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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31,JUNE 30, 2000
COMMISSION FILE NUMBER 000-21129
AWARE, INC.
(Exact Name of Registrant as Specified in Its Charter)
MASSACHUSETTS 04-2911026
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
40 MIDDLESEX TURNPIKE, BEDFORD, MASSACHUSETTS, 01730
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(Address of Principal Executive Offices)
(Zip Code)
(781) 276-4000
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(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
Indicate the number of shares outstanding of the issuer's common stock as of
April 28,July 27, 2000:
CLASS NUMBER OF SHARES OUTSTANDING
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Common Stock, par value $0.01 per share 22,452,94022,505,299 shares
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AWARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31,JUNE 30, 2000
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999 ................ 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 2000
and March 31, 1999 .................................. 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000
and March 31, 1999 .................................. 5
Notes to Consolidated Financial Statements .......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ......................................... 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings ................................... 17
Item 6. Exhibits and Reports on Form 8-K .................... 18
Signatures ..........................................Page
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999............................... 3
Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2000
and June 30, 1999................................................. 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000
and June 30, 1999................................................. 5
Notes to Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk....................................................... 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............... 19
Item 6. Exhibits and Reports on Form 8-K.................................. 20
Signatures........................................................ 20
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PART I. FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
AWARE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31,JUNE 30, DECEMBER 31,
2000 1999
---- --------------- -----------
ASSETS
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 42,318,159 $ 35,248,275equivalents................................................ $46,607,054 $35,248,275
Short-term investments ............................................investments................................................... - 1,017,302
Accounts receivable, (less allowance for doubtful
accounts of $200,000 in 2000 and $175,000 in 1999) ............. 6,922,239net................................................. 7,001,333 5,705,914
Inventories ....................................................... 198,904Inventories.............................................................. 275,015 122,058
Prepaid expenses and other assets ................................. 903,667assets........................................ 217,958 769,155
------------ ----------------------- -----------
Total current assets ........................................ 50,342,969assets.................................................. 54,101,360 42,862,704
------------ ----------------------- -----------
Property and equipment, net ............................................ 11,458,697net................................................. 11,437,684 11,619,761
------------ ----------------------- -----------
Total assets ................................................ $ 61,801,666 $ 54,482,465
============ ============assets.......................................................... $65,539,044 $54,482,465
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 411,949 $ 787,684payable........................................................ $684,206 $787,684
Accrued expenses .................................................. 208,085........................................................ 232,297 177,500
Accrued compensation .............................................. 284,244.................................................... 496,874 467,806
Accrued professional .............................................. 126,875professional..................................................... 70,984 80,678
------------ ----------------------- -----------
Total current liabilities ................................. 1,031,153liabilities............................................. 1,484,361 1,513,668
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares authorized,
none outstanding ..........................................outstanding..................................................... - -
Common stock, $.01 par value; 30,000,000 shares authorized; issued
and outstanding, 22,427,81822,505,049 in 2000 and 21,918,056 in 1999 224,2781999........... 225,050 219,181
Additional paid-in capital ....................................... 70,552,181capital.............................................. 71,247,492 64,865,465
Accumulated deficit .............................................. (10,005,946)deficit..................................................... (7,417,859) (12,115,849)
------------ ----------------------- -----------
Total stockholders' equity ................................ 60,770,513equity........................................... 64,054,683 52,968,797
------------ ----------------------- -----------
Total liabilities and stockholders' equity ................ $ 61,801,666 $ 54,482,465
============ ============equity........................... $65,539,044 $54,482,465
=========== ===========
The accompanying notes are an integral part of the financial statements.
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AWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2000 1999 ---- ----2000 1999
---------- ---------- ----------- ----------
Revenue:
Product sales .................... $1,191,892 $1,224,705sales..................................... $1,174,209 $1,431,126 $ 2,366,101 $2,655,831
Contract revenue ................. 2,551,666 2,561,261
Royalties ........................ 2,663,250 520,302revenue.................................. 3,170,000 2,498,950 5,721,666 5,060,211
Royalties......................................... 2,853,863 780,723 5,517,113 1,301,025
---------- ------------------- ----------- ----------
Total revenue ................ 6,406,808 4,306,268revenue.................................... 7,198,072 4,710,799 13,604,880 9,017,067
Costs and expenses:
Cost of product sales ............. 142,922 246,007sales............................. 232,026 343,243 374,948 589,250
Cost of contract revenue .......... 1,971,159 1,759,059revenue.......................... 2,204,930 1,625,033 4,176,090 3,384,092
Research and development .......... 1,413,784 782,729development.......................... 1,338,624 775,056 2,752,407 1,557,785
Selling and marketing ............. 667,042 586,796marketing............................. 673,345 711,944 1,340,387 1,298,740
General and administrative ........ 671,961 593,135administrative........................ 830,561 681,387 1,502,522 1,274,522
---------- ------------------- ----------- ----------
Total costs and expenses...... 4,866,868 3,967,726expenses......................... 5,279,486 4,136,663 10,146,354 8,104,389
Income from operations ................ 1,539,940 338,542operations................................ 1,918,586 574,136 3,458,526 912,678
Other income ..........................income.......................................... - - - 18,300
Interest income ....................... 569,963 320,121income....................................... 669,501 344,841 1,239,464 664,962
---------- ------------------- ----------- ----------
Income before provision for income taxes ............................... 2,109,903 676,963taxes.............. 2,588,087 918,977 4,697,990 1,595,940
Provision for income taxes ............taxes............................ - - - -
---------- ------------------- ----------- ----------
Net income ............................ $2,109,903 $676,963income............................................ $2,588,087 $ 918,977 $ 4,697,990 $1,595,940
========== =================== =========== ==========
Net income per share - basic .......... $0.09 $0.03basic.......................... $0.12 $0.04 $0.21 $0.08
Net income per share - diluted ........ $0.09 $0.03diluted........................ $0.11 $0.04 $0.20 $0.07
Weighted average shares - basic ....... 22,229,909 21,097,978basic....................... 22,474,584 21,407,811 22,352,247 21,253,747
Weighted average shares - diluted ..... 23,879,848 23,372,593diluted..................... 23,810,643 23,760,248 23,844,855 23,593,016
The accompanying notes are an integral part of the financial statements.
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AWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREESIX MONTHS ENDED
MARCH 31,
------------------------JUNE 30,
-------------------------------
2000 1999
---- --------------- -----------
Cash flows from operating activities:
Net income ...........................................income................................................... $ 2,109,9034,697,990 $ 676,9631,595,940
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................... 444,303 426,474amortization.............................. 900,049 870,427
Increase (decrease) from changes in assets and liabilities:
Accounts receivable ............................ (1,216,325) (977,939)
Inventories .................................... (76,846) 56,330receivable...................................... (1,295,419) (1,643,288)
Inventories.............................................. (152,957) (60,138)
Prepaid expenses and other assets .............. (134,512) 139assets........................ 51,197 90,707
Accounts payable ............................... (375,735) 283,759payable......................................... (103,478) 53,927
Accrued expenses ............................... (106,780) 118,029expenses......................................... 74,171 (32,106)
Deferred revenue ...............................revenue......................................... - (6,250)
------------ ------------(12,500)
----------- -----------
Net cash provided by operating activities ... 644,008 577,505
------------ ------------activities.............. 4,171,553 862,969
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment ................. (283,239) (335,734)equipment.......................... (717,972) (554,847)
Other assets................................................. 500,000 (200,000)
Net sales (purchases) of short-term investments .....investments.............. 1,017,302 (1,964,693)
------------ ------------(1,004,962)
----------- -----------
Net cash provided by (used in) investing activities ............................... 734,063 (2,300,427)
------------ ------------activities.... 799,330 (1,759,809)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock ............. 5,691,813 2,402,536
------------ ------------stock....................... 6,387,896 4,944,982
----------- -----------
Net cash provided by financing activities ... 5,691,813 2,402,536
------------ ------------activities.............. 6,387,896 4,944,982
----------- -----------
Increase in cash and cash equivalents ................... 7,069,884 679,614equivalents.......................... 11,358,779 4,048,142
Cash and cash equivalents, beginning of period ..........period................. 35,248,275 23,512,242
------------ ----------------------- -----------
Cash and cash equivalents, end of period ................ $ 42,318,159 $ 24,191,856
============ ============period.............,......... $46,607,054 $27,560,384
=========== ===========
The accompanying notes are an integral part of the financial statements.
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AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A) BASIS OF PRESENTATION
The accompanying unaudited consolidated balance sheets, statements of
operations, and statements of cash flows reflect all adjustments
(consisting only of normal recurring items) which are, in the opinion of
management, necessary for a fair presentation of financial position at March 31,June
30, 2000, of operations for the three and six month periods ended June 30,
2000 and 1999, and of operations and cash flows for the interimsix month periods ended March 31,June 30,
2000 and 1999.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and therefore do
not include all information and footnotes necessary for a complete
presentation of operations, the financial position, and cash flows of the
Company, in conformity with generally accepted accounting principles. The
Company filed audited financial statements which included all information
and footnotes necessary for such presentation for the three years ended
December 31, 1999 in conjunction with its 1999 Annual Report on Form 10-K.
The results of operations for the interim period ended March 31,June 30, 2000 are
not necessarily indicative of the results to be expected for the year.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation --- an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 to certain issues
including: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a
plan qualifies as a noncompensatory plan; the accounting consequence of
various modifications to the terms of previously fixed stock options or
awards; and the accounting for the exchange of stock compensation
awards in a business combination.25. FIN 44 is effective July 1, 2000, but certain conclusions
in FIN 44 are applicable retroactively to specific events occurring after
either December 15, 1998 or January 12, 2000. The Company does not expect
the application of FIN 44 to have a material impact on the Company's
financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, (SAB 101), "Revenue Recognition in
Financial Statements." SAB 101 summarizes the SEC's views in applying
generally accepted accounting principles to selected revenue recognition
issues in financial statements. The application of the guidance in SAB 101
will be required in the Company's fourth quarter of fiscal 2000. The
Company is currently determining any impact that SAB 101 may have on its
financial position and results of operations.
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B) INVENTORY
Inventory consists primarily of the following:
MARCH 31,JUNE 30, DECEMBER 31,
2000 1999
---- ------------ ------------
Raw materials ............ $169,628 $93,847materials............................... $245,962 $ 93,847
Finished goods ........... 29,276goods.............................. 29,053 28,211
-------- --------
Total ................ $198,904Total................................ $275,015 $122,058
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C) COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share is
computed by dividing net income by the weighted average number of common
shares outstanding plus additional common shares that would have been
outstanding if dilutive potential common shares had been issued. For the
purposes of this calculation, stock options are considered common stock
equivalents in periods in which they have a dilutive effect. Stock options
that are antidilutive are excluded from the calculation.
Net income per share is calculated as follows:
THREE MONTHS ENDED MARCH 31,
--------------------SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- --------------------------
2000 1999 ---- ----2000 1999
----------- ----------- ----------- -----------
Net income $2,109,903 $676,963income...................................... $2,588,087 $918,977 $4,697,990 $1,595,940
Weighted average common shares outstanding 22,229,909 21,097,978outstanding...... 22,474,584 21,407,811 22,352,247 21,253,747
Additional dilutive common stock equivalents 1,649,939 2,274,615
---------- ----------equivalents.... 1,336,059 2,352,437 1,492,608 2,339,269
=========== =========== =========== ===========
Diluted shares outstanding 23,879,848 23,372,593
========== ==========outstanding...................... 23,810,643 23,760,248 23,844,855 23,593,016
=========== =========== =========== ===========
Net income per share - basic $0.09 $0.03basic.................... $0.12 $0.04 $0.21 $0.08
Net income per share - diluted $0.09 $0.03diluted.................. $0.11 $0.04 $0.20 $0.07
OptionsFor the three and six month periods ended June 30, 2000, options to
purchase shares of the Company's common stock totaling 766,754 at March 31, 2000837,444 and 788,629
respectively, were outstanding, but were not included in the computation of
diluted earnings per share as the inclusion of these shares would have been
anti-dilutive.
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D) BUSINESS SEGMENTS
The Company organizes itself as one segment and conducts its operations in
the United States.
The Company sells its products and technology to domestic and international
customers. Revenues were generated from the following geographic regions:
THREE MONTHS ENDED MARCH 31,
---------SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ----------------------------
2000 1999 ---- ----2000 1999
---------- ---------- ----------- ----------
United States $5,492,308 $3,004,601States................ $5,316,553 $2,729,708 $10,808,861 $5,734,309
Germany...................... 1,099,905 549,363 1,307,285 1,544,563
Asia/Pacific 598,900 119,135
Germany 207,380 810,200Pacific................. 631,950 841,915 1,230,850 776,050
Europe, excluding Germany.... 83,770 469,138 108,920 832,628
Rest of World 83,070 8,842
Europe, excluding Germany 25,150 363,490World................ 65,894 120,675 148,964 129,517
---------- ---------- $6,406,808 $4,306,268----------- ----------
$7,198,072 $4,710,799 $13,604,880 $9,017,067
========== ========== =========== ==========
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ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Some of the information in this FormSOME OF THE INFORMATION IN THIS FORM 10-Q contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may,CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. YOU CAN IDENTIFY THESE
STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "MAY," "will,"WILL," "expect,"EXPECT,"
"anticipate,"ANTICIPATE," "believe,"BELIEVE," "estimate,"ESTIMATE," "continue" and similar words. You should
read statements that contain these words carefully because they:"CONTINUE" AND SIMILAR WORDS. YOU SHOULD
READ STATEMENTS THAT CONTAIN THESE WORDS CAREFULLY BECAUSE THEY: (1) discuss our
future expectations;DISCUSS OUR
FUTURE EXPECTATIONS; (2) contain projections of our future operating results or
financial condition; orCONTAIN PROJECTIONS OF OUR FUTURE OPERATING RESULTS OR
FINANCIAL CONDITION; OR (3) state other "forward-looking" information. However,
we may not be able to predict future events accurately. The risk factors listed
in this section, as well as any cautionary language in this FormSTATE OTHER "FORWARD-LOOKING" INFORMATION. HOWEVER,
WE MAY NOT BE ABLE TO PREDICT FUTURE EVENTS ACCURATELY. THE RISK FACTORS LISTED
IN THIS SECTION, AS WELL AS ANY CAUTIONARY LANGUAGE IN THIS FORM 10-Q, provide
examples of risks, uncertainties and events that may cause our actual results to
be materially worse than the expectations we describe in our forward-looking
statements. You should be aware that the occurrence of any of the events
described in these risk factors and elsewhere in this FormPROVIDE
EXAMPLES OF RISKS, UNCERTAINTIES AND EVENTS THAT MAY CAUSE OUR ACTUAL RESULTS TO
BE MATERIALLY WORSE THAN THE EXPECTATIONS WE DESCRIBE IN OUR FORWARD-LOOKING
STATEMENTS. YOU SHOULD BE AWARE THAT THE OCCURRENCE OF ANY OF THE EVENTS
DESCRIBED IN THESE RISK FACTORS AND ELSEWHERE IN THIS FORM 10-Q could materially
and adversely affect our business.COULD MATERIALLY
AND ADVERSELY AFFECT OUR BUSINESS.
RESULTS OF OPERATIONS
Product Sales. Product sales consist primarily of revenue from the sale of
digital subscriber line ("DSL") equipment and compression software products. The
products that comprise DSL equipment sales are primarily test and development
systems and modems.
Product sales decreased 3%18% from $1,225,000$1,431,000 in the firstsecond quarter of 1999 to
$1,192,000$1,174,000 in the current year quarter. As a percentage of total revenue,
product sales decreased from 28%30% in the firstsecond quarter of 1999 to 19%16% in the
current year quarter. For the six months ended June 30, product sales decreased
11% from $2,656,000 in 1999 to $2,366,000 in 2000. As a percentage of total
revenue, product sales decreased from 29% in the first six months of 1999 to 17%
in the corresponding period of 2000.
The dollar decrease in the three month period was primarily due to lower revenue
from the sale of compression software and modems. The revenue decline from these
productsmodems, which was almost entirelypartially offset by an increase in revenue
from the sale of test and development systems. The dollar decrease in the six
month period was due to essentially the same reasons as in the three month
period, and, in addition, compression software revenue was lower. Modem revenue
in both periods was lower because we have been phasing out the development and
sale of our x200 Access Router. DSL test and development system revenue in both
periods was higher primarily because of the availability of new products and the
growth of the DSL market. Compression software revenue in the six month period
was lower due to a large sale to a customer in the prior year quarter that did not
repeat itself in the current year quarter. Modem revenue was lower because we have begun to phase out
sales of our x200 Access Router. DSL test and development system revenue
increased primarily because: (i) more customers are developing chipsets and
equipment using our DSL technology and consequently they purchased more of these
systems in the current year quarter, and (ii) the availability of new test and
development system products that were not available in the prior year quarter.year.
Contract Revenue. Contract revenue consists primarily of license,
engineering development, and customer support fees that we receive under
agreements with our customers to develop and support DSL products.chipsets. Contract
revenue in the first quarter of 1999 also includes a smallnegligible amount of
revenue from U.S. government research contracts. We anticipate that revenue from
such government contracts will not continue in future periods.
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Contract revenue decreased slightlyincreased 27% from $2,561,000$2,499,000 in the firstsecond quarter of 1999 to
$2,552,000$3,170,000 in the current year quarter. As a percentage of total revenue,
contract revenue decreased from 60%53% in the firstsecond quarter of 1999 to 40%44% in the
current year quarter. For the six months ended June 30, contract revenue
increased 13% from $5,060,000 in 1999 to $5,722,000 in 2000. As a percentage of
total revenue, contract revenue decreased from 56% in the first six months of
1999 to 42% in the corresponding period of 2000. The slight dollar decreaseincrease, in both
the three and six month periods, was primarily due to no U.S.
government research revenueto: (i) new chipset
development projects with existing and new semiconductor customers, and (ii)
increased support and new developments associated with the integration of
chipsets using our DSL technology into equipment used in the current year quarter. We completed our last
U.S. government research project in the first quarter of 1999, and we anticipate
that
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revenue from such projects will not continue in future periods. Contract revenue
from telecommunications customers was slightly higher in the current year
period.mass-scale deployments.
Royalties. Royalties consist of royalty payments that we receive under
licensing agreements. We receive royalties when customers use our technology in
their chipsets or equipment.
Royalties increased 266% from $520,000$781,000 in the firstsecond quarter of 1999 to
$2,663,000$2,854,000 in the current year quarter. As a percentage of total revenue,
royalties increased from 12%17% in the firstsecond quarter of 1999 to 42%40% in the current
year quarter. For the six months ended June 30, royalties increased 324% from
$1,301,000 in 1999 to $5,517,000 in 2000. As a percentage of total revenue,
royalties increased from 14% in the first six months of 1999 to 41% in the
corresponding period of 2000. We believe that the increase in royalties was
primarily due to growing deployments of DSL services by the telecommunications
industry in general, and of deployments using our technology in particular.
Cost of Product Sales. Cost of product sales consists primarily of the cost
of equipment sales, because compressionsales. Compression software revenue has minimal cost of sales
associated with it. Cost of product sales decreased 42%32% from $246,000$343,000 in the
firstsecond quarter of 1999 to $143,000$232,000 in the current year quarter. As a percentage
of product sales, cost of product sales decreased from 20%24% in the firstsecond quarter
of 1999 to 12%20% in the current year quarter. TheFor the six months ended June 30,
cost of product sales decreased 36% from $589,000 in 1999 to $375,000 in 2000.
As a percentage of product sales, cost of product sales decreased from 22% in
the first six months of 1999 to 16% in the corresponding period of 2000. For the
three and six month periods, the improvement in product margins is primarily due
to a shift in the sales mix of test and development systems and x200 modems. In
theboth current year quarter,periods, we sold a greater proportion of test and development
systems, which have higher margins than x200 modems.
Cost of Contract Revenue. Cost of contract revenue consists primarily of
salaries for engineers and expenses for consultants, recruiting, supplies,
equipment, depreciation and facilities associated with customer development
projects. Cost of contract revenue increased 12%36% from $1,759,000$1,625,000 in the firstsecond
quarter of 1999 to $1,971,000$2,205,000 in the current year quarter. As a percentage of
contract revenue, cost of contract revenue increased from 69%65% in the firstsecond
quarter of 1999 to 77%70% in the current year quarter. The dollar increase was
primarily due to new chipset development projects with existing and new
semiconductor customers, and the nature of the customer projects we performed
during the second quarter of 2000. We have a more diverse collection of projects
in 2000 involving ASIC (application specific integrated circuit) developments,
specific DSP-based code developments, and the integration of these technologies.
These projects tend to have greater development costs associated with them.
For the six months ended June 30, cost of contract revenue increased 23% from
$3,384,000 in 1999 to $4,176,000 in 2000. As a percentage of contract revenue,
cost of contract revenue
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increased from 67% in the first six months of 1999 to 73% in the corresponding
period of 2000. The dollar increase is primarily due to the nature of the
customer projects we performed induring the first quarterhalf of this year.2000. There were more
projects involving ASIC (application specific integrated circuit) developments,
and these projects tend to have greater development costs associated with them.
Research and Development Expense. Research and development expense consists
primarily of salaries for engineers and expenses for consultants, recruiting,
supplies, equipment, depreciation and facilities related to engineering projects
to enhance and extend our DSLtelecommunications Intellectual Property offerings,
and our compression software technologies.technology. Research and development expense
increased by 81%73% from $783,000$775,000 in the firstsecond quarter of 1999 to $1,414,000$1,339,000 in
the current year quarter. As a percentage of total revenue, research and
development expense increased from 18%16% in the firstsecond quarter of 1999 to 22%19% in
the current year quarter. TheFor the six months ended June 30, research and
development expense increased by 77% from $1,558,000 in 1999 to $2,752,000 in
2000. As a percentage of total revenue, research and development expense
increased from 17% in the first six months of 1999 to 20% in the corresponding
period of 2000. For both the three and six month periods, the dollar increase
was primarily due to increased spending on non-customer-specific research and
development projects, such as our new voice enabled DSL ("VeDSL") and Dr.
DSL(TM) line maintenance and diagnostic technologies. Higher spending on these
projects was partially offset by lower spending on our x200 modem product.
Selling and Marketing Expense. Selling and marketing expense consists
primarily of salaries for sales and marketing personnel, travel, advertising and
promotion, recruiting, and facilities expense. Sales and marketing expense
increased 14%decreased 5% from $587,000$712,000 in the firstsecond quarter of 19981999 to $667,000$673,000 in the
current year quarter. As a percentage of total revenue, sales and marketing
expense decreased from 14%15% in the firstsecond quarter of 1999 to 10%9% in the current
year quarter. The dollar decrease was primarily due to more efficient, therefore
lower, spending on tradeshows and public relations.
For the six months ended June 30, selling and marketing expense increased
3% from $1,299,000 in 1999 to $1,340,000 in 2000. As a percentage of total
revenue, sales and marketing expense decreased from 14% in the first six months
of 1999 to 10% in the corresponding period of 2000. The dollar increase was
primarily due to the addition ofincreased spending on sales staff towho license our technology to
semiconductor customers. 9
10Higher sales staff spending was partially offset by
lower spending on tradeshows and public relations.
General and Administrative Expense. General and administrative expense
consists primarily of salaries for administrative personnel, facilities costs,
and public company, legal, and audit expenses. General and administrative
expense increased 13%22% from $593,000$681,000 in the firstsecond quarter of 1999 to $672,000$831,000 in
the current year quarter. As a percentage of total revenue, general and
administrative expense decreased from 14% in the firstsecond quarter of 1999 to 10%12%
in the current year quarter. TheFor the six months ended June 30, general and
administrative expense increased 18% from $1,275,000 in 1999 to $1,503,000 in
2000. As a percentage of total revenue, general and administrative expense
decreased from 14% in the first six months of 1999 to 11% in the corresponding
period of 2000. For the three and six month periods, the dollar increase is
primarily due to additions tohigher public company expenses, and we increased our legalbad debt
reserve because of generally higher revenue and administrative staffs.accounts receivable balances.
11
12
Other Income. Other income consists of rental income from real estate
leases for space in our headquarters building. Otherbuilding, which terminated in the first
quarter of 1999. For the six months ended June 30, other income decreased from
$18,000 in the first quarter of 1999 to zero in 2000. The decrease is due to the currenttermination of the
leases last year, quarter. Weand we do not anticipate that we will have any more rental
income in the future.
Interest Income. Interest income increased 78%94% from $320,000$345,000 in the firstsecond
quarter of 1999 to $570,000$670,000 in the current year quarter. For the six months
ended June 30, interest income increased 86% from $665,000 in 1999 to $1,239,000
in 2000. The dollar increase in both periods is primarily due to higher cash
balances. Higher cash balances were due to positive cash flows from operations
and stock option exercises during 1999 and the first quartersix months of 2000.
Income Taxes. We have made no provision for income taxes as our historical
net losses have resulted in tax loss carryforwards that we are utilizing. At
December 31, 1999, Aware has federal net operating loss carryforwards of
approximately $52.8 million, which begin to expire in 2003, and federal research
and development credit carryforwards of approximately $3.8 million, which begin
to expire in 2003. At December 31, 1999, Aware also had available state net
operating loss carryforwards of approximately $47.9 million, which begin to
expire in 2000, and state research and development and investment tax credit
carryforwards of approximately $2.2 million, which begin to expire in 2006. Of
the total net operating loss and research and development carryforwards,
approximately $35.3 million and $1.3 million, respectively, are attributable to
the exercise of stock options and the tax benefit from these items will be
credited to additional paid-in capital, if realized.
1012
1113
LIQUIDITY AND CAPITAL RESOURCES
At March 31,June 30, 2000, we had cash, cash equivalents and short-term investments of
$42,318,000,$46,607,000, which represents an increase of $6,053,000$10,341,000 from December 31, 1999.
The increase is primarily due to $644,000$4,671,000 of cash provided from operations and
$5,692,000$6,388,000 of net proceeds from the exercise of employee stock options, which
was partially offset by $283,000$718,000 of cash invested in capital equipment.
Cash provided from operations in the first threesix months of 2000 was the result of
net income less working capital requirements. Capital spending was primarily
related to the purchase of computer hardware and software, laboratory equipment,
and furniture used principally in engineering activities.
While we can not assure you that we will not require additional financing, or
that such financing will be available us, we believe that our cash, cash
equivalents and short-term investments, will be sufficient to fund our operation
for at least the next twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation --- an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 to certain issues including: the
definition of an employee for purposes of applying APB Opinion No. 25; the
criteria for determining whether a plan qualifies as a noncompensatory plan; the
accounting consequence of various modifications to the terms of previously fixed
stock options or awards; and the accounting for the exchange of stock
compensation awards in a business combination.25. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 are applicable
retroactively to specific events occurring after either December 15, 1998 or
January 12, 2000. The Company does not expect the application of FIN 44 to have
a material impact on the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the SEC's views in applying generally accepted
accounting principles to selected revenue recognition issues in financial
statements. The application of the guidance in SAB 101 will be required in the
Company's fourth quarter of fiscal 2000. The Company is currently determining
any impact that SAB 101 may have on its financial position and results of
operations.
RISK FACTORS
We believe that the occurrence of any one or some combination of the following
risk factors could seriously harm our business.
OUR QUARTERLY RESULTS ARE UNPREDICTABLE AND MAY FLUCTUATE SIGNIFICANTLY
Our quarterly revenue and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter. If our quarterly revenue or
operating results fall below the expectations of investors or public market
analysts, the price of our common stock could fall significantly.
13
14
Many of our expenses, such as employee compensation and facilities costs, are
relatively fixed. Moreover, our expense levels are based, in part, on our
expectations regarding future revenue increases. As a result, any shortfalls in
revenue in relation to our expectations could cause significant changes in our
operating results from quarter to quarter and could result in quarterly losses.
Other factors, many of which are outside our control, also could cause
variations in our quarterly revenue and operating results. Some of these factors
are: (i) the rate of market acceptance of DSL broadband access, generally, and
of our full-rate ADSL,G.lite, VeDSL, and G.lite technologyDr. DSL(TM) technologies in particular;
(ii) demand for our licensees' chipsets and products that incorporate our
technology; (iii) development by us or our competitors of enhanced or
alternative high-speed network access technologies; (iv) the extent and timing
of new license transactions; (v) regulatory developments; and (vi) the timing
and related costs of any acquisitions.
WE HAVE A UNIQUE AND UNPROVEN BUSINESS MODEL
Other than our six-yearseven-year relationship with Analog Devices, we do not have
extensive experience licensing our technology to third parties. Moreover,
obtaining suitable licensees for our technology is difficult because of the
following features of our strategy: (i) we typically undergo
11
12 a lengthy and
expensive process of building a relationship with a potential licensee before
entering into an agreement; (ii) we must persuade semiconductor and equipment
manufacturers with significant resources to rely on us for critical technology
on an ongoing basis rather than trying to develop similar technology internally;
and (iii) we must persuade potential licensees to bear development costs
associated with our technology applications and to make the necessary investment
to successfully produce chipsets and products using our technology.
If we cannot obtain suitable licensees or otherwise fail to implement our
business strategy successfully, our business could be seriously harmed.
WE DEPEND SUBSTANTIALLY ON A LIMITED NUMBER OF LICENSEES
There are a relatively limited number of semiconductor and equipment companies
to which we can license our DSL technology in a manner consistent with our
business model. If we fail to maintain relationships with our current licensees
or fail to establish a sufficient number of new licensee relationships, our
business could be seriously harmed. Also, we cannot assure you that our
prospective customers will not use their superior size and bargaining power to
demand license terms that are unfavorable to us.
Royalties from our licensees are often based onrelated to the selling prices of our
licensees' chipsets and products, over which we have little or no control. We
also have little or no control over our licensees' promotional and marketing
efforts. Our licensees are not obligated to use our technology, and generally
are not required to pay us royalties unless they do utilize our technology. They
are not prohibited from competing against us. Because our business model depends
on our receipt of royalties, our licensees' failure to achieve significant sales
of chipsets and products incorporating our technology could seriously harm our
business.
14
15
OUR SUCCESS REQUIRES ACCEPTANCE OF OUR DSL TECHNOLOGY BY A VARIETY OF MARKET
PARTICIPANTS
Due to our business strategy, our success is dependent on our ability to
generate significant royalties from our licensing arrangements with
semiconductor manufacturers. Our ability to generate significant royalties is
materially affected by the acceptance of high-speed access over telephone lines
in general, and our DSL technology in particular by equipment companies, service
providers, and end users.
-|| Equipment companies, particularly those that develop and market
high-volume business and consumercentral office products, such as central office line
cards, modems andDSLAMS, digital loop
carriers, switches, or next generation access platforms, as well as
customer premises products, such as personal computers, gateway
devices, or modems, must purchase chipsets containing our DSL
technology from our licensees for us to be successful. If equipment
companies do not build equipment based on our DSL technology, our
business will be seriously harmed.
-|| Service providers must deploy DSL services based on our technology. If
service providers do not deploy services based on DSL technology, our
business will be seriously harmed.
-|| End Users must purchase services that incorporate our technology. If
end users do not purchase services based on DSL technology, our
business will be seriously harmed.
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13
OUR INTELLECTUAL PROPERTY IS SUBJECT TO LIMITED PROTECTION
Because we are a technology provider, our ability to protect our intellectual
property and to operate without infringing the intellectual property rights of
others is critical to our success. We regard our technology as proprietary, and
we have a number of patents and pending patent applications. We also rely on a
combination of trade secrets, copyright and trademark law and non-disclosure
agreements to protect our unpatented intellectual property. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our technology without authorization.
As part of our licensing arrangements, we typically work closely with our
semiconductor and equipment manufacturer licensees, many of whom are also our
potential competitors, and provide them with proprietary know-how necessary for
their development of customized chipsets based on our DSL technology. Although
our license agreements contain non-disclosure provisions and other terms
protecting our proprietary know-how and technology rights, it is possible that,
despite these precautions, some of our licensees might obtain from us
proprietary information that they could use to compete with us in the
marketplace. Although we intend to defend our intellectual property as
necessary, we cannot be sure that the steps we have taken will be adequate to
prevent misappropriation.
In the future, we may choose to bring legal action to enforce our intellectual
property rights. Any such litigation could be costly and time-consuming for us,
even if we were to prevail. Moreover, even if we are successful in protecting
our proprietary information, we cannot be sure that our competitors will not
independently develop technologies substantially equivalent or superior to our
technology. The misappropriation of our technology or the development of
competitive technology could seriously harm our business.
15
16
Our technology may infringe the intellectual property rights of others. A large
and increasing number of participants in the telecommunications industry have
applied for or obtained patents. Some of these patent holders have demonstrated
a readiness to commence litigation based on allegations of patent and other
intellectual property infringement. Third parties may assert exclusive patent,
copyright and other intellectual property rights to technologies that are
important to our business. Intellectual property rights can be uncertain and can
involve complex legal and factual questions. We may be unknowingly infringing
the proprietary rights of others, which could result in significant liability
for us. If we were found to have infringed any third party's patents, then we
could be subject to substantial damages and an injunction preventing us from
conducting our business.
OUR BUSINESS IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE
The telecommunications industry in general, and the market for high-speed
network access technologies in particular, are characterized by rapid
technological change, with new generations of products being introduced
regularly and with ongoing evolutionary improvements. We expect to depend on our
DSL technology for a substantial portion of our revenue for the foreseeable
future. Therefore, we face risks that others could introduce competing
technology that renders our DSL technology less desirable or obsolete. Also, the
announcement of new technologies could cause our licensees or their customers to
delay or defer entering into arrangements for the use of our existing
technology. Either of these events could seriously harm our business.
13
14
We expect that our business will depend to a significant extent on our ability
to introduce enhancements and new generations of our DSL technology as well as
new technologies that keep pace with other changes in the telecommunications
industry and that achieve rapid market acceptance. We must continually devote
significant engineering resources to achieving technical innovations. These
innovations are complex and require long development cycles. Moreover, we may
have to make substantial investments in technological innovations before we can
determine their commercial viability. We may lack sufficient financial resources
to fund future development. Also, our licensees may decide not to share certain
research and development costs with us. Revenue from technological innovations,
even if successfully developed, may not be sufficient to recoup the costs of
development.
WE FACE INTENSE COMPETITION FROM A WIDE RANGE OF MANUFACTURERS AND VENDORS
The markets for telecommunications and semiconductor products are intensely
competitive. We expect competition to increase in the immediate future, because
of the rapid growth projected across the DSL industry. Because of our strategy,
we face three different kinds of competition and competitors, including:
Technology Licensing Competition. Semiconductor and equipment manufacturers
that develop and sell DSL products may either develop DSL technology
internally or license it from third parties. While we know of no other
independent companies that license DSL technology, such as Aware, we face
intense competition from internal development teams within potential
customers. Furthermore, our current customers may choose to abandon joint
development projects with us and internally develop their own DSL
technology solutions.
DSL Chipset Competition. Our customers' chipsets compete with chipsets from
other vendors of standards-based and non-standards-based DSL chipsets. Some
16
17
of our current and potential competitors are some of the largest
semiconductor companies in the world.
Network Competition. DSL services offered over copper telephone networks
compete with alternative broadband transmission technologies that use other
network architectures, such as cable modems and wireless solutions.
WE REQUIRE ADDITIONAL HIGHLY-QUALIFIED ENGINEERING PERSONNEL
Our future success will depend significantly on our ability to attract, motivate
and retain additional highly qualified engineering personnel. Competition for
qualified engineers is intense and there are a limited number of available
persons with the necessary knowledge and experience in DSL chip design and related
technologies. Finding, training and integrating additional qualified personnel
is likely to be difficult and expensive, and we may be unable to do so
successfully. In the past, we have not been able to hire all of the engineers
that we contemplated in our business plan. If we are unable to hire and retain a sufficient number of
engineers, our business could be seriously harmed.
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15
OUR STOCK PRICE MAY BE VOLATILE
Volatility in our stock price may negatively impact the price you may receive
for your shares of common stock and increases the risk that we could be the
subject of costly securities litigation. The market price of our common stock
could fluctuate substantially based on a variety of factors, including: (i)
quarterly fluctuations in our operating results; (ii) changes in our
relationships with our licensees; (iii) announcements of technological
innovations or new products by us, our licensees or our competitors; (iv)
changes in earnings estimates by public market analysts; (v) key personnel
losses; (vi) sales of common stock; and (vii) developments or announcements with
respect to industry standards, patents or proprietary rights.
In addition, the equity markets have experienced volatility that has
particularly affected the market prices of equity securities of many high
technology companies and that often has been unrelated or disproportionate to
the operating performance of such companies. These broad market fluctuations may
adversely affect the market price of our common stock.
WE HAVE A HISTORY OF OPERATING LOSSES
We may not achievebe profitable operations in any future period. We incurred operating losses in
each fiscal year from inception to December 31, 1998. As of March 31,June 30, 2000, we
had an accumulated deficit of $10.0$7.4 million. We must continue
to invest substantial amounts in research and development to enhance our
technology. Although our revenue has grown in recentwe have been profitable
over the last seven quarters, we cannot assure you that itwe will continue to growbe
profitable in future quarters or that it will grow enough
for us to be profitable. As a result, we may incur substantial losses in the
future and may not be able to achieve profitability on a quarterly or annual
basis.
15quarters.
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ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk relates primarily to our investment portfolio, and
the effect that changes in interest rates would have on that portfolio.
Historically, our investment portfolio has included:
- Cash and cash equivalents, which consist of financial instruments with
purchased maturities of three months or less; and
- Short-term investments, which consist of financial instruments that
meet the high quality standards specified in our investment policy.
This policy dictates that all instruments mature in 18 months or less,
and limits the amount of credit exposure to any one issue, issuer, and
type of instrument.
We do not use derivative financial instruments for speculative or trading
purposes. As of March 31,June 30, 2000, all of our investments matured in twelve months
or less. Due to the short duration of the financial instruments we invest in, we
do not expect that an increase in interest rates would result in any material
loss to our investment portfolio.
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PART II. OTHER INFORMATION
ITEM 1:
LEGAL PROCEEDINGS
From time to time we are involved in litigation incidental to the conduct of our
business. We are not party to any lawsuit or proceeding that, in our opinion, is
likely to seriously harm our business.
17ITEM 4:
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 25, 2000, we held our Annual Meeting of Stockholders (the "Annual
Meeting"). Matters voted on and the results of those votes are set forth below:
(1) Each of Michael A. Tzannes and G. David Forney, Jr. was elected to serve
as a Class I director for a term expiring at our annual meeting of
stockholders in 2003 or a special meeting in lieu thereof. Each of John K.
Kerr, Edmund C. Reiter and David Ehreth continued to serve as a director
following the Annual Meeting.
The votes cast to elect the Class I directors were:
Name For Abstain
---- --- -------
Michael A. Tzannes 18,003,413 388,446
G. David Forney, Jr. 18,001,443 390,416
(2) Our 1996 Stock Option Plan was amended to increase the total number of
shares of our common stock that may be issued pursuant to options granted
under the Plan from 5,000,000 to 6,100,000, subject to adjustment in the
event of stock splits, stock dividends, recapitalizations and similar
events.
The votes cast to amend our 1996 Stock Option Plan were:
For Against Abstain
--- ------- -------
14,185,465 4,176,071 30,323
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ITEM 6:
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.None
(b) REPORTS ON 8-K
None.
* filed herewith- --------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AWARE, INC.
Date: MayAugust 10, 2000 By: /s/ Michael A. Tzannes
----------------------------------------------------------
Michael A. Tzannes, Chief Executive
Officer and President
Date: MayAugust 10, 2000 By: /s/ Richard P. Moberg
----------------------------------------------------------
Richard P. Moberg, Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
1820