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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 000-21129
AWARE, INC.
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(Exact Name of Registrant as Specified in Its Charter)
MASSACHUSETTS 04-2911026
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
40 MIDDLESEX TURNPIKE, BEDFORD, MASSACHUSETTS 01730
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(Address of Principal Executive Offices)
(Zip Code)
(781) 276-4000
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 29, 2000, based on the closing price of the Common
Stock on February 29, 2000 as reported on the Nasdaq National Market, was
approximately $1,354,345,335.
The number of shares outstanding of the registrant's common stock as of February
29, 2000 was 22,396,221.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be delivered to
shareholders in connection with the registrant's Annual Meeting of Shareholders
to be held on May 25, 2000 are incorporated by reference into Part III of this
Annual Report on Form 10-K.
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AWARE, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PART I
Item 1. Description of the Business...................................... 3
Item 2. Properties....................................................... 15
Item 3. Legal Proceedings................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders.............. 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................. 16
Item 6. Selected Financial Data.......................................... 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 17
Item 7(A). Quantitative and Qualitative Disclosures About Market Risk....... 27
Item 8. Consolidated Financial Statements and Supplementary Data......... 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................... 44
PART III
Item 10. Directors and Executive Officers of the Registrant............... 44
Item 11. Executive Compensation........................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and
Management....................................................... 45
Item 13. Certain Relationships and Related Transactions................... 45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K...................................................... 46
Signatures................................................................... 47
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PART I
ITEM 1. DESCRIPTION OF THE BUSINESS
COMPANY BACKGROUND
We provide Digital Subscriber Line ("DSL") technology to semiconductor and
equipment companies that make products to enable simultaneous high-speed data
and regular voice transmissions over copper telephone lines. During our first
seven years, we were engaged primarily in contract research, specializing in
wavelet mathematics, digital compression, and telecommunications, including
digital modulation and coding. In 1993, we shifted our business from contract
research toward the development and licensing of DSL technology, as well as data
and video compression software. DSL technology increases the speed of data
communications over conventional copper telephone networks so that telephone
companies ("telcos") can use existing copper telephone lines to provide both
residential and business customers with simultaneous high-speed data
transmission and plain old telephone service. DSL technology enables data
communications at speeds much higher than possible through voiceband modems.
Our offerings include technology packages for full-rate ADSL and G.lite both of
which have been standardized for global use by the International
Telecommunications Union ("ITU"). In 1996, we complemented our DSL technology
licensing activities by offering DSL hardware products. These hardware products
demonstrated our technology and served as equipment solutions until widespread
deployment of DSL services began. In 1998, after the DSL market continued to
evolve, we refocused our business on licensing DSL technology to semiconductor
and equipment manufacturers to enable them to manufacture and sell integrated
circuits and products incorporating our technology. Although we continue to sell
certain DSL hardware products that support our technology licensing activities,
our principal business focus is on licensing DSL technology to the semiconductor
industry.
We are active in setting standards for the DSL industry. We pursue acceptance of
our technology by standards bodies, including the American National Standards
Institute ("ANSI"), ITU, and DSL Forum, and offer technology packages that are
compliant with industry standards.
We also sell software-based compression products, including WSQ by Aware,
AccuPress for Radiology, MotionWavelets, AccuPress for Remote Sensing, AccuPress
for Multimedia, and SeisPact.
Our executive offices are located at 40 Middlesex Turnpike, Bedford,
Massachusetts, 01730, our telephone number is (781) 276-4000, and our website is
www.aware.com. We were incorporated in Massachusetts in 1986.
INDUSTRY BACKGROUND
Businesses and consumers are increasingly demanding high-speed network access in
order to take advantage of Internet services, such as electronic commerce, and
new data intensive network applications, such as telecommuting. While high-speed
Internet access is the primary application driving customer demand today, new
applications such as second line voice using DSL, video, and video conferencing
will continue to fuel demand in the future. Incumbent and new competitive
service providers, including service providers such as Regional Bell Operating
Companies, Competitive Local Exchange Carriers, and European telephone
companies, initially have responded to these demands by significantly increasing
the data transmission speed and capacity of the core infrastructure, or
"backbone," that links their central office locations. Service providers have
only just begun to make progress in improving access speeds and capacity along
the "last mile" or the "local loop" that connects central office locations with
homes and businesses.
While large businesses have the resources to take advantage of access
technologies that leverage the use of fiber optic cable or dedicated access
lines (such as T-1 service), the cost and availability of these technologies can
be prohibitive to other network users. Without the deployment of improved access
technologies, many residential and small business users will not be able to take
full advantage of the range of existing and emerging Internet services and data
intensive applications.
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Residential and small business users have begun to benefit from emerging
broadband technologies, which enable high-speed network access over a cable line
or a single telephone line. The cable industry has begun to use its installed
base of coaxial cable by marketing and installing cable modems that provide
high-speed access to residential and home office users through existing cable
networks. However, cable broadband access can involve significant deployment
costs, since cable providers must make substantial capital investments to
upgrade their networks to allow two-way transmissions and either cable providers
or users must hire technicians to complete in-house installations. Moreover, the
use of cable modems has raised user concerns about the loss of access speed that
occurs with increased use of a cable network, the reliability of cable networks,
the security of transmissions, and the limited choice of Internet service
providers.
Existing telephone lines offer significant advantages as a medium for providing
high-speed network access to residential and small business users. The worldwide
telephone network of over 750 million copper wire lines already spans the
distance between central office locations and end users; this "last mile" is
where the bottleneck for deploying high-speed access exists. Many residential
and small business users currently rely on conventional voiceband modems that
use the telephone line as a relatively inexpensive way to gain network access.
The rate at which voiceband modems can transmit data has evolved over the past
two decades from 2.4 kilobits per second, or Kbps, to 56 Kbps, but current
speeds are still too slow for some existing data applications and will be unable
to provide the bandwidth for many anticipated applications. In addition,
voiceband modems cannot support simultaneous voice and data services.
Advances in semiconductor integration and digital signal processing have led to
the development of a broadband access technology, known as Digital Subscriber
Line or DSL, technology, which can transmit data over copper telephone lines
significantly faster than voiceband modems. DSL delivers "always on"
availability, eliminating the tedious dial-up process associated with voiceband
modems. DSL is a point-to-point technology that connects the end user to a
telecommunications service provider's central office or to an intermediate hub.
DSL equipment is deployed at each end of the copper wire and the transmission
speed depends on the length and condition of the existing wire.
The first DSL technology, known as Asymmetric Digital Subscriber Line or
full-rate ADSL, was created in the late 1980s and enables data to be transmitted
at speeds more than 100 times faster than 56 Kbps voiceband modems. Full-rate
ADSL, standardized in 1995 by ANSI as T1.413 and by the ITU in 1999 as G.992.1,
permits voice and multi-megabit data traffic to be transmitted simultaneously on
the same line. However, this approach usually requires that a technician install
a filter, known as a voice-data "splitter," at the user's site, which increases
deployment time and cost.
In June 1999, the ITU approved a new global "splitterless" ADSL standard called
"G.lite", known as G.992.2. G.lite services are capable of providing data
transmission speeds between ten and thirty times faster than those of voiceband
modems, while permitting voice and data traffic to be transmitted simultaneously
without the need to install splitters. G.lite-enabled modems can be installed in
or connected to personal computers, and then easily activated by users without
outside technical assistance or significant additional expense. As a result, the
combination of G.lite modems and G.lite or multi-mode G.lite/full rate ADSL
central office equipment can provide high-speed network access to residences and
small offices at a lower cost than full-rate ADSL.
Telephone companies and other service providers began tests and trials of
full-rate ADSL technology in the mid 1990's. Commercial deployment by service
providers began in more significant volume in 1999. A number of service
providers, including Bell Atlantic, Bell South, British Columbia Telecom,
British Telecom, Covad, Deutsche Telecom, GTE, Korea Telecom, New Zealand
Telecom, Northpoint Communications, Rhythms Netconnect, SBC, Singapore Telecom
and US West are offering full-rate ADSL service in regions in North America,
Europe and Asia. These service providers are able to purchase full-rate ADSL
equipment from a number of telecommunications companies, including Advanced
Fibre, Alcatel, Cisco, Copper Mountain, ECI Telecom, Hyundai, Lucent, Newbridge
Networks, Nortel Networks, Orckit, Paradyne and Siemens. In addition, personal
computer and other modem companies have focused on providing customer premises
equipment to users, including 3Com, Compaq, Dell, Efficient Networks, Hewlett-
Packard, Intel, Westell, and Zoom Telephonics. We believe that commercial
deployments of full-rate ADSL technology will continue to grow in the year 2000
and beyond.
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Trial deployments of G.lite technology by telephone companies have commenced
over the last year as well. We believe that key features contained in
G.lite-enabled modems and services will be particularly well suited to serve the
residential consumer market. The benefits of G.lite over full-rate ADSL include
the potential for faster deployment by telcos, lower installation and equipment
costs for consumers, and a more robust and versatile service offering because of
the features included in the G.lite standards, including fast-retrain.
Fast-retrain technology was pioneered by Aware, and we have filed patents to
protect this invention. We believe that G.lite will be embraced by the consumer
electronics industry, including personal computer manufacturers, and that
service providers will begin commercial deployments of G.lite services in the
future.
In order for DSL to be deployed, a DSL solution must be installed at both a
telephone company's central office and at the customer premise. Most of the DSL
deployments today use a digital subscriber line access multiplexer ("DSLAM") at
the central office and a modem at the customer premise. In the future, we
believe that central office switches and digital loop carrier equipment will be
upgraded through the installation of DSL-enabled line cards. In addition, we
expect that consumer electronics devices, including personal computers, modems
and gateway devices (also known as integrated access devices) will all be
DSL-enabled allowing consumers a choice of equipment to use in the customer
premise. Each of these equipment architectures demands a distinctive chipset
architecture. We believe that no single chipset architecture can support the
requirements of the diverse set of equipment architectures that will be used in
the global deployment of DSL.
TECHNOLOGY
We are a leading provider of DSL technology that meets the requirements of
chipset and equipment manufacturers for standard-compliant technology solutions.
Our telecommunications technology is based on our research into wavelet
mathematics and digital communications. Our principal telecommunications
technologies consist of: (i) Full-rate ADSL technology, (ii) G.lite technology,
and (iii) VDSL technology for emerging broadband applications.
Full-Rate ADSL Technology
Full-rate ADSL is a method for expanding the useable bandwidth of copper wire.
Typically, full-rate ADSL systems divide a 1.1 megahertz (MHz) bandwidth on
copper wire into three segments:
* The 0 to 4 kilohertz (KHz) range, which is used for plain old
telephone service ("POTS"),
* The 26 KHz to 138 KHz range, which is used to transmit data upstream,
and
* The 138 KHz to 1.1 MHz range, which is used to transmit data
downstream.
ANSI has published an industry standard (known as T1.413) for full-rate ADSL in
the United States. The ITU has approved a nearly identical global industry
standard for full-rate ADSL, known as G.992.1. The ANSI and ITU specifications
call for operation rates of up to 8 Mbps downstream and up to 640 Kbps upstream
when operating over telephone lines at a distance of up to 24,000 feet.
In addition to higher-speed data capabilities, full-rate ADSL offers the
following advantages over voiceband modems:
* Full-rate ADSL allows simultaneous voice and data traffic over a
single telephone line; and
* Full-rate ADSL can easily distinguish between voice calls and data
calls because they each occupy different frequency bands. Today,
telephone company equipment does not distinguish between voice and
data calls. A data call lasts on average much longer than a voice
call. Because telephone company switches were designed based upon the
average length of a voice phone call, they become inefficient when a
large number of data calls are placed. Full-rate ADSL allows service
providers to take data traffic off the switch and alleviate this
bottleneck.
Standard compliant full-rate ADSL uses a modulation technique known as discrete
multitone, or DMT. DMT divides the upstream and downstream bands into a
collection of smaller frequency ranges of approximately 4 kHz each, called
subchannels. During transmission, each 4 kHz subchannel carries a portion of the
total data rate. By
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dividing the transmission bandwidth into a collection of subchannels, DMT is
able to adapt to the distinct characteristics of each telephone line and
maximize the data transmission rate. Telephone lines are best suited for
transmission of the low frequencies associated with voice traffic (0-4 kHz). The
high frequencies that are used for full-rate ADSL transmissions experience
distortion and attenuation when sent over telephone lines - the higher the
frequency, the more the attenuation. DMT effectively divides the data into a
collection of smaller bandwidth transmissions, each of which occupies a smaller
frequency range and is optimized to maximize the data throughput in that range.
The ANSI and ITU standards have both established DMT as the standard modulation
technique for full-rate ADSL.
An alternative modulation technique to DMT is carrierless amplitude phase, or
CAP. CAP is a single-carrier modulation technique developed by AT&T Paradyne
Corp. The fundamental difference between CAP and DMT is that CAP treats each of
the upstream and downstream frequency ranges as a single element over which as
many bits of information as possible are transmitted. CAP was not adopted as a
standard ADSL technology, and as a result there are a limited number of
equipment suppliers and service providers that are incorporating CAP in their
products and services.
Full-rate ADSL usually requires the installation of a voice-data splitter at the
end user's residence or place of business in order to handle simultaneous data
and voice traffic. When a splitter is deployed, a new twisted pair is typically
installed inside the customer premise to connect the splitter with the ADSL
modem. This has the disadvantage that the only one telephone jack (the one
connected to the splitter) is an ADSL outlet. Some telcos have recently begun to
deploy full-rate ADSL by substituting splitters with microfilters. Microfilters
are devices that users put on every telephone in their home to obviate the need
for a splitter installation by the telco. A microfilter approach has the
advantage that every existing phone jack in the house is now an ADSL outlet.
However, this approach also has the following disadvantages: (i) microfilters on
every phone in the home add to the cost of customer premises equipment, and (ii)
DSL service is susceptible to service problems when there are changes to the
in-home telephone network, such as the addition of phones or answering machines
by the consumer.
G.lite Technology
In an improvement over full-rate ADSL, G.lite enables simultaneous voice traffic
and data traffic without requiring installation of a voice-data splitter and
without requiring microfilters on every phone or answering machine. In the
absence of any splitter, the frequencies used by the G.lite signal are subjected
to numerous voice traffic phenomena. For example, a telephone being picked up
results in a change in the characteristics of the frequencies used by G.lite. We
have invented, implemented and applied for patents on signal processing
techniques that compensate for the effects of this and other related phenomena,
while maintaining G.lite data transmissions. These techniques enable
"splitterless" and "microfilterless" DSL service through a signal processing
technique known as "fast retrain."
In 1997, the Universal ADSL Working Group was formed by Compaq, Intel, Microsoft
and others to promote development of a standard for splitterless DSL. At the
urging of this Group, the ITU began development of a global standard G.lite, in
late 1997. In October 1998, the ITU determined the G.lite standard, which it
renamed G.992.2. G.992.2 is also based upon DMT technology. In June 1999, the
ITU approved the G.lite G.992.2 standard. We provided key technical submissions
involving the splitterless operation of G.lite systems, including fast retrain.
G.lite specifies downstream data transmission rates of up to 1.5 Mbps and
upstream data transmission rates of up to 512 Kbps, at distances of up to 24,000
feet. Typically, G.lite systems divide a 550 KHz bandwidth on copper wire into
three segments:
* The 0 to 4 kilohertz (KHz) range is used for POTS,
* The 26 KHz to 138 KHz range is used to transmit data upstream, and
* The 138 KHz to 550 KHz range is used to transmit data downstream.
We believe that G.lite technology has a number of advantages over full-rate ADSL
technology, including:
* G.lite enables complete splitterless operation, which eliminates the
need for the voice-data splitter and a new phone line to the DSL
modem;
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* G.lite enables microfilterless operation, which eliminates the need
for microfilters altogether or limits them to only those phones whose
voice quality is impaired by the DSL signal;
* G.lite allows any phone jack in the home to be used as a high-speed
DSL outlet; not just the one jack provisioned by the separate phone
line from the voice-data splitter;
* G.lite maintains the robustness of the in-home network as new devices,
such as phones or answering machines, are installed after initial
installation is complete;
* G.lite improves performance in changing noise and crosstalk
environments;
* G.lite enables quicker connection times when turning DSL modems on;
* G.lite-enabled modems allow consumers to plug broadband modems into
the wall in a "plug and play" format as they currently do with
voiceband modems;
* G.lite enables personal computer manufacturers to integrate G.lite
capabilities into personal computers, just as they do with voiceband
modem technology; and
* G.lite enables faster transitions from low power modes and sleep
modes.
Emerging Standards and Technology
The standard for ADSL technology continues to be improved upon. We expect that
new standards will be completed within the next twelve to eighteen months that
document the changing requirements in the rapidly evolving ADSL market. We
believe that the focus of standards bodies will be to:
* Improve ADSL protocols for easier to configure rate adaptation.
* Improve the support of multi-service offerings that bundle high speed
Internet access with other services including voice-through ADSL.
* Improve the performance of ADSL, including loop-reach, so that more
homes can be reached with high-speed data service.
Many of the features that we today distinguish as specific to either G.lite or
full-rate ADSL are very likely to become consolidated into a single standard
that represents ADSL technology that meets the above goals. In addition, we
believe that technology that eases the provisioning, installation and
maintenance of DSL service will be increasingly valuable as deployment numbers
grow.
VDSL Technology For Emerging Broadband Applications
DMT divides a frequency range into the desired number of subchannels by using a
time-domain to frequency-domain transform. The subchannelization method used in
DMT technology utilizes a mathematical process called a Fourier transform. This
technique has been used in the telecommunications industry since the 1960s, but
has become more practical for high-speed, high-volume use as digital signal
processors have improved. Because of fundamental limits associated with these
transforms, the process of creating isolated subchannels is imperfect. These
imperfections inhibit modems from achieving theoretical performance limits in
real-world environments.
We have invented and patented a proprietary communications technology based on
wavelet mathematics called discrete wavelet multitone, or DWMT. We believe that,
as a result of our research and development of DWMT technology, we are a leader
in the commercialization of wavelets for telecommunications. The wavelet
transform yields significantly better subchannelization than the Fourier
transform. This technique more closely approximates ideal subchannelization,
enabling DWMT technology to outperform DMT technology in noisy environments.
We have engaged in projects to develop Very-high-speed Digital Subscriber Line
("VDSL") technology. VDSL is designed to provide performance up to six times
faster than full-rate ADSL, but over shorter distances. VDSL performance enables
service providers to deliver a combination of digital television, data dial tone
and regular telephone service on a single twisted-pair copper wire. Because VDSL
is capable of transmitting only over a shorter distance, it will require service
providers to deploy fiber optic cable closer to the end user. We believe that
VDSL technology may be part of the next generation of high-speed user access
equipment that will be deployed in the future. DWMT is a candidate technology
for our future VDSL solutions.
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STRATEGY & BUSINESS MODEL
We license our DSL technology solutions--including full-rate ADSL and G.lite--to
semiconductor manufacturers that sell chipsets to companies that manufacture and
sell central office and customer premises equipment. We also license our DSL
technology directly to equipment manufacturers that incorporate our technology
into their own products. Central office equipment manufacturers sell their DSL
products to service providers that provide DSL services to end users. Customer
premises equipment manufacturers sell their DSL products through service
providers or directly to end users. To support our technology licensing
activities, we also market our technology to equipment manufacturers and service
providers to encourage them to use Aware-based technology in their products or
services.
Our strategy is based on the following key elements:
* Serve as Independent Technology Provider. A limited number of
technology companies have successfully developed DSL technology, and
most of them are affiliated with semiconductor or equipment
manufacturers. This presents a significant opportunity for independent
providers that are able to supply full-rate ADSL and G.lite technology
to chipset manufacturers for DSL equipment markets. We believe that,
as the market for DSL broadband access products and services grows,
semiconductor manufacturers and other market participants will
increasingly rely on an independent source of DSL technology. By
relying on our technology and experience, our licensees can avoid many
of the risks of development failure or delay they would have faced in
developing their own DSL technology internally.
* Provide Multiple and Flexible Technology Solutions for Various Silicon
Architectures. Numerous silicon solutions will emerge to serve the
requirements of the multiple types of equipment that will be deployed
to support DSL services. Each type of DSL equipment has specific
silicon requirements. For example, consumer electronics solutions need
to be backward compatible with voiceband modems, whereas switch
upgrade solutions will need to support analog voice capabilities.
Moreover, our DSL technology enables chipset manufacturers to design
and manufacture chipsets ranging from fully programmable chipsets,
such as those based upon digital signal processing chips, to fully
fixed function products, such as those based upon application specific
integrated circuits. We offer technology packages for full-rate ADSL,
G.lite, and multimode G.lite/full rate. As an independent technology
supplier, we are focused on supplying technology solutions for all of
the silicon architectures required. This strategy allows us to
participate across a number of silicon and equipment architectures in
the DSL industry.
* Maintain DSL Technology Leadership. Our full-rate DSL technology was
the foundation for the development of our G.lite technology, much of
which was standardized by the ITU. We regularly interact with DSL
equipment manufacturers that sell DSL products to service providers
and end users. Through our relationships with these suppliers, who are
generally customers of our licensees or who are direct customers of
ours, we gain valuable product development information regarding
market trends, end user requirements and technological requirements of
products and services under development. By offering solutions to
customers that have a diverse set of DSL silicon and equipment
architectures, we enjoy economies-of-scale that enable us to
continually improve our technology offerings.
* Leverage Our Own and Our Customers' Strengths. Our strategy is to
leverage the technology and engineering expertise we have developed
over years of research and development efforts, without having to make
significant expenditures to develop the infrastructure required to
manufacture and sell DSL chipsets or equipment ourselves. Instead, we
intend to combine our DSL technological leadership with the
complementary technology, manufacturing, sales and marketing, and
distribution capabilities of our licensees to create industry leading
DSL solutions for the worldwide market. This enables us to gain
exposure across multiple silicon solutions and architectures, making
our success synonymous with the success of numerous customers.
* Influence the Establishment of Industry Standards. We have been and
remain actively involved in industry-wide efforts to set DSL
technology standards. We took an active role in the international
effort to develop the G.lite standard that was approved by the ITU in
June 1999. We are currently actively involved in the
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development of next generation ADSL standards at the ITU. By actively
participating in the establishment of industry standards, we are
better able to influence development of the standards and to
anticipate and identify technological changes affecting the DSL
industry. In addition, we focus on standard compliant technology
offerings that ensure global acceptance and interoperability between
solutions.
AWARE'S TELECOMMUNICATIONS TECHNOLOGY AND PRODUCT OFFERINGS
DSL Technology Offerings
We are focused on developing and licensing our DSL technology. Our DSL
technology expertise, when applied in joint development efforts with our
customers, has produced first-to-market chipsets for both full-rate ADSL and
G.lite. We offer our technology, experience, and expertise to licensees in the
following forms:
Patents. We hold eleven patents pertaining to multicarrier modulation for
broadband communications and have eight additional patents pending, all of which
apply to digital signal processing and digital communications. These patents
underlie our technology offerings.
System models and designs. Our system models and designs are a blueprint of how
to architect a DSL chipset. Our system models and designs model the elements of
a DSL chipset, including the digital and analog subsections, through the use of
software simulations. System models and designs provide design optimization,
trade-off studies and performance analysis.
ASIC Cores. Application specific integrated circuit designs, or ASIC cores, are
a blueprint of how to build a DSL chip that implements certain subsets of a DSL
system. Our cores are developed in synthesizable VHDL and Verilog software.
Run-time software. Our C and assembly code, configured to reside on either a
digital signal processor or microcontroller chip, provide handshake,
initialization, tracking and steady state DSL functions. Software upgrades can
be made available as the technology is upgraded, providing greater flexibility.
For example, run-time software has been developed to upgrade Analog Devices'
full-rate ADSL chipsets to add G.lite functionality.
Reference designs. Reference designs are hardware designs for DSL printed
circuit boards ("PCBs"). The objective of a reference design is to provide a
cost-optimized blueprint, which shows how to position DSL chipsets onto DSL
PCBs, so that the board meets or exceeds industry standard performance
benchmarks.
DSL Hardware Product Offerings
We have developed and market certain hardware products that are manufactured by
third party contract manufacturers. These products are intended to support the
development and deployment of chipsets and equipment incorporating our
technology. Our DSL hardware products consist of:
DSL Development Systems. The Veritas 992 Development System is designed to help
our customers evaluate and build standard-compliant DSL-based products and
services. Development systems assist semiconductor and equipment manufacturers
with performance and interoperability testing during product development.
DSL Test Systems. The Veritas 2000 Test System enables personal computer modem
or standalone modem manufacturers to perform functional tests on their products
without requiring them to purchase expensive central office equipment. Our test
system provides a reliable and cost effective means to efficiently test a DSL
chipset and modem during production.
DSL Modules. The AW-910 and AW-918 DSL Transceiver Modules are board-level
products that contain all of the digital and analog components required to
implement a DSL transceiver. Transceiver modules facilitate rapid integration of
DSL technology into lab and field test equipment.
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DSL Modems. Several years ago when our strategy was to provide DSL customer
premises equipment, we developed a full-rate ADSL modem that we named the x200
Access Router. The x200 provides full-rate ADSL connectivity at data
transmission speeds of up to 9Mbps downstream and 768 Kbps upstream over
standard copper wires. The x200 has been primarily sold for service provider
trials, small campus applications, and as a technology demonstrator at trade
shows. We anticipate that sales of the x200 will be very limited in future
periods, because the x200 is not an important element of our strategy going
forward.
COMPRESSION SOFTWARE TECHNOLOGY AND PRODUCTS
We also develop and sell data and video compression products. Since 1988, we
have developed expertise, trade secrets and intellectual property in the field
of wavelet transform-based data compression and have obtained several patents in
this area. Our wavelet compression technology enables digital image, video and
certain types of data to be compressed to between 1% and 10% of its original
size. Using wavelet compression, the decompressed data are not bit-for-bit
identical to the original data. A risk with this technique is that, as the
original data are increasingly compressed, a larger amount of error is
introduced into the decompressed data. However, compressed data can be
transmitted across networks faster and storage costs are reduced.
In 1993, we began an effort to produce commercially marketable wavelet image
compression software products. We currently offer six software-based compression
products, including:
* WSQ by Aware, which compresses digital fingerprint data for use by law
enforcement agencies such as the Federal Bureau of Investigation;
* AccuPress for Radiology, which compresses digital radiographs and
other types of medical imagery;
* MotionWavelets, which compresses video image data in real time;
* AccuPress for Multimedia, a general-purpose compression product;
* AccuPress for Remote Sensing, which compresses satellite-based remote
sensing imagery; and
* SeisPact, which companies in the oil and gas industry, can use to
store and transmit large amounts of seismic data.
STRATEGIC CUSTOMERS
Our strategy with respect to customers is to select companies based on
development compatibility, market position and the potential for future royalty
revenue. Our strategic customers include the following companies:
Analog Devices, Inc. We began working with Analog Devices in 1993 to develop
ADSL chipsets. Analog Devices has licensed our full-rate ADSL and G.lite
technology. Over the years, we have jointly developed multiple generations of
Analog Devices' DSL chipsets that incorporate our technology, including the
first chipset that implements both full-rate ADSL and G.lite technology. Analog
Devices has announced that it has a number of customers for its chipsets,
including leading companies such as Cisco, Nortel, Lucent, Intel, Hyundai, ECI
Telecom, 3Com and Newbridge Networks.
Infineon Technologies AG. We began working with Infineon, formerly Siemens
Semiconductor, in August 1998. Infineon has licensed our full-rate and G.lite
technology for chipsets targeted at telephone company central office switches.
Their central office chipset brings together our DSL technology and Infineon's
digital signal processor, high-performance broadband subscriber line, and
converter technologies. The Infineon chipset is being used by Siemens in the DSL
upgrade of their EWSD digital electronic switching system.
Intel Corporation. We announced our relationship with Intel in October 1999.
Intel has licensed our full-rate and G.lite technology for DSL solutions
targeted at the residential broadband market. Intel has not publicly announced
any customers at this time.
Lucent Microelectronics Group. We began working with Lucent in December 1997.
Lucent has licensed our G.lite technology for its Wildwire chipset. The Wildwire
chipset is the first personal computer modem chipset for high-speed Internet
access incorporating both G.lite and 56 Kbps technology. Lucent has announced
that several major
10
<PAGE> 11
personal computer and modem manufacturers have selected its Wildwire chipset for
their products. Some of their announced customers include Compaq, Dell,
Hewlett-Packard, and Zoom Telephonics.
NEC Corporation. We began working with NEC in May 1999. NEC has licensed our
G.lite technology for use in its uPD98541 ADSL chipset for customer premises
applications. NEC is the second largest semiconductor manufacturer in the world.
NEC has not publicly announced any customers at this time.
Siemens Information and Communications Networks ("ICN") Group. We began working
with Siemens ICN in September 1998. We entered into an agreement under which we
and Siemens ICN are defining the next-generation architecture for Siemens'
DSL-enabled EWSD digital electronic switching system. Siemens' EWSD product is
the most widely sold carrier-class switching system in the world. The
relationship between Aware and Siemens is intended to produce a specification
for Siemens DSL-enabled central office switches, which will be based on our
G.lite technology.
ST Microelectronics. We began working with ST Microelectronics ("ST") in
December 1998. ST has licensed our G.lite technology for chipsets targeted at
telephone company central office switches. The ST/Aware DSL solution brings
together our G.lite technology and ST's advanced integrated circuits for
communications applications. ST is the third largest seller of
telecommunications chipsets in the world.
3COM/US Robotics. In March 1997, we licensed our full-rate ADSL technology to
3COM (then US Robotics) for use in 3COM's full-rate ADSL product offerings.
3COM/US Robotics DSL product line includes PCI cards, USB modems and office
routers. 3COM/US Robotics is one of the largest sellers of modems in the world.
SALES AND MARKETING
Our principal sales and marketing strategy is to proliferate our DSL technology
to semiconductor manufacturers and DSL equipment suppliers that incorporate our
technology into their products. Due to the complexity of our technology, our
sales people must have a high degree of technical sophistication in order to
effectively sell our technology offerings. We believe that decisions involving
the selection of our technology are frequently made at senior levels within a
prospective customer's organization. Consequently, we rely significantly on
presentations by our senior management to key employees at prospective
customers. As of December 31, 1999, we had eleven people in our
telecommunications sales and marketing organization.
We sell our software-based compression products primarily through OEMs and
systems integrators. As of December 31, 1999, there were three people in our
compression software sales organization.
In 1999, we derived approximately 22%, 12%, 11% and 10% of our total revenue
from ADI, Lucent, Intel, and Infineon, respectively. In 1998, we derived
approximately 29%, 18% and 14% of our total revenue from ADI, Lucent, and
Siemens, respectively. In 1997, we derived approximately 16%, 13%, and 12% of
our total revenue from 3COM/US Robotics, the United States government and ADI,
respectively. All revenue in 1999, 1998, and 1997 was derived from unaffiliated
customers.
COMPETITION
The markets for telecommunications and semiconductor products are intensely
competitive. We expect competition to increase in the immediate future due to
the growth projected across the DSL industry. We intend to compete through a
strategy of offering a comprehensive package of DSL technology to the
semiconductor industry. Our success depends primarily on the willingness and
ability of:
* Semiconductor manufacturers to design, build and sell DSL chipsets
based on our technology,
* Central office and customer premises equipment manufacturers to buy
and use DSL chipsets from our semiconductor licensees,
* Service providers to offer DSL services based on equipment from
customers of our licensees, and
* End users to buy broadband digital services from service providers
using equipment that is based on our DSL technology.
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<PAGE> 12
As a technology supplier, 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. Some of these potential customers
are some of the largest semiconductor and equipment companies in the
world. Furthermore, our current customers, including Analog Devices,
Infineon, Intel, Lucent, NEC, Siemens, ST Micro, and 3Com, 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 these vendors include Alcatel Network Systems
("Alcatel"), Centillium Technology Corp ("Centillium"), Conexant
Systems, Inc. ("Conexant"), Fujitsu Systems ("Fujitsu"), ITEX
Corporation ("ITEX"), Globespan Technologies Inc. ("Globespan"),
Motorola, Inc. ("Motorola"), Orckit Communications Limited ("Orckit"),
PCTel, and Texas Instruments, Inc. ("TI").
* Network Competition. DSL services offered over copper telephone
networks compete with alternative broadband transmission technologies
that use other network architectures. The two primary network
competitors are cable operators using cable modems over their cable
networks, and wireless operators using wireless solutions over their
wireless networks.
Many of our current and prospective licensees, as well as chipset competitors
that compete with our semiconductor licensees, including Alcatel, Conexant,
Fujitsu, Motorola, and TI, have significantly greater financial, technological,
manufacturing, marketing and personnel resources than we do. We cannot assure
you that we will be able to compete successfully or that competitive pressures
will not seriously harm our business.
The markets for our wavelet image compression technology are competitive, and
are expected to become increasingly so in the near future.
RESEARCH AND DEVELOPMENT
We believe that our future success depends on our ability to adapt to the
rapidly changing telecommunications environment and to meet the industry's
ongoing technology development needs. Our research and development organization
is organized into two principal groups.
1. Strategic Development Group. This group is primarily dedicated to
working with our licensees to integrate our full-rate ADSL and G.lite
technology into their chipsets.
2. Research and Development Group. This group focuses on developing and
enhancing our core technology for future telecommunications
applications. The on-going improvement and extension of our technology
is essential if we are to maintain our competitive position. Key
development objectives for this group include multi-port chipset
solutions, voice-enabled DSL technology, diagnostic DSL technology,
ADSL over ISDN, longer reach ADSL, and video over ADSL.
As of December 31, 1999, we had an engineering staff of 78 employees. We
supplemented our staff with 2 contractors as of December 31, 1999. Subject to
our ability to hire and retain engineers, we expect that our engineering
organization will grow significantly in the future. We intend to engage in more
customer development projects and to further develop and enhance our DSL
technology.
Cost of contract revenue consists primarily of spending by our Strategic
Development Group to integrate our technology into our licensees' chipsets and
products. During the years ended December 31, 1999, 1998 and 1997, cost of
contract revenue charged to operations was $7.1 million, $5.4 million, and $3.5
million, respectively.
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<PAGE> 13
Research and development expense consists primarily of spending by our Research
and Development Group to enhance and extend our technology. During the years
ended December 31, 1999, 1998 and 1997, research and development costs charged
to operations were $3.6 million, $3.9 million, and $3.4 million, respectively.
We did not capitalize any software development costs in accordance with
Statement of Financial Accounting Standards No. 86 in 1999, 1998 or 1997.
INTELLECTUAL PROPERTY
In the field of telecommunications technology, we hold eleven patents for
multi-carrier communications systems. We have eight additional pending patent
applications that pertain to the application of multi-carrier technology to
broadband communications, including patent applications that pertain to our
splitterless G.lite techniques. We also hold six patents for image compression
and processing, three patents for video compression, two patents for audio
compression, one patent for certain optical applications and one patent for
seismic data compression.
Although we have patented certain aspects of our technology, we rely primarily
on know-how and trade secrets to protect our intellectual property. We attempt
to protect our trade secrets and other proprietary information through
agreements with our licensees, suppliers, employees and consultants, and through
security measures. Each of our employees is required to sign a nondisclosure and
non-competition agreement. Although we intend to protect our rights vigorously,
we cannot assure you that these measures will be successful. In addition, the
laws of certain countries in which products incorporating our technology may be
developed, manufactured or sold may not protect our intellectual property and
product rights to the same extent as the laws of the United States.
Our ability to compete may be affected by our ability to protect our
intellectual property. We believe, however, that other factors will be as
important in maintaining our competitive position as the protection of our
existing intellectual property. The rapid pace of technological change in the
telecommunications industry, our technical expertise, and our ability to enhance
our DSL technology on a timely basis will also play an important role in
maintaining our competitive position.
Many participants in the telecommunications industry have an increasing number
of patents and have frequently 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 us. From time to time, we
have received letters from third parties suggesting that we may be obligated to
license such intellectual property rights.
During the last several years, we have received letters from Texas Instruments
Inc. and Bell Atlantic each asserting that it owns certain patents, and offering
us the opportunity to enter into a license agreement for these patents. We have
reviewed the Texas Instruments and Bell Atlantic patents, and do not believe
that our DSL technology offerings infringe any valid claim of any of the Texas
Instruments or Bell Atlantic patents. It is our opinion that we do not require a
license under either the Texas Instruments or Bell Atlantic patents in order to
conduct our business.
Notwithstanding our opinion, we cannot assure you that a court to which the
issue is submitted would find that our DSL technology offerings do not infringe
the Texas Instruments or Bell Atlantic patents. Also, we cannot assure you that
Texas Instruments or Bell Atlantic will not assert infringement in the future.
If we are found to have infringed any of their patents, we could be subject to
substantial damages and an injunction preventing us from conducting our
business. If this happens, our business could be seriously harmed. Although
Texas Instruments and Bell Atlantic have offered to license their patents to us,
we cannot assure you that any license would be available on acceptable terms
should we choose to pursue such license or be found to infringe their patents.
In addition, we cannot assure you that:
* Other third parties will not assert infringement claims against us in
the future,
* These third party assertions or those of Texas Instruments or Bell
Atlantic will not result in protracted and costly litigation, or
* We would prevail in any such litigation or be able to license any
valid patents from third parties on commercially reasonable terms.
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<PAGE> 14
Further, such litigation, regardless of its outcome, could result in substantial
costs to us and could cause our management to be distracted. Litigation may also
be necessary to enforce our intellectual property rights. Any infringement claim
or other litigation against or by us could seriously harm our business.
GOVERNMENT REGULATION
The telecommunications industry, including many of our licensees' customers, is
subject to regulation by federal and state agencies, including the Federal
Communications Commission, or FCC, and various state public utility and service
commissions. While such regulation does not necessarily affect us directly, the
effects of these regulations on our customers' customers may, in turn,
negatively affect our business. FCC regulatory policies affecting the
availability of broadband access services and other terms on which service
providers conduct their business may impede our plans for the deployment of our
technology.
In February 1996, the Telecommunications Act of 1996 was enacted. A primary
factor in passage of the Telecommunications Act was the desire to deregulate and
foster competition in the telecommunications markets. While we believe
deregulation and increased competition, in general, will be favorable to our
operations and business plan, the effect of the Telecommunications Act on the
telecommunications industry remains unclear. The FCC could interpret the
Telecommunications Act in ways that could slow the rollout of DSL access
services, which could seriously harm our business.
In addition, our business may also be affected by the imposition of certain
tariffs, duties and other import restrictions on components that our customers
obtain from non-domestic suppliers or by the imposition of export restrictions
on products sold internationally and incorporating our technology.
Internationally, governments of the United Kingdom, Canada, Australia and
numerous other countries actively promote and create competition in the
telecommunications industry. Changes in current or future laws or regulations,
in the U.S. or elsewhere, could seriously harm our business.
MANUFACTURING
Sales of hardware products constitute a relatively small portion of our revenue,
and we do not intend to produce such products in any material quantity for the
foreseeable future. Consequently, we rely on third party contractor
manufacturers to assemble and test substantially all of our products. Our
internal manufacturing capacity is limited to final test and assembly of certain
products. Other than chipsets, which are available from our customers, we
believe that other components for our equipment-based products are available
from a number of suppliers.
EMPLOYEES
At December 31, 1999, we employed 109 people, including 78 in engineering, 14 in
sales and marketing, 3 in manufacturing and 14 in finance and administration. Of
these employees, 104, 4 and 1 were based in Massachusetts, Utah and California,
respectively. We supplement our regular employees as necessary with temporary
and contract personnel. At December 31, 1999, we engaged 2 temporary and
contract personnel, primarily working in research and development. None of our
employees is represented by a labor union. We consider our employee relations to
be good.
We believe that our future success will depend in large part on the service of
our technical and senior management personnel and upon our ability to attract
and retain highly qualified technical, sales and marketing and managerial
personnel. Competition for highly qualified personnel is intense. We cannot
assure you that we will be able to retain our key managerial and technical
employees or that we will be able to attract and retain additional highly
qualified personnel in the future.
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ITEM 2. PROPERTIES
We believe that our existing facilities are adequate for our current needs and
that additional space sufficient to meet our needs for the foreseeable future
will be available on reasonable terms.
We currently occupy:
1. 72,000 square feet of office space in Bedford, Massachusetts, which
serves as our headquarters. This site is used for our research and
development, sales and marketing, and administration activities. We
purchased this building in 1997.
2. 3,362 square feet of research and development space in Salt Lake City,
Utah. This facility is currently leased for a three-year term, which
expires on December 31, 2002.
3. 1,265 square feet of research and development space in Lafayette,
California. This facility is currently leased for a two-year term,
which expires on August 31, 2001.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is the only class of stock we have outstanding, and it trades
on the Nasdaq National Market under the symbol AWRE. The following table sets
forth the high and the low sales prices as reported on the Nasdaq National
Market from January 1, 1998 to December 31, 1999.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
High............ $50 7/16 $87 1/8 $61 1/4 $49
Low............. 25 37 7/16 27 1/4 20 7/8
1998
High............ 15 1/8 15 1/8 11 3/4 27 3/16
Low............. 10 7/16 10 1/4 4 3/4 4 3/4
</TABLE>
As of February 29, 2000, we had approximately 160 shareholders of record. This
number does not include shareholders from whom shares were held in a "nominee"
or "street" name. We have never paid cash dividends on our common stock and we
anticipate that we will continue to reinvest any earnings to finance future
operations.
We did not sell any equity securities that were not registered under the
Securities Act during the three months ended December 31, 1999.
ITEM 6. SELECTED FINANCIAL DATA
In the table below, we provide you with our selected consolidated financial
data. We have prepared this information using our audited financial statements
for the years ended December 31, 1999, 1998, 1997, 1996, and 1995. When you read
this selected financial data, it is important that you read it along with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, our historical consolidated financial statements, and the related
notes to the financial statements, which can be found in Item 8.
<TABLE>
<CAPTION>
(in 000's, except per share data)
Year ended December 31, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenue .............................. $20,527 $ 11,796 $ 6,198 $ 5,301 $ 3,260
Income (loss) from operations ........ 3,321 (3,951) (6,157) (538) (454)
Net income (loss) .................... 4,898 (2,249) (4,448) 259 (343)
Net income (loss) per share - basic .. $ 0.23 $ (0.11) $ (0.23) $ 0.02 $ (0.29)
Net income (loss) per share - diluted. $ 0.21 $ (0.11) $ (0.23) $ 0.01 $ (0.29)
BALANCE SHEET DATA
Cash and short-term investments ...... $36,266 $ 26,567 $ 26,104 $ 36,719 $ 2,154
Working capital ...................... 41,349 28,813 26,774 38,280 2,516
Total assets ......................... 54,482 40,162 39,281 40,123 3,228
Total liabilities .................... 1,513 1,028 1,661 676 309
Total stockholders' equity ........... 52,969 39,134 37,620 39,446 2,920
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain line items from
our consolidated statements of operations stated as a percentage of total
revenue:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1999 1998 1997
---------------------------------
<S> <C> <C> <C>
Revenue:
Product sales ................ 27.0% 26.2% 39.3%
Contract revenue ............. 51.6 70.2 60.3
Royalties .................... 21.4 3.6 0.4
---------------------------------
Total revenue .............. 100.0 100.0 100.0
Costs and expenses:
Cost of product sales ........ 6.6 11.8 20.2
Cost of contract revenue ..... 34.4 46.0 56.1
Research and development ..... 17.7 33.0 54.7
Selling and marketing ........ 12.5 24.0 36.9
General and administrative.... 12.6 18.7 31.4
---------------------------------
Total costs and expenses... 83.8 133.5 199.3
Income (loss) from operations.... 16.2 (33.5) (99.3)
Other income .................... -- 3.4 --
Interest income ................. 7.6 11.0 27.5
---------------------------------
Net income (loss) ............... 23.8% (19.1)% (71.8)%
=================================
</TABLE>
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 increased 79% from $3.1 million in 1998 to $5.5 million in 1999.
As a percentage of total revenue, product sales increased from 26% in 1998 to
27% in 1999. The dollar increase is primarily due to a substantial increase in
the sale of DSL test and development systems in 1999. 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 1999, and (ii) we made new products available in 1999,
including our Veritas 992 and Veritas 2000 products. The increase in product
sales is also, to a lesser degree, due to higher revenue from the sale of
compression software products. Compression software revenue increased primarily
because our OEM customers shipped more of our software in their products in
1999.
Product sales increased 27% from $2.4 million in 1997 to $3.1 million in 1998.
As a percentage of total revenue, product sales decreased from 39% in 1997 to
26% in 1998. The dollar increase was primarily due to the availability of new
hardware products in 1998 and higher shipments of prototype transceiver modules.
The dollar increase in hardware product sales was partially offset by lower
revenue from the sale of compression software products. Lower compression
software sales were primarily the result of a significant sale to a single
customer in 1997 that did not reoccur to the same degree in 1998.
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CONTRACT REVENUE
Contract revenue consists primarily of license, engineering development, and
customer support fees that we receive under agreements with our customers to
jointly develop DSL products. Contract revenue also includes an insignificant
amount of revenue from U.S. government research contracts.
Contract revenue increased 28% from $8.3 million in 1998 to $10.6 million in
1999. As a percentage of total revenue, contract revenue decreased from 70% in
1998 to 52% in 1999. The dollar increase is primarily due to a substantial
increase in contract revenue from our semiconductor manufacturer customers.
Higher contract revenue from semiconductor customers was mostly due to the
addition of new projects with existing and new customers. We believe the growing
DSL market opportunity encouraged more semiconductor companies to enter the
market in 1999. The dollar increase in DSL contract revenue was partially offset
by a decline in U.S. government research revenue. We completed our last U.S.
government research project in the first quarter of 1999. We anticipate that
revenue from these government contracts will not continue in future periods.
Contract revenue increased 122% from $3.7 million in 1997 to $8.3 million in
1998. As a percentage of total revenue, contract revenue increased from 60% in
1997 to 70% in 1998. The dollar increase was primarily due to a substantial
increase in contract revenue from our lead semiconductor customers. The dollar
increase in DSL semiconductor contract revenue was partially offset by a decline
in U.S. government research contract revenue.
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 $418,000 in 1998 to $4.4 million in 1999. As a
percentage of total revenue, royalties increased from 4% in 1998 to 21% in 1999.
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 Aware technology in particular.
Royalties increased from $25,000 in 1997 to $418,000 in 1998. As a percentage of
total revenue, royalties increased from 0.4% in 1997 to 4% in 1998. The dollar
increase was primarily due to initial DSL chipset royalty payments from several
of our lead semiconductor customers.
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 2% from $1.39 million in 1998 to $1.36 million in
1999. As a percentage of product sales, cost of product sales decreased from 45%
in 1998 to 25% in 1999. The percentage of compression software revenue in the
product sales mix was approximately the same in 1999 and 1998. Therefore, the
improvement in the gross margin is primarily due to lower cost of sales on
equipment. Cost of product sales for equipment only as a percentage of equipment
sales was 78% in 1998 as compared to 41% in 1999. The improvement in equipment
gross margins is primarily due to a larger percentage of higher margin test and
development system revenue in the sales mix, and a reduction of obsolescence
provisions in 1999.
Cost of product sales increased 11% from $1.3 million in 1997 to $1.4 million in
1998. As a percentage of product sales, cost of product sales decreased from 51%
in 1997 to 45% in 1998. The dollar increase in cost of product sales was
primarily due to higher volume shipments of DSL equipment products in 1998. The
decrease in cost of product sales as a percentage of product sales was primarily
due to increased sales of higher margin equipment in 1998 compared to 1997. This
rate benefit was partially offset by a higher percentage of DSL equipment in the
product sales mix compared to compression software products, which carry
significantly lower product costs than those for DSL equipment.
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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 30% from $5.4 million in 1998 to $7.1 million in 1999. As a
percentage of contract revenue, cost of contract revenue increased from 66% in
1998 to 67% in 1999. The dollar increase is primarily due to the addition of new
projects with existing and new semiconductor and equipment customers. Increased
spending related to telecommunications projects was partially offset by almost
no spending on U.S. government research projects in 1999.
Cost of contract revenue increased 56% from $3.5 million in 1997 to $5.4 million
in 1998. As a percentage of contract revenue, cost of contract revenue decreased
from 93% in 1997 to 66% in 1998. The dollar increase in cost of contract revenue
was primarily due to new projects with ADI, and the addition of new customer
projects with Lucent and Siemens in 1998. Increased spending related to these
projects was partially offset by: (i) lower spending on U.S. government research
projects, and (ii) no spending on our hybrid fiber coaxial cable telephony
project with DSC Communications Corporation ("DSC"), which was suspended in the
third quarter of 1997. The decrease in cost of contract revenue as a percentage
of contract revenue was primarily due to: (i) software license revenue from ADI
customers in 1998, which had minimal cost of contract revenue associated with
it, and (ii) the suspension of the DSC project, which was unprofitable in 1997.
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 decreased 7%
from $3.9 million in 1998 to $3.6 million in 1999. As a percentage of total
revenue, research and development expense decreased from 33% in 1998 to 18% in
1999. The dollar decrease in spending was primarily due to lower spending on our
x200 modem product and our Very high-speed Digital Subscriber Line ("VDSL")
chipset project. Lower spending on these projects was partially offset by higher
spending on our Veritas test and development products and compression software
research and development.
Research and development expense increased 14% from $3.4 million in 1997 to $3.9
million in 1998. As a percentage of total revenue, research and development
expense decreased from 55% in 1997 to 33% in 1998. The dollar increase was
primarily due to higher spending for engineering efforts to develop and enhance
our: (i) full-rate ADSL and G.lite technologies, including application specific
integrated circuit ("ASIC") cores, (ii) VDSL technology and chipsets, and (iii)
compression software technology. Higher spending on these engineering projects
was partially offset by lower spending for the development of 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 decreased 9% from $2.8 million
in 1998 to $2.6 million in 1999. As a percentage of total revenue, sales and
marketing expense decreased from 24% in 1998 to 13% in 1999. The dollar decrease
was primarily due to lower sales and marketing costs to execute an intellectual
property licensing strategy. Prior to the second quarter of 1998, we were
pursuing a technology licensing strategy as well as an end-user modem
distribution and sales strategy. Sales and marketing expenses in 1998 included
some non-recurring costs that we incurred to better align the sales organization
to execute on a licensing strategy.
Sales and marketing expense increased 24% from $2.3 million in 1997 to $2.8
million in 1998. As a percentage of total revenue, sales and marketing expense
decreased from 37% in 1997 to 24% in 1998. The dollar increase was primarily due
to non-recurring costs incurred in 1998 to better align the sales organization
to execute on our intellectual property licensing strategy.
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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 17% from $2.2 million in
1998 to $2.6 million in 1999. As a percentage of total revenue, general and
administrative expense decreased from 19% in 1998 to 13% in 1999. The dollar
increase is primarily due to higher public company expenses and additions to our
legal and administrative staffs.
General and administrative expense increased 14% from $1.9 million in 1997 to
$2.2 million in 1998. As a percentage of total revenue, general and
administrative expense decreased from 31% in 1997 to 19% in 1998. The dollar
increase was primarily due to additions to our finance and information systems
organizations to support organizational growth.
OTHER INCOME
Other income consists of rental income from real estate leases. Other income
decreased from $405,000 in 1998 to $18,000 in 1999. When we purchased our
headquarters building in July 1997, the terms of the purchase agreement required
us to sublet 24,000 square feet to the seller for a period of 18 months. The
sublease agreement terminated in January 1999. We do not anticipate that we will
have any more sublease income from our headquarters building in the future
because we renovated and moved into the previously subleased space during 1999.
INTEREST INCOME
Interest income increased 20% from $1.3 million in 1998 to $1.6 million in 1999.
The dollar increase is primarily due to higher cash balances. Higher cash
balances were due to positive cash flows from operations and employee stock
option exercises during 1999.
Interest income decreased 24% from $1.7 million in 1997 to $1.3 million in 1998.
The dollar decrease was primarily due to lower cash balances. Lower cash
balances were primarily due to: (i) the purchase and renovation of our
headquarters building in 1997; (ii) the acquisition of capital equipment; and
(iii) the use of cash to fund operating losses during 1997 and the first half of
1998.
INCOME TAXES
We have made no provision for income taxes as our historical net losses have
resulted in tax loss carryforwards. 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.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception in March 1986, we have financed our activities primarily
through the sale of stock, including an initial public offering in August 1996
that generated net proceeds of $35.2 million. In the years ended December 31,
1999, 1998 and 1997, we received net proceeds from the exercise of employee
stock options of $8.9 million, $3.8 million and $2.6 million, respectively. Our
operating activities used net cash of $2.3 million and $2.7 million in the years
ended December 31, 1998 and 1997, respectively. Cash used in operations during
1998 and 1997 was primarily due to operating losses and working capital
requirements. Operating activities provided net cash of $4.3 million in the year
ended December 31, 1999, which was primarily due to our profitability during
that year.
In the years ended December 31, 1999, 1998, and 1997, we made capital
expenditures of $3.1 million, $1.0 million, and $10.6 million, respectively.
Capital expenditures in all three years consist of spending on computer hardware
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<PAGE> 21
and software, laboratory equipment, and furniture used principally in
engineering activities. Capital spending in 1997 also includes the purchase and
partial renovation of our 72,000 square foot headquarters building for $8.2
million. Capital spending in 1999 also includes the renovation of the third
floor of this building for $1.5 million. We have no material commitments for
capital expenditures.
At December 31, 1999, we had cash, cash equivalents and short-term investments
of $36.3 million. We believe that our cash, cash equivalents and short-term
investments, will be sufficient to fund our operations for at least the next
twelve months.
YEAR 2000 COMPLIANCE
The following information constitutes a "Year 2000 Readiness Disclosure" under
the Year 2000 Information and Readiness Disclosure Act. Many currently installed
software products and computer systems are coded to accept only two digit
entries in the date code field. These date code fields will need to accept four
digit entries to distinguish 21st century dates from twentieth century dates.
The use of software and computer systems that are not Year 2000 compliant could
result in system failures or miscalculations causing disruptions of operations,
including a temporary inability to process transactions, send invoices or engage
in similar normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced in order to comply with
Year 2000 requirements.
In 1999, we completed a program to address Year 2000 issues. We evaluated the
software that we sell to customers, as well as the software that we use
internally to run our operations. Based on our efforts to address Year 2000
issues and our experience subsequent to December 31, 1999, we believe that the
software we sell and use is Year 2000 compliant. To date, we have not incurred
significant incremental costs in order to comply with Year 2000 requirements and
we do not believe that we will incur significant incremental costs in the
foreseeable future.
Despite our Year 2000 efforts and our experience after December 31, 1999, we
cannot assure you that Year 2000 errors or defects will not be discovered in the
software that we sell or use in the future. If Year 2000 errors or defects are
discovered in the future, we cannot assure you that the costs of making such
software Year 2000 compliant will not seriously harm our business.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Some of the information in this Form 10-K 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-K, 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-K could materially
and adversely affect 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.
Also, when we have entered into development and license agreements
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<PAGE> 22
with new licensees, we frequently have negotiated for and received Contract
Revenue. Contract Revenue consists primarily of payments for the transfer of
technology, engineering services, and support. We do not expect Contract Revenue
to be our primary source of revenue in the long term. Instead, our business plan
depends on our obtaining royalties through the ongoing sale by our licensees of
chipsets and products that incorporate our technology. To date, Contract Revenue
has had a disproportionate impact on our operating results relative to its
significance in our business plan.
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:
* The rate of market acceptance of DSL broadband access, generally, and
of our full-rate ADSL and G.lite technology in particular;
* Demand for our licensees' chipsets and products that incorporate our
technology;
* Development by us or our competitors of enhanced or alternative
high-speed network access technologies;
* The extent and timing of new license transactions;
* Regulatory developments; and
* The timing and related costs of any acquisitions.
As a result of these factors, we believe that period-to-period comparisons of
our revenue levels and operating results are not necessarily meaningful. You
should not rely on our quarterly revenue and operating results to predict our
future performance.
WE HAVE A UNIQUE AND UNPROVEN BUSINESS MODEL
In the second quarter of 1998, we shifted our business plan to focus on
licensing our DSL technology to chipset manufacturers that incorporate the
technology into DSL chipsets and products, and away from sales of DSL-based
products such as modems. 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:
* We typically undergo a lengthy and expensive process of building a
relationship with a potential licensee before entering into an
agreement;
* 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
* 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 new
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.
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<PAGE> 23
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 Must Incorporate Our DSL Technology
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. There are other solutions available for
equipment companies seeking to offer high-speed network access products.
Therefore, we face the risk that equipment manufacturers will choose chipset
solutions that do not incorporate our technology. Also, where we do not enter
into contracts directly with equipment companies, our ability to influence their
decision whether to adopt our technology is limited.
We also face the risk that equipment companies that elect to incorporate our DSL
technology into their products will not compete successfully against other
equipment companies. Many factors beyond our control could influence the success
or failure of a particular equipment company that adopts our technology,
including:
* Competition from other businesses in the same industry;
* Market acceptance of its products;
* Its engineering, sales and marketing, and management capabilities;
* Technical challenges of developing its products unrelated to our
technology; and
* Its financial and other resources.
Therefore, even if equipment companies incorporate our DSL technology into their
products, we cannot be sure that their products will achieve commercial
acceptance or result in significant royalties to us.
Service Providers Must Initiate Substantial Deployments of DSL Services Based on
Our Technology
The success of our business strategy depends upon whether telecommunications
service providers deploy DSL technologies and upon the timing of that
deployment. Factors that will affect such deployment include:
* The length of the technology approval process by service providers.
That process typically includes laboratory trials, technical trials,
marketing trials, initial commercial deployment and full commercial
deployment;
* The development of a viable business model for DSL services, including
the capability to market, sell, install and maintain DSL services;
* Cost constraints, such as installation costs and space and power
requirements at the telecommunications service provider's central
office;
* Lack of interoperability of DSL equipment that is supplied by
different manufacturers;
* Evolving industry standards for DSL technologies; and
* Government regulation
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Even if service providers deploy DSL technologies, we cannot be sure that they
will deploy services based on our DSL 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
Even if numerous service providers adopt our DSL technology, our success
ultimately will depend on acceptance of services incorporating our DSL
technology by end users, such as access service subscribers and users of
personal computers and modems. DSL services compete with a variety of different
high-speed Internet connectivity technologies, including cable modems,
satellite, and other wireless technologies. Many of these technologies will
compete effectively with DSL services. If any technology competing with DSL
technology is more reliable, faster, less expensive, reaches more customers, or
has other advantages over DSL technology, then the demand for DSL services, and
therefore our technology may decrease.
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. From time to time, we have received claims from other
companies that our technology infringes their patent rights. While we believe
our technology does not infringe the intellectual property of others, we cannot
be sure. 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
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<PAGE> 25
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.
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.
One element of our business strategy is to assume the risks of technology
development failure while reducing such risks for our licensees. In the past, we
have spent significant amounts on development projects that did not produce any
marketable technologies or products, and we expect that to occur again in the
future.
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. Some of these potential customers are some of the largest
semiconductor and equipment companies in the world. 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 these vendors include Alcatel, Centillium, Conexant, Fujitsu Systems,
ITEX, Globespan, Motorola, Orckit, PCTel, and TI.
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.
Many of our current and prospective licensees, as well as chipset competitors
that compete with our semiconductor licensees, including Alcatel, Conexant,
Fujitsu, Motorola, and TI, have significantly greater financial, technological,
manufacturing, marketing and personnel resources than we do. We cannot assure
you that we will be able to compete successfully or that competitive pressures
will not seriously harm our business.
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. During 1998 and 1999, we were not able to hire all of the
engineers that we wanted to hire. If we are unable to hire and retain a
sufficient number of engineers, our business could be seriously harmed.
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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:
* Quarterly fluctuations in our operating results;
* Changes in our relationships with our licensees;
* Announcements of technological innovations or new products by us, our
licensees or our competitors;
* Changes in earnings estimates by public market analysts;
* Key personnel losses;
* Sales of common stock; and
* 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
December 31, 1999, we had an accumulated deficit of $12.1 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.
GOVERNMENT REGULATION
The extensive regulation of the telecommunications industry by federal, state
and foreign regulatory agencies, including the Federal Communications
Commission, or FCC, and various state public utility and service commissions,
could affect us through the effects of such regulation on our licensees and
their customers. In addition, our business may also be affected by the
imposition of certain tariffs, duties and other import restrictions on
components that our customers obtain from non-domestic suppliers or by the
imposition of export restrictions on products sold internationally and
incorporating our technology. Changes in current or future laws or regulations,
in the United States or elsewhere, could seriously harm affect our business.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities", which required adoption in periods
beginning after June 15, 1999. FAS 133 was subsequently amended by Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133" and will now be effective for fiscal years beginning after June 15, 2000,
with earlier adoption permitted. The Company will adopt FAS 133 during fiscal
2001, as required. The Company is currently evaluating the effect of adopting
FAS 133 and has not determined the impact of FAS 133 on its financial
statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the SEC's views in applying generally accepted
accounting principles to selected revenue recognition issues in financial
statements. The
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application of the guidance in SAB 101 will be required in the Company's second
quarter of fiscal 2000. The Company is currently determining the impact that SAB
101 will have on its financial position and results of operations.
ITEM 7(A). 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. Our
investment portfolio includes:
* 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 December 31, 1999 and 1998, 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.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of Aware, Inc. are filed as part
of this Report on Form 10-K:
CONSOLIDATED FINANCIAL STATEMENTS:
Page
----
Report of Independent Accountants........................................ 29
Independent Auditors' Report............................................. 30
Consolidated Balance Sheets as of December 31, 1999 and 1998 ............ 31
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1999............................ 32
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1999...................... 33
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 1999.................. 34
Notes to Consolidated Financial Statements............................... 35
FINANCIAL STATEMENT SCHEDULES:
Page
----
Schedule II - Valuation and Qualifying Accounts.......................... 43
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Aware, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Aware,
Inc. and its subsidiary at December 31, 1999, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
January 26, 2000
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INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Aware, Inc. (the
"Company") and its subsidiary as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 8. These
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and its
subsidiary at December 31, 1998, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 1998, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
January 26, 1999
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AWARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 35,248,275 $ 23,512,242
Short-term investments ............................................ 1,017,302 3,054,717
Accounts receivable (less allowance for doubtful
accounts of $175,000 in 1999 and $100,000 in 1998) ............. 5,705,914 2,901,724
Inventories ....................................................... 122,058 120,911
Prepaid expenses and other assets ................................. 769,155 252,050
------------ ------------
Total current assets ........................................ 42,862,704 29,841,644
------------ ------------
Property and equipment, net ............................................ 11,619,761 10,320,581
------------ ------------
Total assets ................................................ $ 54,482,465 $ 40,162,225
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 787,684 $ 479,705
Accrued expenses .................................................. 177,500 127,525
Accrued compensation .............................................. 467,806 324,669
Accrued professional .............................................. 80,678 84,000
Deferred revenue .................................................. -- 12,500
------------ ------------
Total current liabilities ................................. 1,513,668 1,028,399
------------ ------------
Commitments and contingent liabilities (Note 7)
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, 21,918,056 in 1999 and 20,911,388 in 1998...... 219,181 209,114
Additional paid-in capital ........................................ 64,865,465 55,938,189
Accumulated deficit ............................................... (12,115,849) (17,013,477)
------------ ------------
Total stockholders' equity ................................. 52,968,797 39,133,826
------------ ------------
Total liabilities and stockholders' equity ................. $ 54,482,465 $ 40,162,225
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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AWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Revenue:
Product sales ............................. $ 5,534,465 $ 3,093,294 $ 2,435,365
Contract revenue .......................... 10,594,211 8,285,364 3,737,786
Royalties ................................. 4,398,438 417,672 24,900
----------------------------------------------
Total revenue ......................... 20,527,114 11,796,330 6,198,051
----------------------------------------------
Costs and expenses:
Cost of product sales ..................... 1,363,272 1,393,941 1,251,677
Cost of contract revenue .................. 7,053,119 5,431,136 3,477,561
Research and development .................. 3,635,829 3,886,935 3,396,576
Selling and marketing ..................... 2,574,549 2,829,596 2,285,726
General and administrative ................ 2,579,806 2,205,951 1,943,187
----------------------------------------------
Total costs and expenses ............. 17,206,575 15,747,559 12,354,727
----------------------------------------------
Income (loss) from operations ................. 3,320,539 (3,951,229) (6,156,676)
Other income .................................. 18,300 404,930 --
Interest income ............................... 1,558,789 1,296,878 1,708,340
----------------------------------------------
Income (loss) before provision for income taxes 4,897,628 (2,249,421) (4,448,336)
Provision for income taxes .................... -- -- --
----------------------------------------------
Net income (loss) ............................. $ 4,897,628 $ (2,249,421) $ (4,448,336)
==============================================
Net income (loss) per share - basic ........... $ 0.23 $ (0.11) $ (0.23)
Net income (loss) per share - diluted ......... $ 0.21 $ (0.11) $ (0.23)
Weighted average shares - basic ............... 21,496,864 20,343,339 19,328,252
Weighted average shares - diluted ............. 23,584,688 20,343,339 19,328,252
</TABLE>
The accompanying notes are an integral part of the financial statements.
32
<PAGE> 33
AWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................ $ 4,897,628 ($ 2,249,421) ($ 4,448,336)
Adjustments to reconcile net income (loss) to net cash
Depreciation and amortization ............................. 1,775,480 1,530,235 901,976
Increase (decrease) from changes in assets and liabilities:
Accounts receivable ...................................... (2,804,190) (1,077,605) (169,139)
Unbilled accounts receivable ............................. -- -- 110,722
Inventories .............................................. (1,147) 94,711 231,912
Prepaid expenses ......................................... (17,105) 38,797 (267,421)
Accounts payable ......................................... 307,979 (595,421) 737,787
Accrued expenses ......................................... 189,790 (49,410) 286,821
Deferred revenue ......................................... (12,500) 12,500 (40,000)
------------------------------------------------
Net cash provided by (used in) operating activities .. 4,335,935 (2,295,614) (2,655,678)
------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment ......................... (3,074,660) (1,004,791) (10,581,073)
Other assets ................................................ (500,000) -- --
Net sales (purchases) of short-term investments ............. 2,037,415 (447,306) 3,019,314
------------------------------------------------
Net cash used in investing activities ................ (1,537,245) (1,452,097) (7,561,759)
------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock ...................... 8,937,343 3,763,445 2,621,672
------------------------------------------------
Net cash provided by financing activities ............ 8,937,343 3,763,445 2,621,672
------------------------------------------------
Increase (decrease) in cash and cash equivalents ................ 11,736,033 15,734 (7,595,765)
Cash and cash equivalents, beginning of year .................... 23,512,242 23,496,508 31,092,273
------------------------------------------------
Cash and cash equivalents, end of year .......................... $ 35,248,275 $ 23,512,242 $ 23,496,508
================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
33
<PAGE> 34
AWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Total
-------------------------- Paid-In Accumulated Treasury Stockholders'
Shares Amount Capital Deficit Stock Equity
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 .......... 18,959,897 $ 189,600 $50,025,548 $(10,315,720) $(452,962) $39,446,466
Exercise of common stock options.. 686,127 6,860 2,614,812 2,621,672
Net loss ......................... (4,448,336) (4,448,336)
-----------------------------------------------------------------------------------
Balance at December 31, 1997 .......... 19,646,024 196,460 52,640,360 (14,764,056) (452,962) 37,619,802
Exercise of common stock options... 1,258,171 12,582 3,688,194 3,700,776
Issuance of common stock under
employee stock purchase plan .... 7,193 72 62,597 62,669
Retirement of treasury stock ...... (452,962) 452,962 --
Net loss .......................... (2,249,421) (2,249,421)
-----------------------------------------------------------------------------------
Balance at December 31, 1998 .......... 20,911,388 209,114 55,938,189 (17,013,477) -- 39,133,826
Exercise of common stock options... 1,000,399 10,004 8,784,641 8,794,645
Issuance of common stock under
employee stock purchase plan .... 6,269 63 142,635 142,698
Net income ........................ 4,897,628 4,897,628
-----------------------------------------------------------------------------------
Balance at December 31, 1999 .......... 21,918,056 $ 219,181 $64,865,465 $(12,115,849) $ -- $52,968,797
===================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
34
<PAGE> 35
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Aware, Inc. (the "Company") designs, develops, licenses and markets Digital
Subscriber Line ("DSL") technology that enables high-speed Internet access
over existing telephone networks. The Company licenses its intellectual
property and software to semiconductor manufacturers and equipment
manufacturers that sell chips and equipment incorporating Aware's
technology. Aware also markets to equipment companies to encourage them to
design Aware's technology into their products, and to service providers to
encourage them to deploy new broadband services based on Aware's
technology. The Company's technology includes intellectual property and
software products such as patents, systems designs, semiconductor cores,
run-time software, and hardware designs. The Company also offers hardware
products, such as DSL test and development systems and customer premises
equipment, as well as image compression software products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Aware, Inc. and its subsidiary. All significant intercompany
transactions have been eliminated.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist primarily of
demand deposits, money market funds, commercial paper, and discount notes
in highly liquid short-term instruments with original maturities of three
months or less from the date of purchase and are stated at cost, which
approximates market.
SHORT-TERM INVESTMENTS - At December 31, 1999 and 1998, the Company had
categorized all securities as "available-for-sale," since the Company may
liquidate these investments currently. In calculating realized gains and
losses, cost is determined using specific identification. Unrealized gains
and losses on available-for-sale securities are excluded from earnings and
reported in a separate component of stockholders' equity. At December 31,
1999 and 1998, unrealized gains and losses were not material.
The amortized cost of securities, which approximates fair value, consists
of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Type of security 1999 1998
---------------- ---------- ----------
<S> <C> <C>
Corporate debt securities......... $1,017,302 $1,027,935
U.S. agency securities............ -- 2,026,782
---------- ----------
Total........................... $1,017,302 $3,054,717
========== ==========
</TABLE>
ALLOWANCE FOR DOUBTFUL ACCOUNTS - Accounts are charged to the allowance for
doubtful accounts as they are deemed uncollectible based on a periodic
review of the accounts. Bad debt expense was approximately $100,000,
$50,000, and $26,000 for 1999, 1998, and 1997, respectively.
INVENTORIES - Inventories are stated at the lower of cost or market with
cost being determined by the first-in, first-out ("FIFO") method.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation and amortization of property and equipment is provided using
the straight-line method over the estimated useful lives of the assets.
Upon retirement or sale, the costs of the assets disposed of and the
related accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the determination of income or loss.
The estimated useful lives of assets used by the Company are:
Building and improvements........................ 30 years
Furniture and fixtures and office equipment...... 5 years
Computer & manufacturing equipment............... 3 years
Purchased software............................... 3 years
35
<PAGE> 36
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounts for the impairment of long-lived assets in accordance
with the provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
REVENUE RECOGNITION - Effective January 1, 1998, the Company adopted
Statement of Position 97-2, as amended, Software Revenue Recognition
("SOP"). This SOP applies to all entities that earn revenue on products
containing software, where software is not incidental to the product as a
whole.
Product sales consist primarily of revenue from the sale of modems, access
routers, transceiver modules, test and development systems, and compression
software. Product sales are recognized upon shipment.
Contract revenue includes revenue from development and license agreements
that the Company has entered into with semiconductor and equipment
manufacturers. These agreements typically provide licensees the right to
use the Company's proprietary technology and to receive engineering
implementation services and customer support. Contract revenue is generally
due upon the completion of milestones or the provision of customer support
by the Company. Remaining contract revenue consists primarily of license
fees, which are due upon transfers of pre-existing intellectual property or
upon pre-determined dates.
Contract revenue related to license fees is recognized when a definitive
agreement is reached, technology transfers have been effected, and no
contingent factors are present. Contract revenue related to engineering
service fees is generally recognized as milestone deliverables are achieved
under the terms of the respective agreements. Contract revenue related to
customer support fees is generally recognized as support services are
provided. Contract revenue also consists of revenue from U.S. government
research contracts. Revenue from government contracts is generally
recognized as services are performed.
The Company recognizes royalties when this revenue is due from its
licensees. The terms of the Company's agreements generally require
licensees to give notification to the Company and to pay royalties within
45 days of the end of the quarter during which sales of licensed products
take place.
INCOME TAXES - The Company computes deferred income taxes based on the
differences between the financial statement and tax basis of assets and
liabilities using enacted rates in effect in the years in which the
differences are expected to reverse. The Company must establish a valuation
allowance to offset temporary deductible differences, net operating loss
carryforwards and tax credits when it is more likely than not that the
deferred tax assets will not be realized.
CAPITALIZATION OF SOFTWARE COSTS - The Company capitalizes certain
internally generated software development costs after technological
feasibility of the product has been established. No software costs were
capitalized for the years ended December 31, 1999, 1998 and 1997, because
such costs incurred subsequent to the establishment of technological
feasibility, but prior to commercial availability, were immaterial.
CONCENTRATION OF CREDIT RISK - At December 31, 1999 and 1998, the Company
had bank cash balances and money market investments, in excess of federally
insured deposit limits of approximately $36,166,000 and $26,467,000,
respectively.
Concentration of credit risk with respect to accounts receivable is limited
to $1,300,000, $1,159,000, $576,000, $560,000, $494,000, $486,000, and
$450,000 with seven customers at December 31, 1999 and to $922,000,
$734,000 and $585,000 with three customers at December 31, 1998.
STOCK-BASED COMPENSATION - The Company grants stock options to its
employees and directors. Such grants are for a fixed number of shares with
an exercise price equal to the fair value of the shares at the date of
grant. As permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company accounts for stock option grants in accordance
with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, the Company has adopted the
provisions of SFAS No. 123 through disclosure only (Note 6).
36
<PAGE> 37
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPUTATION OF EARNINGS PER SHARE - Basic earnings per share is computed by
dividing income available to common shareholders by the weighted average
number of common shares outstanding. Diluted earnings per share is computed
by dividing income available to common shareholders 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.
USE OF ESTIMATES - The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. Significant estimates
include reserves for doubtful accounts, reserves for excess and obsolete
inventory, useful lives of fixed assets, valuation allowance for deferred
income tax assets, and accrued liabilities. Actual results could differ
from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and cash
equivalents, short-term investments, accounts receivable, accounts payable
and accrued expenses approximate fair value because of their short-term
nature.
COMPREHENSIVE INCOME - Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources, including foreign currency
translation adjustments and unrealized gains and losses on marketable
securities. For the years ended December 31, 1999, 1998 and 1997,
comprehensive income (loss) was not materially different from net income
(loss).
RECENT ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
(FAS 133), "Accounting for Derivative Instruments and Hedging Activities",
which required adoption in periods beginning after June 15, 1999. FAS 133
was subsequently amended by Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133" and will now be
effective for fiscal years beginning after June 15, 2000, with earlier
adoption permitted. The Company will adopt FAS 133 during fiscal 2001, as
required. The Company is currently evaluating the effect of adopting FAS
133 and has not determined the impact of FAS 133 on its financial
statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, (SAB 101), "Revenue Recognition in
Financial Statements." SAB 101 summarizes the SEC's views in applying
generally accepted accounting principles to selected revenue recognition
issues in financial statements. The application of the guidance in SAB 101
will be required in the Company's second quarter of fiscal 2000. The
Company is currently determining the impact that SAB 101 will have on its
financial position and results of operations.
RECLASSIFICATIONS - Certain prior period amounts have been reclassified to
be consistent with the current period presentation.
SEGMENTS - The Company organizes itself as one segment reporting to the
chief operating decision-maker. Revenue consists of product sales, contract
revenue, and royalties. The Company has sales outside of the United States,
which are described in Note 8. All long-lived assets are maintained in the
United States.
37
<PAGE> 38
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVENTORIES
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Raw materials..................... $ 93,847 $ 13,091
Finished goods.................... 28,211 107,820
-------- --------
Total......................... $122,058 $120,911
======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Land................................................ $ 1,080,000 $ 1,080,000
Building and improvements........................... 8,719,980 7,217,953
Computer equipment.................................. 3,545,140 2,624,729
Furniture and fixtures.............................. 784,275 501,610
Office equipment.................................... 276,127 205,389
Manufacturing equipment............................. 262,610 262,610
Purchased software.................................. 1,587,625 1,288,806
----------- -----------
Total............................................ 16,255,757 13,181,097
Less accumulated depreciation and amortization...... (4,635,996) (2,860,516)
----------- -----------
Property and equipment, net...................... $11,619,761 $10,320,581
=========== ===========
</TABLE>
5. INCOME TAXES
Deferred tax assets are attributable to the following at December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Federal net operating loss carryforwards.......................... $16,829,661 $10,304,000
Research and development and other tax credit carryforwards....... 5,787,926 2,505,000
State net operating loss carryforwards............................ 3,015,992 1,513,000
Depreciation...................................................... 113,522 90,000
Accrued expenses.................................................. 88,614 171,000
Deferred revenue.................................................. -- 5,000
Reserves not currently deductible................................. 152,176 --
----------- -----------
Total.......................................................... 25,987,891 14,588,000
Less valuation allowance.......................................... (25,987,891) (14,588,000)
----------- -----------
Deferred tax assets, net....................................... $ -- $ --
=========== ===========
</TABLE>
A reconciliation of the U.S. federal statutory rate to the effective tax
rate is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate..................... 34% (34)% (34)%
State rate, net of federal benefit......... 4 (6) (6)
Tax credits................................ (69) (44) (17)
Valuation allowance........................ 27 84 51
Other 4 - 6
---- ---- ----
Effective tax rate...................... -% -% -%
==== ==== ====
</TABLE>
38
<PAGE> 39
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management of the Company has evaluated the positive and negative evidence
affecting the realizability of its deferred tax assets. Based on the weight
of the available evidence, it is more likely than not that all of the
deferred tax assets will not be realized, and accordingly the deferred tax
assets have been fully reserved. Management re-evaluates the positive and
negative evidence on a quarterly basis.
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.
6. STOCK COMPENSATION PLANS
At December 31, 1999, the Company has three stock-based compensation plans,
which are described below. The Company adopted SFAS No. 123, but, as
permitted, applies APB Opinion No. 25 and related Interpretations in
accounting for options granted to employees and directors. The Company has
no performance-based stock option plans. Had compensation cost for the
Company's three stock-based compensation plans been determined based on the
fair value at the grant dates as prescribed by SFAS No. 123, the Company's
net income (loss) and basic and diluted net income (loss) per share would
have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) - as reported.......................... $ 4,897,628 $(2,249,421) $(4,448,336)
Net income (loss) - pro forma............................ $(11,744,507) $(7,432,112) $(8,531,745)
Basic earnings (loss) per share - as reported............ $0.23 ($0.11) ($0.23)
Basic earnings (loss) per share - pro forma.............. ($0.55) ($0.37) ($0.44)
Diluted earnings (loss) per share - as reported.......... $0.21 ($0.11) ($0.23)
Diluted earnings (loss) per share - pro forma............ ($0.55) ($0.37) ($0.44)
</TABLE>
The fair value of options on their grant date was measured using the
Black-Scholes option pricing model. Key assumptions used to apply this
pricing model are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Average risk-free interest rate ........ 5.54% 5.15% 6.48%
Expected life of option grants ......... 5 years 5 years 5 years
Expected volatility of underlying stock. 98% 89% 96%
Expected dividend yield ................ -- -- --
</TABLE>
FIXED STOCK OPTION PLANS - The Company has two fixed option plans. Under
the 1990 Incentive and Nonstatutory Stock Option Plan ("1990 Plan"), the
Company may grant incentive stock options or nonqualified stock options to
its employees and directors for up to 2,873,002 shares of common stock.
Under the 1996 Stock Option Plan ("1996 Plan"), the Company may grant
incentive stock options or nonqualified stock options to its employees and
directors for up to 5,000,000 shares of common stock. Under both plans,
options are granted at an exercise price as determined by the Board of
Directors; have a maximum term of ten
39
<PAGE> 40
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years; and generally vest over three to five years. As of December 31,
1999, there were 170,404 shares available for grant under the 1996 Plan,
and no shares available under the 1990 Plan.
A summary of the transactions of the Company's two fixed stock option plans
for the years ended December 31, 1999, 1998, and 1997 is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.. 3,097,043 $ 9.24 3,554,171 $ 7.01 3,396,408 $ 5.01
Granted .......................... 1,562,500 38.14 1,477,217 10.30 913,186 12.20
Exercised ........................ (1,000,399) 8.79 (1,258,171) 2.94 (686,127) 3.82
Forfeited or cancelled ........... (120,457) 11.54 (676,174) 11.58 (69,296) 9.10
-------------------- -------------------- --------------------
Outstanding at end of year ....... 3,538,687 $ 22.05 3,097,043 $ 9.24 3,554,171 $ 7.01
==================== ==================== ====================
Options exercisable at year end... 1,595,443 $ 16.32 1,278,888 $ 7.69 1,754,552 $ 4.23
</TABLE>
The weighted average grant date fair values of options granted during the
years ended December 31, 1999, 1998 and 1997 were $29.16, $7.40 and $9.28,
respectively.
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- -----------------------------
Number Weighted-Avg. Number
Range of Outstanding at Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices 12/31/99 Contractual Life Exercise Price At 12/31/99 Exercise Price
--------------- ----------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
$0 to 6............... 406,886 8.0 years $ 4.48 162,165 $ 2.97
6 to 11.............. 749,488 6.8 8.94 627,118 8.69
11 to 20.............. 821,840 7.9 12.26 260,327 12.36
20 to 30.............. 546,005 9.2 25.72 386,631 25.90
30 to 40.............. 117,468 9.5 32.98 41,905 33.73
40 to 50.............. 867,000 9.5 46.06 107,609 46.10
50 to 60.............. 30,000 9.3 52.08 9,688 52.52
----------------------------------------------- -----------------------------
3,538,687 8.3 $ 22.05 1,595,443 $ 16.32
=============================================== =============================
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN - In June 1996, the Company adopted an
Employee Stock Purchase Plan (the "ESPP Plan") under which eligible
employees may purchase common stock at a price equal to 85% of the lower of
the fair market value of the common stock at the beginning or end of each
six-month offering period. Participation in the ESPP Plan is limited to 6%
of an employee's compensation, may be terminated at any time by the
employee and automatically ends on termination of employment with the
Company. A total of 100,000 shares of common stock have been reserved for
issuance. As of December 31, 1999 there were 86,538 shares available for
future issuance under the ESPP Plan. The Company issued 6,269 and 7,193
common shares in 1999 and 1998, respectively. No shares were issued under
the plan in 1997.
7. COMMITMENTS AND CONTINGENT LIABILITIES
LEASE COMMITMENTS - The Company owns its principal office and research
facility in Bedford, Massachusetts, which it has occupied since November
1997. Prior to November 1997, the Company leased its principal research
facilities under various operating leases that expired in 1997. The Company
conducts a
40
<PAGE> 41
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
portion of its research and development activities in leased facilities in
Lafayette, California and Salt Lake City, Utah under non-cancellable
operating leases that expire in 2001 and 2002, respectively.
The following is a schedule of future minimum rental payments required
under real estate leases:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
2000........................................... $ 96,172
2001............................................ 87,986
2002............................................ 68,921
Thereafter...................................... -
--------
Total minimum lease payments................. $253,079
========
</TABLE>
Rental expense was approximately $14,000, $4,000, and $308,000 in 1999,
1998 and 1997, respectively.
LITIGATION - There are no material pending legal proceedings to which the
Company is a party or to which any of its properties are subject which,
either individually or in the aggregate, are expected by the Company to
have a material adverse effect on its business, financial position or
results of operations.
8. BUSINESS SEGMENTS AND MAJOR CUSTOMERS
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>
Year ended December 31,
------------------------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
United States....................... $14,801,458 $ 9,376,625 $5,648,987
Germany............................. 2,430,923 1,672,795 9,616
Asia/Pacific........................ 2,169,065 182,302 224,058
Europe, excluding Germany........... 945,475 519,160 296,158
Rest of world....................... 180,193 45,448 19,232
----------- ----------- ----------
$20,527,114 $11,796,330 $6,198,051
=========== =========== ==========
</TABLE>
The portion of total revenue that was derived from major customers was as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Customer A.................... 22% 29% 12%
Customer B.................... 12% 18% 6%
Customer C.................... 11% - -
Customer D.................... 10% - -
Customer E ................... 2% 14% -
Customer F ................... 1% 8% 16%
Customer G.................... - 4% 13%
</TABLE>
9. EMPLOYEE BENEFIT PLAN
In 1994, the Company established a qualified 401(k) Retirement Plan (the
"Plan") under which employees are allowed to contribute certain percentages
of their pay, up to the maximum allowed under Section 401(k) of the
41
<PAGE> 42
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Internal Revenue Code. Company contributions to the Plan are at the
discretion of the Board of Directors. Company contributions were $148,000
and $58,000 in 1999 and 1998, respectively, and there were no Company
contributions in 1997.
10. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is calculated as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss).................................... $4,897,628 $(2,249,421) $(4,448,336)
Weighted average common shares outstanding........... 21,496,864 20,343,339 19,328,252
Additional dilutive common stock equivalents ........ 2,087,824 -- --
---------- ----------- -----------
Diluted shares outstanding .......................... 23,584,688 20,343,339 19,328,252
========== =========== ===========
Net income (loss) per share - basic.................. $ 0.23 $ (0.11) $ (0.23)
Net income (loss) per share - diluted................ $ 0.21 $ (0.11) $ (0.23)
</TABLE>
For the years ended December 31, 1998 and 1997, common stock equivalents
are not included in the per share calculations for diluted EPS, because the
Company had a net loss and the effect of their inclusion would be
anti-dilutive. Anti-dilutive common stock equivalents not included in per
share calculations for 1998 and 1997 were 1,027,457 and 1,676,311,
respectively.
11. QUARTERLY RESULTS OF OPERATIONS - UNAUDITED
The following table presents unaudited quarterly operating results for each
of the Company's eight quarters in the two-year period ended December 31,
1999:
<TABLE>
<CAPTION>
1999 Quarters Ended
--------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue ...................................$ 4,306,268 $ 4,710,799 $ 5,407,059 $ 6,102,988
Income from operations .................... 338,542 574,136 1,032,630 1,375,231
Net income ................................ 676,963 918,977 1,424,382 1,877,306
Net income per share - basic ..............$ 0.03 $ 0.04 $ 0.07 $ 0.09
Net income per share - diluted ............$ 0.03 $ 0.04 $ 0.06 $ 0.08
</TABLE>
<TABLE>
<CAPTION>
1998 Quarters Ended
--------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue ...................................$ 2,004,016 $ 2,431,504 $ 3,346,693 $ 4,014,117
Income (loss) from operations ............. (1,893,126) (1,715,539) (503,411) 160,847
Net income (loss) ......................... (1,455,437) (1,290,978) (77,772) 574,766
Net income (loss) per share - basic .......$ (0.07) $ (0.06) $ (0.00) $ 0.03
Net income (loss) per share - diluted .....$ (0.07) $ (0.06) $ (0.00) $ 0.03
</TABLE>
42
<PAGE> 43
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS - YEARS ENDED DECEMBER 31,
1999, 1998, AND 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
COL. A COL. B COL. C (1) COL. C (2) COL. D COL. E
- ---------------------------------------------------------------------------------------------------
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED DEDUCTIONS BALANCE
BEGINNING COSTS AND TO OTHER CHARGED TO AT END
OF PERIOD EXPENSES ACCOUNTS RESERVES OF PERIOD
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
1999 ....................... $100,000 $ 100,000 -- $ 25,000 $175,000
1998 ....................... $ 50,000 $ 50,000 -- -- $100,000
1997 ....................... $ 35,000 $ 25,923 -- $ 10,923 $ 50,000
Allowance for sales returns and
1999 ....................... $ 50,000 -- $(15,000) -- $ 35,000
1998 ....................... $ 50,000 -- -- -- $ 50,000
1997 ....................... -- -- $ 50,000 -- $ 50,000
Inventory reserves:
1999 ....................... $183,805 $ (25,000) -- -- $158,805
1998 ....................... $ 16,667 $ 274,999 -- $107,861 $183,805
1997 ....................... $300,000 $ 275,000 -- $558,333 $ 16,667
</TABLE>
43
<PAGE> 44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and directors, and their ages as of February 29, 2000 are
as follows:
NAME AGE POSITION
---- --- --------
Michael A. Tzannes...... 38 President, Chief Executive Officer, and Director
Richard P. Moberg....... 44 Chief Financial Officer and Treasurer
Edmund C. Reiter........ 36 Senior Vice President and Director
Richard W. Gross........ 42 Senior Vice President - Strategic Development
John K. Kerr ........... 62 Chairman of the Board of Directors
David Ehreth ........... 50 Director
G. David Forney, Jr..... 59 Director
Michael A. Tzannes has been Aware's President and Chief Executive Officer since
April 1998 and has served as a director of Aware since March 1998. From
September 1997 to April 1998, he served as the Company's Chief Technology
Officer and General Manager of Telecommunications. Mr. Tzannes served as Aware's
Senior Vice President, Telecommunications from April 1996 to September 1997, as
Aware's Vice President, Telecommunications from December 1992 to April 1996, as
a Senior Member of Aware's Technical Staff from January 1991 to November 1992,
and as a consultant to the Company from October 1990 to December 1990. From 1986
to 1990, he was a Staff Engineer at Signatron, Inc., a telecommunications
technology and systems developer. Mr. Tzannes received a Ph.D. in electrical
engineering from Tufts University, an M.S. from the University of Michigan at
Ann Arbor, and a B.S. from the University of Patras, Greece.
Richard P. Moberg joined Aware in June 1996 as Chief Financial Officer and
Treasurer. From December 1990 to June 1996, Mr. Moberg held a number of
positions at Lotus Development Corporation, a computer software developer,
including Corporate Controller from June 1995 to June 1996, Assistant Corporate
Controller from May 1993 to June 1995, and Director of Financial Services from
December 1990 to May 1993. Mr. Moberg received an M.B.A. from Bentley College
and a B.B.A. in accounting from the University of Massachusetts at Amherst.
Edmund C. Reiter has been Senior Vice President of Aware since May 1998 and has
served as a director of Aware since December 1999. Prior to becoming a Senior
Vice President, he served as Aware's Vice President, Advanced Products from
August 1995 to May 1998, Aware's Manager of Product Development for still image
compression products from June 1994 to August 1995, as a Senior Member of
Aware's Technical Staff from November 1993 to June 1994, and as a Member of
Aware's Technical Staff from December 1992 to November 1993. Mr. Reiter served
as Senior Scientist at New England Research, Inc. from January 1991 to November
1992. Mr. Reiter received a Ph.D. from the Massachusetts Institute of Technology
and a B.S. from Boston College.
Richard W. Gross was appointed as Senior Vice President - Strategic Development
in July 1999. Mr. Gross also served as Vice President - Strategic Development
from July 1998 to July 1999. Prior to the Vice President position, he held
various senior level engineering positions from the time he joined Aware in
September 1993 until July 1998. Prior to joining Aware, Mr. Gross was a senior
technical staff member at GTE Laboratories from 1987 to 1993; a technical staff
member at the Heinrich Hertz Institute from 1984 to 1987; and a programmer for
IBM, Federal Systems Division from 1980 to 1984. Mr. Gross received a Ph.D. and
M.S. in electrical engineering from the University of Rhode Island and a B.A. in
physics from Holy Cross College.
44
<PAGE> 45
John K. Kerr has been a director of Aware since 1990 and Chairman of the board
of directors since March 1999. Mr. Kerr previously served as a director of Aware
from 1988 to 1989 and the Chairman of the board of directors from November 1992
to March 1994. Mr. Kerr has been General Partner of Grove Investment Partners, a
private investment partnership, since 1990. Mr. Kerr received an M.A. and a B.A.
from Baylor University.
David Ehreth has served as a director of Aware since November 1997. Since
September 1998, Mr. Ehreth has served as Chief Executive Officer of Westwave
Communications, Inc., a telecommunications software company. From June 1993 to
August 1998, Mr. Ehreth served as Division Vice President of the Access Division
of DSC Communications Corporation, a manufacturer of digital switching, access,
transport, and private network system products for the telecommunications
industry. From 1987 to June 1993, Mr. Ehreth served as a Vice President of
Engineering of Optilink, Inc., a manufacturer of access systems for the
telecommunications industry. Optilink, Inc. was acquired by DSC Communications
Corporation in 1990.
G. David Forney, Jr. has served as a director of Aware since May 1999. Mr.
Forney was a Vice President of Motorola, Inc. from 1977 until his retirement in
January 1999. Mr. Forney was previously a Vice President of research and
development, and a director of Codex Corporation prior to its acquisition by
Motorola in 1977. Mr. Forney is currently a Bernard M. Gordon Adjunct Professor
in the Department of Electrical Engineering and Computer Sciences at the
Massachusetts Institute of Technology. Mr. Forney received an Sc.D. in
electrical engineering from M.I.T. in 1965 and a B.S.E. in electrical
engineering from Princeton University in 1961.
ITEM 11. EXECUTIVE COMPENSATION
The information required by item 11 of Form 10-K is incorporated by reference
from the information contained in the section captioned "Compensation of
Directors and Executive Officers" in the Proxy Statement that will be delivered
to our shareholders in connection with our May 25, 2000 Annual Meeting of
Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by item 12 of Form 10-K is incorporated by reference
from the information contained in the section captioned "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement that will be
delivered to our shareholders in connection with our May 25, 2000 Annual Meeting
of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by item 13 of Form 10-K is incorporated by reference
from the information contained in the section captioned "Certain Transactions"
in the Proxy Statement that will be delivered to our shareholders in connection
with our May 25, 2000 Annual Meeting of Shareholders.
45
<PAGE> 46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) See Item 8 for an index to the consolidated financial statements,
supplementary financial information, and financial statement schedule.
(B) There were no reports on Form 8-K filed during the fourth quarter ended
December 31, 1999.
(C) INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
3.1 Amended and Restated Articles of Organization (filed as
Exhibit 3.2 to the Company's Registration Statement on Form
S-1, File No. 333-6807 and incorporated herein by
reference).
3.2 Amended and Restated By-Laws (filed as Exhibit 3.3 to the
Company's Form 10-Q for the quarter ended June 30, 1996 and
incorporated herein by reference.)
10.1 1990 Incentive and Non-Statutory Stock Option Plan (filed as
Exhibit 10.2 to the Company's Registration Statement on Form
S-1, File No. 333-6807 and incorporated herein by
reference).
10.2 * 1996 Stock Option Plan, as amended and restated.
10.3 1996 Employee Stock Purchase Plan (filed as Exhibit 10.4 to
the Company's Registration Statement on Form S-1, File No.
333-6807 and incorporated herein by reference).
10.4 Form of Director Indemnification Agreement (filed as Exhibit
10.13 to the Company's Registration Statement on Form
S-1, File No. 333-6807 and incorporated herein by
reference).
10.5 Employment Agreement of James C. Bender, dated October 27,
1994, as amended on December 20, 1996 and April 23, 1998
(filed as Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended March 31, 1998 and incorporated herein by
reference).
21.1 * Subsidiaries of Registrant
23.1 * Consent of PricewaterhouseCoopers LLP
23.2 * Consent of Deloitte & Touche LLP
* Filed herewith
46
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Michael A. Tzannes
-------------------------------------------
Michael A. Tzannes, Chief Executive Officer &
President
Date: March 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 28th day of March 2000.
SIGNATURE TITLE
--------- -----
/s/ Michael A. Tzannes Chief Executive Officer, President, and Director
- -------------------------- (Principal Executive Officer)
Michael A. Tzannes
/s/ Richard P. Moberg Chief Financial Officer, Treasurer
- -------------------------- (Principal Financial and Accounting Officer)
Richard P. Moberg
/s/ John K. Kerr Chairman of the Board of Directors
- --------------------------
John K. Kerr
/s/ Edmund C. Reiter Senior Vice President, and Director
- --------------------------
Edmund C. Reiter
/s/ David Ehreth Director
- --------------------------
David Ehreth
/s/ G. David Forney, Jr. Director
- --------------------------
G. David Forney, Jr
47
<PAGE> 1
EXHIBIT 10.2
AWARE, INC.
1996 STOCK OPTION PLAN
SECTION 1. PURPOSE
This 1996 Stock Option Plan (the "Plan") of Aware, Inc., a Massachusetts
corporation (the "Company"), is designed to provide additional incentive to
executives and other key employees of the Company and its subsidiaries and for
certain other individuals providing services to or acting as directors of the
Company and its subsidiaries. The Company intends that this purpose will be
effected by the granting of incentive stock options ("Incentive Stock Options")
as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and nonqualified stock options ("Nonqualified Options") under the Plan
which afford such executives, key employees, directors and other eligible
individuals an opportunity to acquire or increase their proprietary interest in
the Company through the acquisition of shares of its Common Stock. The Company
intends that Incentive Stock Options issued under the Plan will qualify as
"incentive stock options" as defined in Section 422 of the Code and the terms of
the Plan shall be interpreted in accordance with this intention. The term
"subsidiary" shall have the meaning set forth in Section 424 of the Code.
SECTION 2. ADMINISTRATION
2.1 THE COMMITTEE. Unless otherwise determined by the Company's Board of
Directors (the "Board"), the Plan shall be administered by a Committee (the
"Committee") consisting of at least two (2) "Outside Directors" who may also be
members of the Compensation Committee. As used herein, the term "Outside
Director" means any director who (i) is not an employee of the Company or of any
"affiliated group," as such term is defined in Section 1504(a) of the Code,
which includes the Company (an "Affiliate"), (ii) is not a former employee of
the Company or any Affiliate who is receiving compensation for prior services
(other than benefits under a tax-qualified retirement plan) during the Company's
or any Affiliate's taxable year, (iii) has not been an officer of the Company or
any Affiliate and (iv) does not receive remuneration from the Company or any
Affiliate, either directly or indirectly, in any capacity other than as a
director. It is the intention of the Company that the Plan shall be administered
by "non-employee directors" within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934 (the "Exchange Act"), but the authority and
validity of any act taken or not taken by the Committee shall not be affected if
any person administering the Plan is not a non-employee director. Except as
specifically reserved to the Board under the terms of the Plan, the Committee
shall have full and final authority to operate, manage and administer the Plan
on behalf of the Company. Action by the Committee shall require the affirmative
vote of a majority of all members thereof.
2.2 POWERS OF THE COMMITTEE. Subject to the terms and conditions of the
Plan, the Committee shall have the power:
(a) To determine from time to time the persons eligible to receive
options and the options to be granted to such persons under the Plan and to
prescribe the terms, conditions, restrictions, if any, and provisions
(which need not be identical) of each option granted under the Plan to such
persons;
(b) To construe and interpret the Plan and options granted thereunder
and to establish, amend, and revoke rules and regulations for
administration of the Plan. In this connection, the Committee may correct
any defect or supply any omission, or reconcile any inconsistency in the
Plan, or in any option agreement, in the manner and to the extent it shall
deem necessary or expedient to make the Plan fully effective. All decisions
and determinations by the Committee in the exercise of this power shall be
final and binding upon the Company and optionees;
(c) To make, in its sole discretion, changes to any outstanding
option granted under the Plan, including:
<PAGE> 2
(i) To reduce the exercise price of or otherwise reprice any
outstanding option granted under the Plan, whether through amendment,
cancellation or replacement grant or any other means, but only if (A)
such outstanding option is held by a person other than a director,
officer or other affiliate of the Company and (B) the aggregate number
of shares of Common Stock (or other securities as provided in Section
8 hereof) subject to the options to be repriced, together with all
other options granted under the Plan that have been previously
repriced, does not exceed 10% of the number of shares of Common Stock
(or such other securities) authorized to be issued under the Plan from
time to time;
(ii) To accelerate the vesting schedule of any option, but only
(A) upon the death, retirement or disability of the optionee, (B) in
connection with any change in control of the Company described in
Section 8.5, (C) in the case of any option vesting according to the
lapse of time, to vest not more quickly than ratably over a period of
three years, or (D) in the case of any option vesting according to
performance criteria established by the Committee or the Board, to
vest no earlier than the later of the first anniversary of the date of
grant or the satisfaction of such performance criteria; or
(iii) To extend the expiration date of any option; and
(d) Generally, to exercise such powers and to perform such acts as
are deemed necessary or expedient to promote the best interests of the
Company with respect to the Plan.
SECTION 3. STOCK
3.1 STOCK TO BE ISSUED. The stock subject to the options granted under the
Plan shall be shares of the Company's authorized but unissued Common Stock, $.01
par value (the "Common Stock"), or shares of the Company's Common Stock held in
treasury. The total number of shares that may be issued pursuant to options
granted under the Plan shall not exceed an aggregate of 5,000,000 shares of
Common Stock; provided, however, that the class and aggregate number of shares
which may be subject to options granted under the Plan shall be subject to
adjustment as provided in Section 8 hereof.
3.2 EXPIRATION, CANCELLATION OR TERMINATION OF OPTION. Whenever any
outstanding option under the Plan expires, is cancelled or is otherwise
terminated (other than by exercise), the shares of Common Stock allocable to the
unexercised portion of such option may again be the subject of options under the
Plan.
3.3 LIMITATION ON GRANTS. In no event may any Plan participant be granted
options with respect to more than 250,000 shares of Common Stock in any calendar
year. The number of shares of Common Stock issuable pursuant to an option
granted to a Plan participant in a calendar year that is subsequently forfeited,
cancelled or otherwise terminated shall continue to count toward the foregoing
limitation in such calendar year. In addition, if the exercise price of an
option is subsequently reduced, the transaction shall be deemed a cancellation
of the original option and the grant of a new one so that both transactions
shall count toward the maximum shares issuable in the calendar year of each
respective transaction.
SECTION 4. ELIGIBILITY
4.1 PERSONS ELIGIBLE. Incentive Stock Options under the Plan may be
granted only to officers and other employees of the Company or its subsidiaries.
Nonqualified Options may be granted to officers or other employees of the
Company or its subsidiaries, and to members of the Board and consultants or
other persons who render services to the Company (regardless of whether they are
also employees).
4.2 GREATER-THAN-TEN-PERCENT STOCKHOLDERS. Except as may otherwise be
permitted by the Code or other applicable law or regulation, no Incentive Stock
Option shall be granted to an individual who, at the time the option is granted,
owns (including ownership attributed pursuant to Section 424 of the Code) more
than ten percent of the total combined voting power of all classes of stock of
the Company or any subsidiary (a "greater-than-ten-percent stockholder"), unless
such Incentive Stock Option provides that (i) the purchase price per share shall
not be less than one hundred ten percent of the fair market value of the Common
Stock at the time such option
<PAGE> 3
is granted, and (ii) that such option shall not be exercisable to any extent
after the expiration of five years from the date it is granted.
4.3 MAXIMUM AGGREGATE FAIR MARKET VALUE. The aggregate fair market value
(determined at the time the option is granted) of the Common Stock with respect
to which Incentive Stock Options are exercisable for the first time by any
optionee during any calendar year (under the Plan and any other plans of the
Company or its subsidiary for the issuance of incentive stock options) shall not
exceed $100,000 (or such greater amount as may from time to time be permitted
with respect to incentive stock options by the Code or any other applicable law
or regulation).
SECTION 5. TERMINATION OF EMPLOYMENT OR DEATH OF OPTIONEE
5.1 TERMINATION OF EMPLOYMENT. Except as may be otherwise expressly
provided herein, options shall terminate on the earlier of:
(a) the date of expiration thereof,
(b) the date of termination of the optionee's employment with or
services to the Company by it for cause (as determined by the Company), or
voluntarily by the optionee; or
(c) thirty days after the date of termination of the optionee's
employment with or services to the Company by it without cause;
provided that Nonqualified Options granted to persons who are not employees of
the Company need not, unless the Committee determines otherwise, be subject to
the provisions set forth in clauses (b) and (c) above.
An employment relationship between the Company and the optionee shall be
deemed to exist during any period in which the optionee is employed by the
Company or any subsidiary. Whether authorized leave of absence, or absence on
military or government service, shall constitute termination of the employment
relationship between the Company and the optionee shall be determined by the
Committee at the time thereof.
As used herein, "cause" shall mean (x) any material breach by the optionee
of any agreement to which the optionee and the Company are both parties, (y) any
act or omission to act by the optionee which may have a material and adverse
effect on the Company's business or on the optionee's ability to perform
services for the Company, including, without limitation, the commission of any
crime (other than ordinary traffic violations), or (z) any material misconduct
or material neglect of duties by the optionee in connection with the business or
affairs of the Company or any affiliate of the Company.
5.2 DEATH OR PERMANENT DISABILITY OF OPTIONEE. In the event of the death
or permanent and total disability of the holder of an option prior to
termination of the optionee's employment with or services to the Company and
before the date of expiration of such option, such option shall terminate on the
earlier of such date of expiration or one year following the date of such death
or disability. After the death of the optionee, his/her executors,
administrators or any person or persons to whom his/her option may be
transferred by will or by the laws of descent and distribution, shall have the
right, at any time prior to such termination, to exercise the option to the
extent the optionee was entitled to exercise such option immediately prior to
his/her death. Permanent and total disability shall be determined in accordance
with Section 22(e)(3) of the Code and the regulations issued thereunder.
SECTION 6. TERMS OF THE OPTION AGREEMENTS
Each option agreement shall be in writing and shall contain such terms,
conditions, restrictions, if any, and provisions as the Committee shall from
time to time deem appropriate. Such provisions or conditions may include without
limitation restrictions on transfer, repurchase rights, or such other provisions
as shall be determined by the Committee; provided that such additional
provisions shall not be inconsistent with any other term or condition of the
Plan and such additional provisions shall not cause any Incentive Stock Option
granted under the Plan to fail to qualify as an incentive option within the
meaning of Section 422 of the Code. Option agreements need not be
<PAGE> 4
identical, but each option agreement by appropriate language shall include the
substance of all of the following provisions:
6.1 EXPIRATION OF OPTION. Notwithstanding any other provision of the Plan
or of any option agreement, each option shall expire on the date specified in
the option agreement, which date shall not, in the case of an Incentive Stock
Option, be later than the tenth anniversary (fifth anniversary in the case of a
greater-than-ten-percent stockholder) of the date on which the option was
granted, or as specified in Section 5 hereof.
6.2 EXERCISE. Subject to Section 7.3 hereof, each option may be exercised,
so long as it is valid and outstanding, from time to time in part or as a whole,
subject to any limitations with respect to the number of shares for which the
option may be exercised at a particular time and to such other conditions as the
Committee in its discretion may specify upon granting the option.
6.3 PURCHASE PRICE. The purchase price per share under each option shall
be determined by the Committee at the time the option is granted; provided,
however, that the option price shall not be less than the fair market value of
the Common Stock on the date the option is granted (110% of the fair market
value in the case of a greater-than-ten-percent stockholder). For the purpose of
the Plan the fair market value of the Common Stock shall be the closing price
per share on the date of grant of the option as reported by a nationally
recognized stock exchange, or, if the Common Stock is not listed on such an
exchange, as reported by the National Association of Securities Dealers
Automated Quotation System, Inc. ("NASDAQ"), or, if the Common Stock is not
quoted on NASDAQ, the fair market value as determined by the Committee.
6.4 TRANSFERABILITY OF OPTIONS. Options shall not be transferable by the
optionee otherwise than by will or under the laws of descent and distribution,
and shall be exercisable, during his or her lifetime, only by him or her.
6.5 RIGHTS OF OPTIONEES. No optionee shall be deemed for any purpose to be
the owner of any shares of Common Stock subject to any option unless and until
the option shall have been exercised pursuant to the terms thereof, and the
Company shall have issued and delivered the shares to the optionee.
6.6 REPURCHASE RIGHT. The Committee may in its discretion provide upon the
grant of any option hereunder that the Company shall have an option to
repurchase upon such terms and conditions as determined by the Committee all or
any number of shares purchased upon exercise of such option. The repurchase
price per share payable by the Company shall be such amount or be determined by
such formula as is fixed by the Committee at the time the option for the shares
subject to repurchase is granted. In the event the Committee shall grant options
subject to the Company's repurchase option, the certificates representing the
shares purchased pursuant to such option shall carry a legend satisfactory to
counsel for the Company referring to the Company's repurchase option.
6.7 "LOCKUP" AGREEMENT. The Committee may in its discretion specify upon
granting an option that the optionee shall agree for a period of time (not to
exceed 180 days) from the effective date of any registration of securities of
the Company (upon request of the Company or the underwriters managing any
underwritten offering of the Company's securities), not to sell, make any short
sale of, loan, grant any option for the purchase of, or otherwise dispose of any
shares issued pursuant to the exercise of such option, without the prior written
consent of the Company or such underwriters, as the case may be.
SECTION 7. METHOD OF EXERCISE; PAYMENT OF PURCHASE PRICE
7.1 METHOD OF EXERCISE. Any option granted under the Plan may be exercised
by the optionee by delivering to the Company on any business day a written
notice specifying the number of shares of Common Stock the optionee then desires
to purchase and specifying the address to which the certificates for such shares
are to be mailed (the "Notice"), accompanied by payment for such shares.
7.2 PAYMENT OF PURCHASE PRICE. Payment for the shares of Common Stock
purchased pursuant to the exercise of an option shall be made by:
<PAGE> 5
(a) cash in an amount, or a check, bank draft or postal or express
money order payable in an amount, equal to the aggregate exercise price for
the number of shares specified in the Notice;
(b) with the consent of the Committee, shares of Common Stock of the
Company having a fair market value (as defined for purposes of Section 6.3
hereof) equal to such aggregate exercise price;
(c) with the consent of the Committee, a personal recourse note
issued by the optionee to the Company in a principal amount equal to such
aggregate exercise price and with such other terms, including interest rate
and maturity, as the Committee may determine in its discretion; provided
that the interest rate borne by such note shall not be less than the lowest
applicable federal rate, as defined in Section 1274(d) of the Code;
(d) with the consent of the Committee, such other consideration that
is acceptable to the Committee and that has a fair market value, as
determined by the Committee, equal to such aggregate exercise price,
including any broker-directed cashless exercise/resale procedure adopted by
the Committee; or
(e) with the consent of the Committee, any combination of the
foregoing.
As promptly as practicable after receipt of the Notice and accompanying payment,
the Company shall deliver to the optionee certificates for the number of shares
with respect to which such option has been so exercised, issued in the
optionee's name; provided, however, that such delivery shall be deemed effected
for all purposes when the Company or a stock transfer agent of the Company shall
have deposited such certificates in the United States mail, addressed to the
optionee, at the address specified in the Notice.
7.3 SPECIAL LIMITS AFFECTING SECTION 16(B) OPTION HOLDERS. Shares issuable
upon exercise of options granted to a person who in the opinion of the Committee
may be deemed to be a director or officer of the Company within the meaning of
Section 16(b) of the Exchange Act and the rules and regulations thereunder shall
not be sold or disposed of until after the expiration of six months following
the date of grant.
SECTION 8. CHANGES IN COMPANY'S CAPITAL STRUCTURE
8.1 RIGHTS OF COMPANY. The existence of outstanding options shall not
affect in any way the right or power of the Company or its stockholders to make
or authorize, without limitation, any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or its
business, or any merger or consolidation of the Company, or any issue of Common
Stock, or any issue of bonds, debentures, preferred or prior preference stock or
other capital stock ahead of or affecting the Common Stock or the rights
thereof, or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business, or any other corporate
act or proceeding, whether of a similar character or otherwise.
8.2 RECAPITALIZATION, STOCK SPLITS AND DIVIDENDS. If the Company shall
effect a subdivision or consolidation of shares or other capital readjustment,
the payment of a stock dividend, or other increase or reduction of the number of
shares of the Common Stock outstanding, in any such case without receiving
compensation therefor in money, services or property, then (i) the number,
class, and price per share of shares of stock subject to outstanding options
hereunder shall be appropriately adjusted in such a manner as to entitle an
optionee to receive upon exercise of an option, for the same aggregate cash
consideration, the same total number and class of shares as he or she would have
received as a result of the event requiring the adjustment had he or she
exercised his or her option in full immediately prior to such event; (ii) the
number and class of shares with respect to which options may be granted under
the Plan; and (iii) the number and class of shares set forth in Section 3.3
shall be adjusted by substituting for the total number of shares of Common Stock
then reserved for issuance under the Plan that number and class of shares of
stock that the owner of an equal number of outstanding shares of Common Stock
would own as the result of the event requiring the adjustment.
8.3 MERGER WITHOUT CHANGE OF CONTROL. After a merger of one or more
corporations into the Company, or after a consolidation of the Company and one
or more corporations in which (i) the Company shall be the surviving
corporation, and (ii) the stockholders of the Company immediately prior to such
merger or
<PAGE> 6
consolidation own after such merger or consolidation shares representing at
least fifty percent of the voting power of the Company, each holder of an
outstanding option shall, at no additional cost, be entitled upon exercise of
such option to receive in lieu of the number of shares as to which such option
shall then be so exercisable, the number and class of shares of stock or other
securities to which such holder would have been entitled pursuant to the terms
of the agreement of merger or consolidation if, immediately prior to such merger
or consolidation, such holder had been the holder of record of a number of
shares of Common Stock equal to the number of shares for which such option was
exercisable.
8.4 SALE OR MERGER WITH CHANGE OF CONTROL. If the Company is merged into
or consolidated with another corporation under circumstances where the Company
is not the surviving corporation, or if there is a merger or consolidation where
the Company is the surviving corporation but the stockholders of the Company
immediately prior to such merger or consolidation do not own after such merger
or consolidation shares representing at least fifty percent of the voting power
of the Company, or if the Company is liquidated, or sells or otherwise disposes
of substantially all of its assets to another corporation while unexercised
options remain outstanding under the Plan, (i) subject to the provisions of
clause (iii) below, after the effective date of such merger, consolidation,
liquidation, sale or disposition, as the case may be, each holder of an
outstanding option shall be entitled, upon exercise of such option, to receive,
in lieu of shares of Common Stock, shares of such stock or other securities,
cash or property as the holders of shares of Common Stock received pursuant to
the terms of the merger, consolidation, liquidation, sale or disposition; (ii)
the Committee may accelerate the time for exercise of all unexercised and
unexpired options to and after a date prior to the effective date of such
merger, consolidation, liquidation, sale or disposition, as the case may be,
specified by the Committee; or (iii) all outstanding options may be cancelled by
the Committee as of the effective date of any such merger, consolidation,
liquidation, sale or disposition provided that (x) notice of such cancellation
shall be given to each holder of an option and (y) each holder of an option
shall have the right to exercise such option to the extent that the same is then
exercisable or, if the Committee shall have accelerated the time for exercise of
all unexercised and unexpired options, in full during the 30-day period
preceding the effective date of such merger, consolidation, liquidation, sale or
disposition.
8.5 ADJUSTMENTS TO COMMON STOCK SUBJECT TO OPTIONS. Except as hereinbefore
expressly provided, the issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, for cash or property,
or for labor or services, either upon direct sale or upon the exercise of rights
or warrants to subscribe therefor, or upon conversion of shares or obligations
of the Company convertible into such shares or other securities, shall not
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of shares of Common Stock then subject to outstanding options.
8.6 MISCELLANEOUS. Adjustments under this Section 8 shall be determined by
the Committee, and such determinations shall be conclusive. No fractional shares
of Common Stock shall be issued under the Plan on account of any adjustment
specified above.
SECTION 9. GENERAL RESTRICTIONS
9.1 INVESTMENT REPRESENTATIONS. The Company may require any person to whom
an option is granted, as a condition of exercising such option, to give written
assurances in substance and form satisfactory to the Company to the effect that
such person is acquiring the Common Stock subject to the option for his or her
own account for investment and not with any present intention of selling or
otherwise distributing the same, and to such other effects as the Company deems
necessary or appropriate in order to comply with federal and applicable state
securities laws.
9.2 COMPLIANCE WITH SECURITIES LAWS. The Company shall not be required to
sell or issue any shares under any option if the issuance of such shares shall
constitute a violation by the optionee or by the Company of any provisions of
any law or regulation of any governmental authority. In addition, in connection
with the Securities Act of 1933, as now in effect or hereafter amended (the
"Act"), upon exercise of any option, the Company shall not be required to issue
such shares unless the Committee has received evidence satisfactory to it to the
effect that the holder of such option will not transfer such shares except
pursuant to a registration statement in effect under such Act or unless an
opinion of counsel satisfactory to the Company has been received by the Company
to the effect that such registration is not required. Any determination in this
connection by the Committee shall be final, binding and conclusive. In the event
the shares issuable on exercise of an option are not registered under the Act,
the Company
<PAGE> 7
may imprint upon any certificate representing shares so issued the following
legend or any other legend which counsel for the Company considers necessary or
advisable to comply with the Act and with applicable state securities laws:
The shares of stock represented by this certificate have not been
registered under the Securities Act of 1933 or under the securities
laws of any State and may not be sold or transferred except upon such
registration or upon receipt by the Corporation of an opinion of
counsel satisfactory to the Corporation, in form and substance
satisfactory to the Corporation, that registration is not required for
such sale or transfer.
The Company may, but shall in no event be obligated to, register any
securities covered hereby pursuant to the Act; and in the event any shares are
so registered the Company may remove any legend on certificates representing
such shares. The Company shall not be obligated to take any other affirmative
action in order to cause the exercise of an option or the issuance of shares
pursuant thereto to comply with any law or regulation of any governmental
authority.
9.3 EMPLOYMENT OBLIGATION. The granting of any option shall not impose
upon the Company any obligation to employ or continue to employ any optionee;
and the right of the Company to terminate the employment of any officer or other
employee shall not be diminished or affected by reason of the fact that an
option has been granted to him or her.
SECTION 10. WITHHOLDING TAXES
10.1 RIGHTS OF COMPANY. The Company may require an employee exercising a
Nonqualified Option, or disposing of shares of Common Stock acquired pursuant to
the exercise of an Incentive Option in a disqualifying disposition (as defined
in Section 421(b) of the Code), to reimburse the Company for any taxes required
by any government to be withheld or otherwise deducted and paid by the Company
in respect of the issuance or disposition of such shares. In lieu thereof, the
Company shall have the right to withhold the amount of such taxes from any other
sums due or to become due from the Company to the employee upon such terms and
conditions as the Company may prescribe. The Company may, in its discretion,
hold the stock certificate to which such employee is otherwise entitled upon the
exercise of an Option as security for the payment of any such withholding tax
liability, until cash sufficient to pay that liability has been received or
accumulated.
10.2 PAYMENT IN SHARES. An employee may elect to have such tax withholding
obligation satisfied, in whole or in part, by (i) authorizing the Company to
withhold from shares of Common Stock to be issued pursuant to the exercise of a
Nonqualified Option a number of shares with an aggregate fair market value (as
defined in Section 6.3 hereof determined as of the date the withholding is
effected) that would satisfy the withholding amount due with respect to such
exercise, or (ii) transferring to the Company shares of Common Stock owned by
the employee with an aggregate fair market value (as defined in Section 6.3
hereof determined as of the date the withholding is effected) that would satisfy
the withholding amount due. With respect to any employee who is subject to
Section 16 of the Exchange Act, the following additional restrictions shall
apply:
(a) the election to satisfy tax withholding obligations relating to
an option exercise in the manner permitted by this Section 10.2 shall be
made either (1) during the period beginning on the third business day
following the date of release of quarterly or annual summary statements of
sales and earnings of the Company and ending on the twelfth business day
following such date, or (2) at least six (6) months prior to the date of
exercise of the option;
(b) such election shall be irrevocable;
(c) such election shall be subject to the consent or approval of the
Committee; and
(d) the Common Stock withheld to satisfy tax withholding, if granted
at the discretion of the Committee, must pertain to an option which has
been held by the employee for at least six (6) months from the date of
grant of the option.
<PAGE> 8
10.3 NOTICE OF DISQUALIFYING DISPOSITION. Each holder of an Incentive
Option shall agree to notify the Company in writing immediately after making a
disqualifying disposition (as defined in Section 421(b) of the Code) of any
Common Stock purchased upon exercise of the Incentive Option.
SECTION 11. AMENDMENT OR TERMINATION OF PLAN
11.1 AMENDMENT. The Board may terminate the Plan and may amend the Plan at
any time, and from time to time, subject to the limitation that, except as
provided in Section hereof, no amendment shall be effective unless approved by
the stockholders of the Company in accordance with applicable law and
regulations, at an annual or special meeting held within 12 months before or
after the date of adoption of such amendment, in any instance in which such
amendment would: (i) increase the number of shares of Common Stock that may be
issued under, or as to which Options may be granted pursuant to, the Plan; or
(ii) change in substance the provisions of Section hereof relating to
eligibility to participate in the Plan. Without limiting the generality of the
foregoing, the Board is expressly authorized to amend the Plan, at any time and
from time to time, to confirm it to the provisions of Rule 16b-3 under the
Exchange Act, as that Rule may be amended from time to time.
Except as provided in Section hereof, the rights and obligations under any
option granted before amendment of this Plan or any unexercised portion of such
option shall not be adversely affected by amendment of this Plan or such option
without the consent of the holder of such option.
11.2 TERMINATION. This Plan shall terminate as of the tenth anniversary of
its effective date. The Board may terminate this Plan at any earlier time for
any or no reason. No Option may be granted after the Plan has been terminated.
No Option granted while this Plan is in effect shall be altered or impaired by
termination of this Plan, except upon the consent of the holder of such Option.
The power of the Committee to construe and interpret this Plan and the Options
granted prior to the termination of this Plan shall continue after such
termination.
SECTION 12. NONEXCLUSIVITY OF PLAN
Neither the adoption of this Plan by the Board of Directors nor the
submission of this Plan to the stockholders of the Company for approval shall be
construed as creating any limitations on the power of the Board to adopt such
other incentive arrangements as it may deem desirable, including the granting of
stock options otherwise than under this Plan, and such arrangements may be
either applicable generally or only in specific cases.
SECTION 13. EFFECTIVE DATE AND DURATION OF PLAN
This Plan shall become effective upon its adoption by the Board, provided
that the stockholders of the Company shall have approved this Plan within twelve
months prior to or following the adoption of this Plan by the Board. Subject to
the foregoing, options may be granted under the Plan at any time subsequent to
its effective date; provided, however, that (a) no such option shall be
exercised or exercisable unless the stockholders of the Company shall have
approved the Plan within twelve months prior to or following the adoption of
this Plan by the Board, and (b) all options issued prior to the date of such
stockholders' approval shall contain a reference to such condition. No option
may be granted under the Plan after the tenth anniversary of the effective date.
The Plan shall terminate (i) when the total amount of the Common Stock with
respect to which options may be granted shall have been issued upon the exercise
of options or (ii) by action of the Board of Directors pursuant to Section 11
hereof, whichever shall first occur.
SECTION 14. PROVISIONS OF GENERAL APPLICATION
14.1 SEVERABILITY. The invalidity or unenforceability of any provision of
this Plan shall not affect the validity or enforceability of any other provision
of this Plan, each of which shall remain in full force and effect.
14.2 CONSTRUCTION. The headings in this Plan are included for convenience
only and shall not in any way effect the meaning or interpretation of this Plan.
Any term defined in the singular shall include the plural, and vice versa. The
words "herein," "hereof" and "hereunder" refer to this Plan as a whole and not
to any particular part
<PAGE> 9
of this Plan. The word "including" as used herein shall not be construed so as
to exclude any other thing not referred to or described.
14.3 FURTHER ASSURANCES. The Company and any holder of an option shall from
time to time execute and deliver any and all further instruments, documents and
agreements and do such other and further acts and things as may be required or
useful to carry out the intent and purpose of this Plan and such option and to
assure to the Company and such option holder the benefits contemplated by this
Plan; provided, however, that neither the Company nor any option holder shall in
any event be required to take any action inconsistent with the provisions of
this Plan.
14.4 GOVERNING LAW. This Plan and each Option shall be governed by the laws
of The Commonwealth of Massachusetts.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
NAME OF ORGANIZATION JURISDICTION
- -------------------- ------------
Aware Security Corporation ................ Massachusetts
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-15805) of Aware, Inc. of our report dated January
26, 2000 relating to the financial statements and financial statement schedule,
which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 28, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Registration Statement No.
333-15805 of Aware, Inc. on Form S-8, of our report dated January 26, 1999,
appearing in this Annual Report on Form 10-K of Aware, Inc. for the year ended
December 31, 1999.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 27, 2000
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