders at this 2007 annual meeting and certain requirements are satisfied, bonuses issued to such participants under the Bonus Plan beginning with the 2007 performance year may qualify as deductible “performance-based compensation” within the meaning of Section 162(m) of the Code.

 

Administration.  The Bonus Plan will be administered by the compensation committee, consisting of no less than two independent members of the board of directors.

 

Determination of Awards.  Under the Bonus Plan, participants will be eligible to receive awards based upon the attainment and certification of certain performance goals established by the compensation committee. The performance goals the compensation committee may choose from may include one or more of the following:

 

 

The performance goals may be used to measure the performance of our company as a whole or a business unit and may be measured relative to a peer group or index. The performance goals may differ from participant to participant and from award to award. Prior to the determination date, the compensation committee will determine whether any significant elements will be included in or excluded from the calculation of any performance goals with respect to any participant. In all other respects, the performance goals will be calculated in accordance with our financial statements, generally accepted accounting principles, or under a methodology established by the committee prior to the issuance of an award, which is consistently applied and identified in the financial statements, including footnotes, the management discussion and analysis section of our annual report, or the minutes of the board of directors.

 

Our compensation committee retains the discretion to reduce or eliminate any award that would otherwise be payable pursuant to the Bonus Plan.

 

Payment of Awards.  We will distribute awards in cash or as an equity award, including stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares, dividend equivalents, or other stock awards. All awards will be paid as soon as is practicable following determination of the award, unless we establish a plan to permit deferral of bonus amounts, in which case awards will be paid pursuant to the timing requirements of that plan and applicable law. The compensation committee may also defer the payment of awards in its discretion, as necessary or desirable to preserve the deductibility of such awards under Code Section 162(m).

 

Maximum Award.  The amounts that will be paid pursuant to the Bonus Plan are not currently determinable. The maximum bonus payment that any participant may receive under the Bonus Plan in any performance period, which is generally one fiscal year, is $1,500,000.

 

Amendment and Termination.  The compensation committee may amend, modify, suspend or terminate the Bonus Plan, in whole or in part, at any time, including the adoption of amendments deemed necessary or desirable to correct any defect, to supply omitted data or to reconcile any inconsistency in the Bonus Plan or in any award granted thereunder. The compensation committee may amend or modify the Bonus Plan in any respect, or terminate the Bonus Plan, without the consent of any affected participant. In no event, however, may such amendment or modification (i) impair any payments made to participants prior to the amendment, modification, suspension or termination, unless the compensation committee has made a determination that such amendment or modification is in the best interests of all persons to whom awards have been granted, (ii) result in an increase in the amount of compensation payable pursuant to any award or (iii) cause compensation that is, or may become, payable under the Bonus Plan to fail to qualify as “performance-based compensation” under Code Section 162(m). Certain amendments to the Bonus Plan will be subject to stockholder approval.

 

Indemnification.  Our board of directors and compensation committee are generally indemnified by us for any liability arising from claims relating to the Bonus Plan.

 

2007 Bonus Plan.  Our compensation committee has established 2007 performance measures for some executives, subject to stockholder approval. See the discussion below on page 40 under “Summary of the 2007 Short Term Incentive Plan.”

 

Federal Income Tax Consequences

 

The following paragraphs are a summary of the general federal income tax consequences to U.S. taxpayers and us of awards granted under the Bonus Plan. Tax consequences for any particular individual may be different.

 

Cash.  Under present federal income tax law, participants will recognize ordinary income equal to the amount of the cash award received in the year of receipt. That income will be subject to applicable income and employment tax withholding by us.

 

Nonstatutory Stock Options.  No taxable income is reportable when a nonstatutory stock option with an exercise price equal to the fair market value of the underlying stock on the date of grant is granted to a participant. Upon exercise, the participant will recognize ordinary income in an amount equal to the excess of the fair market value (on the exercise date) of the shares purchased over the exercise price of the option. Any taxable income recognized in connection with an option exercise by one of our employees is subject to tax withholding by us. Any additional gain or loss recognized upon any later disposition of the shares would be capital gain or loss.

 

Incentive Stock Options.  No taxable income is reportable when an incentive stock option is granted or exercised (except for purposes of the alternative minimum tax, in which case taxation is the same as for nonstatutory stock options). If the participant exercises the option and then later sells or otherwise disposes of the shares more than two years after the grant date and more than one year after the exercise date, the difference between the sale price and the exercise price will be taxed as capital gain or loss. If the participant exercises the option and then later sells or otherwise disposes of the shares before the end of the two- or one-year holding periods described above, he or she generally will have ordinary income at the time of the sale equal to the fair market value of the shares on the exercise date (or the sale price, if less) minus the exercise price of the option.

 

Stock Appreciation Rights.  No taxable income is reportable when a stock appreciation right with an exercise price equal to the fair market value of the underlying stock on the date of grant is granted to a participant. Upon exercise, the participant will recognize ordinary income in an amount equal to the amount of cash received and the fair market value of any shares received. Any additional gain or loss recognized upon any later disposition of the shares would be capital gain or loss.

 

Restricted Stock, Restricted Stock Units, Performance Units and Performance Shares.  A participant generally will not have taxable income at the time an award of restricted stock, restricted stock units, performance shares or performance units are granted. Instead, he or she will recognize ordinary income in the first taxable year in which his or her interest in the shares underlying the award becomes either (i) freely transferable, or (ii) no longer subject to substantial risk of forfeiture. The recipient of a restricted stock award, however, may elect to recognize income at the time he or she receives the award in an amount equal to the fair market value of the shares underlying the award (less any cash paid for the shares) on the date the award is granted.

 

Dividend Equivalents.  A participant generally will recognize ordinary compensation income each time a dividend is paid pursuant to the dividend equivalent rights award equal to the fair market value of the dividend received. If the dividends are deferred, additional requirements must be met to ensure that the dividend is taxable upon actual delivery of the shares, instead of the grant of the dividend.

 

Tax Effect for PCTEL.  If and to the extent that the Bonus Plan awards satisfy the requirements of Section 162(m) of the Code and otherwise satisfy the requirements for deductibility under federal income tax law, we will receive a deduction for the amount constituting ordinary income to participants.

 

THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION UPON PARTICIPANTS AND US WITH RESPECT TO AWARDS UNDER THE BONUS PLAN. IT DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX CONSEQUENCES OF A PARTICIPANT’S DEATH OR THE PROVISIONS OF THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE PARTICIPANT MAY RESIDE.

 

Awards to be Granted to Certain Individuals and Groups

 

Awards under the Bonus Plan are determined based on actual future performance, so future actual awards cannot now be determined.

 

PROPOSAL #4

 

RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

 

Our audit committee has appointed Grant Thornton LLP, independent registered public accounting firm, to audit our financial statements for the fiscal year ending December 31, 2007. This appointment is being presented to our stockholders for ratification at the 2007 annual meeting of stockholders.

 

Before selecting Grant Thornton LLP as our independent registered public accounting firm for fiscal year 2007, our audit committee carefully considered the firm’s qualifications as independent auditors. This included a review of the qualifications of the engagement team, the quality control procedures the firm has established and its reputation for integrity and competence in the fields of accounting and auditing. The audit committee’s review also included matters required to be considered under the SEC’s rules on auditor independence, including the nature and extent of non-audit services, to ensure that Grant Thornton LLP’s independence will not be impaired.

 

Grant Thornton LLP has been conducting independent audits of our financial statements since May 2006. Representatives of Grant Thornton LLP are expected to be present at the 2007 annual meeting of stockholders. They will have the opportunity to address the audience at the meeting, and will be available to answer appropriate questions from stockholders.

 

Change in Independent Registered Public Accounting Firm

 

As previously reported in our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 18, 2006, on May 12, 2006 our audit committee dismissed our independent registered public accounting firm, PricewaterhouseCoopers LLP.

 

The reports of PricewaterhouseCoopers LLP on our consolidated financial statements as of and for the years ended December 31, 2004, and December 31, 2005, did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles.

 

We reported a material weakness in our internal control over financial reporting in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2004 and in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2005. These Annual Reports indicated that as of December 31, 2004 and 2005, we had a material weakness in that we did not maintain effective controls over the review, completeness and accuracy of our provision for income taxes and the related financial statement presentation and disclosure of income tax matters. This control deficiency resulted in audit adjustments to the fourth quarter 2004 consolidated financial statements with respect to the provision for income taxes, the 2005 annual consolidated financial statements with respect to income tax disclosures and the 2005 second quarter consolidated financial statements with respect to the provision for income taxes. During 2006, we remediated this material weakness. Except for the material weakness in internal control over financial reporting described in this paragraph, during the years ended December 31, 2004 and 2005, and through May 12, 2006, we did not have any reportable events within the meaning of Item 304(a)(1)(v) of Regulation S-K. We authorized PricewaterhouseCoopers LLP to respond fully to the inquiries of the successor independent registered public accounting firm concerning the subject matter of the material weakness described above.

 

During our fiscal years ended December 31, 2004 and December 31, 2005 and through May 12, 2006, there were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to PricewaterhouseCoopers LLP’s satisfaction, would have caused PricewaterhouseCoopers LLP to make reference thereto in its reports on our financial statements for such years. PricewaterhouseCoopers LLP’s letter to the Securities and Exchange Commission stating its agreement with the statements above is filed as an exhibit to our Current Report on Form 8-K filed on May 18, 2006.

 

On May 12, 2006, our audit committee engaged Grant Thornton LLP as our independent registered public accounting firm. During our fiscal years ended December 31, 2004 and December 31, 2005 and through May 12,

2006, neither we nor anyone acting on our behalf consulted with Grant Thornton LLP regarding either: (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on our financial statements; or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).

 

Summary of Fees

 

The following table summarizes the approximate aggregate fees billed to us or expected to be billed to us by Grant Thornton LLP for our 2006 fiscal year and by PricewaterhouseCoopers LLP for our 2006 and 2005 fiscal years:

 

 

 

 

 

Pre-Approval of Independent Auditor Services and Fees

 

Our audit committee reviewed and pre-approved all audit and non-audit fees for services provided by Grant Thornton LLP and PricewaterhouseCoopers LLP and has determined that each firm’s provision of such services to us during fiscal 2006 is compatible with and did not impair Grant Thornton LLP’s or PricewaterhouseCoopers LLP’s independence. It is the practice of the audit committee to consider and approve in advance all auditing and non-auditing services provided to us by our independent registered public accounting firm in accordance with the applicable requirements of the SEC.

 

Vote Required and Recommendation

 

Stockholder ratification of the selection of Grant Thornton LLP as our independent registered public accounting firm is not required by our bylaws or other applicable legal requirement. However, our board of

directors is submitting the selection of Grant Thornton LLP to our stockholders for ratification as a matter of good corporate practice. Notwithstanding the selection by the audit committee of Grant Thornton LLP or stockholder ratification of that selection, the audit committee may direct the appointment of a new independent registered public accounting firm at any time during the year if the audit committee determines that such a change would be in our best interest and in that of our stockholders. In the event of a negative vote on ratification, the audit committee will reconsider its selection.

 

The affirmative vote of the holders of a majority of the shares of our common stock present or represented by proxy and entitled to vote at the annual meeting will be required to approve this proposal.

 

Our board of directors recommends that stockholders vote “FOR” the ratification of Grant Thornton LLP as our independent registered public accounting firm.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth certain information regarding the beneficial ownership of our common stock as of March 31, 2007 by:

 

 

Beneficial ownership is determined based on the rules of the SEC. Percent of beneficial ownership is based upon 22,437,009 shares of our common stock outstanding as of March 31, 2007. In addition, shares of common stock that are exercisable as of March 31, 2007 or will become exercisable on or before May 30, 2007 (60 days subsequent to March 31), are treated as outstanding and beneficially owned by the person holding the options for the purpose of computing the percentage ownership of such person and are listed below under the “Number of Shares Underlying Options” column below, but those option shares are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, we believe the stockholders

listed below have sole voting or investment power with respect to all shares listed beside each stockholder’s name, subject to applicable community property laws.

 

 

 

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Introduction

 

The compensation committee of our board of directors was formed in March 2000 and currently consists of Mr. Alberding, Mr. Sheehan and Mr. Jackman, each of whom is an independent, non-employee director of our company. Members of management, including the CEO, Vice President of Finance and Vice President of Human Resources, are invited by the committee to observe and participate in committee meetings from time to time.

 

The original charter of the compensation committee was adopted by our board of directors in August 1999. The committee has reviewed the charter on an annual basis and has modified it from time to time, most recently in March 2005, to clarify the responsibilities of the committee in recognition of our corporate governance needs as well as current industry requirements and practices. The charter of the committee is located on our website (www.PCTEL.com) in the “Corporate Governance” section under “Investor Relations”.

 

The committee maintains minutes of its meetings, and reports to our board of directors on at least a quarterly basis to make our board of directors aware of significant matters that require its attention. The committee met a total of 12 times in 2006.

 

Responsibilities of the Committee

 

Acting on behalf of our board of directors, the compensation committee’s responsibilities are outlined in its charter and include the following:

 

 

Annual Compensation Process

 

Although the committee has full authority to determine the compensation of the executive officers of our company other than the CEO, the CEO’s compensation must be approved each year by the non-employee directors of our board, based on the recommendation of the committee. In making its recommendation, the committee takes into consideration the results of a performance evaluation of the CEO for the preceding year. This evaluation includes the business and financial performance of our company, the CEO’s success in executing our company’s near term objectives and long range strategies, and the quality of the CEO’s interaction with the board of directors, the management and our company’s stockholders. The annual evaluation of the CEO is conducted by the nominating and governance committee based on input from each member of our board of directors, including the CEO. At the time of this performance evaluation, the committee solicits directional guidance from our board of directors as to the general elements that should be addressed in the CEO’s total compensation package for the upcoming year. In addition, the Chair of the committee, as well as our Lead Director, will solicit comment from the CEO in the course of the committee’s formulation of its recommendation. The review and approval of the committee’s recommendation by our board of directors are undertaken in closed session, without the CEO or any other employee of our company present.

 

In recent years up through mid-2006, the compensation of the CEO has been traditionally determined in the second quarter of each year, following the first quarter determination of the compensation of all other officers and other managers; this timing resulted from setting Mr. Singer’s annual compensation that approximately corresponded to the time he was hired as the CEO in the latter part of 2001. In 2006, our board of directors and the committee concluded that beginning in 2007, the compensation of the CEO and all other officers and managers would be established at the same time and prior to the end of the first quarter of the year. The committee believes that this practice will be helpful in standardizing the performance goals used by the committee in motivating company management. The committee also believes that determining compensation at the beginning of the year for all officers will serve to enhance the motivating nature of the performance goals that are used, and to address the committee’s focus on internal pay equity among the members of senior management of our company.

 

The CEO provides significant assistance to the committee each year with operational insights as to individual performance matters and with recommendations for compensation for the officers (other than the CEO) and managers of our company. The CEO is also involved in providing commentary and observations to the committee on general compensation objectives for our company’s senior management. With regard to determining the compensation of the CEO, the committee uses its independent judgment, based in part on the advice of the committee’s independent compensation consultant (see below), in formulating its recommendation to our board of directors. With limited exceptions, the committee’s discussions on the elements of compensation for the CEO are conducted in closed session, typically with its compensation consultant in attendance but with no company employees present. The CEO is not permitted to participate in the deliberations by our board of directors in its evaluation of the committee’s recommendation for CEO compensation.

 

Compensation Philosophy

 

The committee’s philosophy in setting compensation policies for executive and corporate officers is to maximize stockholder value over time. The primary goals of the executive compensation program are, therefore:

 

 

It is the committee’s practice to review at least annually all components of compensation for our executive officers to ensure that the amount and structure of total compensation for each officer is consistent with our compensation philosophies and objectives. Internal pay equity among our officers, i.e., the relationship that exists between the total compensation we pay to the CEO to compensation levels we pay to our other executive officers and management, is also a factor in the committee’s assessment of total compensation for our officers.

 

With these considerations in mind, the general philosophy of the committee has been to strive to (i) establish executive compensation at a level between the median and the 75th percentile of total direct compensation in reference to peer group and other competitive market information, and (ii) establish a strong correlation between the level of compensation and the financial performance of our company compared against its peer group and other companies.

 

Independent Compensation Consultant.  The committee relies significantly upon the services of independent compensation consultants in applying its judgment as to appropriate levels and components of compensation for the executive officers and key management in our company. In 2006, we renewed the annual engagement of The Delves Group, an independent, Chicago-based compensation consulting firm, to assist the committee in establishing our compensation goals and objectives, to provide relevant peer group and survey data on the compensation practices of other companies, and to advise on industry trends in executive compensation. The committee first engaged The

Delves Group in 2004 and has renewed this engagement each year since that time. Although the fees of this consultant are paid by our company, the consultant is accountable and has direct reporting responsibility to the committee. The committee’s practice is to invite a representative of this consulting firm to attend substantially all committee meetings.

 

In addition, management of our company has engaged the services of Franks & Associates, a San Francisco-based compensation consulting firm, as a source of additional information and guidance in establishing compensation for the senior management of our company. Management shares this information with the committee when it is helpful to the committee.

 

Survey Data, Peer Groups and the Use of Industry Benchmarking Data.  A significant factor in the committee’s analysis of executive compensation, particularly as it relates to the compensation of the CEO, is the use of compensation data derived from broadly available compensation surveys compiled by recognized compensation firms, as well as public data from a peer group of publicly traded companies that are comparable to PCTEL. The survey data used by the committee’s independent compensation consultant is derived from different databases of companies that compare to PCTEL only in general terms, including broad industry sectors and size of company.

 

The peer group information is designed to be more specific. The consultant, with assistance from our company’s management and guidance from the committee, is responsible for selecting the companies that are included within this peer group and for compiling relevant executive compensation and corporate performance data. Although it is not possible to construct a group of companies with characteristics entirely similar to PCTEL, The Delves Group strives to compile data from companies that are similar in terms of industry sector, revenue level, market capitalization, operating and financial characteristics and other relevant factors. The peer group used to assist the committee in 2006 and 2007 for determining CEO compensation consisted of 10 companies in similar or related technology businesses with annual revenues ranging from $100-800 million and a median annual revenue level of approximately $200 million. In 2006, the peer group of companies was as follows:

 

 

In 2007, the same peer group of companies was used, with the exception that Proxim and Aether Holdings were replaced by Airspan Networks and Centillium Communications. The compensation data derived from these selected peer groups consisted of annual and long term compensation amounts representing three-year averages. The financial performance data derived from these peer groups includes revenue growth, EBA (earnings before amortization) and EBA margin, EBITD (earnings before interest, taxes and depreciation), and total shareholder return.

 

Industry benchmarking information from the survey data and the identified peer group has been equally relevant to the committee in respect of establishing cash compensation and equity ownership levels among the PCTEL managers and executives other than the CEO. Beginning in 2006, the committee has used benchmarking information to evaluate “total compensation” of our company’s executives, i.e., principally salary, bonus and long term incentives combined, and expects to continue to emphasize this category of information as it becomes more prevalent in the industry as a compensation measurement tool.

 

Other Factors.  Other factors that have been taken into consideration by the committee in its deliberations concerning executive compensation are as follows:

 

 

 

Principal Elements of Compensation

 

The principal elements included in executive compensation for our company’s CEO and executive management consist of:

 

 

Annual Salary.  The committee uses salary as the principal element of cash compensation for our executives. In addition to consideration of the performance levels, experience and responsibilities of our senior managers in reviewing compensation, the committee seeks to establish for our executives and managers an annual salary that is competitive with those paid to executives at comparably situated companies. This element of compensation is key to our company’s ability to hire and retain executives and key managers.

 

Annual Bonuses under our Short Term Incentive Plan.  This plan is a performance-based bonus plan that awards annual cash and/or stock bonuses based on the achievement of corporate- and business unit-level objectives tailored to specific growth and business goals established by management with the concurrence of our board of directors and the committee. Executives are permitted to earn maximum potential bonuses expressed as a percentage of their annual salary. The bonus each year is structured to be payable at lesser or greater amounts based on under- or over-achievement of the identified performance objectives. The committee believes that this structure is a common one employed by many technology companies, and one which is adaptable to our company’s specific business requirements.

 

The committee looks upon the bonus component of executive compensation as its principal tool in structuring incentives designed to realize our company’s yearly growth objectives. The performance objectives that are the basis of awards under the Short Term Incentive Plan are in general tied to, or derived from, our company’s annual financial plan for the upcoming year as approved by our board of directors. As a result, awards under this plan tend to focus more on near term operational and financial objectives of our company. See the discussion below on page 37 under “Short Term Incentive Plan.”

 

Long Term Incentives.  Our company provides long term incentives on an annual basis through the grant of restricted stock and stock options under its stock plans. The nature and terms of the equity award are determined by the committee based on the kinds of motivations that the committee is seeking to establish.

 

Because of the long range vesting arrangements that are implemented with grants of restricted stock (including performance-based shares) and stock options, as well as the potential for appreciation in the value of our stock in our public trading markets as our company grows, the committee regards this element of compensation as having long

term incentive and retention value in the hands of management. In addition, since these incentives are structured to vest (if at all) over a term that ranges from two to five years, depending on the nature of the award, their incentive value to our management is more strategic in nature.

 

The committee is cognizant of the risk-based nature of stock options and performance-based restricted stock, i.e., their economic value to the recipient is dependent on an increase in the stock price in the case of stock options and achievement of performance objectives in the case of performance-based restricted shares. The committee believes risk is an important element in structuring compensation for our executives and senior managers.

 

We believe that small- to mid-cap technology companies in the last few years have increasingly emphasized the use of time-based restricted stock to supplement the use of stock options. This is in part to reduce the usage rate of stock reserved under employee stock plans and in part to ensure that executives acquire a more meaningful stake in the equity ownership of the companies that they manage. We have similarly placed increasing emphasis on time-based restricted stock, which typically vests in equal annual increments over four or five years from the grant date, as a component of executive compensation. In addition, given the continuing emphasis on pay-for-performance in the corporate community and the recent requirement under Financial Accounting Standard 123R that companies record the value of equity awards as compensation expense on the date of grant, we believe that industry conventions are beginning to shift toward the use of performance-based equity structures as incentives for executive management. In 2006, we implemented a performance-based restricted stock award for the CEO. In 2007, performance-based restricted stock awards were again made to Mr. Singer, as well as to Messrs. Schoen, Miller and Nair (as discussed below).

 

Stock Ownership Guidelines

 

From time to time, the committee has considered the implementation of formal stock ownership guidelines for our company’s officers and for members of our board of directors. As a matter of implementation by other public companies, these guidelines are intended to promote minimum levels of equity ownership by managers and directors in the companies that they govern, thus ensuring a clear alignment of economic interest between these fiduciaries and their constituent shareholders. The committee currently believes that formal stock ownership guidelines for either the officers or directors of our company are unnecessary, due to our company’s historical emphasis on the use of stock instead of cash as the form of payment of bonuses to executives under the Short Term Incentive Plan, the existing annual stock elements of director compensation, and the actual ownership levels of stock by both officers and the directors in our company. However, the committee continues to evaluate the need for stock ownership guidelines on a periodic basis.

 

Under the insider trading policy adopted by our company at the time of our initial public offering, our insiders are prohibited from trading in our common stock while in possession of material non-public information. To obviate the possibility of hedging the economic risk of ownership, this prohibition extends to trading in derivative securities of our company, including any put or call options.

 

PCTEL Equity Incentive Plans and Terms of Grant

 

Our company has traditionally provided long term incentives to our executives and senior managers through the grant of restricted stock and stock options under our 1997 Stock Plan. This plan was approved by the stockholders at the time it was originally adopted in 1997, and in 2006, material amendments to the plan (including an increase in the reserve of shares for issuance under the plan) were also approved by our stockholders.

 

The committee and our board of directors believe that the grant of stock options and restricted stock under the 1997 Stock Plan create a direct link between management compensation and our company’s long term performance. Stock options and restricted stock grants awarded to executive management have typically included time-based vesting periods to encourage senior management to continue in our company’s employment, and to optimize the value of the shares granted to them.

 

Material Terms of Stock Option Grants.  Stock options granted to employees have a term of 10 years and are exercisable over time, typically over a period of 48 months from the date of grant, subject to the continued employment of the recipient. Under this 48-month exercisability schedule, there is a one year “cliff” period at the

conclusion of which 25% of the shares subject to the option grant become exercisable; thereafter, the remaining option shares become exercisable in equal monthly increments over the balance of the four-year vesting period. All stock option grants made to our company’s employees, including officers, have an exercise price equal to the fair market value of the common stock on the date of grant, based on the trading price of the common stock as reported by Nasdaq. The committee and our board of directors have determined, as a matter of policy, that all stock option grants under the 1997 Stock Plan will be non-statutory options for federal tax purposes. A non-statutory option is taxable to the recipient upon exercise of the option to the extent that the fair market value of the stock on the exercise date exceeds the exercise price.

 

Because the economic value of a stock option to the employee is dependent upon an increase in the trading price of the common stock above the exercise price of the option, this portion of an executive’s compensation is directly aligned with an increase in stockholder value. If the trading price of the stock falls below the exercise price of the stock option, as has happened from time to time in respect of PCTEL stock option grants, then the stock option may lose its incentive value to the executive. The committee has never repriced previously granted stock options to employees where the trading price of the stock is less than the exercise price, and our 1997 Stock Plan, as amended in 2006, expressly prohibits the repricing of previously granted awards.

 

Material Terms of Time-Based Restricted Stock Grants.  Restricted stock grants typically vest in equal yearly increments over five years from the date of grant, also subject to the continued employment of the recipient. In some cases, restricted stock grants have been made with shorter vesting periods (two, three and four years), depending on the purpose for which they have been awarded. As restricted stock grants vest, there is no exercise price to be paid or other requirement to enable the recipient of the grant to realize the value of the stock at the vesting date. As a result, even though the stock price of our company may drop below the price of the stock that existed on the grant date of the restricted share, the share continues to hold residual value in the hands of the employee. The fair market value of the restricted stock as it vests (based on the trading price of the stock), represents taxable gain to the employee at that time. Our company has the right to require our officers and managers to meet their statutory tax withholding obligations on each vesting date through the delivery of their vested shares net of the number of shares used to satisfy the withholding obligation.

 

Beginning in 2005, the committee determined to use time-based restricted stock grants instead of stock options as the principal form of long term incentive award for our company’s executives and key managers. This decision resulted in part because the committee believes that restricted stock grants provide greater motivational benefit in the hands of our company’s key managers, and in part to reduce the dilution to our company’s stockholders resulting from grants of equity incentives to employees. Because restricted stock grants do not require the payment of an exercise price by the recipient, substantially fewer shares are required for a stock grant to achieve the equivalent economic incentive of a stock option. As a general premise, based on valuation factors specific to our company, this economic equivalence is approximately achieved at the ratio of one share of restricted stock for three option shares. Our company amended its 1997 Stock Plan in 2006 to increase the reserve of shares under the plan to accommodate the continued use of equity incentives to substantially all employees. As this reserve is depleted, our company will be required to seek further approval of its stockholders to replenish the reserve. The committee and management believe that the current reserve will meet our company’s retention and incentive requirements for approximately two to three years.

 

Material Terms of Performance-Based Restricted Stock Grants.  Beginning with the grant of long term incentives in 2006 to the CEO, the committee has determined that the use of performance-based restricted stock grants is an important element of executive compensation. The committee believes that the performance measures used in constructing long term incentives must be meaningful to management, must emphasize the long term strategic goals of our company, and must remain relevant over a period of several years. The committee’s development of meaningful performance measures with long term relevance was first undertaken in mid-2006 in connection with a grant of performance-based shares to Mr. Singer. The committee in 2007 has again authorized the use of performance-based shares to Mr. Singer and other executive officers. The performance measures used for grants made during the two years differ materially, as the committee has continued to evaluate guidance from its compensation consultant and input from our management, and applied this information in the context of our company’s financial performance. The principal terms of these performance-based incentive grants are summarized

below on page 40 under “Long Term Equity Incentives: Time-Based Stock Options and Time- and Performance-Based Restricted Stock”.

 

Accounting.  Beginning January 1, 2006, Financial Accounting Standard 123R became effective. This accounting standard in general requires that our company record a compensation charge equal to the value of each equity incentive award on the date of grant. Based on the approximate 1:3 ratio that we have used in determining economic equivalence of restricted stock to stock options, there is no material difference in accounting cost to our company in the form of either incentive award to management.

 

Administrative Protocols for the Grant of Equity Incentives

 

Board and Committee Authority for Stock Option and Restricted Stock Grants.  Consistent with the provisions of our company’s stock plans, the responsibility for the administration of the stock plans, including the grant of equity incentives under the plans, is conferred upon our board of directors, or any committee of our board of directors. Our board of directors has delegated to the compensation committee the authority to serve as administrator of our company’s plans.

 

The committee adheres to the following protocols in the grant of equity incentive awards to our company’s employees, including officers and senior managers:

 

 

Administrative Protocols in Stock Option and Restricted Stock Grants.  In mid-2006, as a result of the widespread public and regulatory scrutiny of many public companies that improperly administered the grant of equity incentive awards to their employees, the audit committee of our board of directors instructed our Chief Financial Officer to conduct an investigation of the procedures and practices used by our company with respect to the administration of its equity incentive activities dating back to 1999, the year in which our company completed its initial public offering. This investigation ended with the conclusion that no irregularities or improper practices had occurred during the period under investigation, but included a recommendation to improve some of our company’s procedures and practices. As a result of this investigation, a Statement of Administrative Policy was adopted in November 2006, codifying approved procedures in respect of award grants under our company’s 1997 Stock Plan and our 2001 Stock Plan (another plan that we use for non-officer employees). This policy is administered by the committee. The key elements of the policy are as follows:

 

 

 

Annual Salary

 

CEO Salary.

 

 

 

 

The annual salary that we paid to the CEO in 2005 represented a decline from $385,000 paid during the previous year. The CEO’s salary level in 2005 resulted from Mr. Singer’s voluntary request for a salary reduction as part of an overall expense reduction program designed to meet profit targets for 2005. As part of this program, our other named executive officers similarly agreed to reductions in salary. The dollar amounts of these reductions were less than the reduction initiated by Mr. Singer. In connection with Mr. Singer’s salary reduction as well as the elimination in 2005 of a car allowance and other company perquisites, upon the recommendation of the committee, our board of directors approved the grant to Mr. Singer of 53,200 shares of restricted stock that vest in equal annual increments over a period of five years, subject to Mr. Singer’s continued service as an employee.

 

In mid-2006, at the committee’s recommendation, our board of directors approved an increase in Mr. Singer’s salary to $400,000, representing an increase of 14% over the prior year. This salary increase was authorized in part due to our company’s favorable financial performance in 2005, measured against the financial plan for that year, and in part due to the committee’s concern that Mr. Singer had not been provided with any increase in his base salary

since 2004. The resulting salary level in 2006 was determined to be within competitive norms based on industry benchmarking information provided by the committee’s compensation consultant.

 

In 2007, the increase in Mr. Singer’s salary to $450,000 was recommended by the committee to our board of directors, reflected our board of directors’ assessment of the performance of the CEO based on its annual evaluation, and was consistent with the committee’s philosophy of maintaining total compensation for the CEO within competitive norms.

 

Salaries for Other Named Executive Officers.  

 

 

 

 

The annual salaries that we paid to our other named executive officers in 2005 (with the exclusion of Mr. Deppe, who was not a named executive officer at the time), at the recommendation of management, similarly were reduced in the aggregate by approximately 4% from salary levels paid in the previous year as a result of our company’s failure to meet its 2004 financial plan objectives. Concurrent with these salary reductions, the committee determined to provide the approximate value of the reductions in salary, together with elimination of other company perquisites, in restricted shares of our common stock, subject to vesting in equal annual increments over five years.

 

In 2006, taking into consideration the achievement by our company of its 2005 financial plan objectives, the committee approved an increase in salaries paid to our named executive officers (not including the CEO) by an aggregate of 4% from the previous year, which approximates the increase in the cost of living over the period.

 

In 2007, the committee again approved an increase in salaries for Messrs. Schoen, Miller and Nair. Mr. Deppe’s salary remained the same, in light of his changed responsibilities as our Executive Vice President of Strategy and Business Development effective in October 2006. The increase in 2007 salaries in the aggregate for the named executive officers (other than the CEO) represents an increase of 9% over 2006 levels. The increase for Mr. Miller reflected his promotion from Vice President, Global Sales to Vice President and General Manager, Broadband Technology Group and his increased revenue responsibility related to that business unit. With each annual adjustment for the named executive officers (not including the CEO) and other key management in our company, the committee was aided with substantial guidance and observations from the CEO and considered these increases in light of their individual contributions, their total compensation, and relevant industry compensation data provided by our management.

 

Short Term Incentive Plan

 

Our company pays annual bonuses to its executive officers and key managers under its Short Term Incentive Plan. Our 2006 Short Term Incentive Plan represents a continuation of bonus structure that was originally conceived and implemented by the committee in 2004. These annual bonuses are designed to:

 

 

Key Terms of Short Term Incentive Plan.  The amount of the bonus each year is determined based upon the achievement of identified goals by the executive and our company. These goals typically have been approved by the

committee (or, in the case of the CEO, by our board of directors, upon the recommendation of the committee) during the early part of the performance year or the end of the preceding year. In 2005, 2006 and 2007, these goals have consisted of both corporate goals and/or goals corresponding to the business unit of the participating officer. For officers whose responsibilities are not confined to a particular business unit, the goals are weighted 100% in favor of corporate goals. Executive officers with chief corporate responsibilities include Mr. Singer and Mr. Schoen. For employees with business unit responsibilities, the weighting of the goals is allocated between corporate goals and goals of the particular business unit. Executive officers with key business unit responsibilities in 2006 included Mr. Miller as the Vice President of Global Sales, Mr. Nair as the Vice President and General Manager of the Mobility Solutions Group, and Mr. Deppe as the Vice President and General Manager of the Antenna Products Group. In 2007, the executive officers with key business unit responsibilities following the announced reorganization of business units of our company include Mr. Miller as the Vice President and General Manager of the Broadband Technology Group, and Mr. Nair continuing with his same position and responsibilities. Mr. Deppe continues as an executive officer of our company as the Executive Vice President of Strategy and Business Development, but does not have business unit responsibilities.

 

Corporate goals are defined in terms of planned revenue and planned EBTA (income net of taxes, stock-based compensation, acquisition intangibles amortization, goodwill impairment, restructuring charges and, in 2006, a one-time intellectual property litigation settlement award) of PCTEL on a consolidated basis. Our company’s annual financial plan as reviewed and approved by our board of directors for a particular year is the foundation of the goals used in the Short Term Incentive Plan. The goals established under the Short Term Incentive Plan are consistent with the financial and operating targets included within the annual financial plan for that year as approved by the board of directors. Business unit goals are generally defined in terms of targeted operational goals under the control of the participating employee based on anticipated business unit performance. These goals include targeted revenue, EBTA contribution and other operating measures for each particular unit for the fiscal year.

 

Achievement of a particular planned corporate goal and/or targeted business unit goal results in a score of 75% of the maximum potential bonus under the plan for any particular individual. This structure permits recognition of over-achievement of a planned or targeted goal by a specified amount with scores of up to 100%, as well as under-achievement with scores that scale down to no award. Scores for corporate and business unit goals are aggregated and averaged on a weighted basis in determining the amount of a particular award. However, where there is a failure to achieve the minimum targeted goal of a business unit, no award is made, even if a planned corporate goal is achieved. In establishing performance targets under the plan (including over-achievement and under-achievement levels), the committee takes into consideration the following factors:

 

 

In general, the committee believes that payment of 75% of the maximum potential bonus for achievement of the annual financial plan for the year presents a realistic opportunity for the executive officers and other managers participating in the Short Term Incentive Plan to realize a competitive level of compensation. The plan is designed to create a meaningful challenge in realizing the performance measures while at the same time providing incentive to accomplish the financial and operating goals of our company.

 

In general, once the corporate and business unit goals of our company have been established for a fiscal year, the committee has awarded payment to a named executive officer or other manager under the plan in a manner that has been consistent with such goals. On occasion, the committee has awarded special bonuses not contemplated by the Short Term Incentive Plan to managers for exemplary performance or significant commitment of personal time.

 

Bonus Payments in Stock.  Bonuses awarded under our 2005 and 2006 Short Term Incentive Plans were paid in shares of immediately vested shares of our common stock in lieu of cash. The committee and our board of directors have similarly determined that bonuses will continue to be paid in shares of our immediately vested

common stock under the 2007 Short Term Incentive Plan. The committee approves the use of common stock as the currency for payment of bonuses under the plan in part to increase the equity ownership of management in our company, which the committee believes serves to more closely align the interests of management with those of our company’s stockholder base, and in part to conserve cash. The number of shares paid to an employee is determined by dividing the amount of the bonus by the closing price of our company’s common stock on Nasdaq on the effective date of the award. The effective date of awards paid in common stock has been the third day following the release of our financial results for the applicable year.

 

Summary of the 2006 Short Term Incentive Plan

 

The award of bonuses under the 2006 plan, approved by the committee in February 2007, reflects the below-plan revenue growth of our company and one of its business units over the preceding fiscal year. The participation in this plan by the CEO and our other named executive officers is summarized below.

 

 

 

 

Summary of the 2007 Short Term Incentive Plan

 

In March 2007, the compensation committee and our board of directors adopted a 2007 Short Term Incentive Plan with substantially the same structure as the 2006 plan. In 2007, among other factors considered by the committee in structuring performance measures under the plan were the need to continue emphasis on revenue growth and expense management. The participation in this plan by the CEO and our other named executive officers is summarized below.

 

 

Concurrently with our board of directors’ approval of the 2007 Short Term Incentive Plan, our board of directors has approved an Executive Compensation Plan for the CEO and our other named executive officers. This latter plan governs the 2007 Short Term Incentive Plan for purposes of Section 162(m) of the Code. Bonuses payable to these officers under the 2007 Short Term Incentive Plan summarized above are conditioned upon the approval of the Executive Compensation Plan by our stockholders at the 2007 annual meeting. See the discussion below on page 45 under “Section 162(m) of the Internal Revenue Code.”

 

Long Term Equity Incentives: Time-Based Stock Options and Time-and Performance-Based Restricted Stock

 

In considering long term equity incentive awards for our senior management, the committee believes that these awards should:

 

 

Beginning in mid-2006, the committee implemented the use of performance-based restricted stock as an element of compensation for the CEO. Performance-based restricted stock grants, in contrast with time-based restricted stock grants, vest on the achievement of established performance goals. The committee believes that performance-based stock, as with bonus payments under our company’s Short Term Incentive Plan, directly motivate management to achieve company-specific goals and objectives. However, because of the long term incentive nature of equity as an element of compensation, the committee also believes that performance-based shares are optimal as an incentive tool when they are structured around performance objectives that are targeted for accomplishment in periods typically longer than a single year. Based on the usage ratios used by our company in grants of restricted stock compared to grants of stock options, our company strives to ensure that there is no material difference in accounting cost to our company between the two incentive structures. As with time-based restricted stock, our company has the right to require that the statutory tax withholding obligations of the recipient arising on each vesting date to be met through the delivery of vested shares.

 

CEO Long Term Equity Incentives for 2006.  The industry survey and peer group information reviewed by the committee in assessing the level of long term incentives to be awarded to the CEO in 2006 indicated that:

 

 

The committee believed that a grant of long term incentives for 2006 — a combination of stock options and performance-based restricted stock — with an economic value of approximately $1,000,000 (based on an informal approximation by the committee’s compensation consultant) reflected an appropriate level of incentive relative to Mr. Singer’s salary and bonus compensation. The committee believed that long term incentives that measured to the 75th percentile of peer group performance data were reasonable and would yield value based on the future performance of our company. It was also relevant to the committee’s deliberations that emphasis of long term incentives as a major element of Mr. Singer’s compensation served to support the strategy of structuring executive compensation to remain within the deductible limits of Section 162(m) of the Code. See the discussion below on page 45 under “Section 162(m) of the Internal Revenue Code”.

 

2006 Stock Option Grants to the CEO.  With these considerations in mind, our board of directors, upon the recommendation of the committee, authorized the grant to Mr. Singer of stock options as follows:

 

 

2006 Performance-Based Restricted Stock Grant to the CEO.  Concurrently with the June 2006 stock option grant, our board of directors, upon the recommendation of the committee, authorized the grant to the CEO of 26,000 performance-based restricted shares with an approximate economic value on the date of grant (based on an informal approximation by the committee’s compensation consultant) of $250,000. This grant was made as an additional long term incentive to Mr. Singer for 2006. The performance criteria, measured over a performance period of 18 months commencing July 1, 2006 and ending December 31, 2007, were cumulative PCTEL revenue ranging from $136 million to $160 million, and total shareholder return ranging from 7.5% to 22.5%. The 18-month performance period for this grant of shares to Mr. Singer was a one-time transitional event; in 2007 and going forward, performance periods used as the basis for the grant of restricted shares are expected to correspond to fiscal years.

 

Subject to the achievement by our company of the two performance measures over the 18-month performance period, the actual number of shares that could be awarded to the CEO may increase (up to 150% of the targeted amount) or decrease (no shares for performance below the minimum thresholds). In addition, upon the completion of the performance period and assuming that some level of performance-based shares were earned based on the two performance measures, such shares will not “vest” to Mr. Singer unless he continues his employment with our company through June 30, 2009, representing an additional 18-month service period in addition to the performance measures. As discussed below, based on our company’s current and planned financial performance through the end of 2007, it is unlikely that any of these restricted shares will be awarded to Mr. Singer.

 

2007 Long Term Incentives for the CEO.  In March 2007, upon the recommendation of the committee, our board of directors approved a grant of 80,000 shares of restricted stock to the CEO, consisting of a time-based grant of 40,000 shares and a performance-based grant of 40,000 shares, with a total economic value of approximately $800,000 (based on an informal approximation by the committee’s compensation consultant). Among the factors considered by the committee in connection with its recommendation to our board of directors concerning CEO compensation for 2007 were the following:

 

 

The 40,000-share time-based restricted stock grant awarded to Mr. Singer will vest in equal annual increments over a period of four years, subject to his continued service.

 

The 40,000-share performance-based restricted stock grant awarded to Mr. Singer may be earned on an annual basis, subject to his continued service and based on the achievement of corporate performance measures. These measures consist of (i) annual revenue growth and (ii) annual “pro forma” net income growth (i.e., net income as adjusted for the exclusion of licensing fees, restructuring charges, intangible charges for goodwill, and stock-based compensation charges), assessed each fiscal year over a period of four years. The annual revenue growth target and the annual “pro forma” net income growth target each range from 5% to 25%, and the percentage of the performance-based shares that may be earned by Mr. Singer based on achievement of the measures ranges from 150% at the 25% level of annual growth or higher (i.e., a potential maximum of 60,000 shares), and no shares at less than the 5% level of annual growth. The two measures are weighted equally and averaged for purposes of determining the number of shares to be earned. In addition, using the same methodology, Mr. Singer is permitted a final opportunity at the end of the four-year period to earn any remaining shares based on cumulative corporate performance over the four years.

 

2006 Long Term Incentives for Other Named Executive Officers.  In March 2006, the committee approved the grant of restricted stock to our named executive officers (other than the CEO) as follows:

 

 

These restricted stock grants vest in equal annual increments over a period of five years, subject to continued service. In addition, Mr. Nair received a stock option for 5,000 shares in recognition of his contributions and leadership as the head of our Mobility Solutions Group.

 

The committee considered a number of factors in approving these incentives, including our company’s favorable financial performance in 2005, their individual contributions as senior managers within our company, equity incentive levels in previous years, the value of these awards relative to their total compensation for 2006, and their cumulative equity ownership in our company.

 

2007 Long Term Incentives for Other Named Executive Officers.  In March 2007, the committee approved the grant of restricted stock to the named executive officers identified below as follows:

 

 

The time-based stock grant awarded to each officer will vest in equal annual increments over a period of four years, subject to his continued service.

 

The performance-based stock grant awarded to each officer may be earned on the same basis as described above for Mr. Singer in respect of his 2007 performance-based stock grant.

 

The committee determined that in 2007, 50% of the long term incentives annually granted to the executive officers of our company should be performance-based, consistent with the committee’s philosophy that compensation at the executive level should be tied to corporate performance. The committee considered a number of factors in approving both the time-based and the performance-based incentives, including our company’s below-plan financial performance in 2006, the individual performance contributions of each officer, equity incentive levels in previous years, the value of these awards relative to their total compensation for 2007, and their cumulative equity ownership in our company, and budgeting factors in determining to reduce the usage rate of equity incentives under our 1997 Stock Plan. Mr. Miller’s incentive grant reflected his promotion and substantially increased revenue responsibility for our newly formed Broadband Technology Group. Mr. Deppe was not included in the grant of long term incentives pending an evaluation of his business development and corporate strategy responsibilities.

 

Other Benefits

 

 

 

Change in Control and Severance Arrangements

 

The table below and the summary of retention arrangements related to benefits associated with a change in control of our company should be read in conjunction with the table on page 54 of this proxy statement.

 

 

 

 

In 2006, the committee, working with the CEO, reviewed the severance and change of control benefits of all managers of our company under existing employment and management retention agreements and arrangements. This review was undertaken to promote uniformity of benefits and to eliminate historical anomalies associated with managers who had joined our company at different times or under unique circumstances. In conjunction with this review, the CEO agreed to reduce his salary continuation severance benefit under his employment agreement from

24 to 12 months, consistent with the levels established for the other named executive officers. Previously, Mr. Singer had also voluntarily agreed to modify his employment agreement to eliminate his personal car allowance, his CEO “stretch bonus” plan, and his post-retirement healthcare benefits, all for the purpose of promoting parity of benefits with the other named executive officers in our company. In 2006, the retention and employment agreements of our other named executive officers and our vice-presidents were amended as necessary to ensure that the benefit levels were consistent based on seniority of the manager, and in accord with industry norms as determined by the committee, its independent compensation consultant and the CEO.

 

A change in control is defined to include any merger, reorganization or acquisition of our company, including by way of sale of all or substantially all of our assets, in which a majority of the voting control of our company is transferred. The retention benefits summarized in the table above in connection with a change in control are based on a “double trigger” structure, i.e., no benefit will be provided unless there is both (i) a completed change in control event, and (ii), within 12 months following such event, the manager’s employment is involuntarily terminated. The committee and the CEO believe that all managers of our company should contribute to the success of our company following any possible merger or acquisition, to the extent permitted by the successor or acquirer. The “double trigger” structure ensures that our managers have the necessary motivation to support our company during a post-acquisition transition. The principal retention benefits that result from this structure include lump sum payment of a specified percentage of annual salary, acceleration of 100% of any then unvested equity incentives, and company-paid healthcare benefits for a specified period of time. The committee believes that the level of these benefits would not in the aggregate represent a financial deterrent to a buyer or successor entity in considering a combination transaction with our company.

 

Our named executive officers and other managers are also entitled to severance and related benefits in connection the involuntary termination of their employment under their employment agreements with our company. The level of these benefits was similarly reviewed by the committee and the CEO in 2006, also for the purpose of uniformity and to reassess them against industry norms and corporate objectives. The principal severance benefits include salary continuation and company-paid healthcare benefits for a specified period of time. In addition, upon the occurrence of an involuntary termination or death or disability, severance benefits include 12 months accelerated vesting of any then unvested time-based restricted shares, and immediate vesting of performance-based restricted shares in the amount targeted for vesting in the performance year in which termination, death or disability occurs.

 

In the case of the CEO, severance benefits resulting from involuntary termination also includes payment of the maximum potential bonus under our Short Term Incentive Plan; in the event of death or disability, the amount of the bonus that would be paid under our Short Term Incentive Plan would be based on the actual amount of the bonus determined for the performance year in which death or disability occurred, pro rated for the year based on the date of death or disability. The current employment agreement with Mr. Singer also imposes a non-competition and non-solicitation covenant with a term of 12 months from his termination date in connection with his severance arrangements; these covenants have a term of 24 months from his termination date in connection with a change in control that is followed by the involuntary termination of his employment.

 

Section 162(m) of the Internal Revenue Code

 

Under Section 162(m) of the Code, our company is able for federal tax purposes to deduct compensation paid to the CEO and our four other named executive officers only if the compensation for such officer is less than $1 million during the fiscal year, or is “performance-based,” as defined under Section 162(m).

 

The committee has considered the corporate tax deductibility limits under Section 162(m). Although it is the objective of the committee to seek to qualify all executive compensation as deductible, the committee has not adopted a policy with this objective, in order to provide flexibility and to ensure that our executive compensation programs remain competitive.

 

In 2006, although the total compensation (other than performance-based compensation) paid to Mr. Singer exceeded the $1 million threshold under Section 162(m), the loss of deductibility as to this excess did not materially affect our company’s financial results for the fiscal year. No other named executive officers received compensation in 2006 which approached the $1 million threshold. In 2006, the committee considered or acted upon the following in connection with structuring executive compensation:

 

 

Section 409A of the Internal Revenue Code

 

Section 409A of the Code, which was added by the American Jobs Creation Act of 2004, provides certain new requirements on non-qualified deferred compensation arrangements. These include new requirements with respect to an individual’s election to defer compensation and the individual’s selection of the timing and form of distribution of the deferred compensation. Section 409A also generally provides that distributions must be made on or following the occurrence of certain events (e.g., the individual’s separation from service, a predetermined date, or the individual’s death). Section 409A imposes restrictions on an individual’s ability to change his or her distribution timing or form after the compensation has been deferred. For certain individuals who are officers, Section 409A requires that such individual’s distribution commence no earlier than six months after such officer’s separation from service.

 

The committee evaluates the various benefit plans and compensation arrangements that we have in place for our officers and management, and requires modifications of these plans and arrangements as necessary to comply with the requirements of Section 409A.

 

Adjustment of Awards

 

Our company’s financial statements and the related financial performance goals and measures used by the committee as the basis for executive compensation have not to date been subject to revision or restatement. As a result, the committee has never been required to consider an adjustment of an award made on the basis of a relevant financial measure that has been revised or restated. However, if such a circumstance were to occur, the committee and our board of directors would consider all appropriate remedial measures, which may include the recovery of amounts that were inappropriately awarded to an individual executive.

 

COMPENSATION COMMITTEE REPORT

 

The compensation committee of the board of directors has reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K of the Securities Exchange Act of 1934, as amended, and, based on such review and discussions, the compensation committee recommended to the board of directors that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference into our company’s 2006 Annual Report on Form 10-K.

 

The Compensation Committee

 

Richard C. Alberding

John R. Sheehan

Brian J. Jackman

 

EXECUTIVE COMPENSATION AND OTHER MATTERS

 

The following table presents the compensation of our Chief Executive Officer, Chief Financial Officer, and three other most highly compensated executive officers for the fiscal year ended December 31, 2006. We refer to these individuals elsewhere in this proxy as “named executive officers.”

 

Summary Compensation Table for the Fiscal Year Ended December 31, 2006

 

 

 

 

The following table provides information on plan-based awards granted in fiscal 2006 to each of our named executive officers.

 

Grants of Plan-Based Awards for the Fiscal Year Ended December 31, 2006