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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, 1999
COMMISSION FILE NUMBER 000-21129
AWARE, INC.
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(Exact Name of Registrant as Specified in Its Charter)
MASSACHUSETTS 04-2911026
(State or Other Jurisdiction of (I.R.S.
Incorporation or Organization) Employer Identification No.)
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
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Indicate the number of shares outstanding of the issuer's common stock as of
April 30, 1999:
CLASS NUMBER OF SHARES OUTSTANDING
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Common Stock, par value $0.01 per share 21,377,678 shares
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AWARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets as of
March 31, 1999 and December 31, 1998 .......................... 3
Consolidated Condensed Statements of Operations for the
Three Months Ended March 31, 1999
and March 31, 1998 ............................................ 4
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended March 31, 1999
and March 31, 1998 ............................................ 5
Notes to Consolidated Condensed Financial Statements .......... 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 7
Item 3 Quantitative and Qualitative Disclosures about
Market Risk ................................................... 17
PART II OTHER INFORMATION
Item 1 Legal Proceedings ............................................. 18
Item 6 Exhibits and Reports on Form 8-K .............................. 19
Signatures .................................................... 19
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PART I. FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
AWARE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
1999 1998
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ASSETS
Current assets:
Cash and cash equivalents............................................. $24,191,856 $23,512,242
Short-term investments................................................ 5,019,410 3,054,717
Accounts receivable (less allowance for doubtful
accounts of $100,000 in 1999 and $100,000 in 1998)................. 3,879,663 2,901,724
Inventories........................................................... 64,581 120,911
Prepaid expenses...................................................... 251,911 252,050
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Total current assets............................................ 33,407,421 29,841,644
Property and equipment, net of accumulated depreciation and
amortization of $3,286,990 in 1999 and $2,860,516 in 1998............. 10,229,841 10,320,581
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Total assets............................................................... $43,637,262 $40,162,225
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 763,463 $ 479,704
Accrued expenses ..................................................... 134,113 127,525
Accrued compensation ................................................. 447,694 324,669
Accrued professional.................................................. 72,416 84,000
Deferred revenue...................................................... 6,250 12,500
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Total current liabilities..................................... 1,423,936 1,028,398
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares authorized,
none outstanding.............................................. -- --
Common stock, $.01 par value; 30,000,000 shares authorized; issued
and outstanding, 21,234,313 in 1999 and 20,911,388 in 1998... 212,343 209,114
Additional paid-in capital........................................... 58,337,496 55,938,189
Accumulated deficit................................................. (16,336,513) (17,013,476)
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Total stockholders' equity................................... 42,213,326 39,133,827
Total liabilities and stockholders' equity................................. $43,637,262 $40,162,225
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The accompanying notes are an integral part of the
financial statements.
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AWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
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1999 1998
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Revenue:
Product sales ................................ $ 1,224,705 $ 741,458
Contract revenue ............................. 2,561,261 1,199,377
Royalties .................................... 520,302 63,181
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Total revenue ............................ 4,306,268 2,004,016
Costs and expenses:
Cost of product sales ........................ 246,007 377,133
Cost of contract revenue ..................... 1,759,059 1,099,075
Research and development ..................... 782,729 1,097,356
Selling and marketing ........................ 586,796 767,607
General and administrative ................... 593,135 555,971
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Total costs and expenses ................ 3,967,726 3,897,142
Income (loss) from operations .................... 338,542 (1,893,126)
Other income and expense ......................... 18,300 99,000
Interest income .................................. 320,121 338,689
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Net income (loss) before provision for income
taxes ......................................... 676,963 (1,455,437)
Provision for income taxes ....................... -- --
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Net income (loss) ................................ $ 676,963 $(1,455,437)
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Net income (loss) per share - basic .............. $ 0.03 $ (0.07)
Net income (loss) per share - diluted ............ $ 0.03 $ (0.07)
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Weighted average shares - basic .................. 21,097,978 19,718,820
Weighted average shares - diluted ................ 23,372,593 19,718,820
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The accompanying notes are an integral part of the
financial statements.
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AWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
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1999 1998
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Cash flows from operating activities:
Net income (loss).......................................... $ 676,963 $(1,455,437)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 426,474 336,879
Increase (decrease) from changes in assets and
liabilities:
Accounts receivable.................................. (977,939) (371,502)
Inventories.......................................... 56,330 42,132
Prepaid expenses..................................... 139 (25,890)
Accounts payable..................................... 283,759 (211,461)
Accrued expenses..................................... 118,029 (67,309)
Deferred revenue..................................... (6,250) -
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Net cash provided by (used in) operating activities.......... 577,505 (1,752,588)
Cash flows from investing activities:
Purchases of property and equipment....................... (335,734) (269,138)
Net (purchases) sales of short-term investments.......... (1,964,693) 562,165
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Net cash (used in) provided by investing activities (2,300,427) 293,027
Cash flows from financing activities:
Proceeds from issuance of common stock................... 2,402,536 532,306
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Increase (decrease) in cash and cash equivalents.............. 679,614 (927,255)
Cash and cash equivalents, beginning of period................ 23,512,242 23,496,508
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Cash and cash equivalents, end of period...................... $24,191,856 $22,569,253
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The accompanying notes are an integral part of the
financial statements.
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AWARE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
A) BASIS OF PRESENTATION
The accompanying unaudited consolidated 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 March 31, 1999, and of operations and cash flows
for the interim periods ended March 31, 1999 and 1998.
The accompanying unaudited consolidated 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 three years ended December 31, 1998 in conjunction with its 1998
Annual Report on Form 10-K.
The results of operations for the interim period ended March 31, 1999
are not necessarily indicative of the results to be expected for the
year.
B) INVENTORY
Inventory consists primarily of the following:
MARCH 31, DECEMBER 31,
1999 1998
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Raw materials............................... $ 8,103 $ 13,091
Work-in-process............................. -- --
Finished goods.............................. 56,478 107,820
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Total................................ $64,581 $120,911
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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
Certain statements contained in the following Management's Discussion
and Analysis of Financial Condition and Results of Operations, including
statements regarding the anticipated development and expansion of the Company's
business, the intent, belief or current expectations of the Company, its
directors or its officers, primarily with respect to the future operating
performance of the Company, and other statements contained herein regarding
matters that are not historical facts, are "forward-looking" statements. 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 include, but
are not limited to, the risk factors identified 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 Sales. Product sales consist primarily of revenue from the sale
of compression software products and digital subscriber line ("DSL") equipment.
DSL equipment sales include customer premise equipment, such as modems and
access routers, and engineering tools, such as DSL test and development systems.
Product sales increased 65.2% from $741,458 in the first quarter of 1998 to
$1,224,705 in the current year quarter. As a percentage of total revenue,
product sales decreased from 37.0% in the first quarter of 1998 to 28.4% in the
current year quarter. The dollar increase was primarily due to a substantial
increase in compression software revenue, and higher revenue from the sale of
test and development systems. Compression software revenue increased primarily
due to an OEM customer who began to ship the Company's radiology compression
software in higher volumes this quarter. Test and development system revenue
increased primarily due to the addition of more semiconductor customers over the
past year, and the availability of the Company's new Veritas992 DSL Lab Test
System during the first quarter of 1999.
Contract Revenue. Contract revenue consists primarily of license,
engineering development, and customer support fees that Aware is paid under
development and license agreements with semiconductor and equipment
manufacturers. The majority of contract revenue is due upon transfers of
pre-existing intellectual property, upon the completion of development
milestones, or the provision of customer support by Aware. Contract revenue also
includes an insignificant amount of revenue from U.S. government research
contracts.
Contract revenue increased 113.5% from $1,199,377 in the first quarter of 1998
to $2,561,261 in the current year quarter. As a percentage of total revenue,
contract revenue decreased slightly from 59.8% in the first quarter of 1998 to
59.5% in the current year quarter. The dollar increase was primarily due to a
substantial increase in contract revenue from the Company's main
telecommunications semiconductor customers. More specifically, contract revenue
growth was
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primarily due to new and ongoing projects with Lucent Microelectronics
("Lucent"), and the addition of Siemens AG ("Siemens") and STMicroelectronics
("ST") as new customers during the past year. The dollar increase in
telecommunications contract revenue was partially offset by a decline in U.S.
government research revenue. The Company completed its last U.S. government
research project in the first quarter of 1999, and anticipates that on-going
revenue from such projects will not continue in future periods.
Royalties. Royalties consist of royalty payments to Aware under
development and license agreements. Royalties are due from customers upon
shipment of chipset or equipment products that contain the Company's licensed
technology. Royalty payments are either based on a fixed dollar amount for each
unit of product shipped or a percentage of net product revenue.
Royalties increased from $63,181 in the first quarter of 1998 to $520,302 in the
current year quarter. As a percentage of total revenue, royalties increased from
3.2% in the first quarter of 1998 to 12.1% in the current year quarter. The
dollar increase was primarily due to DSL chipset royalty payments from two of
the Company's main semiconductor customers. The Company believes that higher
shipments of its customers' DSL chipsets to manufacturers of central office
equipment and personal computers was driven by initial deployments of DSL
services by the telecommunications industry.
Cost of Product Sales. Cost of product sales consists primarily of: (i)
cost of goods for purchases of finished inventory from third party suppliers,
(ii) Aware overhead costs related to testing and final assembly, and (iii) in
certain periods, provisions for excess and obsolete inventory.
Cost of product sales decreased 34.8% from $377,133 in the first quarter of 1998
to $246,007 in the current year quarter. As a percentage of product sales, cost
of product sales decreased from 50.9% in the first quarter of 1998 to 20.1% in
the current year quarter. Much of the percentage decrease is attributable to a
higher percentage of compression software in the product sales mix, which has
minimal related costs. DSL equipment cost of product sales as a percentage of
DSL equipment product sales was 87% in the first quarter of 1998 as compared to
41% in the first quarter of 1999. The percentage decline is primarily due to a
larger percentage of higher margin test and development system revenue in the
sales mix, and a substantial reduction of obsolescence provisions in the current
year period.
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 Aware's license and
development agreements and U.S. government contracts. Cost of contract revenue
increased 60.0% from $1,099,075 in the first quarter of 1998 to $1,759,059 in
the current year quarter. As a percentage of contract revenue, cost of contract
revenue decreased from 91.6% in the first quarter of 1998 to 68.7% in the
current year quarter. The dollar increase in cost of contract revenue was
primarily due to new and ongoing projects with Lucent, and the addition of new
customer projects with Siemens and ST. Increased spending related to these new
projects and customers was partially offset by slightly lower spending on U.S.
government research projects. The percentage decline is primarily due to the
Company's ability to leverage its technology over a larger customer base.
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 research
and development on Aware hardware products and basic technology. Research and
development expense decreased by 28.7% from $1,097,356 in the first quarter of
1998 to $782,729 in the current year quarter. As a percentage of total revenue,
research and development
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expense decreased from 54.8% in the first quarter of 1998 to 18.2% in the
current year quarter. The dollar decrease was primarily due to: (i) lower
spending related to the development of the Company's x200 Access Router, and
(ii) lower spending on non-customer-specific research and development projects.
Lower spending on these engineering efforts was partially offset by higher
spending related to the development of the Company's compression software
technology and Veritas992 DSL Lab Test System.
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. Selling and marketing expense
decreased 23.6% from $767,607 in the first quarter of 1998 to $586,796 in the
current year quarter. As a percentage of total revenue, sales and marketing
expense decreased from 38.3% in the first quarter of 1998 to 13.6% in the
current year quarter. The dollar decrease was primarily due to lower marketing
and support staff spending in the current year quarter, as a result of the
realignment of the sales and marketing organization in 1998 to better execute
the Company's intellectual property and software licensing strategy.
General and Administrative Expense. General and administrative expense
consists primarily of salaries for administrative personnel, facilities costs,
public company expenses and professional services, such as legal and audit
expenses. General and administrative expense increased 6.7% from $555,971 in the
first quarter of 1998 to $593,135 in the current year quarter. As a percentage
of total revenue, general and administrative expense decreased from 27.7% in the
first quarter of 1998 to 13.8% in the current year quarter. The dollar increase
is primarily due to higher public company expenses in the current year period.
Other income and expense. Other income consists of rental income from
real estate leases. Other income and expense decreased from $99,000 in the first
quarter of 1998 to $18,300 in the current year quarter. When the Company
completed the purchase of its headquarters building in July 1997, the terms of
the purchase agreement required Aware to sublet 24,000 square feet to the seller
for a period of 18 months. The sublease agreement terminated in January 1999 and
the Company does not anticipate any further sublease income in future periods.
The Company plans to begin occupying the additional 24,000 square feet starting
in the second half of 1999.
Interest Income. Interest income decreased 5.5% from $338,689 in the
first quarter of 1998 to $320,121 in the current year quarter. The modest dollar
decrease is primarily due to lower interest rates on cash and cash equivalents,
and short-term investments in the current period. The decrease in interest
income was partially offset by increased interest income stemming from higher
cash balances in the current period.
Income Taxes. Aware has made no provision for income taxes as its
historical net losses have resulted in tax loss carryforwards. At December 31,
1998, Aware had available federal net operating loss carryforwards of
approximately $30,304,000, which expire in 2003 through 2013, and federal
research and development credit carryforwards of approximately $1,268,000, which
expire in 2003 through 2013. At December 31, 1998, Aware also had available
state net operating loss carryforwards of approximately $24,141,000, which
expire in 1999 through 2003, and state research and development and investment
tax credit carryforwards of approximately $996,000, which expire in 2006 through
2013. Of the total net operating loss carryforwards, approximately $12,027,000
are attributable to the exercise of stock options, and the tax benefit from
these losses, when utilized, will be credited to additional paid-in capital.
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LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had cash, cash equivalents and short-term
investments of $29,211,266, an increase of $2,644,307 from December 31, 1998.
This increase is primarily due to $577,505 of cash provided from operations and
$2,402,536 of proceeds from the issuance of common stock under the Company's
stock option plans, which was partially offset by $335,734 of cash invested in
property and equipment.
Cash provided by operations was primarily the result of net income in the first
quarter of 1999. Property and equipment spending was primarily related to
laboratory equipment, computer equipment, and purchased software for engineering
activities.
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.
YEAR 2000 COMPLIANCE
The following information constitutes a "Year 2000 Readiness Disclosure" under
the Year 2000 Information and Readiness Disclosure Act. Many currently installed
software products and computer systems are coded to accept only two digit
entries in the date code field. These date code fields will need to accept four
digit entries to distinguish 21st century dates from twentieth century dates.
The use of software and computer systems that are not Year 2000 compliant could
result in system failures or miscalculations causing disruptions of operations,
including a temporary inability to process transactions, send invoices or engage
in similar normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced in order to comply with
Year 2000 requirements.
The Company has implemented a program to consider and address Year 2000 issues.
A project team led by members of the Company's management is making a detailed
assessment of (1) software that the Company licenses to third parties and (2)
software that the Company uses internally. The assessment is nearly complete and
the Company has begun implementing solutions to address Year 2000 issues that it
has identified.
Most of the software that the Company licenses to third parties is aimed at
transmitting or compressing data and is not date sensitive. The Company does
license some software that is date sensitive, which it believes is now Year 2000
compliant. Although the Company believes the software it licenses is either Year
2000 compliant or not affected by Year 2000 issues, the Company's software is
typically used in conjunction with other software and computer systems supplied
by third parties. The failure of other software or computer systems to be Year
2000 compliant when used in conjunction with the Company's software could cause
the entire application to perform improperly. Failure of applications that
contain the Company's software to be Year 2000 compliant could result in fewer
or no sales of those applications, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company has reviewed the software it uses internally to determine whether it
is Year 2000 compliant. In those instances in which installed software is not
already Year 2000 compliant, the Company is planning either to replace
non-compliant software with Year 2000 compliant software or to obtain patches
that will make such software Year 2000 compliant. The Company is in the process
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of obtaining and implementing the replacement software and patches, a process
that the Company expects to complete by mid 1999. Based on the foregoing, the
Company currently has no reason to believe that its internal software systems
will not be Year 2000 compliant.
To date, the Company has not incurred significant incremental costs in order to
comply with Year 2000 requirements and does not believe it will incur
significant incremental costs in the foreseeable future. However, there can be
no assurance that Year 2000 errors or defects will not be discovered in software
that the Company licenses or in its own internal software systems and, if such
errors or defects are discovered, there can be no assurance that the costs of
making such software Year 2000 compliant will not have a material adverse effect
on the Company's business, financial condition and results of operations.
Although the Company has assessed whether its internal software systems are Year
2000 compliant, it has not conducted a Year 2000 review of all of its vendors
and suppliers. Failure of systems maintained by the Company's vendors and
suppliers to operate properly with regard to the Year 2000 and thereafter could
require the Company to incur significant unanticipated expenses to remedy any
problems or replace affected vendors and suppliers that could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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 may not achieve profitable operations in any future period. The
Company has incurred operating losses in every fiscal year since inception. As
of March 31, 1999, the Company had an accumulated deficit of $16.3 million.
Substantial additional research and development spending will be required to
enhance the Company's core technology before market acceptance can be
determined. Although revenue has grown in recent quarters and the Company has
begun to achieve profitability, there can be no assurance that it will continue
to grow in future quarters or that it will grow enough to enable sustained
profitability.
Unpredictable and Fluctuating Operating Results
Because many of the Company's revenue components fluctuate and are difficult to
predict, and its expenses are largely independent of revenues in any particular
period, it is difficult for the Company to accurately forecast revenues and
profits or losses. If quarterly revenue or operating results fall below the
expectations of investors or public market analysts, the price of the Company's
common stock could fall significantly.
Other factors, many of which are outside of the Company's control, also could
cause variations in quarterly revenue and operating results. Some of these
factors are: (i) the rate of market acceptance of DSL broadband access,
generally, and of Aware's DSL-Lite and full-rate ADSL technology in particular;
(ii) demand for the Company's licensees' chipsets and products that incorporate
Aware technology, particularly DSL-Lite; (iii) development by Aware or its
competitors of enhanced or
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alternative high-speed network access technologies; (iv) changes in industry
standards governing DSL technology solutions; (v) the extent and timing of new
customer license transactions; (vi) changes in the Company's and system
companies' development schedules and levels of expenditure on research and
development; (vii) personnel changes, particularly those involving engineering
and technical personnel; (viii) costs associated with protecting the Company's
intellectual property; (ix) regulatory developments; and (x) general economic
trends.
New and Unproven Business Model
In the second quarter of 1998, the Company shifted its business strategy to
focus on licensing its DSL technology to semiconductor and equipment
manufacturers that incorporate the Company's technology into DSL chipsets and
products, and away from sales of DSL-based products such as modems. Other than
the Company's five-year relationship with Analog Devices, Aware does not have
extensive experience licensing its technology to third parties. Moreover,
obtaining suitable licensees for the Company's technology is difficult because
of the following features of its strategy: (i) the Company must typically
undergo a lengthy and expensive process of building a relationship with a
potential licensee before entering into an agreement; (ii) the Company must
persuade semiconductor and equipment manufacturers with significant resources to
rely on the Company for critical technology on an ongoing basis rather than
trying to develop similar technology internally; and (iii) the Company must
persuade potential licensees to bear development costs associated with the
Company's technology applications and to make the necessary investment to
successfully produce chipsets and products using Aware's technology. The
Company's success also depends on its ability to generate significant royalties
from its customer licensing arrangements. If the Company cannot obtain suitable
licensees or otherwise fails to implement its business strategy successfully,
there could be a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence Upon Limited Number of Licensees
There are a relatively limited number of larger semiconductor and equipment
companies to which the Company can license its DSL technology in a manner
consistent with its business model. There can be no assurance that customers
will not use their superior size and bargaining power to demand license terms
that are unfavorable to the Company.
Aware's royalties from its licensees are often based on the selling prices of
its licensees' chipsets and products, and the Company has little or no control
over such selling prices. The Company also has little or no control over its
licensees' promotional and marketing efforts. The Company's licensees are not
obligated to use Aware's technology, and generally are not required to pay
royalties to Aware unless they use the Company's technology. The failure of the
Company's licensees to achieve significant sales of chipsets and products
incorporating Aware's technology could materially and adversely affect the
Company's business.
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Dependence on Equipment Companies To Incorporate Aware's Technology
Equipment companies, particularly those that develop and market high-volume
business and consumer products such as central office line cards, modems and
personal computers, must purchase chipsets containing Aware's DSL technology
from Aware's licensees for the Company to be successful. There are other chipset
solutions available for equipment companies seeking to offer high-speed network
access products. Therefore, the Company faces the risk that equipment
manufacturers will choose chipset solutions that do not incorporate Aware's
technology. Also, the Company's ability to influence equipment manufacturers'
decision whether to adopt its technology is limited.
The Company also faces the risk that equipment companies that elect to
incorporate Aware's DSL technology into their products will not compete
successfully against other equipment companies. Many factors beyond Aware's
control could influence the success or failure of a particular equipment company
that adopts Aware's technology, such as: (i) competition from other businesses
in the same industry; (ii) market acceptance of the equipment company's
products; (iii) engineering, sales and marketing, and management capabilities of
the equipment company; (iv) technical challenges that an equipment company faces
during its product development cycle that are unrelated to Aware's technology;
and (v) the financial and other resources of the equipment company.
Therefore, even if equipment companies incorporate Aware's DSL technology into
their products, there can be no assurance that their products will achieve
commercial acceptance or result in significant royalties to Aware.
Dependence on Service Providers and End Users To Purchase Products and Services
That Incorporate Aware's Technology
The markets for products incorporating DSL technology and for DSL services are
new and rapidly evolving. As is typical of new and rapidly evolving markets,
demand for recently introduced DSL products and services is highly uncertain.
The market for products and services incorporating Aware's DSL technology may
not develop successfully.
The Company's future success depends substantially upon whether its DSL
technology gains widespread commercial acceptance by providers of high-speed
network access services. Although global standards for DSL technology have been
adopted, including the G.lite standard, service providers continue to evaluate
DSL and alternative technology solutions as options for "last-mile" data
transmission. There can be no assurance that service providers will deploy
Aware's DSL technology in their services.
Even if numerous service providers buy equipment that incorporates Aware's DSL
technology, the Company is also dependent on the acceptance of those high-speed
DSL service offerings by end user customers. There can be no assurance that end
user customers will accept DSL service offerings and products in sufficient
volumes to support the Company's business model.
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Dependence on Acceptance of DSL Technology For Broadband Access
In addition to DSL technology for telephone networks, high-speed network access
solutions have been developed for cable networks and wireless systems.
Furthermore, other alternative high-speed access technologies may be developed
in the future as well. Cable modem installations have begun in limited numbers,
and are expected to increase significantly for the foreseeable future. If
alternative high-speed network access technologies supplant telephone lines as
an access medium, the Company's business could be materially and adversely
affected.
Limited Intellectual Property Protection; Risk of Third Party Claims of
Infringement
Because Aware is a technology provider and does not have significant sales of
hardware products, its ability to protect its intellectual property and to
operate without infringing the intellectual property rights of others is
critical to its success. The Company regards its technology as proprietary, and
has a number of patents and pending patent applications. The Company also relies
on a combination of trade secrets, copyright and trademark law and
non-disclosure agreements to protect its unpatented intellectual property.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use Aware's technology without authorization. Although the
Company intends to defend its intellectual property as necessary, there can be
no assurance that the steps the Company has taken will be adequate to prevent
misappropriation.
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 the Company's business. From time to time, Aware has received
claims from other companies that its technology may infringe their patent
rights. While the Company believes its technology does not infringe the
intellectual property of others, there can be no assurance that it does not.
Intellectual property rights can be uncertain and can involve complex legal and
factual questions. The Company may be unknowingly infringing the proprietary
rights of others, which could result in significant liability. If Aware were
found to have infringed any third party's patents, then it could be subject to
substantial damages and an injunction preventing it from conducting its
business.
Rapid Technological Change; Reliance on Fundamental Technology; Importance of
Timely New Product Development
The telecommunications and semiconductor industries are characterized by rapid
technological change, with new generations of products and technology being
introduced periodically and with ongoing evolutionary improvements. The Company
has derived a substantial portion of its revenue from its DSL technology and
expects that this dependence on its fundamental technology will continue for the
foreseeable future. The introduction or market acceptance of competing
technology which renders the Company's DSL technology less desirable or obsolete
would have a rapid and material adverse effect on the Company's business,
results of operations and financial condition. The announcement of new
technologies by the Company could cause licensees or equipment companies to
delay or defer entering into arrangements for the use of the Company's
technology, which could
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have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company's operating results will depend to a significant extent on its
ability to introduce enhancements and new generations of its DSL technology
which keep pace with other changes in the semiconductor and telecommunications
industries and which achieve rapid market acceptance. The Company must
continually devote significant engineering resources to addressing the
ever-increasing need for technical innovations. Technical innovations of the
type that will be required for the Company to be successful are inherently
complex and require long development cycles, and there can be no assurance that
the Company's development efforts will ultimately be successful. In addition,
these innovations must be completed before changes in the semiconductor and
telecommunications industries have rendered them obsolete, must be available
when equipment companies require them, and must be sufficiently compelling to
cause semiconductor and equipment companies to enter into licensing arrangements
with Aware for the new technology. There can be no assurance that Aware will be
able to meet these requirements. Moreover, significant technological innovations
generally require a substantial investment before their commercial viability can
be determined. There can be no assurance that the Company will have the
financial resources necessary to fund future development, that the Company's
licensees will continue to share certain research and development costs with the
Company as they have in the past, or that revenues from enhancements or new
generations of the Company's technology, even if successfully developed, will
exceed the costs of development.
Competition
The semiconductor and telecommunications industries are intensely competitive
and have been characterized by price erosion, rapid technological change, short
product life cycles, cyclical market patterns and increasing foreign and
domestic competition. Many of the Company's competitors and potential
competitors have significantly greater financial, technological, manufacturing,
marketing and personnel resources than the Company. The Company's competitors
include vendors of standards-based and non-standards-based ADSL technology, as
well as vendors of alternative technologies, such as cable modems and wireless
services. Furthermore, the Company believes that its principal competition may
come from its licensees and prospective licensees, many of which are evaluating
and developing products based on alternative technologies. 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.
Dependence on Hiring and Retaining Personnel
The Company believes that its future success will depend significantly on its
ability to attract, motivate and retain additional highly-skilled technical,
managerial and marketing 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 the Company may be unable to do so successfully.
During 1997, 1998 and the first three months of 1999, the Company was not able
to hire all of the engineers it had contemplated in its business plans. If the
Company is unable to hire and retain a sufficient number of engineers, its
business could be materially and adversely affected.
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Volatility of Stock Price
The market price of the Company's common stock could fluctuate substantially
based on a variety of factors, including: (i) quarterly fluctuations in the
Company's operating results; (ii) changes in the Company's relationships with
its licensees; (iii) announcements of technological innovations or new products
by the Company, its licensees or its 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 the
Company's Common Stock.
Year 2000
See "Year 2000 Compliance" above for a description of the risks the Company
faces in connection with Year 2000 issues.
Government Regulation
The extensive regulation of the telecommunications industry by federal, state
and foreign regulatory agencies, including the Federal Communications
Commission, or FCC, and various state public utility and service commissions,
could affect the Company through the effects of such regulation on its licensees
and their customers. Changes in current or future laws or regulations, in the
United States or elsewhere, could materially and adversely affect the Company's
business.
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ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CASH AND CASH EQUIVALENTS
As of March 31, 1999, the Company is exposed to market risks which primarily
include changes in U.S. interest rates.
The Company maintains a portion of its cash and cash equivalents in financial
instruments with purchased maturities of three months or less. These financial
instruments are subject to interest rate risk and will decline in value if
interest rates increase. Due to the short duration of these financial
instruments, an immediate increase in interest rates would not have a material
effect upon the Company's financial position.
SHORT-TERM INVESTMENTS
The Company does not hold derivative financial instruments in its short-term
investment portfolio. Short-term investments consist of instruments that meet
high quality standards consistent with the Company's investment policy. The
Company's policy dictates that all short-term investments mature in 18 months or
less. All short-term investments in the Company's portfolio bear interest at
fixed rates and mature within one year. Due to the relatively short duration of
the financial instruments in the portfolio, an immediate increase in interest
rates would not have a material effect upon the Company's financial position.
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PART II. OTHER INFORMATION
ITEM 1:
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is
a party or to which any of its properties are subject which, either individually
or in the aggregate, are expected by the Company to have a material adverse
effect in its business, financial position or results of operations.
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PART II. OTHER INFORMATION
ITEM 6:
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 11.1* - Computation of Net Income (Loss) per Share
(b) REPORTS ON 8-K
None.
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* 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: May 10, 1999 By: /s/ Michael A. Tzannes
-----------------------------------
Michael A. Tzannes, Chief Executive
Officer and President
Date: May 10, 1999 By: /s/ Richard P. Moberg
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Richard P. Moberg, Vice President and Chief
Financial Officer (Principal Financial and
Accounting Officer)
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