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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..........MAY 3, 1997.....................
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 JUNE 11, 1997, 19,151,250 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
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMATI COMMUNICATIONS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
May 3, April 27, May 3, April 27,
1997 1996 1997 1996
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net sales $ 3,663 $ 3,756 $ 11,188 $ 9,634
Cost of sales 2,042 2,180 6,242 5,566
---------- ---------- --------- ----------
Gross margin 1,621 1,576 4,946 4,068
Operating expenses:
Research and development 2,050 1,105 5,680 2,489
Marketing and sales 783 276 1,938 480
General and administrative 1,035 696 3,041 1,527
Write-off of acquired in-process
research and development --- --- --- 31,554
---------- ---------- --------- ----------
Total operating expenses 3,868 2,077 10,659 36,050
Loss from operations (2,247) (501) (5,713) (31,982)
Other income (expense):
Interest income 35 11 68 155
Interest expense (81) (8) (180) (11)
---------- ---------- --------- ----------
Total other income (expense) (46) 3 (112) 144
---------- ---------- --------- ----------
Loss before taxes (2,293) (498) (5,825) (31,838)
Provision for income taxes --- --- --- 43
---------- ---------- --------- ----------
NET LOSS $ (2,293) $ (498) $ (5,825) $ (31,881)
---------- ---------- --------- ----------
---------- ---------- --------- ----------
NET LOSS PER SHARE $ (0.12) $ (0.03) $ (0.32) $ (2.16)
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Number of shares used in computation
of net loss per share 18,958 17,138 18,436 14,747
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
1
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AMATI COMMUNICATIONS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
May 3, July 27,
1997 1996
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 515 $ 886
Short term investments 1,000 ---
Accounts receivable, less allowance of
$30 in 1997 and 1996 2,964 1,524
Inventories 3,847 1,616
Other current assets 750 1,156
-------- --------
Total current assets 9,076 5,182
Equipment and leasehold improvements-net 5,569 1,059
Other non-current assets 300 ---
-------- --------
TOTAL ASSETS $ 14,945 $ 6,241
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 4,336 $ 3,079
Accrued employee compensation 1,094 793
Current maturities of capitalized lease obligations 773 ---
Notes payable --- 395
-------- --------
Total current liabilities 6,203 4,267
-------- --------
Long-term liabilities:
Capitalized lease obligations, net of
current maturities 2,053 ---
Obligations under lease commitments 294 294
-------- --------
Total long-term liabilities 2,347 294
-------- --------
Stockholders' equity 6,395 1,680
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,945 $ 6,241
-------- --------
-------- --------
The accompanying notes are an integral part of these
consolidated condensed financial statements.
2
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AMATI COMMUNICATIONS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------
May 3, April 27,
1997 1996
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
NET LOSS $ (5,825) $ (31,881)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 946 418
Write-off of acquired in-process research and development --- 31,554
Provision for bad debts --- 20
Loss on retirement of capital equipment 25 3
Increase in accounts receivable (1,440) (333)
Decrease (increase) in inventories (2,231) 138
Increase in other assets (69) (7)
Increase (decrease) in accounts payable, accrued
expenses and employee compensation 1,558 (917)
Increase (decrease) in other liabilities (395) 395
---------- -----------
NET CASH USED FOR OPERATING ACTIVITIES (7,431) (610)
---------- -----------
Cash flows from investing activities:
Proceeds from sale of equipment 38 ---
Advances to Amati and acquisition costs --- (2,266)
Purchases of held-to-maturity investments (2,482) ---
Proceeds from maturities of held-to-maturity investments 1,482 2,425
Purchase of equipment and leasehold improvements (2,143) (161)
---------- -----------
NET CASH USED FOR INVESTING ACTIVITIES (3,105) (2)
---------- -----------
Cash flows from financing activities:
Payment of debt/lease obligations (375) ---
Proceeds from equity financing, net of issuance costs 9,724
Proceeds from exercise of stock options/warrants 816 1,024
---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,165 1,024
---------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS (371) 412
BEGINNING BALANCE - CASH AND CASH EQUIVALENTS 886 1,066
---------- -----------
ENDING BALANCE - CASH AND CASH EQUIVALENTS $ 515 $ 1,478
---------- -----------
---------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 81 $ 3
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
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AMATI COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MAY 3, 1997
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 LOSS PER SHARE
Net loss per share is based on the weighted average number of shares
outstanding of common stock. No common stock equivalents have been included
in fiscal 1997 because the effect would decrease the loss per share.
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share, which
simplifies the standards for computing earnings per share previously found in
Accounting Principles Board Opinion ("APBO") No. 15. SFAS No. 128 replaces
the presentation of primary earnings per share with a presentation of basic
earnings per share, which excludes dilution. SFAS No. 128 also requires dual
presentation of basic and diluted earnings per share on the face of the
income statement for all entities with complex capital structures and
requires a reconciliation. Diluted earnings per share is computed similarly
to fully diluted earnings per share pursuant to APBO No. 15. SFAS No. 128
must be adopted for financial statements issued for periods ending after
December 15, 1997, including interim period; earlier application is not
permitted. SFAS No. 128 requires restatement of all prior period earnings
per share presented. The Company does not anticipate that SFAS No. 128 will
have a material impact on its earnings per share calculation.
4
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AMATI COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MAY 3, 1997
NOTE C - INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and are comprised of the following:
May 3, 1997 July 27, 1996
----------- -------------
Finished goods $ 426 $ 1
Work in process 1,725 890
Purchased and service parts 1,696 725
------------- --------------
$3,847 $1,616
------------- --------------
------------- --------------
NOTE D - 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:
5
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AMATI COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MAY 3, 1997
Nine Months Ended
-----------------
April 27, 1996
--------------
(in thousands except per share data)
Revenues $ 11,061
Net loss $(34,330)
Net loss per share $ (2.04)
Shares used in computation 16,827
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 E - 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 December 17,
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 received
$10,000,000 pursuant to this Investment Agreement. In exchange for the
$10,000,000 investment in the Company, the Investors received an aggregate of
741,913 shares of the Company's Common Stock. 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 under Section 4(2) of the
Securities Act. The resale of the shares of Common Stock issued to the
Investors, and the 600,000 shares of Common Stock issuable on exercise of
the Warrants, has been registered by the Company on behalf of the Investors.
On June 3, 1997, the Company exercised its put right to take down the final
$5,000,000 in equity financing.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Other than for statements of historical fact, statements made in this
Quarterly Report on Form 10-Q, including in Management's Discussion and
Analysis of Financial Condition and Results of Operations regarding financial
projections, information or expectations about the Company's products or
markets, 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. In September
1996, the combined company moved to a new 40,000 square foot building in San
Jose, California to accommodate its growth and consolidate engineering and
manufacturing in a single facility.
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. 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 its 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") such as International Business Machines ("IBM"). The
Company and IBM have had a long-standing relationship. Since 1989, the
Company has undertaken several projects in which it has designed, developed
and manufactured custom products for IBM, including the completion of the
current generation of local area network ("LAN") products which IBM launched
into the market in 1994.
7
<PAGE>
RESULTS OF OPERATIONS
Total net sales in the third quarter of fiscal 1997 decreased 2% to
$3,663,000 from sales of $3,756,000 in the third quarter of the prior fiscal
year. Revenues recognized during the current fiscal quarter relate primarily
to contract revenues recorded under the Company's previously announced joint
development agreement with NEC Japan. For the nine months of fiscal 1997,
net sales of $11,188,000 represents an increase of 16% over sales for the
comparable prior fiscal period. Sales to IBM accounted for 39% and 49% of
the Company's revenue in the third quarter and nine months of fiscal 1997,
respectively, compared with 56% and 64% for the comparable periods of fiscal
1996. Royalty revenues derived from a product developed by the Company for
IBM were $144,000 in the third quarter and $545,000 for the first nine months
of fiscal 1997 compared with $172,000 and $633,000 for the third quarter and
nine months of the prior fiscal year, respectively. In February 1997, the
Company signed an extended contract with IBM for the development and
manufacture of its next generation internetworking products. The Company
expects that IBM will continue to account for a substantial portion of the
Company's revenues until development and commercialization of its ADSL
products are completed.
In the third quarter of fiscal 1996, the Company first delivered the Overture 8,
which is characterized by a high bandwidth as defined by the ANSI standards.
The Company's ADSL products continue to participate successfully in labs and
field trials in both international and domestic markets. The international
trials include services being offered by Post Telephone and Telegraph
("PTT")'s in Europe and Asia-Pacific, with companies such as Italtel, Tadiran
and Samsung. Other trials include broadcast video installed in Australia and
data/video applications in France. In the US, the Company has provided
equipment in GTE's Internet access trials in Washington and Texas. Sales of
the Overture series in the third quarter and the first nine months of fiscal
1997 were $320,000 and $1,271,000, respectively.
In January 1997, the first in a line of products developed by the Company
called the Allegro Access Concentrator, a platform for high density
installation of the Overture 8 DMT modem technology, was shipped to France.
This shelf version uses the Overture 8 modem and offers high-speed
concentration of packet based information or video data streams and
multiplexing of multiple data channels per ADSL modem connection. During the
third quarter of fiscal 1997, the Company introduced its next generation of
Overture 8 products, the Model 810, which delivers speeds up to 8 Mbps
downstream and 640 Kbps upstream. Its advanced, low power design consumes
less than 7W and adjusts power consumption to line lengths and traffic
conditions. This model is designed to be used as a plug-in for the Allegro
Access Concentrator or as a stand-alone unit for the subscriber. In the VDSL
technology, development efforts in conjunction with NEC Japan are ongoing.
PC to Mainframe Connectivity sales of $212,000 and $709,000 in the third
quarter and first nine months of fiscal 1997 represent a decline of 60% and
54% when compared with the same periods 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
8
<PAGE>
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 44% for the third quarter and first
nine months of fiscal 1997 compared with 42% for the same periods of fiscal
1996. The increase in margin was primarily attributable to product mix.
Amortization of capitalized software costs charged to cost of sales were
$61,000 and $183,000 in the third quarter and nine- month period of fiscal
1997, respectively.
Net research and development expenses increased 86% to $2,050,000 in the
third quarter of fiscal 1997 and 128% to $5,680,000 for the first nine months
when compared to the same periods of fiscal 1996 largely because of the
addition of engineers and other new employees as a result of the merger, and
the introduction of the Company's new family of Overture 8 ADSL/DMT modems,
access system shelf products and access concentrators. Maintaining the
Company's technology 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 the DMT 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 third quarter and nine-month
period of fiscal 1997 compared with $150,000 and $288,000 in the same periods
of fiscal 1996. There was no capitalization of software development costs
charged to research and development 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 to provide
high-speed solutions for the future.
Marketing and sales expenses increased by $507,000 or 184% in the third
quarter and $1,458,000 or 304% for the first nine months of fiscal 1997 when
compared with the same periods of the prior fiscal year. This is primarily
due to an increase in staffing and overseas travel in conjunction with the
Overture series representation in field trials internationally and
participation in domestic trade shows and product promotion. Sales,
marketing and customer support operations of the Company's ADSL products,
which cover both domestic and international markets, is handled by fourteen
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 $339,000 or 49% in the third
quarter and $1,514,000 or 99% for the nine months of fiscal 1997 when
compared with the same periods of the prior fiscal year. This is primarily
due to patent and legal expenses, additional corporate staffing and occupancy
costs.
9
<PAGE>
Interest income decreased to $68,000 in the nine-month period of fiscal 1997
compared to $155,000 in the same period of fiscal 1996 due to lower cash
balances for investment purposes.
There were no provisions for income taxes for the third quarter of both
fiscal years and first nine months of fiscal 1997 compared to $43,000 for the
comparable nine-month period of fiscal 1996. Tax provisions for fiscal 1996
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 $1,515,000 as of May 3,
1997, compared to $886,000 as of July 27, 1996. During the fiscal period,
cash used for operating activities of $7,431,000 related primarily to the net
loss incurred during the period. Cash used for investing activities of
$3,105,000 was primarily for leasehold improvements associated with the move
to a larger facility to consolidate the Company's operations, and the
purchase of short-term investments. Cash provided by financing activities of
$10,165,000 resulted primarily from the completion of an equity financing
transaction with an investors group, discussed below, and proceeds from the
exercise of stock options and warrants.
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. As of February 1, 1997, proceeds of
$10,000,000 has been received pursuant to this agreement in exchange for
741,913 shares of the Company's common stock. On June 3, 1997, the Company
has exercised its put right to take down the final $5,000,000 in equity
financing.
In the prior fiscal year, the Company secured a capital lease line of
$1,500,000, subsequently increased to $1,700,000. 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 through the fiscal year, 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 its ADSL products.
10
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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 net losses 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) and for the nine months ended May 3,
1997 of $5,825,000. 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 subsequently increased to $1,700,000 and entered
into an Investment Agreement with the Investors, which provides to the
Company up to $15 million in equity financing. As of May 3, 1997, proceeds
of $10,000,000 have been received pursuant to this financing agreement. On
June 3, 1997, the Company exercised its put right to take down the final
$5,000,000 in financing. 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 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
11
<PAGE>
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 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.
12
<PAGE>
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 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 49% for the nine months ended May 3, 1997. 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
13
<PAGE>
with IBM expiring in December 1996 had been extended. 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 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
14
<PAGE>
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 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 December 17,
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 received $10,000,000
pursuant to this Investment Agreement. In exchange for the $10,000,000
investment in the Company, the Investors received an aggregate of 741,913
shares of the Company's Common Stock. 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 under Section 4(2) of the Securities Act.
The resale of the 741,913 shares of Common Stock issued to the Investors, and
the 600,000 shares of Common Stock issuable on exercise of the Warrants, has
been registered by the Company on behalf of the Investors. On June 3, 1997,
the Company has exercised its put option to take down the final $5,000,000 in
equity financing.
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: June 13, 1997 /S/ JAMES STEENBERGEN
--------------------------------------
James Steenbergen
Director, President,
Chief Executive Officer and
Chief Financial Officer
Dated: June 13, 1997 /S/ TERRY MEDEL
--------------------------------------
Terry Medel
Controller, Treasurer and Secretary
17
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