ÿAWARE INC /MA/ 10-K
Filing Date: 3/30/98 ÿ ÿ ÿ Filing Index
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<DESCRIPTION>AWARE, INC.
<TEXT>
<PAGE> 1
================================================================================
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, 1997
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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 27, 1998, based on the closing price of the Common
Stock on February 27, 1998 as reported on the Nasdaq National Market, was
approximately $169,226,281.
The number of shares outstanding of the registrant's common stock as of February
27, 1998 was 19,774,682.
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 27, 1998 are incorporated by reference into Part III of this
Annual Report on Form 10-K.
================================================================================
<PAGE> 2
AWARE, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PART I
Item 1. 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.......................................... 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 19
Item 8. Financial Statements and Supplementary Data...................... 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 41
PART III
Item 10. Directors and Executive Officers of the Registrant............... 42
Item 11. Executive Compensation........................................... 43
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................... 43
Item 13. Certain Relationships and Related Transactions................... 43
PART IV
Item 14. Exhibits, Financial Statement Schedule, and
Reports on Form 8-K.............................................. 44
Signatures................................................................. 47
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
Aware, Inc. (the "Company" or "Aware") was incorporated in Massachusetts in
1986. During its first seven years, the Company was engaged primarily in
research, specializing in wavelet mathematics, image and video compression, and
channel modulation and coding. The Company holds nineteen patents in areas
related to wavelet mathematics, data compression and similar technologies. The
Company's revenue during this period consisted largely of research grants from
agencies of the U.S. government and certain commercial companies. In 1993, the
Company began to shift its business from contract research toward development
of: (i) Digital Subscriber Line ("xDSL") technologies, and (ii) image
compression products. Two principal lines of business emerged as a result of the
decision to commercialize the Company's core technology: telecommunications and
image compression.
The Company's telecommunications business is dedicated to developing
technology and products that increase the speed of data communications over
conventional copper telephone networks. The Company believes that its technology
and products will enable telephone companies ("telcos") to utilize their
installed bases of copper telephone lines to provide both residential and
business customers with interactive data transmission at speeds much higher than
currently available. The Company's core telecommunications technology includes
algorithms, software, hardware designs, and chipsets that implement Asymmetric
Digital Subscriber Line ("ADSL"), splitterless lite Digital Subscriber Line
("DSL Lite"), Very High Speed Digital Subscriber Line ("VDSL"), and Symmetric
Digital Subscriber Line ("SDSL") technologies.
The Company has co-developed an ADSL chipset with Analog Devices, Inc.
("ADI"), a leading supplier of integrated circuits. ADI has a non-exclusive
technology and software license to manufacture and sell such chipsets for which
the Company receives royalty payments. In 1997, the Company entered into an
agreement with Lucent Technologies, Inc. ("Lucent") to develop DSL Lite software
that will operate on Lucent digital signal processors ("DSPs"). Lucent has a
non-exclusive technology and software license to manufacture and sell such chips
for which the Company will receive royalty payments. The Company's
telecommunications business is also engaged in the design and development of
access routers, modems, transceiver modules, and other communications products
that incorporate the Company's technologies.
The Company's image compression products include WSQ by Aware, AccuPress for
Radiology, AccuPress for Remote Sensing, AccuPress for Multimedia, and SeisPact.
In addition, the Company's image compression organization continues to perform
some contract research for the U.S. government.
The Company's executive offices are located at 40 Middlesex Turnpike,
Bedford, Massachusetts, 01730, and its telephone number is (781) 276-4000.
3
<PAGE> 4
PRODUCTS AND MARKETS
TELECOMMUNICATIONS
TELECOMMUNICATIONS MARKET
With the rise of the Internet and World Wide Web, network service providers
are experiencing a fundamental shift in the type of communications traffic
transmitted over their networks. The existing network infrastructure of
twisted-pair copper wiring, which was originally designed to provide analog
voice service ("Plain Old Telephone Service" or "POTS" ), and fiber coaxial
cable, which was designed to provide broadcast cable television service, are
increasingly required to carry large amounts of data produced by computers.
Service providers are faced with the challenge of providing high-speed data
communications at reasonable costs, while preserving their investment in copper
wire and coaxial cable networks.
Copper wire telephone networks are estimated to include over 170 million
lines in the United States and over 700 million lines worldwide, according to
industry sources. These networks represent a massive undepreciated capital
investment. Cable television service is currently available to approximately
ninety percent of the homes in the U.S. and approximately sixty-five percent of
the homes in the U.S. subscribe to the service.
To date, the telcos' copper wire and cable companies' infrastructures have
not proven adequate for the increasing volume of traffic generated by computers
remotely connected to each other and the Internet. Digital information requires
more bandwidth than traditional analog voice communications if it is to be
transmitted at a speed that is satisfactory to the computer user. Currently, the
fastest transmission rate readily available to typical home or remote office
computer users over existing copper wire is achieved through the use of a 56
kilobits per second ("Kbps") modem, although many users still employ modems that
are slower than this. For the over 80 million and growing Internet users, these
transmission rates are one of the chief frustrations of using the World Wide
Web, which is the fastest growing and most data intensive segment of the
Internet.
Service providers, recognizing the need for higher speed data
communications, are increasingly seeking to upgrade their networks. The telcos
are replacing copper wire with fiber optic cable, which permits high speed data
transmissions, particularly through the backbone of the network that links their
central offices to one another. However, installing fiber optic cable all the
way into customers' homes or businesses is prohibitively expensive and would
take decades. Similarly, cable companies have deployed hybrid fiber coaxial
("HFC") networks, and are providing two-way data transmissions over these
networks using cable modems.
Telcos are seeking cost-effective technologies to accommodate high speed
data transmission over copper wires. Some of these technologies are described
below:
ISDN. In the early 1980s, telcos introduced Integrated Service
Digital Network ("ISDN") technology, which provides digital
transmission over copper wire typically at basic rates up to 144
Kbps. Although this technology is several times faster than a
voiceband modem, the market penetration of existing ISDN technology
is limited because its equipment and installation costs are
relatively high, and it does not allow simultaneous POTS and data
transmission on those wires.
4
<PAGE> 5
T-1. T-1 (E-1 in countries outside the U.S.) is a multiplexing
format that allows digital conversion of an analog line. Once
converted, a T-1 digital line can deliver data at speeds up to 1.544
megabits per second ("Mbps"). However, T-1 service cannot use the
existing copper wire networks without expensive and time-consuming
modifications, including installation of repeaters every 3,000 to
5,000 feet to regenerate the signal as it passes along the line. T-1
also requires two sets of twisted-pair copper wires and does not
allow simultaneous POTS and data transmission on those wires.
HDSL. In 1992, telcos introduced High bit-rate Digital Subscriber
Line ("HDSL") technology, which reduces the cost of installing T-1
service. HDSL increases the distance of T-1 transmission over copper
wires to approximately 12,000 feet, which reduces the need for
repeaters. As a result, some telcos are deploying HDSL technology in
their local access networks. However, HDSL requires two sets of
twisted-pair copper wires and does not allow simultaneous POTS and
data transmission on those wires.
ADSL. For several years telcos have been evaluating the deployment
of ADSL technology, which uses digital signal processing technology
to expand the useable bandwidth of copper telephone wire. ADSL was
initially created in the late 1980s by Bellcore, the research entity
jointly created and funded by the Regional Bell Operating Companies
("RBOCs"). ADSL technology allows non-repeated transmissions of data
at a distance of up to 18,000 feet over telcos' existing copper
networks at a rate of up to 8 Mbps downstream to the customer and at
a rate of up to 768 Kbps upstream from the customer, with the speed
of transmission decreasing as distance increases. ADSL allows
simultaneous POTS and high speed digital data transmission on a
single set of twisted-pair copper wires. To accomplish this, ADSL
uses a filtering device, called a POTS splitter, to isolate the POTS
and ADSL signals from one another.
DSL Lite. In 1997, the Company helped pioneer a new xDSL
technology alternatively referred to as DSL Lite, G.lite,
splitterless DMT, and Universal ADSL ("UADSL"). Similar to ADSL, DSL
Lite enables voice and high-speed data communications to coexist on a
single copper telephone wire. DSL Lite has the added advantage that
it eliminates, in most cases, the need for a POTS splitter to
separate voice and data signals on the customer premise side of the
connection. The omission of a POTS splitter vastly reduces the
installation cost of DSL Lite service over that of ADSL service by
eliminating the need to send a technician for service installation.
DSL Lite technology allows downstream data transmissions speeds of up
to 1.5 Mbps without any disruption to the customer's telephone
service. Also in 1997, a consortium of leading companies from the
personal computer, networking and telecommunications industries
formed a group known as the Universal ADSL Working Group ("UAWG") to
write a specification for UADSL. Upon completion of the
specification, the UAWG intends to submit the document to the
International Telecommunications Union ("ITU") for consideration as
the worldwide G.lite standard.
In addition to these telco technologies, cable company suppliers are working
to improve HFC technology, which would permit two-way broadband digital
communications over typical cable networks. HFC technology uses digital signal
processing to allow efficient sharing of upstream bandwidth so that a cable line
can be used for two-way transmissions. According to industry sources,
approximately 100,000 lines of cable modems had been installed as of December
31, 1997. New HFC networks are also being installed by telcos so that they can
offer television service as well as telephone and data dial-tone services. |
