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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.
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(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)
ONE OAK PARK, BEDFORD, MASSACHUSETTS, 01730
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(Address of Principal Executive Offices)
(Zip Code)
(617) 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 X
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Indicate the number of shares outstanding of the issuer's common stock as of
August 14,November 4, 1996:
CLASS NUMBER OF SHARES OUTSTANDING
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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
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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
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Total assets ........................................................................................................................................ $ 5,017,39040,431,237 $ 3,228,359
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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
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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)
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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
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The accompanying notes are an integral part of the financial statements.
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AWARE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIXNINE MONTHS ENDED
JUNESEPTEMBER 30, JUNESEPTEMBER 30,
------------------------- --------------------------------------------------- --------------------------
1996 1995 1996 1995
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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
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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
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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
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Net income (loss) ........................................................... $ 48,668261,683 $ (530,282)179,965 $ 89,819351,501 $ (617,495)(437,530)
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Net income (loss) per share ....................... $ 0.00 $ (0.26)................ $ 0.01 $ (0.30)0.01 $ 0.02 $ (0.21)
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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
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The accompanying notes are an integral part of the financial statements.
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AWARE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIXNINE MONTHS ENDED
JUNESEPTEMBER 30,
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1996 1995
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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)
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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) --
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----------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
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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
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Cash and cash equivalents, end of period ........................... $2,694,112 $2,055,875
==========..................... $31,483,407 $2,042,076
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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.
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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
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Raw materials ............................. $516,516 $39,713
Finished goods ............................ 368,900 --
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Total .............................. $885,416 $39,713
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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.
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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.
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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
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.
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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
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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
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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.
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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.
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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.
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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.
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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
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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
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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)
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