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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 1, 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
(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 5, 1997, 19,791,310 SHARES OF REGISTRANT'S COMMON STOCK WERE
OUTSTANDING.
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FORM 10-Q
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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 1, NOVEMBER 2,
1997 1996
----------- -----------
Net sales $ 4,702 $ 4,513
Cost of sales 4,678 2,087
-------- --------
Gross margin 24 2,426
-------- --------
Operating expenses:
Research and development 2,323 1,751
Marketing and sales 1,043 557
General and administrative 905 720
Other 105 128
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Total operating expenses 4,376 3,156
-------- --------
Loss from operations (4,352) (730)
-------- --------
Other income (expense):
Interest income 15 1
Interest expense (105) (17)
-------- --------
Total other income (expense) (90) (16)
-------- --------
NET LOSS $ (4,442) $ (746)
-------- --------
-------- --------
NET LOSS PER SHARE $ (0.23) $ (0.04)
-------- --------
-------- --------
Weighted Average Number of
Common Shares and Common
Share Equivalents 19,727 17,719
-------- --------
-------- --------
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 1, AUGUST 2,
1997 1997
----------- ---------
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,844 $ 791
Short term investments 709 709
Accounts receivable, less allowance of
$30 in 1998 and 1997 3,166 1,369
Stock subscriptions receivable --- 2,500
Inventories 2,810 3,055
Other current assets 1,082 858
------- -------
Total current assets 9,611 9,282
Equipment and leasehold improvements - net 5,968 5,801
------- -------
TOTAL ASSETS $15,579 $15,083
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable - bank $ 428 $ 428
Accounts payable and accrued expenses 4,838 3,326
Accrued employee compensation 1,121 1,035
Bridge loan payable 3,050 ---
Current maturities of capitalized
lease obligations 769 728
------- -------
Total current liabilities 10,206 5,517
------- -------
Long-term liabilities:
Long term portion of deferred revenue 2,100 2,000
Capitalized lease obligations, net of
current maturities 2,033 2,086
Obligations under lease commitments 454 454
------- -------
Total long-term liabilities 4,587 4,540
------- -------
Stockholders' equity 786 5,026
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $15,579 $15,083
------- -------
------- -------
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 1, NOVEMBER 2
1997 1996
----------- -----------
Cash flows from operating activities:
NET LOSS $(4,442) $ (746)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 425 164
Loss on retirement of capital equipment --- 51
Increase in accounts receivable (1,797) (2,683)
Decrease (increase) in inventories 245 (233)
Increase in other assets (224) (52)
Increase in accounts payable, accrued
expenses and employee compensation 1,699 2,063
------- -------
NET CASH USED FOR OPERATING ACTIVITIES (4,094) (1,436)
------- -------
Cash flows from investing activities:
Purchase of equipment and leasehold
improvements (408) (1,415)
------- -------
NET CASH USED FOR INVESTING ACTIVITIES (408) (1,415)
------- -------
Cash flows from financing activities:
Payments on capital lease obligations (197) ---
Proceeds from bridge loan 3,050 ---
Proceeds from equity financing, net of
issuance costs 2,464 5,000
Proceeds from exercise of stock
options/warrants 238 72
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NET CASH PROVIDED BY FINANCING ACTIVITIES 5,555 5,072
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,053 2,221
BEGINNING BALANCE - CASH AND CASH EQUIVALENTS 791 886
------- -------
ENDING BALANCE - CASH AND CASH EQUIVALENTS $ 1,844 $ 3,107
------- -------
------- -------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 94 $ 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 1, 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 August 2, 1997. 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 years
1998 and 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 ("APB") 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 reconciliation. Diluted earnings per share are 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 periods, 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.
NOTE C - INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market and
are comprised of the following:
NOVEMBER 1, 1997 AUGUST 2, 1997
---------------- --------------
Finished goods $ 137 $ 448
Work in process 1,710 1,783
Purchased and service parts 963 824
------ ------
$2,810 $3,055
------ ------
------ ------
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AMATI COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOVEMBER 1, 1997
NOTE D - PROPOSED MERGER
On September 30, 1997, the Company and Westell Technologies, Inc. entered
into a proposed merger wherein Amati would have become a wholly owned
subsidiary of Westell Technologies, Inc.
Holders of outstanding Amati Common Stock were to receive in exchange for
each share, 0.9 shares of Westell Class A Common Stock. Under the provisions
of a Loan and Security Agreement dated September 30, 1997, Westell
Technologies, Inc. could extend financing to the Company of up to $5,000,000
secured by a promissory note due on or before September 30, 1999 with
interest payable at the following rates: prime plus 2% for the first $1
million and prime plus 21/2% for all borrowings in excess of $1 million. As
of November 1, 1997, $3,050,000 was outstanding under the Westell Loan,
subsequently increased to $3,550,000.
Following the end of the current fiscal quarter, the Company terminated the
agreement with Westell Technologies, Inc. paying a $14.8 million fee in
connection with such termination. On November 19, 1997 the Company entered
into an Agreement and Plan of Merger with Texas Instruments, Incorporated
("TI") providing for an all-cash tender offer for all outstanding shares of
the Company's Common Stock at $20 per share to commence on November 25, 1997
and ending on December 23, 1997, unless extended. Following completion of
the tender offer, and upon consummation of a merger with a wholly owned
subsidiary of TI, the Company will become a wholly owned subsidiary of TI.
Under the provisions of a Loan and Security Agreement dated November 19, 1997,
Texas Instruments agreed to grant a term loan in the amount of $14,774,000 and a
revolving loan in the amount of $5,000,000 to the Company secured by a
promissory note due September 30, 1999 with interest at the rate of prime plus
2%. As of December 5, 1997, $18,763,000 was outstanding under the TI loan.
Proceeds from these borrowings were used to repay in full all amounts owing to
Westell under the Loan and Security Agreement dated September 30, 1997, all
amounts owing to the Silicon Valley Bank under its revolving line of credit
agreement, and to pay a termination fee to Westell Technologies, Inc.
5
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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 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
Amati Communications Corporation ("Amati" or the "Company") is a leading
developer of advanced transmission equipment utilizing Discrete Multi-tone
("DMT") technology for the Asymmetrical Digital Subscriber Line ("ADSL"),
Very high-speed Digital Subscriber Line ("VDSL") and cable modem markets.
The Company is the holder of the ADSL/DMT patents and has licensed the
technology to companies such as Motorola, NEC, Nortel and Analog Devices,
Inc. The Company is also a provider of network connectivity systems for the
internetworking and OEM marketplaces, which include local area network
gateways, client-based workstation software and network data communications
interfaces.
RESULTS OF OPERATIONS
Total net sales in the first quarter of 1998 increased 4% to $4,702,000 from
sales of $4,513,000 in the first quarter of the prior fiscal year. Revenues
recognized during both fiscal quarters include revenues recorded under the
Company's previously announced joint development agreement with NEC Japan.
VDSL development efforts in conjunction with NEC Japan are ongoing. Sales to
IBM accounted for 32% of the Company's revenue in the first quarter of fiscal
1998 compared with 44% for the comparable period of fiscal 1997. 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 June 1997, the Company was selected to provide equipment to BC Tel,
Canada's second largest telecommunications company, for its first commercial,
standards-based ADSL services. These ADSL/DMT products will be used in the
central switching office and by customers and will enable BC Tel to initially
offer services such as high-speed Internet access and high-speed corporate
LAN access to its customers. Sales of the ADSL/DMT products in the first
quarter of 1998 were $1,722,000 compared with $240,000 for the first quarter
of the prior fiscal year.
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PC to Mainframe Connectivity sales of $120,000 for the first quarter of
fiscal 1998 represents a decrease of 60% 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, 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 who 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 less than 1% for the first quarter of
fiscal 1998 compared with 54% for the same period of fiscal 1997. Margins
were lower as a result of product volume mix represented by shipments of ADSL
products in its early stage of development comprising 37% of sales in the
current fiscal quarter compared to 6% of sales in the first quarter of the
prior fiscal year.
Net research and development expenses increased 33% to $2,323,000 in the
first quarter of fiscal 1998 when compared to the same period of fiscal 1997
largely because of the addition of engineers and the introduction of the
Company's new ADSL/DMT modems, access system shelf products and access
concentrators, and outside design work to support the VDSL standards.
Marketing and sales expenses increased by $486,000 or 87% in the first
quarter of fiscal 1998 when compared with the same period 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 outside service and consultants expenses. Sales,
marketing and customer support operations of the Company's ADSL products,
which cover both domestic and international markets, are 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.
General and administrative expenses increased by $185,000 or 26% in the first
quarter of fiscal 1998 when compared with the same period of the prior fiscal
year. This is primarily due to patent and legal expenses and higher
depreciation and amortization expenses related to equipment and leasehold
expenditures with the move to a larger facility.
Interest income increased to $15,000 in the three-month period of fiscal 1998
compared to $1,000 in the same period of fiscal 1997 due to higher cash
balances for investment purposes.
There were no provisions for income taxes for the first quarter of both
fiscal years.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and short-term investments of $2,553,000 as of November
1, 1997, compared to $1,500,000 as of August 2, 1997. During the fiscal
period, cash used for operating activities of $4,094,000 related primarily to
the net loss incurred during the period. Cash used for investing activities
of $408,000 was primarily for leasehold improvements and capital equipment
purchases associated with the move to a larger facility. Cash provided by
financing activities of
7
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$5,555,000 resulted primarily from the completion of an equity financing
transaction with an investors group, discussed below, and proceeds from the
Westell loan.
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 provided 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. As of August 2, 1997, the Company
has received $12,500,000 pursuant to this Investment Agreement and recorded a
Stock Subscription Receivable of $2,500,000. On August 7, 1997, the Company
received the final $2,500,000 take down in equity financing. In exchange for
the $15,000,000 investment in the Company, the Investors received an
aggregate of 1,242,915 shares of the Company's Common Stock.
On September 30, 1997, the Company and Westell Technologies, Inc. entered
into a proposed merger wherein Amati would have become a wholly owned
subsidiary of Westell Technologies, Inc. Holders of outstanding Amati Common
Stock were to receive in exchange for each share, 0.9 shares of Westell Class
A Common Stock. Under the provisions of a Loan and Security Agreement dated
September 30, 1997, Westell Technologies, Inc. could extend financing to the
Company of up to $5,000,000 secured by a promissory note due on or before
September 30, 1999 with interest payable at the following rates: prime plus
2% for the first $1 million and prime plus 21/2% for all borrowings in excess
of $1 million. As of November 1, 1997, $3,050,000 was outstanding under the
Westell loan, subsequently increased to $3,550,000.
The Company has a revolving line of credit agreement with a bank, which
expires on April 25, 1998. The agreement provides for borrowings up to
$2,000,000 at the bank's prime rate plus .75% (9.25 % at August 2, 1997).
The line of credit is collateralized by the accounts receivable of the
Company. As of August 2, 1997, borrowings under this agreement were
$428,000. Borrowings under this agreement are subject to certain debt
covenants. At August 2, 1997, the Company was out of compliance with certain
of these covenants relating to quick ratios and debt to net worth ratios.
Acknowledging however, that with the $2,500,000 of cash received on August 7,
1997 from stock subscriptions receivable shown on the balance sheet as of
fiscal 1997 year-end the Company will be in compliance, the bank waived all
financial covenants in default. In addition, the Company has a capital lease
line of $1,700,000, which was fully utilized as of August 2, 1997.
Subsequent to the end of the current fiscal quarter, the Company ended the
Agreement with Westell Technologies, Inc. paying a $14.8 million fee. On
November 19, 1997 the Company in connection with such termination entered
into an Agreement and Plan of Merger with Texas Instruments, Incorporated
("TI") providing for an all-cash tender offer for all outstanding shares of
the Company's Common Stock at $20 per share, to commence on November 25, 1997
and end
8
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on December 23, 1997, unless extended. Following completion of the tender
offer and upon consummation of a merger with a wholly owned subsidiary of TI,
the Company will become a wholly owned subsidiary of TI.
Under the provisions of a Loan and Security Agreement dated November 19,
1997, Texas Instruments agreed to grant a term loan in the amount of
$14,774,000 and a revolving loan in the amount of $5,000,000 to the Company
secured by a promissory note due September 30, 1999 with interest at the rate
of prime plus 2%. As of December 5, 1997, $18,763,000 was outstanding under
the TI loan. Proceeds from these borrowings were used to repay in full all
amounts owing to Westell under the Loan and Security Agreement dated
September 30, 1997, all amounts owing to the Silicon Valley Bank under its
revolving line of credit agreement, and to pay the fee to Westell
Technologies, Inc.
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. The company may
seek additional funding through collaborative agreements or though public or
private sale of securities prior to the commercialization of its ADSL
products.
RISK FACTORS
Other than for statements of historical fact, the information about the
Company included or incorporated by reference herein are forward looking
statements that involve risks and uncertainties, including the risks detailed
below.
HISTORY OF LOSSES. The Company had net losses of approximately $12,243,000
for the fiscal year ended August 2, 1997, and $4,442,000 for the fiscal
quarter ended November 1, 1997. 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 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. 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 currently available. 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.
9
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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 that 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.
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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 who 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 American National Standards Institute ("ANSI")
standard for VDSL is expected to be intense. 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 will depend on the commercial availability of other products and
components, including the content, digital switches, 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 data
dialtone or video dialtone services.
DEPENDENCE ON LARGE CUSTOMERS AND SYSTEM INTEGRATORS. The Company expects to
sell many of its telecommunication transmission products to large
telecommunications service companies that 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 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.
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CUSTOMER CONCENTRATION; RELIANCE ON SALES TO IBM. Sales to IBM for PC to
Mainframe connectivity and related products accounted for approximately 83%,
69% and 51% of the Company's net sales in fiscal 1995, 1996 and 1997,
respectively, and 32% of its revenue in the first quarter of fiscal 1998.
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, which originally expired in December 1996, has
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 effect 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
12
<PAGE>
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 intends to 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 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 Shares by
the Selling Stockholders or sales of the Company's Common Stock by other
current stockholders and by option holders and warrant holders who exercise
Company stock options or warrants could have a depressive effect on the
market price of the Company's Common Stock.
13
<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 $15,000,000
pursuant to this Investment Agreement. In exchange for the $15,000,000
investment in the Company, the Investors received an aggregate of 1,242,915
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 1,242,915 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
None.
Reports on Form 8-K
Form 8K filed on October 3, 1997 with respect to the proposed merger with
Westell Technologies, Inc.
14
<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 11, 1997 /S/ JAMES STEENBERGEN
--------------------------------
James Steenbergen
Director, President,
Chief Executive Officer and
Chief Financial Officer
Dated: December 11, 1997 /S/ TERRY MEDEL
--------------------------------
Terry Medel
Controller, Treasurer and Secretary
15
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