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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 JUNESEPTEMBER 30, 1996

                        COMMISSION FILE NUMBER 000-21129


                                   AWARE, INC.
                                   ---------------------
             (Exact Name of Registrant as Specified in Its Charter)



      MASSACHUSETTS                                        04-2911026
      -------------                                        ----------
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
Incorporation or Organization)



                   ONE OAK PARK, BEDFORD, MASSACHUSETTS, 01730
                   -------------------------------------------
                    (Address of Principal Executive Offices)
                                   (Zip Code)


                                 (617) 276-4000
                                 --------------
              (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  X
                                    ---     ---

Indicate the number of shares outstanding of the issuer's common stock as of
August 14,November 4, 1996:

               CLASS                          NUMBER OF SHARES OUTSTANDING
               -----                          ----------------------------
Common Stock, par value $0.01 per share             18,392,39718,905,397 shares

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                                   AWARE, INC.
                                    FORM 10-Q
                    FOR THE QUARTER ENDED JUNESEPTEMBER 30, 1996


                                TABLE OF CONTENTS



                                                                          Page
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PART I   FINANCIAL INFORMATION

Item 1.  Condensed Financial Statements

         Condensed Balance Sheets as of JuneSeptember 30, 1996
         and December 31, 1995 ............................................................................      3

         Condensed Statements of Operations for the
         Three and SixNine Months Ended JuneSeptember 30, 1996
         and JuneSeptember 30, 1995 ...............................................................................      4

         Condensed Statements of Cash Flows for the
         SixNine Months Ended JuneSeptember 30, 1996 and
         Juneand September 30, 1995 ................................................      5

         Notes to Condensed Financial Statements ........................................      6

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations .......................      8.........................      7

PART II  OTHER INFORMATION

Item 4.    Submission of Matters to a Vote of Security Holders .......     13

Item 6.  Exhibits and Reports on Form 8-K ..........................     15............................     12

         Signatures ................................................     15..................................................     12


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                          PART I. FINANCIAL INFORMATION
                          ITEM 1: FINANCIAL STATEMENTS
                                   AWARE, INC.

                                    CONDENSED BALANCE SHEETS
                                          (UNAUDITED)
JUNESEPTEMBER 30, DECEMBER 31, 1996 1995 ------------------------- ------------ ASSETS Current assets: Cash and cash equivalents ....................................................................................................... $ 2,694,11231,483,407 $ 2,153,681 Short-term investments .................................................... 6,042,896 -- Accounts receivable (less allowance for doubtful accounts of $15,300 in 1996 and $5,300 in 1995) ............................. 833,798....................... 1,025,779 500,828 Unbilled accounts receivable ................................................... 109,648.............................................. 193,273 116,261 Inventories .................................................................... 504,119............................................................... 885,416 39,713 Deferred financing costs ....................................................... 371,240 - Prepaid expenses ............................................................... 32,098.......................................................... 81,366 14,471 ------------ ------------ Total current assets ..................................................... 4,545,015................................................... 39,712,137 2,824,954 Property and equipment, net of accumulated depreciation and amortization of $1,594,669$1,674,875 in 1996 and $1,480,614 in 1995 ...................... 472,375................. 719,100 403,405 ------------ ------------ Total assets ........................................................................................................................................ $ 5,017,39040,431,237 $ 3,228,359 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ......................................................................................................................... $ 777,215574,417 $ 111,519 Accrued expenses ............................................................... 39,472.......................................................... 144,317 65,404 Accrued compensation ........................................................... 89,964...................................................... 159,358 67,887 Accrued professional fees ...................................................... 18,926................................................. 33,451 14,000 Deferred revenue ......................................................................................................................... 50,000 50,000 ------------ ------------ Total current liabilities .............................................. 975,577961,543 308,810 Stockholders' equity: Preferred stock, $1.00 par value; no shares authorized ......................... - -.................... -- -- Preferred stock, $1.00 par value: Series B convertible preferred stock, 15,875 shares authorized, 15,875 issued and outstanding in 1995, none outstanding in 1996 ........ -..... -- 15,875 Series C convertible preferred stock, 13,525 shares authorized, 13,525 issued and outstanding in 1995, 5,410none outstanding in 1996 ....... 5,410...... -- 13,525 Series D convertible preferred stock, 74,800 shares authorized, 69,166 issued and outstanding in 1995, 13,012none outstanding in 1996 ...... 13,012-- 69,166 Series E convertible preferred stock, 45,000 shares authorized, 29,432 issued and outstanding in 1995, andnone outstanding in 1996 ......................... 29,432...... -- 29,432 Common stock, $.01 par value; 30,000,000 shares authorized; issued and outstanding, 1,166,960 in 1995 and 10,207,00718,905,397 in 1996 .............. 102,070........... 189,054 11,670 Additional paid-in capital .................................................... 14,830,134................................................ 49,957,203 13,807,945 Accumulated deficit ........................................................... (10,485,283)....................................................... (10,223,601) (10,575,102) Treasury stock ............................................................................................................................ (452,962) (452,962) ------------ ------------ Total stockholders' equity ............................................. 4,041,813........................................... 39,469,694 2,919,549 Total liabilities and stockholders' equity ............................................................................ $ 5,017,39040,431,237 $ 3,228,359 ============ ============
The accompanying notes are an integral part of the financial statements. 3 4 AWARE, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIXNINE MONTHS ENDED JUNESEPTEMBER 30, JUNESEPTEMBER 30, ------------------------- --------------------------------------------------- -------------------------- 1996 1995 1996 1995 ----------- --------------------- ----------- ---------- Revenue: Product ....................................................................... $ 144,894379,926 $ 23,10099,720 $ 150,019529,945 $ 224,801324,521 License and royalty ........................... 792,169 55,159 1,439,605 392,511.................... 782,047 349,729 2,221,652 742,240 Research and development ...................... 191,412 283,316 500,854 694,639............... 343,847 514,049 844,701 1,208,688 ----------- --------------------- ----------- ---------- Total revenue ............................. 1,128,475 361,575 2,090,478 1,311,951...................... 1,505,820 963,498 3,596,298 2,275,449 Costs and expenses: Cost of product revenue ....................... 94,460 14,567 98,580 99,008................ 266,125 46,195 364,705 145,203 Cost of research and development revenue ...... 144,973 242,046 392,587 605,390215,256 259,195 607,843 864,585 Research and development ...................... 437,872 361,344 789,497 707,916............... 593,570 236,960 1,383,067 944,876 Selling and marketing ......................... 188,857 112,338 330,548 202,598.................. 178,568 101,282 509,117 303,880 General and administrative .................... 244,013 193,794 443,315 375,390............. 248,051 164,832 691,366 540,222 ----------- --------------------- ----------- ---------- Total costs and expenses ................. 1,110,175 924,089 2,054,527 1,990,302.......... 1,501,570 808,464 3,556,098 2,798,766 Income (loss) from operations ..................... 18,300 (562,514) 35,951 (678,351).............. 4,250 155,034 40,200 (523,317) Interest income ................................... 30,368 32,232 53,868 60,856............................ 257,433 24,931 311,301 85,787 ----------- --------------------- ----------- ---------- Net income (loss) ........................................................... $ 48,668261,683 $ (530,282)179,965 $ 89,819351,501 $ (617,495)(437,530) =========== ===================== =========== ========== Net income (loss) per share ....................... $ 0.00 $ (0.26)................ $ 0.01 $ (0.30)0.01 $ 0.02 $ (0.21) =========== ===================== =========== ========== Weighted average common and common equivalent shares outstanding .................... 16,590,304 2,049,149 16,194,736 2,040,782............. 19,071,834 15,077,312 17,544,989 2,043,593 =========== ===================== =========== ==========
The accompanying notes are an integral part of the financial statements. 4 5 AWARE, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIXNINE MONTHS ENDED JUNESEPTEMBER 30, --------------------------- 1996 1995 --------------------- ---------- Cash flows from operating activities: Net income (loss) ........................................................................................ 351,501 $ 89,819 $ (617,495)(437,530) Depreciation and amortization ................................... 114,514 105,000............................. 194,720 150,282 Increase (decrease) from changes in assets and liabilities: Accounts receivable .......................................... (332,970) 281,492.................................... (524,951) 49,521 Unbilled accounts receivable ................................. 6,613 257,448........................... (77,012) 265,400 Inventories .................................................. (464,406) 5,905............................................ (845,703) (14,487) Prepaid expenses ............................................. (17,627) 26,092 Deferred offering costs ...................................... (371,240) -....................................... (66,895) 39,998 Accounts payable ............................................. 665,696 (26,651)....................................... 462,898 (18,392) Accrued expenses ............................................. 1,071 (396,267)....................................... 189,835 (348,597) Deferred revenue ............................................. -....................................... -- (39,720) --------------------- ---------- Net cash used in operating activities .............................. (308,530) (404,196)........................ (315,607) (353,525) Cash flows from investing activities: Purchases of property and equipment ............................ (183,484) (121,985)...................... (510,415) (186,550) Net purchases of short-term investments .................. (6,042,896) -- ----------- ---------- ----------Net cash used in investing activities ........................ (6,553,311) (186,550) Cash flows from financing activities: Proceeds from issuance of common stock ........................ 1,032,445 15,928 ----------.................. 36,198,644 16,023 ----------- ---------- Increase (decrease) in cash and cash equivalents ................... 540,431 (510,253)............. 29,329,726 (524,052) Cash and cash equivalents, beginning of period .................................... 2,153,681 2,566,128 --------------------- ---------- Cash and cash equivalents, end of period ........................... $2,694,112 $2,055,875 ==========..................... $31,483,407 $2,042,076 =========== ========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest .............................................................................. $ 628820 $ 578668 SUPPLEMENTAL NONCASH DISCLOSURES: Conversion of preferred stock to common stock ................................ $ 80,144 -127,998 -- Repurchase of Series D preferred shares for cancellation of notes ...................................... -................................ -- $ 457,062
The accompanying notes are an integral part of the financial statements. 5 6 AWARE, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) A) BASIS OF PRESENTATION The accompanying unaudited condensed 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 JuneSeptember 30, 1996, and of operations and cash flows for the interim periods ended JuneSeptember 30, 1996 and 1995. The accompanying unaudited condensed 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 years ended December 31, 1995 and December 31, 1994 in conjunction with a Registration Statement on Form S-1 (SEC File No. 333-6807), as declared effective on August 8, 1996. The results of operations for the interim period ended JuneSeptember 30, 1996 are not necessarily indicative of the results to be expected for the year. B) INVENTORY Inventory consists primarily of raw materials to manufacture modems. There were nominal amounts of work-in-process and finished goods inventory on hand at December 31, 1995 and June 30, 1996. Inventory consists primarily of the following:
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ Raw materials ............................. $516,516 $39,713 Finished goods ............................ 368,900 -- -------- ------- Total .............................. $885,416 $39,713 ======== =======
C) NET INCOME (LOSS) PER SHARE Net income (loss) per share is based on the weighted average number of common and dilutive common equivalent shares (common stock options and convertible preferred stock) outstanding. Common equivalent shares are not included in the per share calculations in fiscalfor the nine months ended September 30, 1995, periods because the effect of their inclusion would be antidilutive, except in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 83. The Bulletin requires all common shares issued and options to purchase shares of common stock granted by the Company during the twelve-month period prior to the filing of a proposed initial public offering to be included in the calculation as if they were outstanding for all periods. 6 7 D) SUBSEQUENT EVENT On August 14, 1996, the Company completed an initial public offering ("IPO") whereupon 3,400,000 shares of Common Stock were sold at a price of $10.00 per share. Net proceeds to the Company after underwriting discounts and commissions and related expenses were approximately $30,700,000. In addition, the Company granted to the underwriters of the IPO a 30-day option to purchase up to an additional 510,000 shares of Common Stock solely to cover over-allotments. Upon the closing of the IPO, all outstanding shares of the Company's Preferred Stock were automatically converted into shares of Common Stock. 7 8 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 The statements contained in the following Management's Discussion and Analysis of Financial Condition and Results of Operations which are not historical are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent the Company's present expectations or beliefs concerning future events, however the Company cautions that such statements are qualified by important factors. Such factors, which are identified under the heading "Risk Factors" below, could cause actual results to differ materially from those indicated in Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS Product Revenue. Product revenue consists primarily of revenue from the sale of tangible products, such as Asymmetric Digital Subscriber Line ("ADSL") modems and video editing chipset products, which are manufactured by the Company or third party suppliers. Product revenue increased by 527%281% from $23,100$99,720 in the secondthird quarter of 1995 to $144,894$379,926 in the current year quarter. Product revenue as a percentage of total revenue was 13%25% in the secondthird quarter of 1996 as compared to 6%10% in the corresponding quarter of 1995. The dollar increase, as well as the increase as a percentage of total revenue, is primarily due to the following reasons. Revenue in the secondthird quarter of 1995 period consisted primarily of revenue from the sale of video editing chipset products, which the Company discontinued in the fourth quarter of 1995. Revenue in the secondthird quarter of 1996 consisted primarily of revenue from the sale of ADSL modems, which the Company began shipping in the first quarter of 1996. Accordingly, a comparison of product revenue on a year over year basis is not particularly meaningful due to differences in the composition of product revenue. For the sixnine months ended JuneSeptember 30, product revenue decreasedincreased by 33%63% from $224,801$324,521 in 1995 to $150,019$529,945 in 1996. Product revenue as a percentage of total revenue was 7%15% for the first sixnine months of 1996 as compared to 17%14% in the corresponding period in 1995. The decrease in dollarA comparison of product revenue and ason a percentage of total revenuenine month period over period basis is primarilynot particularly meaningful due to a large video editing chipset saledifferences in the first quartercomposition of 1995 and a nominal amount of revenue from the sale of ADSL modems in the first quarter of 1996.product revenue. License and Royalty Revenue. License and royalty revenue consists primarily of revenue from the sale of intellectual property, such as hardware and software technology licenses, compression software licenses, and royalties from the sale of chipsets by customers who have licensed the Company's technology. As such revenue has only a nominal cost of sale associated with it, the Company does not report a separate cost of license and royalty revenue line in its Statements of Operations. 87 98 License and royalty revenue increased by 124% from $55,159$349,729 in the secondthird quarter of 1995 to $792,169$782,047 in the current year quarter. License and royalty revenue as a percentage of total revenue was 70%52% in the secondthird quarter of 1996 as compared to 15%36% in the corresponding quarter of 1995. For the sixnine months ended JuneSeptember 30, license and royalty revenue increased by 199% from $392,511$742,240 in 1995 to $1,439,605$2,221,652 in 1996. License and royalty revenue as a percentage of total revenue was 69%62% for the first sixnine months of 1996 as compared to 30%33% in the corresponding period of 1995. The dollar increase as well as the increase as a percentage of total revenue, in both the three and sixnine month periods, is primarily due to an increase in the sale of compression software licenses, and sales of ADSL and other broadband technology licenses to telephone company equipment suppliers, and sales of compression software licenses. Research and Development Revenue. Research and development revenue consists primarily of revenue from commercial contract engineering and development, and government research contracts. Research and development revenue decreased by 32%33% from $283,316$514,049 in the secondthird quarter of 1995 to $191,412$343,847 in the current year quarter. Research and development revenue as a percentage of total revenue was 17%23% in the secondthird quarter of 1996 as compared to 78%53% in the corresponding quarter of 1995. The dollar decrease is primarily due to lower revenue from commercial research and development contracts, as well as lower revenue from U.S. government research contracts. For the sixnine months ended JuneSeptember 30, research and development revenue decreased by 30% from $694,639$1,208,688 in 1995 to $500,854$844,701 in 1996. Research and development revenue as a percentage of total revenue was 24% for the first sixnine months of 1996 as compared to 53% in the corresponding period of 1995. The dollar decrease as well as the decrease as a percentage of total revenue, in the three and six month periods, is primarily due to lower revenue from commercial research and development contracts, which was partially offset by a modest increase in revenue from U.S. government research contracts. TheFor both the three and nine month periods, the decrease in research and development revenue as a percentage of total revenue was also driven by the Company's decision to shift its business away from contract research activities toward the sale of commercial technology licenses.licenses, which resulted in lower research and development revenue and higher product and license and royalty revenue. Cost of Product Revenue. Cost of product revenue consists primarily of direct material, direct labor and overhead costs to produce the Company's products, and cost of goods for purchases of finished goods inventory from third party suppliers. Cost of product revenue as a percentage of product revenue was 65%70% in the secondthird quarter of 1996 as compared to 63%46% in the prior year quarter. Cost of product revenue as a percentage of product revenue was 66%69% for the first sixnine months of 1996 as compared to 44%45% in the corresponding 1995 period. In the three and sixnine month periods in 1996, the percentages primarily reflect the cost of modem revenue. In the three and sixnine month periods in 1995, the percentages primarily reflect the cost of video editing chipset revenue. The lowerAccordingly, a comparison of cost of product revenue on a year over year basis is not particularly meaningful due to differences in the first six monthscomposition of 1995 reflects lower costs from the Company's video editing chipset supplier due to a volume purchase.product revenue. Cost of Research and Development Revenue. Cost of research and development revenue consists primarily of direct labor, direct material and travel expenses associated with commercial contract engineering and development, and government research contracts. As a percentage of research and development revenue, related costs decreasedincreased from 85%50% in the secondthird quarter of 1995 to 76%63% in the current year quarter, and decreased from 87% in the first six months of 1995 to 78% in the corresponding 1996 period.quarter. The slight improvementincrease in cost as a percentage of research and 8 9 development revenue is primarily attributable to the mix of commercial and U.S. government research contracts, and the profitability of individual contracts. The cost of research and development revenue as a percentage of research and development revenue was unchanged at 72% for the nine month periods in 1995 and 1996. Research and Development Expense. Research and development expense consists primarily of employee and consultant costs, supplies and allocated facilities costs related to the development and enhancement of the Company's products and technology. Research and 9 10 development expense increased by 21%151% from $361,344$236,960 in the secondthird quarter of 1995 to $437,872$593,570 in the current year quarter. For the sixnine month period ended JuneSeptember 30, research and development expense increased 12%46% from $707,916$944,876 in 1995 to $789,497$1,383,067 in 1996. For the three and sixnine month periods, the increase in research and development expense is primarily attributable to higher spending on projects to develop, enhance, and enhancecommercialize the Company's ADSL and Hybrid Fiber Coaxial technology. Higher spending on these projects was partially offset by lower spending as a result of the discontinuance of research involving audio compression technology and lower facilities costs as a result of the relocation of the Company's facilities in June 1995. Selling and Marketing Expense. Selling and marketing expense consists primarily of salaries for sales and marketing personnel, travel, product advertising, and allocated facilities expense. Selling and marketing expense increased 68%76% from $112,338$101,282 in the secondthird quarter of 1995 to $188,857$178,568 in the current year quarter. For the sixnine month period ended JuneSeptember 30, sales and marketing expense increased 63%68% from $202,598$303,880 in 1995 to $330,548$509,117 in 1996. For the three and sixnine month periods, the increase is primarily due to the addition of sales personnel and increased product advertising related to the introduction of the Company's ADSL modem. General and Administrative Expense. General and administrative expense consists primarily of salaries for administrative officers and support personnel, allocated facilities costs, and professional services, such as legal and audit expenses. General and administrative expense increased by 26%51% from $193,794$164,832 in the secondthird quarter of 1995 to $244,013$248,051 in the current year quarter. For the sixnine month period ended JuneSeptember 30, general and administrative expense increased 18%28% from $375,390$540,222 in 1995 to $443,315$691,366 in 1996. For the three and sixnine month periods, the increase is primarily due to additions to the Company's management team, as well as legal expenses, and, with respect to the three month period, expenses associated with patent filings and other general matters.becoming a public company. Interest Income. Interest income decreased 6%increased from $32,232$24,931 in the secondthird quarter of 1995 to $30,368$257,433 in the current year quarter, primarily as a result of lower averagehigher cash balances.balances due to the investment of net proceeds from the Company's initial public offering ("IPO"). For the sixnine months ended JuneSeptember 30, interest income decreased 11%increased from $60,856$85,787 in 1995 to $53,868$311,301 in 1996, also primarily as a result of lower average cash balances.interest earned on the IPO proceeds. Income Taxes. The Company has not provided for income taxes as it has a history of net losses, which has resulted in tax loss carryforwards. As of December 31, 1995, the Company had net operating loss carryforwards of approximately $9,700,000 and approximately $576,000 of research and development tax credit carryforwards to offset future federal taxable income. To the extent not utilized, the net operating loss and tax credit carryforwards expire between 2003 and 2010. 9 10 LIQUIDITY AND CAPITAL RESOURCES Cash, and cash equivalents and short-term investments increased by $540,431$35,372,622 to $2,694,112$37,526,303 at JuneSeptember 30, 1996. The primary source of cash flow in the first sixnine months of 1996 was approximately $36,199,000 of net proceeds from the issuance of common stock. In the third quarter of 1996, the Company completed an initial public offering of its common stock. The Company sold 3,910,000 shares and realized net proceeds of approximately $35,162,000. The Company also realized approximately $1,000,000 of proceeds from the issuance of common stock under the Company'sin connection with its stock option plans. ProceedsNet proceeds from the sale of common stock were offset by $308,530$315,607 of cash used in operations, and $183,484$510,415 of cash invested in property and equipment. 10 11 Funds used in operations were principally attributable to an increase in inventory. The Company purchased raw materials to manufacture ADSL modems in anticipation of increased revenuesales from such products. The increase in property and equipment was primarily related to purchases of computer and other equipment used in research and development activities. On August 14, 1996, the Company completed an initial public offering of its common stock. The Company sold 3,400,000 shares and realized net proceeds of approximately $30,700,000. The increase in deferred offering costs and accounts payable at June 30, 1996 is primarily due to unpaid costs related to the public offering. These financing costs will be paid and netted against the proceeds from the public offering in the third quarter of 1996. While there can be no assurance that the Company will not require additional financing, or that such financing will be available to the Company, the Company believes that its financial resources are adequate to meet its liquidity requirements over the next twelve months. RISK FACTORS The Company believes that the occurrence of any one or some combination of the following risk factors could have a material adverse effect on the Company's business, financial condition and results of operations. History of Operating Losses The Company has incurred net losses in every fiscal year since inception. Substantial additional research and development expenses to enhance the performance and reduce the manufacturing costs of the Company's products will be required before market acceptance can be determined. There can be no assurance that the Company will achieve profitable operations in any future period. Dependence on Acceptance of ADSL Technology The Company's future success is substantially dependent upon whether ADSL technology gains widespread commercial acceptance by the telephone companies ("telcos") and end users of telco services. The Company has invested substantial resources in the development of ADSL technology implemented through the Discrete Multi-Tone ("DMT") modulation technique. Telcos have only begun evaluating DMT-based ADSL technology, and there can be no assurance that the telcos will pursue the deployment of such ADSL technology. 10 11 Reliance on Telcos; Dependence on a Limited Number of Customers Even if telcos adopt policies favoring full-scale implementation of ADSL technology, there can be no assurance that sales of the Company's ADSL products will become significant. The Company's customers, including Regional Bell Operating Companies ("RBOCs"), OEMs and other telcos, are relatively few in number and have significantly greater resources than that of the Company. The Company has limited ability to influence or control decisions made by these customers. There can be no assurance that these customers will not use their size and bargaining power to demand unfavorable terms and conditions (including price), seek alternative suppliers, or undertake internal development of products comparable to those of the Company's. 11 12 Substantial Dependence on Analog Devices, Inc. The Company and Analog Devices, Inc. ("ADI") have entered into a series of agreements to develop integrated chipsets based on the Company's technology. The inability or refusal of ADI to manufacture, market and sell such chipsets in substantial quantities would prevent telcos from adopting the Company's technology and would have a material adverse effect on the Company's business. There can be no assurance that ADI will succeed or, in the event that ADI is not successful, that the Company would be able to find a substitute chipset manufacturer without significant delays. Proprietary Technology; Risk of Third Party Claims of Infringement The Company's ability to compete effectively will depend to a significant extent on its ability to protect it proprietary information and to operate without infringing the intellectual property rights of others. Despite the precautions the Company has taken to protect its intellectual property, there can be no assurance that such steps will be adequate to prevent the misappropriation of its technology. In addition, third parties may assert exclusive patent, copyright and other intellectual property rights to technologies that are important to the Company. There can be no assurance that other third parties will not assert such claims against the Company in the future. Rapid Technological Change; Dependence on New Products The markets for the Company's products are characterized by rapid technological advances, evolving industry standards, changes in end-user requirements, frequent new product introductions, and evolving telco offerings. The Company's business will be materially adversely affected if technologies or standards on which Company's products are based become obsolete, or if the Company is unable to develop and introduce new products in a timely manner in response to changing market conditions. Competition The markets for the Company's products are intensely competitive and the Company expects competition to increase in the immediate future. Many of the Company's competitors and potential competitors, including the RBOCs and AT&T Paradyne Corporation, have significantly greater financial, technological, manufacturing, marketing and personnel resources than the Company. There can be no assurance that the Company will be able to compete successfully or that competition will not adversely affect the Company's business. 11 12 Manufacturing The Company has limited experience in manufacturing or in supervising the manufacture of its products, including its ADSL Internet Access Modem. There can be no assurance that the Company will not encounter significant difficulties in manufacturing or controlling the quality of its products, or that its products will be reliable in the field. 12 13 PART II. OTHER INFORMATION ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) On May 23, 1996, the Company held a special stockholders' meeting in lieu of an annual meeting of stockholders. Matters voted on and the results of those votes are set forth below: (1) The votes cast to adopt Amended and Restated Articles of Organization were: For: 13,476,117 Against: 0 Abstain: 0 Broker non-vote: 0 (2) The votes cast to adopt Amended and Restated By-Laws were: For: 13,476,117 Against: 0 Abstain: 0 Broker non-vote: 0 (3) The votes cast to ratify the selection of Deloitte & Touche LLP as the Company's independent auditors were: For: 13,476,117 Against: 0 Abstain: 0 Broker non-vote: 0 (4) The votes cast to adopt the Directors' Non-Statutory Option Plan were: For: 588,800 Against: 1,346,500 Abstain: 11,540,817 Broker non-vote: 0 (5) The votes cast to elect directors were:
Name For Against Abstain Broker non-vote - ------------------------------------------------------------------------------------------- James C. Bender 13,476,117 0 0 0 John K. Kerr 13,175,317 0 300,800 0 William N. Sick, Jr. 13,175,317 0 300,800 0 John S. Stafford, Jr. 13,476,117 0 0 0 Charles K. Stewart 13,476,117 0 0 0
(6) The votes cast to ratify and confirm all acts and deeds of all of the officers and directors of the Company from inception to present were: For: 13,175,317 Against: 0 Abstain: 300,800 Broker non-vote: 0 13 14 PART II. OTHER INFORMATION ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED) (b) On June 6, 1996, the Company held a special stockholders' meeting. Matters voted on and the results of those votes are set forth below: (1) The votes cast to adopt Amended and Restated Articles of Organization were: For: 12,547,025 Against: 0 Abstain: 100 Broker non-vote: 0 (2) The votes cast to adopt the 1996 Stock Option Plan were: For: 12,475,312 Against: 100 Abstain: 71,713 Broker non-vote: 0 (3) The votes cast to adopt the 1996 Employee Stock Purchase Plan were: For: 12,544,525 Against: 2,500 Abstain: 100 Broker non-vote: 0 (4) The votes cast to adopt Amended and Restated Articles of Organization to be effective following the closing of the Company's initial public offering were: For: 12,547,025 Against: 0 Abstain: 100 Broker non-vote: 0 14 15 PART II. OTHER INFORMATION ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a)(A) EXHIBITS Exhibit 3.3* - Amended and Restated By-Laws Exhibit 11.1* - Computation of Net Income (Loss) per Share (b)(B) REPORTS ON 8-K None. - -------------------- *filed herewith SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 29,November 8, 1996 AWARE, INC. By: /s/ James C. Bender ----------------------------------------------------------- James C. Bender, Chief Executive Officer and President Date: August 29,November 8, 1996 /s/ Richard P. Moberg ----------------------------------------------------------------- Richard P. Moberg, Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 1513