<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2000
COMMISSION FILE NUMBER 000-21129
AWARE, INC.
(Exact Name of Registrant as Specified in Its Charter)
MASSACHUSETTS 04-2911026
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
40 MIDDLESEX TURNPIKE, BEDFORD, MASSACHUSETTS, 01730
(Address of Principal Executive Offices)
(Zip Code)
(781) 276-4000
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
Indicate the number of shares outstanding of the issuer's common stock as of
April 28, 2000:
CLASS NUMBER OF SHARES OUTSTANDING
----- ----------------------------
Common Stock, par value $0.01 per share 22,452,940 shares
<PAGE> 2
AWARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999 ................ 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 2000
and March 31, 1999 .................................. 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000
and March 31, 1999 .................................. 5
Notes to Consolidated Financial Statements .......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ......................................... 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings ................................... 17
Item 6. Exhibits and Reports on Form 8-K .................... 18
Signatures .......................................... 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
AWARE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 42,318,159 $ 35,248,275
Short-term investments ............................................ - 1,017,302
Accounts receivable (less allowance for doubtful
accounts of $200,000 in 2000 and $175,000 in 1999) ............. 6,922,239 5,705,914
Inventories ....................................................... 198,904 122,058
Prepaid expenses and other assets ................................. 903,667 769,155
------------ ------------
Total current assets ........................................ 50,342,969 42,862,704
------------ ------------
Property and equipment, net ............................................ 11,458,697 11,619,761
------------ ------------
Total assets ................................................ $ 61,801,666 $ 54,482,465
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 411,949 $ 787,684
Accrued expenses .................................................. 208,085 177,500
Accrued compensation .............................................. 284,244 467,806
Accrued professional .............................................. 126,875 80,678
------------ ------------
Total current liabilities ................................. 1,031,153 1,513,668
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares authorized,
none outstanding .......................................... - -
Common stock, $.01 par value; 30,000,000 shares authorized; issued
and outstanding, 22,427,818 in 2000 and 21,918,056 in 1999 224,278 219,181
Additional paid-in capital ....................................... 70,552,181 64,865,465
Accumulated deficit .............................................. (10,005,946) (12,115,849)
------------ ------------
Total stockholders' equity ................................ 60,770,513 52,968,797
------------ ------------
Total liabilities and stockholders' equity ................ $ 61,801,666 $ 54,482,465
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
AWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
---- ----
<S> <C> <C>
Revenue:
Product sales .................... $1,191,892 $1,224,705
Contract revenue ................. 2,551,666 2,561,261
Royalties ........................ 2,663,250 520,302
---------- ---------
Total revenue ................ 6,406,808 4,306,268
Costs and expenses:
Cost of product sales ............. 142,922 246,007
Cost of contract revenue .......... 1,971,159 1,759,059
Research and development .......... 1,413,784 782,729
Selling and marketing ............. 667,042 586,796
General and administrative ........ 671,961 593,135
---------- ---------
Total costs and expenses...... 4,866,868 3,967,726
Income from operations ................ 1,539,940 338,542
Other income .......................... - 18,300
Interest income ....................... 569,963 320,121
---------- ---------
Income before provision for income
taxes ............................... 2,109,903 676,963
Provision for income taxes ............ - -
---------- ---------
Net income ............................ $2,109,903 $676,963
========== =========
Net income per share - basic .......... $0.09 $0.03
Net income per share - diluted ........ $0.09 $0.03
Weighted average shares - basic ....... 22,229,909 21,097,978
Weighted average shares - diluted ..... 23,879,848 23,372,593
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
AWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................... $ 2,109,903 $ 676,963
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................... 444,303 426,474
Increase (decrease) from changes in assets and
liabilities:
Accounts receivable ............................ (1,216,325) (977,939)
Inventories .................................... (76,846) 56,330
Prepaid expenses and other assets .............. (134,512) 139
Accounts payable ............................... (375,735) 283,759
Accrued expenses ............................... (106,780) 118,029
Deferred revenue ............................... - (6,250)
------------ ------------
Net cash provided by operating activities ... 644,008 577,505
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment ................. (283,239) (335,734)
Net sales (purchases) of short-term investments ..... 1,017,302 (1,964,693)
------------ ------------
Net cash provided by (used in) investing
activities ............................... 734,063 (2,300,427)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock ............. 5,691,813 2,402,536
------------ ------------
Net cash provided by financing activities ... 5,691,813 2,402,536
------------ ------------
Increase in cash and cash equivalents ................... 7,069,884 679,614
Cash and cash equivalents, beginning of period .......... 35,248,275 23,512,242
------------ ------------
Cash and cash equivalents, end of period ................ $ 42,318,159 $ 24,191,856
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A) BASIS OF PRESENTATION
The accompanying unaudited consolidated balance sheets, statements of
operations, and statements of cash flows reflect all adjustments
(consisting only of normal recurring items) which are, in the opinion
of management, necessary for a fair presentation of financial position
at March 31, 2000, and of operations and cash flows for the interim
periods ended March 31, 2000 and 1999.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and
therefore do not include all information and footnotes necessary for a
complete presentation of operations, the financial position, and cash
flows of the Company, in conformity with generally accepted accounting
principles. The Company filed audited financial statements which
included all information and footnotes necessary for such presentation
for the three years ended December 31, 1999 in conjunction with its
1999 Annual Report on Form 10-K.
The results of operations for the interim period ended March 31, 2000
are not necessarily indicative of the results to be expected for the
year.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation -- an interpretation of APB Opinion No. 25" ("FIN
44"). FIN 44 clarifies the application of APB Opinion No. 25 to certain
issues including: the definition of an employee for purposes of
applying APB Opinion No. 25; the criteria for determining whether a
plan qualifies as a noncompensatory plan; the accounting consequence of
various modifications to the terms of previously fixed stock options or
awards; and the accounting for the exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000, but
certain conclusions in FIN 44 are applicable retroactively to specific
events occurring after either December 15, 1998 or January 12, 2000.
The Company does not expect the application of FIN 44 to have a
material impact on the Company's financial position or results of
operations.
B) INVENTORY
Inventory consists primarily of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
Raw materials ............ $169,628 $93,847
Finished goods ........... 29,276 28,211
-------- --------
Total ................ $198,904 $122,058
======== ========
</TABLE>
6
<PAGE> 7
C) COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings
per share is computed by dividing net income by the weighted average
number of common shares outstanding plus additional common shares that
would have been outstanding if dilutive potential common shares had
been issued. For the purposes of this calculation, stock options are
considered common stock equivalents in periods in which they have a
dilutive effect. Stock options that are antidilutive are excluded from
the calculation.
Net income per share is calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
---- ----
<S> <C> <C>
Net income $2,109,903 $676,963
Weighted average common shares outstanding 22,229,909 21,097,978
Additional dilutive common stock equivalents 1,649,939 2,274,615
---------- ----------
Diluted shares outstanding 23,879,848 23,372,593
========== ==========
Net income per share - basic $0.09 $0.03
Net income per share - diluted $0.09 $0.03
</TABLE>
Options to purchase shares of the Company's common stock totaling
766,754 at March 31, 2000 were outstanding, but were not included in
the computation of diluted earnings per share as the inclusion of these
shares would have been anti-dilutive.
D) BUSINESS SEGMENTS
The Company organizes itself as one segment and conducts its operations
in the United States.
The Company sells its products and technology to domestic and
international customers. Revenues were generated from the following
geographic regions:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------
2000 1999
---- ----
<S> <C> <C>
United States $5,492,308 $3,004,601
Asia/Pacific 598,900 119,135
Germany 207,380 810,200
Rest of World 83,070 8,842
Europe, excluding Germany 25,150 363,490
---------- ----------
$6,406,808 $4,306,268
========== ==========
</TABLE>
7
<PAGE> 8
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Some of the information in this Form 10-Q contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," "continue" and similar words. You should
read statements that contain these words carefully because they: (1) discuss our
future expectations; (2) contain projections of our future operating results or
financial condition; or (3) state other "forward-looking" information. However,
we may not be able to predict future events accurately. The risk factors listed
in this section, as well as any cautionary language in this Form 10-Q, provide
examples of risks, uncertainties and events that may cause our actual results to
be materially worse than the expectations we describe in our forward-looking
statements. You should be aware that the occurrence of any of the events
described in these risk factors and elsewhere in this Form 10-Q could materially
and adversely affect our business.
RESULTS OF OPERATIONS
Product Sales. Product sales consist primarily of revenue from the sale
of digital subscriber line ("DSL") equipment and compression software products.
The products that comprise DSL equipment sales are primarily test and
development systems and modems.
Product sales decreased 3% from $1,225,000 in the first quarter of 1999 to
$1,192,000 in the current year quarter. As a percentage of total revenue,
product sales decreased from 28% in the first quarter of 1999 to 19% in the
current year quarter. The dollar decrease was primarily due to lower revenue
from the sale of compression software and modems. The revenue decline from these
products was almost entirely offset by an increase in revenue from the sale of
test and development systems. Compression software revenue was lower due to a
large sale to a customer in the prior year quarter that did not repeat in the
current year quarter. Modem revenue was lower because we have begun to phase out
sales of our x200 Access Router. DSL test and development system revenue
increased primarily because: (i) more customers are developing chipsets and
equipment using our DSL technology and consequently they purchased more of these
systems in the current year quarter, and (ii) the availability of new test and
development system products that were not available in the prior year quarter.
Contract Revenue. Contract revenue consists primarily of license,
engineering development, and customer support fees that we receive under
agreements with our customers to develop DSL products. Contract revenue in the
first quarter of 1999 also includes a small amount of revenue from U.S.
government research contracts.
Contract revenue decreased slightly from $2,561,000 in the first quarter of 1999
to $2,552,000 in the current year quarter. As a percentage of total revenue,
contract revenue decreased from 60% in the first quarter of 1999 to 40% in the
current year quarter. The slight dollar decrease was primarily due to no U.S.
government research revenue in the current year quarter. We completed our last
U.S. government research project in the first quarter of 1999, and we anticipate
that
8
<PAGE> 9
revenue from such projects will not continue in future periods. Contract revenue
from telecommunications customers was slightly higher in the current year
period.
Royalties. Royalties consist of royalty payments that we receive under
licensing agreements. We receive royalties when customers use our technology in
their chipsets or equipment.
Royalties increased from $520,000 in the first quarter of 1999 to $2,663,000 in
the current year quarter. As a percentage of total revenue, royalties increased
from 12% in the first quarter of 1999 to 42% in the current year quarter. We
believe that the increase in royalties was primarily due to growing deployments
of DSL services by the telecommunications industry in general, and of
deployments using our technology in particular.
Cost of Product Sales. Cost of product sales consists primarily of the
cost of equipment sales, because compression software revenue has minimal cost
of sales associated with it. Cost of product sales decreased 42% from $246,000
in the first quarter of 1999 to $143,000 in the current year quarter. As a
percentage of product sales, cost of product sales decreased from 20% in the
first quarter of 1999 to 12% in the current year quarter. The improvement in
product margins is primarily due to a shift in the sales mix of test and
development systems and x200 modems. In the current year quarter, we sold a
greater proportion of test and development systems, which have higher margins
than x200 modems.
Cost of Contract Revenue. Cost of contract revenue consists primarily
of salaries for engineers and expenses for consultants, recruiting, supplies,
equipment, depreciation and facilities associated with customer development
projects. Cost of contract revenue increased 12% from $1,759,000 in the first
quarter of 1999 to $1,971,000 in the current year quarter. As a percentage of
contract revenue, cost of contract revenue increased from 69% in the first
quarter of 1999 to 77% in the current year quarter. The dollar increase is
primarily due to the nature of the customer projects we performed in the first
quarter of this year. There were more projects involving ASIC (application
specific integrated circuit) developments, and these projects tend to have
greater development costs associated with them.
Research and Development Expense. Research and development expense
consists primarily of salaries for engineers and expenses for consultants,
recruiting, supplies, equipment, depreciation and facilities related to
engineering projects to enhance and extend our DSL and compression software
technologies. Research and development expense increased by 81% from $783,000 in
the first quarter of 1999 to $1,414,000 in the current year quarter. As a
percentage of total revenue, research and development expense increased from 18%
in the first quarter of 1999 to 22% in the current year quarter. The dollar
increase was primarily due to increased spending on non-customer-specific
research and development projects, such as our new voice enabled DSL and
diagnostic technologies. Higher spending on these projects was partially offset
by lower spending on our x200 modem product.
Selling and Marketing Expense. Selling and marketing expense consists
primarily of salaries for sales and marketing personnel, travel, advertising and
promotion, recruiting, and facilities expense. Sales and marketing expense
increased 14% from $587,000 in the first quarter of 1998 to $667,000 in the
current year quarter. As a percentage of total revenue, sales and marketing
expense decreased from 14% in the first quarter of 1999 to 10% in the current
year quarter. The dollar increase was primarily due to the addition of sales
staff to license our technology to semiconductor customers.
9
<PAGE> 10
General and Administrative Expense. General and administrative expense
consists primarily of salaries for administrative personnel, facilities costs,
and public company, legal, and audit expenses. General and administrative
expense increased 13% from $593,000 in the first quarter of 1999 to $672,000 in
the current year quarter. As a percentage of total revenue, general and
administrative expense decreased from 14% in the first quarter of 1999 to 10% in
the current year quarter. The dollar increase is primarily due to additions to
our legal and administrative staffs.
Other Income. Other income consists of rental income from real estate
leases for space in our headquarters building. Other income decreased from
$18,000 in the first quarter of 1999 to zero in the current year quarter. We do
not anticipate that we will have any more rental income in the future.
Interest Income. Interest income increased 78% from $320,000 in the
first quarter of 1999 to $570,000 in the current year quarter. The dollar
increase is primarily due to higher cash balances. Higher cash balances were due
to positive cash flows from operations and stock option exercises during 1999
and the first quarter of 2000.
Income Taxes. We have made no provision for income taxes as our
historical net losses have resulted in tax loss carryforwards that we are
utilizing. At December 31, 1999, Aware has federal net operating loss
carryforwards of approximately $52.8 million, which begin to expire in 2003, and
federal research and development credit carryforwards of approximately $3.8
million, which begin to expire in 2003. At December 31, 1999, Aware also had
available state net operating loss carryforwards of approximately $47.9 million,
which begin to expire in 2000, and state research and development and investment
tax credit carryforwards of approximately $2.2 million, which begin to expire in
2006. Of the total net operating loss and research and development
carryforwards, approximately $35.3 million and $1.3 million, respectively, are
attributable to the exercise of stock options and the tax benefit from these
items will be credited to additional paid-in capital, if realized.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, we had cash, cash equivalents and short-term investments of
$42,318,000, which represents an increase of $6,053,000 from December 31, 1999.
The increase is primarily due to $644,000 of cash provided from operations and
$5,692,000 of net proceeds from the exercise of employee stock options, which
was partially offset by $283,000 of cash invested in capital equipment.
Cash provided from operations in the first three months of 2000 was the result
of net income less working capital requirements. Capital spending was primarily
related to the purchase of computer hardware and software, laboratory equipment,
and furniture used principally in engineering activities.
While we can not assure you that we will not require additional financing, or
that such financing will be available us, we believe that our cash, cash
equivalents and short-term investments, will be sufficient to fund our operation
for at least the next twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 to certain issues including: the
definition of an employee for purposes of applying APB Opinion No. 25; the
criteria for determining whether a plan qualifies as a noncompensatory plan; the
accounting consequence of various modifications to the terms of previously fixed
stock options or awards; and the accounting for the exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions in FIN 44 are applicable retroactively to specific
events occurring after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
RISK FACTORS
We believe that the occurrence of any one or some combination of the following
risk factors could seriously harm our business.
OUR QUARTERLY RESULTS ARE UNPREDICTABLE AND MAY FLUCTUATE SIGNIFICANTLY
Our quarterly revenue and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter. If our quarterly revenue or
operating results fall below the expectations of investors or public market
analysts, the price of our common stock could fall significantly.
Many of our expenses, such as employee compensation and facilities costs, are
relatively fixed. Moreover, our expense levels are based, in part, on our
expectations regarding future revenue increases. As a result, any shortfalls in
revenue in relation to our expectations could cause significant changes in our
operating results from quarter to quarter and could result in quarterly losses.
Other factors, many of which are outside our control, also could cause
variations in our quarterly revenue and operating results. Some of these factors
are: (i) the rate of market acceptance of DSL broadband access, generally, and
of our full-rate ADSL and G.lite technology in particular; (ii) demand for our
licensees' chipsets and products that incorporate our technology; (iii)
development by us or our competitors of enhanced or alternative high-speed
network access technologies; (iv) the extent and timing of new license
transactions; (v) regulatory developments; and (vi) the timing and related costs
of any acquisitions.
WE HAVE A UNIQUE AND UNPROVEN BUSINESS MODEL
Other than our six-year relationship with Analog Devices, we do not have
extensive experience licensing our technology to third parties. Moreover,
obtaining suitable licensees for our technology is difficult because of the
following features of our strategy: (i) we typically undergo
11
<PAGE> 12
a lengthy and expensive process of building a relationship with a potential
licensee before entering into an agreement; (ii) we must persuade semiconductor
and equipment manufacturers with significant resources to rely on us for
critical technology on an ongoing basis rather than trying to develop similar
technology internally; and (iii) we must persuade potential licensees to bear
development costs associated with our technology applications and to make the
necessary investment to successfully produce chipsets and products using our
technology.
If we cannot obtain suitable licensees or otherwise fail to implement our
business strategy successfully, our business could be seriously harmed.
WE DEPEND SUBSTANTIALLY ON A LIMITED NUMBER OF LICENSEES
There are a relatively limited number of semiconductor and equipment companies
to which we can license our DSL technology in a manner consistent with our
business model. If we fail to maintain relationships with our current licensees
or fail to establish a sufficient number of new licensee relationships, our
business could be seriously harmed. Also, we cannot assure you that our
prospective customers will not use their superior size and bargaining power to
demand license terms that are unfavorable to us.
Royalties from our licensees are often based on the selling prices of our
licensees' chipsets and products, over which we have little or no control. We
also have little or no control over our licensees' promotional and marketing
efforts. Our licensees are not obligated to use our technology, and generally
are not required to pay us royalties unless they do utilize our technology. They
are not prohibited from competing against us. Because our business model depends
on our receipt of royalties, our licensees' failure to achieve significant sales
of chipsets and products incorporating our technology could seriously harm our
business.
OUR SUCCESS REQUIRES ACCEPTANCE OF OUR DSL TECHNOLOGY BY A VARIETY OF MARKET
PARTICIPANTS
Due to our business strategy, our success is dependent on our ability to
generate significant royalties from our licensing arrangements with
semiconductor manufacturers. Our ability to generate significant royalties is
materially affected by the acceptance of high-speed access over telephone lines
in general, and our DSL technology in particular by equipment companies, service
providers, and end users.
- Equipment companies, particularly those that develop and market
high-volume business and consumer products such as central office line
cards, modems and personal computers, must purchase chipsets
containing our DSL technology from our licensees for us to be
successful. If equipment companies do not build equipment based on our
DSL technology, our business will be seriously harmed.
- Service providers must deploy DSL services based on our technology. If
service providers do not deploy services based on DSL technology, our
business will be seriously harmed.
- End Users must purchase services that incorporate our technology. If
end users do not purchase services based on DSL technology, our
business will be seriously harmed.
12
<PAGE> 13
OUR INTELLECTUAL PROPERTY IS SUBJECT TO LIMITED PROTECTION
Because we are a technology provider, our ability to protect our intellectual
property and to operate without infringing the intellectual property rights of
others is critical to our success. We regard our technology as proprietary, and
we have a number of patents and pending patent applications. We also rely on a
combination of trade secrets, copyright and trademark law and non-disclosure
agreements to protect our unpatented intellectual property. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our technology without authorization.
As part of our licensing arrangements, we typically work closely with our
semiconductor and equipment manufacturer licensees, many of whom are also our
potential competitors, and provide them with proprietary know-how necessary for
their development of customized chipsets based on our DSL technology. Although
our license agreements contain non-disclosure provisions and other terms
protecting our proprietary know-how and technology rights, it is possible that,
despite these precautions, some of our licensees might obtain from us
proprietary information that they could use to compete with us in the
marketplace. Although we intend to defend our intellectual property as
necessary, we cannot be sure that the steps we have taken will be adequate to
prevent misappropriation.
In the future, we may choose to bring legal action to enforce our intellectual
property rights. Any such litigation could be costly and time-consuming for us,
even if we were to prevail. Moreover, even if we are successful in protecting
our proprietary information, we cannot be sure that our competitors will not
independently develop technologies substantially equivalent or superior to our
technology. The misappropriation of our technology or the development of
competitive technology could seriously harm our business.
Our technology may infringe the intellectual property rights of others. A large
and increasing number of participants in the telecommunications industry have
applied for or obtained patents. Some of these patent holders have demonstrated
a readiness to commence litigation based on allegations of patent and other
intellectual property infringement. Third parties may assert exclusive patent,
copyright and other intellectual property rights to technologies that are
important to our business. Intellectual property rights can be uncertain and can
involve complex legal and factual questions. We may be unknowingly infringing
the proprietary rights of others, which could result in significant liability
for us. If we were found to have infringed any third party's patents, then we
could be subject to substantial damages and an injunction preventing us from
conducting our business.
OUR BUSINESS IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE
The telecommunications industry in general, and the market for high-speed
network access technologies in particular, are characterized by rapid
technological change, with new generations of products being introduced
regularly and with ongoing evolutionary improvements. We expect to depend on our
DSL technology for a substantial portion of our revenue for the foreseeable
future. Therefore, we face risks that others could introduce competing
technology that renders our DSL technology less desirable or obsolete. Also, the
announcement of new technologies could cause our licensees or their customers to
delay or defer entering into arrangements for the use of our existing
technology. Either of these events could seriously harm our business.
13
<PAGE> 14
We expect that our business will depend to a significant extent on our ability
to introduce enhancements and new generations of our DSL technology as well as
new technologies that keep pace with other changes in the telecommunications
industry and that achieve rapid market acceptance. We must continually devote
significant engineering resources to achieving technical innovations. These
innovations are complex and require long development cycles. Moreover, we may
have to make substantial investments in technological innovations before we can
determine their commercial viability. We may lack sufficient financial resources
to fund future development. Also, our licensees may decide not to share certain
research and development costs with us. Revenue from technological innovations,
even if successfully developed, may not be sufficient to recoup the costs of
development.
WE FACE INTENSE COMPETITION FROM A WIDE RANGE OF MANUFACTURERS AND VENDORS
The markets for telecommunications and semiconductor products are intensely
competitive. We expect competition to increase in the immediate future, because
of the rapid growth projected across the DSL industry. Because of our strategy,
we face three different kinds of competition and competitors, including:
Technology Licensing Competition. Semiconductor and equipment
manufacturers that develop and sell DSL products may either
develop DSL technology internally or license it from third
parties. While we know of no other independent companies that
license DSL technology, such as Aware, we face intense
competition from internal development teams within potential
customers. Furthermore, our current customers may choose to
abandon joint development projects with us and internally develop
their own DSL technology solutions.
DSL Chipset Competition. Our customers' chipsets compete with
chipsets from other vendors of standards-based and
non-standards-based DSL chipsets. Some of our current and
potential competitors are some of the largest semiconductor
companies in the world.
Network Competition. DSL services offered over copper telephone
networks compete with alternative broadband transmission
technologies that use other network architectures, such as cable
modems and wireless solutions.
WE REQUIRE ADDITIONAL HIGHLY-QUALIFIED ENGINEERING PERSONNEL
Our future success will depend significantly on our ability to attract, motivate
and retain additional highly qualified engineering personnel. Competition for
qualified engineers is intense and there are a limited number of available
persons with the necessary knowledge and experience in DSL, chip design and
related technologies. Finding, training and integrating additional qualified
personnel is likely to be difficult and expensive, and we may be unable to do so
successfully. In the past, we have not been able to hire all of the engineers
that we contemplated in our business plan. If we are unable to hire and retain a
sufficient number of engineers, our business could be seriously harmed.
14
<PAGE> 15
OUR STOCK PRICE MAY BE VOLATILE
Volatility in our stock price may negatively impact the price you may receive
for your shares of common stock and increases the risk that we could be the
subject of costly securities litigation. The market price of our common stock
could fluctuate substantially based on a variety of factors, including: (i)
quarterly fluctuations in our operating results; (ii) changes in our
relationships with our licensees; (iii) announcements of technological
innovations or new products by us, our licensees or our competitors; (iv)
changes in earnings estimates by public market analysts; (v) key personnel
losses; (vi) sales of common stock; and (vii) developments or announcements with
respect to industry standards, patents or proprietary rights.
In addition, the equity markets have experienced volatility that has
particularly affected the market prices of equity securities of many high
technology companies and that often has been unrelated or disproportionate to
the operating performance of such companies. These broad market fluctuations may
adversely affect the market price of our common stock.
WE HAVE A HISTORY OF OPERATING LOSSES
We may not achieve profitable operations in any future period. We incurred
operating losses in each fiscal year from inception to December 31, 1998. As of
March 31, 2000, we had an accumulated deficit of $10.0 million. We must continue
to invest substantial amounts in research and development to enhance our
technology. Although our revenue has grown in recent quarters, we cannot assure
you that it will continue to grow in future quarters or that it will grow enough
for us to be profitable. As a result, we may incur substantial losses in the
future and may not be able to achieve profitability on a quarterly or annual
basis.
15
<PAGE> 16
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk relates primarily to our investment portfolio, and
the effect that changes in interest rates would have on that portfolio.
Historically, our investment portfolio has included:
- Cash and cash equivalents, which consist of financial instruments with
purchased maturities of three months or less; and
- Short-term investments, which consist of financial instruments that meet
the high quality standards specified in our investment policy. This policy
dictates that all instruments mature in 18 months or less, and limits the
amount of credit exposure to any one issue, issuer, and type of instrument.
We do not use derivative financial instruments for speculative or trading
purposes. As of March 31, 2000, all of our investments matured in twelve months
or less. Due to the short duration of the financial instruments we invest in, we
do not expect that an increase in interest rates would result in any material
loss to our investment portfolio.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1:
LEGAL PROCEEDINGS
From time to time we are involved in litigation incidental to the conduct of our
business. We are not party to any lawsuit or proceeding that, in our opinion, is
likely to seriously harm our business.
17
<PAGE> 18
ITEM 6:
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON 8-K
None.
* filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AWARE, INC.
Date: May 10, 2000 By: /s/ Michael A. Tzannes
----------------------
Michael A. Tzannes, Chief Executive
Officer and President
Date: May 10, 2000 By: /s/ Richard P. Moberg
----------------------
Richard P. Moberg, Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 42,318
<SECURITIES> 0
<RECEIVABLES> 7,122
<ALLOWANCES> 200
<INVENTORY> 199
<CURRENT-ASSETS> 50,343
<PP&E> 16,539
<DEPRECIATION> 5,080
<TOTAL-ASSETS> 61,802
<CURRENT-LIABILITIES> 1,031
<BONDS> 0
0
0
<COMMON> 224
<OTHER-SE> 60,547
<TOTAL-LIABILITY-AND-EQUITY> 61,802
<SALES> 1,192
<TOTAL-REVENUES> 6,407
<CGS> 143
<TOTAL-COSTS> 2,114
<OTHER-EXPENSES> 2,753
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,110
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,110
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,110
<EPS-BASIC> 0.09
<EPS-DILUTED> 0.09
</TABLE>
