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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, 2001
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)
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, 2001:
CLASS NUMBER OF SHARES OUTSTANDING
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Common Stock, par value $0.01 per share 22,618,434 shares
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AWARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
TABLE OF CONTENTS
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
March 31, 2001 and December 31, 2000....................... 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 2001
and March 31, 2000......................................... 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2001
and March 31, 2000......................................... 5
Notes to Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk................................................17
PART II OTHER INFORMATION
Item 1. Legal Proceedings..........................................18
Item 6. Exhibits and Reports on Form 8-K...........................19
Signatures.................................................19
2
PART I. FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
AWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2001 2000
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents................................................ $59,257 $51,662
Short-term investments................................................... 2,239 5,841
Accounts receivable, net 3,132 5,200
Inventories.............................................................. 250 167
Deferred tax assets...................................................... 5,722 7,093
Prepaid expenses and other assets........................................ 364 300
---------------- ----------------
Total current assets 70,964 70,263
---------------- ----------------
Property and equipment, net................................................... 11,220 11,187
---------------- ----------------
Total assets....................................................... $82,184 $81,450
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $599 $483
Accrued expenses ........................................................ 391 332
Accrued compensation .................................................... 466 664
Accrued professional..................................................... 168 169
Deferred revenue......................................................... 53 1,469
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Total current liabilities........................................ 1,677 3,117
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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, 22,618,309 in 2001 and 22,606,277 in 2000...... 226 226
Additional paid-in capital.............................................. 76,927 76,809
Retained earnings...................................................... 3,354 1,298
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Total stockholders' equity...................................... 80,507 78,333
---------------- ----------------
Total liabilities and stockholders' equity....................... $82,184 $81,450
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The accompanying notes are an integral part of the financial statements.
3
AWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------------
2001 2000
------------------ ----------------
Revenue:
Product sales................................................. $1,452 $1,192
Contract revenue.............................................. 2,647 2,783
Royalties..................................................... 4,119 2,588
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Total revenue 8,218 6,563
Costs and expenses:
Cost of product sales......................................... 180 143
Cost of contract revenue...................................... 2,191 1,971
Research and development...................................... 1,837 1,414
Selling and marketing......................................... 672 667
General and administrative.................................... 705 672
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Total costs and expenses 5,585 4,867
Income from operations............................................ 2,633 1,696
Interest income................................................... 794 570
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Income before provision for income taxes and
cumulative effect of change in accounting principle........... 3,427 2,266
Provision for income taxes........................................ 1,371 -
------------------ ----------------
Income before cumulative effect of change in accounting
principle..................................................... 2,056 2,266
Cumulative effect of change in accounting principle............... - (1,618)
------------------ ----------------
Net income........................................................ $2,056 $648
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Basic income per share:
Income before cumulative effect of change in accounting
principle.................................................. $0.09 $0.10
Cumulative effect of change in accounting principle............ - ($0.07)
------------------ ----------------
Net income per share........................................... $0.09 $0.03
================== ================
Diluted income per share:
Income before cumulative effect of change in accounting
principle.................................................. $0.09 $0.09
Cumulative effect of change in accounting principle........... - ($0.06)
------------------ ----------------
Net income per share........................................... $0.09 $0.03
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Weighted average shares - basic 22,614 22,230
Weighted average shares - diluted 22,945 23,880
The accompanying notes are an integral part of the financial statements.
4
AWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------------
2001 2000
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Cash flows from operating activities:
Net income................................................. $2,056 $648
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................. 407 444
Increase (decrease) from changes in assets and
liabilities:
Accounts receivable.................................. 2,068 (1,216)
Inventories.......................................... (83) (76)
Deferred tax assets.................................. 1,371 -
Prepaid expenses..................................... (64) (135)
Accounts payable..................................... 116 (376)
Accrued expenses..................................... (140) (107)
Deferred revenue..................................... (1,416) 1,462
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Net cash provided by operating activities........ 4,315 644
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Cash flows from investing activities:
Purchases of property and equipment....................... (440) (283)
Net sales of short-term investments...................... 3,602 1,017
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Net cash provided by investing activities........ 3,162 734
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Cash flows from financing activities:
Proceeds from issuance of common stock................... 118 5,692
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Net cash provided by financing activities......... 118 5,692
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Increase in cash and cash equivalents......................... 7,595 7,070
Cash and cash equivalents, beginning of period................ 51,662 35,248
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Cash and cash equivalents, end of period...................... $59,257 $42,318
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The accompanying notes are an integral part of the financial statements.
5
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A) BASIS OF PRESENTATION
The accompanying unaudited consolidated balance sheets, statements of
operations, and statements of cash flows reflect all adjustments
(consisting only of normal recurring items) which are, in the opinion
of management, necessary for a fair presentation of financial position
at March 31, 2001, and of operations and cash flows for the interim
periods ended March 31, 2001 and 2000.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and
therefore do not include all information and footnotes necessary for a
complete presentation of operations, the financial position, and cash
flows of the Company, in conformity with generally accepted accounting
principles. The Company filed audited financial statements which
included all information and footnotes necessary for such presentation
for the three years ended December 31, 2000 in conjunction with its
2000 Annual Report on Form 10-K.
The results of operations for the interim period ended March 31, 2001
are not necessarily indicative of the results to be expected for the
year.
B) INVENTORY
Inventory consists primarily of the following (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
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Raw materials............................... $238 $142
Finished goods.............................. 12 25
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Total................................ $250 $167
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6
C) COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings
per share is computed by dividing net income by the weighted average
number of common shares outstanding plus additional common shares that
would have been outstanding if dilutive potential common shares had
been issued. For the purposes of this calculation, stock options are
considered common stock equivalents in periods in which they have a
dilutive effect. Stock options that are anti-dilutive are excluded from
the calculation.
Net income per share is calculated as follows (in thousands, except per
share data):
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2001 2000
-------------------------------
Net income......................................... $2,056 $648
Weighted average common shares outstanding......... 22,614 22,230
Additional dilutive common stock equivalents....... 331 1,650
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Diluted shares outstanding ........................ 22,945 23,880
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Net income per share - basic....................... $0.09 $0.03
Net income per share - diluted..................... $0.09 $0.03
Options to purchase shares of the Company's common stock totaling
2,758,691 and 766,754 at March 31, 2001 and March 31, 2000
respectively, were outstanding, but were not included in the
computation of diluted earnings per share as the inclusion of these
shares would have been anti-dilutive.
D) BUSINESS SEGMENTS
The Company organizes itself as one segment and conducts its operations
in the United States.
The Company sells its products and technology to domestic and
international customers. Revenues were generated from the following
geographic regions (in thousands):
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2001 2000
-------------------------------
United States $8,074 $5,443
Rest of World 144 1,120
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$8,218 $6,563
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7
E) RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2000 we changed our method of revenue recognition in
accordance with Securities and Exchange Commission Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements ("SAB 101"). The cumulative
effect of the change on prior years resulted in a charge to income of $1.6
million in the first quarter of 2000. Of the amount $0.9 million was recognized
as revenue during the first quarter of 2001. The Company has adjusted its
results for the three month period ended March 31, 2000 to conform with SAB 101.
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
SOME OF THE INFORMATION IN THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. YOU CAN IDENTIFY THESE
STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "MAY," "WILL," "EXPECT,"
"ANTICIPATE," "BELIEVE," "ESTIMATE," "CONTINUE" AND SIMILAR WORDS. YOU SHOULD
READ STATEMENTS THAT CONTAIN THESE WORDS CAREFULLY BECAUSE THEY: (1) DISCUSS OUR
FUTURE EXPECTATIONS; (2) CONTAIN PROJECTIONS OF OUR FUTURE OPERATING RESULTS OR
FINANCIAL CONDITION; OR (3) STATE OTHER "FORWARD-LOOKING" INFORMATION. HOWEVER,
WE MAY NOT BE ABLE TO PREDICT FUTURE EVENTS ACCURATELY. THE RISK FACTORS LISTED
IN THIS SECTION, AS WELL AS ANY CAUTIONARY LANGUAGE IN THIS FORM 10-Q, PROVIDE
EXAMPLES OF RISKS, UNCERTAINTIES AND EVENTS THAT MAY CAUSE OUR ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THE EXPECTATIONS WE DESCRIBE IN OUR FORWARD-LOOKING
STATEMENTS. YOU SHOULD BE AWARE THAT THE OCCURRENCE OF ANY OF THE EVENTS
DESCRIBED IN THESE RISK FACTORS AND ELSEWHERE IN THIS FORM 10-Q COULD MATERIALLY
AND ADVERSELY AFFECT OUR BUSINESS.
RESULTS OF OPERATIONS
PRODUCT SALES. Product sales consist primarily of revenue from the sale
of digital subscriber line ("DSL") equipment and compression software products.
The products that comprise DSL equipment sales are primarily test and
development systems.
Product sales increased 22% from $1.2 million in the first quarter of 2000 to
$1.5 million in the current year quarter. As a percentage of total revenue,
product sales were 18% for both the first quarter of 2000 and 2001. The dollar
increase was primarily due to a substantial increase in revenue from the sale of
compression software, which was partially offset by a decrease in revenue from
the sale of test and development systems. Compression software revenue was
higher due to a large electronic identification product sale. DSL test and
development system revenue decreased primarily due to a slowdown in capital
spending in the telecommunications industry in early 2001.
CONTRACT REVENUE. Contract revenue consists primarily of license and
engineering service fees that we receive under agreements with our customers to
develop ADSL chipsets.
Contract revenue decreased 5% from $2.8 million in the first quarter of 2000 to
$2.6 million in the current year quarter. As a percentage of total revenue,
contract revenue decreased from 42% in the first quarter of 2000 to 32% in the
current year quarter. The dollar decrease was primarily due to a slowdown in
spending in the semiconductor industry in general and in the ADSL chip market in
particular.
ROYALTIES. Royalties consist of royalty payments that we receive under
licensing agreements. We receive royalties from customers for the right to use
our technology in their chipsets or solutions.
Royalties increased 59% from $2.6 million in the first quarter of 2000 to $4.1
million in the current year quarter. As a percentage of total revenue, royalties
increased from 39% in the first
9
quarter of 2000 to 50% in the current year quarter. The increase in royalties
was primarily due to an increase in ADSL chipset sales by Analog Devices, Inc.
We believe that this increase was driven by strong global end-user demand for
ADSL service, in general, and ADI's success in South Korea and Europe, in
particular. While end-user demand for ADSL service remains strong, more ADSL
chipsets were sold in 2000 than were required by new subscribers. This imbalance
has led to overcapacity at ADSL service providers' central offices, as well as
excess chipset inventory at ADSL equipment manufacturers. Because of this,
chipset demand may be lower over the remaining quarters of 2001, which may cause
our royalty revenue to decline in those quarters relative to the first quarter
of 2001.
COST OF PRODUCT SALES. Cost of product sales consists primarily of the
cost of equipment sales as the cost of compression software sales is minimal.
Cost of product sales increased 26% from $143,000 in the first quarter of 2000
to $180,000 in the current year quarter. As a percentage of product sales, cost
of product sales were 12% in both the first quarter of 2000 and 2001. The
increase in cost of product sales dollars is primarily due to a lower percentage
of higher margin test and development system sales in the sales mix in the first
quarter of 2001.
COST OF CONTRACT REVENUE. Cost of contract revenue consists primarily
of salaries for engineers and expenses for consultants, recruiting, supplies,
equipment, depreciation and facilities associated with customer development
projects. Cost of contract revenue increased 11% from $2.0 million in the first
quarter of 2000 to $2.2 million in the current year quarter. As a percentage of
contract revenue, cost of contract revenue increased from 71% in the first
quarter of 2000 to 83% in the current year quarter. The dollar increase was
primarily due to chipset development projects with existing semiconductor
customers, and the nature of the customer projects we performed in the first
quarter of this year. We have engaged in a more diverse collection of projects
involving ASIC (application specific integrated circuit) core developments,
specific DSP-based code developments, and developments involving the combination
of ASIC cores and DSP code. These projects tend to have greater development
costs associated with them.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
consists primarily of salaries for engineers and expenses for consultants,
recruiting, supplies, equipment, depreciation and facilities related to
engineering projects to enhance and extend our telecommunications intellectual
property offerings, and our compression software technology. Research and
development expense increased by 30% from $1.4 million in the first quarter of
2000 to $1.8 million in the current year quarter. As a percentage of total
revenue, research and development expense was 22% in the first quarter of 2000
and 22% in the current year quarter. The dollar increase in spending was
primarily due to increased spending on non-customer-specific research and
development projects, including voice enabled DSL(VeDSL(TM)), Dr. DSL(R),
DMTflex(TM), FastADSL(TM) and other technology improvements.
SELLING AND MARKETING EXPENSE. Selling and marketing expense consists
primarily of salaries for sales and marketing personnel, travel, advertising and
promotion, recruiting, and facilities expense. Sales and marketing expense
increased 1% from $667,000 in the first quarter of 2000 to $672,000 in the
current year quarter. As a percentage of total revenue, sales and marketing
expense decreased from 10% in the first quarter of 2000 to 8% in the current
year quarter. The dollar increase was primarily due to the addition of sales
staff, which was mostly offset by lower spending on public relations.
10
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
consists primarily of salaries for administrative personnel, facilities costs,
and public company, bad debt, legal, and audit expenses. General and
administrative expense increased 5% from $672,000 in the first quarter of 2000
to $705,000 in the current year quarter. As a percentage of total revenue,
general and administrative expense decreased from 10% in the first quarter of
2000 to 9% in the current year quarter. The dollar increase is primarily due to
slightly higher spending across most administrative functions.
INTEREST INCOME. Interest income increased 39% from $570,000 in the
first quarter of 2000 to $794,000 in the current year quarter. The dollar
increase is primarily due to higher cash balances. Higher cash balances were
primarily due to positive cash flows from operations during 2000 and the first
quarter of 2001.
INCOME TAXES. Our effective income tax rate increased to 40% for the
first quarter of 2001 from 0% for the first quarter of 2000. Prior to the fourth
quarter of 2000, we did not make provisions for income taxes as our historical
net losses had resulted in tax loss and credit carryfowards that we used to
offset any income tax expense. In the fourth quarter of 2000, we determined that
based on our continuing profitability, it was more likely than not that we would
realize a portion of our tax assets, and recorded a deferred tax asset of $7.1
million as of December 31, 2000. We began recording income tax expense in the
first quarter of 2001 after utilizing all our tax carryforwards in the fourth
quarter of 2000 that would provide an income statement benefit.
Management will continue to evaluate, on a quarterly basis, the positive and
negative evidence affecting the realizability of that portion of its deferred
tax assets for which it has continued to establish a valuation reserve.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Effective January
1, 2000 we changed our method of revenue recognition in accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements ("SAB 101"). The cumulative effect of the
change on prior years resulted in a charge to income of $1.6 million in the
first quarter of 2000. Of the amount $0.9 million was recognized as revenue
during the first quarter of 2001. The Company has adjusted its results for the
three month period ended March 31, 2000 to conform with SAB 101.
11
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, we had cash, cash equivalents and short-term investments of
$61.5 million, which represents an increase of $4.0 million from December 31,
2000. The increase is primarily due to $4.3 million of cash provided from
operations, which was partially offset by $440,000 of cash invested in capital
equipment.
Cash provided from operations in the first three months of 2001 was primarily
the result of our profitable operations. Capital spending was primarily related
to the purchase of computer hardware and software, and laboratory equipment used
principally in engineering activities.
While we can not assure you that we will not require additional financing, or
that such financing will be available us, we believe that our cash, cash
equivalents and short-term investments will be sufficient to fund our operations
for at least the next twelve months.
RISK FACTORS
We believe that the occurrence of any one or some combination of the following
risk factors could seriously harm our business.
OUR QUARTERLY RESULTS ARE UNPREDICTABLE AND MAY FLUCTUATE SIGNIFICANTLY
Our quarterly revenue and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter. If our quarterly revenue or
operating results fall below the expectations of investors or public market
analysts or if we change our financial guidance for future results, the price of
our common stock could fall significantly.
Many of our expenses, such as employee compensation and facilities costs, are
relatively fixed. Moreover, our expense levels are based, in part, on our
expectations regarding future revenue increases. As a result, any shortfalls in
revenue in relation to our expectations could cause significant changes in our
operating results from quarter to quarter and could result in quarterly losses.
Other factors, many of which are outside our control, also could cause
variations in our quarterly revenue and operating results. Some of these factors
are: (i) the rate of market acceptance of DSL broadband access, generally, and
of our ADSL technologies in particular; (ii) demand for our licensees' chipsets
and products that incorporate our technology; (iii) the impact of channel
inventory on demand for ADSL chipsets; (iv) development by us or our competitors
of enhanced or alternative high-speed network access technologies; (v) the
extent and timing of new license transactions; (vi) regulatory developments; and
(vii) the timing and related costs of any acquisitions.
WE HAVE A UNIQUE BUSINESS MODEL
The success of our business model depends upon i) our ability to license our
technology to semiconductor and equipment companies, and ii) our customers'
willingness and ability to sell
12
products that incorporate our technology so that we may receive significant
royalties that are consistent with our plans and expectations.
Obtaining suitable licensees for our technology is difficult because of the
following features of our strategy: (i) we typically undergo a lengthy and
expensive process of building a relationship with a potential licensee before
entering into an agreement; (ii) we must persuade semiconductor and equipment
manufacturers with significant resources to rely on us for critical technology
on an ongoing basis rather than trying to develop similar technology internally;
and (iii) we must persuade potential licensees to bear development costs
associated with our technology applications and to make the necessary investment
to successfully produce chipsets and products using our technology.
Moreover, the success of our business model also depends on the receipt of
royalties from licensees. Royalties from our licensees are often based on the
selling prices of our licensees' chipsets and products, over which we have
little or no control. We also have little or no control over our licensees'
promotional and marketing efforts. Our licensees are not obligated to use our
technology, and generally are not required to pay us royalties unless they do
use our technology.
Our business could be seriously harmed if: (i) we cannot obtain suitable
licensees; (ii) our licensees fail to achieve significant sales of chipsets or
products incorporating our technology; or (iii) we otherwise fail to implement
our business strategy successfully.
WE DEPEND SUBSTANTIALLY ON A LIMITED NUMBER OF LICENSEES
There are a relatively limited number of semiconductor and equipment companies
to which we can license our DSL technology in a manner consistent with our
business model. If we fail to maintain relationships with our current licensees
or fail to establish a sufficient number of new licensee relationships, our
business could be seriously harmed. Also, we cannot assure you that our
prospective customers will not use their superior size and bargaining power to
demand license terms that are unfavorable to us.
WE DERIVE A SIGNIFICANT AMOUNT OF REVENUE FROM ONE CUSTOMER
In 2000 and the first quarter of 2001, we derived a significant amount of our
total revenue from Analog Devices, Inc. ADI was the first customer to license
ADSL technology from us in 1993 and their chipsets are the most mature
implementations of our technology in the market. Our royalty revenues to date
have been primarily due to sales of ADI chipsets that use our ADSL technology.
While we expect to see an increase in the number of our customers with ADSL
chipsets on the market, our revenue in the near term is highly dependent upon
ADI's ability to maintain their market share and pricing. To the extent that ADI
is unable to maintain market share or experiences significant price erosion in
its ADSL chipsets, our revenue could decrease.
OUR SUCCESS REQUIRES ACCEPTANCE OF OUR DSL TECHNOLOGY BY A VARIETY OF MARKET
PARTICIPANTS
Due to our business strategy, our success is dependent on our ability to
generate significant royalties from our licensing arrangements with
semiconductor manufacturers. Our ability to
13
generate significant royalties is materially affected by the acceptance of
high-speed access over telephone lines in general, and our DSL technology in
particular. Specifically, our DSL technology must be accepted by various market
participants, including:
| | 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
our DSL technology from our licensees for us to be successful. There
are other solutions available for equipment companies seeking to offer
high-speed network access products. Therefore, we face the risk that
equipment manufacturers will choose chipset solutions that do not
incorporate our technology. Generally, our ability to influence their
decision whether to adopt our technology is limited. If equipment
companies do not build equipment based on our DSL technology, our
business will be seriously harmed.
| | SERVICE PROVIDERS must deploy DSL services based on our technology. If
service providers do not deploy services based on DSL technology, our
business will be seriously harmed.
| | END USERS must purchase services that incorporate our technology. If
end users do not purchase services based on DSL technology, our
business will be seriously harmed.
OUR INTELLECTUAL PROPERTY IS SUBJECT TO LIMITED PROTECTION
Because we are a technology provider, our ability to protect our intellectual
property and to operate without infringing the intellectual property rights of
others is critical to our success. We regard our technology as proprietary, and
we have a number of patents and pending patent applications. We also rely on a
combination of trade secrets, copyright and trademark law and non-disclosure
agreements to protect our unpatented intellectual property. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our technology without authorization.
As part of our licensing arrangements, we typically work closely with our
semiconductor and equipment manufacturer licensees, many of whom are also our
potential competitors, and provide them with proprietary know-how necessary for
their development of customized chipsets based on our DSL technology. Although
our license agreements contain non-disclosure provisions and other terms
protecting our proprietary know-how and technology rights, it is possible that,
despite these precautions, some of our licensees might obtain from us
proprietary information that they could use to compete with us in the
marketplace. Although we intend to defend our intellectual property as
necessary, we cannot be sure that the steps we have taken will be adequate to
prevent misappropriation.
In the future, we may choose to bring legal action to enforce our intellectual
property rights. Any such litigation could be costly and time-consuming for us,
even if we were to prevail. Moreover, even if we are successful in protecting
our proprietary information, we cannot be sure that our competitors will not
independently develop technologies substantially equivalent or superior to our
technology. The misappropriation of our technology or the development of
competitive technology could seriously harm our business.
14
Our technology may infringe the intellectual property rights of others. A large
and increasing number of participants in the telecommunications industry have
applied for or obtained patents. Some of these patent holders have demonstrated
a readiness to commence litigation based on allegations of patent and other
intellectual property infringement. Third parties may assert exclusive patent,
copyright and other intellectual property rights to technologies that are
important to our business. From time to time, we have received claims from other
companies that our technology infringes their patent rights. While we believe
our technology offerings do not infringe the intellectual property of others, we
cannot be sure. Intellectual property rights can be uncertain and can involve
complex legal and factual questions. We may be unknowingly infringing the
proprietary rights of others, which could result in significant liability for
us. If we were found to have infringed any third party's patents, then we could
be subject to substantial damages and an injunction preventing us from
conducting our business.
OUR BUSINESS IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE
The telecommunications industry in general, and the market for high-speed
network access technologies in particular, are characterized by rapid
technological change, with new generations of products being introduced
regularly and with ongoing evolutionary improvements. We expect to depend on our
DSL technology for a substantial portion of our revenue for the foreseeable
future. Therefore, we face risks that others could introduce competing
technology that renders our DSL technology less desirable or obsolete. Also, the
announcement of new technologies could cause our licensees or their customers to
delay or defer entering into arrangements for the use of our existing
technology. Either of these events could seriously harm our business.
We expect that our business will depend to a significant extent on our ability
to introduce enhancements and new generations of our DSL technology as well as
new technologies that keep pace with other changes in the telecommunications
industry and that achieve rapid market acceptance. We must continually devote
significant engineering resources to achieving technical innovations. These
innovations are complex and require long development cycles. Moreover, we may
have to make substantial investments in technological innovations before we can
determine their commercial viability. We may lack sufficient financial resources
to fund future development. Also, our licensees may decide not to share certain
research and development costs with us. Revenue from technological innovations,
even if successfully developed, may not be sufficient to recoup the costs of
development.
WE FACE INTENSE COMPETITION FROM A WIDE RANGE OF MANUFACTURERS AND VENDORS
The markets for telecommunications and semiconductor products are intensely
competitive. We expect competition to increase in the immediate future, because
of the rapid growth projected across the DSL industry. Because of our strategy,
we face three different kinds of competition and competitors, including:
TECHNOLOGY LICENSING COMPETITION. Semiconductor and equipment
manufacturers that develop and sell DSL products may either develop DSL
technology internally or license it from third parties. While we know
of no other independent companies that license DSL technology, such as
Aware, we face intense competition from internal development teams
within potential customers. Some of these potential customers are some
of the largest semiconductor and
15
equipment companies in the world. Furthermore, our current customers
may choose to abandon joint development projects with us and develop
DSL solutions without using our technology.
DSL CHIPSET COMPETITION. Our customers' chipsets compete with chipsets
from other vendors of standards-based and non-standards-based DSL
chipsets. Some of our current and potential competitors are some of the
largest semiconductor companies in the world.
NETWORK COMPETITION. DSL services offered over copper telephone
networks compete with alternative broadband transmission technologies
that use other network architectures, such as cable modems and wireless
solutions.
Many of our current and prospective licensees, as well as chipset competitors
that compete with our semiconductor licensees have significantly greater
financial, technological, manufacturing, marketing and personnel resources than
we do. We cannot assure you that we will be able to compete successfully or that
competitive pressures will not seriously harm our business.
WE REQUIRE ADDITIONAL HIGHLY-QUALIFIED ENGINEERING PERSONNEL
Our future success will depend significantly on our ability to attract, motivate
and retain additional highly qualified engineering personnel. Competition for
qualified engineers is intense and there are a limited number of available
persons with the necessary knowledge and experience in DSL, chip design and
related technologies. Finding, training and integrating additional qualified
personnel is likely to be difficult and expensive, and we may be unable to do so
successfully. In the past, we have not been able to hire all of the engineers
that we wanted to hire. If we are unable to hire and retain a sufficient number
of engineers, our business could be seriously harmed.
OUR STOCK PRICE MAY BE VOLATILE
Volatility in our stock price may negatively impact the price you may receive
for your shares of common stock and increases the risk that we could be the
subject of costly securities litigation. The market price of our common stock
could fluctuate substantially based on a variety of factors, including: (i)
quarterly fluctuations in our operating results; (ii) changes in future
financial guidance that we may provide to investors and public market analysis;
(iii) changes in our relationships with our licensees; (iv) announcements of
technological innovations or new products by us, our licensees or our
competitors; (v) changes in DSL market growth rates as well as investor
perceptions regarding the investment opportunity that companies participating in
the DSL industry afford them; (vi) changes in earnings estimates by public
market analysts; (vii) key personnel losses; (viii) sales of common stock; and
(ix) developments or announcements with respect to industry standards, patents
or proprietary rights.
In addition, the equity markets have experienced volatility that has
particularly affected the market prices of equity securities of many high
technology companies and that often has been unrelated or disproportionate to
the operating performance of such companies. These broad market fluctuations may
adversely affect the market price of our common stock.
16
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk relates primarily to our investment portfolio, and
the effect that changes in interest rates would have on that portfolio.
Historically, our investment portfolio has included:
| | Cash and cash equivalents, which consist of financial instruments with
purchased maturities of three months or less; and
| | Short-term investments, which consist of financial instruments that
meet the high quality standards specified in our investment policy.
This policy dictates that all instruments mature in 18 months or less,
and limits the amount of credit exposure to any one issue, issuer, and
type of instrument.
We do not use derivative financial instruments for speculative or trading
purposes. As of March 31, 2001, all of our investments matured in twelve months
or less. Due to the short duration of the financial instruments we invest in, we
do not expect that an increase in interest rates would result in any material
loss to our investment portfolio.
17
PART II. OTHER INFORMATION
ITEM 1:
LEGAL PROCEEDINGS
From time to time we are involved in litigation incidental to the conduct of our
business. We are not party to any lawsuit or proceeding that, in our opinion, is
likely to seriously harm our business.
18
ITEM 6:
EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit 10.6* Aware, Inc. 2001 Nonqualified Stock Plan
(B) REPORTS ON 8-K
None.
- --------------------
* filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AWARE, INC.
Date: May 11, 2001 By: /s/ Michael A. Tzannes
----------------------
Michael A. Tzannes, Chief Executive
Officer
Date: May 11, 2001 By: /s/ Richard P. Moberg
---------------------
Richard P. Moberg, Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
19
EXHIBIT 10.6
AWARE, INC.
2001 NONQUALIFIED STOCK PLAN
SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS
The name of the plan is the Aware, Inc. 2001 Nonqualified Stock Plan
(the "Plan"). The purpose of the Plan is to encourage and enable directors,
officers and employees of Aware, Inc., a Massachusetts corporation (the
"Company"), and its Subsidiaries to acquire a proprietary interest in the
Company. It is anticipated that providing such persons with a direct stake in
the Company's welfare will assure a closer identification of their interests
with those of the Company and its stockholders, thereby stimulating their
efforts on the Company's behalf and strengthening their desire to remain with
the Company. The Company intends that this purpose will be effected by the
granting of Awards (as defined below) under the Plan.
The following terms shall be defined as set forth below:
"Affiliate" means any company in an "affiliated group," as such term is
defined in Section 1504(a) of the Code, which includes the Company.
"Award" or "Awards," except where referring to a particular category of
grant under the Plan, shall include Non-Statutory Stock Options, Restricted
Stock Awards, Unrestricted Stock Awards and Performance Share Awards.
"Board" means the Board of Directors of the Company.
"Cause" means (i) any material breach by the participant of any
agreement to which the participant and the Company are both parties, (ii) any
act (other than Normal Retirement) or omission to act by the participant which
may have a material and adverse effect on the Company's business or on the
participant's ability to perform services for the Company, including, without
limitation, the commission of any crime (other than minor traffic violations),
or (iii) any material misconduct or material neglect of duties by the
participant in connection with the business or affairs of the Company or any
Subsidiary or Affiliate of the Company.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor code, and related rules, regulations and interpretations.
"Committee" shall mean the Board or, if appointed by the Board, a
committee of not less than two (2) directors. It is the intention of the Company
that the Plan shall be administered by "non-employee directors" within the
meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, but
the authority and validity of any act taken or not taken by the Committee shall
not be affected if any director administering the Plan is not a non-employee
director.
"Disability" means disability as set forth in Section 22(e)(3) of the
Code.
"Effective Date" means April 10, 2001.
"Eligible Person" shall have the meaning set forth in Section 4.
"Fair Market Value" on any given date means the closing price per share
of the Stock on such date as reported by a nationally recognized stock exchange,
or, if the Stock is not listed on such an exchange, as reported by the Nasdaq
Stock Market, or, if the Stock is not quoted by the Nasdaq Stock Market, the
fair market value of the Stock as determined by the Committee.
"Non-Statutory Stock Option" means any stock option that is not an
incentive stock option as defined in Section 422 of the Code.
"Normal Retirement" means retirement from active employment with the
Company and its Subsidiaries in accordance with the retirement policies of the
Company and its Subsidiaries then in effect.
"Officer" means an officer as defined in Rule 16a-1(f) of the
Securities Exchange Act of 1934, as amended.
"Performance Share Award" means an Award granted pursuant to Section 8.
"Restricted Stock" shall have the meaning set forth in Section 6.
"Restricted Stock Award" means an Award granted pursuant to Section 6.
"Stock" means the common stock, $0.01 par value per share, of the
Company, subject to adjustments pursuant to Section 3.
"Stock Option" means any option to purchase shares of Stock granted
pursuant to Section 5.
"Subsidiary" means a subsidiary as defined in Section 424 of the Code.
"Unrestricted Stock Award" means an award granted pursuant to Section
7.
SECTION 2. ADMINISTRATION OF PLAN; COMMITTEE AUTHORITY TO SELECT PARTICIPANTS
AND DETERMINE AWARDS
(a) COMMITTEE. The Plan shall be administered by the Committee. The
Committee shall select one of its members as its chairman and shall hold its
meetings at such times and places as it shall deem advisable. A majority of its
members shall constitute a quorum, and all actions of the Committee shall
require the affirmative vote of a majority of its members. Any action may be
taken by a written instrument signed by all of the members, and any action so
taken shall be as fully effective as if it had been taken by a vote of a
majority of the members at a meeting duly called and held. Except as
specifically reserved to the Board under the terms of the Plan, the Committee
shall have full and final authority to operate, manage and administer the Plan
on behalf of the Company. Action by the Committee shall require the affirmative
vote of a majority of all members thereof.
(b) POWERS OF COMMITTEE. The Committee shall have the power and
authority to grant and modify Awards consistent with the terms of the Plan,
including the power and authority:
(i) to select the persons to whom Awards may from time to time
be granted;
(ii) to determine the time or times of grant, and the extent, if
any, of Non-Statutory Stock Options, Restricted Stock, Unrestricted Stock and
Performance Shares, or any combination of the foregoing, granted to any one or
more participants;
(iii) to determine the number of shares to be covered by any
Award;
(iv) to determine and modify the terms and conditions, including
restrictions, not inconsistent with the terms of the Plan, of any Award, which
terms and conditions may differ among individual Awards and participants, and to
approve the form of written instruments evidencing the Awards; PROVIDED,
HOWEVER, that no such action shall adversely affect rights under any outstanding
Award without the participant's consent;
(v) to accelerate the exercisability or vesting of all or any
portion of any Award, but only (A) upon the death, retirement or disability of
the participant, (B) in connection with any merger, consolidation, dissolution
or liquidation of the Company, (C) in the case of any Award vesting according to
the lapse of time, to vest not more quickly than ratably over a period of three
(3) years, or (D) in the case of any Award vesting according to performance
criteria established by the Committee, to vest no earlier than the later of the
first anniversary of the date of grant or the satisfaction of such performance
criteria;
(vi) subject to the provisions of Section 5(b), to extend the
period in which any outstanding Stock Option may be exercised;
(vii) to determine whether, to what extent, and under what
circumstances Stock and other amounts payable with respect to an Award shall be
deferred either automatically or at the election of the participant and whether
and to what extent the Company shall pay or credit amounts equal to interest (at
rates determined by the Committee) or dividends or deemed dividends on such
deferrals;
(viii) to delegate to other persons the responsibility for
performing ministerial actions in furtherance of the Plan's purpose; and
(ix) to adopt, alter and repeal such rules, guidelines and
practices for administration of the Plan and for its own acts and proceedings as
it shall deem advisable; to interpret the terms and provisions of the Plan and
any Award (including related written instruments); to make all determinations it
deems advisable for the administration of the Plan; to decide all disputes
arising in connection with the Plan; and to otherwise supervise the
administration of the Plan.
Notwithstanding the foregoing, the Committee shall not, without
stockholder approval, reduce the exercise price or otherwise reprice any
outstanding Award granted under the Plan. All decisions and interpretations of
the Committee shall be binding on all persons, including the Company and Plan
participants.
SECTION 3. SHARES ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION
(a) SHARES ISSUABLE. The maximum number of shares of Stock with respect
to which Awards may be granted under the Plan, subject to adjustment upon
changes in capitalization of the Company as provided in this Section 3, shall be
three million (3,000,000) shares of Stock. For purposes of this limitation, if
any shares of Stock covered by an Award granted under the Plan, or to which such
an Award relates, are repurchased or forfeited, or if an Award has expired,
terminated or been canceled for any reason whatsoever (other than by reason of
exercise or vesting), then such shares of Stock or the shares of Stock covered
by such Award, as the case may be, shall be added back to the shares of Stock
with respect to which Awards may be granted under the Plan. Subject to such
overall limitation, any type or types of Award may be granted with respect to
shares of Stock. Shares of Stock issued under the Plan may be authorized but
unissued shares or shares reacquired by the Company.
(b) LIMITATION ON AWARDS. Notwithstanding anything to the contrary set
forth herein, to the extent necessary to qualify as a "broadly based plan" under
the applicable Marketplace Rules of the Nasdaq Stock Market, Inc. ("Nasdaq"), no
more than forty-nine percent (49%) of the Awards hereunder shall be granted to
directors and Officers of the Company as measured on the earlier of the date of
the Plan's expiration or the third anniversary of the Effective Date, and on
each anniversary thereafter, unless otherwise approved by Nasdaq.
(c) STOCK DIVIDENDS, MERGERS, ETC. In the event that the Company
effects a stock dividend, stock split or similar change in capitalization
affecting the Stock, the Committee shall make appropriate adjustments in (i) the
number and kind of shares of stock or securities with respect to which Awards
may thereafter be granted (including without limitation the limitations set
forth in Sections 3(a) and (b) above), (ii) the number and kind of shares
remaining subject to outstanding Awards, and (iii) the option or purchase price
in respect of such shares. In the event of the merger, consolidation,
dissolution or liquidation of the Company, the Committee in its sole discretion
may, as to any outstanding Awards, make such substitution or adjustment in the
aggregate number of shares reserved for issuance under the Plan and in the
number and purchase price (if any) of shares subject to such Awards as it may
determine and as may be permitted by the terms of such transaction, or
accelerate, amend or terminate such Awards upon such terms and conditions as it
shall provide (which, in the case of the termination of the vested portion of
any Award, shall require payment or other consideration which the Committee
deems equitable in the circumstances).
(d) SUBSTITUTE AWARDS. The Committee may grant Awards under the Plan by
assumption of or in substitution for stock and stock-based awards granted or
issued by another company to its directors, officers, employees, consultants and
other service providers if such persons become Eligible Persons in connection
with an acquisition of that company or any division thereof by the Company,
whether by merger, consolidation, purchase of stock, purchase of assets or
otherwise. The Committee may direct that the substitute awards be granted on
such terms and conditions as the Committee considers appropriate in the
circumstances. Shares which may be delivered under such substitute awards may be
in addition to the maximum number of shares provided for in Section 3(a).
SECTION 4. ELIGIBILITY
Subject to the limitations set forth in Section 3(b), Awards may be
granted to directors, officers and employees of the Company and its Subsidiaries
("Eligible Persons").
SECTION 5. STOCK OPTIONS
The Committee may grant Stock Options to Eligible Persons pursuant to
the Plan. Any Stock Option granted under the Plan shall be in writing and in
such form as the Committee may from time to time approve. Stock Options granted
under the Plan shall be Non-Statutory Stock Options.
The Committee in its discretion may determine the effective date of
Stock Options. Stock Options granted pursuant to this Section 5 shall be subject
to the following terms and conditions and the terms and conditions of Section 9
and shall contain such additional terms and conditions, not inconsistent with
the terms of the Plan, as the Committee shall deem desirable:
(a) EXERCISE PRICE. The exercise price per share for the Stock
covered by a Stock Option granted pursuant to this Section 5 shall be determined
by the Committee at the time of grant; PROVIDED, HOWEVER, that the exercise
price shall not be less than Fair Market Value on the date of grant.
(b) OPTION TERM. The term of each Stock Option shall be fixed by the
Committee, but no Stock Option shall be exercisable more than ten (10) years
after the date the Stock Option is granted.
(c) EXERCISABILITY; RIGHTS OF A STOCKHOLDER. Stock Options shall
become vested and exercisable at such time or times, whether or not in
installments, and upon such conditions, as shall be determined by the Committee
at or after the grant date. Subject to Section 2(b)(v), the Committee may at any
time accelerate the exercisability of all or any portion of any Stock Option. An
optionee shall have the rights of a stockholder only as to shares acquired upon
the exercise of a Stock Option and not as to unexercised Stock Options.
(d) METHOD OF EXERCISE. Stock Options may be exercised in whole or in
part, by delivering written notice of exercise to the Company, specifying the
number of shares to be purchased. Payment of the purchase price may be made by
one or more of the following methods:
(i) in cash, by certified or bank check or other instrument
acceptable to the Committee;
(ii) with the consent of the Committee, in the form of shares of
Stock owned by the optionee for a period of at least six (6) months
and not then subject to restrictions. Such surrendered shares shall be
valued at Fair Market Value on the exercise date;
(iii) with the consent of the Committee, by the optionee
delivering to the Company a properly executed exercise notice together
with irrevocable instructions to a broker to promptly deliver to the
Company cash or a check payable and acceptable to the Company to pay
the purchase price; PROVIDED THAT in the event the optionee chooses to
pay the purchase price as so provided, the optionee and the broker
shall comply with such procedures and enter into such agreements of
indemnity and other agreements as the Committee shall prescribe as a
condition of such payment procedure. The Company need not act upon
such exercise notice until the Company receives full payment of the
exercise price; or
(iv) by any other means (including, without limitation, by
delivery of a promissory note of the optionee payable on such terms as
are specified by the Committee; PROVIDED, HOWEVER, that the interest
rate borne by such note shall not be less than the lowest applicable
federal rate, as defined in Section 1247(d) of the Code) which the
Committee determines are consistent with the purpose of the Plan and
with applicable laws and regulations.
The delivery of certificates representing shares of Stock to be
purchased pursuant to the exercise of a Stock Option will be contingent upon
receipt from the optionee (or a purchaser acting in his stead in accordance with
the provisions of the Stock Option) by the Company of the full purchase price
for such shares and the fulfillment of any other requirements contained in the
Stock Option or imposed by applicable laws and regulations, as determined by the
Committee in its sole discretion.
(e) NON-TRANSFERABILITY OF STOCK OPTIONS. Except as the Committee may
otherwise provide, no Stock Option shall be transferable other than by will or
by the laws of descent and distribution and all Stock Options shall be
exercisable, during the optionee's lifetime, only by the optionee.
(f) FORM OF SETTLEMENT. Shares of Stock issued upon exercise of a
Stock Option shall be free of all restrictions under the Plan, except as
otherwise provided in this Plan or in the terms of such Stock Option.
SECTION 6. RESTRICTED STOCK AWARDS
(a) NATURE OF RESTRICTED STOCK AWARD. The Committee in its discretion
may grant Restricted Stock Awards to any Eligible Person, entitling the
recipient to acquire, for a purchase price determined by the Committee (but not
less than Fair Market Value on the date of grant), shares of Stock subject to
such restrictions and conditions as the Committee may determine at the time of
grant ("Restricted Stock"), including continued employment and/or achievement of
pre-established performance goals and objectives.
(b) ACCEPTANCE OF AWARD. A participant who is granted a Restricted
Stock Award shall have no rights with respect to such Award unless the
participant shall have accepted the Award within ten (10) days (or such shorter
date as the Committee may specify) following the delivery of written notice to
the participant of the Award by making payment to the Company of the specified
purchase price of the shares covered by the Award and by executing and
delivering to the Company a written instrument that sets forth the terms and
conditions applicable to the Restricted Stock in such form as the Committee
shall determine.
(c) RIGHTS AS A STOCKHOLDER. Upon complying with Section 6(b) above, a
participant shall have all the rights of a stockholder with respect to the
Restricted Stock, including voting and dividend rights, subject to
non-transferability restrictions and Company repurchase rights described in this
Section 6 and subject to such other conditions contained in the written
instrument evidencing the Restricted Stock Award. Unless the Committee shall
otherwise determine, certificates evidencing shares of Restricted Stock shall
remain in the possession of the Company until such shares are vested as provided
in Section 6(e) below.
(d) RESTRICTIONS. Shares of Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise encumbered or disposed of except as
specifically provided herein. In the
event of termination of employment with the Company and its Subsidiaries for any
reason (including death, Disability, Normal Retirement, for Cause and voluntary
termination by the participant), the Company shall have the right, at the
discretion of the Committee, to repurchase shares of Restricted Stock with
respect to which conditions have not lapsed at their purchase price from the
participant or the participant's legal representative. The Company must exercise
such right of repurchase within sixty (60) days following such termination of
employment (unless otherwise specified in the written instrument evidencing the
Restricted Stock Award).
(e) VESTING OF RESTRICTED STOCK. The Committee at the time of grant
shall specify the date or dates and/or the attainment of pre-established
performance goals, objectives and other conditions on which the
non-transferability of the Restricted Stock and the Company's right of
repurchase shall lapse. Subsequent to such date or dates and/or the attainment
of such pre-established performance goals, objectives and other conditions, the
shares on which all restrictions have lapsed shall no longer be Restricted Stock
and shall be deemed "vested." Subject to Sections 2(b)(v) and 12, the Committee
at any time may accelerate such date or dates and otherwise waive or amend any
conditions of the Award.
(f) WAIVER, DEFERRAL AND REINVESTMENT OF DIVIDENDS. The written
instrument evidencing the Restricted Stock Award may require or permit the
immediate payment, waiver, deferral or investment of dividends paid on the
Restricted Stock.
SECTION 7. UNRESTRICTED STOCK AWARDS
(a) GRANT OR SALE OF UNRESTRICTED STOCK. The Committee in its
discretion may grant or sell to any Eligible Person shares of Stock free of any
restrictions under the Plan ("Unrestricted Stock") at a purchase price
determined by the Committee. Shares of Unrestricted Stock may be granted or sold
as described in the preceding sentence in respect of past services or other
valid consideration.
(b) RESTRICTIONS ON TRANSFERS. The right to receive Unrestricted Stock
may not be sold, assigned, transferred, pledged or otherwise encumbered, other
than by will or the laws of descent and distribution.
SECTION 8. PERFORMANCE SHARE AWARDS
A Performance Share Award is an award entitling the recipient to
acquire shares of Stock upon the attainment of specified performance goals. The
Committee may make Performance Share Awards independent of or in connection with
the granting of any other Award under the Plan. Performance Share Awards may be
granted under the Plan to any Eligible Person. The Committee in its discretion
shall determine whether and to whom Performance Share Awards shall be made, the
performance goals applicable under each such Award, the periods during which
performance is to be measured, the conditions under which such Award shall
terminate, and all other limitations and conditions applicable to the awarded
Performance Shares.
SECTION 9. TERMINATION OF STOCK OPTIONS
(a) STANDARD TERMINATION PROVISIONS:
(i) TERMINATION BY DEATH. If any participant's employment by
or services to the Company and its Subsidiaries terminates by reason of
death, any Stock Option owned by such participant may thereafter be
exercised to the extent exercisable at the date of death, by the legal
representative or legatee of the participant, for a period of one (1)
year (or such longer period as the Committee shall specify at any time)
from the date of death, or until the expiration of the stated term of
the Stock Option, if earlier.
(ii) TERMINATION BY REASON OF DISABILITY OR NORMAL RETIREMENT.
(A) Any Stock Option held by a participant whose
employment by or service to the Company and its Subsidiaries
has terminated by reason of Disability may thereafter be
exercised, to the extent it was exercisable at the time of
such termination, for a period of one (1) year (or such longer
period as the Committee shall specify at any time) from the
date of such termination, or until the expiration of the
stated term of the Stock Option, if earlier.
(B) Any Stock Option held by a participant whose
employment by or service to the Company and its Subsidiaries
has terminated by reason of Normal Retirement may thereafter
be exercised, to the extent it was exercisable at the time of
such termination, for a period of thirty (30) days from the
date of such termination, or until the expiration of the
stated term of the Stock Option, if earlier.
(C) The Committee shall have sole authority and discretion
to determine whether a participant's employment or services
have been terminated by reason of Disability or Normal
Retirement.
(D) Except as otherwise provided by the Committee at the
time of grant, the death of a participant during a period
provided in this Section 9(a)(ii) for the exercise of a Stock
Option shall extend such period for one (1) year from the date
of death, subject to termination on the expiration of the
stated term of the Stock Option, if earlier.
(iii) TERMINATION FOR CAUSE. If any participant's employment
by or service to the Company and its Subsidiaries has been terminated
for Cause, any Stock Option held by such participant shall immediately
terminate and be of no further force or effect; PROVIDED, HOWEVER, that
the Committee may, in its sole discretion at the time of such
termination, provide that such Stock Option can be exercised for a
period of up to sixty (60) days from the date of termination, or until
the expiration of the stated term of the Stock Option, if earlier.
(iv) OTHER TERMINATION. Unless otherwise determined by the
Committee, if a participant's employment by or services to the Company
and its Subsidiaries terminates for any reason other than death,
Disability, Normal Retirement, or for Cause, any Stock Option held by
such participant may thereafter be exercised, to the extent it was
exercisable on the date of such termination, for thirty (30) days from
the date of termination, or until the expiration of the stated term of
the Stock Option, if earlier.
(b) COMMITTEE DISCRETION. Notwithstanding the foregoing, the Committee
may grant Stock Options under the Plan which contain such terms and conditions
with respect to termination as the Committee, in its discretion, may from time
to time determine.
SECTION 10. TAX WITHHOLDING
(a) PAYMENT BY PARTICIPANT. Each participant shall, no later than the
date as of which the value of an Award or of any Stock or other amounts received
thereunder first becomes includable in the gross income of the participant for
Federal income tax purposes, pay to the Company, or make arrangements
satisfactory to the Committee regarding the payment of, any Federal, state,
local or other taxes of any kind required by law to be withheld with respect to
such income. The Company and its Subsidiaries shall, to the extent permitted by
law, have the right to deduct any such taxes from any payment of any kind
otherwise due to the participant.
(b) PAYMENT IN SHARES. A participant may elect, with the consent of the
Committee, to have such tax withholding obligation satisfied, in whole or in
part, by (i) authorizing the Company to withhold from shares of Stock to be
issued pursuant to an Award a number of shares with an aggregate Fair Market
Value (as of the date the withholding is effected) that would satisfy the
minimum withholding amount due with respect to such Award, or (ii) transferring
to the Company shares of Stock owned by the participant for a period of at least
six (6) months and with an aggregate Fair Market Value (as of the date the
withholding is effected) that would satisfy the minimum withholding amount due
with respect to such Award.
SECTION 11. TRANSFER, LEAVE OF ABSENCE, ETC.
For purposes of the Plan, a transfer to the employment of the Company
from a Subsidiary or from the Company to a Subsidiary, or from one Subsidiary to
another, shall not be deemed a termination of employment. Whether authorized
leave of absence, or absence on military or government service, shall constitute
termination of the employment relationship between the Company and the
participant shall be determined by the Committee at the time thereof.
SECTION 12. AMENDMENTS AND TERMINATION
The Board may at any time amend or discontinue the Plan and the
Committee may at any time, subject to Section 2, amend or cancel any outstanding
Award (or provide substitute Awards) for the purpose of satisfying changes in
law or for any other lawful purpose, but no such action shall adversely affect
rights under any outstanding Award without the holder's consent.
SECTION 13. STATUS OF PLAN
With respect to the portion of any Award that has not been exercised, a
participant shall have no rights greater than those of a general creditor of the
Company unless the Committee shall otherwise expressly determine in connection
with any Award or Awards. In its sole discretion, the Committee may authorize
the creation of trusts or other arrangements to meet the Company's obligations
to deliver Stock or make payments with respect to Awards hereunder,
PROVIDED that the existence of such trusts or other arrangements is consistent
with the provision of the foregoing sentence.
SECTION 14. LOCKUP AGREEMENT
The acceptance of any Award under this Plan by the participant or any
subsequent holder shall constitute the agreement of such person that, upon the
request of the Company or the underwriters managing any underwritten offering of
the Company's securities, such person will not, for a period of time (not to
exceed one hundred eighty (180) days) following the effective date of any
registration statement filed by the Company under the Securities Act of 1933, as
amended, sell, make any short sale of, loan, grant any option for the purchase
of, or otherwise dispose of any shares of Stock received pursuant to such Award,
without the prior written consent of the Company or such underwriters, as the
case may be, and that such person will execute and deliver to the Company or
such underwriters a written agreement to that effect, in such form as the
Company or such underwriters shall designate.
SECTION 15. GENERAL PROVISIONS
(a) NO DISTRIBUTION; COMPLIANCE WITH LEGAL REQUIREMENTS. The Committee
may require each person acquiring shares pursuant to an Award to represent to
and agree with the Company in writing that such person is acquiring the shares
without a view to distribution thereof, in such form as the Committee shall in
its sole discretion deem advisable.
No shares of Stock shall be issued pursuant to an Award until, in the
opinion of the Committee, all applicable securities laws and other legal and
stock exchange requirements have been satisfied. The Committee may require the
placing of such stop orders and restrictive legends on certificates for Stock
and Awards as it deems appropriate.
(b) DELIVERY OF STOCK CERTIFICATES. Delivery of stock certificates to
participants under this Plan shall be deemed effected for all purposes when the
Company or a stock transfer agent of the Company shall have delivered such
certificates in the United States mail, addressed to the participant, at the
participant's last known address on file with the Company.
(c) OTHER COMPENSATION ARRANGEMENTS; NO EMPLOYMENT RIGHTS. Nothing
contained in this Plan shall prevent the Board from adopting other or additional
compensation arrangements, including trusts, subject to stockholder approval if
such approval is required; and such arrangements may be either generally
applicable or applicable only in specific cases. The adoption of the Plan or any
Award under the Plan does not confer upon any employee any right to continued
employment with the Company or any Subsidiary.
SECTION 16. EFFECTIVE DATE OF PLAN
The Plan shall become effective upon its adoption by the Board.
SECTION 17. GOVERNING LAW
This Plan and each Award under the Plan shall be governed by, and
construed and enforced in accordance with, the substantive laws of the
Commonwealth of Massachusetts without regard to its principles of conflicts of
laws.