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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant To Section 13 Or 15(d) Of The
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000
Commission file number 000-21129
AWARE, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 04-2911026
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
40 Middlesex Turnpike, Bedford, Massachusetts 01730
(Address of Principal Executive Offices)
(Zip Code)
(781) 276-4000
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark 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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 12, 2001, based on the closing price of the Common Stock
on March 12, 2001 as reported on the Nasdaq National Market, was approximately
$206,972,301.
The number of shares outstanding of the registrant's common stock as of March
12, 2001 was 22,618,309.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be delivered to
shareholders in connection with the registrant's Annual Meeting of Shareholders
to be held on May 24, 2001 are incorporated by reference into Part III of this
Annual Report on Form 10-K.
AWARE, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PART I
Item 1. Description of the Business .................................. 3
Item 2. Properties ................................................... 16
Item 3. Legal Proceedings ............................................ 16
Item 4. Submission of Matters to a Vote of Security Holders .......... 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .......................................... 17
Item 6. Selected Financial Data ...................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 18
Item 7 (A). Quantitative and Qualitative Disclosures About Market Risk ... 28
Item 8. Consolidated Financial Statements and Supplementary Data ..... 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ..................................... 46
PART III
Item 10. Directors and Executive Officers of the Registrant ........... 46
Item 11. Executive Compensation ....................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management ................................................... 47
Item 13. Certain Relationships and Related Transactions ............... 47
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K .................................................. 48
Signatures................................................................. 49
2
PART I
ITEM 1. DESCRIPTION OF THE BUSINESS
Company Background
We provide Digital Subscriber Line ("DSL") technology to semiconductor and
equipment companies that make products to enable simultaneous high-speed data
and regular voice transmissions over copper telephone lines. During our first
seven years, we were engaged primarily in contract research, specializing in
wavelet mathematics, digital compression, and telecommunications, including
digital modulation and coding. In 1993, we shifted our business from contract
research toward the development and licensing of DSL technology, as well as data
and video compression software. DSL technology increases the speed of data
communications over conventional copper telephone networks so that telephone
companies ("telcos") can use existing copper telephone lines to provide both
residential and business customers with simultaneous high-speed data
transmission and plain old telephone service. DSL technology enables data
communications at speeds much higher than possible through voiceband modems.
In 1996, we complemented our technology licensing activities by offering DSL
hardware products. These products demonstrated our technology and served as
equipment solutions until more widespread deployment of DSL services began. In
1998, we refocused our business on licensing DSL technology to semiconductor and
equipment manufacturers to enable them to manufacture and sell integrated
circuits and products incorporating our technology. Although we continue to sell
DSL hardware products, our principal business focus is licensing DSL technology
to the semiconductor industry.
Our offerings include technology packages for full-rate ADSL and G.lite, both of
which have been standardized for global use by the International
Telecommunications Union ("ITU"). In 2000, we complemented our core DSL
technology packages by adding Voice enabled DSL ("VeDSL(TM)") and Dr. DSL(R).
VeDSL is technology that enables the transport of multiple lines of digitized
voice over a single twisted pair telephone wire using DSL. Dr. DSL is technology
that service providers can use to install DSL service, as well as diagnose and
solve DSL service problems.
We are active in setting standards for the DSL industry. We pursue acceptance of
our technology by standards bodies, including the American National Standards
Institute ("ANSI"), ITU, and DSL Forum, and offer technology packages that are
compliant with industry standards.
We also sell software-based compression products, including WSQ by Aware,
NistPack by Aware, CJIS Web, JPEG 2000 Codec by Aware, MotionWavelets Video, and
SeisPact(R).
Our executive offices are located at 40 Middlesex Turnpike, Bedford,
Massachusetts, 01730, our telephone number is (781) 276-4000, and our website is
www.aware.com. We were incorporated in Massachusetts in 1986.
Industry Background
Since the emergence of the Internet in the mid-1990s, businesses and residential
consumers have been increasingly demanding high-speed network access in order to
take full advantage of the services this new medium has to offer. While
high-speed Internet access is the primary application driving customer demand
today, new applications such as second line voice services, video, video
conferencing, and telecommuting will continue to fuel demand for broadband
services in the future. While large businesses have the resources to take
advantage of access technologies that leverage the use of fiber optic cable or
dedicated T-1 service, the cost and availability of these technologies can be
prohibitive to other network users. Without the deployment of improved access
technologies, many residential and small business users are not able to take
full advantage of the Internet and other data intensive applications that
require increased data speeds.
Telephone companies initially responded to these demands by significantly
increasing the data transmission speed and capacity of the core infrastructure,
or "backbone," that links their central office locations. Improving access
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speeds and capacity along the "last mile" or the "local loop" that connects
their central office locations with homes and businesses has only recently
begun. Consequently, many residential and small business users must still rely
on conventional voiceband modems for their Internet access and communication
needs. Although the rate at which voiceband modems can transmit data has
improved over the past two decades from 2.4 kilobits per second, or Kbps, to 56
Kbps, these speeds are still too slow for some existing and many anticipated
data applications. In addition, voiceband modems cannot support simultaneous
voice and data services.
Advances in semiconductor integration and digital signal processing have led to
the development of a broadband access technology, known as Digital Subscriber
Line or DSL, which can transmit data over copper telephone lines significantly
faster than voiceband modems by using frequencies higher than those used for
voice and voiceband modems. DSL delivers "always on" availability, eliminating
the tedious dial-up process associated with voiceband modems. DSL is a
point-to-point technology that connects the end user to a telecommunications
service provider's central office or to an intermediate hub. DSL equipment is
deployed at each end of the copper wire and the transmission speed depends on
the length and condition of the existing wire.
The first DSL technology, known as Asymmetric Digital Subscriber Line or
full-rate ADSL, was created in the late 1980s and enables data to be transmitted
at speeds more than 100 times faster than 56 Kbps voiceband modems. Full-rate
ADSL, standardized in 1995 by ANSI as T1.413 and by the ITU in 1999 as G.992.1,
permits voice and multi-megabit data traffic to be transmitted simultaneously on
the same line. Full-rate ADSL requires that either a voice-data "splitter" be
installed by a telephone company technician at the users home or that
"microfilters" be installed by end user customers on every telephone in the
home. In 1999, the ITU also approved a new global "splitterless" ADSL standard
called "G.lite", known as G.992.2. G.lite services are capable of providing data
transmission speeds between ten and thirty times faster than those of voiceband
modems, while permitting voice and data traffic to be transmitted simultaneously
without the need to install splitters or microfilters on every phone in the
customer premise.
Both full-rate and G.lite ADSL are primarily designed to serve residential
telephone customers, because ADSL offers the simultaneous voice and high-speed
data service that this market requires. Other forms of DSL have also been
developed to serve small to medium-sized businesses. The primary requirement for
this market is symmetric upstream and downstream data rates to support business
applications. Some of the forms of DSL that address the symmetric market include
High Speed DSL ("HDSL" and "HDSL2"), Symmetric DSL ("SDSL"), and Symmetric High
Speed DSL ("SHDSL").
Telephone companies and other service providers began tests and trials of
full-rate ADSL technology in the mid 1990s. Commercial deployment of ADSL
services began in modest volumes in 1999, and at the end of 1999 service
providers had deployed fewer than 400,000 worldwide lines of ADSL. In 2000, the
rate of deployment of ADSL services accelerated dramatically, particularly in
the United States and South Korea. The DSL market also became more segmented in
2000 as Incumbent Local Exchange Carriers ("ILECs") primarily focused on ADSL
service to residential customers, and Competitive Local Exchange Carriers
("CLECs") primarily focused on symmetric service to small and medium-sized
businesses. The residential ADSL and symmetric DSL business markets have begun
to evolve into distinctly different markets.
The Residential ADSL Market
According to industry analysts, there were approximately 5.5 million new ADSL
subscribers worldwide in 2000. These 5.5 million lines were deployed
approximately as follows, 2.0 million in the United States, 2.5 million in South
Korea, and 1.0 million lines in the rest of the world. ILECs deployed the
overwhelming majority of these lines, and nearly all of these lines were based
on full-rate ADSL. Leading U.S. service providers include Bell South, QWest,
SBC, and Verizon. Korea Telecom and Hanaro are the leading providers in South
Korea; and Deutsche Telekom, France Telecom, British Telecom, New Brunswick
Telecom and Bell Canada are some of the leading providers in Europe and Canada.
In 2000, the rapid increase in service demand caused some service providers to
experience installation delays and customer service problems. Installation and
customer service problems were primarily the result of an insufficient number of
service provider technicians and customer service representatives to meet
customer demand. Service providers have begun to address these conditions by
adding additional employees to staff these positions. The rate
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of ADSL deployment is also affected by variations in the proximity of end users
to central offices, and the condition of telephone networks. A number of ADSL
equipment, semiconductor and technology suppliers are developing solutions aimed
at improving diagnostic capabilities to determine the length and condition of
telephone lines as well as improving installation times and maintenance of DSL
service.
Service providers are able to purchase ADSL equipment from a number of
telecommunications equipment suppliers. Some of the leading suppliers of central
office ADSL equipment include Alcatel Alsthom S.A., Cisco Systems, Inc., ECI
Telecom, LTD, Hyundai Corporation, Lucent Technologies, Inc., Nortel Networks
Corporation, Orckit Communications Ltd., and Samsung Corporation. Some of the
leading customer premises modem suppliers include 3Com Corporation, Alcatel,
Efficient Networks Inc., Intel Corporation, and Westell Technology Inc.
Telecommunications equipment suppliers are able to purchase ADSL chipsets from a
number of semiconductor suppliers. Some of the leading suppliers of ADSL
chipsets include Alcatel, Analog Devices Inc., Agere Systems, Inc. (formerly the
Lucent Microelectronics Group), Centillium Technology Corporation, Globespan
Technologies Inc., ITEX Corporation, and Texas Instruments.
Based on public announcements by ADSL semiconductor manufacturers, approximately
28 to 30 million ADSL chipsets were sold in 2000, which represents more chipsets
than were required by new subscribers. We believe this situation is primarily
due to (i) an excess of chipset inventory at certain DSLAM manufacturers and
(ii) the manner in which service providers build out their central offices with
ADSL. Today, most service providers install digital subscriber line access
multiplexers ("DSLAMs") when they begin to offer ADSL service out of a central
office. Since a single DSLAM is capable of serving many customers, a newly
upgraded central office generally has more capacity than actual subscribers to
use that capacity. In addition, telcos usually outfit multiple central offices
with DSLAMs to make DSL service widely available. Service providers knowingly
upgrade their central offices with excess capacity, because it is operationally
efficient and economically beneficial given the way DSLAM equipment is
configured and sold.
We believe that approximately 65% to 75% of the chipsets sold in 2000 were
delivered to DSLAM manufacturers. As of the end of 2000, a large proportion of
those chipsets were in DSLAMs that service providers installed to build out
their ADSL infrastructure to meet current as well as anticipated demand. We also
believe that ADSL silicon shortages in 2000 caused some DSLAM manufacturers to
purchase more chipsets than they currently required, and that some portion of
those chipsets remained in manufacturers' inventory at the end of 2000. We
believe that the other 25% to 35% of the ADSL chipsets were sold to
manufacturers of ADSL modems. This number of modem chipsets approximately
correlates with the number of new worldwide ADSL subscribers in 2000.
In 1999 and 2000, service providers primarily deployed ADSL using a DSLAM at the
central office and a modem at the customer premise. In the future, we believe
that existing central office switch and digital loop carrier ("DLC") equipment
will be upgraded through the installation of DSL-enabled line cards (these line
cards currently support POTS). In addition, we expect that consumer electronics
devices, including personal computers, modems and gateway devices (also known as
integrated access devices) will be DSL-enabled. When this occurs, consumers will
be able to purchase a variety of customer premises devices through traditional
consumer electronics retail channels.
We believe that commercial deployment of ADSL technology will continue to grow
in 2001 and beyond for the following reasons:
o Service providers will continue to deploy DSL service in countries
where they have already begun to build out their central office
infrastructures, such as the U.S. and South Korea;
o Service providers in new countries around the world will begin to
build out their central office infrastructures and commence large
scale service offerings;
o Service providers will upgrade existing DLC and switch equipment to
support DSL to make DSL available to more subscribers; and
o The consumer electronics industry will offer DSL-enabled devices
that will help fuel the growth of ADSL deployments.
5
The Symmetric DSL Business Market
The number of potential subscribers in the symmetric DSL business market is
significantly smaller than that in the residential ADSL market. The symmetric
DSL market is served by CLECs whose primary focus has been to offer less
expensive DSL alternatives to ILECs' T-1 service. CLECs have also begun to offer
residential ADSL services primarily through Internet Service Providers ("ISPs").
Some of the national U.S. CLEC service providers include Covad Communications
Group, Inc., Northpoint Communications Group, Inc., and Rhythms NetConnections
Inc. CLECs are able to purchase equipment from suppliers such as Cisco, Copper
Mountain Networks, Inc., Lucent, Netopia, Inc., Nokia Corporation, and Paradyne
Networks, Inc.
CLECs and some of the equipment manufacturers that supply them have experienced
difficult business conditions during the last year. These difficult conditions
were primarily the result of:
o capital markets that were unwilling to continue to fund the
significant levels of capital required by CLECs to build their
networks and support staffs;
o inability to obtain timely access to customer telephone lines;
o inability to predict or guarantee data rates to customers;
o unprofitable business models; and
o unfavorable regulatory rulings.
The future growth and direction of this market is difficult to predict at the
current time.
Technology
We are a leading provider of ADSL intellectual property ("IP") for the
residential ADSL market. Our principal IP offerings are for: (i) Full-rate ADSL
technology, (ii) G.lite technology, (iii) Voice enabled DSL, or VeDSL,
technology, (iv) Dr. DSL technology , and (v) DMTflex(TM) technology.
Full-Rate ADSL Technology
Full-rate ADSL technology expands the useable bandwidth of copper wire.
Typically, full-rate ADSL systems divide a 1.1 megahertz (MHz) bandwidth on
copper wire into three segments:
o The 0 to 4 kilohertz (KHz) range, which is used for plain old
telephone service ("POTS"),
o The 26 KHz to 138 KHz range, which is used to transmit data
upstream, and
o The 138 KHz to 1.1 MHz range, which is used to transmit data
downstream.
ANSI has published an industry standard (known as T1.413) for full-rate ADSL in
the United States. The ITU has approved a nearly identical global industry
standard for full-rate ADSL, known as G.992.1. The ANSI and ITU specifications
call for operation rates of up to 8 Mbps downstream and up to 640 Kbps upstream
when operating over telephone lines at a distance of up to 24,000 feet.
The primary method by which consumers access the Internet today using telephone
networks are voiceband, or dial-up, modems. Some of the advantages Full-rate
ADSL offers over voiceband modems include:
o Simultaneous POTS and data traffic over a single telephone line;
o Significantly higher data rates that enable true high-speed Internet
access; and
o The opportunity for telcos to offer other revenue producing
services, such as second line digitized voice and entertainment
quality video.
Standard compliant full-rate ADSL uses a modulation technique known as discrete
multitone, or DMT. DMT divides the upstream and downstream bands into a
collection of smaller frequency ranges of approximately 4 kHz each, called
subchannels. During transmission, each 4 kHz subchannel carries a portion of the
total data rate. By dividing the transmission bandwidth into a collection of
subchannels, DMT is able to adapt to the distinct
6
characteristics of each telephone line and maximize the data transmission rate.
Telephone lines are best suited for transmission of the low frequencies
associated with voice traffic (0-4 kHz). The high frequencies that are used for
full-rate ADSL transmissions experience distortion and attenuation when sent
over telephone lines - the higher the frequency, the more the attenuation. DMT
effectively divides the data into a collection of smaller bandwidth
transmissions, each of which occupies a smaller frequency range and is optimized
to maximize the data throughput in that range. The ANSI and ITU standards have
both established DMT as the standard modulation technique for full-rate ADSL.
Full-rate ADSL usually requires the installation of a voice-data splitter at the
end user's residence or place of business in order to handle simultaneous data
and voice traffic. When a splitter is deployed, a new twisted pair is typically
installed inside the customer premise to connect the splitter with the ADSL
modem. This has the disadvantage that only one telephone jack (the one connected
to the splitter) is an ADSL outlet. Most telcos have deployed full-rate ADSL by
substituting splitters with microfilters. Microfilters are devices that users
put on every telephone in their home to obviate the need for a splitter
installation by the telco. A microfilter approach has the advantage that every
existing phone jack in the house is now an ADSL outlet. However, this approach
also has the following disadvantages: (i) microfilters on every phone in the
home add to the cost of customer premises equipment, and (ii) DSL service is
susceptible to service problems when there are changes to the in-home telephone
network, such as the addition of phones or answering machines by the consumer.
G.lite Technology
G.lite enables simultaneous voice traffic and data traffic without requiring
installation of a voice-data splitter and without requiring microfilters on
every phone or answering machine. In the absence of any splitter, the
frequencies used by the G.lite signal are subjected to numerous voice traffic
phenomena. For example, a telephone being picked up results in a change in the
characteristics of the frequencies used by G.lite. We have invented, implemented
and applied for patents on signal processing techniques that compensate for the
effects of this and other related phenomena, while maintaining G.lite data
transmissions. These techniques enable "splitterless" and "microfilterless" ADSL
service through a signal processing technique known as "fast retrain."
In 1997, the Universal ADSL Working Group was formed by Compaq, Intel, Microsoft
and others to promote development of a standard for splitterless DSL. At the
urging of this Group, the ITU began development of a global standard G.lite, in
late 1997. In October 1998, the ITU determined the G.lite standard, which it
renamed G.992.2. G.992.2 is also based upon DMT technology. In June 1999, the
ITU approved the G.lite G.992.2 standard
G.lite specifies downstream data transmission rates of up to 1.5 Mbps and
upstream data transmission rates of up to 512 Kbps, at distances of up to 24,000
feet. Typically, G.lite systems divide a 550 KHz bandwidth on copper wire into
three segments:
o The 0 to 4 kilohertz (KHz) range is used for POTS,
o The 26 KHz to 138 KHz range is used to transmit data upstream, and
o The 138 KHz to 550 KHz range is used to transmit data downstream.
While some telephone companies began trial deployments of G.lite technology over
the last few years, G.lite technology has not been deployed in any meaningful
way as of the end of 2000. Full-rate ADSL service deployments coupled with
consumer-installed microfilters slowed the momentum G.lite technology had built
up in 1997 through 1999. We believe that key features contained in
G.lite-enabled modems and services will be particularly well suited to serve the
residential consumer market. The benefits of G.lite over full-rate ADSL include
the potential for faster deployment by telcos, lower installation and equipment
costs for consumers, and a more robust and versatile service offering because of
the features included in the G.lite standards, including fast-retrain and low
power modes. While it is difficult to predict when, we believe that G.lite will
be embraced by the consumer electronics industry and that service providers will
begin commercial deployments of G.lite services at some point in the future.
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Emerging Standards and Technology
Improvements to ADSL are being introduced in emerging standards. We expect that
new ADSL standards will be completed within the next twelve to eighteen months
that document the changing requirements in the rapidly evolving ADSL market. We
believe that the focus of standards bodies will be to:
o Improve the performance of ADSL, including loop-reach and data
rates, so that more homes can be reached with high-speed data
service.
o Improve ADSL protocols for easier to configure rate adaptation.
o Improve the support of multi-service offerings that bundle
high-speed Internet access with other services including channelized
voice.
Voice enabled DSL Technology
Voice-enabled DSL technology allows service providers to offer toll-quality,
second-line voice service to residential telephone consumers. With VeDSL, ADSL
delivers high-speed data and POTS as well as multiple lines of digitized voice
or dial-up data/fax modems on a single line of copper wire. VeDSL transports
voice within the physical layer of a full-rate ADSL or G.Lite link. This
approach eliminates the need for packetization of voice traffic over the copper
loop into upper layer protocols such as ATM and IP, yielding several advantages
crucial to offering a toll-quality residential voice-over-DSL solution. These
advantages include the elimination of latency, which degrades the quality of the
call, and the elimination of echo cancellation, which lowers the cost of VeDSL
solutions.
VeDSL allocates a portion of the total DSL bandwidth to digitized voice, while
allocating the remaining bandwidth to other applications, such as web surfing
and streaming video. When using Pulse Code Modulation ("PCM") with no
compression, each voice channel consumes 64 Kbps of bandwidth in each direction
without overhead. With voice compression, bandwidth consumption can be reduced
to 32 Kbps per voice line or less. The voice bandwidth can be dynamically
allocated, so that when the voice lines are not in use, the bandwidth can be
used for data traffic.
VeDSL offers service providers a cost effective means to :
o Offer residential customers reliable, toll-quality multi-line voice
service without the installation of a new wire at the home or new
equipment in the central office;
o Increase voice and data revenue through bundled voice and data
services over ADSL; and
o Use their existing telephone network infrastructure and management
systems, while maintaining the flexibility to evolve to a packetized
network.
Efforts are underway at the ITU to adopt standards for voice service that
employs a physical layer approach, such as VeDSL. The ITU generally refers to
such physical layer approaches as "channelized voice." We expect that the ITU
will include channelized voice as part of the next ADSL standard that is
scheduled to be adopted by 2002.
Dr. DSL Technology
Dr. DSL is designed to assist service providers with provisioning, monitoring,
and maintenance of their DSL services by enabling them to collect important
information about their copper loop plant. Dr. DSL also empowers subscribers
with tools they can use to assist with provisioning and maintenance. The primary
goal of Dr. DSL is to reduce the number of calls subscribers make to customer
service representatives, as well as the number of the costly truck rolls
technicians make to subscriber locations.
Dr. DSL uses ADSL chipsets in existing ADSL equipment to collect important
information about an ADSL line. Central office equipment, such as DSLAMs, DLCs,
and test heads, and customer premise equipment, such as ADSL modems, routers and
integrated access devices, can be equipped with Dr. DSL. Once equipped, central
office equipment can be linked up with customer premise equipment to analyze a
line and its environment.
Dr. DSL interprets collected data into useful information, identifying physical
characteristics of the phone line, and quantifies the effects of its
environment. Dr. DSL can calculate the data rate lost attributable to each
source of
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interference. This information can then be transmitted to the service provider's
network database, or operations support system ("OSS"), where it can be made
available to technicians to facilitate provisioning, monitoring, and maintenance
of DSL services. The data collected will tell a technician what data rate is
being achieved, what problems are degrading service levels, and by how much.
This data can be used to make intelligent, informed decisions regarding customer
service.
Dr. DSL equipped central office equipment can receive commands from the service
provider's OSS, run tests on the loop, collect and interpret the data, then send
the resulting information back to the OSS, even if it is not connected to a Dr.
DSL enabled modem at the customer premises. When Dr. DSL software is present at
both ends of a telephone line, the technology can also send commands to the
customer modem to collect data about the modem and in-home environment.
Specific Dr. DSL features include loop length measurement, bridged tap
measurement, crosstalk disturber detection and management, external disturber
detection, and subscriber self installation and in-home diagnostics.
DMTflex Technology
As deployment of ADSL services accelerates, service providers are seeking
alternatives for reducing the size of central office equipment to ease space
constraints. ADSL silicon suppliers have responded with chipsets that are
capable of enabling multiple lines, or "ports", of ADSL on a single chipset.
These "multi-port" solutions enable equipment manufacturers to build smaller,
more concentrated central office equipment.
At the same time, service providers are also seeking ways to offer multiple
forms of DSL service from a single DSLAM. Very high speed DSL ("VDSL") is a
technology that further expands the achievable data rate on telephone lines by
providing data transmission speeds of 20-50 Mbps at distances up to three
thousand feet. VDSL provides telephone companies the necessary technology to
compete for bundled video, voice and data services over a single twisted pair
telephone line. VDSL standardization efforts are underway at ANSI T1E1 as well
as the ITU.
DMTflex is designed to enable DSL silicon suppliers to offer a single chipset
that operates in any of three modes: (i) multi-port G.lite, (ii) multi-port full
rate ADSL or (iii) single-port VDSL. Specifically, DMTflex can enable 16 ports
of G.lite, eight ports of full rate ADSL, or one port of VDSL on a single
chipset. The flexibility of our solution enables VDSL to come down the
cost/volume curve rapidly by capitalizing on ADSL's mass-market success. We
believe that DMTflex-enabled VDSL solutions can be offered more cost-effectively
than VDSL-only solutions.
Strategy & Business Model
We license our DSL technology solutions--including full-rate ADSL and G.lite--to
semiconductor manufacturers that sell chipsets to companies that manufacture and
sell central office and customer premises equipment. We also license our DSL
technology directly to equipment manufacturers that incorporate our technology
into their own products. Central office equipment manufacturers sell their DSL
products to service providers that provide DSL services to end users. Customer
premises equipment manufacturers sell their DSL products through service
providers or directly to end users. To support our technology licensing
activities, we also market our technology to equipment manufacturers and service
providers to encourage them to use Aware-based technology in their products or
services.
Our strategy is based on the following key elements:
o Serve as Independent Technology Provider. A limited number of
technology companies have successfully developed DSL technology, and
most of them are affiliated with semiconductor or equipment
manufacturers. This presents a significant opportunity for
independent providers that are able to supply full-rate ADSL and
G.lite technology to chipset manufacturers for DSL equipment
markets. We believe that, as the market for DSL broadband access
products and services grows, semiconductor manufacturers and other
market participants will increasingly rely on an independent source
of DSL technology. By
9
relying on our technology and experience, our licensees can avoid
many of the risks of development failure or delay they would have
faced in developing their own DSL technology internally.
o Provide Multiple and Flexible Technology Solutions. Numerous silicon
solutions will emerge to serve the requirements of the multiple
types of equipment that will be deployed to support DSL services.
Our DSL technology enables chipset manufacturers to design and
manufacture chipsets ranging from fully programmable, such as those
based upon digital signal processing chips, to entirely fixed
function, such as those based upon application specific integrated
circuits. Our solutions include standard compliant DSL technology,
and service over DSL technology, such as VeDSL and diagnostic and
maintenance Dr. DSL technology. By supplying multiple and flexible
technology solutions we intend to participate in the multiple DSL
silicon and equipment architectures that are emerging in the ADSL
market.
o Leverage Our Own and Our Customers' Strengths. Our strategy is to
leverage the technology and engineering expertise we have developed
over years of research and development efforts, without having to
make significant expenditures to develop the infrastructure required
to manufacture and sell DSL chipsets or equipment ourselves.
Instead, we intend to combine our DSL technological leadership with
the complementary technology, manufacturing, sales and marketing,
and distribution capabilities of our licensees to create industry
leading DSL solutions for the worldwide market. By taking advantage
of our customers' strengths, we are able to address a larger market
more effectively than we could alone. This enables us to align our
success with the success of numerous silicon solutions through
numerous customers.
o Influence the Establishment of Industry Standards. We have been and
remain actively involved in industry-wide efforts to set DSL
technology standards. We took an active role in the international
effort to develop the G.lite standard that was approved by the ITU
in June 1999. We are currently actively involved in the development
of next generation ADSL standards at the ITU. By actively
participating in the establishment of industry standards, we are
better able to influence development of the standards and to
anticipate and identify technological changes affecting the DSL
industry. In addition, our focus on standard compliant technology
offerings improves the likelihood of interoperability between
solutions and global acceptance and proliferation of these
offerings.
Aware's Telecommunications Technology and Product Offerings
DSL Technology Offerings & Engineering Services
We develop and license our DSL technology. Our DSL technology expertise, when
applied in joint development efforts with our customers, has produced chipsets
for full-rate ADSL, G.Lite and multi-mode G.lite/full-rate ADSL. We offer our
technology, experience, and expertise to licensees in the following forms:
Patents. We have 13 issued patents and have 33 pending patent applications
pertaining to telecommunications and signal processing technology. These patents
underlie our technology offerings.
System models and designs. Our system models and designs are blueprints of how
to build a DSL chipset. Our system models and designs model the elements of a
DSL chipset, including the digital and analog subsections, through the use of
software simulations.
ASIC Cores. Application specific integrated circuit ("ASIC") cores are hardware
designs that enable our customers to manufacture DSL chips that implement
certain subsets of a DSL system. ASIC cores are developed and delivered in
synthesizable VHDL and Verilog software.
Run-time software. Run-time software is software that is configured to reside on
either digital signal processors or other programmable devices. This software
directs chipset operations such as handshake, initialization, tracking or steady
state DSL functions.
10
Engineering services. We offer a variety of engineering services to assist
customers with their projects during and after chipset development. Depending on
their requirements, our customers can elect to purchase one or more of the
following engineering services from us: i) system specification definition, ii)
system design, iii) analog front end qualification, iv) hardware and software
integration, v) performance optimization, vi) interoperability with other
vendors' chipsets, vii) reference designs for one or multiple DSL chipsets on
printed circuit boards, and viii) technical support at our customers' customers.
DSL Hardware Product Offerings
We develop and sell certain hardware products that are manufactured by third
party contract manufacturers. These products are intended to support the
development and deployment of chipsets and equipment incorporating our
technology. Our DSL hardware products consist of:
DSL Development Systems. The Veritas 992 Development System is designed to help
our customers evaluate and build standard-compliant DSL-based products and
services. Development systems assist semiconductor and equipment manufacturers
with performance and interoperability testing during product development.
DSL Test Systems. The Veritas 2000 and Veritas 4000 Test Systems enable personal
computer modem or standalone modem manufacturers to perform functional tests on
their products without requiring them to purchase expensive central office
equipment. Our test system provides a reliable and cost effective means to
efficiently test DSL chipsets and modems during production.
DSL Modules. The AW-918 and AW-930 DSL Transceiver Modules are board-level
products that contain all of the digital and analog components required to
implement a DSL transceiver. Transceiver modules facilitate rapid integration of
DSL technology into lab and field test equipment.
Compression Software Technology and Products
We also develop and sell data and video compression products. Since 1988, we
have developed intellectual property in the field of wavelet transform-based
data compression and have obtained several patents in this area. Our wavelet
compression technology enables digital image, video and certain types of data to
be compressed to between 1% and 10% of its original size. Using wavelet
compression, the decompressed data are not bit-for-bit identical to the original
data. A risk with this technique is that, as the original data are increasingly
compressed, a larger amount of error is introduced into the decompressed data.
However, compressed data can be transmitted across networks faster and stored
less expensively.
In 1993, we began an effort to produce commercially marketable wavelet image
compression software products. We currently offer a variety of software-based
compression products, including:
o WSQ by Aware. This product compresses digital fingerprint data for
use by law enforcement agencies such as the Federal Bureau of
Investigation;
o Nistpack by Aware. This product is a suite of software development
tools that enables law enforcement agencies to generate, view, edit
and print ANSI/NIST and FBI compliant fingerprint, mug shot, and
demographic data files.
o CJIS Web. This product is a set of tools for Intranet and Web
developers who develop custom Intranet solutions for the viewing of
digital fingerprints and mug shot images, scanned documents, and
demographic text data.
o JPEG 2000 Codec by Aware. This product provides a solution for the
compression and decompression of images using a high-quality,
wavelet-based method defined by the JPEG 2000 standard; and
o SeisPact. This product is used by companies in the oil and gas
industry to store and transmit large amounts of seismic data.
We have also licensed our radiology compression software, which compresses
digital radiographs and other types of medical imagery, to an OEM customer for
inclusion in their hardware-based products.
11
Strategic Customers
Our strategy with respect to customers is to select companies based on
development compatibility, market position and the potential for future royalty
revenue. The strategic customers that we have publicly announced include the
following companies:
Analog Devices, Inc.("ADI"). We began working with ADI in 1993 to develop ADSL
chipsets. ADI has licensed our full-rate ADSL, G.lite, and VeDSL technologies.
Over the years, we have jointly developed multiple generations of ADI ADSL
chipsets that incorporate our technology, including ADI's AD20MSP910,
AD20MSP918, AD20MSP930, Eagle and 4-port Copperhead chipsets. ADI has announced
that it has a number of customers for its chipsets, including Alcatel (through
its Newbridge Networks subsidiary), Cisco, Nortel, Lucent, Intel, Hyundai, ECI
Telecom, and Samsung. ADI was the number two supplier of chipsets to the ADSL
market in 2000.
Agere Systems, Inc. ("Agere"). Agere was formerly the Lucent Microelectronics
Group. We began working with Agere in December 1997. Agere licensed our G.lite
technology for its Wildwire chipset. The Wildwire chipset was the first personal
computer modem chipset for high-speed Internet access incorporating both G.lite
and 56 Kbps technology.
Infineon Technologies AG ("Infineon"). We began working with Infineon, formerly
Siemens Semiconductor, in August 1998. Infineon has licensed our full-rate and
G.lite technology for chipsets targeted at telephone company central office
switches and DLCs. Their central office chipsets bring together our DSL
technology and Infineon's digital signal processor, high-performance broadband
subscriber line, and converter technologies.
Intel Corporation ("Intel"). We announced our relationship with Intel in October
1999. Intel has licensed our full-rate and G.lite technology for DSL solutions
targeted at the residential broadband market.
Legerity, Inc ("Legerity"). We began working with Legerity, formerly Advanced
Micro Devices' Communication Products Division, in August 1999. Legerity has
licensed our full-rate and G.lite technology for highly integrated,
cost-effective central office switch and DLC chipset solutions. Their central
office chipset brings together our DSL technology and Legerity's leadership in
analog and digital integrated circuits for voice and data communications
equipment.
NEC Corporation ("NEC"). We began working with NEC in May 1999. NEC has licensed
both our full-rate ADSL and G.lite technology for use in ADSL chipsets for
customer premises applications.
Siemens Information and Communications Networks ("ICN") Group. We began working
with Siemens ICN in September 1998. We entered into an agreement under which we
and Siemens ICN are defining the next-generation architecture for Siemens'
DSL-enabled EWSD digital electronic switching system. Siemens' EWSD product is
the most widely sold carrier-class switching system in the world.
ST Microelectronics ("ST Micro"). ST Micro licensed our G.lite technology in
December 1998 for chipsets targeted at telephone company central office
switches.
Sigmatel, Inc. ("Sigmatel"). We began working with SigmaTel in March 2000.
SigmaTel has licensed our G.lite ADSL technology for its highly flexible,
multi-mode G.lite/V.90 chipset solution. This chipset is designed to be
interoperable with both full-rate and G.lite ADSL equipment. This relationship
combines SigmaTel's strength in mixed-signal integrated circuits with Aware's
ADSL technology for chipsets targeted at the consumer market.
3COM/US Robotics ("3Com"). In March 1997, we licensed our full-rate ADSL
technology to 3COM (then US Robotics) for use in 3COM's full-rate ADSL product
offerings. 3COM/US Robotics DSL product line includes PCI cards, USB modems and
office routers. 3COM/US Robotics is one of the largest sellers of modems in the
world.
12
Sales and Marketing
Our principal sales and marketing strategy is to proliferate our DSL technology
to semiconductor manufacturers and DSL equipment suppliers that incorporate our
technology into their products. Due to the complexity of our technology, our
sales people must have a high degree of technical sophistication in order to
effectively sell our technology offerings. We believe that decisions involving
the selection of our technology are frequently made at senior levels within a
prospective customer's organization. Consequently, we rely significantly on
presentations by our senior management to key employees at prospective
customers. As of December 31, 2000, we had thirteen people in our
telecommunications sales and marketing organization.
We sell our software-based compression products primarily through OEMs and
systems integrators. As of December 31, 2000, there were two people in our
compression software sales organization.
In 2000, we derived approximately 51% of our total revenue from ADI. In 1999, we
derived approximately 22%, 12%, 11% and 10% of our total revenue from ADI,
Agere, Intel, and Infineon, respectively. In 1998, we derived approximately 29%,
18% and 14% of our total revenue from ADI, Agere, and Siemens, respectively. All
revenue in 2000, 1999, and 1998 was derived from unaffiliated customers.
Competition
The markets for telecommunications and semiconductor products are intensely
competitive. We expect competition to increase in the immediate future due to
the growth projected across the DSL industry. We intend to compete through a
strategy of offering a comprehensive package of DSL technology to the
semiconductor industry. Our success depends primarily on the willingness and
ability of:
o Semiconductor manufacturers to design, build and sell DSL chipsets
based on our technology,
o Central office and customer premises equipment manufacturers to buy
and use DSL chipsets from our semiconductor licensees,
o Service providers to offer DSL services based on equipment from
customers of our licensees, and
o End users to buy broadband digital services from service providers
using equipment that is based on our DSL technology.
As a technology supplier, we face three different kinds of competition and
competitors, including:
o Technology Licensing Competition. Semiconductor and equipment
manufacturers that develop and sell DSL products may either develop
DSL technology internally, acquire DSL technology companies, 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 equipment companies in the world and may elect to
develop DSL chipsets without using our technology. Furthermore, our
current customers may choose to abandon joint development projects
with us and internally develop DSL chipsets without using our
technology.
o DSL Chipset Competition. Our customers' chipsets compete with
chipsets from other vendors of standards-based and
non-standards-based DSL chipsets. Some of these vendors include
Alcatel, Broadcom Corporation, Centillium, Conexant Systems, Inc.,
ITEX, Globespan, PCTel Inc., Texas Instruments, Tioga Technologies,
Ltd., and Virata Corporation.
o Network Competition. DSL services offered over copper telephone
networks compete with alternative broadband transmission
technologies that use other network architectures. The two primary
network competitors are cable operators using cable modems over
their cable networks, and wireless operators using wireless
solutions over their wireless networks.
13
Many of our current and prospective licensees, as well as chipset competitors
that compete with our semiconductor licensees, including Alcatel, Broadcom,
Conexant, and Texas Instruments, 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.
The markets for our wavelet image compression technology are competitive, and
are expected to become increasingly so in the near future.
Research and Development
We believe that our future success depends on our ability to adapt to the
rapidly changing telecommunications environment and to meet the industry's
ongoing technology development needs. Our research and development organization
is organized into two principal groups.
1. Strategic Development Group. This group focuses on commercializing
our DSL technology and working with our licensees to integrate that
technology into their chipsets. Key developments for this group have
included the packaging our IP offerings into C-Models, ASIC cores
and reference designs for multiple central office and customer
premises equipment silicon architectures.
2. Research and Development Group. This group focuses on extending and
enhancing our core technology for future telecommunications
applications. Key developments for this group have included
multi-port reference designs, voice-enabled DSL technology, and Dr.
DSL technology.
As of December 31, 2000, we had an engineering staff of 98 employees. We
supplemented our staff with 4 contractors as of December 31, 2000. Subject to
our ability to hire and retain engineers, we expect that our engineering
organization will grow significantly in the future. We intend to engage in more
customer development projects and to further develop and enhance our DSL
technology.
Research and development expense consists primarily of spending by our Research
and Development Group to enhance and extend our technology. During the years
ended December 31, 2000, 1999, and 1998, research and development costs charged
to operations were $5.9 million, $3.6 million, and $3.9 million, respectively.
Intellectual Property
We have 13 issued patents and 33 pending patent applications pertaining to
telecommunications and signal processing technology. We also have 12 issued
patents and 1 pending patent application pertaining to image compression, video
compression, audio compression, seismic data compression and optical
applications.
Although we have patented certain aspects of our technology, we rely primarily
on know-how and trade secrets to protect our intellectual property. We attempt
to protect our trade secrets and other proprietary information through
agreements with our licensees, suppliers, employees and consultants, and through
security measures. Each of our employees is required to sign a nondisclosure and
non-competition agreement. Although we intend to protect our rights vigorously,
we cannot assure you that these measures will be successful. In addition, the
laws of certain countries in which products incorporating our technology may be
developed, manufactured or sold may not protect our intellectual property and
product rights to the same extent as the laws of the United States.
Our ability to compete may be affected by our ability to protect our
intellectual property. We believe, however, that other factors will also be
important in maintaining our competitive position as the protection of our
existing intellectual property. The rapid pace of technological change in the
telecommunications industry, our technical expertise, and our ability to enhance
our DSL technology on a timely basis will also play an important role in
maintaining our competitive position.
Many participants in the telecommunications industry have an increasing number
of patents and have frequently 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
14
technologies that are important to us. Over the last several years, we have
received letters from third parties suggesting that we may be obligated to
license such intellectual property rights. While we believe our technology
offerings do not infringe the intellectual property rights of others, we cannot
assure you that they do not.
In addition, we cannot assure you that:
o Third parties will not assert infringement claims against us in the
future,
o These third party assertions will not result in protracted and
costly litigation, or
o We would prevail in any such litigation or be able to license any
valid patents from third parties on commercially reasonable terms.
Further, such litigation, regardless of its outcome, could result in substantial
costs to us and could cause our management to be distracted. Litigation may also
be necessary to enforce our intellectual property rights. Any infringement claim
or other litigation against or by us could seriously harm our business.
Government Regulation
The telecommunications industry, including many of our licensees' customers, is
subject to regulation by federal and state agencies, including the Federal
Communications Commission, or FCC, and various state public utility and service
commissions. While such regulation does not necessarily affect us directly, the
effects of these regulations on our customers' customers may, in turn,
negatively affect our business. FCC regulatory policies affecting the
availability of broadband access services and other terms on which service
providers conduct their business may impede our plans for the deployment of our
technology.
In February 1996, the Telecommunications Act of 1996 was enacted. A primary
factor in passage of the Telecommunications Act was the desire to deregulate and
foster competition in the telecommunications markets. While we believe
deregulation and increased competition, in general, will be favorable to our
operations and business plan, the effect of the Telecommunications Act on the
telecommunications industry remains unclear. The FCC could interpret the
Telecommunications Act in ways that could slow the rollout of DSL access
services, which could seriously harm our business.
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.
Internationally, governments of the United Kingdom, Canada, Australia and
numerous other countries actively promote and create competition in the
telecommunications industry. Changes in current or future laws or regulations,
in the U.S. or elsewhere, could seriously harm our business.
Manufacturing
Sales of hardware products constitute a small portion of our revenue, and we do
not intend to produce such products in any material quantity for the foreseeable
future. Consequently, we rely on third party contractor manufacturers to
assemble and test substantially all of our products. Our internal manufacturing
capacity is limited to final test and assembly of certain products. Other than
chipsets, which are available from our customers, we believe that other
components for our equipment-based products are available from a number of
suppliers.
Employees
At December 31, 2000, we employed 131 people, including 98 in engineering, 15 in
sales and marketing, 3 in manufacturing and 15 in finance and administration. Of
these employees, 127 were based in Massachusetts, and 4 were based in
California. We supplement our regular employees as necessary with temporary and
contract personnel. At December 31, 2000, we engaged 4 temporary and contract
personnel, primarily working in research and development. None of our employees
is represented by a labor union. We consider our employee relations to be good.
15
We believe that our future success will depend in large part on the service of
our technical and senior management personnel and upon our ability to attract
and retain highly qualified technical, sales and marketing and managerial
personnel. Competition for highly qualified personnel is intense. We cannot
assure you that we will be able to retain our key managerial and technical
employees or that we will be able to attract and retain additional highly
qualified personnel in the future.
ITEM 2. PROPERTIES
We believe that our existing facilities are adequate for our current needs and
that additional space sufficient to meet our needs for the foreseeable future
will be available on reasonable terms.
We currently occupy:
1. 72,000 square feet of office space in Bedford, Massachusetts, which
serves as our headquarters. This site is used for our research and
development, sales and marketing, and administrative activities. We
purchased this building in 1997.
2. 1,265 square feet of research and development space in Lafayette,
California. This facility is currently leased for a two-year term,
which expires on August 31, 2001.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter ended December 31, 2000.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is the only class of stock we have outstanding, and it trades
on the Nasdaq National Market under the symbol AWRE. The following table sets
forth the high and the low sales prices as reported on the Nasdaq National
Market from January 1, 1999 to December 31, 2000.
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------------------------------------------------
2000
High.......................... $67 $55 $61 7/16 $39 3/4
Low........................... 30 7/16 24 5/8 35 16 1/2
1999
High.......................... 50 7/16 87 1/8 61 1/4 49
Low........................... 25 37 7/16 27 1/4 20 7/8
As of March 12, 2001, we had approximately 160 shareholders of record. This
number does not include shareholders from whom shares were held in a "nominee"
or "street" name. We have never paid cash dividends on our common stock and we
anticipate that we will continue to reinvest any earnings to finance future
operations.
We did not sell any equity securities that were not registered under the
Securities Act of 1933 during the three months ended December 31, 2000.
ITEM 6. SELECTED FINANCIAL DATA
In the table below, we provide you with our selected consolidated financial
data. We have prepared this information using our audited financial statements
for the years ended December 31, 2000, 1999, 1998, 1997, and 1996. When you read
this selected financial data, it is important that you read it along with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, our historical consolidated financial statements, and the related
notes to the financial statements, which can be found in Item 8.
Year ended December 31, 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Statements of Operations Data
Revenue ........................................ $30,667 $20,527 $ 11,796 $ 6,198 $ 5,301
Income (loss) from operations .................. 9,490 3,321 (3,951) (6,157) (538)
Cumulative effect of change in
accounting principle (1) ................... (1,618) -- -- -- --
Net income (loss) .............................. 13,414 4,898 (2,249) (4,448) 259
Net income (loss) per share - basic ............ $ 0.60 $ 0.23 ($0.11) ($0.23) $ 0.02
Net income (loss) per share - diluted .......... $ 0.56 $ 0.21 ($0.11) ($0.23) $ 0.01
Balance Sheet Data
Cash and short-term investments ................ $57,503 $36,265 $ 26,567 $26,104 $36,719
Working capital ................................ 67,146 41,348 28,813 26,774 38,280
Total assets ................................... 81,450 54,482 40,162 39,281 40,123
Total liabilities .............................. 3,117 1,514 1,028 1,661 676
Total stockholders' equity ..................... 78,333 52,968 39,133 37,618 39,446
17
(1) Effective January 1, 2000, the Company adopted Securities and Exchange
Commission Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements ("SAB 101") and recorded the impact in fiscal year
2000. In 1999, the pro forma effect of retroactive application of SAB 101
would have resulted in net income of $3.280 million and net income per
share, basic and diluted, of $0.15 and $0.14, respectively. There was no
pro forma effect on 1998, 1997, and 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain line items from
our consolidated statements of operations stated as a percentage of total
revenue:
Year ended December 31,
-------------------------
2000 1999 1998
-------------------------
Revenue:
Product sales ..................................... 15% 27% 26%
Contract revenue .................................. 40 52 70
Royalties ......................................... 45 21 4
-------------------------
Total revenue ................................... 100 100 100
Costs and expenses:
Cost of product sales ............................. 3 7 12
Cost of contract revenue .......................... 29 34 46
Research and development .......................... 19 18 33
Selling and marketing ............................. 8 12 24
General and administrative ........................ 10 13 19
-------------------------
Total costs and expenses ....................... 69 84 134
Income (loss) from operations ........................ 31 16 (34)
Other income ......................................... -- -- 4
Interest income ...................................... 9 8 11
-------------------------
Income (loss) before benefit from income taxes and
cumulative effect of change in accounting principle 40 24 (19)
Benefit from income taxes ............................ 9 -- --
-------------------------
Income (loss) before cumulative effect of change in .. 49 24 (19)
accounting principle
-------------------------
Cumulative effect of change in accounting principle .. (5) -- --
-------------------------
Net income (loss) .................................... 44% 24% (19)%
=========================
Product Sales
Product sales consist primarily of revenue from the sale of DSL equipment and
compression software products. The products that comprise DSL equipment sales
are primarily test and development systems and modems.
Product sales decreased 16% from $5.5 million in 1999 to $4.7 million in 2000.
As a percentage of total revenue, product sales decreased from 27% in 1999 to
15% in 2000. The dollar decrease was primarily due to lower revenue from the
sale of modems. Modem revenue was lower because we have almost completely phased
out the
18
development and sale of our x200 Access Router. We anticipate that sales of x200
products will be minimal in future periods.
Product sales increased 79% from $3.1 million in 1998 to $5.5 million in 1999.
As a percentage of total revenue, product sales increased from 26% in 1998 to
27% in 1999. The dollar increase was primarily due to a substantial increase in
the sale of DSL test and development systems in 1999. DSL test and development
system revenue increased primarily because: (i) more customers are developing
chipsets and equipment using our DSL technology, and consequently they purchased
more of these systems in 1999, and (ii) we made new products available in 1999,
including our Veritas 992 and Veritas 2000 products. The increase in product
sales was also, to a lesser degree, due to higher revenue from the sale of
compression software products. Compression software revenue increased primarily
because our OEM customers shipped more of our software in their products in
1999.
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 in 1999 and 1998 also includes revenue from U.S. government
research contracts.
Contract revenue increased 15% from $10.6 million in 1999 to $12.2 million in
2000. As a percentage of total revenue, contract revenue decreased from 52% in
1999 to 40% in 2000. The dollar increase is primarily due to new chipset
development projects with existing and new semiconductor customers. Continued
growth of the DSL market encouraged existing and new customers to seek our
technology and engineering assistance for their DSL chipset products, which
caused contract revenue to increase in 2000.
Contract revenue increased 28% from $8.3 million in 1998 to $10.6 million in
1999. As a percentage of total revenue, contract revenue decreased from 70% in
1998 to 52% in 1999. The dollar increase was primarily due to a substantial
increase in contract revenue from our semiconductor manufacturer customers.
Higher contract revenue from semiconductor customers was mostly due to the
addition of new projects with existing and new customers. We believe the growing
DSL market opportunity encouraged more semiconductor companies to enter the
market in 1999. The dollar increase in DSL contract revenue was partially offset
by a decline in U.S. government research revenue. We completed our last U.S.
government research project in the first quarter of 1999. We anticipate that
revenue from these government contracts will not continue in future periods.
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 215% from $4.4 million in 1999 to $13.9 million in 2000. As
a percentage of total revenue, royalties increased from 21% in 1999 to 45% in
2000. The increase in royalties was primarily due to a sharp increase in ADSL
chipset sales in 2000 in general and the success of ADI, our largest customer,
in particular. We believe that this increase was driven by growing deployments
of ADSL service primarily in the U.S. and Korea. We do not expect royalties in
2001 to grow at the rate at which they grew in 2000.
Royalties increased from $418,000 in 1998 to $4.4 million in 1999. As a
percentage of total revenue, royalties increased from 4% in 1998 to 21% in 1999.
We believe that the increase in royalties was primarily due to growing
deployments of ADSL services by the telecommunications industry in general, and
of deployments using our technology in particular.
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 decreased
39% from $1.4 million in 1999 to $0.8 million in 2000. As a percentage of
product sales, cost of product sales decreased from 25% in 1999 to 18% in 2000.
The decrease in cost of product
19
sales dollars and the improvement in product margins is primarily due to a lower
percentage of lower margin x200 modem sales in 2000.
Cost of product sales decreased 2% from $1.39 million in 1998 to $1.36 million
in 1999. As a percentage of product sales, cost of product sales decreased from
45% in 1998 to 25% in 1999. The percentage of compression software revenue in
the product sales mix was approximately the same in 1999 and 1998. Therefore,
the improvement in the gross margin is primarily due to lower cost of sales on
equipment. Cost of product sales for equipment only as a percentage of equipment
sales was 78% in 1998 as compared to 41% in 1999. The improvement in equipment
gross margins is primarily due to a larger percentage of higher margin test and
development system revenue in the sales mix, and a reduction of obsolescence
provisions in 1999.
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 25% from $7.1 million in 1999 to $8.8 million in 2000. As a
percentage of contract revenue, cost of contract revenue increased from 67% in
1999 to 72% in 2000. The dollar increase was primarily due to new chipset
development projects with existing and new semiconductor customers, and the
nature of the customer projects we performed in 2000. We have engaged in a more
diverse collection of projects in 2000 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.
Cost of contract revenue increased 30% from $5.4 million in 1998 to $7.1 million
in 1999. As a percentage of contract revenue, cost of contract revenue increased
from 66% in 1998 to 67% in 1999. The dollar increase is primarily due to the
addition of new projects with existing and new semiconductor and equipment
customers. Increased spending related to telecommunications projects was
partially offset by almost no spending on U.S. government research projects in
1999.
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 63% from $3.6 million in
1999 to $5.9 million in 2000. As a percentage of total revenue, research and
development expense increased from 18% in 1999 to 19% in 2000. The dollar
increase in spending was primarily due to increased spending on
non-customer-specific research and development projects, including voice enabled
DSL, Dr. DSL and DMTflex. Higher spending on these projects was partially offset
by lower spending on our x200 modem product.
Research and development expense decreased 7% from $3.9 million in 1998 to $3.6
million in 1999. As a percentage of total revenue, research and development
expense decreased from 33% in 1998 to 18% in 1999. The dollar decrease in
spending was primarily due to lower spending on our x200 modem product and our
Discrete Wavelet Multitone ("DWMT") chipset project. Lower spending on these
projects was partially offset by higher spending on our Veritas test and
development products and compression software research and development.
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 decreased 2% from $2.6 million
in 1999 to $2.5 million in 2000. As a percentage of total revenue, sales and
marketing expense decreased from 12% in 1999 to 8% in 2000. The dollar decrease
was primarily due to lower spending on public relations.
20
Sales and marketing expense decreased 9% from $2.8 million in 1998 to $2.6
million in 1999. As a percentage of total revenue, sales and marketing expense
decreased from 24% in 1998 to 12% in 1999. The dollar decrease was primarily due
to lower sales and marketing costs because of the reduction in focus on end-user
modem sales. Prior to the second quarter of 1998, we were pursuing a technology
licensing strategy as well as an end-user modem distribution and sales strategy.
Sales and marketing expenses in 1998 included some non-recurring costs that we
incurred to better align the sales organization to execute on a licensing
strategy.
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 20% from $2.6
million in 1999 to $3.1 million in 2000. As a percentage of total revenue,
general and administrative expense decreased from 13% in 1999 to 10% in 2000.
The dollar increase is primarily due to higher administration, investor
relations and bad debt expenses.
General and administrative expense increased 17% from $2.2 million in 1998 to
$2.6 million in 1999. As a percentage of total revenue, general and
administrative expense decreased from 19% in 1998 to 13% in 1999. The dollar
increase is primarily due to higher public company expenses and additions to our
legal and administrative staffs.
Other Income
Other income consists of rental income from real estate leases for space in our
headquarters building, which terminated in the first quarter of 1999. Other
income decreased from $405,000 in 1998 to $18,000 in 1999 to zero in 2000. The
dollar decrease is due to the termination of the leases in January 1999, and we
anticipate that we will not have any more rental income in the future.
Interest Income
Interest income increased 81% from $1.6 million in 1999 to $2.8 million in 2000.
The dollar increase is primarily due to higher cash balances. Higher cash
balances were due to positive cash flows from operations and stock option
exercises during 2000.
Interest income increased 20% from $1.3 million in 1998 to $1.6 million in 1999.
The dollar increase is primarily due to higher cash balances. Higher cash
balances were due to positive cash flows from operations and stock option
exercises during 1999.
Income Taxes
We made no provision for income taxes in 1998 or 1999 as our historical net
losses have resulted in tax loss carryforwards that we used to offset any tax
expense. In the fourth quarter of 2000, we determined that based on our
continuing profitability, it was more likely than not that we will realize a
portion of our tax assets. Accordingly, we recorded a deferred tax asset of $7.1
million at December 31, 2000, which consisted of an income statement tax benefit
of $2.7 million for tax loss carryforwards and research and development credits,
and an adjustment to additional paid-in capital of $4.4 million for stock option
related deductions. The tax assets as of December 31, 2000 for which we have
recorded a valuation allowance are attributable to the exercise of stock options
and the tax benefit of these items will be credited to additional paid-in
capital, if realized. Consequently, to the extent we are profitable in future
periods, we anticipate that we will record income tax expense.
At December 31, 2000, we had federal net operating loss carryforwards of
approximately $55.9 million, which begin to expire in 2003, and federal research
and development credit carryforwards of approximately $5.5 million, which begin
to expire in 2003. At December 31, 2000, we also had available state net
operating loss carryforwards of approximately $50.2 million, which begin to
expire in 2001, and state research and development and investment tax credit
carryforwards of approximately $3.6 million, which begin to expire in 2006.
21
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. Previously, we recognized
contract revenue under multiple element agreements upon completion of contract
milestones or upon transfer of intellectual property. Under the accounting
method we adopted retroactive to January 1, 2000, we now recognize contract
revenue under multiple element agreements by recording total license and
engineering fees for the entire contract on a straight-line basis over the
estimated contract performance period, subject to the limitation that cumulative
revenue through the end of any period may not exceed cumulative contract
payments through that same period. The cumulative effect of the change on prior
years resulted in a charge to income of $1.6 million for the year ended December
31, 2000. For the year ended December 31, 2000, we recognized $0.7 million in
revenue that was included in the cumulative effect adjustment as of January 1,
2000.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception in March 1986, we have financed our activities primarily
through the sale of stock. In the years ended December 31, 2000, 1999 and 1998,
we received net proceeds from the exercise of employee stock options of $7.6
million, $8.9 million and $3.8 million, respectively. Our operating activities
provided net cash of $14.5 million and $4.3 million in the years ended December
31, 2000 and 1999, respectively. Cash provided by operations during 2000 and
1999 was primarily due to our profitability. Operating activities used net cash
of $2.3 million in the year ended December 31, 1998, which was primarily due to
operating losses and working capital requirements.
In the years ended December 31, 2000, 1999, and 1998, we made capital
expenditures of $1.3 million, $3.1 million, and $1.0 million, respectively.
Capital expenditures in all three years consist of spending on computer hardware
and software, laboratory equipment, and furniture used principally in
engineering activities. Capital spending in 1999 also included the renovation of
the third floor of our headquarters building for $1.5 million. We have no
material commitments for capital expenditures.
At December 31, 2000, we had cash, cash equivalents and short-term investments
of $57.5 million. 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Some of the information in this Form 10-K 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-K, 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-K could materially
and adversely affect 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, the price of our common stock could fall significantly.
22
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:
o The rate of market acceptance of DSL broadband access, generally,
and of our ADSL technologies in particular;
o Demand for our licensees' chipsets and products that incorporate our
technology;
o Development by us or our competitors of enhanced or alternative
high-speed network access technologies;
o The extent and timing of new license transactions;
o Regulatory developments; and
o The timing and related costs of any acquisitions.
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 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 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:
o We typically undergo a lengthy and expensive process of building a
relationship with a potential licensee before entering into an
agreement;
o 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
o 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. They are not prohibited from competing against us.
Our business could be seriously harmed if:
o We cannot obtain suitable licensees;
o Our licensees fail to achieve significant sales of chipsets or
products incorporating our technology; or
o We otherwise fail to implement our business strategy successfully.
23
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, we derived 51% 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 generate significant royalties is
materially affected by the acceptance of high-speed access over telephone lines
in general, and our DSL technology in particular by equipment companies, service
providers, and end users.
Equipment Companies Must Incorporate Our DSL Technology
Equipment companies, particularly those that develop and market high-volume
business and consumer products such as central office line cards, modems and
personal computers, must purchase chipsets containing 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.
We also face the risk that equipment companies that elect to incorporate our DSL
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 adopts our technology,
including:
o Competition from other businesses in the same industry;
o Market acceptance of its products;
o Its engineering, sales and marketing, and management capabilities;
o Technical challenges of developing its products unrelated to our
technology; and
o Its financial and other resources.
Therefore, even if equipment companies incorporate our DSL technology into their
products, we cannot be sure that their products will achieve commercial
acceptance or result in significant royalties to us.
Service Providers Must Initiate Substantial Deployments of DSL Services Based on
Our Technology
The success of our business strategy depends upon whether telecommunications
service providers deploy DSL technologies and upon the timing of that
deployment. Factors that will affect such deployment include:
o The development of a viable business model for DSL services,
including the capability to market, sell, install and maintain DSL
services;
24
o Cost constraints, such as installation costs and space and power
requirements at the telecommunications service provider's central
office;
o Lack of interoperability of DSL equipment that is supplied by
different manufacturers;
o Evolving industry standards for DSL technologies; and
o Government regulation.
If service providers do not deploy services based on DSL technology, our
business will be seriously harmed. Even if service providers deploy DSL
technologies, we cannot be sure that they will deploy services based on our DSL
technology.
End Users Must Purchase Services That Incorporate Our Technology
Even if numerous service providers adopt our DSL technology, our success
ultimately will depend on acceptance of services incorporating our DSL
technology by end users, such as access service subscribers and users of
personal computers and modems. DSL services compete with a variety of different
high-speed Internet connectivity technologies, including cable modems,
satellite, and other wireless technologies. Many of these technologies will
compete effectively with DSL services. If any technology competing with DSL
technology is more reliable, faster, less expensive, reaches more customers, or
has other advantages over DSL technology, then the demand for DSL services, and
therefore our technology may decrease.
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.
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.
25
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.
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 development projects that did not produce any
marketable technologies or products, and we expect that to occur again in the
future.
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 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 these vendors include Alcatel, Broadcom, Centillium,
Conexant, ITEX, Globespan, PCTel, TI, Tioga, and Virata.
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, including Alcatel, Broadcom,
Conexant, and TI, 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
26
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 were not 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.
In addition, stock options have been an important element of our program to
fairly compensate and retain highly qualified employees. The recent decline of
telecommunications technology stocks in general and our stock in particular has
left the vast majority of our employees with stock options that are
significantly out of the money. If the price of our stock does not increase or
if we do not otherwise address this situation through the grant of new stock
options or additional compensation, we may have difficulty retaining employees,
which could seriously harm our business.
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:
o Quarterly fluctuations in our operating results;
o Changes in future financial guidance that we may provide to
investors and public market analysts;
o Changes in our relationships with our licensees;
o Announcements of technological innovations or new products by us,
our licensees or our competitors;
o Changes in DSL market growth rates as well as investor perceptions
regarding the investment opportunity that companies participating in
the DSL industry afford them;
o Changes in earnings estimates by public market analysts;
o Key personnel losses;
o Sales of common stock; and
o 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.
Government Regulation
The extensive regulation of the telecommunications industry by federal, state
and foreign regulatory agencies, including the Federal Communications
Commission, or FCC, and various state public utility and service commissions,
could affect 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 affect our business.
27
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities", which required adoption in periods
beginning after June 15, 1999. FAS 133 was subsequently amended by Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133" and is effective for fiscal years beginning after June 15, 2000, with
earlier adoption permitted. The Company will adopt FAS 133 during fiscal 2001,
as required. The Company has not historically entered into transactions
involving derivative instruments, nor has it hedged any of its business
activities, so it does not believe that adoption of FAS 133 will have an effect
on its financial statements.
ITEM 7 (A). 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 includes:
o Cash and cash equivalents, which consist of financial instruments
with purchased maturities of three months or less; and
o 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 December 31, 2000 and 1999, 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.
28
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
The following consolidated financial statements of Aware, Inc. are filed as part
of this Report on Form 10-K:
Consolidated Financial Statements:
Page
----
Report of Independent Accountants..................................... 30
Independent Auditors' Report.......................................... 31
Consolidated Balance Sheets as of December 31, 2000 and 1999 ......... 32
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2000....................... 33
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 2000................. 34
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 2000............. 35
Notes to Consolidated Financial Statements............................ 36
Financial Statement Schedules:
Page
----
Schedule II - Valuation and Qualifying Accounts....................... 45
29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Aware, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Aware,
Inc. and its subsidiary at December 31, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2000, the Company changed its method of recognizing revenue.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 26, 2001
30
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Aware, Inc. and its subsidiary for the
year ended December 31, 1998. Our audit also included the financial statement
schedule listed in the Index at Item 8. These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of the Company and
its subsidiary for the year ended December 31, 1998, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
Deloitte & Touche LLP
Boston, Massachusetts
January 26, 1999
31
AWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
------------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 51,662 $ 35,248
Short-term investments ..................................................... 5,841 1,017
Accounts receivable (less allowance for doubtful
accounts of $402 in 2000 and $175 in 1999) .............................. 5,200 5,706
Inventories ................................................................ 167 122
Deferred tax assets ........................................................ 7,093 --
Prepaid expenses and other assets .......................................... 300 769
-------- --------
Total current assets ................................................. 70,263 42,862
-------- --------
Property and equipment, net ..................................................... 11,187 11,620
-------- --------
Total assets ......................................................... $ 81,450 $ 54,482
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 483 $ 788
Accrued expenses ........................................................... 332 177
Accrued compensation ....................................................... 664 468
Accrued professional ....................................................... 169 81
Deferred revenue ........................................................... 1,469 --
-------- --------
Total current liabilities .......................................... 3,117 1,514
-------- --------
Commitments and contingent liabilities (Note 7)
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, 22,606,277 in 2000 and 21,918,056 in 1999 ......... 226 219
Additional paid-in capital ................................................ 76,809 64,865
Retained earnings (accumulated deficit) ................................... 1,298 (12,116)
-------- --------
Total stockholders' equity ......................................... 78,333 52,968
-------- --------
Total liabilities and stockholders' equity ......................... $ 81,450 $ 54,482
======== ========
The accompanying notes are an integral part of the financial statements.
32
AWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years ended December 31,
--------------------------------------
2000 1999 1998
--------------------------------------
Revenue:
Product sales ............................................... $ 4,655 $ 5,535 $ 3,093
Contract revenue ............................................ 12,152 10,594 8,285
Royalties ................................................... 13,860 4,398 418
--------------------------------------
Total revenue ........................................... 30,667 20,527 11,796
--------------------------------------
Costs and expenses:
Cost of product sales ....................................... 831 1,363 1,394
Cost of contract revenue .................................... 8,800 7,053 5,431
Research and development .................................... 5,915 3,636 3,887
Selling and marketing ....................................... 2,533 2,574 2,829
General and administrative .................................. 3,098 2,580 2,206
--------------------------------------
Total costs and expenses ............................... 21,177 17,206 15,747
--------------------------------------
Income (loss) from operations ................................... 9,490 3,321 (3,951)
Other income .................................................... -- 18 405
Interest income ................................................. 2,826 1,559 1,297
--------------------------------------
Income (loss) before benefit from income taxes and
cumulative effect of change in accounting principle .......... 12,316 4,898 (2,249)
Benefit from income taxes ....................................... 2,716 -- --
--------------------------------------
Income (loss) before cumulative effect of change in
accounting principle ......................................... 15,032 4,898 (2,249)
Cumulative effect of change in accounting
principle (Note 2) ........................................... (1,618) -- --
--------------------------------------
Net income (loss) ............................................... $ 13,414 $ 4,898 ($ 2,249)
======================================
Basic net income (loss) per share:
Income (loss) before cumulative effect of change in
accounting principle ..................................... $ 0.67 $ 0.23 ($ 0.11)
Cumulative effect of change in accounting principle .......... ($ 0.07) -- --
--------------------------------------
Net income (loss) per share .................................. $ 0.60 $ 0.23 ($ 0.11)
======================================
Diluted net income (loss) per share:
Income (loss) before cumulative effect of change in
accounting principle ..................................... $ 0.63 $ 0.21 ($ 0.11)
Cumulative effect of change in accounting principle .......... ($ 0.07) -- --
--------------------------------------
Net income (loss) per share .................................. $ 0.56 $ 0.21 ($ 0.11)
======================================
Weighted average shares - basic ................................. 22,454 21,497 20,343
Weighted average shares - diluted ............................... 23,807 23,585 20,343
The accompanying notes are an integral part of the financial statements.
33
AWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
------------------------------------
2000 1999 1998
------------------------------------
Cash flows from operating activities:
Net income (loss) ............................................ $ 13,414 $ 4,898 ($2,249)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................. 1,738 1,775 1,530
Provision for doubtful accounts ........................... 325 100 50
Increase (decrease) from changes in assets and liabilities:
Accounts receivable ...................................... 181 (2,904) (1,128)
Inventories .............................................. (45) (1) 95
Deferred tax assets ...................................... (2,716) -- --
Prepaid expenses ......................................... (31) (17) 39
Accounts payable ......................................... (305) 308 (596)
Accrued expenses ......................................... 439 190 (50)
Deferred revenue ......................................... 1,469 (13) 13
------------------------------------
Net cash provided by (used in) operating activities .. 14,469 4,336 (2,296)
------------------------------------
Cash flows from investing activities:
Purchases of property and equipment ......................... (1,305) (3,075) (1,005)
Other assets ................................................ 500 (500) --
Net sales (purchases) of short-term investments ............. (4,824) 2,038 (447)
------------------------------------
Net cash used in investing activities ................ (5,629) (1,537) (1,452)
------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock ...................... 7,574 8,937 3,763
------------------------------------
Net cash provided by financing activities ............ 7,574 8,937 3,763
------------------------------------
Increase in cash and cash equivalents ........................... 16,414 11,736 15
Cash and cash equivalents, beginning of year .................... 35,248 23,512 23,497
------------------------------------
Cash and cash equivalents, end of year .......................... $ 51,662 $ 35,248 $ 23,512
====================================
The accompanying notes are an integral part of the financial statements.
34
AWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Retained
Common Stock Additional Earnings Total
---------------------- Paid-In (Accumulated Treasury Stockholders'
Shares Amount Capital Deficit) Stock Equity
--------------------------------------------------------------------------------
Balance at December 31, 1997 ............ 19,646 $ 196 $ 52,640 ($14,765) ($453) $ 37,618
Exercise of common stock options .... 1,258 13 3,688 3,701
Issuance of common stock under
employee stock purchase plan ..... 7 -- 63 63
Retirement of treasury stock ........ (453) 453 --
Net loss ............................ (2,249) (2,249)
--------------------------------------------------------------------------------
Balance at December 31, 1998 ............ 20,911 209 55,938 (17,014) -- 39,133
Exercise of common stock options .... 1,001 10 8,785 8,795
Issuance of common stock under
employee stock purchase plan ..... 6 -- 142 142
Net income .......................... 4,898 4,898
--------------------------------------------------------------------------------
Balance at December 31, 1999 ............ 21,918 219 64,865 (12,116) -- 52,968
Exercise of common stock options .... 680 7 7,405 7,412
Issuance of common stock under
employee stock purchase plan ..... 8 -- 162 162
Tax benefit of stock option exercises 4,377 4,377
Net income .......................... 13,414 13,414
--------------------------------------------------------------------------------
Balance at December 31, 2000 ............ 22,606 $ 226 $ 76,809 $ 1,298 $ -- $ 78,333
================================================================================
The accompanying notes are an integral part of the financial statements.
35
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Aware, Inc. ("Aware" or the "Company") designs, develops, licenses and
markets Digital Subscriber Line ("DSL") technology that enables high-speed
Internet access over existing telephone networks. The Company licenses its
intellectual property and software to semiconductor manufacturers and
equipment manufacturers that sell chips and equipment incorporating
Aware's technology. Aware also markets to equipment companies to encourage
them to design Aware's technology into their products, and to service
providers to encourage them to deploy new broadband services based on
Aware's technology. The Company's full-rate ADSL and G.lite offerings
include licenses of patent rights, software and semiconductor designs and
engineering services. The Company also offers hardware products, such as
DSL test and development systems and customer premises equipment, as well
as image compression software products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements include the
accounts of Aware, Inc. and its subsidiary. All significant intercompany
transactions have been eliminated.
Cash and Cash Equivalents - Cash and cash equivalents consist primarily of
demand deposits, money market funds, commercial paper, and discount notes
in highly liquid short-term instruments with original maturities of three
months or less from the date of purchase and are stated at cost, which
approximates market.
Short-term Investments - At December 31, 2000 and 1999, the Company had
categorized all securities as "available-for-sale," since the Company may
liquidate these investments currently. In calculating realized gains and
losses, cost is determined using specific identification. Unrealized gains
and losses on available-for-sale securities are excluded from earnings and
reported in a separate component of stockholders' equity. At December 31,
2000 and 1999, unrealized gains and losses were not material.
The amortized cost of securities, which approximates fair value, consists
of the following at December 31, 2000 and 1999 (in thousands):
Type of security 2000 1999
------ ------
Corporate debt securities ......... $ -- $1,017
U.S. agency securities ............ 5,841 --
------ ------
Total ........................... $5,841 $1,017
====== ======
Allowance for Doubtful Accounts - Accounts are charged to the allowance
for doubtful accounts as they are deemed uncollectible based on a periodic
review of the accounts. Bad debt expense was approximately $325,000,
$100,000, and $50,000 for 2000, 1999, and 1998, respectively.
Inventories - Inventories are stated at the lower of cost or market with
cost being determined by the first-in, first-out ("FIFO") method.
Property and Equipment - Property and equipment are stated at cost.
Depreciation and amortization of property and equipment is provided using
the straight-line method over the estimated useful lives of the assets.
Upon retirement or sale, the costs of the assets disposed of and the
related accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the determination of income or loss.
The estimated useful lives of assets used by the Company are:
Building and improvements........................... 30 years
Furniture and fixtures and office equipment......... 5 years
Computer & manufacturing equipment.................. 3 years
Purchased software.................................. 3 years
36
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounts for the impairment of long-lived assets in accordance
with the provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Revenue Recognition - Effective January 1, 2000, the Company adopted
Securities and Exchange Commission Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements ("SAB 101"). The Company
recognizes revenue when there is persuasive evidence of an arrangement,
the sales price is fixed or determinable, collection of the related
receivable is reasonably assured and delivery has occurred or services
have been rendered as more fully described below.
Product sales. Product sales consist primarily of revenue from the sale of
modems, access routers, transceiver modules, test and development systems,
and compression software. Product sales are recognized upon shipment.
Contract revenue. The Company has entered into nonexclusive technology
licensing agreements with semiconductor licensees that provide for the
Company to receive fees for: (i) the transfer of intellectual property
components and/or (ii) the performance of engineering services to customer
specifications. Technology licensing agreements also provide licensees
with the right to incorporate the Company's intellectual property
components in their products with terms and conditions that have
historically varied by licensee. Generally licensing agreements include
one or more of the following elements: i) technology license fees; which
are payable upon the transfer of intellectual property, ii) engineering
service fees, which generally are payable upon the Company's achievement
of defined milestones, and iii) royalty payments, which are generally
payable when licensees use the Company's intellectual property in their
products. The Company classifies license and engineering service fees
received under licensing agreements as contract revenue.
The Company's revenue recognition methodology for contract revenue
classifies licensing agreements between those contracts that contain
multiple elements of license and engineering service fees and those
contracts that contain a single element.
Multiple element licensing agreements. Contract revenue under
multiple element agreements is recognized by recording total license
and engineering fees for the entire contract on a straight-line
basis over the estimated contract performance period, subject to the
limitation that cumulative revenue through the end of any period may
not exceed cumulative contract payments through that same period.
Single element licensing agreements. Technology license fees are
recognized as revenue when technology transfers have been effected
and no contingent factors are present. Engineering services are
recognized as revenue when the defined milestones are completed.
Engineering milestones have historically been formulated to
correlate with the estimated level of effort and related costs. In
1998 and 1999, contract revenue included minimal amounts of revenue
from U.S. government research contracts. Revenue from government
contracts was recognized as services were performed.
Royalty revenue. Royalty revenue is generally recognized in the quarter in
which a report is received from a licensee detailing the shipments of
products incorporating the Company's intellectual property components
(i.e., in the quarter following the sales of the licensed product by the
licensee). The terms of the Company's licensing agreements generally
require licensees to give notification to the Company and to pay royalties
within 45 to 60 days of the end of the quarter during which sales of
licensed products take place.
Change in Accounting Principle - Effective January 1, 2000 the Company
changed its method of revenue recognition in accordance with SAB 101.
Previously, the Company recognized contract revenue under multiple element
agreements upon completion of contract milestones or upon transfer of
intellectual property. Under the accounting method adopted retroactive to
January 1, 2000, the Company now recognizes contract revenue under
multiple element agreements by recording total license and engineering
fees for the entire contract on a straight-line basis over the estimated
contract performance period, subject to the limitation that cumulative
revenue through the end of any period may not exceed cumulative contract
payments through that same period. The cumulative effect of the change on
prior years resulted in a charge to income of $1.6
37
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
million for the year ended December 31, 2000. For the year ended December
31, 2000, the Company recognized $0.7 million in revenue that was included
in the cumulative effect adjustment as of January 1, 2000.
In 1999, the pro forma effect of retroactive application of SAB 101 would
have resulted in net income of $3.280 million and net income per share,
basic and diluted, of $0.15 and $0.14, respectively. There was no pro
forma effect on 1998.
Income Taxes - The Company computes deferred income taxes based on the
differences between the financial statement and tax basis of assets and
liabilities using enacted rates in effect in the years in which the
differences are expected to reverse. The Company must establish a
valuation allowance to offset temporary deductible differences, net
operating loss carryforwards and tax credits when it is more likely than
not that the deferred tax assets will not be realized.
Capitalization of Software Costs - The Company capitalizes certain
internally generated software development costs after technological
feasibility of the product has been established. No software costs were
capitalized for the years ended December 31, 2000, 1999 and 1998, because
such costs incurred subsequent to the establishment of technological
feasibility, but prior to commercial availability, were immaterial.
Concentration of Credit Risk - At December 31, 2000 and 1999, the Company
had bank cash balances and money market investments, in excess of
federally insured deposit limits of approximately $57.4 million and $36.2
million, respectively.
Concentration of credit risk with respect to accounts receivable consists
of $3.4 million, $0.6 million, $0.5 million, and $0.5 million with four
customers at December 31, 2000 and to $1.3 million, $1.2 million, $0.6
million, $0.6 million, $0.5 million, $0.5 million, and $0.5 million with
seven customers at December 31, 1999.
Stock-Based Compensation - The Company grants stock options to its
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", the Company accounts 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 Compensation."
Accordingly, the Company has adopted the provisions of SFAS No. 123
through disclosure only (Note 6).
Computation of Earnings per Share - Basic earnings per share is computed
by dividing income available to common shareholders by the weighted
average number of common shares outstanding. Diluted earnings per share is
computed by dividing income available to common shareholders 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 antidilutive are excluded
from the calculation.
Use of Estimates - The preparation of the Company's financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amount of revenues and expenses during the reporting period. Significant
estimates include reserves for doubtful accounts, reserves for excess and
obsolete inventory, useful lives of fixed assets, valuation allowance for
deferred income tax assets, and accrued liabilities. Actual results could
differ from those estimates.
Fair Value of Financial Instruments - The carrying amounts of cash and
cash equivalents, short-term investments, accounts receivable, accounts
payable and accrued expenses approximate fair value because of their
short-term nature.
38
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comprehensive Income - Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources, including foreign
currency translation adjustments and unrealized gains and losses on
marketable securities. For the years ended December 31, 2000, 1999 and
1998, comprehensive income (loss) was not materially different from net
income (loss).
Recent Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
133, (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities", which required adoption in periods beginning after June 15,
1999. FAS 133 was subsequently amended by Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133" and is effective for fiscal years beginning after June 15, 2000, with
earlier adoption permitted. The Company will adopt FAS 133 during fiscal
2001, as required. The Company has not historically entered into
transactions involving derivative instruments, nor has it hedged any of
its business activities, so it does not believe that adoption of FAS 133
will have an effect on its financial statements.
Reclassifications - Certain prior period amounts have been reclassified to
be consistent with the current period presentation.
Segments - The Company organizes itself as one segment reporting to the
chief operating decision-maker. The Company has sales outside of the
United States, which are described in Note 8. All long-lived assets are
maintained in the United States.
3. INVENTORIES
Inventories consisted of the following at December 31 (in thousands):
2000 1999
---- ----
Raw materials ......................... $142 $ 94
Finished goods ........................ 25 28
---- ----
Total ............................. $167 $122
==== ====
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31 (in
thousands):
2000 1999
-------- --------
Land ................................................. $ 1,080 $ 1,080
Building and improvements ............................ 8,757 8,720
Computer equipment ................................... 4,367 3,545
Purchased software ................................... 1,907 1,588
Furniture and fixtures ............................... 864 784
Office equipment ..................................... 319 276
Manufacturing equipment .............................. 267 263
-------- --------
Total ............................................. 17,561 16,256
Less accumulated depreciation and amortization ....... (6,374) (4,636)
-------- --------
Property and equipment, net ....................... $ 11,187 $ 11,620
======== ========
Deprecation expense amounted to $1.7 million, $1.8 million and $1.5
million for the years ended December 31, 2000, 1999, and 1998,
respectively.
39
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INCOME TAXES
Deferred tax assets are attributable to the following at December 31 (in
thousands):
2000 1999
-------- --------
Federal net operating loss carryforwards .................... $ 19,000 $ 16,830
Research and development and other tax credit carryforwards . 9,481 5,788
State net operating loss carryforwards ...................... 3,163 3,016
Deferred revenue ............................................ 355 --
Other ....................................................... 489 354
-------- --------
Total .................................................... 32,488 25,988
Less valuation allowance .................................... (25,395) (25,988)
-------- --------
Deferred tax assets, net ................................. $ 7,093 $ --
======== ========
A reconciliation of the U.S. federal statutory rate to the effective tax
rate is as follows:
Year ended December 31,
-------------------------------
2000 1999 1998
------- ------ -------
Federal statutory rate ..................................... 34% 34% (34)%
State rate, net of federal benefit ......................... 6 4 (6)
Tax credits ................................................ (9) (69) (44)
Valuation allowance ........................................ (58) 27 84
Other ...................................................... 5 4 --
------- ------ -------
Effective tax rate ...................................... (22)% --% --%
======= ====== =======
In the fourth quarter of 2000, management determined that based on the
Company's continuing profitability it was more likely than not that it
will realize a portion of its tax assets. Accordingly, the Company
recorded a deferred tax asset of $7.1 million at December 31, 2000.
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.
At December 31, 2000, the Company had federal net operating loss
carryforwards of approximately $55.9 million, which begin to expire in
2003, and federal research and development credit carryforwards of
approximately $5.5 million, which begin to expire in 2003. At December 31,
2000, the Company also had available state net operating loss
carryforwards of approximately $50.2 million, which begin to expire in
2001, and state research and development and investment tax credit
carryforwards of approximately $3.6 million, which begin to expire in
2006. The tax assets as of December 31, 2000 for which a valuation
allowance was recorded are attributable to the exercise of stock options
and the tax benefit of these items will be credited to additional paid-in
capital, if realized.
6. STOCK COMPENSATION PLANS
At December 31, 2000, the Company has three stock-based compensation
plans, which are described below. The Company adopted SFAS No. 123, but,
as permitted, applies APB Opinion No. 25 and related Interpretations in
accounting for options granted to employees and directors. The Company has
no performance-based stock option plans. Had compensation cost for the
Company's three stock-based compensation plans been determined based on
the fair value at the grant dates as prescribed by SFAS No. 123, the
Company's net income (loss) and basic and diluted net income (loss) per
share would have been adjusted to the pro forma amounts indicated below
(in thousands, except per share data):
40
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31,
-----------------------------------
2000 1999 1998
------- -------- -------
Net income (loss) - as reported.......................... $13,414 $4,898 ($2,249)
Net income (loss) - pro forma............................ ($3,833) ($11,745) ($7,432)
Basic earnings (loss) per share - as reported............ $0.60 $0.23 ($0.11)
Basic earnings (loss) per share - pro forma.............. ($0.17) ($0.55) ($0.37)
Diluted earnings (loss) per share - as reported.......... $0.56 $0.21 ($0.11)
Diluted earnings (loss) per share - pro forma............ ($0.17) ($0.55) ($0.37)
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:
Year ended December 31,
---------------------------------
2000 1999 1998
------- ------- -------
Average risk-free interest rate.................... 6.15% 5.54% 5.15%
Expected life of option grants..................... 5 years 5 years 5 years
Expected volatility of underlying stock............ 106% 98% 89%
Expected dividend yield............................ -- -- --
Fixed Stock Option Plans - The Company has two fixed option plans. Under
the 1990 Incentive and Nonstatutory Stock Option Plan ("1990 Plan"), the
Company may grant incentive stock options or nonqualified stock options to
its employees and directors for up to 2,873,002 shares of common stock.
Under the 1996 Stock Option Plan ("1996 Plan"), the Company may grant
incentive stock options or nonqualified stock options to its employees and
directors for up to 6,100,000 shares of common stock. Under both plans,
options are granted at an exercise price as determined by the Board of
Directors; have a maximum term of ten years; and generally vest over three
to five years. As of December 31, 2000, there were 44,995 shares available
for grant under the 1996 Plan, and no shares available under the 1990
Plan.
A summary of the transactions of the Company's two fixed stock option
plans for the years ended December 31, 2000, 1999, and 1998 is presented
below:
2000 1999 1998
----------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding at beginning of year ............ 3,538,687 $22.05 3,097,043 $ 9.24 3,554,171 $ 7.01
Granted ..................................... 1,631,350 37.86 1,562,500 38.14 1,477,217 10.30
Exercised ................................... (680,413) 10.89 (1,000,399) 8.79 (1,258,171) 2.94
Forfeited or cancelled ...................... (405,941) 29.10 (120,457) 11.54 (676,174) 11.58
--------- ------ --------- ------ --------- ------
Outstanding at end of year .................. 4,083,683 $29.52 3,538,687 $22.05 3,097,043 $ 9.24
========= ====== ========= ====== ========= ======
Options exercisable at year end ............. 1,711,351 $23.79 1,595,443 $16.32 1,278,888 $ 7.69
The weighted average grant date fair values of options granted during the
years ended December 31, 2000, 1999 and 1998 were $30.30, $29.16 and
$7.40, respectively.
41
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding
at December 31, 2000:
Options Outstanding Options Exercisable
---------------------------------------------------------- ---------------------------------
Number Weighted-Avg. Number
Range of Outstanding at Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices 12/31/00 Contractual Life Exercise Price At 12/31/00 Exercise Price
---------------------------------------------------------- ---------------------------------
$0 to 6............... 237,309 7.7 years $ 5.48 102,821 $ 5.50
6 to 11.............. 424,360 5.8 9.06 367,440 8.90
11 to 20.............. 593,290 6.9 12.28 299,939 12.36
20 to 30.............. 700,305 8.8 23.50 391,108 25.64
30 to 40.............. 620,225 9.0 32.20 179,069 32.31
40 to 50.............. 1,498,194 8.9 47.46 364,724 46.63
50 to 70.............. 10,000 8.8 58.06 6,250 55.10
---------------------------------------------------------- ---------------------------------
4,083,683 8.2 $ 29.52 1,711,351 $ 23.79
========================================================== =================================
Employee Stock Purchase Plan - In June 1996, the Company adopted an
Employee Stock Purchase Plan (the "ESPP Plan") under which eligible
employees may purchase common stock at a price equal to 85% of the lower
of the fair market value of the common stock at the beginning or end of
each six-month offering period. Participation in the ESPP Plan is limited
to 6% of an employee's compensation, may be terminated at any time by the
employee and automatically ends on termination of employment with the
Company. A total of 100,000 shares of common stock have been reserved for
issuance. As of December 31, 2000 there were 78,730 shares available for
future issuance under the ESPP Plan. The Company issued 7,808, 6,269 and
7,193 common shares in 2000, 1999 and 1998, respectively.
7. COMMITMENTS AND CONTINGENT LIABILITIES
Lease Commitments - The Company owns its principal office and research
facility in Bedford, Massachusetts, which it has occupied since November
1997. The Company conducts a portion of its research and development
activities in leased facilities in Lafayette, California under a
non-cancellable operating lease that expires in 2001.
The following is a schedule of future minimum rental payments required
under the California operating lease (in thousands):
Year ended December 31,
-----------------------
2001 ....................................................... $21
Thereafter ................................................. --
---
Total minimum lease payments ............................ $21
===
Rental expense was approximately $105,000, $14,000, and $4,000 in 2000,
1999 and 1998, respectively.
Litigation - There are no material pending legal proceedings to which the
Company is a party or to which any of its properties are subject which,
either individually or in the aggregate, are expected by the Company to
have a material adverse effect on its business, financial position or
results of operations.
8. BUSINESS SEGMENTS AND MAJOR CUSTOMERS
The Company organizes itself as one segment and conducts its operations in
the United States.
42
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company sells its products and technology to domestic and
international customers. Revenues were generated from the following
geographic regions (in thousands):
Year ended December 31,
-------------------------------
2000 1999 1998
------- ------- -------
United States .................. $26,606 $14,801 $ 9,377
Germany ........................ 2,060 2,431 1,673
Asia/Pacific ................... 1,567 2,169 182
Europe, excluding Germany ...... 171 946 519
Rest of world .................. 263 180 45
------- ------- -------
$30,667 $20,527 $11,796
======= ======= =======
The portion of total revenue that was derived from major customers was as
follows:
Year ended December 31,
-------------------------------
2000 1999 1998
---- ---- ----
Customer A ..................... 51% 22% 29%
Customer B ..................... 9% 11% --
Customer C ..................... 7% 10% --
Customer D ..................... 2% 12% 18%
Customer E ..................... -- 2% 14%
9. EMPLOYEE BENEFIT PLAN
In 1994, the Company established a qualified 401(k) Retirement Plan (the
"Plan") under which employees are allowed to contribute certain
percentages of their pay, up to the maximum allowed under Section 401(k)
of the Internal Revenue Code. Company contributions to the Plan are at the
discretion of the Board of Directors. Company contributions were $166,000,
$148,000 and $58,000 in 2000, 1999 and 1998, respectively.
10. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is calculated as follows (in thousands, except
per share data):
Year ended December 31,
----------------------------------
2000 1999 1998
-------- -------- --------
Net income (loss) .............................. $ 13,414 $ 4,898 ($ 2,249)
Weighted average common shares outstanding ..... 22,454 21,497 20,343
Additional dilutive common stock equivalents ... 1,353 2,088 --
-------- -------- --------
Diluted shares outstanding ..................... 23,807 23,585 20,343
======== ======== ========
Net income (loss) per share - basic ............ $ 0.60 $ 0.23 ($ 0.11)
Net income (loss) per share - diluted .......... $ 0.56 $ 0.21 ($ 0.11)
For the years ended December 31, 2000 and 1999, options to purchase
1,508,194 and 897,000 shares of common stock at average weighted prices of
$47.53 and $46.26 per share, 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 shares and
thus would be anti-dilutive. For the year ended December 31, 1998,
potential common stock equivalents of 1,027,457 were not included in the
per share calculations for diluted EPS, because the Company had a net loss
and the effect of their inclusion would be anti-dilutive.
43
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. QUARTERLY RESULTS OF OPERATIONS - UNAUDITED
The following table presents unaudited quarterly operating results for
each of the Company's quarters in the two-year period ended December 31,
2000 (in thousands, except per share data). As discussed in Note 2, the
Company changed its method of revenue recognition effective January 1,
2000. Accordingly, the following unaudited quarterly operating results for
the first three quarters of the year ended December 31, 2000 have been
adjusted to reflect the impact of the change in accounting method as if
adopted on January 1, 2000.
2000 Quarters Ended
-------------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
---------------------- --------------------- --------------------- -----------
As As As
Previously As Previously As Previously As As
Reported Adjusted Reported Adjusted Reported Adjusted Reported
----------- -------- ---------- -------- ---------- -------- -----------
Revenue .............................. $6,407 $ 6,563 $7,198 $7,018 $8,106 $8,019 $9,067
Income from operations ............... 1,540 1,696 1,919 1,738 2,750 2,664 3,392
Income before cumulative
effect of change in
accounting principle .............. 2,110 2,266 2,588 2,408 3,507 3,421 6,937
Cumulative effect of change
in accounting principle ........... -- (1,618) -- -- -- -- --
Net income ........................... 2,110 648 2,588 2,408 3,507 3,421 6,937
Net income per share - basic ......... $ 0.09 $ 0.03 $ 0.12 $ 0.11 $ 0.16 $ 0.15 $ 0.31
Net income per share - diluted ....... $ 0.09 $ 0.03 $ 0.11 $ 0.10 $ 0.15 $ 0.14 $ 0.30
1999 Quarters Ended
---------------------------------------------------------------------
March 31 June 30 September 30 December 31
---------------------------------------------------------------------
Revenue .............................. $4,306 $4,711 $5,407 $6,103
Income from operations ............... 339 574 1,033 1,375
Net income ........................... 677 919 1,425 1,877
Net income per share - basic ......... $ 0.03 $ 0.04 $ 0.07 $ 0.09
Net income per share - diluted ....... $ 0.03 $ 0.04 $ 0.06 $ 0.08
The pro forma effect of retroactive application of SAB 101 on the fourth
quarter of 1999 would have resulted in revenue of $5.696 million, income
from operations of $0.969 million, net income of $1.471 million, and net
income per share basic and diluted of $0.07 and $0.06, respectively.
44
FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts - Years ended December 31, 2000,
1999, and 1998 (in thousands)
- -----------------------------------------------------------------------------------------------------------------------
Col. A Col. B Col. C (1) Col. C (2) Col. D Col. E
- -----------------------------------------------------------------------------------------------------------------------
Additions
---------------------------
Balance at Charged to Charged Deductions Balance
Beginning Costs and to Other Charged to At End
of Period Expenses Accounts Reserves of Period
- -----------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts receivable:
2000 ................................... $175 $ 325 -- $ 98 $402
1999 ................................... $100 $ 100 -- $ 25 $175
1998 ................................... $ 50 $ 50 -- -- $100
Allowance for sales returns and allowances:
2000 ................................... $ 35 -- $ 90 -- $125
1999 ................................... $ 50 -- ($15) -- $ 35
1998 ................................... $ 50 -- -- -- $ 50
Inventory reserves:
2000 ................................... $159 $ 50 -- -- $209
1999 ................................... $184 ($25) -- -- $159
1998 ................................... $ 17 $ 275 -- $108 $184
45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and directors, and their ages as of March 12, 2001 are as
follows:
Name Age Position
---- --- --------
Michael A. Tzannes....... 39 Chief Executive Officer and Director
Edmund C. Reiter......... 37 President and Director
Richard P. Moberg........ 46 Chief Financial Officer and Treasurer
Richard W. Gross......... 43 Senior Vice President - Strategic Development
John K. Kerr ............ 63 Chairman of the Board of Directors
David Ehreth ............ 51 Director
G. David Forney, Jr. .... 60 Director
Michael A. Tzannes has been Aware's chief executive officer since April 1998 and
has served as a director of Aware since March 1998. Mr. Tzannes served as
Aware's president from April 1998 to March 2001. From September 1997 to April
1998, he served as Aware's chief technology officer and general manager of
telecommunications. Mr. Tzannes served as Aware's senior vice president,
telecommunications from April 1996 to September 1997, as Aware's vice president,
telecommunications from December 1992 to April 1996, as a senior member of
Aware's technical staff from January 1991 to November 1992, and as a consultant
to Aware from October 1990 to December 1990. From 1986 to 1990, he was a staff
engineer at Signatron, Inc., a telecommunications technology and systems
developer. Mr. Tzannes received a Ph.D. in electrical engineering from Tufts
University, an M.S. from the University of Michigan at Ann Arbor, and a B.S.
from the University of Patras, Greece.
Edmund C. Reiter has served as Aware's president since March 2001 and as a
director of Aware since December 1999. Mr. Reiter served as a senior vice
president from May 1998 to March 2001, as Aware's vice president, advanced
products from August 1995 to May 1998, as Aware's manager of product development
for still image compression products from June 1994 to August 1995, as a senior
member of Aware's technical staff from November 1993 to June 1994, and as a
member of Aware's technical staff from December 1992 to November 1993. Mr.
Reiter served as senior scientist at New England Research, Inc. from January
1991 to November 1992. Mr. Reiter received a Ph.D. from the Massachusetts
Institute of Technology and a B.S. from Boston College.
Richard P. Moberg joined Aware in June 1996 as Chief Financial Officer and
Treasurer. From December 1990 to June 1996, Mr. Moberg held a number of
positions at Lotus Development Corporation, a computer software developer,
including Corporate Controller from June 1995 to June 1996, Assistant Corporate
Controller from May 1993 to June 1995, and Director of Financial Services from
December 1990 to May 1993. Mr. Moberg received an M.B.A. from Bentley College
and a B.B.A. in accounting from the University of Massachusetts at Amherst.
Richard W. Gross was appointed as Senior Vice President - Strategic Development
in July 1999. Mr. Gross served as Vice President - Strategic Development from
July 1998 to July 1999. Prior to the Vice President position, he held various
senior level engineering positions from the time he joined Aware in September
1993 until July 1998. Prior to joining Aware, Mr. Gross was a senior technical
staff member at GTE Laboratories from 1987 to 1993; a technical staff member at
the Heinrich Hertz Institute from 1984 to 1987; and a programmer for IBM,
Federal Systems Division from 1980 to 1984. Mr. Gross received a Ph.D. and M.S.
in electrical engineering from the University of Rhode Island and a B.A. in
physics from Holy Cross College.
46
John K. Kerr has been a director of Aware since 1990 and Chairman of the board
of directors since March 1999. Mr. Kerr previously served as a director of Aware
from 1988 to 1989 and as Chairman of the board of directors from November 1992
to March 1994. Mr. Kerr has been General Partner of Grove Investment Partners, a
private investment partnership, since 1990. Mr. Kerr received an M.A. and a B.A.
from Baylor University.
David Ehreth has served as a director of Aware since November 1997. Since April
1998, Mr. Ehreth has served as president, chief executive officer and chairman
of Westwave Communications, Inc., a telecommunications software company. From
June 1992 to August 1998, Mr. Ehreth served as division vice president of the
access division of DSC Communications Corporation, a manufacturer of digital
switching, access, transport and private network system products for the
telecommunications industry. From 1987 to June 1992, Mr. Ehreth served as vice
president of engineering of Optilink, Inc., a manufacturer of access systems for
the telecommunications industry. Optilink, Inc. was acquired by DSC
Communications Corporation in 1990. From 1977 to 1987, Mr. Ehreth held numerous
positions in the Digital Telephone Systems division of Harris Corporation.
G. David Forney, Jr. has served as a director of Aware since May 1999. Mr.
Forney was a Vice President of Motorola, Inc. from 1977 until his retirement in
January 1999. Mr. Forney was previously a Vice President of research and
development, and a director of Codex Corporation prior to its acquisition by
Motorola in 1977. Mr. Forney is currently Bernard M. Gordon Adjunct Professor in
the Department of Electrical Engineering and Computer Sciences at the
Massachusetts Institute of Technology. Mr. Forney received an Sc.D. in
electrical engineering from Massachusetts Institute of Technology and a B.S.E.
in electrical engineering from Princeton University.
ITEM 11. EXECUTIVE COMPENSATION
The information required by item 11 of Form 10-K is incorporated by reference
from the information contained in the section captioned "Compensation of
Directors and Executive Officers" in the Proxy Statement that will be delivered
to our shareholders in connection with our May 24, 2001 Annual Meeting of
Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by item 12 of Form 10-K is incorporated by reference
from the information contained in the section captioned "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement that will be
delivered to our shareholders in connection with our May 24, 2001 Annual Meeting
of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by item 13 of Form 10-K is incorporated by reference
from the information contained in the section captioned "Certain Transactions"
in the Proxy Statement that will be delivered to our shareholders in connection
with our May 24, 2001 Annual Meeting of Shareholders.
47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) See Item 8 for an index to the consolidated financial statements,
supplementary financial information, and financial statement schedule.
(B) There were no reports on Form 8-K filed during the fourth quarter ended
December 31, 2000.
(C) INDEX TO EXHIBITS
Exhibits have been filed separately with the United States Securities and
Exchange Commission in connection with the Annual Report on Form 10-K or
have been incorporated into the report by reference. Copies of such
exhibits may be obtained from the Company upon request.
Exhibit No. Description of Exhibit
----------- ----------------------
3.1 Amended and Restated Articles of Organization (filed as
Exhibit 3.2 to the Company's Registration Statement on Form
S-1, File No. 333-6807 and incorporated herein by
reference).
3.2 Amended and Restated By-Laws (filed as Exhibit 3.3 to the
Company's Form 10-Q for the quarter ended June 30, 1996 and
incorporated herein by reference).
10.1 1990 Incentive and Non-Statutory Stock Option Plan (filed as
Exhibit 10.2 to the Company's Registration Statement on Form
S-1, File No. 333-6807 and incorporated herein by
reference).
10.2 1996 Stock Option Plan, as amended and restated (filed as
Annex A to the Company's Definitive Proxy Statement filed
with the Securities and Exchange Commission on April 11,
2000 and incorporated herein by reference).
10.3 1996 Employee Stock Purchase Plan (filed as Exhibit 10.4 to
the Company's Registration Statement on Form S-1, File No.
333-6807 and incorporated herein by reference).
10.4 Form of Director Indemnification Agreement (filed as Exhibit
10.13 to the Company's Registration Statement on Form S-1,
File No. 333-6807 and incorporated herein by reference).
10.5 Employment Agreement of James C. Bender, dated October 27,
1994, as amended on December 20, 1996 and April 23, 1998
(filed as Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended March 31, 1998 and incorporated herein by
reference).
21.1* Subsidiaries of Registrant.
23.1* Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Deloitte & Touche LLP.
* Filed herewith
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Michael A. Tzannes
----------------------------------------
Michael A. Tzannes, Chief Executive Officer
Date: March 28, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 28th day of March 2001.
Signature Title
--------- -----
/s/ Michael A. Tzannes Chief Executive Officer and Director
- -------------------------- (Principal Executive Officer)
Michael A. Tzannes
/s/ Edmund C. Reiter President and Director
- --------------------------
Edmund C. Reiter
/s/ Richard P. Moberg Chief Financial Officer, Treasurer
- -------------------------- (Principal Financial and Accounting Officer)
Richard P. Moberg
/s/ John K. Kerr Chairman of the Board of Directors
- --------------------------
John K. Kerr
/s/ David Ehreth Director
- --------------------------
David Ehreth
/s/ G. David Forney, Jr. Director
- --------------------------
G. David Forney, Jr