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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
COMMISSION FILE NUMBER 000-21129
AWARE, INC.
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(Exact Name of Registrant as Specified in Its Charter)
MASSACHUSETTS 04-2911026
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(State or Other Jurisdiction of (I.R.S. Employer
Identification No.) Incorporation or Organization)
40 MIDDLESEX TURNPIKE, BEDFORD, MASSACHUSETTS, 01730
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(Address of Principal Executive Offices)
(Zip Code)
(781) 276-4000
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(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of the issuer's common stock as of
November 1, 2002:
CLASS NUMBER OF SHARES OUTSTANDING
----- ----------------------------
Common Stock, par value $0.01 per share 22,686,030 shares
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AWARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
PAGE
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
September 30, 2002 and December 31, 2001.................... 3
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2002
and September 30, 2001...................................... 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2002
and September 30, 2001...................................... 5
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk................................................. 23
Item 4. Controls and Procedures..................................... 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 24
Item 5. Other Information........................................... 24
Item 6. Exhibits and Reports on Form 8-K............................ 25
Signatures.................................................. 25
Certifications.............................................. 26
2
PART I. FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
AWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
----------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents................................................ $48,678 $36,056
Short-term investments................................................... 1,208 21,228
Accounts receivable, net................................................. 2,513 1,383
Inventories.............................................................. 50 282
Deferred tax assets...................................................... - 1,811
Prepaid expenses and other assets........................................ 710 795
----------------- ----------------
Total current assets............................................... 53,159 61,555
----------------- ----------------
Property and equipment, net................................................... 10,212 10,937
Deferred tax assets........................................................... - 5,282
Other assets, net............................................................. 235 329
----------------- ----------------
Total assets....................................................... $63,606 $78,103
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $647 $353
Accrued expenses ........................................................ 183 521
Accrued compensation .................................................... 642 948
Accrued professional..................................................... 202 125
Deferred revenue......................................................... 43 -
----------------- ----------------
Total current liabilities........................................ 1,717 1,947
----------------- ----------------
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares authorized,
none outstanding................................................. - -
Common stock, $.01 par value; 70,000,000 shares authorized; issued
and outstanding, 22,686,030 in 2002 and 22,657,741 in 2001...... 227 227
Additional paid-in capital.............................................. 77,272 77,151
Accumulated deficit.................................................... (15,610) (1,222)
----------------- ----------------
Total stockholders' equity...................................... 61,889 76,156
----------------- ----------------
Total liabilities and stockholders' equity....................... $63,606 $78,103
================= ================
The accompanying notes are an integral part of the financial statements.
3
AWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- --------------
Revenue:
Product sales....................................... $1,298 $819 $3,399 $2,959
Contract revenue.................................... 1,926 1,538 6,177 6,412
Royalties........................................... 729 751 1,965 5,972
--------------- --------------- --------------- --------------
Total revenue..................................... 3,953 3,108 11,541 15,343
Costs and expenses:
Cost of product sales............................... 489 173 831 447
Cost of contract revenue............................ 1,352 1,376 4,344 5,516
Research and development............................ 3,378 3,007 9,915 6,917
Selling and marketing............................... 774 704 2,275 2,186
General and administrative.......................... 772 722 2,165 2,172
--------------- --------------- --------------- --------------
Total costs and expenses........................... 6,765 5,982 19,530 17,238
Loss from operations.................................... (2,812) (2,874) (7,989) (1,895)
Interest income......................................... 224 522 695 1,953
--------------- --------------- --------------- --------------
Income (loss) before benefit from (provision for)
income taxes......................................... (2,588) (2,352) (7,294) 58
Benefit from (provision for) income taxes............... (7,093) 313 (7,093) -
--------------- --------------- --------------- --------------
Net income (loss)....................................... ($9,681) ($2,039) ($14,387) $58
=============== =============== =============== ==============
Net income (loss) per share - basic..................... ($0.43) ($0.09) ($0.63) $0.00
Net income (loss) per share - diluted................... ($0.43) ($0.09) ($0.63) $0.00
Weighted average shares - basic......................... 22,686 22,639 22,675 22,621
Weighted average shares - diluted....................... 22,686 22,639 22,675 22,876
The accompanying notes are an integral part of the financial statements.
4
AWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
2002 2001
---------------- ----------------
Cash flows from operating activities:
Net income (loss).......................................... ($14,387) $58
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 1,405 1,249
Provision for doubtful accounts......................... - 25
Increase (decrease) from changes in assets and
liabilities:
Accounts receivable.................................. (1,130) 2,190
Inventories.......................................... 232 (200)
Deferred tax assets.................................. 7,093 -
Prepaid expenses and other assets ................... 85 (202)
Accounts payable..................................... 294 67
Accrued expenses..................................... (567) (127)
Deferred revenue..................................... 43 (1,451)
---------------- ----------------
Net cash provided by (used in) operating
activities..................................... (6,932) 1,609
---------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment....................... (587) (1,030)
Other assets.............................................. - (175)
Net sales of short-term investments...................... 20,020 2,821
---------------- ----------------
Net cash provided by investing activities........ 19,433 1,616
---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of common stock................... 121 262
---------------- ----------------
Net cash provided by financing activities......... 121 262
---------------- ----------------
Increase in cash and cash equivalents......................... 12,622 3,487
Cash and cash equivalents, beginning of period................ 36,056 51,662
---------------- ----------------
Cash and cash equivalents, end of period...................... $48,678 $55,149
================ ================
The accompanying notes are an integral part of the financial statements.
5
AWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A) BASIS OF PRESENTATION
The accompanying unaudited consolidated balance sheets, statements of
operations, and statements of cash flows reflect all adjustments
(consisting only of normal recurring items) which are, in the opinion
of management, necessary for a fair presentation of financial position
at September 30, 2002, and of the results of operations and cash flows
for the interim periods ended September 30, 2002 and 2001.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and
therefore do not include all information and footnotes necessary for a
complete presentation of our financial position, results of operations
and cash flows, in conformity with generally accepted accounting
principles. We filed audited financial statements which included all
information and footnotes necessary for such presentation for the three
years ended December 31, 2001 in conjunction with our 2001 Annual
Report on Form 10-K.
The results of operations for the interim period ended September 30,
2002 are not necessarily indicative of the results to be expected for
the year.
B) INVENTORY
Inventory consists primarily of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2002 2001
----------------- -----------------
Raw materials............. $15 $146
Finished goods............ 35 136
----------------- -----------------
Total.............. $50 $282
================= =================
6
C) COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income or loss by
the weighted average number of common shares outstanding. Diluted
earnings per share is computed by dividing net income or loss by the
weighted average number of common shares outstanding plus additional
common shares that would have been outstanding if dilutive potential
common shares had been issued. For the purposes of this calculation,
stock options are considered common stock equivalents in periods in
which they have a dilutive effect. Stock options that are anti-dilutive
are excluded from the calculation.
Net income or loss per share is calculated as follows (in thousands,
except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net income (loss)................................. ($9,681) ($2,039) ($14,387) $58
Weighted average common shares outstanding........ 22,686 22,639 22,675 22,621
Additional dilutive common stock equivalents...... - - - 255
------------- ------------- ------------- -------------
Diluted shares outstanding ....................... 22,686 22,639 22,675 22,876
============= ============= ============= =============
Net income (loss) per share - basic............... ($0.43) ($0.09) ($0.63) $0.00
Net income (loss) per share - diluted............. ($0.43) ($0.09) ($0.63) $0.00
For the three month periods ended September 30, 2002 and 2001,
potential common stock equivalents of 459 and 65,329, respectively,
were not included in the per share calculation for diluted EPS, because
we had a net loss and the effect of their inclusion would be
anti-dilutive. For the nine month period ended September 30, 2002,
potential common stock equivalents of 309,647 were not included in the
per share calculation for diluted EPS, because we had a net loss and
the effect of their inclusion would be anti-dilutive. For the three
month periods ended September 30, 2002 and 2001, additional options to
purchase 7,594,304 and 5,259,223 shares of common stock, respectively,
were outstanding, but were not included in the computation of diluted
EPS because the options' exercise prices were greater than the average
market price of the common stock and thus would be anti-dilutive. For
the nine month periods ended September 30, 2002 and 2001, additional
options to purchase 5,364,298 and 3,496,090 shares of common stock,
respectively, were outstanding, but were not included in the
computation of diluted EPS because the options' exercise prices were
greater than the average market price of the common stock and thus
would be anti-dilutive.
7
D) BUSINESS SEGMENTS
We organize the company as one segment and conduct our operations in
the United States.
We sell our products and technology to domestic and international
customers. Revenues were generated from the following geographic
regions (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------- ------------- --------------
United States.................................... $3,153 $2,849 $9,294 $14,507
Asia/Pacific..................................... 434 59 1,523 97
Rest of World.................................... 366 200 724 739
------------- ------------- ------------- --------------
$3,953 $3,108 $11,541 $15,343
============= ============= ============= ==============
E) INCOME TAXES
We have evaluated, on a quarterly basis, the positive and negative
evidence affecting the realizability of our deferred tax assets. In the
third quarter of 2002, we determined that due to our continuing
operating losses over the last six quarters as well as the uncertainty
of the timing of profitability in future periods, we should fully
reserve our deferred tax assets as of September 30, 2002. As a result,
we recorded a tax provision of $7.1 million in the quarter ended
September 30, 2002.
At December 31, 2001, we had federal net operating loss carryforwards
of approximately $50.9 million, which begin to expire in 2005, and
federal research and development credit carryforwards of approximately
$6.7 million, which begin to expire in 2003. At December 31, 2001, we
also had available state net operating loss carryforwards of
approximately $50.9 million, which began to expire in 2002, and state
research and development and investment tax credit carryforwards of
approximately $3.5 million, which begin to expire in 2003.
F) SUBSEQUENT EVENT
In October 2002, we terminated 35 employees to reduce our operating
costs. Of the 35 employees who were terminated, 32 were in engineering,
2 were in selling and marketing, and 1 was in administration. We
estimate that the cost of severance and other employee benefits for
terminated employees will be approximately $700,000. The full cost of
the headcount reduction will be recorded in the fourth quarter of 2002.
8
G) RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 supercedes FASB Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS 144 applies to all
long-lived assets (including discontinued operations) and consequently
amends Accounting Principles Board Opinion No. 30, "Reporting Results
of Operations - Reporting the Effects of Disposal of a Segment of a
Business." SFAS 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001. We adopted SFAS 144 in
the first quarter of 2002. The implementation of SFAS 144 did not have
an effect on our financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). This
statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and supercedes EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)" ("EITF 94-3"). SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. EITF 94-3 allowed for an
exit cost liability to be recognized at the date of an entity's
commitment to an exit plan. SFAS 146 also requires that liabilities
recorded in connection with exit plans be initially measured at fair
value. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early
adoption encouraged. We do not expect the adoption of SFAS 146 will
have a material impact on our financial position or results of
operations.
9
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SOME OF THE INFORMATION IN THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. YOU CAN IDENTIFY THESE
STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "MAY," "WILL," "EXPECT,"
"ANTICIPATE," "BELIEVE," "ESTIMATE," "CONTINUE" AND SIMILAR WORDS. YOU SHOULD
READ STATEMENTS THAT CONTAIN THESE WORDS CAREFULLY BECAUSE THEY: (1) DISCUSS OUR
FUTURE EXPECTATIONS; (2) CONTAIN PROJECTIONS OF OUR FUTURE OPERATING RESULTS OR
FINANCIAL CONDITION; OR (3) STATE OTHER "FORWARD-LOOKING" INFORMATION. HOWEVER,
WE MAY NOT BE ABLE TO PREDICT FUTURE EVENTS ACCURATELY. THE RISK FACTORS LISTED
IN THIS SECTION, AS WELL AS ANY CAUTIONARY LANGUAGE IN THIS FORM 10-Q, PROVIDE
EXAMPLES OF RISKS, UNCERTAINTIES AND EVENTS THAT MAY CAUSE OUR ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THE EXPECTATIONS WE DESCRIBE IN OUR FORWARD-LOOKING
STATEMENTS. YOU SHOULD BE AWARE THAT THE OCCURRENCE OF ANY OF THE EVENTS
DESCRIBED IN THESE RISK FACTORS AND ELSEWHERE IN THIS FORM 10-Q COULD MATERIALLY
AND ADVERSELY AFFECT OUR BUSINESS.
RESULTS OF OPERATIONS
PRODUCT SALES. Product sales consist primarily of revenue from the sale
of asymmetric digital subscriber line ("ADSL") equipment and compression
software products. The products that comprise ADSL equipment sales are primarily
test and development systems, modules, and modems.
Product sales increased 58% from $0.8 million in the third quarter of 2001 to
$1.3 million in the current year quarter. As a percentage of total revenue,
product sales increased from 26% in the third quarter of 2001 to 33% in the
current year quarter. The dollar increase was primarily due to an increase in
revenue from the sale of modules and compression software. Module sales were
higher primarily due to sales to a customer that is using them in ADSL test
equipment. Compression software revenue increased primarily due to higher demand
for our electronic identification products.
For the nine months ended September 30, product sales increased 15% from $3.0
million in 2001 to $3.4 million in 2002. As a percentage of total revenue,
product sales increased from 19% in the first nine months of 2001 to 29% in the
corresponding period of 2002. The dollar increase was primarily due to an
increase in revenue from the sale of modules, which was partially offset by a
decrease in revenue from the sale of test and development systems. Module sales
were higher primarily due to sales to a customer that is using them in ADSL test
equipment.
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 increased 25% from $1.5 million in the third quarter of 2001 to
$1.9 million in the current year quarter. As a percentage of total revenue,
contract revenue was 49% for the third quarter of 2001 and the current year
quarter. The dollar increase was primarily due to the completion of a project
with one of our existing customers.
10
For the nine months ended September 30, contract revenue decreased 4% from $6.4
million in 2001 to $6.2 million in 2002. As a percentage of total revenue,
contract revenue increased from 42% in the third quarter of 2001 to 54% in the
current year quarter. The dollar decrease was primarily due to a difficult
semiconductor industry environment. Both existing and prospective ADSL chipset
licensees have been reluctant or slow to begin new development projects with us.
We believe this is a result of the uncertainty in the semiconductor and
telecommunications industries. We are uncertain when the market conditions we
faced over the last six quarters will improve.
ROYALTIES. Royalties consist of royalty payments that we receive under
licensing agreements. We receive royalties from customers for the right to use
our technology in their chipsets or solutions.
Royalties decreased 3% from $0.8 million in the third quarter of 2001 to $0.7
million in the current year quarter. As a percentage of total revenue, royalties
decreased from 24% in the third quarter of 2001 to 18% in the current year
quarter. For the nine months ended September 30, royalties decreased 67% from
$6.0 million in 2001 to $2.0 million in 2002. As a percentage of total revenue,
royalties decreased from 39% in the first nine months of 2001 to 17% in the
corresponding period of 2002.
For the three and nine months periods, the decrease in royalties was primarily
due to a decrease in ADSL chipset sales by our largest customer, Analog Devices,
Inc. ("ADI"). We believe that sluggish chipset demand and lower chipset prices
were the primary reasons behind the decline in ADI's chipset sales. While
worldwide demand for ADSL service remains strong, demand for ADSL chipsets has
been weaker because of excess equipment capacity at telephone companies' central
offices. Also, the availability of ADSL chipsets from a number of suppliers and
intense competition among those suppliers has caused chipset prices to drop
sharply over the last six quarters. We are uncertain when these market
conditions will improve.
COST OF PRODUCT SALES. Since the cost of compression software license
sales is minimal, cost of product sales consists primarily of ADSL equipment
sales. Cost of product sales increased 183% from $173,000 in the third quarter
of 2001 to $489,000 in the current year quarter. As a percentage of product
sales, cost of product sales increased from 21% in the third quarter of 2001 to
38% in the current year quarter. For the nine months ended September 30, cost of
product sales increased 86% from $447,000 in 2001 to $831,000 in 2002. As a
percentage of product sales, cost of product sales increased from 15% in the
first nine months of 2001 to 24% in the corresponding period of 2002.
For the three and nine month periods, the increase in cost of product sales was
primarily due to a greater proportion of module sales in the sales mix. Modules
have higher cost of sales than the other products that comprise our product
revenue.
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. Our total engineering costs are allocated between cost of contract
revenue and research and development expense. In a given period, the allocation
of engineering costs between cost of contract revenue and research and
development is a function of the level of effort expended on each. As a
particular technology matures from the development stage to integration into
customer chips, engineering costs typically shift from research and development
to cost of contract revenue.
11
For the three months ended September 30, cost of contract revenue was
essentially the same at $1.4 million in 2001 and in 2002. As a percentage of
contract revenue, cost of contract revenue decreased from 89% in the third
quarter of 2001 to 70% in the current year quarter. Cost of contract revenue as
a percentage of contract revenue fell in 2002 because the mix of license fees
and engineering services fees in contract revenue in 2002 produced more
profitable business than in 2001.
For the nine months ended September 30, cost of contract revenue decreased 21%
from $5.5 million in 2001 to $4.3 million in 2002. As a percentage of contract
revenue, cost of contract revenue decreased from 86% in the first nine months of
2001 to 70% in the corresponding period of 2002. The dollar decrease in cost of
contract revenue was primarily due to two factors: (i) contract revenue was
lower in 2002 as compared to 2001, therefore cost of contract revenue was lower
as well, and (ii) the mix of license fees and engineering service fees in
contract revenue in 2002 produced more profitable business than in 2001.
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 broadband intellectual property
offerings, and our compression software technology. Research and development
expense increased by 12% from $3.0 million in the third quarter of 2001 to $3.4
million in the current year quarter. As a percentage of total revenue, research
and development expense decreased from 97% in the third quarter of 2001 to 85%
in the current year quarter. For the nine months ended September 30, research
and development expense increased by 43% from $6.9 million in 2001 to $9.9
million in 2002. As a percentage of total revenue, research and development
expense increased from 45% in the first nine months of 2001 to 86% in the
corresponding period of 2002.
For the three and nine month periods, the dollar increase in research and
development spending was primarily due to two factors: (i) we hired a number of
new engineers during 2001, therefore our 2002 spending reflects the full period
effect of those new hires, whereas 2001 spending reflects that portion of the
period that these employees were with us; and (ii) as our customer contract
revenue projects decreased over the past year, we have shifted engineers who
were working on these customer projects to internal research and development
projects. Our research and development spending is principally focused on
projects related to core ADSL technology, VeDSL, Dr. DSL, G.SHDSL, wireless
local area network communications as well as other development projects.
In October 2002, we terminated 35 employees to reduce our operating costs. Of
the 35 employees who were terminated, 32 were engineers. We estimate that the
cost of severance and other employee benefits for terminated employees will be
approximately $700,000. This cost will be recorded in the fourth quarter of
2002, and it approximates our historical quarterly costs for these employees as
if they were active employees. Consequently, we expect fourth quarter research
and development expenses will be consistent with prior quarters in 2002 assuming
consistent levels of contract revenue. If contract revenue in the fourth quarter
declines relative to the prior quarters of 2002, more engineering resources will
shift from cost of contract revenue into research and development, and as a
result research and development expense may increase despite the reduction in
force.
12
In connection with the October reduction in force, we informed remaining
employees that effective January 1, 2003 their salaries would be reduced by 5%
and that senior management's salaries would be reduced by 10%. We anticipate
that the reduction in force and salary reductions will lower total 2003
engineering expenses by approximately $3.7 million annually, and will lower
total 2003 company expenses by $4.1 million annually. Total engineering expenses
include cost of contract revenue and research and development expense.
SELLING AND MARKETING EXPENSE. Selling and marketing expense consists
primarily of salaries for sales and marketing personnel, travel, advertising and
promotion, recruiting, and facilities expense. Selling and marketing expense
increased 10% from $704,000 in the third quarter of 2001 to $774,000 in the
current year quarter. As a percentage of total revenue, selling and marketing
expense decreased from 23% in the third quarter of 2001 to 20% in the current
year quarter. The dollar increase was primarily due to increased spending on
sales staff, higher sales commissions and higher legal expenses associated with
negotiating development and licensing agreements.
For the nine months ended September 30, selling and marketing expense increased
by 4% from $2.2 million in 2001 to $2.3 million in 2002. As a percentage of
total revenue, selling and marketing expense increased from 14% in the first
nine months of 2001 to 20% in the corresponding period of 2002. The dollar
increase was primarily due to increased spending on sales staff and higher
commissions for product sales, which was partially offset by lower advertising
and tradeshow expenses.
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 7% from $722,000 in the third quarter of 2001
to $772,000 in the current year quarter. As a percentage of total revenue,
general and administrative expense decreased from 23% in the third quarter of
2001 to 20% in the current year quarter. The dollar increase is primarily due to
higher expenses associated with being a public company.
For the nine months ended September 30, general and administrative expenses were
$2.2 million in 2001 and in 2002. As a percentage of total revenue, general and
administrative expense increased from 14% in the first nine months of 2001 to
19% in the corresponding period of 2002.
INTEREST INCOME. Interest income decreased 57% from $522,000 in the
third quarter of 2001 to $224,000 in the current year quarter. For the nine
months ended September 30, interest income decreased 64% from $1,953,000 in 2001
to $695,000 in 2002. For the three and nine month periods, the dollar decrease
is primarily due to lower interest rates earned on our cash balances and to a
lesser extent lower cash balances.
INCOME TAXES. We have evaluated, on a quarterly basis, the positive and
negative evidence affecting the realizability of our deferred tax assets. In the
third quarter of 2002, we determined that due to our continuing operating losses
over the last six quarters as well as the uncertainty of the timing of
profitability in future periods, we should fully reserve our deferred tax assets
as of September 30, 2002. As a result, we recorded a tax provision of $7.1
million in the quarter ended September 30, 2002.
13
In the first quarter of 2001, we recorded a $1.4 million provision for income
taxes based on our profitability in that quarter and our projected taxable
income for 2001. As 2001 progressed, it became apparent that deteriorating ADSL
market conditions would adversely affect our full year revenue and profit
expectations. Consequently, we revised our 2001 effective tax rate and reversed
$1.1 million and $0.3 million of the first quarter income tax provision in the
second and third quarters of 2001, respectively.
At December 31, 2001, we had federal net operating loss carryforwards of
approximately $50.9 million, which begin to expire in 2005, and federal research
and development credit carryforwards of approximately $6.7 million, which begin
to expire in 2003. At December 31, 2001, we also had available state net
operating loss carryforwards of approximately $50.9 million, which began to
expire in 2002, and state research and development and investment tax credit
carryforwards of approximately $3.5 million, which begin to expire in 2003.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, we had cash, cash equivalents and short-term investments
of $49.9 million, which represents a decrease of $7.4 million from December 31,
2001. The decrease is primarily due to $6.9 million of cash used in operations,
and $587,000 of cash invested in capital equipment, which was partially offset
by $121,000 of proceeds from the issuance of common stock.
Cash used in operations in the first nine months of 2002 was primarily the
result of operating losses and working capital requirements. Capital spending
was primarily related to the purchase of computer hardware and software, and
laboratory equipment used principally in engineering activities.
While we can not assure you that we will not require additional financing, or
that such financing will be available to us, we believe that our cash, cash
equivalents and short-term investments will be sufficient to fund our operations
for at least the next twelve months.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS 144 supercedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS 144 applies to all long-lived assets (including discontinued operations)
and consequently amends Accounting Principles Board Opinion No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business." SFAS 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001. We adopted SFAS 144 in the first
quarter of 2002. The implementation of SFAS 144 did not have an effect on our
financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and supercedes EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
14
Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3").
SFAS 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. EITF 94-3
allowed for an exit cost liability to be recognized at the date of an entity's
commitment to an exit plan. SFAS 146 also requires that liabilities recorded in
connection with exit plans be initially measured at fair value. The provisions
of SFAS 146 are effective for exit or disposal activities that are initiated
after December 31, 2002, with early adoption encouraged. We do not expect the
adoption of SFAS 146 will have a material impact on our financial position or
results of operations.
RISK FACTORS
We believe that the occurrence of any one or some combination of the following
risk factors could seriously harm our business.
OUR QUARTERLY RESULTS ARE UNPREDICTABLE AND MAY FLUCTUATE SIGNIFICANTLY
Our quarterly revenue and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter. Because our revenue components
fluctuate and are difficult to predict, and our expenses are largely independent
of revenues in any particular period, it is difficult for us to accurately
forecast revenues and profitability. We generally recognize contract revenues
ratably over the period during which we expect to provide engineering services.
While this means that contract revenues from current licenses are generally
predictable, changes can be introduced by a reevaluation of the length of the
development period. The initial estimate of this period is subject to revision
as the product being developed under a contract nears completion, and a revision
may result in an increase or decrease to the quarterly revenue for that
contract. In addition, accurate prediction of revenues from new licensees is
difficult because the development of a business relationship with a potential
licensee is a lengthy process, frequently spanning a year or more, and the
fiscal period in which a new license agreement will be entered into, if at all,
and the financial terms of such an agreement are difficult to predict. Contract
revenues also include fees for engineering services, which are dependent upon
the varying level of assistance desired by licensees and, therefore, the revenue
from these services is also difficult to predict.
It is also difficult for us to make accurate forecasts of royalty revenues.
Royalties are generally recognized in the quarter in which we receive a report
from a licensee regarding the shipment of licensed integrated circuits in the
prior quarter, and are dependent upon fluctuating sales volumes and/or prices of
chips containing our technology, all of which are beyond our ability to control
or assess in advance.
Our business is subject to a variety of additional risks, which could materially
adversely affect quarterly and annual operating results, including:
|X| market acceptance of our broadband technologies by semiconductor
companies;
|X| the extent and timing of new license transactions with semiconductor
companies;
|X| changes in our and our licensees' development schedules and levels of
expenditure on research and development;
|X| the loss of a strategic relationship with a licensee;
|X| equipment companies' acceptance of integrated circuits produced by our
licensees;
|X| the loss by a licensee of a strategic relationship with an equipment
company customer;
15
|X| announcements or introductions of new technologies or products by us
or our competitors;
|X| delays or problems in the introduction or performance of enhancements
or of future generations of our technology;
|X| delays in the adoption of new industry standards or changes in market
perception of the value of new or existing standards;
|X| competitive pressures resulting in lower contract revenues or royalty
rates;
|X| personnel changes, particularly those involving engineering and
technical personnel;
|X| costs associated with protecting our intellectual property;
|X| the potential that licensees could fail to make payments under their
current contracts;
|X| ADSL market-related issues, including lower ADSL chipset unit demand
brought on by excess channel inventory and lower average selling
prices for ADSL chipsets as a result of market surpluses;
|X| regulatory developments; and
|X| general economic trends and other factors.
WE HAVE EXPERIENCED NET LOSSES
We had net losses during 2001 and the first nine months of 2002. We expect that
we will have a net loss during the fourth quarter of 2002. We may continue to
experience losses beyond the fourth quarter of 2002 if:
|X| the semiconductor and telecommunications markets do not recover from
the downturn that began in 2001;
|X| our existing customers do not increase their revenues from sales of
chipsets with our technology; or
|X| new customers do not choose to license our intellectual property for
new chipset products.
WE HAVE A UNIQUE BUSINESS MODEL
The success of our business model depends upon our ability to license our
technology to semiconductor and equipment companies, and our customers'
willingness and ability to sell products that incorporate our technology so that
we may receive significant royalties that are consistent with our plans and
expectations.
We face numerous risks in successfully obtaining suitable licensees on terms
consistent with our business model, including, among others:
|X| we must typically undergo a lengthy and expensive process of building
a relationship with a potential licensee before there is any assurance
of a license agreement with such party;
|X| we must persuade semiconductor and equipment manufacturers with
significant resources to rely on us for critical technology on an
ongoing basis rather than trying to develop similar technology
internally;
|X| we must persuade potential licensees to bear development costs
associated with our technology applications and to make the necessary
investment to successfully produce chipsets and products using our
technology; and
16
|X| we must successfully transfer technical know-how to licensees.
Moreover, the success of our business model also depends on the receipt of
royalties from licensees. Royalties from our licensees are often based on the
selling prices of our licensees' chipsets and products, over which we have
little or no control. We also have little or no control over our licensees'
promotional and marketing efforts. Our licensees are not required to pay us
royalties unless they use our technology. They are not prohibited from competing
against us.
Our business could be seriously harmed if:
|X| we cannot obtain suitable licensees;
|X| our licensees fail to achieve significant sales of chipsets or
products incorporating our technology; or
|X| we otherwise fail to implement our business strategy successfully.
THERE IS AN OVERSUPPLY OF ADSL CHIPSETS, WHICH HAS CAUSED OUR ROYALTY REVENUE TO
DECLINE
The royalties we receive are influenced by many of the risks faced by the ADSL
market in general; including reduced average selling prices ("ASPs") for ADSL
chipsets during periods of surplus. Since late 2000, the ADSL industry has
experienced an oversupply of ADSL chipsets and central office equipment.
Excessive inventory levels led to soft chipset demand, which in turn led to
declining ASPs. As a result of the soft demand and declining ASPs for ADSL
chipsets, our royalty revenue has decreased substantially from the levels we
achieved in 2000. Price decreases for ADSL chipsets, and the corresponding
decreases in per unit royalties received by us, can be sudden and dramatic.
Pricing pressures may continue during the fourth quarter of 2002 and beyond. Our
royalty revenue may continue to decline.
WE DEPEND SUBSTANTIALLY UPON A LIMITED NUMBER OF LICENSEES
There is a relatively limited number of semiconductor and equipment companies to
which we can license our broadband technology in a manner consistent with our
business model. If we fail to maintain relationships with our current licensees
or fail to establish a sufficient number of new licensee relationships, our
business could be seriously harmed. Our prospective customers may use their
superior size and bargaining power to demand license terms that are unfavorable
to us and prospective customers may not elect to license from us.
WE DERIVE A SIGNIFICANT AMOUNT OF REVENUE FROM ONE CUSTOMER
In 2001 and the first nine months of 2002, we derived a significant amount of
our total revenue from ADI. 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.
Our revenue in the near term is highly dependent upon ADI's ability to maintain
its market share and pricing. The ADSL market has experienced significant price
erosion, which has adversely affected ADI's ADSL revenue, which in turn has
adversely affected our royalty revenue. To the
17
extent that ADI has lost market share, or loses market share in the future, or
experiences further price erosion in its ADSL chipsets, our royalty revenue may
continue to decline.
OUR SUCCESS REQUIRES ACCEPTANCE OF OUR TECHNOLOGY BY EQUIPMENT COMPANIES
Due to our business strategy, our success is dependent on our ability to
generate significant royalties from our licensing arrangements with
semiconductor manufacturers. Our ability to generate significant royalties is
materially affected by the willingness of equipment companies to purchase
integrated circuits that incorporate our technology from our licensees. There
are other competitive solutions available for equipment companies seeking to
offer broadband communications products. We face the risk that equipment
manufacturers will choose those alternative solutions. Generally, our ability to
influence equipment companies' decisions whether to purchase integrated circuits
that incorporate our technology is limited.
We also face the risk that equipment companies that elect to use integrated
circuits that incorporate our technology into their products will not compete
successfully against other equipment companies. Many factors beyond our control
could influence the success or failure of a particular equipment company that
uses integrated circuits based on our technology, including:
|X| competition from other businesses in the same industry;
|X| market acceptance of its products;
|X| its engineering, sales and marketing, and management capabilities;
|X| technical challenges of developing its products unrelated to our
technology; and
|X| its financial and other resources.
Even if equipment companies incorporate our chipsets based on our intellectual
property into their products, their products may not achieve commercial
acceptance or result in significant royalties to us.
OUR SUCCESS REQUIRES TELEPHONE COMPANIES TO INSTALL ADSL SERVICE IN VOLUME
The success of our ADSL licensing business depends upon telephone companies
installing ADSL service in significant volumes. Factors that affect the volume
deployment of ADSL service include:
|X| the desire of telephone companies to install ADSL service, which is
dependent on the development of a viable business model for ADSL
service, including the capability to market, sell, install and
maintain the service;
|X| the pricing of ADSL services by telephone companies;
|X| the quality of telephone companies' networks;
|X| government regulations; and
|X| the willingness of residential telephone customers to demand ADSL
service in the face of competitive service offerings, such as cable
modems.
If telephone companies do not install ADSL service in significant volumes, or if
telephone companies install ADSL service based on other technology, our business
will be seriously harmed.
18
OUR INTELLECTUAL PROPERTY IS SUBJECT TO LIMITED PROTECTION
Because we are a technology provider, our ability to protect our intellectual
property and to operate without infringing the intellectual property rights of
others is critical to our success. We regard our technology as proprietary, and
we have a number of patents and pending patent applications. We also rely on a
combination of trade secrets, copyright and trademark law and non-disclosure
agreements to protect our unpatented intellectual property. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our technology without authorization.
As part of our licensing arrangements, we typically work closely with our
semiconductor and equipment manufacturer licensees, many of whom are also our
potential competitors, and provide them with proprietary know-how necessary for
their development of customized chipsets based on our ADSL technology. Although
our license agreements contain non-disclosure provisions and other terms
protecting our proprietary know-how and technology rights, it is possible that,
despite these precautions, some of our licensees might obtain from us
proprietary information that they could use to compete with us in the
marketplace. Although we intend to defend our intellectual property as
necessary, the steps we have taken may be inadequate to prevent
misappropriation.
In the future, we may choose to bring legal action to enforce our intellectual
property rights. Any such litigation could be costly and time-consuming for us,
even if we were to prevail. Moreover, even if we are successful in protecting
our proprietary information, our competitors may independently develop
technologies substantially equivalent or superior to our technology. The
misappropriation of our technology or the development of competitive technology
could seriously harm our business.
Our technology 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 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, we could be subject to
substantial damages and an injunction preventing us from conducting our
business.
OUR BUSINESS IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE
The semiconductor and telecommunications industries, as well as the market for
high-speed network access technologies, are characterized by rapid technological
change, with new generations of products being introduced regularly and with
ongoing evolutionary improvements. We expect to depend on our ADSL technology
for a substantial portion of our revenue for the foreseeable future. Therefore,
we face risks that others could introduce competing technology that renders our
ADSL technology less desirable or obsolete. Also, the announcement of new
technologies could cause our licensees or their customers to delay or defer
entering into
19
arrangements for the use of our existing technology. Either of these events
could seriously harm our business.
We expect that our business will depend to a significant extent on our ability
to introduce enhancements and new generations of our ADSL technology as well as
new technologies that keep pace with changes in the telecommunications and
broadband industries and that achieve rapid market acceptance. We must
continually devote significant engineering resources to achieving technical
innovations. These innovations are complex and require long development cycles.
Moreover, we may have to make substantial investments in technological
innovations before we can determine their commercial viability. We may lack
sufficient financial resources to fund future development. Also, our licensees
may decide not to share certain research and development costs with us. Revenue
from technological innovations, even if successfully developed, may not be
sufficient to recoup the costs of development.
One element of our business strategy is to assume the risks of technology
development failure while reducing such risks for our licensees. In the past, we
have spent significant amounts on development projects that did not produce any
marketable technologies or products, and we cannot assure you that it will not
occur again.
WE FACE INTENSE COMPETITION FROM A WIDE RANGE OF COMPETITORS
Our success as an intellectual property supplier depends on the willingness and
ability of semiconductor manufacturers to design, build and sell integrated
circuits based on our intellectual property. The semiconductor industry is
intensely competitive and has been characterized by price erosion, rapid
technological change, short product life cycles, cyclical market patterns and
increasing foreign and domestic competition.
As an intellectual property supplier to the semiconductor industry, we face
intense competition from internal development teams within potential
semiconductor customers. We must convince potential licensees to license from us
rather than develop technology internally. Furthermore, semiconductor customers,
who have licensed our intellectual property, may choose to abandon joint
development projects with us and develop chipsets themselves without using our
technology. In addition to competition from internal development teams, we
compete against other independent suppliers of intellectual property. We
anticipate intense competition from suppliers of intellectual property for ADSL
and wireless local area networking.
The market for ADSL chipsets is also intensely competitive. Our success within
the ADSL industry requires that ADSL equipment manufacturers buy chipsets from
our semiconductor licensees, and that telephone companies buy ADSL equipment
from those equipment manufacturers. Our customers' chipsets compete with
products from other vendors of standards-based and ADSL chipsets, including
Alcatel, Broadcom, Centillium, Conexant, GlobespanVirata, and Texas Instruments.
ADSL services offered over copper telephone networks also compete with
alternative broadband transmission technologies that use the telephone network
as well as other network architectures. Alternative technologies for the
telephone network include symmetric high speed DSL (also known as HDSL, SDSL and
G.SHDSL), and very high speed DSL, also known as VDSL. These DSL technologies
are based on techniques other than those used by ADSL to transport high-speed
data over telephone lines. Alternative technologies that use other network
architectures to
20
provide high-speed data service include cable modems using cable networks, and
wireless solutions using wireless networks. These alternative broadband
technologies may be more successful than ADSL.
Many of our current and prospective ADSL licensees, as well as chipset
competitors that compete with our semiconductor licensees, including Alcatel,
Broadcom, Conexant, GlobespanVirata and Texas Instruments, have significantly
greater financial, technological, manufacturing, marketing and personnel
resources than we do. We may be unable to compete successfully, and competitive
pressures could seriously harm our business.
OUR RECENT REDUCTION IN WORKFORCE MAY ADVERSELY AFFECT THE MORALE AND
PERFORMANCE OF OUR PERSONNEL, OUR ABILITY TO HIRE NEW PERSONNEL AND OUR
OPERATIONS.
In October 2002, as part of an effort to reduce operating expenses, we
terminated 35 employees, which constituted approximately 22 percent of our
workforce. As a result of that workforce reduction, we have incurred costs
related to severance and other employee-related costs. Our workforce reduction
may also subject us to litigation risks and expenses. In addition, our
restructuring plan may yield unanticipated consequences, such as attrition
beyond our planned reduction in workforce. As a result of these reductions, our
ability to respond to unexpected challenges may be impaired, and we may be
unable to take advantage of new opportunities. Further, the reduction in force
may reduce employee morale and may create concern among existing employees about
job security, which may lead to increased attrition or turnover. As a result of
these factors, our remaining personnel may decide to seek employment with more
established companies, and we may have difficulty attracting new personnel that
we might wish to hire in the future.
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE
Volatility in our stock price may negatively affect the price you may receive
for your shares of common stock and increases the risk that we could be the
subject of costly securities litigation. The market price of our common stock
has fluctuated substantially and could continue to fluctuate based on a variety
of factors, including:
|X| quarterly fluctuations in our operating results;
|X| changes in future financial guidance that we may provide to investors
and public market analysts;
|X| changes in our relationships with our licensees;
|X| announcements of technological innovations or new products by us, our
licensees or our competitors;
|X| changes in ADSL market growth rates as well as investor perceptions
regarding the investment opportunity that companies participating in
the ADSL industry afford them;
|X| changes in earnings estimates by public market analysts;
|X| key personnel losses;
|X| sales of common stock; and
|X| developments or announcements with respect to industry standards,
patents or proprietary rights.
21
In addition, the equity markets have experienced volatility that has
particularly affected the market prices of equity securities of many high
technology companies and that often has been unrelated or disproportionate to
the operating performance of such companies. These broad market fluctuations may
adversely affect the market price of our common stock.
OUR BUSINESS MAY BE AFFECTED BY GOVERNMENT REGULATIONS
The extensive regulation of the telecommunications industry by federal, state
and foreign regulatory agencies, including the Federal Communications
Commission, and various state public utility and service commissions, could
affect us through the effects of such regulation on our licensees and their
customers. In addition, our business may also be affected by the imposition of
certain tariffs, duties and other import restrictions on components that our
customers obtain from non-domestic suppliers or by the imposition of export
restrictions on products sold internationally and incorporating our technology.
Changes in current or future laws or regulations, in the United States or
elsewhere, could seriously harm affect our business.
22
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk relates primarily to our investment portfolio and
the effect that changes in interest rates would have on that portfolio. Our
investment portfolio has included:
|X| Cash and cash equivalents, which consist of financial instruments with
original maturities of three months or less; and
|X| Investments, which consist of financial instruments that meet the high
quality standards specified in our investment policy. This policy
dictates that all instruments mature in three years or less, and
limits the amount of credit exposure to any one issue, issuer, and
type of instrument.
We do not use derivative financial instruments for speculative or trading
purposes. As of September 30, 2002, 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.
ITEM 4:
CONTROLS AND PROCEDURES
(a) DISCLOSURE CONTROLS AND PROCEDURES. Within 90 days before filing this
report, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures. Our disclosure controls and procedures are
the controls and other procedures that we designed to ensure that we record,
process, summarize and report in a timely manner the information we must
disclose in reports that we file with or submit to the SEC. Our disclosure
controls and procedures include a significant portion of our internal controls.
Michael A. Tzannes, our Chief Executive Officer, and Richard P. Moberg, our Vice
President and Chief Financial Officer, supervised and participated in this
evaluation. Based on this evaluation, Mr. Tzannes and Mr. Moberg concluded that,
as of the date of their evaluation, our disclosure controls and procedures were
effective.
(b) INTERNAL CONTROLS. Since the date of the evaluation described above, there
have not been any significant changes in our internal controls or in other
factors that could significantly affect those controls.
23
PART II. OTHER INFORMATION
ITEM 1:
LEGAL PROCEEDINGS
From time to time we are involved in litigation incidental to the conduct of our
business. We are not party to any lawsuit or proceeding that, in our opinion, is
likely to seriously harm our business.
ITEM 5:
OTHER INFORMATION
CERTIFICATION UNDER SARBANES-OXLEY ACT
Our chief executive officer and chief financial officer have furnished to the
SEC the certification with respect to this Report that is required by Section
906 of the Sarbanes-Oxley Act of 2002.
24
ITEM 6:
EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT NO. DESCRIPTION
3.3* Articles of Amendment to the Articles of Organization
(B) REPORTS ON 8-K
None.
- --------------------
* filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AWARE, INC.
Date: November 12, 2002 By: /s/ Michael A. Tzannes
----------------------
Michael A. Tzannes, Chief
Executive Officer
Date: November 12, 2002 By: /s/ Richard P. Moberg
---------------------
Richard P. Moberg, Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
25
CERTIFICATIONS
I, Michael A. Tzannes, Chief Executive Officer of Aware, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Aware, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
26
Date: November 12, 2002 /s/ Michael A. Tzannes
----------------------------- --------------------------------
Michael A. Tzannes
Chief Executive Officer
I, Richard P. Moberg, Vice President and Chief Financial Officer of Aware,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aware, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
27
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Richard P. Moberg
----------------------------- --------------------------------
Richard P. Moberg
Vice President and Chief
Financial Officer
28