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PCTEL designs develops and delivers wireless solutions. PCTEL's products include wireless local area network software products that simplify installation roaming Internet access and billing. Its subsidiary DTI designs develops and distributes software-defined receivers and receiver-based products that measure monitor and optimize the performance of cellular and Wi-Fi networks. . MAXRAD designs develops manufactures and distributes innovative antenna solutions that facilitate and simplify wireless communications. Pctel Inc. has a market cap of $106.1 million; its shares were traded at around $5.65 with and P/S ratio of 1.3. Highlight of Business Operations:During the quarter ended June 30, 2009, the company entered into a plan of liquidation for the Wi-Sys legal entity as part of its consolidation of Wi-Sys’ operations into PCTEL in order to achieve operating cost synergies. Pursuant to that liquidation, the company incurred $275 of Canadian income taxes related to the transfer of assets from the Canadian entity to the company’s U.S. entity. The company initially recorded those taxes as income tax expense in the quarter. Under accounting for income taxes incurred related to the transfer of assets between companies in a controlled group, the current Canadian taxes of $275, less the reversal of the deferred tax liability of $223 should be charged to prepaid taxes, with the balance amortized over the life of the related assets. Therefore income tax expense during the quarter was overstated by $275.
The company acquired Wi-Sys Communications, a Canadian company, through a purchase of all of Wi-Sys’ common stock for $2.3 million in cash on January 5, 2009. When recording the initial Wi-Sys balance sheet at fair value under purchase accounting in the quarter ended March, 31, 2009, the company did not record a $223 deferred tax liability, with correspondent recording of additional goodwill, for the effect of the book over tax basis in the related intangible asset. The company evaluated at the time, in error, that it would treat the permanent difference as a reconciling item in its reconciliation of effective tax rate to statutory rate. During the same quarter, the company impaired all of its goodwill, resulting in goodwill impairment expense being understated by $223, equal to the amount of the unrecorded deferred tax liability.
The effect of the misstatements year to date are presented in this amendment as compared to the original filings on form 10-Q for the quarters ended March 31, 2009 and June 30, 2009. The year to date effect of the misstatements on the income statement is that goodwill impairment expense is understated by $223, income tax expense is overstated by $148, and net income is overstated by $75.
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