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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 SEPTEMBER 30, 2005
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2). YES X NO
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES NO X
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Indicate the number of shares outstanding of the issuer's common stock as of
October 21, 2005:
CLASS NUMBER OF SHARES OUTSTANDING
----- ----------------------------
Common Stock, par value $0.01 per share 23,171,143 shares
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AWARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2005
TABLE OF CONTENTS
PAGE
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
September 30, 2005 and December 31, 2004.......................... 3
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2005
and September 30, 2004............................................ 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2005
and September 30, 2004............................................ 5
Notes to Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk....................................................... 22
Item 4. Controls and Procedures........................................... 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................. 24
Item 6. Exhibits ......................................................... 25
Signatures........................................................ 25
2
PART I. FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
AWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2005 2004
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents............................................ $13,374 $7,482
Short-term investments............................................... 23,143 27,483
Accounts receivable, net............................................. 3,606 3,070
Inventories.......................................................... 54 143
Prepaid expenses and other current assets............................ 656 417
--------------- ---------------
Total current assets............................................. 40,833 38,595
--------------- ---------------
Property and equipment, net............................................. 8,063 8,287
Investments............................................................. 1,001 3,301
Other assets, net....................................................... 322 -
--------------- ---------------
Total assets..................................................... $50,219 $50,183
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $451 $361
Accrued expenses .................................................... 144 157
Accrued compensation ................................................ 939 625
Accrued professional................................................. 257 169
Deferred revenue..................................................... 105 115
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Total current liabilities........................................ 1,896 1,427
--------------- ---------------
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares authorized,
none outstanding................................................. - -
Common stock, $.01 par value; 70,000,000 shares authorized; issued
and outstanding, 23,171,143 in 2005 and 22,908,918 in 2004...... 232 229
Additional paid-in capital........................................... 78,721 77,882
Accumulated deficit.................................................. (30,630) (29,355)
--------------- ---------------
Total stockholders' equity...................................... 48,323 48,756
--------------- ---------------
Total liabilities and stockholders' equity....................... $50,219 $50,183
=============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
3
AWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Revenue:
Product sales.................................. $2,417 $977 $4,163 $3,228
Contract revenue............................... 1,920 2,556 5,061 5,625
Royalties...................................... 750 1,028 2,770 3,035
------------- ------------- ------------- -------------
Total revenue................................. 5,087 4,561 11,994 11,888
Costs and expenses:
Cost of product sales.......................... 157 198 279 730
Cost of contract revenue....................... 826 676 2,384 1,996
Research and development....................... 2,487 2,511 7,400 7,685
Selling and marketing.......................... 721 521 2,064 1,792
General and administrative..................... 644 634 1,940 1,857
------------- ------------- ------------- -------------
Total costs and expenses...................... 4,835 4,540 14,067 14,060
Income (loss) from operations.................... 252 21 (2,073) (2,172)
Interest income.................................. 309 143 798 381
------------- ------------- ------------- -------------
Income (loss) before provision for income taxes.. 561 164 (1,275) (1,791)
Provision for income taxes....................... - - - -
------------- ------------- ------------- -------------
Net income (loss)................................ $561 $164 ($1,275) ($1,791)
============= ============= ============= =============
Net income (loss) per share - basic ............. $0.02 $0.01 ($0.06) ($0.08)
Net income (loss) per share - diluted............ $0.02 $0.01 ($0.06) ($0.08)
Weighted average shares - basic ................. 23,116 22,784 23,027 22,767
Weighted average shares - diluted................ 25,168 22,837 23,027 22,767
The accompanying notes are an integral part of the consolidated financial statements.
4
AWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2005 2004
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Cash flows from operating activities:
Net loss.......................................................... ($1,275) ($1,791)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................................... 460 789
Increase (decrease) from changes in assets and liabilities:
Accounts receivable......................................... (536) (1,402)
Inventories................................................. 89 43
Prepaid expenses............................................ (239) 50
Accounts payable............................................ 90 386
Accrued expenses............................................ 389 233
Deferred revenue............................................ (10) (311)
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Net cash used in operating activities.................... (1,032) (2,003)
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Cash flows from investing activities:
Purchases of property and equipment.............................. (219) (116)
Other assets...................................................... (339) -
Sales of investments............................................. 20,028 24,294
Purchases of investments......................................... (13,388) (16,438)
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Net cash provided by investing activities................ 6,082 7,740
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Cash flows from financing activities:
Proceeds from issuance of common stock.......................... 842 95
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Net cash provided by financing activities................ 842 95
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Increase in cash and cash equivalents............................... 5,892 5,832
Cash and cash equivalents, beginning of period....................... 7,482 2,304
---------------- ----------------
Cash and cash equivalents, end of period............................. $13,374 $8,136
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The accompanying notes are an integral part of the consolidated financial statements.
5
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A) BASIS OF PRESENTATION
The accompanying unaudited consolidated balance sheet, 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
September 30, 2005, and of operations and cash flows for the interim
periods ended September 30, 2005 and 2004.
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 our financial position, results of operations and cash
flows, in conformity with generally accepted accounting principles. We
filed audited financial statements which included all information and
footnotes necessary for such presentation for the three years ended
December 31, 2004 in conjunction with our 2004 Annual Report on Form 10-K.
Auction rate securities in the amount of $17.2 million at December 31, 2003
and $12.5 million at September 30, 2004 have been reclassified from cash
and cash equivalents to short-term investments in the statement of cash
flows for the nine months ended September 30, 2004 to conform to the 2005
financial statement presentation. Accordingly, the statement of cash flows
for the quarter ended September 30, 2004 reflects the gross purchases and
sales of these securities as investing activities rather than as a
component of cash and cash equivalents.
The results of operations for the interim period ended September 30, 2005
are not necessarily indicative of the results to be expected for the year.
B) INVENTORY
Inventory consists primarily of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2005 2004
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Raw materials........................ $54 $143
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6
C) COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income or loss by the
weighted average number of common shares outstanding. Diluted earnings per
share is computed by dividing net income or loss 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 or loss per share is calculated as follows (in thousands, except
per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net income (loss)................................. $561 $164 ($1,275) ($1,791)
Weighted average common shares outstanding........ 23,116 22,784 23,027 22,767
Additional dilutive common stock equivalents...... 2,052 53 - -
------------- ------------- ------------- -------------
Diluted shares outstanding ....................... 25,168 22,837 23,027 22,767
============= ============= ============= =============
Net income (loss) per share - basic............... $0.02 $0.01 ($0.06) ($0.08)
Net income (loss) per share - diluted............. $0.02 $0.01 ($0.06) ($0.08)
For the three month periods ended September 30, 2005 and 2004, options to
purchase 202,167 and 3,234,406 shares of common stock, respectively, were
outstanding, but were not included in the computation of diluted EPS
because the options' exercise prices were greater than the average market
price of the common stock and thus would be anti-dilutive.
For the nine month periods ended September 30, 2005 and 2004, potential
common stock equivalents of 1,789,280 and 227,801, respectively, were not
included in the per share calculation for diluted EPS, because we had net
losses and the effect of their inclusion would be anti-dilutive. For the
nine month periods ended September 30, 2005 and 2004, options to purchase
1,876,167 and 294,167 shares of common stock, respectively, were
outstanding, but were not included in the computation of diluted EPS
because the options' exercise prices were greater than the average market
price of the common stock and thus would be anti-dilutive.
D) STOCK-BASED COMPENSATION
We grant stock options to our employees and directors. Such grants are for
a fixed number of shares with an exercise price equal to the fair value of
the shares at the date of grant. As permitted by SFAS No. 123, "Accounting
for Stock-Based Compensation", we account for stock option grants in
accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and FASB Interpretation No. 44
("FIN 44"), "Accounting for Certain Transactions Involving Stock
7
Compensation." Accordingly, we have adopted the provisions of SFAS No. 123
through disclosure only.
No stock-based employee compensation cost is reflected in net income
(loss), as all options granted under those plans had an exercise price
equal to the fair market value of the underlying common stock on the date
of grant. The following table illustrates the pro forma effect on net loss
and earnings per share if we had applied the fair value recognition
provisions of SFAS No. 123 and SFAS No. 148 to stock-based employee
compensation (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2005 2004 2005 2004
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Net income (loss) - as reported................... $561 $164 ($1,275) ($1,791)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards........................... 593 2,044 9,042 7,593
------------- ------------- ------------- -------------
Net loss - pro forma ............................. ($32) ($1,880) ($10,317) ($9,384)
============= ============= ============= =============
Basic income (loss) per share - as reported....... $0.02 $0.01 ($0.06) ($0.08)
Basic loss per share - pro forma.................. $0.00 ($0.08) ($0.45) ($0.41)
Diluted income (loss) per share - as reported..... $0.02 $0.01 ($0.06) ($0.08)
Diluted loss per share - pro forma................ $0.00 ($0.08) ($0.45) ($0.41)
The fair value of options on their grant date was measured using the
Black-Scholes option pricing model. Key assumptions used to apply this
pricing model are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Average risk-free interest rate................... 4.04% 3.51% 3.93% 3.41%
Expected life of option grants.................... 5 years 5 years 5 years 5 years
Expected volatility of underlying stock........... 82% 94% 84% 94%
Expected dividend yield........................... - - - -
8
E) 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2005 2004 2005 2004
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United States................................ $3,447 $3,202 $7,123 $7,096
Germany...................................... 1,578 1,121 3,493 3,474
Rest of World................................ 62 238 1,378 1,318
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$5,087 $4,561 $11,994 $11,888
============= ============= ============= ==============
F) RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 123 (revised 2004),
Share-Based Payment ("SFAS 123R"). This Statement is a revision to SFAS
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, and supersedes APB Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. SFAS 123R requires the
measurement of the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the
award. The cost will be recognized over the period during which an employee
is required to provide service in exchange for the award. No compensation
cost is recognized for equity instruments for which employees do not render
service. The planned effective date of SFAS 123R was to be the first
interim or annual reporting period that began after June 15, 2005. In April
2005, the effective date was extended for calendar year companies until
January 1, 2006. We expect that the adoption of SFAS 123R will have a
significant impact on our results of operations. We do not expect the
adoption of SFAS 123R to impact our overall financial position.
9
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
hardware and software products. Hardware products include ADSL test and
development systems, modules, and modems. Software products consist of standard
off-the-shelf software products for biometric, medical imaging and digital
imaging applications, as well as DSL test and diagnostics software.
Product sales increased 147% from $1.0 million in the third quarter of 2004 to
$2.4 million in the current year quarter. As a percentage of total revenue,
product sales increased from 21% in the third quarter of 2004 to 48% in the
current year quarter. For the nine months ended September 30, product sales
increased 29% from $3.2 million in 2004 to $4.2 million in 2005. As a percentage
of total revenue, product sales increased from 27% in the first nine months of
2004 to 35% in the corresponding period of 2005.
For the three month period, the dollar increase was due to a $1.5 million
increase in revenue from the sale of software products, partially offset by a
decrease in revenue of $0.1 million from the sale of hardware products. For the
nine month period, the dollar increase was due to a $1.9 million increase in
revenue from the sale of software products, partially offset by a decrease in
revenue of $1.0 million from the sale of hardware products.
CONTRACT REVENUE. Contract revenue consists primarily of license and
engineering service fees that we receive under agreements with our customers to
develop ADSL (including ADSL2, ADSL2plus or VDSL2) chipsets.
Contract revenue decreased 25% from $2.6 million in the third quarter of 2004 to
$1.9 million in the current year quarter. As a percentage of total revenue,
contract revenue decreased from 56% in the third quarter of 2004 to 38% in the
current year quarter. The dollar decrease was due to lower license fee revenues
associated with the delivery of licensed technology and engineering services.
10
For the nine months ended September 30, contract revenue decreased 10% from $5.6
million in 2004 to $5.1 million in 2005. As a percentage of total revenue,
contract revenue decreased from 47% in the first nine months of 2004 to 42% in
the corresponding period of 2005. The dollar decrease was due to lower license
fee revenues associated with the delivery of licensed technology and engineering
services.
While we believe that the transition to ADSL2plus technology in the ADSL
industry and the recent establishment of a VDSL2 standard by the International
Telecommunications Union increase the value proposition of our technology, both
existing and prospective ADSL chipset licensees have continued to be reluctant
to begin new development projects given: (i) generally weak worldwide economic
conditions, (ii) a difficult and uncertain environment in the semiconductor and
telecommunications industries, and (iii) intense ADSL chipset competition and
falling chipset prices. During the last several years, customers and potential
customers cautiously evaluated new chipset projects or delayed or cancelled
projects in the face of such conditions.
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 decreased 27% from $1.0 million in the third quarter of 2004 to $0.8
million in the current year quarter. As a percentage of total revenue, royalties
decreased from 23% in the third quarter of 2004 to 15% in the current year
quarter. For the nine months ended September 30, royalties decreased 9% from
$3.0 million in 2004 to $2.8 million in 2005. As a percentage of total revenue,
royalties decreased from 26% in the first nine months of 2004 to 23% in the
corresponding period of 2005.
Our royalty revenue comes predominantly from ADSL chipset sales by Analog
Devices, Inc. ("ADI"), and Infineon Technologies AG ("Infineon"). Despite steady
growth of worldwide ADSL subscribers over the last several years, the
availability of ADSL chipsets from a number of suppliers and intense competition
among those suppliers has caused chipset prices to steadily decline. We are
uncertain how the transition to ADSL2plus and VDSL2 will impact our customers in
the near term, how quickly sales of our customers' chipsets will increase and
whether such increases will contribute meaningful royalties to us.
COST OF PRODUCT SALES. Since the cost of software product sales is minimal, cost
of product sales consists primarily of the cost of hardware product sales. Cost
of product sales decreased 21% from $198,000 in the third quarter of 2004 to
$157,000 in the current year quarter. As a percentage of product sales, cost of
product sales decreased from 20% in the third quarter of 2004 to 7% in the
current year. This percentage decrease was primarily due to a lower proportion
of hardware sales during the current quarter. In terms of dollars, the decrease
in cost of product sales and the increase in product margin was primarily due to
lower hardware product sales. The increase in product margin as a percent of
product sales was primarily due to a larger proportion of software sales in the
product sales revenue mix.
For the nine months ended September 30, cost of product sales decreased 62% from
$730,000 in 2004 to $279,000 in 2005. As a percentage of product sales, cost of
product sales decreased from 23% in the first nine months of 2004 to 7% in the
corresponding period of 2005. This
11
percentage decrease was primarily due to a lower proportion of hardware sales
during the nine month period. In terms of dollars, the decrease in cost of
product sales and increase in product margin was primarily due to lower hardware
product sales. The increase in product margin as a percent of product sales was
primarily due to a larger proportion of software sales in the product sales
revenue mix.
COST OF CONTRACT REVENUE. Cost of contract revenue consists primarily of
salaries for engineers and expenses for consultants, technology licensing fees,
recruiting, supplies, equipment, depreciation and facilities associated with
customer development projects. Our total engineering costs are allocated between
cost of contract revenue and research and development expense. In a given
period, the allocation of engineering costs between cost of contract revenue and
research and development is a function of the level of effort expended on each.
Cost of contract revenue increased 22% from $0.7 million in the third quarter of
2004 to $0.8 million in the third quarter of 2005. As a percentage of contract
revenue, cost of contract revenue increased from 26% in the third quarter of
2004 to 43% in the current year quarter. For the nine months ended September 30,
cost of contract revenue increased 19% from $2.0 million in 2004 to $2.4 million
in 2005. As a percentage of contract revenue, cost of contract revenue increased
from 35% in the first nine months of 2004 to 47% in the corresponding period of
2005.
For the three and nine month periods, the dollar increase in cost of contract
revenue was primarily due to more customer projects in the three and nine month
periods of 2005 as compared with 2004. Since our cost of contract revenue is
based on the level of effort we expend on customer projects and the number of
customer projects increased, cost of contract revenue increased as well.
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 improve our broadband intellectual property offerings, as well as our
software and hardware product technology.
Research and development expense was approximately $2.5 million in both the
third quarter of 2004 and 2005. As a percentage of total revenue, research and
development expense decreased from 55% in the third quarter of 2004 to 49% in
the current year quarter. For the nine months ended September 30, research and
development expense decreased 4% from $7.7 million in 2004 to $7.4 million in
2005. As a percentage of total revenue, research and development expense
decreased from 65% in the first nine months of 2004 to 62% in the corresponding
period of 2005.
For the nine month period the dollar decrease was from $0.3 million decreased
spending resulting from a shift of engineers to customer projects, where
spending is classified as cost of contract revenue. This shift occurred because
we had more customer projects in 2005 than in 2004. The dollar decrease in
spending was also attributable to $0.3 million lower depreciation expense. The
dollar decreases were partially offset by a $0.4 million increase for chip
design and tape out costs associated with our StratiPHY3 product.
Our research and development spending was principally focused on improving our
ADSL, ADSL2 and ADSL2plus StratiPHY2+(TM) technology and chips, developing our
VDSL2 StratiPHY3 technology and chips, developing test and diagnostics hardware
and software and developing imaging and biometrics software.
12
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 38% in the current quarter compared with the corresponding quarter of
2004, and was approximately $0.5 million in the third quarter of 2004 and $0.7
million in the current year quarter. As a percentage of total revenue, sales and
marketing expense increased from 11% in the third quarter of 2004 to 14% in the
current year quarter. For the current nine months ended September 30, selling
and marketing expense increased 15% and was approximately $1.8 million in 2004
and $2.1 million in 2005. As a percentage of total revenue, selling and
marketing expense increased from 15% in the first nine months of 2004 to 17% in
the corresponding period of 2005. For both the three and nine month periods, the
dollar increases were mainly attributable to higher compensation costs.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
consists primarily of salaries for administrative personnel, facility costs, bad
debt, audit, legal, stock exchange and insurance expenses. General and
administrative expenses were approximately $0.6 million in the third quarter of
both 2004 and 2005. As a percentage of total revenue, general and administrative
expense decreased from 14% in the third quarter of 2004 to 13% in the
corresponding quarter of the current year. For the nine months ended September
30, general and administrative expenses were approximately $1.9 million in both
2004 and 2005. As a percentage of total revenue, general and administrative
expenses were approximately 16% in the first nine months of 2004 and in the
corresponding period of 2005.
INTEREST INCOME. Interest income increased 116% from $143,000 in the third
quarter of 2004 to $309,000 in the current year quarter. For the nine months
ended September 30, interest income increased 109% from $381,000 in 2004 to
$798,000 in 2005. For the three and nine month periods, the dollar increase was
due to higher interest rates earned on our cash and investment balances.
INCOME TAXES. We made no provision for income taxes in the first nine
months of 2005 and 2004 due to net losses incurred. In 2002, we determined that
due to our continuing operating losses as well as the uncertainty of the timing
of profitability in future periods, we should fully reserve our deferred tax
assets. As of September 30, 2005, our deferred tax assets continue to be fully
reserved. We will continue to evaluate, on a quarterly basis, the positive and
negative evidence affecting the realizability of our deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2005, we had cash, cash equivalents, short-term investments and
investments of $37.5 million, which represents a decrease of $0.7 million from
December 31, 2004. The decrease was primarily due to $1.0 million of cash used
in operations and capital expenditures of $0.5 million, partially offset by $0.8
million of proceeds from the exercise of employee stock options.
Cash used in operations in the first nine months of 2005 was primarily from
operating losses. Capital spending was primarily related to the purchase of
computer hardware and software, and laboratory equipment used principally in
engineering activities, as well as expenditures related to the purchase of
certain technology assets.
13
At September 30, 2004, we had cash, cash equivalents, short-term investments and
investments of $36.9 million, which represents a decrease of $2.0 million from
December 31, 2003. The decrease is primarily due to $2.0 million of cash used in
operations.
Cash used in operations in the first nine months of 2004 was primarily the
result of operating losses and working capital requirements. 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 to us, we believe that our cash, cash
equivalents and investments will be sufficient to fund our operations for at
least the next twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based
Payment ("SFAS 123R"). This Statement is a revision to SFAS 123, ACCOUNTING FOR
STOCK-BASED Compensation, and supersedes APB Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES. SFAS 123R requires the measurement of the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. The cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award. No compensation cost is recognized for equity instruments for which
employees do not render service. The planned effective date of SFAS 123R was to
be the first interim or annual reporting period that began after June 15, 2005.
In April 2005, the effective date was extended for calendar year companies until
January 1, 2006. We expect that the adoption of SFAS 123R will have a
significant impact on our results of operations. We do not expect the adoption
of SFAS 123R to impact our overall financial position.
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. Because our revenue components
fluctuate and are difficult to predict, and our expenses are largely independent
of revenues in any particular period, it is difficult for us to accurately
forecast revenues and profitability. When appropriate, we recognize contract
revenues ratably over the period during which we expect to deliver technology
and provide engineering services. While this means that contract revenues from
certain current agreements are generally predictable, changes can be introduced
by a reevaluation of the length of the development period, or by the termination
of a contract. The initial estimate of this period is subject to revision as the
product being developed under a contract nears completion, and a revision may
result in an increase or decrease to the quarterly revenue for that contract. In
addition, accurate prediction of revenues from new contracts or licensees is
difficult
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because contract negotiation is a lengthy process, frequently spanning a year or
more, and the fiscal period in which a new license agreement will be entered
into, if at all, and the financial terms of such an agreement are difficult to
predict. Contract revenues also include fees for engineering services, which are
dependent upon the varying level of assistance desired by licensees and,
therefore, the revenue from these services is also difficult to predict.
It is also difficult for us to make accurate forecasts of royalty revenues.
Royalties are recognized in the quarter in which we receive a report from a
licensee regarding the shipment of licensed integrated circuits in the prior
quarter, and are dependent upon fluctuating sales volumes and/or prices of chips
containing our technology, all of which are beyond our ability to control or
assess in advance.
Our business is subject to a variety of additional risks, which could materially
adversely affect quarterly and annual operating results, including:
|X| market acceptance of broadband technologies we supply by semiconductor
or equipment companies;
|X| the extent and timing of new license transactions with semiconductor
companies;
|X| changes in our and our licensees' development schedules and levels of
expenditure on research and development;
|X| the loss of a strategic relationship or termination of a project by a
licensee;
|X| equipment companies' acceptance of integrated circuits produced by our
licensees;
|X| the loss by a licensee of a strategic relationship with an equipment
company customer;
|X| announcements or introductions of new technologies or products by us
or our competitors;
|X| delays or problems in the introduction or performance of enhancements
or of future generations of our technology;
|X| failures or problems in our hardware or software products;
|X| delays in the adoption of new industry standards or changes in market
perception of the value of new or existing standards;
|X| competitive pressures resulting in lower contract revenues or royalty
rates;
|X| competitive pressures resulting in lower software or hardware product
revenues;
|X| personnel changes, particularly those involving engineering and
technical personnel;
|X| costs associated with protecting our intellectual property;
|X| the potential that licensees could fail to make payments under their
current contracts;
|X| ADSL market-related issues, including lower ADSL chipset unit demand
brought on by excess channel inventory and lower average selling
prices for ADSL chipsets as a result of market surpluses;
|X| regulatory developments; and
|X| general economic trends and other factors.
As a result of these factors, we believe that period-to-period comparisons of
our revenue levels and operating results are not necessarily meaningful. You
should not rely on our quarterly revenue and operating results to predict our
future performance.
WE EXPERIENCED NET LOSSES
We had a net loss during 2001, 2002, 2003, 2004 and the first nine months of
2005. We may continue to experience losses in the future if:
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|X| the semiconductor and telecommunications markets do not improve;
|X| our existing customers do not increase their revenues from sales
of chipsets with our technology;
|X| new or existing customers do not choose to license our
intellectual property for new chipset products; or
|X| new or existing customers do not choose to use our software or
hardware products.
WE HAVE A UNIQUE BUSINESS MODEL
The success of our business model depends upon our ability to license our
technology to semiconductor and equipment companies, and our customers'
willingness and ability to sell products that incorporate our technology so that
we may receive significant royalties that are consistent with our plans and
expectations.
We face numerous risks in successfully obtaining suitable licensees on terms
consistent with our business model, including, among others:
|X| we must typically undergo a lengthy and expensive process of building
a relationship with a potential licensee before there is any assurance
of a license agreement with such party;
|X| 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;
|X| we must persuade potential licensees to bear development costs
associated with our technology applications and to make the necessary
investment to successfully manufacture chipsets and products using our
technology; and
|X| we must successfully transfer technical know-how to licensees.
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. They are not prohibited from competing
against us.
Our business could be seriously harmed if:
|X| we cannot obtain suitable licensees;
|X| our licensees fail to achieve significant sales of chipsets or
products incorporating our technology; or
|X| we otherwise fail to implement our business strategy successfully.
THERE HAS BEEN AND MAY CONTINUE TO BE AN OVERSUPPLY OF ADSL CHIPSETS, AND THERE
IS INTENSE COMPETITION FOR ADSL CHIPSETS, WHICH HAS CAUSED OUR ROYALTY REVENUE
TO DECLINE
The royalties we receive are influenced by many of the risks faced by the ADSL
market in general, including reduced average selling prices ("ASPs") for ADSL
chipsets during periods of
16
surplus. In 2000, 2001, and 2002, the ADSL industry had experienced an
oversupply of ADSL chipsets and central office equipment. Excessive inventory
levels led to soft chipset demand, which in turn led to declining ASPs. ASPs
have also been under pressure because of intense competition in the ADSL chipset
marketplace. As a result of the soft demand and declining ASPs for ADSL
chipsets, our royalty revenue has decreased substantially from the levels we
achieved in 2000. Price decreases for ADSL chipsets, and the corresponding
decreases in per unit royalties received by us, can be sudden and dramatic.
Pricing pressures may continue during the remainder of 2005 and beyond. Our
royalty revenue may decline over the long term.
WE DEPEND SUBSTANTIALLY UPON A LIMITED NUMBER OF LICENSEES
There are a relatively limited number of semiconductor and equipment companies
to which we can license our broadband 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 licensing relationships, our
business could be seriously harmed. In addition, our prospective customers may
use their superior size and bargaining power to demand license terms that are
unfavorable to us and prospective customers may not elect to license from us.
WE DERIVE A SIGNIFICANT AMOUNT OF REVENUE FROM A SMALL NUMBER OF CUSTOMERS
In 2002, 2003, 2004 and the first nine months of 2005, we derived 32%, 27%, 26%
and 19%, respectively, of our total revenue from ADI and 15%, 17%, 28%, and 28%
respectively, of our total revenue from Infineon. ADI and Infineon have
developed many generations of ADSL chipsets based upon our technology. Our
royalty revenue in the near term is highly dependent upon ADI's and Infineon's
ADSL chipset market share and pricing. The ADSL market has experienced
significant price erosion, which has adversely affected ADSL chipset revenues,
which in turn has adversely affected our royalty revenue. To the extent that ADI
or Infineon loses market share, is unable to transition its product to support
new ADSL2 and ADSL2plus standards, or experiences further price erosion in its
ADSL chipsets, our royalty revenue could decline.
OUR SUCCESS REQUIRES ACCEPTANCE OF OUR TECHNOLOGY BY EQUIPMENT COMPANIES
Due to our business strategy, our success is dependent on our ability to
generate significant royalties from our licensing arrangements with
semiconductor manufacturers. Our ability to generate significant royalties is
materially affected by the willingness of equipment companies to purchase
integrated circuits that incorporate our technology from our licensees. There
are other competitive solutions available for equipment companies seeking to
offer broadband communications products. We face the risk that equipment
manufacturers will choose those alternative solutions. Generally, our ability to
influence equipment companies' decisions whether to purchase integrated circuits
that incorporates our technology is limited.
We also face the risk that equipment companies that elect to use integrated
circuits that incorporate our technology into their products will not compete
successfully against other equipment companies. Many factors beyond our control
could influence the success or failure of a particular equipment company that
uses integrated circuits based on our technology, including:
17
|X| competition from other businesses in the same industry;
|X| market acceptance of its products;
|X| its engineering, sales and marketing, and management capabilities;
|X| technical challenges of developing its products unrelated to our
technology; and
|X| its financial and other resources.
Even if equipment companies incorporate chipsets based on our intellectual
property into their products, their products may not achieve commercial
acceptance or result in significant royalties to us.
OUR SUCCESS REQUIRES TELEPHONE COMPANIES TO INSTALL ADSL SERVICE IN VOLUME
The success of our ADSL licensing business depends upon telephone companies
installing ADSL service in significant volumes. Factors that affect the volume
deployment of ADSL service include:
|X| the desire of telephone companies to install ADSL service, which is
dependent on the development of a viable business model for ADSL
service, including the capability to market, sell, install and
maintain the service;
|X| the pricing of ADSL services by telephone companies;
|X| the transition by telephone companies to new ADSL technologies, such
as ADSL2, ADSL2plus and VDSL2;
|X| the quality of telephone companies' networks;
|X| deployment by phone companies of fiber-to-the home or broadband
wireless services;
|X| government regulations; and
|X| the willingness of residential telephone customers to demand ADSL
service in the face of competitive service offerings, such as cable
modems, fiber-based service or broadband wireless access.
If telephone companies do not install ADSL service in significant volumes, or if
telephone companies install broadband service based on other 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 ADSL technology. Although
our license agreements contain non-disclosure provisions and other terms
protecting our proprietary know-how and technology rights, it is
18
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, the steps we have taken may be inadequate 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, our competitors may 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.
Our technology, software or products may infringe the intellectual property
rights of others. A large and increasing number of participants in the
telecommunications and compression industries 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 patent, copyright and other intellectual
property rights to technologies that are important to our business. In the past,
we have received claims from other companies that our technology infringes their
patent rights. Intellectual property rights can be uncertain and can involve
complex legal and factual questions. We may infringe 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, 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 semiconductor and telecommunications industries, as well as the market for
high-speed network access technologies, 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 ADSL 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
ADSL 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 ADSL technology as well as
new technologies that keep pace with changes in the telecommunications and
broadband industries 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.
One element of our business strategy is to assume the risks of technology
development failure while reducing such risks for our licensees. In the past, we
have spent significant amounts on
19
development projects that did not produce any marketable technologies or
products, and we cannot assure you that it will not occur again.
WE FACE INTENSE COMPETITION FROM A WIDE RANGE OF COMPETITORS
Our success as an intellectual property supplier depends on the willingness and
ability of semiconductor manufacturers to design, build and sell integrated
circuits based on our intellectual property. The semiconductor industry is
intensely competitive and has been characterized by price erosion, rapid
technological change, short product life cycles, cyclical market patterns and
increasing foreign and domestic competition.
As an intellectual property supplier to the semiconductor industry, we face
intense competition from internal development teams within potential
semiconductor customers. We must convince potential licensees to license from us
rather than develop technology internally. Furthermore, semiconductor customers,
who have licensed our intellectual property, may choose to abandon joint
development projects with us and develop chipsets themselves without using our
technology. In addition to competition from internal development teams, we
compete against other independent suppliers of intellectual property. We
anticipate intense competition from suppliers of intellectual property for ADSL.
The market for ADSL chipsets is also intensely competitive. Our success within
the ADSL industry requires that ADSL equipment manufacturers buy chipsets from
our semiconductor licensees, and that telephone companies buy ADSL equipment
from those equipment manufacturers. Our customers' chipsets compete with
products from other vendors of standards-based and ADSL chipsets, including
Broadcom, Centillium, Conexant, ST Microelectronics and Texas Instruments.
ADSL services offered over copper telephone networks also compete with
alternative broadband transmission technologies that use the telephone network
as well as other network architectures. Alternative technologies for the
telephone network include symmetric high speed DSL (also known as HDSL, SDSL and
G.SHDSL), and very high speed DSL, also known as VDSL. These DSL technologies
may be based on techniques other than those used by ADSL to transport high-speed
data over telephone lines. While we are actively developing VDSL technology and
products that meet new VDSL2 standards, we are not certain that we will be able
to participate in future VDSL deployments. Alternative technologies that use
other network architectures to provide high-speed data service include cable
modems using cable networks, wireless solutions using wireless networks, and
optical solutions using fiber optics technology. These alternative broadband
technologies may be more successful than ADSL and we may not be able to
participate in the markets involving these alternative technologies.
Many of our current and prospective ADSL licensees, as well as chipset
competitors that compete with our semiconductor licensees, including Broadcom,
Conexant, ST Microelectronics and Texas Instruments have significantly greater
financial, technological, manufacturing, marketing and personnel resources than
we do. We may be unable to compete successfully, and competitive pressures could
seriously harm our business.
20
WE MUST MAKE JUDGMENTS IN THE PROCESS OF PREPARING OUR FINANCIAL STATEMENTS
We prepare our financial statements in accordance with generally accepted
accounting principles and certain critical accounting polices that are relevant
to our business. The application of these principles and policies requires us to
make significant judgments and estimates. In the event that judgments and
estimates we make are incorrect, we may have to change them, which could
materially affect our financial position and results of operations.
Moreover, accounting standards have been subject to rapid change and evolving
interpretations by accounting standards setting organizations over the past few
years. The implementation of new standards requires us to interpret and apply
them appropriately. If our current interpretations or applications are later
found to be incorrect, our financial position and results of operations could be
materially affected.
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE
Volatility in our stock price may negatively affect 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
has fluctuated substantially and could continue to fluctuate based on a variety
of factors, including:
|X| quarterly fluctuations in our operating results;
|X| changes in future financial guidance that we may provide to investors
and public market analysts;
|X| changes in our relationships with our licensees;
|X| announcements of technological innovations or new products by us, our
licensees or our competitors;
|X| changes in ADSL market growth rates as well as investor perceptions
regarding the investment opportunity that companies participating in
the ADSL industry afford them;
|X| changes in earnings estimates by public market analysts;
|X| key personnel losses;
|X| sales of common stock; and
|X| 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.
OUR BUSINESS MAY BE AFFECTED BY GOVERNMENT REGULATIONS
The extensive regulation of the telecommunications industry by federal, state
and foreign regulatory agencies, including the Federal Communications
Commission, and various state public utility and service commissions, could
affect us through the effects of such regulation on our licensees and their
customers. In addition, our business may also be affected by the imposition of
certain tariffs, duties and other import restrictions on components that our
customers obtain from non-domestic suppliers or by the imposition of export
restrictions on products sold internationally and incorporating our technology.
Changes in current or future laws or regulations, in the United States or
elsewhere, could seriously harm our business.
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ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk relates primarily to our investment portfolio, and
the effect that changes in interest rates would have on that portfolio. Our
investment portfolio has included:
|X| Cash and cash equivalents, which consist of financial instruments with
original maturities of three months or less; and
|X| 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 three years 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 September 30, 2005, we had $36.5 million in cash, cash
equivalents and short-term investments that matured in twelve months or less.
Due to the short duration of these financial instruments, we do not expect that
an increase in interest rates would result in any material loss to our
investment portfolio.
As of September 30, 2005, we had invested $1.0 million in long-term investments
that matured in one to three years. These long-term securities are invested in
high quality U.S. government securities. Despite the high quality of these
securities, they may be subject to interest rate risk. This means that if
interest rates increase, the principal amount of our investment would probably
decline. A large increase in interest rates may cause a material loss to our
long-term investments. The following table (dollars in thousands) presents
hypothetical changes in the fair value of our long-term investments at September
30, 2005. The modeling technique measures the change in fair value arising from
selected potential changes in interest rates. Movements in interest rates of
plus or minus 50 basis points (BP) and 100 BP reflect immediate hypothetical
shifts in the fair value of these investments.
Valuation of securities Valuation of securities
given an interest rate given an interest rate
decrease of No change increase of
------------------------- in interest -------------------------
Type of security (100BP) (50 BP) rates 100 BP 50 BP
- ---------------------------------------------------------------------------------------------------------
Long-term investments with
maturities of one to three years... $1,015 $1,008 $1,001 $986 $993
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ITEM 4:
CONTROLS AND PROCEDURES
Our management, including our chief executive officer and chief financial
officer, has evaluated our disclosure controls and procedures as of the end of
the quarterly period covered by this Form 10-Q and has concluded that our
disclosure controls and procedures are effective. They also concluded that there
were no changes in our internal control over financial reporting that occurred
during the quarterly period covered by this Form 10-Q that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1:
LEGAL PROCEEDINGS
From time to time we are involved in litigation incidental to the conduct of our
business. We are not party to any lawsuit or proceeding that, in our opinion, is
likely to seriously harm our business.
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ITEM 6:
EXHIBITS
(A) EXHIBITS
Exhibit 31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ------------------
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: November 4, 2005 By: /s/ Michael A. Tzannes
----------------------
Michael A. Tzannes, Chief
Executive Officer
Date: November 4, 2005 By: /s/ Robert J. Weiskopf
----------------------
Robert J. Weiskopf, Chief
Financial Officer (Principal
Financial and Accounting
Officer)
25