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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED..............NOVEMBER 2, 1996...............
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD ENDED................TO...........................
COMMISSION FILE NUMBER.....................0-4187...........................
AMATI COMMUNICATIONS CORPORATION
(FORMERLY ICOT CORPORATION)
(Exact name of registrant as specified in its charter)
DELAWARE 94-1675494
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2043 SAMARITAN DRIVE, SAN JOSE, CA 95124
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 879-2000
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 AT LEAST THE PAST 90 DAYS.
YES X NO
---- ----
AS OF DECEMBER 13, 1996, 18,586,980 SHARES OF REGISTRANT'S COMMON STOCK
WERE OUTSTANDING.
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FORM 10-Q
CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Condensed Statements of Operations
Consolidated Condensed Balance Sheets
Consolidated Condensed Statements of Cash Flows
Notes to Consolidated Condensed Financial Statements
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMATI COMMUNICATIONS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended
----------------------------
November 2, October 28,
1996 1995
----------- -----------
Net sales $ 4,513 $ 3,354
Cost of sales 2,087 1,840
--------- ---------
Gross margin 2,426 1,514
Operating expenses:
Research and development 1,751 360
Marketing and sales 557 60
General and administrative 720 321
Other 128 --
---------- ---------
Total operating expenses 3,156 741
Income (loss) from operations (730) 773
Other income (expense):
Interest income 1 86
Interest expense (17) 0
---------- ---------
Total other income (expense) (16) 86
Income (loss) before income taxes (746) 859
Provision for income taxes -- 43
---------- ---------
NET INCOME (LOSS) $ (746) $ 816
---------- ---------
---------- ---------
NET INCOME (LOSS) PER SHARE $ (0.04) $ 0.07
---------- ---------
---------- ---------
Weighted Average Number of
Common Shares and Common
Share Equivalents 17,719 12,264
---------- ---------
---------- ---------
The accompanying notes are an integral part of these consolidated
condensed financial statements.
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AMATI COMMUNICATIONS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
November 2, July 27,
1996 1996
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 3,107 $ 886
Accounts receivable, less allowance of
$30 in 1997 and 1996 4,207 1,524
Inventories 1,849 1,616
Other current assets 1,146 1,156
-------- --------
Total current assets 10,309 5,182
Equipment and leasehold improvements-net 4,574 1,059
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TOTAL ASSETS $ 14,883 $ 6,241
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of capitalized lease
obligations $ 545 $ --
Accounts payable and accrued expenses 5,130 3,079
Employee compensation 1,041 793
Notes payable 395 395
--------- --------
Total current liabilities 7,111 4,267
--------- --------
Long-term liabilities:
Capitalized lease obligations, less current
maturities 1,708 --
Obligations under lease commitments 294 294
--------- --------
Total long-term liabilities 2,002 294
--------- --------
Stockholders' equity 5,770 1,680
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,883 $ 6,241
--------- --------
--------- --------
The accompanying notes are an integral part of these consolidated
condensed financial statements.
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AMATI COMMUNICATIONS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
------------------------
November 2, Ocober 28,
1996 1995
----------- ----------
Cash flows from operating activities:
Net income (loss) $ (746) $ 816
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 164 136
Loss on retirement of capital equipment 51 3
Increase in accounts receivable (2,683) (77)
Decrease (increase) in inventories (233) 180
Decrease (increase) in other assets (52) 226
Increase (decrease) in accounts payable, accrued
expenses and employee compensation 2,063 (274)
------- -----
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (1,436) 1,010
------- -----
Cash flows from investing activities:
Advances to Amati and acquisition costs incurred -- (2,417)
Purchases of held-to-maturity investments -- (1,992)
Proceeds from maturities of held-to-maturity investments -- 2,425
Purchase of equipment and leasehold improvements (1,415) (2)
------- -----
NET CASH USED FOR INVESTING ACTIVITIES (1,415) (1,986)
------- -----
Cash flows from financing activities:
Payment of lease obligations -- (4)
Proceeds from equity financing 5,000 --
Proceeds from exercise of stock options/warrants 72 605
------- -----
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,072 601
------- -----
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,221 (375)
BEGINNING BALANCE - CASH AND CASH EQUIVALENTS 886 1,066
------- -----
ENDING BALANCE - CASH AND CASH EQUIVALENTS $ 3,107 $ 691
------- -----
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Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 55 $ --
------- -----
------- -----
The accompanying notes are an integral part of these consolidated
condensed financial statements.
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AMATI COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
November 2, 1996
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission and do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring entries) considered necessary for a fair
presentation have been included. For further information, refer to the
financial statements and footnotes included in the Company's Annual Report on
Form 10-K for the year ended July 27, 1996. The results for the period are
not necessarily indicative of results for the full fiscal year.
NOTE B - NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of shares
outstanding of common stock and common stock equivalents (when dilutive)
using the treasury stock method. No common stock equivalents have been
included in fiscal 1997 because the effect would decrease the loss per share.
NOTE C - INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and are comprised of the following:
NOVEMBER 2, 1996 JULY 27, 1996
---------------- -------------
Finished goods $ 47 $ 1
Work in process 631 890
Purchased and service parts 1,171 725
--------- --------
$ 1,849 $ 1,616
--------- --------
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AMATI COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
November 2, 1996
NOTE D - LITIGATION
In November 1993, an action was brought against the Company for damages
related to the use of the Company's products. The plaintiff filed a suit
claiming repetitive stress injuries resulting from the use of the Company's
product in the course of employment with American Airlines from the period
May 1981 through July 1991. The plaintiff alleges damages in the amount of
$1 million and seeks punitive damages of $10 million. The Company believes
that the claim is without merit and has tendered defense of this action to
its insurance carriers. In the opinion of management, the outcome of this
litigation will not have a material adverse effect on the Company's financial
position or its results of operations. The Company is not involved in any
other substantial litigation.
NOTE E - ACQUISITION OF OLD AMATI
On November 28, 1995, the Company acquired all of the outstanding shares of
Amati Communications Corporation ("Old Amati") for approximately $29.5
million. The purchase price consisted of the issuance of 2.6 million shares
of Company common stock in exchange for all shares of Old Amati common stock,
1.5 million shares of Company common stock in exchange for all shares of Old
Amati Series A preferred stock, warrants for the purchase of up to 1.1
million shares of Company common stock in exchange for all Old Amati
warrants, and options to purchase up to 1.6 million shares of Company common
stock in exchange for all options to purchase Old Amati common stock. The
purchase price also includes registration and other acquisition costs of $0.8
million, total cash advances to Old Amati prior to the merger of $5.6 million
and is net of the estimated proceeds from the assumed exercise of Old Amati
options and warrants of $3.3 million.
The transaction was accounted for using the purchase method of accounting.
The Company allocated the purchase price to the net assets based upon their
estimated fair values. The fair values of tangible assets acquired and
liabilities assumed were $1.2 million and $3.2 million, respectively. The
balance of the purchase price, $31.6 million, was charged to earnings to
write off in-process research and development that had not reached
technological feasibility and had no alternative future uses.
The following table reflects unaudited pro-forma combined results of
operations of the Company and Old Amati on the basis that the acquisition had
taken place and the related charge, noted above, was recorded at the
beginning of the fiscal year for the period presented:
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AMATI COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
November 2, 1996
Three Months Ended October 28, 1995
-----------------------------------
(in thousands except per share data)
Revenues $ 3,728
Net loss $ (32,579)
Net loss per share $ (1.93)
Shares used in computation 16,919
In management's opinion, the unaudited pro-forma combined results of
operations are not necessarily indicative of the actual results that would
have occurred had the acquisition been consummated at the beginning of 1996
or of future operations of the combined companies under the ownership and
management of the Company.
NOTE F - CHANGE IN SECURITIES
In October 1996, the Company entered into an Investment Agreement (the
"Investment Agreement") with Quantum Industrial Partners LDC, S-C Phoenix
Holdings, L.L.C., Winston Partners, L.P., Winston Partners II LDC and Winston
Partners II L.L.C. (collectively, the "Investors") which will provide to the
Company up to $15 million in equity financing in exchange for the issuance of
Company Common Stock and warrants (the "Warrants") to purchase up to 600,000
shares of Company Common Stock. The Warrants were issued on October 3, 1996
and are exercisable at any time between December 17, 1996 and October 2,
2001. Warrants to purchase up to 300,000 shares of Common Stock are
exercisable at $17.45 per share; Warrants to purchase the other 300,000
shares are exercisable at $25 per share. The Company has delivered a Put
Notice to the Investors for $10,000,000 pursuant to the Investment Agreement.
In exchange for the $10,000,000 investment in the Company, the Investors
will receive an aggregate of 741,913 shares of the Company's Common Stock.
The Company has received $5,000,000 pursuant to this first Put Notice. The
Warrants and Common Stock issued in connection with the Investment Agreement
were exempt from the registration requirements of the Securities Act of 1933,
as amended (the "Securities Act"), pursuant to the exemption therefrom
found at Section 4(2) of the Securities Act.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
To the extent that Management's Discussion and Analysis of Financial
Condition and Results of Operations discusses financial projections,
information or expectations about the Company's products or markets, or
otherwise makes statements about future events, such statements are
forward-looking and are subject to a number of risks and uncertainties that
could cause actual results to differ materially from the statements made.
These include, among others, successful and timely development and acceptance
of new products, the availability of sufficient funding to complete
development of new products and other factors described below. In addition,
such risks and uncertainties also include the matters identified under the
heading "Risk Factors" below.
OVERVIEW
On November 28, 1995, ICOT Corporation, based in San Jose, California, and
Amati Communications Corporation ("Old Amati"), a privately held Mountain
View, California based company, completed a merger by which Old Amati became
a wholly-owned subsidiary of ICOT Corporation. Effective as of the merger,
the name of the surviving company was changed to Amati Communications
Corporation (the "Company") and its common stock began trading on the Nasdaq
National Market under the symbol "AMTX" on November 29, 1995.
The Company is a leading developer of advanced transmission equipment
utilizing Discrete Multi-tone "DMT" technology for the Asymmetric Digital
Subscriber Line "ADSL", Very high-speed Digital Subscriber Line "VDSL" and
cable modem markets. Its DMT technology has been selected as the American
National Standards Institute "ANSI" and European Telecommunications Standards
Institute "ETSI" standard for ADSL products. The Company is the holder of
ADSL/DMT patents and has licensed the technology to companies such as Nortel,
Motorola and NEC. The Company is also a provider of network connectivity
systems for the internetworking and Original Equipment Manufacturers "OEM"
marketplaces.
RESULTS OF OPERATIONS
Total net sales in the first quarter of fiscal 1997 increased 35% to
$4,513,000 from sales of $3,354,000 in the first quarter of fiscal 1996.
Sales to IBM accounted for 44% of the Company's revenue in the first quarter
of fiscal 1997, compared with 80% for the comparable period of fiscal 1996.
Royalty revenues derived from a product developed by the Company for IBM were
$181,000 in the current fiscal quarter compared with $233,000 for the first
quarter of the prior fiscal year. The Company expects that IBM will continue
to account for a substantial portion of the Company's revenues until it
completes development and commercialization of its ADSL products. IBM is not
obligated to purchase any specified amounts of products or to provide
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binding forecasts of product purchases for any period. Since IBM considers
product sales and market data confidential, the Company has very little
ability to forecast future demand. Furthermore, since IBM has the exclusive
responsibility for marketing and selling of the products that the Company
develops, results of operations can be significantly affected by IBM's
success in the market place.
During fiscal 1996, the Company began shipping its Overture series of
transceivers. The Overture 4 is a prototype that does not have a low enough
cost or power consumption for mass deployment and its components are entirely
discrete (off the shelf). This product is to be phased out in favor of the
next series of transceiver, called Overture 8. In the third quarter of
fiscal 1996, the Company delivered the Overture 8, which is characterized by
a high bandwidth as defined by the ANSI standards. This product is currently
installed in its first field trial of broadcast video in Australia. Sales of
the Overture series field trials in the first quarter of fiscal 1997 were
$240,000. In addition, contract revenues realized during the current quarter
include an initial consideration under a joint development agreement entered
into by the Company and NEC Corporation-Japan on October 30, 1996. The
Company anticipates that the Overture series of products will continue to be
represented at international field trials.
PC to Mainframe Connectivity sales of $297,000 for the first quarter of
fiscal 1997 represents a decline of 54% when compared with the same period of
the prior fiscal year due to a general decline in the Company's connectivity
market share. The PC to Mainframe Connectivity market is highly competitive
and is characterized by rapid advances in technology which frequently result
in the introduction of new products with improved performance
characteristics, thereby subjecting the Company's products to risk of
technological obsolescence. The Company competes directly or indirectly with
a broad range of companies, many of whom have significantly greater
resources. In addition, the Company is competing for a limited segment of a
declining market.
Gross margin as a percent of sales was 54% for the first quarter of fiscal
1997 compared with 45% for the same period of fiscal 1996. The increase in
margin was primarily attributable to higher margins on contract revenues.
Amortization of capitalized software costs charged to cost of sales was
$61,000 in the first quarters of fiscal 1997 and fiscal 1996.
Net research and development expenses increased 386% to $1,751,000 in the
first quarter of fiscal 1997 when compared to the same period of fiscal 1996
largely because of the addition of 15 Old Amati engineers and the hiring of
16 new employees as a result of the merger. Higher costs in fiscal 1997 are
primarily due to the introduction of the Company's new family of Overture 8
ADSL/DMT modems and Overture 8 Access System shelf products. From the
technology acquired in the merger, the Company believes it has a
technological leadership position in DMT technology. Maintaining this
position is largely dependent on the Company's ability to develop new
products that meet a wide range of customer needs. Research and development
efforts for the DMT technology are grouped into three areas: the
microelectronics group which is primarily focused on ADSL and VDSL markets;
the software group, which is primarily focused on the development of firmware
for the Overture series; and the hardware group, which is primarily focused
on analog and digital design activities. All research and development
expenses related to
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this technology are charged to operations as incurred. Total engineering
expenses are net of funded development costs from IBM. There were no funded
development costs for the first quarter of fiscal 1997 compared with $5,000
in the first quarter of fiscal 1996. There was no capitalization of software
development costs in either fiscal year. The Company considers research and
development a key element in its ability to compete and will continue to make
investments in product development and support.
Marketing and sales expenses increased by $497,000 or 828% for the first
quarter of fiscal 1997 when compared with the same period of the prior fiscal
year due to an increase in staffing and overseas travel in conjunction with
the Overture series participation in field trials internationally. Sales,
marketing and customer support operations of the acquired business, which
cover both domestic and international markets, is handled by five
individuals. The Company's strategy is to sell to telephone companies
worldwide through large telecommunication suppliers who will integrate the
Company's products into larger systems for their customers. This type of OEM
selling does not require a large sales force.
General and administrative expenses increased by $399,000 or 124% in the
first quarter of fiscal 1997 when compared with the same period of the prior
fiscal year. This is primarily due to patent and legal expenses, additional
corporate staffing and occupancy costs.
Interest income decreased to $1,000 in the first quarter of fiscal 1997
compared to $86,000 in the same period of fiscal 1996 due to lower cash
balances for investment purposes.
There was no provision for income taxes for the first quarter of fiscal 1997
compared to $43,000 for the comparable period of fiscal 1996. Tax provisions
were required for Federal alternative minimum tax and California state taxes
due to limitations on the use of California's loss carryforwards. The
Company had provided a valuation allowance against the deferred tax asset
attributable to the net operating losses due to uncertainties regarding the
realization of these assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and short term investments of $3,107,000 as of November
2, 1996, compared to $886,000 as of July 27, 1996. Cash used for operating
activities of $1,436,000 related primarily to the net loss incurred during
the period. Cash used for investing activities of $1,415,000 was primarily
for leasehold improvements associated with the move to a larger facility to
consolidate its operations and accommodate the Company's recent growth. Cash
provided by financing activities of $5,072,000 resulted primarily from the
completion of an equity financing transaction with an investors group, as
further discussed.
In October 1996, the Company entered into an Investment Agreement (the
"Investment Agreement") with Quantum Industrial Partners LDC, S-C Phoenix
Holdings, L.L.C., Winston Partners, L.P., Winston Partners II LDC and Winston
Partners II L.L.C. (collectively, the
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"Investors") which will provide to the Company up to $15 million in equity
financing in exchange for the issuance of Company Common Stock and warrants
(the "Warrants") to purchase up to 600,000 shares of Company Common Stock.
As of November 2, 1996, proceeds of $5,000,000 has been received as an
initial draw down pursuant to this agreement.
In the prior fiscal year, the Company secured a capital lease line of
$1,500,000, of which $880,000 has been utilized. In addition, an existing
bank line of credit for $1,250,000 was increased to $2,000,000.
The Company's ability to meet its future capital requirements will depend on
many factors, including sales levels, progress in research and development
programs, the establishment of collaborative agreements, and costs of
manufacturing facilities and commercialization activities. While the Company
anticipates that the funding available under the line of credit, capital
lease line and Investment Agreement will be sufficient to meet its capital
requirements for the foreseeable future, the Company may require funding in
addition to that available under these agreements, and may seek additional
funding through collaborative agreements or through public or private sale of
securities prior to the commercialization of Old Amati products.
RISK FACTORS
The information about the Company included or incorporated by reference
herein contains forward looking statements that involve risks and
uncertainties, including the risks detailed below.
HISTORY OF LOSSES. The Company had a net loss in the fiscal year ended July
27, 1996 of approximately $34,078,000 (including a charge related to the
Merger of approximately $31,554,000). Due in part to the Merger, the Company
is not expected to operate profitably in the foreseeable future as the
Company continues research, development, production and marketing activities.
There can be no assurance that the Company will ever attain profitability.
Any long-term viability, profitability and growth from the Company's
technology will depend upon successful commercialization of products
resulting from its research and product development activities. Extensive
additional research and development will be required prior to
commercialization of certain products. There can be no assurance that the
Company will be able to develop commercially viable products from its
technology, generate significant revenues and/or achieve profitability.
NEED FOR ADDITIONAL CAPITAL. During fiscal 1996, the Company secured a line
of credit for $1,250,000 subsequently increased to $2,000,000, a capital
lease line of $1,500,000 and entered into an Investment Agreement with the
Investors, which provides to the Company up to $15 million in equity
financing. As of November 2, 1996, proceeds of $5,000,000 were received as
an initial draw down pursuant to this financing agreement. The Company's
future capital requirements will depend on many factors, including sales
levels, progress in research and development programs, the establishment of
collaborative agreements, and costs of manufacturing facilities and
commercialization activities. The Company may require funding in addition to
that
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available under its line of credit, capital lease line and the Investment
Agreement. There can be no assurance that such additional funding will be
available on acceptable terms, if at all. If additional funds are required
and not available, the Company could be required to curtail significantly or
defer, temporarily or permanently, one or more of its research and
development programs or to obtain funds through arrangements that may require
the Company to relinquish certain technology or product rights.
MARKET FOR ADSL PRODUCTS STILL UNDER DEVELOPMENT; PRINCIPAL ADSL MARKET
OUTSIDE OF THE UNITED STATES. ADSL was developed to transmit digital video
over copper wire and also has application in providing access to the Internet
over copper wire. Although the current infrastructure in the local
distribution networks of telephone companies is based on copper wire, there
can be no assurance that telephone companies will pursue the deployment of
ADSL systems or, if deployment occurs, as to the volume and timing of such
deployment. Significant deployment may be prevented or delayed by a number
of factors, including cost, regulatory barriers, lack of programming content,
lack of consumer demand and the availability of alternative technologies.
Access systems with high performance broadband capability, such as the ADSL
system, may be attractive to telephone companies only to the extent that the
telephone companies plan to offer broadcast video, video-on-demand or
Internet access services which utilize the full features of a high
performance local distribution network. Substantial amounts of time, effort
and money will be required to develop such high performance services. There
can be no assurance that sufficient programming content for video services
will be developed to justify deploying digital video transmission systems, or
that programming content will be both attractive to consumers and offered at
prices that will create a mass market. If such high performances services
are offered, and there is demand for them, there can be no assurance that
telephone companies will select ADSL over competing technologies, such as
fiber-to-the-curb, hybrid fiber-coaxial ("HFC"), and wireless communications.
Fiber-to-the curb, HFC and wireless systems have greater bandwidth than the
ADSL products being developed by the Company. Although Internet access
services may provide a market for ADSL in the United States, because foreign
telephone companies currently face less competition from cable companies than
telephone companies face in the United States, the Company believes that its
principal markets for ADSL video applications will be outside the United
States.
PRICE COMPETITIVENESS OF ADSL PRODUCTS. The Company believes that in order
to design and manufacture commercially acceptable ADSL products, cost
improvements beyond those available with current technology will be
necessary. The future success of the Company will depend, in part, on its
ability to develop ADSL products that compete effectively on the basis of
price and performance. Current prices are significantly higher than those
that the Company believes would be necessary for mass deployment of ADSL
products. There can be no assurance that the Company will be successful in
developing ADSL products that can be sold at prices which are viable in the
market.
RAPID TECHNOLOGICAL CHANGE; COMPETITION IN THE TELECOMMUNICATION TRANSMISSION
BUSINESS. Competition from existing companies, including major communications
companies, is expected to increase. Most of the Company's competitors in the
communications industry are more
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established, benefit from greater market recognition and have greater
financial, technical, production and marketing resources than the Company.
Some competitors are developing alternate access technologies, such as HFC,
fiber-to-curb and wireless systems, that may prove technologically superior
or more cost effective than the Company's technology. There can be no
assurance that developments by others will not render the Company's products
or technologies obsolete or noncompetitive or that the Company will be able
to keep pace with new technological developments.
COMPETITION IN THE PC TO MAINFRAME CONNECTIVITY BUSINESS. The PC to
Mainframe Connectivity market is highly competitive and is characterized by
rapid advances in technology which frequently result in the introduction of
new products with improved performance characteristics, thereby subjecting
the Company's products to the risk of technological obsolescence. The
Company's ability to compete is dependent on several factors, including
reliability, product performance, quality, features, distribution channels,
name awareness, customer support, product development capabilities, and the
ability to meet delivery schedules. The Company competes, directly or
indirectly, with a broad range of companies in the PC-Connectivity business,
many of whom have significantly greater financial and other resources. In
addition, the Company is only competing for a limited and declining segment
of the PC-Connectivity market, which is itself declining and expected to
continue to decline. The Company expects revenues from its PC-Connectivity
business to continue to decline.
COMPETITION FOR VDSL STANDARDS. The Company expects to apply its DMT
technology to the development of VDSL products for the transmission of
digital video service in connection with a fiber-optic backbone to cover the
distance from this platform or node to subscribers' homes over copper wire or
coaxial cable. ANSI has not yet awarded the standard for VDSL technology,
and the competition for the ANSI standard for VDSL is expected to be intense.
AT&T, as well as other companies with greater resources than the Company,
are expected to compete for these standards. There is no assurance that the
Company's DMT technology will be successful in obtaining the ANSI VDSL
standard.
DEPENDENCE ON COMPLEMENTARY PRODUCTS. Widespread use of ADSL and VDSL
products for digital video service will depend on the commercial availability
of other products and components, including the video content, digital
switches, video servers, encode/decode equipment, and set-top boxes in
subscribers' homes. There can be no assurance that other suppliers will
develop and market these complementary components effectively or that these
components, when combined with the Company's ADSL and VDSL products, will be
a cost-effective means of transmitting video-on-demand or video dialtone.
DEPENDENCE ON LARGE CUSTOMERS AND SYSTEM INTEGRATORS. The Company expects to
sell many of its telecommunication transmission products to large
telecommunications service companies which serve as integrators for the
various component systems that make up a video-on-demand or multimedia
system. These systems integrators in turn sell the systems to telephone
companies for distribution to their subscribers. The Company is largely
dependent on these systems integrators for the introduction of its products
to field trials. There can be no assurance that systems
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integrators will select the Company's products for field trials or, if they
do initially select the Company's products, that they will continue to use
them. In addition, telephone companies are generally reluctant to deploy new
technologies available only from a single source, especially when the
supplier is as relatively small as the Company, and often require the
availability of alternative sources before deploying a new technology. This
reluctance may put the Company at a competitive disadvantage relative to some
of its competitors. Further, acceptance of the Company's products by these
customers may require the Company to relinquish rights to its technology or
products. There can be no assurance, however, that even if the Company were
to relinquish such rights to its technology or products, telephone companies
would deploy the Company's ADSL or VDSL products.
CUSTOMER CONCENTRATION; RELIANCE ON SALES TO IBM. Sales to IBM for PC to
Mainframe Connectivity and related products accounted for approximately 65%,
83% and 69% of the Company's net sales in fiscal 1994, 1995 and 1996,
respectively, and 44% for the three months ended November 2, 1996. Since IBM
considers product sales and market data confidential, the Company has very
little ability to anticipate future demands and IBM is not obligated to
purchase any specified amount of products. For its PC-Connectivity products,
the Company is highly dependent on sales to IBM and expects that quarterly
and annual results could be volatile due to its dependence on this dominant
customer. In addition, there can be no assurance that IBM will continue to
distribute and support the Company's products. The Company's principal
contract with IBM expires in December 1996. Further, IBM may terminate its
agreements with the Company upon 30 days' notice without a significant
penalty.
INTERNATIONAL BUSINESS. The Company expects that sales outside of the United
States will represent a significant portion of its future sales, especially
of the Company's ADSL products. Operations outside of the United States are
subject to various risks, including exposure to currency fluctuations, the
imposition of governmental controls, the need to comply with a wide variety
of foreign and United States export laws, political and economic instability,
trade restrictions, changes in tariffs and taxes, and longer payment cycles
typically associated with international sales. The inability of the Company
to design products to comply with foreign standards or any significant or
prolonged delay in the Company's international sales could have a material
adverse effect on the Company's future business and results of operations.
REGULATORY MATTERS. Telephone companies, which constitute the initial
primary market for the Company's telecommunication transmission products, and
cable television companies, which may become a future market for such
products, are subject to extensive regulation by both the federal and state
governments in the United States and by foreign governments. Many of these
regulations have the effect of limiting the economic incentive of telephone
companies to deploy new technologies. Restrictions on telephone companies
and cable television companies may materially and adversely affect demand for
the products of the Company. Recent legislation passed by Congress will
significantly alter the regulations on telephone companies and cable
companies in the United States, and there can be no assurance that such
legislation will not adversely affect the commercialization of the Company's
products. In addition, both in the United States and abroad, rates for
telecommunications services are governed by tariffs or licensed
13
<PAGE>
carriers that are subject to regulatory approval. These tariffs also could
have a material adverse affect on the demand for the Company's products.
DEPENDENCE ON SUPPLIERS AND THIRD-PARTY MANUFACTURERS. Certain key
components in the Company's products, such as integrated circuits, are
currently available only from single sources. The Company does not have any
long-term supply contracts with its sole source vendors and purchases these
components on a purchase order basis. In addition, certain components and
subassemblies for the Company's products have long lead times. While the
Company seeks to accurately forecast its requirements, inaccuracies in its
forecast could result in shortages or oversupplies of these components. The
inability to obtain sufficient quantities of sole source components or
subassemblies as required, or to develop alternative sources as required in
the future, or inaccuracies in forecasts for long lead time components or
subassemblies could result in delays or reductions in product shipments or
product redesigns which would materially and adversely affect the Company's
business, operating results and financial condition. In addition, increases
in the prices of components for which the Company does not have alternate
sources could materially and adversely affect the Company's operating results.
The Company may outsource a portion of its manufacturing operations to
independent third party manufacturers. There are risks associated with the
use of independent manufacturers, including unavailability of or delays in
obtaining adequate supplies of products and reduced control of manufacturing
quality and production costs. There can be no assurance that the Company's
third party manufacturers will provide adequate supplies of quality products
on a timely basis. The inability to obtain such products on a timely basis
would have a material adverse effect on the Company's business, operating
results and financial condition.
PATENTS AND TRADE SECRETS. There can be no assurance that any patents owned
or controlled by the Company will provide commercially significant protection
of the Company's technology or ensure that the Company may not be determined
to infringe valid patents of others. The Company's patents have not been
tested in court, and the validity and scope of the Company's proprietary
rights could be challenged. The Company has also received foreign patents,
but since the patent laws of foreign countries differ from those of the
United States, the degree of protection afforded by any foreign patents may
be different from that available under U.S. patent laws.
The Company also relies on trade secrets and proprietary know-how which it
seeks to protect by confidentiality agreements with its collaborators,
employees and consultants. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach or that the Company's trade secrets and proprietary know-how will not
otherwise become known or be discovered by competitors.
THE COMPANY'S RSI LAWSUIT. The Company is a defendant in a suit brought in
November 1993 alleging repetitive stress injuries ("RSI") resulting from the
use of the Company's products claiming $1 million in compensatory and $10
million in punitive damages. The Company has tendered defense of the suit to
its insurance carriers, but there can be no assurance that the suit
14
<PAGE>
will not have a material adverse effect on the financial position or results
of operations of the Company.
POSSIBLE VOLATILITY OF STOCK PRICE; SHARES ELIGIBLE FOR FUTURE SALE. The
market price of the Company's Common Stock has been and may continue to be
highly volatile. Future events, many of which will be beyond the control of
the Company, as well as announcements related to technology and product
development and collaborative arrangements and expected quarterly
fluctuations in revenues and financial results, may have a significant impact
on the market price of the Company's Common Stock. Future sales of the
Company's Common Stock by the Investors which is a party for the Investment
Agreement or by other current stockholders and by option holders and warrant
holders who exercise the Company stock options or warrants could have a
depressive effect on the market price of the Company's Common Stock.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
In October 1996, the Company entered into an Investment Agreement (the
"Investment Agreement") with Quantum Industrial Partners LDC, S-C Phoenix
Holdings, L.L.C., Winston Partners, L.P., Winston Partners II LDC and Winston
Partners II L.L.C. (collectively, the "Investors") which will provide to the
Company up to $15 million in equity financing in exchange for the issuance of
Company Common Stock and warrants (the "Warrants") to purchase up to 600,000
shares of Company Common Stock. The Warrants were issued on October 3, 1996
and are exercisable at any time between December 17, 1996 and October 2,
2001. Warrants to purchase up to 300,000 shares of Common Stock are
exercisable at $17.45 per share; Warrants to purchase the other 300,000
shares are exercisable at $25 per share. The Company has delivered a Put
Notice to the Investors for $10,000,000 pursuant to the Investment Agreement.
In exchange for the $10,000,000 investment in the Company, the Investors
will receive an aggregate of 741,913 shares of the Company's Common Stock.
The Company has received $5,000,000 pursuant to this first Put Notice. The
Warrants and Common Stock issued in connection with the Investment Agreement
were exempt from the registration requirements of the Securities Act of 1933,
as amended (the "Securities Act"), pursuant to the exemption therefrom
found at Section 4(2) of the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
None.
REPORTS ON FORM 8-K
None.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMATI COMMUNICATIONS CORPORATION
(Registrant)
Dated: December 13, 1996 /S/ JAMES STEENBERGEN
-------------------------------
James Steenbergen
Director, President,
Chief Executive Officer and
Chief Financial Officer
Dated: December 13, 1996 /S/ TERRY MEDEL
-------------------------------
Terry Medel
Controller, Treasurer and Secretary
17
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