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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
ý ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
or
o TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission file No. 000-24009
Com21, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 94-3201698 (IRS Employer Identification No.) |
750 Tasman Drive
Milpitas, California 95035
(408) 953-9100
(Address, including zip code, and telephone number, including area code, of the
registrant's principal executive offices)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
Indicate by a checkmark 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 ý No o
Indicate by a 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. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý
As of June 28, 2002, (the last business day of the registrant's most recently completed second fiscal quarter), the aggregate market value of registrant's common stock, par value $0.001 per share held by non-affiliates of registrant was approximately $12,461,321.
At February 28, 2003, there were 28,394,371 shares of the registrant's common stock, $0.001 par value, issued and outstanding.
Com21, Inc. (the "Company" or "Com21") hereby amends in its entirety the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 12, 2003. The amendment is intended to provide the disclosure required by Part III of Form 10-K relating to (i) our directors and executive officers, (ii) executive compensation, (iii) security ownership of certain beneficial owners and management and related stockholder matters, and (iv) certain relationships and related transactions. Additionally, the amendment is intended to correct certain typographical errors noted in the original filing.
This Form 10-K/A contains forward-looking statements that have been made under the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections about our industry, our beliefs, and assumptions. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include those described in "Risk Factors" and elsewhere in this Form 10-K/A. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our management's view only as of the date of this Form 10-K/A. We undertake no obligation to update these statements or publicly release the result of any revisions to the forward-looking statements that we may make to reflect events or circumstances after the date of this Form 10-K/A or to reflect the occurrence of unanticipated events.
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| | Page | ||
---|---|---|---|---|
PART I: | ||||
Item 1 | Business | 4 | ||
Item 2 | Properties | 20 | ||
Item 3 | Legal Proceedings | 20 | ||
Item 4 | Submission of Matters to a Vote of Security Holders | 20 | ||
PART II: | ||||
Item 5 | Market for Registrant's Common Equity and Related Stockholders Matters | 21 | ||
Item 6 | Consolidated Selected Financial Data | 22 | ||
Item 7 | Management's Discussion and Analysis of Financial Condition and Results of Operations | 23 | ||
Item 7A | Quantitative and Qualitative Disclosures About Market Risk | 32 | ||
Item 8 | Consolidated Financial Statements and Supplementary Data | 33 | ||
Item 9 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 64 | ||
PART III: | ||||
Item 10 | Directors and Executive Officers of the Registrant | 64 | ||
Item 11 | Executive Compensation | 69 | ||
Item 12 | Security Ownership of Certain Beneficial Owners and Management | 75 | ||
Item 13 | Certain Relationships and Related Transactions | 77 | ||
Item 14 | Controls and Procedures | 77 | ||
PART IV: | ||||
Item 15 | Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K | 78 | ||
Exhibit Index | 78 | |||
Signatures | 81 | |||
CEO/CFO Certifications per Section 302 of Sarbanes-Oxley | 82-83 | |||
CEO/CFO Certifications per Section 906 of Sarbanes-Oxley |
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Com21, Inc. is a leading global supplier of system solutions for the broadband access market. Our Data Over Cable System Interface Specification (DOCSIS)-based and Asynchronous Transfer Mode (ATM) products enable cable operators and service providers to deliver high-speed, cost-effective Internet and telephony applications to corporate telecommuters, small businesses, home offices, and residential users. To date, we have shipped over 2.3 million cable modems and over 2,000 headend controllers worldwide.
Com21 was incorporated in Delaware in June 1992. Our principal executive offices are located at 750 Tasman Drive, Milpitas, California 95035 and our telephone number at that address is (408) 953-9100. Additional information about the Company is available on our web site at http://www.com21.com.
INDUSTRY OVERVIEW
We believe the broadband industry, which in its most basic form is identified with an always-on internet connection characterized by data transfer rates significantly faster than dial-up services, is poised to offer much more than faster web surfing. With a significant upgrade to the cable and telecommunication networks over the past several years, operators are now well positioned to utilize the power of broadband networks to deliver much more than just data. Previously, service providers (both telecommunication and cable companies) could deliver only one or two out of the three basic service types by which most communications can be categorized: data, voice, and video. With upgraded networks and advanced equipment to service the networks, broadband service providers are now able to take advantage of the full power of broadband and deliver all three services over a single unified network. In the process, we believe broadband is driving technology innovation and investment, as the increase in bandwidth is driving the pace of innovation in software applications, computers, communications equipment, semiconductors, and other similar devices.
The broadband industry is rapidly moving toward offering data, voice, video over a single network and still has the opportunity for substantial growth ahead of it. As broadband rollout becomes more widespread, we believe these integrated services will drive an accelerated demand for transmission equipment, cable and DSL modems, digital set-top boxes, and voice gateways. Of all the broadcast mediums, we believe in cable given its capability to deliver digital video, data, voice, and other two-way services such as pay per view, or PPV, video-on-demand, or VOD, and subscription video-on-demand, or sVOD, all over the same network. We believe cable will be the access platform of choice in carrying out the full service vision of the broadband service providers. In spite of a challenging macroeconomic environment, cable has continued to be a steady source of demand for broadband equipment. If the economy improves, and acceptance of integrated services accelerates, we believe cable will be a strong driver of growth for broadband equipment providers focused on equipment to facilitate digital service delivery from the cable headend to a customer premise.
COM21 STRATEGY
Building upon the solutions that Com21 has pioneered to date for the cable data industry, we are focused on delivering system solutions that allow cable operators to realize the full potential of their digital networks. As we have demonstrated with our XB System which is comprised of the DOXcontroller™ 1000XB cable modem termination system (CMTS), the NMAPS XB network management software, and the DOXport® 1110XB DOCSIS™ 1.1—certified cable modem, as well as our ComUNITY Access® System, which comprised of the ComCONTROLLER® line of headends (over 2,000 shipped to date), ComPORT® modems (over 1.1 million units covering over a million subscribers worldwide), and network management and provisioning system or NMAPS, (over 400 copies installed, covering over a million
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subscribers worldwide), end-to-end product solutions are a key strength for Com21. Leveraging on this core competency, the following are some key elements of Com21's business strategy:
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- Continue the roll out of our XB System to our customers with continued enhancement and evolution of the product line as part of the renewed focus on providing a complete solution to our customers. Our first DOCSIS CMTS product, the DOXcontroller 1000, was announced in 2002 and began revenue shipments in September 2002. Not only do we believe that CMTS is a performance leader, we believe it to be the first CMTS designed from the ground up as a DOCSIS 1.1 compliant CMTS, upgradable to a DOCSIS 2.0 compliant CMTS. In concert with the CMTS, Com21 also developed a network management platform to leverage the same user interface, and architecture of the existing NMAPS platform. Given the role of network management software in the selection of hardware equipment, Com21 will preserve continuity between ComUNITY and DOCSIS network management software. We believe this will continue to facilitate a smooth transition of Com21's ComUNITY customers to Com21's DOCSIS products.
- •
- Concentrate our time on high margin system solutions, and de-emphasize our modem business. We intend to pursue system opportunities and offer modems only as part of an overall technology solution.
- •
- Continue to service and protect the substantial installed base of ComUNITY Access System customers while working with them to migrate their technology to our XB System. We do not intend to expand our customer base for ATM products, rather service our existing customers while working with them in the transition toward our DOCSIS XB System solution.
- •
- Continue development of the Digital Headend suite of digital video products that was launched during 2002. The Digital Headend suite facilitates the continuing transition of cable systems to digital service by enabling services at a price point significantly below previous technologies. Com21 is now focusing development on the system's first component, the GigaQAM™ video QAM synthesizer. GigaQAM is an ultra-dense, low-cost, multiple QAM-RF (Quadrature Amplitude Modulation-Radio Frequency) modulator with transport stream multiplexing, DVB-Simulcrypt conditional access encryption, and gigabit Ethernet inputs.
CURRENT YEAR DEVELOPMENTS
During 2002, Com21 introduced our XB System. The XB System consists of the CMTS, NMAPS XB (Network Management and Provisioning System), and DOXport™ family of modems. The XB System combines the DOXcontroller 1000XB CMTS with the recently enhanced Com21 NMAPS (Network Management and Provisioning System) capabilities including advanced TDMA support and superior performance for advanced symmetrical data rate applications. The XB System provides full support for both DOCSIS and Euro-DOCSIS environments, with digital receiver technology to deliver ingress noise cancellation and full spectrum analysis. The complete XB System began shipment during the third quarter of 2002.
In March 2002, Com21 cancelled all outstanding purchase orders with its two contract manufacturers. In connection with the cancellation, we signed promissory notes for existing payables to the vendors and for certain materials held by the vendors. These notes totaled approximately $22.5 million, bore interest at an average rate ranging from 8% to 10% and mature in December 2003 and May 2004. The approximate $9.7 million of materials held by the vendors will likely be of no future use to Com21. Accordingly, the materials with no future use were written off during the first quarter of 2002. Our provision for excess and obsolete inventory at December 31, 2002 contained provisions for the entire $9.7 million of materials held by the vendors. In addition to the notes, Com21 granted warrants to the vendors to purchase a total of 350,000 shares of common stock. At December 31, 2002, we had $11.5 million outstanding under the notes payable.
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We are currently in default on both of the promissory notes, as we did not make scheduled payments. We are seeking to renegotiate the notes with both of the contract manufacturers and resolve the matter.
During the third quarter of 2002, Com21's board of directors adopted a stockholder rights plan pursuant to which we distributed one right for each outstanding share of common stock held by stockholders of record as of August 7, 2002. The rights plan was put in place to prevent a take-over without first negotiating with our board of directors.
During 2002, Com21 continued its restructuring programs to reduce operating expenses. These programs included workforce reductions and consolidation of facilities. As a result of the restructuring efforts, we recorded restructuring charges of $3.8 million for the year ended December 31, 2002.
Workforce Reduction—The restructuring programs resulted in the reduction of approximately 60 employees across all business functions and operating units.
Closure of Excess Facilities—In the second quarter 2002, Com21 exited portions of facilities in Delft, The Netherlands and the Ireland development center in Cork, Ireland.
The programs noted above reduced recurring operating expenditures during 2002 while allowing us to focus our development efforts on our DOXcontroller™ XB System.
SEGMENT INFORMATION
For purposes of segment reporting, Com21 aggregates operating segments that have similar economic characteristics and meet the aggregation criteria of Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." Based on such criteria, there are three operating and reportable segments: DOCSIS Products, ATM Products, and Voice Products. The DOCSIS Products segment develops, manufactures, and markets DOCSIS cable modems, CMTS and network management software. The ATM Products segment develops, manufactures, and markets the proprietary cable modems, ATM headend equipment and network management software. The Voice Products segment, based primarily in Israel, developed, manufactured, and marketed voice over Internet cable modems, and was sold during 2001.
DOCSIS Segment—The DOCSIS based XB System consists of the DOXcontroller™ 1000XB cable modem termination system (CMTS), the NMAPS XB network management software, and the DOXport® family of modems. The market and customers for the segment are similar to the market and customers for our ATM segment and are discussed in the "Markets" and "Customers" sections below.
The DOCSIS-based XB System consists of the following products:
DOXcontroller™ XB System. The DOXcontroller XB System comprises a headend (DOXcontroller 1000) and the newly expanded version of the popular NMAPS. Previously available only for the ComUNITY Access System, the updated NMAPS 5.0 now supports DOCSIS systems, as well. The one-rack unit high (13/4") headend offers full DOCSIS features with advanced time division multiple access, or TDMA support, for advanced symmetrical data rate applications. The DOXcontroller 1000 provides full upstream support for both DOCSIS and EuroDOCSIS environments, with user-configurable upstream channel bandwidth allocation and load balancing.
NMAPS: The easy-to-use NMAPS 5.0 includes a standard command-line interface, plus the ability to remotely configure and monitor the DOXcontroller 1000 through a web browser. Full-featured, NMAPS 5.0 provides tiered services and virtual local area network, or VLAN support, as well as fault and performance management tools. The network management system's familiar interface provides a seamless transition for current ComUNITY Access System users, minimizing the need for training.
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DOXport 1110XB and 1112XB. The DOXport 1110XB and DOXport 1112XB are DOCSIS 1.1 compliant cable modems that combine the cost-effective Broadcom 3345 chip with our leading edge firmware (DOXcore™) to be a fast and efficient solution for the DOCSIS market. The DOXport 1110XB received CableLabs' certified status for both DOCSIS 1.0 and DOCSIS 1.1 in July 2002.
Com21 currently has under development the following DOCSIS-based products:
DOXport 1110XB2 and DOXport 1112XB2. The DOXport 1110XB2 and DOXport 1112XB2 are being developed to be DOCSIS 1.1 and 2.0 compliant and EuroDOCSIS 1.1 and 2.0 compliant cable modems that utilize the cost-effective Broadcom 3348 chip. The DOXport 1110XB2 received CableLabs' certified status for DOCSIS 1.1 in December 2002. Com21 will also be offering Voice Over IP (VoIP) versions of both modems to support PacketCable's Media Gateway Control Protocol (MGCP) in 2003.
DOXswitch™ XB. The DOXswitch 1000XB boost system availability by allowing quick switchover of the RF network from a normal CMTS to a standby CMTS. Separate downstream and upstream signal paths are provided to allow operation in any data-over-cable environment, even those that use multiple upstream channels at the same frequency. The switch supports up to nine CMTSs—up to eight for normal operation plus an additional unit as a spare. Although designed to work with the DOXcontroller 1000XB, the switch can be used with other DOCSIS CMTSs.
DOXmonitor™ XB. This unit consists of individual monitors for each downstream signal to constantly validate the quality of received downstream signal. If the monitoring unit detects that the signal quality is impaired, it can alert the operator and initiate an automatic transfer of the RF paths to a standby CMTS if configured to do so by the operator.
ATM Segment—The ATM-based ComUNITY Access® System is an end-to-end system solution including our headend, cable modem, and management software, all based on our proprietary technology. The market and customers for the segment are similar to the market and customers for our DOCSIS segment and are discussed in the "Markets" and "Customers" sections below.
The ATM-based ComUNITY Access System consists of the following products:
ComCONTROLLER Headend Switches. The ComCONTROLLER controls the flow of data communications between the ComPORT modem at a subscriber's site and an external network, such as the Internet or a corporate network.
ComPORT Cable Modems (CP1080). The ComPORT cable modem sends and receives data from the subscriber's site over coaxial cable, cost-effectively providing high-speed connectivity. The ComPORT modem uses an Ethernet interface and connects to the personal computer's Ethernet card or an Ethernet hub.
Network Management and Provisioning System. The Network Management and Provisioning System is a network management software package that facilitates subscriber provisioning, fault isolation, network configuration, field inventory, auto-discovery and system performance for the ComUNITY Access System. NMAPS provides for remote monitoring, remote modem software upgrade, and has a graphical user interface.
Com21 currently has under development the following digital video products:
Digital Headend suite of digital video products. Com21 has begun the development of the Digital Headend suite of digital video products. The Digital Headend suite facilitates the continuing transition of cable systems to digital service by enabling services at a price point significantly below previous technologies. Com21 is now readying the system's first component, the GigaQAM™ video QAM synthesizer, in a design strengthened by functional and architectural
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feedback from cable operators in North America, Europe and Asia. GigaQAM is an ultra-dense, low-cost, multiple QAM-RF (Quadrature Amplitude Modulation-Radio Frequency) modulator with transport stream multiplexing, DVB-Simulcrypt conditional access encryption, and gigabit Ethernet inputs.
CUSTOMERS
In North America, we generally sell directly to cable operators. Internationally, we sell primarily to system integrators, who in turn sell to cable operators. In 2000, 2001 and 2002 revenues attributable to international customers constituted 67%, 77% and 68%, respectively.
The top ten percent customers in 2000, 2001 and 2002 are as follow: in 2000, revenues attributable to Siemens, Telindus, and Comcast Communications accounted for 12%, 11%, and 10%, respectively. In 2001, revenues attributable to Telindus and Comcast Communications accounted for 25% and 10% of net revenues, respectively. In 2002, revenues attributable to Telindus, Adelphia Communication and Siemens accounted for 23%, 12% and 11% of net revenues, respectively.
MARKETS
Com21's products enable cable operators to serve three primary end-user markets, each of which has varying speed, service and pricing requirements.
Residential consumer Internet users. Residential consumer Internet users generally only require a connection to their Internet service provider, or ISP, without the same level of security and reliability required by business and small office/home office, or SOHO users. Frequent users desire high-speed access to the Internet for Web browsing, gaming and downloading of multimedia applications and files.
Corporate telecommuter and remote office users. Corporate telecommuters and remote office business users need available, high-speed access to corporate intranets and corporate local area networks, or LANs. These users also must interconnect the LANs among their various offices. Such offices may be collocated or widely dispersed. Connections to a central telephone Private Branch Exchange, or PBX, rapid two-way transfer of large data files, desktop video conferencing, security, and reliability exemplify the services that business users may require.
Small office/home office, or SOHO users. SOHO users increasingly find the Internet an efficient means of communicating and processing transactions with customers and suppliers. Com21 believes these businesses require high speed Internet access that is reliable and always available. SOHO users may have a local area network to connect to cable modem services, and may require routing in order to connect multiple terminals. These businesses may also require desktop video conferencing capability, and connectivity with other businesses.
MANUFACTURING
Com21 tests and assembles its ComCONTROLLER headend equipment in its Milpitas, California facility. We outsource printed circuit board assemblies on a turnkey basis and perform final integration and burn-in at our Milpitas facility. We configure the headend equipment and the network management and provisioning software prior to customer shipment.
Com21 outsources the entire production of our DOXcontroller XB CMTS to a contract manufacturer in the United Kingdom. Com21 supplies the contract manufacturer with all raw materials necessary to build the DOXcontroller XB CMTS.
Com21 outsources turnkey manufacturing of our cable modems to contract manufacturers with facilities in Mexico and Taiwan. With these contract manufacturers, we have developed and implemented a series of product test methodologies, quality standards, and process control parameters. We believe that
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employing turnkey manufacturers enables us to meet anticipated manufacturing needs and reduces the cost of product procurement.
We believe our current manufacturing capabilities can accommodate our requirements through the end of 2003. Warranty and repair support is performed at third party repair facilities in Europe and on site at Com21's facility in the United States. Com21 received ISO 9001 certification in December 1998 and continues to maintain its certification.
MARKETING AND SALES
Marketing. Domestically, we have targeted our marketing efforts primarily at cable operators. We seek to work with local cable operators to promote Com21's products and accelerate cable modem service penetration. Internationally, we have focused our marketing efforts on supporting our systems integration partners' marketing programs.
Sales. As of December 31, 2002, we have a sales force of 18 people located in Europe, Asia, Latin America and the United States. Currently, Com21 sells its products in North America primarily through direct sales to cable operators. Overseas, we sell our products primarily to systems integrators, who resell our products to cable operators. Com21's three largest systems integrators are France Telecom, Telindus and Siemens, all of whom have a strong presence in many international markets. Our systems integrators have established customer bases and relationships with cable operators. These relationships allow us to market within each region by selling locally into their respective markets, and the local presence of the systems integrators bridges cultural and communication gaps.
RESEARCH AND DEVELOPMENT
We have focused our research and development efforts to prioritize initiatives around high-growth areas of the business and with a focus on profit contribution. We rely on our research and development programs for the development of new products and improvement of existing products in line with our goal of maximizing profit contribution.
Our research and development expenditures were $46.9 million in 2000, $22.6 million in 2001, and $11.2 million in 2002. Research and development expenses primarily consist of salaries and related costs of employees and consultants engaged in ongoing research, design and development of our products and technology. As of December 31, 2002, Com21 had a team of 53 engineers with expertise in digital electronics design, encryption, radio frequency modulation and demodulation, networking, embedded software, and network management. The engineers are located in development centers in Milpitas, California and Cork, Ireland.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
We believe that successful long-term relationships with our customers require a service organization committed to customer satisfaction. As of December 31, 2002, Com21 had 9 technical support employees.
In North America, Com21 provides direct support by telephone and at the customers' locations. Com21 has the ability to supply support 24 hours a day, seven days a week. Internationally, systems integrators provide first level support, and Com21 provides second level support. Com21 maintains a customer call tracking system that captures and monitors service activities.
COMPETITION
The markets for Com21's products are intensely competitive, rapidly evolving, and subject to rapid technological change. The principal competitive factors in these markets are likely to include product performance and features, reliability, technical support and service, relationships with cable operators and systems integrators, compliance with industry standards, interoperability with the products of other
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suppliers, sales and distribution capabilities, strength of brand name, price, long-term cost of ownership to cable operators, and general industry and economic conditions. Com21's current and potential competitors include Motorola, Scientific-Atlanta, Inc., Toshiba America, Inc., Thomson, Samsung Electronics Company, Terayon Communication Systems, and Cisco Systems, Inc.
BACKLOG
Our backlog on February 28, 2003 was approximately $1.5 million compared with an approximate backlog of $7.6 million at February 28, 2002. We only include in our backlog orders that have been confirmed with a purchase order for products to be shipped to customers with approved credit status. Because delivery schedules are always subject to change, and orders are subject to being cancelled, we do not believe that our backlog, as of any particular date, is necessarily indicative of actual net sales for any future period.
INTELLECTUAL PROPERTY
Com21 relies on a combination of patent, copyright and trademark laws, and on trade secrets, confidentiality provisions and other contractual provisions to protect our proprietary rights. These measures afford only limited protection. Com21 currently has sixteen issued U.S. patents and several pending patent applications.
EMPLOYEES
As of December 31, 2002, Com21 had 113 full-time employees. Of the total number of employees, 53 were in research and development, 12 in marketing and technical support, 11 in operations, 18 in sales, and 19 in administration. Com21's employees are not represented by any collective bargaining agreement with respect to their employment by Com21, and Com21 has never experienced an organized work stoppage. Com21 has a continuing payment of salary agreement for one certain employee and two executives of the company in the event of change in control.
WEBSITE
Com21's website address is http://www.com21.com. Com21 makes available free of charge on or through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.
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RISK FACTORS
We wish to caution the reader that the following important business risks and factors, and those business risks and factors described elsewhere in this report or our other Securities and Exchange Commission filings, could cause our actual results to differ materially from those stated in the forward-looking statements.
Com21 may be unable to obtain additional capital needed to operate our business.
Cumulative operating losses, current negative cash flows, defaults with respect to our debt obligations and our current balance of unrestricted cash and short term investments create substantial doubt about Com21's ability to continue as a going concern. Com21 has implemented, and is continuing to pursue, aggressive cost cutting programs in order to preserve available cash. As previously announced, we are also currently evaluating alternative forms of financing. These alternatives may include the sale of equity, sale of debt instruments, and the divestiture of certain business assets. Current market conditions present uncertainty as to our ability to secure the necessary financing needed to reach profitability and there can be no assurances as to the availability of additional financing, the terms of such financing if it is available, or as to our ability to achieve a level of sales to support Com21's cost structure. As of December 31, 2002, our cash, cash equivalents and short-term investments were $4.5 million. As of February 28, 2003, Com21's unrestricted cash and short-term investments totaled $4.1 million, a decrease of $0.4 million over the first two months of 2003. If we are unable to secure additional financing, we anticipate that our cash will continue to decrease at a pace similar to that of the first two months of 2003, and as such we do not expect to be able to meet our obligations throughout the entirety of 2003.
At December 31, 2002, we had an accumulated deficit of approximately $279.4 million. If we do not increase revenues, improve gross margins, and reduce operating expenses, we may also incur net losses during future quarters. Because of a decline in our revenues in the fourth quarter of 2000, we introduced measures to reduce operating expenses that resulted in restructuring charges of $69.3 million in the year ended December 31, 2001. In 2002, we had additional work force reductions and consolidated additional excess facilities resulting in restructuring charges of $3.8 million. Any subsequent actions may result in additional workforce reductions, restructuring charges, discontinuation of product lines, and provisions for impairment of long-lived assets, which could harm our financial position, results of operations and stock price.
We are currently in default of our debt obligations and our lenders have the right to demand accelerated payment of borrowings.
We were delisted from the Nasdaq SmallCap Market, which may affect the trading price of our common stock.
As of February 21, 2003, our common stock trades on the Over the Counter Bulletin Board. This is generally considered a less efficient market, and our stock price, as well as the liquidity of our common stock, may be adversely affected as a result.
We may not be able to continue to maintain the trading of our stock on the OTC Bulletin Board, which in 2003 will implement listing standards and an application approval requirement to transition to the new Bulletin Board Exchange (BBX) trading system. The BBX trading system will also require listing fees. Even if our stock continues to be traded on the OTC Bulletin Board or the BBX, many stocks traded on the OTC Bulletin Board have experienced extreme price and trading volume fluctuations. These fluctuations are often unrelated or disproportionate to the operating performance of individual companies. Our stock price may be materially affected by such fluctuations, regardless of our operating results. Additionally, many common stocks traded on the OTC Bulletin Board are thinly traded, such as our common stock, which would make it difficult to sell our stock. If we are not eligible to list our common stock for trading on the BBX, our stock will then be traded on the Pink Sheets, which would likely make
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our stock more difficult to trade and subject to greater price volatility than if it were traded on the OTC Bulletin Board.
Com21's revenues in one or more future periods are likely to fluctuate significantly and may fail to meet or exceed the expectations of securities analysts or investors.
Com21's operating results are likely to fluctuate significantly in the future on a quarterly and an annual basis due to a number of factors, many of which are outside Com21's control. Supply of components, delays in getting new products into high volume manufacturing, and manufacturing or testing constraints could result in delays in the delivery of products and impact revenues and gross margins.
Revenues for any future quarter are difficult to predict. Delays in the product distribution schedule of one or more of our cable operator customers would likely reduce our operating results for a particular period. Concerns by our customers over our financial position may cause our customer not to purchase products from us.
Factors that could cause our revenues to fluctuate include:
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- pressure to reduce prices;
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- variations in the timing of orders and shipments of our products;
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- variations in the size of orders by our customers;
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- new product introductions by us or by competitors;
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- delays in obtaining certification for our standards-based products;
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- general economic conditions and economic conditions specific to the cable and electronic data transmission industries;
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- cable operators' financial stability; and
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- delays in obtaining regulatory approvals necessary to sell our products.
Com21's gross margin in one or more future periods is likely to fluctuate significantly and may cause operating results to fall below the expectations of analysts and investors.
Our operating results are impacted significantly by our ability to improve and sustain gross margins. The factors which impact gross margins and cause them to fluctuate from quarter to quarter include:
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- volume sales of our XB System which have a higher margin than our modem products;
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- pressures to reduce prices;
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- write-off of excess inventory;
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- changes in the cost of inventory;
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- the sales mix within a product group, especially between proprietary ATM and standards-based DOCSIS modems;
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- component prices we secure from our vendors;
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- the average selling prices of our products;
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- the effectiveness of our cost reduction efforts;
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- the sales mix between our headend equipment and cable modems;
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- the ability of the new contract manufacturers to produce quality products; and
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- the volume of products manufactured.
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A reduction in gross margins would harm our operating results and reduce the amount of cash flow generated from our operations. Additionally, if operating results did not satisfy the expectations of analysts or investors, the trading price of our common stock would likely decline.
Fluctuation in our stock price could impact our relationships with existing customers and discourage potential customers from doing business with us.
Fluctuations in our stock price could lead to a loss of revenues due to our inability to engage new customers and vendors and to renew contracts with our current customers and vendors. Existing and potential customers and vendors may perceive our fluctuating stock price as a sign of instability and may be unwilling to do business with us. If this were to continue to occur, our business, results of operations and financial condition could be harmed.
Com21 is exposed to general economic and market conditions
Our business is subject to the effects of general economic conditions in the United States and globally, and, in particular, market conditions in the communications and networking industries. In recent quarters, our operating results have been adversely affected by unfavorable economic conditions and reduced capital spending in the United States, Europe and Asia. In particular, sales to North America, and the manufacturing industry in the United States were materially affected during fiscal 2001 and 2002. If the economic conditions in the United States and globally do not improve, or if we experience a worsening in the global economic slowdown, we may continue to experience negative impacts on our business, operating results, and financial condition.
We may not be able to produce sufficient quantities of our products because we depend on third-party manufacturers, their suppliers and original equipment manufacturers and have limited manufacturing experience.
We contract for the manufacture of cable modems and integrated circuit boards on a turnkey basis. Our future success will depend, in significant part, on our ability to have others manufacture our products cost-effectively, and in sufficient volumes to meet production and delivery schedules. Dependence on third-party manufacturers presents a number of risks, including:
- •
- the contract manufacturer may not provide sufficient payment terms and /or may lower available credit limits;
- •
- failure of our contract manufacturer to meet delivery schedules;
- •
- the contract manufacturer may not build products which meet our quality standards;
- •
- the contract manufacturer may produce less than satisfactory manufacturing yields and costs;
- •
- the contract manufacturer may not be able to build product in sufficient quantity to meet our demand;
- •
- difficulty in planning mix of units to be produced by us; and
- •
- the potential misappropriation of our intellectual property if the manufacturer were to market our products as its own.
Any manufacturing disruption could impair our ability to fulfill orders. We are dependent on our manufacturers to secure components at favorable prices, and in sufficient volume. If our contract manufacturers fail to perform in any of these areas, it could harm our relationships with customers. Failure to obtain these components and supply our customers with our products would decrease our revenues.
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We have adopted a stockholder rights plan, which, together with provisions in our charter documents and Delaware law, may delay or prevent an acquisition of us, which could decrease the value of our stock.
Our board of directors recently adopted a stockholder rights plan pursuant to which we distributed one right for each outstanding share of common stock held by stockholders of record as of August 7, 2002. Because the rights may substantially dilute the stock ownership of a person or group attempting a take-over of us without the approval of our board of directors, the plan could make it more difficult for a third party to acquire us, or a significant percentage of our outstanding capital stock, without first negotiating with our board of directors.
Further, provisions of our certificate of incorporation and our bylaws could make it more difficult for a third party to acquire control of us in a transaction not approved by our board of directors. For example, our board of directors has the authority to issue preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting and conversion rights, of those shares without any further vote or action by the stockholders. The issuance of preferred stock could have the effect of delaying, deterring or preventing an unsolicited take over of us, or could make it more difficult for holders of our common stock to effect certain corporate actions, including the replacement of incumbent directors and the completion of transactions opposed by the incumbent board of directors. The rights of the holders of our common stock would be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which could also have the effect of delaying or preventing our acquisition by a third party.
Our future success will depend in part upon our ability to enhance our existing products and to develop and introduce, on a timely basis, new products and features that meet changing customer requirements and emerging industry standards.
The market for cable modem systems and products is characterized by rapidly changing technologies and short product life cycles. Our future success will depend in large part upon our ability to:
- •
- identify and respond to emerging technological trends in the market;
- •
- develop and maintain competitive products;
- •
- enhance our products by adding innovative features that differentiate our products from those of competitors;
- •
- bring products to market on a timely basis at competitive prices; and
- •
- respond effectively to new technological changes or new product announcements by others.
The technological innovations required for us to remain competitive are inherently complex, require long development cycles, are dependent in some cases on sole source suppliers and require us, in some cases, to license technology from others. If our product development and enhancements take longer than planned, the availability of products would be delayed. We must continue to invest in research and development to attempt to maintain and enhance our existing technologies and products, but we may not have the funds available to do so. Even if we have sufficient funds, these investments may not serve the needs of our customers or be compatible with changing technological requirements or standards. Most costs must be incurred before we can determine the technological feasibility or commercial viability. In addition, revenues from future products or product enhancements may not be sufficient to recover the development costs incurred by these products or enhancements.
We may not be successful in managing the transition from our current products to our new and enhanced products. Product transitions contain a number of inherent risks, including obsolescence of product inventory, unavailability of product as inventory of existing product is exhausted before availability of new product, market acceptance of new products, undetected defects in new products, and availability of
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components and parts in new products. If we are unable to successfully manage the risks of the release and transition of new and enhanced products, our revenues could be reduced.
Com21 has a short operating history, has not made a profit, and may incur losses in the future.
We have not made a profit, and in order to achieve and subsequently maintain profitable operations, we must successfully design, develop, test, manufacture, introduce, market and distribute products on a broad commercial basis and secure higher revenues and gross profits and contain our operating expenses. Our future revenues will depend on a number of factors, many of which are beyond our control. These factors include our ability to:
- •
- reduce prices;
- •
- manufacture products at acceptable quality standards;
- •
- have product available when our customers need it;
- •
- meet industry standards;
- •
- respond to technological change; and
- •
- have a strong competitive advantage.
Due to these factors, we cannot forecast with a degree of accuracy what our revenues will be or how quickly cable operators will adopt our systems and buy our cable modems. If we do not generate sufficient revenues and gross margins, we may not achieve, or be able to sustain, profitability.
Com21's customer base is concentrated and the loss of one or more of our customers could cause our business to suffer.
A relatively small number of customers have accounted for a large part of our revenues, and we expect that this trend will continue. For the year ended 2002, our top five customers accounted for 56% of total revenues. We expect that our largest customers in the future could be different from our largest customers today due to a variety of factors, including customers' distribution schedules and budget considerations. Additionally, some of our systems integrators could develop and manufacture products that compete with our products and choose not to distribute our products. Because a limited number of companies account for a majority of our prospective customers, our future success will depend upon our ability to establish and maintain relationships with these companies. We may not be able to retain our current accounts or to obtain additional accounts. Both in the U.S. and internationally, a substantial majority of households passed by cable access are served by a relatively small number of cable operators. The loss of one or more of our customers or our inability to successfully develop relationships with other significant cable operators could cause our business to suffer.
The market in which we sell our products is characterized by many competing technologies, and the technology on which our product is based may not compete effectively against other technologies.
There are many different methods of getting high speed Internet access to the end customers. These methods include:
- •
- Regular dial up connection—using a telephone line and the average 28.8K or 56K modem;
- •
- Digital subscriber line/asymmetric digital subscriber line—a digital high-speed modem connection offered by telephone companies, also known as DSL or ADSL;
- •
- Cable modems—high-speed modem connections offered by cable television companies;
- •
- Wireless—high-speed wireless local loop connections that work similarly to cell phones. Digital subscriber line/asymmetric digital subscriber line and cable modems can operate in a wireless environment; and
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- •
- Fiber optics—strands of very pure glass capable of carrying enormous volumes of data and voice traffic.
Because of the widespread reach of telephone networks and the financial resources of telephone companies, competition from telephone-based solutions is expected to be intense. Cable modem technology may not be able to compete effectively against wireline or wireless technologies. Significant market acceptance of alternative solutions for high-speed data transmission could decrease the demand for our products if these alternatives are viewed as providing faster access, greater reliability, increased cost-effectiveness, or other advantages.
Com21's market is highly competitive and has many established competitors.
The market for Com21's products is intensely competitive, rapidly evolving and subject to rapid technological change. Our competitors include Motorola, Inc., Scientific-Atlanta, Inc., Toshiba America, Inc., Thomson, Samsung Electronics Company, Terayon Communication Systems, and Cisco Systems, Inc.
We believe that our business is affected by the following competitive factors:
- •
- costs;
- •
- ease of installation;
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- technical support and service;
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- breadth of product line;
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- conformity to industry standards; and
- •
- implementation of additional product features and enhancements.
Many of our existing and potential competitors have been operating longer, have better name recognition, more established business relationships, and significantly greater financial, technical, marketing and distribution resources than we do. These competitors may undertake more extensive marketing campaigns, adopt more aggressive pricing policies, undertake more vendor financing programs or longer customer payment cycles and devote substantially more resources to developing new or enhanced products than we do. Some competitors may sell their modems below cost to reduce excess inventories, causing severe price competition.
Supply of our products may be limited by our ability to forecast demand accurately.
Our customers have increasingly been requiring us to ship product upon ordering instead of submitting purchase orders in advance of expected shipment dates. This practice requires us to keep inventory on hand for immediate shipment. Any significant cancellations or deferrals could adversely affect our business by slowing our growth and decreasing our revenues. Additionally, cancellations or deferrals could cause us to hold excess inventory, which could reduce our profit margins and restrict our ability to fund our operations. In particular, increases in inventory could cause a harmful effect on operations if this inventory is not used or becomes obsolete. This risk could result in inventory write-offs in any given period.
We may be subject to product returns and product liability claims due to defects in our products.
Our products are complex and may contain undetected defects, errors, design deficiencies, or may have been manufactured incorrectly. Our products have contained errors in the past and may contain errors in the future. Defects, errors, or failures in our products could result in delayed shipments, returned products, and loss or delay of market acceptance of our products. We could incur costs or losses in excess of accrued warranty amounts. Although we have not experienced any product liability claims, due to the highly technical nature of our products, such a risk exists. A successful product liability claim brought against us could impair our business, operating results, and financial condition by forcing us to use cash
16
and personnel resources. This would limit our ability to grow the company and would decrease our revenues.
Com21 may not be successful in attracting and retaining key personnel and management.
Our success has always depended on our ability to attract and retain highly skilled technical, managerial, sales, and marketing personnel. In spite of the economic slowdown, competition for these personnel is intense, especially in the Silicon Valley area of Northern California. We must retain and attract high caliber personnel. Competitors and others have in the past and may in the future attempt to recruit Com21's employees. We do not have employment contracts with any of our key personnel with exception of a continuing payment of salary agreement for a certain employee and two executives of the company in the event of change in control. Volatility or lack of positive performance in our stock price may also adversely affect our ability to retain key employees, all of whom have been granted stock options. We do not maintain key person life insurance on key personnel. The loss of services of any of our key personnel, the inability to retain and attract qualified personnel in the future, or delays in hiring required personnel, particularly engineers and sales personnel, could make it difficult to meet key objectives, such as timely product introductions.
Competition for these personnel is intense; however, there is less competition for these skilled workers in other countries. In September 2001, we completed the transfer of the research and development, product management, and marketing functions for the proprietary ComUNITY Access System product line to our facility in Cork, Ireland. We made this transition to take advantage of the greater availability of qualified personnel in Cork to support this product line. However, the loss of any key Cork employee with technical, marketing or support knowledge may affect our ability to provide timely development and support activities for the ComUNITY Access System product line.
We may be subject to additional credit risk in the form of trade accounts receivable.
Our standard credit terms are net 30 days from the date of shipment, and we generally do not require collateral or other security to support customer receivables. Starting with third quarter 2001, we offered certain customers a 2% discount for payment received within 10 days of the invoice date. We may require letters of credit from a customer before shipping an order if we determine that the customer has not proven to be creditworthy.
Com21 may be charged for excess inventory held or on order with contract manufacturers, which would reduce our gross profit.
We rely on contract manufacturers for the production of our products. Contract manufacturers generally require revenue forecasts in order to manage component inventories to meet customer demand. Accordingly, our contract manufacturers may order substantial amounts of inventory to meet our revenue forecasts. If our future shipments do not utilize the committed inventory, these contract manufacturers would have the right to charge us for inventory carrying costs and to bill us for any excess component and finished goods inventory. We would be required to fulfill these obligations even if demand for our products were lower than we anticipate, which could reduce our working capital and have a negative impact on our financial position.
Our standards-based products are subject to evolving industry standards. If our products do not comply with any standard that achieves market acceptance, customers may refuse to purchase our products.
Early cable modem equipment was not interoperable, meaning cable modem products from different cable modem developers would not work together. For different companies' products to work together, each company must meet an established standard. For each standard, a certification body is established to certify that a product meets the standard. Cable operators are demanding certified standards-based cable modem products for two primary reasons. First, a certified product has proven to have the functionality they want. Second, certified interoperable products give cable operators the freedom to buy products from a variety of cable modem manufacturers, creating increased competition and driving down prices.
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The DOCSIS and Euro DOCSIS standard have achieved substantial market acceptance. Cable Television Laboratories, or CableLabs, performs certification for both the DOCSIS and Euro DOCSIS standard. The DOCSIS standards are evolving standards and become more complex and more difficult to comply with as they evolve. As we continue to enhance and develop our DOCSIS and Euro DOCSIS products to meet the evolving standards, we may incur additional costs. Additionally, we cannot assure you that enhancements or new DOCSIS products will be certified. Even if these products are certified, we cannot assure you that they will be accepted by the market. The development of new competing technologies and standards increases the risk that current or new competitors could develop products that would reduce the competitiveness of our products. If any of these new technologies or standards achieve widespread market acceptance, any failure by us to develop new products or enhancements, or to address these new technologies or standards, could harm our business.
New products and services may present additional and unanticipated risks.
As we research and introduce new products and services such as the DOXcontroller XB™ System, we may encounter risks not present in our current business. We must anticipate and manage these risks, which may include new regulations, competition, technological requirements and our own ability to deliver or maintain reliable services to our customers or partners. Failure to do so may result in unrecovered costs, loss of market share, or adverse publicity.
We rely on indirect distribution channels for our products and need to develop additional distribution channels.
Today, cable operators and systems integrators purchase cable modems from vendors through direct and indirect sales channels. We anticipate that the North American cable modem market may at some point shift to a consumer purchase model. If this occurs, we will likely sell more of our cable modems directly through consumer sales channels. Our success will be dependent on our ability to market effectively to end users, to establish brand awareness, to set up the required channels of distribution and to have cable operators' reference sell our products. We have begun to establish new distribution channels for our cable modems. We may not have the capital required or the necessary personnel or expertise to develop these distribution channels, which could harm our business, operating results, and financial condition. As large consumer electronics companies enter the cable modem market, their well-established retail distribution capabilities and brands would provide them with a significant competitive advantage.
If we fail to adequately protect our proprietary rights we may be unable to successfully compete in our industry.
We depend on our proprietary technology. To protect our intellectual property rights we rely on a combination of patent, copyright and trademark laws, and trade secrets, confidentiality provisions and contractual provisions to protect our proprietary rights. However, any of our intellectual proprietary rights could be challenged by third parties. Our means of protecting our proprietary rights in the U.S. or abroad may not be adequate. An unauthorized party may attempt to copy aspects of our products or to obtain and use trade secrets or other proprietary information. Additionally, the laws of some foreign countries do not protect Com21's proprietary rights as fully as do the laws of the U.S. Issued patents may not preserve Com21's proprietary position. Even if they do, competitors or others may develop technologies similar to or superior to those of Com21. If we do not enforce and protect our intellectual property, our business will be harmed.
Our products may infringe on the intellectual property rights of third parties that may result in lawsuits and prohibit us from selling our products.
Third parties may claim that we are infringing on their intellectual property. Even if we do not believe that our products are infringing third parties' intellectual property rights, these claims can be time-consuming, costly to defend, and divert management's attention and resources away from our business. Claims of intellectual property infringement might also require us to enter into costly royalty or
18
license agreements. If we cannot or do not license the infringed technology or substitute similar technology from another source, our business could suffer. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Litigation to determine the validity of any claims, whether or not the litigation is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel from productive tasks. If there is an adverse ruling against us in any litigation, we may be required to pay substantial damages, discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology, or obtain licenses to infringing technology. Our failure to develop or license a substitute technology could prevent us from selling our products.
Com21 depends on strategic relationships; if we are not able to find and maintain these relationships, we may not be able to develop our technologies or products, which could slow our growth and decrease our revenues.
Our business strategy relies to a significant extent on strategic relationships with other companies. These relationships include:
- •
- software license arrangements for our network management system;
- •
- technology licensing agreements;
- •
- development arrangements and agreements with original equipment manufacturers for advanced products;
- •
- marketing arrangements with system integrators and others; and
- •
- collaboration agreements with suppliers of routers and headend equipment to ensure the interoperability of our cable modems with these suppliers' products.
The failure to maintain and develop these relationships, or replace them if any of these relationships are terminated and to renew or extend any license agreements with a third party may harm our business.
Com21 is subject to risks of operating in international markets.
For the year ended December 31, 2002, international sales accounted for 68% of revenues. We intend to enter new international markets, and we expect that a significant portion of our sales will continue to be in international markets. Because we sell primarily through systems integrators, a successful expansion of our international operations and sales may require us to develop relationships with new international systems integrators and distributors. If we are unable to identify, attract or retain suitable international systems integrators or distributors, we may not be able to successfully expand our international operations. Additionally, international operations involve a number of risks not typically present in domestic operations, including:
- •
- changes in regulatory requirements;
- •
- the possibility of difficult accounts receivable collections;
- •
- costs and risks of distributing systems in other countries;
- •
- licenses, tariffs and other trade barriers;
- •
- political and economic instability;
- •
- difficulties in staffing and managing international operations;
- •
- potentially adverse tax consequences;
- •
- difficulties in obtaining governmental approvals for products;
- •
- the burden of complying with a wide variety of complex international laws and treaties;
19
- •
- the imposition of legislation and regulations on the import and export of high technology products; and
- •
- fluctuations in foreign currency especially with the increasing use of Euro as common currency for members of the European Union, this could have an impact on foreign exchange exposure.
The industry in which we compete is subject to consolidation.
There has been a trend toward industry consolidation for several years, which is expected to continue through 2002. We expect this trend to continue as companies attempt to strengthen or hold their market positions in an evolving industry. We believe that industry consolidation may produce increasingly stronger competitors. This could lead to more variability in operating results as we compete to be a vendor solution and could harm our business, operating results, and financial condition. We believe that industry consolidation may lead to fewer possible customers. If we are unable to maintain our current customers or secure additional customers, our business could be harmed.
The location of Com21's facilities is subject to the risk of earthquakes and other natural disasters.
Com21's corporate headquarters, including some of its research and development operations and our in-house manufacturing facilities, are located in the Silicon Valley area of Northern California, a region known for seismic activity. A significant natural disaster in the Silicon Valley, such as an earthquake or power loss, could halt our business, weaken our financial condition and create disappointing operating results.
Com21 leases approximately 96,000 square feet of administrative, research and development, and manufacturing facilities in Milpitas, California. We believe that future growth can be accommodated through our existing space. Com21 also leases offices in Germantown, Maryland, Long Island, New York; Cork, Ireland; and Delft, The Netherlands. Com21 uses the Milpitas, Cork and Delft office for the operations of the ATM and DOCSIS segments. The Germantown and Long Island offices have been subleased to third parties.
Com21 is subject to various legal proceedings and claims which arise in the normal course of business. Com21 does not believe that any current litigation or claims have any merit and intends to defend them vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Com21's common stock is traded on the Over the Counter Market under the symbol "CMTO.OB". There are 282 holders of record as of February 28, 2003.
The following table sets forth the high and low bid quotations of the Company's common stock for the periods indicated as reported by The Nasdaq National Market or NASD electronic bulletin board. Prices shown in the table represent inter-dealer quotations, without adjustment for retail markup, markdown, or commission, and do not necessarily represent actual transactions.
2002 | High | Low | ||||
---|---|---|---|---|---|---|
First quarter | $ | 1.55 | $ | 0.85 | ||
Second quarter | $ | 1.30 | $ | 0.41 | ||
Third quarter | $ | 0.44 | $ | 0.13 | ||
Fourth quarter | $ | 0.51 | $ | 0.12 | ||
2001 | High | Low | ||||
First quarter | $ | 8.75 | $ | 1.91 | ||
Second quarter | $ | 3.05 | $ | 1.09 | ||
Third quarter | $ | 2.05 | $ | 0.39 | ||
Fourth quarter | $ | 1.95 | $ | 0.40 |
Com21 has never declared or paid any cash dividends on its common stock, and we do not intend to declare or pay dividends in the near future.
On February 21, 2003, Com21's securities were delisted from the Nasdaq SmallCap Market and we are now trading on the Over the Counter Bulletin Board.
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ITEM 6. CONSOLIDATED SELECTED FINANCIAL DATA
The following information was compiled from the audited consolidated financial statements of Com21, Inc. and its subsidiary. The consolidated financial statements and related notes and discussions for the year ended December 31, 2002 (pages 31 through 56), should be read to obtain a better understanding of this information. The historical results are not necessarily indicative of the operating results to be expected in the future (amounts in thousands, except per share data):
| Year Ended December 31, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1998 | 1999 | 2000 | 2001 | 2002 | |||||||||||||
Consolidated Statement of Operations Data: | ||||||||||||||||||
Net revenues | $ | 48,114 | $ | 95,743 | $ | 193,983 | $ | 122,761 | $ | 56,228 | ||||||||
Cost of net revenues | 29,573 | 60,918 | 151,319 | 116,826 | 58,221 | |||||||||||||
Gross profit | 18,541 | 34,825 | 42,664 | 5,935 | (1,993 | ) | ||||||||||||
Operating expenses: | ||||||||||||||||||
Research and development | 19,936 | 29,821 | 46,932 | 22,582 | 11,248 | |||||||||||||
Sales and marketing | 10,273 | 16,250 | 29,064 | 18,926 | 7,694 | |||||||||||||
General and administrative | 3,871 | 4,120 | 10,884 | 13,366 | 7,335 | |||||||||||||
Restructuring charges | — | — | — | 69,320 | 3,775 | |||||||||||||
Write off of fixed assets | — | — | — | 1,416 | — | |||||||||||||
Amortization of intangible assets | — | — | 5,176 | 4,988 | — | |||||||||||||
Impairment loss on goodwill | — | — | — | — | 3,570 | |||||||||||||
Stock-based compensation | — | — | 1,812 | 1,567 | 40 | |||||||||||||
In-process research and development | — | — | 8,823 | — | — | |||||||||||||
Total operating expenses | 34,080 | 50,191 | 102,691 | 132,165 | 33,662 | |||||||||||||
Loss from operations | (15,539 | ) | (15,366 | ) | (60,027 | ) | (126,230 | ) | (35,655 | ) | ||||||||
Total other income (expense), net | 2,190 | 5,104 | 3,993 | (3 | ) | (2,282 | ) | |||||||||||
Loss before income taxes | (13,349 | ) | (10,262 | ) | (56,034 | ) | (126,233 | ) | (37,937 | ) | ||||||||
Income taxes | 14 | 55 | 22 | 19 | 186 | |||||||||||||
Net loss | $ | (13,363 | ) | $ | (10,317 | ) | $ | (56,056 | ) | $ | (126,252 | ) | $ | (38,123 | ) | |||
Net loss per share, basic and diluted | $ | (1.10 | ) | $ | (0.49 | ) | $ | (2.42 | ) | $ | (4.67 | ) | $ | (1.35 | ) | |||
Shares used in computation, basic and diluted | 12,150 | 20,932 | 23,123 | 27,031 | 28,290 | |||||||||||||
| December 31, | |||||||||||||||||
1998 | 1999 | 2000 | 2001 | 2002 | ||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||
Cash, cash equivalents, restricted cash and short-term investments | $ | 65,744 | $ | 106,023 | $ | 45,914 | $ | 29,735 | $ | 4,918 | ||||||||
Working capital | 68,084 | 112,233 | 63,483 | 21,524 | (8,475 | ) | ||||||||||||
Total assets | 82,948 | 141,166 | 214,365 | 84,975 | 23,559 | |||||||||||||
Long-term debt obligations | 936 | 345 | 9 | 198 | 36 | |||||||||||||
Total stockholders' equity (deficiency) | $ | 73,366 | $ | 120,078 | $ | 142,638 | $ | 31,206 | $ | (6,413 | ) |
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with Com21's consolidated financial statements and notes to consolidated financial statements. The results described below are not necessarily indicative of the results to be expected in any future period. Certain statements in this discussion and analysis, including statements regarding our strategy, financial performance and revenue sources, are forward-looking statements based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements, including those described in "Risk Factors" and elsewhere in this Annual Report on Form 10-K/A.
Overview
We are a leading global supplier of system solutions for the broadband access market. Our products enable domestic and international cable operators to provide high-speed, cost-effective Internet access, reduce operating costs, and maximize revenues opportunities in a variety of subscriber markets—including residential, corporate telecommuters, and small businesses. We develop, manufacture and sell headend equipment, subscriber cable modems, and network management software, all designed to support Asynchronous Transfer Mode, or ATM, Data Over Cable System Interface Specification, or DOCSIS, Euro-DOCSIS industry standards. In the North American market, we primarily sell directly to cable operators and systems integrators. Internationally, we sell primarily to systems integrators, who in turn sell to cable operators.
Cumulative operating losses, negative working capital, current negative cash flows, shareholders' deficiency, defaults with respect to our debt obligations and our current balance of unrestricted cash and short term investments create substantial doubt about Com21's ability to continue as a going concern. Com21 has implemented, and is continuing to pursue, aggressive cost cutting programs in order to preserve available cash. As previously announced, we are also currently evaluating alternative forms of financing. These alternatives may include the sale of equity, sale of debt instruments, and the divestiture of certain business assets. Current market conditions present uncertainty as to our ability to secure the necessary financing needed to reach profitability and there can be no assurances as to the availability of additional financing, the terms of such financing if it is available, or as to our ability to achieve a level of sales to support Com21's cost structure. As of December 31, 2002, our cash, cash equivalents and short-term investments were $4.5 million. As of February 28, 2003, Com21's unrestricted cash and short-term investments totaled $4.1 million, a decrease of $0.4 million over the first two months of 2003. If we are unable to secure additional financing, we anticipate that our cash will continue to decrease at a pace similar to that of the first two months of 2003, and as such we do not expect to be able to meet our obligations throughout the entirety of 2003.
As of February 21, 2003, we were delisted from the Nasdaq SmallCap Market. Currently, our common stock trades on the Over the Counter Bulletin Board.
Summary of Critical Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. Our preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from such estimates under different assumptions or conditions.
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The following summarizes our critical accounting policies and significant estimates used in preparing our consolidated financial statements:
Com21's investment in a privately held company is stated at the lower of cost or fair value. Our investment in a publicly held company is stated at fair value based on Nasdaq's quoted market prices. Investments are classified as available-for-sale based on the intended use. Gains and losses on sales of investments are determined on a specific identification basis. We perform periodic reviews of their investments for impairment. Investments in publicly held companies are generally considered impaired when a decline in the fair value of an investment as measured by quoted market prices is less than its carrying value and such decline is not considered temporary. Investments in privately held companies are considered impaired when a review of the investee's operations and other indicators indicate that the carrying value of the investment is not likely to be recoverable. Such indicators used to evaluate impairment include, but are not limited to, capital resources, prospects of receiving additional financing, and prospects for liquidity of the related securities. If our estimates of fair value change in the future, we may be required to record additional impairment charges.
Inventories consist of networking equipment, modems and sub-assemblies stated at the lower of cost (first-in, first-out method) or market. We write-down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additionally inventory write-downs may be required.
In March 2002, Com21 cancelled all outstanding purchase orders with its two contract manufacturers. In connection with the cancellation, we signed promissory notes for existing payables to the vendors and for certain materials held by the vendors. These notes totaled approximately $22.5 million, bore interest at an average rate ranging from 8% to 10% and mature in December 2003 and May 2004. The approximate $9.7 million of materials held by the vendors will likely be of no future use to Com21. Accordingly, the materials with no future use were written off during the first quarter of 2002. Our provision for excess and obsolete inventory at December 31, 2002 contained provisions for the entire $9.7 million of materials held by the vendors. In addition to the notes, Com21 granted warrants to the vendors to purchase a total of 350,000 shares of common stock.
In March 2002, Com21 also signed a letter agreement with our major chip supplier to cancel the purchase order of $10.4 million in exchange for an exclusive relationship on certain components over a two-year period with no specified volume commitment.
In calculating the restructuring charge related to our facilities consolidation, certain estimates were used for items such as, sublease terms upon the negotiation of future subleases, broker commissions, tenant improvements and facility maintenance costs. In developing our estimates, we obtained information from third party leasing agents to calculate anticipated third party sublease income and the vacancy period prior to finding a sub lessee. In calculating the undiscounted value of ongoing lease commitments for unused facilities, we considered ongoing facilities needs and the sublease rate. Market conditions will affect our ability to sublease facilities on terms consistent with our estimates. Management re-evaluates these estimates quarterly, based on the availability of more recent information and makes adjustments to the facilities charges accordingly. Our ability to sublease facilities ahead of schedule or the negotiation of lease terms resulting in higher or lower sublease income than estimated will affect our accrual and the related restructuring charge. Difference between estimates of related broker commissions, tenant improvements and facility maintenance costs may increase or decrease the accrual upon final negotiation. The restructuring accrual for closure of excess facilities at December 31, 2002 was $5.8 million, which is comprised of $8.4 million of future rent obligations offset by $2.6 million of estimated future sublease income, net of costs.
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Results of Operations
Net Revenues. Net revenues in 2002 decreased by 54.2% to $56.2 million as compared to $122.8 million in 2001. Unit sales of all our cable modem products decreased 24.6% from 2001, and unit sales of our headend products decreased 60.6% from 2001. We believe the decrease in revenues is due to a continued economic slowdown that has affected and, in general, continues to affect our customers. Cable modem sales accounted for 86.9% of net revenues in 2002, as compared to 83.9% of net revenues in 2001.
The decrease in revenues is due in part to a decline in our DOCSIS modem business. Net DOCSIS related revenues in 2002 decreased by 44.8% to $24.0 million as compared to $43.4 million in 2001. We experienced a small decrease in the number of DOCSIS modems sold but a substantial decrease in the average selling price of these units. The average selling price of DOCSIS modems declined due to planned price reductions to meet pricing pressures from our competitors. This decrease in DOCSIS modem revenue was partially offset by the sales of our DOCSIS XB System, which began shipping in the third quarter of 2002. We anticipate a continued decrease in revenue associated with our DOCSIS modems, due to continued pricing pressure, and as we intend to focus on sales of our higher margin XB System while de-emphasizing our DOCSIS modem business. We intend to aggressively pursue DOCSIS system opportunities and offer modems only as part of an overall technology solution.
The decrease in revenues is also due in part to a decline in our ATM business. Net ATM related revenues in 2002 decreased by 59.0% to $32.3 million as compared to $78.7 million in 2001, as we experienced a substantial decrease in the units and average selling prices of both ATM modems and ATM headends sold. We anticipate this trend to continue in 2003 as we do not intend to extend our customer base for ATM products, rather service our existing customers while working with them in their transition toward our DOCSIS XB System solution.
Overall, we anticipate that cable operators will remain cautious in light of the current economic conditions, with expenditures for cable networking equipment increasing slowly throughout the year. We also anticipate the continued pricing pressure as well as declines in the average selling price of our cable modems and headend equipment during 2003 due to competitive pricing pressures and the number of suppliers competing for market share.
Net revenues in 2001 decreased by 36.7% to $122.8 million as compared to $194.0 million in 2000. Our revenues growth was principally due to the growth in cable modem revenues over the prior year. Unit sales of all our cable modem products decreased 14.8% from 2000, and unit sales of our headend products decreased 26.1% from 2000. The decrease in revenues is due to the economic slowdown, which has affected and continues to affect our customers' purchases and the rebalancing of their inventory levels. The decrease in revenues is also due to a shift in product mix to include higher unit volumes of the lower priced DOCSIS modems coupled with a decline in the average selling price of DOCSIS cable modems from the third quarter of 2000 due to heavy price competition.
We anticipate cable operators will remain cautious in light of the current economic conditions, with expenditures for cable networking equipment increasing slowly throughout the year. We also anticipate continued pricing pressure on our cable modems and headend equipment, and declines in the average selling price of our DOCSIS cable modems and headend equipment during 2003 due to competitive pricing pressures and the number of suppliers competing for market share.
Gross Margins. Gross margins decreased to a negative 3.5% in 2002 from a positive 4.8% in 2001. The decrease in margins is primarily due to the following factors:
Gross margins for DOCSIS related products increased from a negative 14% in 2001 to a negative 5% in 2002. During 2002, Com21 began shipment of its cost reduced DP1110XB DOCSIS modem. The decrease in costs of the DP1110XB more than offset the continued reduction in average selling prices experienced from 2001 to 2002. In addition, Com21 began shipping its higher margin XB System that comprises a headend (DOXcontroller 1000) and our newly expanded version of our network management
25
software, NMAPS 5.0. We anticipate that DOCSIS related gross margin would continue to improve as we focus on sales of our higher margin XB System while de-emphasizing our DOCSIS modem business.
Gross margins for ATM related products increased from 25.7% in 2001 to 37.4% in 2002. During 2002, Com21 began shipment of its cost reduced ATM modems, the CP1080. The decrease in costs of the CP1080 modems more than offset the continued reduction in average selling prices experienced from 2001 to 2002. Product mix within the ATM segment between ATM modems and ATM headends remained relatively stable between 2001 and 2002. We anticipate moderate declines in ATM margins during 2003 as product mix shifts towards ATM modems that have a lower margin than the ATM headends.
The improvements in gross margins of the DOCSIS and ATM segments were more than offset by the following factors:
- •
- Cancellation of all outstanding purchase orders with two of our former contract manufacturers in March 2002. In connection with the cancellation, we signed promissory notes for existing payables to the vendors and for certain materials held by the vendors. At March 2002, these notes totaled approximately $22.5 million, bore interest at an average rate ranging from 8% to 10% and mature in December 2003 and May 2004. At December 31, 2002, we determined that the entire materials held by the vendors will likely be of no future use to Com21 because these materials relate to our older version of modems which we no longer sell, and that we could not find any buyer for the parts. Accordingly, all materials held at these vendors of $9.7 million were written off. In addition to the notes, Com21 granted warrants to the vendors to purchase a total of 350,000 shares of common stock, which resulted in a charge of $219,000 to cost of revenues. We are currently in default on the promissory notes to both contract manufacturers, as scheduled payments in July were not made. Com21 is seeking to renegotiate the notes with the contract manufacturers and resolve the matter.
- •
- Write-off of component and finished goods inventory related to certain discontinued ATM and DOCSIS modems of $3.2 million.
Overall, we believe margins will improve during 2003. As noted above, we intend to focus on sales of our higher margin XB System while de-emphasizing our DOCSIS modem business. We intend to aggressively pursue DOCSIS system opportunities while we support our existing ATM customers, working with them in their transition toward our XB System solution.
Gross margins decreased to 4.8% in 2001 from 22.0% in 2000. The decrease in margins was due primarily to the shift in product mix to include higher unit volumes of the lower priced DOCSIS modems. DOCSIS cable modem shipments increased from 49.8% of total Com21 modem shipments in 2000 to 55.3% of total Com21 modems shipped in 2001. The decrease in gross margin is also due to the carrying charges resulting from excess inventory at our contract manufacturers, write off of our obsolete component and finished goods inventory and amortization of intangible assets as a result of the GADline acquisition.
Research and Development. Research and development expenses consist primarily of personnel costs, as well as prototype material expenditures and equipment and supplies required to develop and to enhance our products. Research and development expenses decreased 50.2% to $11.2 million in 2002 from $22.6 million in 2001. The decrease in research and development expenses is due to our efforts to reduce expenses through workforce reductions and consolidation of excess research and development facility. In 2003, we anticipate that research and development expenses will decline by $0.8 million to $1.0 million. The decline is likely to result from the 2002 personnel reductions as well as the continuing effort to reduce expenses and future work force reductions.
Research and development expenses decreased 51.9% to $22.6 million in 2001 from $46.9 million in 2000. The decrease in research and development expenses is due to our efforts to reduce expenses. These efforts involved workforce reductions, elimination of certain development programs, and closure and consolidation of research and development facilities, as we refocused our development efforts on key technology initiatives.
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Sales and Marketing. Sales and marketing expenses consist primarily of salaries and commissions for sales personnel, marketing and support personnel and costs related to trade shows, consulting and travel. Sales and marketing expenses decreased 59.3% to $7.7 million in 2002 from $18.9 million in 2001. This decline is due to our efforts to reduce costs which involved workforce reductions and a decrease in spending on marketing programs. In 2003, we anticipate that sales and marketing expenses will decline by $1.5 million to $2.0 million. The decline is likely to result from the 2002 personnel reductions as well as the continuing effort to reduce expenses and future work force reductions.
Sales and marketing expenses decreased 34.9% to $18.9 million in 2001 from $29.1 million in 2000. This decline is due to our efforts to reduce costs which involved workforce reductions and a decrease in spending on marketing programs.
General and Administrative. General and administrative expenses primarily consist of salary and benefits for administrative officers and support personnel, travel expenses, legal, accounting and consulting fees. General and administrative expenses decreased 45.1% to $7.3 million in 2002 from $13.4 million in 2001. This decrease is due to our efforts to reduce costs through workforce reductions and an overall decrease in spending. In 2003, we anticipate that sales and marketing expenses will decline by $1.5 million to $2.0 million. The decline is likely to result from the 2002 personnel reductions as well as the continuing effort to reduce expenses and future work force reductions.
General and administrative expenses increased 22.8% to $13.4 million in 2001 from $10.9 million in 2000. This increase is related to higher personnel related costs, increased rent, inclusion of expenses of our GADline acquisition, professional fees, and insurance costs.
Restructuring Charges. Restructuring charges of $69.3 million and $3.8 million resulted from actions during 2001 and 2002, respectively, to reduce operating expenses. This included reductions in workforce, reorganization and closure of certain business functions, and consolidation of excess facilities.
Impairment and Amortization of Intangible Assets. Amortization of intangible assets relating to our July 2000 acquisitions of GADline and BitCom totaled an aggregate of $2.6 million for the first quarter of 2001. In connection with the 2001 restructuring activities, we sold GADline and closed down BitCom, which resulted in the impairment of all goodwill and acquired intangible assets except for the $3.6 million of goodwill associated with BitCom. During the second quarter of 2002, we reevaluated the goodwill due to indicators of impairment including substantial decreases in ATM related revenues and future projections. Com21 performed a valuation of the ATM reporting unit and allocated fair value to all of the assets and liabilities of that unit, including any unrecognized intangible assets. Based on this allocation, there was no excess fair value over the amounts assigned to the unit's assets and liabilities, and therefore no implied goodwill. As a result of this valuation, we wrote off the remaining goodwill of $3,570,000, associated with the ATM business unit, in the second quarter of 2002.
Stock-Based Compensation. Stock-based compensation resulted primarily from the amortization of deferred stock compensation generated from assumed unvested options and restricted stock in our July 2000 acquisitions of GADline and BitCom, the fair value of common stock issued to non-employees for services, and the issuance of additional shares related to meeting defined milestones in January 2001. Deferred stock compensation was amortized to expense over the vesting period of the individual options. During the second quarter of 2001, we sold GADline and closed BitCom, which resulted in the acceleration of all remaining deferred stock compensation for terminated employees. During 2002, Com21 issued common stock to non-employees for services which resulted in a charge of $40,000 to general and administrative expenses.
In-Process Research and Development. Com21 recorded a one-time charge associated with the GADline acquisition of $8.8 million in the third quarter of 2000 for purchased in-process technology related to a development project that had not reached technological feasibility, had no alternative future
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use, and for which successful development was uncertain. Management believes that the in-process research and development had no alternative future use.
Total Other Income (Expense), Net. Total other income (expense), net increased to a $2.3 million expense in 2002 from $3,000 in expense in 2001. The increase was attributable to lower interest income on a declining cash and investments balance during 2001 and 2002, coupled with $1.0 million write down of an impaired investment and interest expense related to the notes payable entered into during the first quarter of 2002. The $1.0 million write down resulted from our periodic review of our investments for impairment. During our review in the first quarter of 2002, we noted that the company we invested in had its financial position severely weakened due to slow demand for its products during 2002. Additionally, our investment was illiquid as we had no ability to transfer or sell the shares without the company's approval and therefore, we had no way to receive partial value for our investment. As the company financial position was weak, and we can not extract value from the shares, we determined that the investment had an impairment of value that was other than temporary, and therefore, the investment was written off during the first quarter of 2002.
Total other income (expense), net decreased to a $3,000 expense in 2001 from $4.0 million in income in 2000. This decrease was attributable to lower interest income on a declining cash and investments balance during 2001 coupled with $867,000 in interest expenses charged by the line of credit and term loan, and $769,000 of recognized unrealized loss on a current investment.
Income Taxes. Income tax expense for all years consisted solely of state franchise taxes. We have not recorded any income tax benefit as we have not generated taxable income and as we have provided a full valuation allowance against our deferred tax assets based on our evaluation of the likelihood of realization of future tax benefits.
Liquidity and Capital Resources
At December 31, 2002, our cash, cash equivalents and short-term investments were $4.9 million, compared to $29.7 million at December 31, 2001. Included in the amounts at December 31, 2001 was a $10.0 million in restricted cash used for a stand-by letter of credit. The stand-by letter of credit was issued to our former contract manufacturer, Celestica. During July 2002, the letter of credit for $10.0 million was drawn by Celestica, reducing both the restricted cash and the related note payable by $10.0 million. Included in the cash amounts at December 31, 2002 is $409,000 in restricted cash held in an escrow account to retain key employees.
Net cash used in operating activities was $6.8 million for the year ended 2002. Cash used in operating activities resulted from all of the following decreases to assets: a decrease in accounts receivable—trade of $8.2 million; a decrease in accounts receivable—other of $6.2 million; a decrease in inventory of $15.9 million; an increase accrued restructuring charges of $3.2 million. The inflow of cash was offset by a net loss of $38.1 million which included (non-cash charge of $8.9 million related to stock-based compensation, warrants issued to contract manufacturers, depreciation and amortization, non-cash restructuring charges, deferred rent, write off of impaired investment, goodwill, and loss on sale of assets); a decrease in accounts payable of $9.3 million; and a decrease in accrued compensation and related benefits of $869,000 and a decrease in other current liabilities of $1.1 million. The decrease in accounts receivable—trade related to the decrease in revenues for the year. The decrease in accounts receivable—other related primarily to the offset between accounts receivable and accounts payable between Com21 and our two former contract manufacturers. The decrease in inventory was due to utilization of existing inventory during the year, the write-off of components and finished goods on certain discontinued ATM modems, and the reserve for excess and obsolete inventory held by our two former contract manufacturers.
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Net cash used in investing activities was $1.0 million in 2002. Cash used in investing activities was primarily attributable to the purchases of property and equipment.
Net cash used in financing activities was $7.4 million in 2002. Cash used in financing activities consisted primarily of the repayment on the line of credit and notes payable of $17.2 million and a decrease in restricted cash of $9.6 million.
Com21 entered into a borrowing agreement in December 2001 which consisted of a revolving line of credit for working capital purposes, and a $10.0 million letter of credit facility which can be utilized as security for a contract manufacturer. The revolving line of credit was cancelled by both parties in August 2002.
In March 2002, Com21 cancelled all outstanding purchase orders with two of our former contract manufacturers. In connection with the cancellation, we signed promissory notes for existing payables to the vendors and for excess component inventory materials held by the vendors. At March 2002, these notes totaled approximately $22.5 million, bore interest at an average rate ranging from 8% to 10% and mature in December 2003 and May 2004. Currently, Com21 is in default on the promissory notes to both contract manufacturers, as scheduled payments were not made. We are seeking to renegotiate the notes with the contract manufacturers. During July 2002, the letter of credit for $10.0 million was drawn by one of the contract manufacturers, reducing both the restricted cash and the related note payable by $10.0 million.
At December 31, 2001, we had cash, cash equivalents and short-term investments of $19.7 million compared to $25.2 million at December 31, 2000, a decrease of $5.5 million. The decrease is primarily a result of net cash used in operating activities of $18.0 million offset by cash provided by investing of $8.6 million and by cash provided by financing activities of $3.8 million.
Cumulative operating losses, negative working capital, current negative cash flows, shareholders' deficiency, defaults with respect to our debt obligations and our current balance of unrestricted cash and short term investments create substantial doubt about Com21's ability to continue as a going concern. Com21 has implemented, and is continuing to pursue, aggressive cost cutting programs in order to preserve available cash. As previously announced, we are also currently evaluating alternative forms of financing. These alternatives may include the sale of equity, sale of debt instruments, and the divestiture of certain business assets. Current market conditions present uncertainty as to our ability to secure the necessary financing needed to reach profitability and there can be no assurances as to the availability of additional financing, the terms of such financing if it is available, or as to our ability to achieve a level of sales to support Com21's cost structure. As of December 31, 2002, our cash, cash equivalents and short-term investments were $4.5 million. As of February 28, 2003, Com21's unrestricted cash and short-term investments totaled $4.1 million, a decrease of $0.4 million over the first two months of 2003. If we are unable to secure additional financing, we anticipate that our cash will continue to decrease at a pace similar to that of the first two months of 2003, and as such we do not expect to be able to meet our obligations throughout the entirety of 2003.
The following table depicts our contractual obligations (net of sublease collections) as of December 31, 2002:
| Contractual Obligations | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | 1-3 Year | 4-5 Year | Greater Than 5 Year | ||||||||
| (in thousands) | |||||||||||
Notes Payable | $ | 11,504 | $ | 11,504 | $ | — | $ | — | ||||
Inventory Purchase Commitments | 2,692 | 2,692 | — | — | ||||||||
Capital Lease Obligations | 197 | 160 | 37 | — | ||||||||
Operating Lease Obligations | 11,034 | 10,111 | 346 | 577 | ||||||||
Total Contractual Cash Obligations | $ | 25,427 | $ | 24,467 | $ | 383 | $ | 577 | ||||
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Com21 subleases certain of its offices to third parties. If the subleasees fail to make the payments, Com21 would be liable for an additional $640,000 over the next four years.
New Accounting Standards
On January 1, 2002, Com21 adopted Statement of Financial Accounting Standards (SFAS) No. 141 "Business Combinations". SFAS No. 141 requires that all business combinations initiated after September 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. The adoption of SFAS No. 141 had no impact on Com21's consolidated financial position, results of operations or cash flows.
On January 1, 2002, Com21 adopted SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets after their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather tested at least annually for impairment. In accordance with SFAS No. 142, Com21 ceased amortizing goodwill totaling $3.6 million as of the beginning of fiscal 2002.
During the second quarter of 2002, we reevaluated the goodwill due to indicators of impairment including substantial decreases in ATM related revenues and future projections. Com21 performed a valuation of the ATM reporting unit and allocated the fair value to all of the assets and liabilities of that unit, including any unrecognized intangible assets. Based on this allocation, there was no excess fair value over the amounts assigned to the unit's assets and liabilities, and therefore no implied goodwill. As a result of this valuation, we wrote off the remaining goodwill of $3.6 associated with the ATM business unit.
On January 1, 2002, Com21 adopted SFAS No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The adoption of SFAS No. 144 had no impact on Com21's consolidated financial position, results of operations or cash flows.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. The Company will adopt the provisions of SFAS 146 for exit or disposal activities that are initiated after December 31, 2002.
In November 2002, the EITF reached a consensus on Issue No. 00-21 "Accounting for Revenue Arrangements with Multiple Deliverables". The EITF concluded that revenue arrangements with multiple elements should be divided into separate units of accounting if the deliverables in the arrangement have value to the customer on a standalone basis, if there is objective and reliable evidence of the fair value of the undelivered elements, and as long as there are no rights of return or additional performance guarantees by the Company. The provisions of EITF Issue No. 00-21 will be effective for fiscal periods beginning after June 15, 2003. We are currently determining what effect, if any, the provisions of EITF Issue No. 00-21 will have on our operating results or financial condition.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others".
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FIN No. 45 elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees it has issued and clarifies the accounting for such guarantees. We adopted the disclosure requirements of FIN No. 45 in the fourth quarter of fiscal 2002 (see Note 8 in the consolidated financial statements concerning the reserve for warranty costs). The recognition and measurement provisions will be applied to guarantees issued or modified after December 31, 2002. We have not yet determined the impact, if any, of the adoption of FIN No. 45.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123". SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the related existing disclosure requirements. As more fully described in Notes 1 and 10, the Company accounts for its stock-based compensation under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". We will adopt the disclosure provisions of SFAS No. 148 in the first quarter of fiscal year 2003. We have not yet determined the effect that the transition provisions of SFAS No. 148 would have on our operating results or financial position, if any.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity. Com21 maintains an investment portfolio of government and corporate debt obligations. These available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10 percent from levels at December 31, 2002, the fair value of the portfolio would decline by an immaterial amount. We generally have the ability to hold our fixed income investments until maturity and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio.
Com21 has fixed rate debt obligations of $196,000 at December 31, 2002 that have no interest rate risk. The fixed rates on such obligations ranged from 8% to 11% in 2002, and matures on various dates through 2004.
Market Price Risk. Com21 is also exposed to market price risk through investments in marketable equity securities held as available-for-sale investments. These investments are in publicly traded companies as well as private companies in the volatile high-technology industry sector. A 50% adverse change in the equity price would result in an approximate $543,000 decrease in the fair value of the investment in the marketable equity security as of December 31, 2002.
Foreign Currency Risk. To date, our international sales have been dominated solely in U.S. dollars, and accordingly, we have not been exposed to foreign currency exchange rate fluctuations related to sales transactions. During 2002, we had sales in Euro; however, the U.S. dollars and the Euro dollars were of equivalent; therefore, it did not have a material impact on our consolidated financial positions or results of operation. The functional currency of our subsidiary in Ireland is the U.S. dollar; however, the local accounts are maintained in Irish pounds subjecting us to foreign currency exchange rate fluctuations associated with remeasurement to U.S. dollars. A hypothetical change of 10% in the foreign currency exchange rates would not have a material impact on our consolidated financial positions or results of operation.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
Index To Consolidated Financial Statements
| Page | |
---|---|---|
Independent Auditors' Report | 34 | |
Consolidated Balance Sheets as of December 31, 2001 and 2002 | 35 | |
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2000, 2001 and 2002 | 36 | |
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000, 2001 and 2002 | 37 | |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 2001 and 2002 | 38 | |
Notes to Consolidated Financial Statements | 40 |
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To the Board of Directors and Stockholders of Com21, Inc.:
We have audited the accompanying balance sheets of Com21, Inc. and its subsidiaries (the Company) as of December 31, 2001 and 2002, and the related statements of income, stockholders' equity (deficiency), and cash flows for the years then ended. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and 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 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 audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Com21, Inc. and its subsidiaries as of December 31, 2001 and 2002, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the consolidated financial statement schedule listed in Item 15(a)(2), when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company's recurring losses from operations, negative working capital and negative cash flows raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 1 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No., 142, "Goodwill and Other Intangible Assets."
/s/ DELOITTE & TOUCHE LLP
San Jose, California
January 21, 2003 (February 21, 2003 as to Note 17)
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Com21, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
| December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2002 | ||||||||
ASSETS | ||||||||||
Current Assets: | ||||||||||
Cash and cash equivalents | $ | 19,673 | $ | 4,423 | ||||||
Restricted cash | 10,025 | 409 | ||||||||
Short-term investments | 37 | 86 | ||||||||
Accounts receivable: | ||||||||||
Trade (net of allowances of $2,383 and $586 in 2001 and 2002, respectively) | 11,945 | 3,697 | ||||||||
Related parties | 63 | — | ||||||||
Other | 10,837 | 468 | ||||||||
Inventories | 18,335 | 8,274 | ||||||||
Prepaid expenses and other | 970 | 776 | ||||||||
Total current assets | 71,885 | 18,133 | ||||||||
Long-term investments | 2,000 | 1,000 | ||||||||
Property and equipment—net | 7,365 | 4,260 | ||||||||
Intangibles assets—net | 3,570 | — | ||||||||
Other assets | 155 | 166 | ||||||||
Total assets | $ | 84,975 | $ | 23,559 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||
Current Liabilities: | ||||||||||
Accounts payable | $ | 36,818 | $ | 6,562 | ||||||
Accrued compensation and related benefits | 1,635 | 766 | ||||||||
Accrued restructuring charges | 2,211 | 5,238 | ||||||||
Other current liabilities | 3,519 | 2,377 | ||||||||
Current capital lease and debt obligations | 6,178 | 11,665 | ||||||||
Total current liabilities | 50,361 | 26,608 | ||||||||
Deferred rent | 239 | 171 | ||||||||
Accrued restructuring charges | 2,971 | 3,157 | ||||||||
Capital lease and debt obligations | 198 | 36 | ||||||||
Total liabilities | 53,769 | 29,972 | ||||||||
Commitments and contingencies (Note 9) | ||||||||||
Stockholders' Equity(Deficiency): | ||||||||||
Preferred stock, $0.001 par value; 5,000,000 shares authorized and undesignated; none issued and outstanding | — | — | ||||||||
Common stock, $0.001 par value; shares authorized: 2000, 40,000,000; 2001, 160,000,000; shares issued and outstanding: 2001, 28,106,848; 2002, 28,394,371 | 28 | 28 | ||||||||
Additional paid-in capital | 272,502 | 272,957 | ||||||||
Accumulated deficit | (241,324 | ) | (279,447 | ) | ||||||
Accumulated other comprehensive income | — | 49 | ||||||||
Total stockholders' equity (deficiency) | 31,206 | (6,413 | ) | |||||||
Total liabilities and stockholders' equity (deficiency) | $ | 84,975 | $ | 23,559 | ||||||
See Notes to Consolidated Financial Statements.
35
Com21, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
| Years Ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2000 | 2001 | 2002 | |||||||||
Net revenues ($2,122 and $42, in 2000 and 2001, respectively, from related parties) | $ | 193,983 | $ | 122,761 | $ | 56,228 | ||||||
Cost of revenues ($1,588 and $58 in 2000 and 2001, respectively, for related parties) | 149,804 | 109,960 | 45,301 | |||||||||
Cost of change in contract manufacturers | — | — | 9,674 | |||||||||
Write off of discontinued product inventory | — | 5,602 | 3,246 | |||||||||
Amortization of intangible assets | 1,515 | 1,264 | — | |||||||||
Total cost of revenues | 151,319 | 116,826 | 58,221 | |||||||||
Gross profit (loss) | 42,664 | 5,935 | (1,993 | ) | ||||||||
Operating expenses: | ||||||||||||
Research and development | 46,932 | 22,582 | 11,248 | |||||||||
Sales and marketing | 29,064 | 18,926 | 7,694 | |||||||||
General and administrative | 10,884 | 13,366 | 7,335 | |||||||||
Restructuring charges | — | 69,320 | 3,775 | |||||||||
Write off of fixed assets | — | 1,416 | — | |||||||||
Amortization of intangible assets | 5,176 | 4,988 | — | |||||||||
Impairment loss on goodwill | — | — | 3,570 | |||||||||
Stock-based compensation* | 1,812 | 1,567 | 40 | |||||||||
In-process research and development | 8,823 | — | — | |||||||||
Total operating expenses | 102,691 | 132,165 | 33,662 | |||||||||
Loss from operations | (60,027 | ) | (126,230 | ) | (35,655 | ) | ||||||
Other income (expense): | ||||||||||||
Interest income | 4,825 | 1,765 | 191 | |||||||||
Interest expense | (74 | ) | (867 | ) | (1,272 | ) | ||||||
Impairment loss on investment | — | — | (1,000 | ) | ||||||||
Other income (expense)—net | (758 | ) | (901 | ) | (201 | ) | ||||||
Total other income (expense), net | 3,993 | (3 | ) | (2,282 | ) | |||||||
Loss before income taxes | (56,034 | ) | (126,233 | ) | (37,937 | ) | ||||||
Incomes taxes | 22 | 19 | 186 | |||||||||
Net loss | (56,056 | ) | (126,252 | ) | (38,123 | ) | ||||||
Other comprehensive income (loss), net of tax: | ||||||||||||
Unrealized gain (loss) on available-for-sale investments | (443 | ) | 279 | 49 | ||||||||
Comprehensive loss | $ | (56,499 | ) | $ | (125,973 | ) | $ | (38,074 | ) | |||
Net loss per share, basic and diluted | $ | (2.42 | ) | $ | (4.67 | ) | $ | (1.35 | ) | |||
Shares used in computation, basic and diluted | 23,123 | 27,031 | 28,290 | |||||||||
* Stock-based compensation: | ||||||||||||
Research and development | $ | 1,453 | $ | 1,437 | $ | — | ||||||
Sales and marketing | 25 | 29 | — | |||||||||
General and administrative | 334 | 101 | 40 | |||||||||
$ | 1,812 | $ | 1,567 | $ | 40 | |||||||
See Notes to Consolidated Financial Statements.
36
Com21, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
| Common Stock | | | | | | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Additional Paid-In Capital | Deferred Stock Compensation | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity (Deficiency) | ||||||||||||||||
| Shares | Amount | |||||||||||||||||||
Balances, January 1, 2000 | 21,619,172 | $ | 22 | $ | 179,138 | $ | (230 | ) | $ | (59,016 | ) | $ | 164 | $ | 120,078 | ||||||
Exercise of stock options | 637,472 | 1 | 3,489 | — | — | — | 3,490 | ||||||||||||||
Sale of stock under employee stock purchase plan | 92,556 | — | 946 | — | — | — | 946 | ||||||||||||||
Repurchase of shares | (196,733 | ) | — | (272 | ) | — | — | — | (272 | ) | |||||||||||
Value of stock options issued in acquisitions | — | — | 4,683 | — | — | — | 4,683 | ||||||||||||||
Issuance of common stock in acquisitions | 2,281,750 | 2 | 67,340 | — | — | — | 67,342 | ||||||||||||||
Issuance of restricted stock | 245,000 | — | 6,049 | (6,049 | ) | — | — | — | |||||||||||||
Deferred stock compensation | — | — | 1,372 | (1,372 | ) | — | — | — | |||||||||||||
Issuance of stock options and warrants to nonemployees for services | — | — | 1,058 | — | — | — | 1,058 | ||||||||||||||
Amortization of deferred stock compensation | — | — | — | 1,812 | — | — | 1,812 | ||||||||||||||
Unrealized loss on available-for-sale investments | — | — | — | — | — | (443 | ) | (443 | ) | ||||||||||||
Net loss | — | — | — | — | (56,056 | ) | — | (56,056 | ) | ||||||||||||
Balances, December 31, 2000 | 24,679,217 | 25 | 263,803 | (5,839 | ) | (115,072 | ) | (279 | ) | 142,638 | |||||||||||
Exercise of stock options | 387,347 | — | 229 | — | — | — | 229 | ||||||||||||||
Sale of stock under employee stock purchase plan | 295,998 | — | 386 | — | — | — | 386 | ||||||||||||||
Repurchase of shares | (440 | ) | — | (1 | ) | — | — | — | (1 | ) | |||||||||||
Issuance of common stock for acquisition milestones | 244,726 | — | 1,333 | — | — | — | 1,333 | ||||||||||||||
Issuance of common stock in private equity financing (net of issuance costs of $780) | 2,450,000 | 3 | 4,348 | — | — | — | 4,351 | ||||||||||||||
Issuance of warrants in private equity financing | — | — | 2,513 | — | — | — | 2,513 | ||||||||||||||
Net reversal of deferred stock compensation from forfeitures | — | — | (293 | ) | 293 | — | — | — | |||||||||||||
Issuance of common stock to employees for services | 50,000 | — | 127 | — | — | — | 127 | ||||||||||||||
Issuance of stock options to non-employees for services | — | — | 57 | — | — | — | 57 | ||||||||||||||
Amortization of deferred stock compensation | — | — | — | 5,546 | — | — | 5,546 | ||||||||||||||
Unrealized gain on available-for-sale investments | — | — | — | — | — | 279 | 279 | ||||||||||||||
Net loss | — | — | — | — | (126,252 | ) | — | (126,252 | ) | ||||||||||||
Balances, December 31, 2001 | 28,106,848 | 28 | 272,502 | — | (241,324 | ) | — | 31,206 | |||||||||||||
Exercise of stock options | 116,986 | — | 115 | — | — | — | 115 | ||||||||||||||
Sale of stock under employee stock purchase plan | 170,537 | — | 81 | — | — | — | 81 | ||||||||||||||
Issuance of warrants to contract manufacturers | — | — | 219 | — | — | — | 219 | ||||||||||||||
Issuance of stock options to non-employees for services | — | — | 40 | — | — | — | 40 | ||||||||||||||
Unrealized gain on available-for-sale investments | — | — | — | — | — | 49 | 49 | ||||||||||||||
Net loss | — | — | — | — | (38,123 | ) | — | (38,123 | ) | ||||||||||||
Balances, December 31, 2002 | 28,394,371 | $ | 28 | $ | 272,957 | $ | — | $ | (279,447 | ) | $ | 49 | $ | (6,413 | ) | ||||||
See Notes to Consolidated Financial Statements.
37
Com21, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| For the Years Ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2000 | 2001 | 2002 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||||
Net loss | $ | (56,056 | ) | $ | (126,252 | ) | $ | (38,123 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||||
Stock-based compensation | 2,870 | 1,625 | 40 | ||||||||||
Warrants issued to contract manufacturers | — | — | 219 | ||||||||||
Depreciation and amortization | 11,904 | 11,330 | 3,224 | ||||||||||
In-process research and development | 8,823 | — | — | ||||||||||
Deferred rent | 67 | (118 | ) | (68 | ) | ||||||||
Gain on sales and maturities of investments | (536 | ) | (830 | ) | — | ||||||||
Write-off of impaired investments | — | 769 | 1,000 | ||||||||||
Write-off of impaired goodwill adn purchased technology | — | 51,305 | 3,570 | ||||||||||
Write-off of impaired asset | 2,518 | 6,344 | 123 | ||||||||||
Write-off of stock-based compensation | — | 4,368 | — | ||||||||||
Loss on sale of assets | — | — | 793 | ||||||||||
Changes in operating assets and liabilities: | |||||||||||||
Accounts receivable—trade | (24,902 | ) | 27,495 | 8,248 | |||||||||
Accounts receivable—related parties | 4,172 | 549 | 63 | ||||||||||
Accounts receivable—other | (9,271 | ) | (678 | ) | 6,168 | ||||||||
Inventories | (24,599 | ) | 13,451 | 15,856 | |||||||||
Prepaid expenses and other | (1,519 | ) | 2,165 | 194 | |||||||||
Other assets | (2,165 | ) | 572 | (11 | ) | ||||||||
Accounts payable | 33,812 | (10,406 | ) | (9,332 | ) | ||||||||
Accrued compensation and related benefits | 715 | (2,007 | ) | (869 | ) | ||||||||
Accrued restructuring charges | — | 5,182 | 3,213 | ||||||||||
Other current liabilities | (1,129 | ) | (2,903 | ) | (1,142 | ) | |||||||
Net cash used in operating activities | (55,296 | ) | (18,039 | ) | (6,834 | ) | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||||
Purchases of property and equipment | (11,911 | ) | (1,087 | ) | (1,035 | ) | |||||||
Purchases of investments | (55,794 | ) | — | — | |||||||||
Proceeds from sales and maturities of investments | 133,875 | 9,730 | — | ||||||||||
Purchase of companies, net of cash acquired | (783 | ) | — | — | |||||||||
Net cash provided by (used in) investing activities | 65,387 | 8,643 | (1,035 | ) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||||
Proceeds from private equity financing, net | — | 6,864 | — | ||||||||||
Proceeds from issuance of common stock | 4,436 | 615 | 196 | ||||||||||
Repurchases of common stock | (272 | ) | (1 | ) | — | ||||||||
Proceeds from issuance of debt obligations | 10,000 | 6,000 | — | ||||||||||
Repayments under debt obligations | — | (10,480 | ) | (6,000 | ) | ||||||||
Repayments under capital lease obligations | (592 | ) | (391 | ) | (180 | ) | |||||||
Repayments on debt obligations | (3,675 | ) | — | (11,013 | ) | ||||||||
Restricted cash (increase) decrease | (11,250 | ) | 1,225 | 9,616 | |||||||||
Net cash provided by (used in) financing activities | (1,353 | ) | 3,832 | (7,381 | ) | ||||||||
Net change in cash and cash equivalents | 8,738 | (5,564 | ) | (15,250 | ) | ||||||||
Cash and cash equivalents, beginning of year | 16,499 | 25,237 | 19,673 | ||||||||||
Cash and cash equivalents, end of year | $ | 25,237 | $ | 19,673 | $ | 4,423 | |||||||
38
NONCASH INVESTING AND FINANCING ACTIVITIES: | |||||||||||||
Property acquired under capital lease | $ | — | $ | 476 | $ | — | |||||||
Deferred stock compensation | $ | 7,421 | $ | (293 | ) | $ | — | ||||||
Unrealized gain (loss) on available-for-sale investments | $ | (552 | ) | $ | (279 | ) | $ | 49 | |||||
Common stock issued to acquire companies | $ | 67,342 | $ | — | $ | — | |||||||
Value of stock options issued in acquisitions | $ | 4,683 | $ | — | $ | — | |||||||
Issuance of common stock for acquisition milestones | $ | — | $ | 1,333 | $ | — | |||||||
Warrants to purchase common stock | $ | — | $ | — | $ | 219 | |||||||
Liabilities net of assets converted to notes payable (Note 6) | $ | — | $ | — | $ | 22,518 | |||||||
Letter of credit drawn by contract manufacturer reducing notes payable (Note 6) | $ | — | $ | — | $ | 10,000 | |||||||
SUPPLEMENTAL CASH FLOW INFORMATION: | |||||||||||||
Cash paid for income taxes | $ | 22 | $ | 19 | $ | 186 | |||||||
Cash paid for interest | $ | 190 | $ | 867 | $ | 518 | |||||||
See Notes to Consolidated Financial Statements.
39
Com21, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2000, 2001 and 2002
1. Business and Significant Accounting Policies
Business—Com21, Inc. (the Company or Com21) was incorporated in Delaware in June 1992. The Company is a global supplier of broadband access solutions. The Company develops and sells Data Over Cable System Interface Specification (DOCSIS), and headend equipment, subscriber cable modems and network management software to support the Asynchronous Transfer Mode (ATM). Such products enable domestic and international cable operators to provide high-speed, cost-effective Internet access to a variety of subscriber markets including corporate telecommuters, small businesses and private homes.
Cumulative operating losses, negative working capital, current negative cash flows, shareholders' deficiency, defaults with respect to our debt obligations and our current balance of unrestricted cash and short term investments create substantial doubt about Com21's ability to continue as a going concern. Com21 has implemented, and is continuing to pursue, aggressive cost cutting programs in order to preserve available cash. As previously announced, we are also currently evaluating alternative forms of financing. These alternatives may include the sale of equity, sale of debt instruments, and the divestiture of certain business assets. Current market conditions present uncertainty as to our ability to secure the necessary financing needed to reach profitability and there can be no assurances as to the availability of additional financing, the terms of such financing if it is available, or as to our ability to achieve a level of sales to support Com21's cost structure. As of December 31, 2002, our cash, cash equivalents and short-term investments were $4.5 million. As of February 28, 2003, Com21's unrestricted cash and short-term investments totaled $4.1 million (unaudited), a decrease of $0.4 million over the first two months of 2003. If we are unable to secure additional financing, we anticipate that our cash will continue to decrease at a pace similar to that of the first two months of 2003, and as such we do not expect to be able to meet our obligations throughout the entirety of 2003.
Basis of Presentation—The consolidated financial statements include the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Certain prior period amounts in the accompanying audited condensed consolidated financial statements have been reclassified to conform to current period presentation. These reclassifications had no effect on the financial position, results of operations, or cash flows for any of the periods presented.
Financial Statement Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 amounts of revenues and expenses during the reporting period. Such management estimates include an allowance for doubtful accounts receivable, reserves for sales returns, provisions for inventory to reflect the net realizable value, estimates of fair value for investments in publicly and privately held companies, estimates of remaining obligations on leased facilities, valuation allowances against deferred income taxes and accruals for product warranty and other liabilities. Actual results could differ from those estimates.
Cash Equivalents—The Company considers all highly liquid debt instruments with maturities at the date of purchase of three months or less to be cash equivalents.
Restricted Cash—As of December 31, 2001 and 2002, there was $25,000 cash held in a certificate of deposit for letters of credit used as security on purchases from a vendor, and $409,000 of cash held in an escrow to retain key employees.
40
Investments—Investment in privately held company is stated at fair value. Investment in publicly held company is stated at fair value based on Nasdaq's quoted market prices. Investments are classified as available-for-sale based on the Company's intended use. The difference between amortized cost and fair value representing unrealized holding gains or losses, net of deferred taxes, are recorded as a component of stockholders' equity as accumulated other comprehensive income (loss). Gains and losses on sales of investments are determined on a specific identification basis.
The Company performs periodic reviews of their investments for impairment. Investments in publicly held companies are generally considered impaired when a decline in the fair market value of an investment, as measured by quoted market prices, is less than its carrying value and such decline is not considered temporary. Investments in privately held companies are considered impaired when a review of the investee's operations and other indicators indicate that the carrying value of the investment is not likely to be recoverable. Such indicators used to evaluate impairment include, but are not limited to, capital resources, prospects of receiving additional financing, and prospects for liquidity of the related securities. In 2001, the Company recorded a non-cash, other-than-temporary write down of $769,000 related to the impairment of one of its investments in a publicly traded company. In the first quarter of 2002, we recorded $1,000,000 related to the impairment of our investment in a privately held company as we judged the decline in the investment's value to be other than temporary.
Other Accounts Receivable—Other accounts receivable consists of receivables due from third party outsource manufacturers for the sale of component inventories used by the manufacturers in the production of the Company's product.
Inventories—Inventories consist of networking equipment, modems and sub-assemblies stated at the lower of cost (first-in, first-out method) or market.
Property and Equipment—Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally three to seven years. Amortization of leasehold improvements and assets recorded under capital lease agreements are computed using the straight-line method over the shorter of the lease term or the estimated useful lives of the related assets.
Intangible Assets—Intangibles assets are amortized on a straight-line basis over useful lives of three to five years.
Long-Lived Assets—The Company evaluates long-lived tangible and intangible assets for impairment using a discounted cash flows method whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. On January 1, 2002, Com21 adopted SFAS No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The adoption of SFAS No. 144 had no impact on Com21's consolidated financial position, results of operations or cash flows.
In June 2000, the Company entered into a 43-month development agreement with a third party for a cash payment of $2,250,000 which was recorded as an asset at the time the payment was made. In December 2000, in accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
41
Accounting for the Impairment of Long-Lived Assets To Be Disposed Of, the Company recorded an impairment charge of $2,518,000 as research and development expense in the accompanying consolidated statement of operations and comprehensive loss for 2000. The amount consisted of the remaining net book value of the initial payment as well as noncancelable commitments to purchase materials for the development project. Such assets were determined to be impaired based on a comparison of the carrying amount of such assets to future undiscounted cash flows expected to be generated by the asset. As the development project was canceled with undeveloped product, there were no future cash flows.
Income Taxes—The Company accounts for income taxes under an asset and liability approach. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and operating loss and tax credit carryforwards measured by applying currently enacted tax laws. Valuation allowances are provided when necessary to reduce net deferred tax assets to an amount that is more likely than not to be realized.
Certain Significant Risks and Uncertainties—The Company participates in a dynamic high technology industry and believes that changes in any of the following areas could have a material adverse effect on the Company's future consolidated financial position, results of operations or cash flows: advances and trends in new technologies and industry standards; competitive pressures in the form of new products or price reductions on current products; changes in product mix; changes in the overall demand for products offered by the Company; changes in third-party manufacturers or key suppliers; changes in certain strategic relationships or customer relationships; litigation or claims against the Company based on intellectual property, patent, product, regulatory or other factors; risks associated with changes in domestic and international economic and/or political conditions or regulations; availability of necessary components; the Company's ability to obtain additional capital to support operations; and the Company's ability to attract and retain employees necessary to support its growth.
Since inception, the Company has incurred net losses and has an accumulated deficit of $279,447,000 at December 31, 2002. If profitability is not achieved in the near term, it could have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments and accounts receivable. Cash and cash equivalents are held primarily with two financial institutions and consist primarily of cash in bank accounts. The Company's investment policy is to invest in instruments with minimum credit ratings of A-1/P-1 (Short-Term) or AA (Long-Term) and in strategic equity investments requiring Board of Directors approval. The Company sells its products primarily to cable operators in North America and to systems integrators in Europe, Asia and South/Central America, and generally does not require its customers to provide collateral or other security to support accounts receivable. To reduce credit risk, management performs ongoing credit evaluations of its customers' financial condition. The Company maintains allowances for estimated bad debt losses. The recorded carrying amount of cash and cash equivalents, investments, accounts receivable, accounts payable, and debt obligations approximates fair value.
The Company's customer base is highly concentrated. A relatively small number of customers have accounted for a significant portion of the Company's net revenues and the Company expects that this trend
42
will continue for the foreseeable future. For the years ended December 31, 2000, 2001 and 2002, the top five customers comprised 47%, 54% and 56%, respectively, of the Company's net revenues.
Revenue Recognition—The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable, and collectibility is reasonably assured. The Company generates revenue from the sale of products and related services to its customers.
Product revenue is generated from the sale of broadband access equipment embedded with software that is essential to its functionality, and accordingly, the Company accounts for these transactions in accordance with SEC Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, and Statement of Position (SOP) 97-2, Software Revenue Recognition. Product revenue is recognized when there is persuasive evidence of an arrangement exists, delivery has occurred, risk of loss has passed, the price is fixed or determinable, and collectability is reasonably assured. Estimated sales returns and warranty costs, based on historical experience by product, are recorded at the time product revenue is recognized.
Service revenue is generated from the sale of training and postcontract customer support and maintenance agreements (PCS) associated with the broadband access equipment. The Company also accounts for these transactions in accordance with SAB No. 101 and SOP 97-2, and as such, recognizes revenue when all of the related revenue recognition criteria are met which is: (i) at the time the training service is delivered; and (ii) ratably over the term of the PCS agreement. Service revenue has been less than 10% of net revenues for all periods presented in the accompanying consolidated statements of operations and comprehensive loss.
In multiple element arrangements where there are undelivered elements at the time of product shipment, the relative fair value of the delivered product is recognized at the time of shipment and the relative fair value of the undelivered elements is deferred and recognized as the elements are delivered.
Software Development Costs—Development costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time certain development costs required to attain general production release would be capitalized. To date, the Company's software development has essentially been completed concurrent with the establishment of technological feasibility, and accordingly, no costs have been capitalized.
Stock-Based Compensation—In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In December 2002, the Company adopted the disclosure requirements of SFAS No. 148 which requires disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company continues to account for stock-based compensation using Accounting Principles Board Statement (APB) No. 25, Accounting for Stock Issued to Employees. We will adopt the disclosure
43
provisions of SFAS No. 148 in the first quarter of fiscal 2003. We have not yet determined the effect that the transition provisions of SFAS No. 148 would have on our operating results or financial position, if any.
Foreign Currency—The functional currency of the Company's foreign subsidiaries is the U.S. dollar. Accordingly, all monetary assets and liabilities are translated at the current exchange rate as of the balance sheet date, nonmonetary assets and liabilities are translated at historical rates and revenues and expenses are translated at average exchange rates in effect during the period. Translation gains and losses, which are included in other income (expense)—net in the accompanying consolidated statements of operations and comprehensive loss, were not significant in 2001, and was a loss of $628,000 and $192,000 in 2000 and 2002, respectively.
Comprehensive Loss—In accordance with SFAS No. 130, Reporting Comprehensive Income, the Company reports by major components and as a single total, the change in net assets during the period from nonowner sources in a consolidated statement of comprehensive loss which has been included with the consolidated statements of operations. Accumulated other comprehensive income in the accompanying consolidated balance sheets consists entirely of unrealized gains and losses on available-for-sale investments for all periods presented.
Net Loss Per Share—Basic earnings per share, or EPS, excludes dilution and is computed by dividing net income attributable to common stockholders by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (restricted stock, common stock options and warrants using the treasury stock method) were exercised or converted into common stock. Potential common shares in the diluted EPS computation are excluded in net loss periods as their effect would be antidilutive.
New Accounting Standards—In June, 2001, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 141 "Business Combinations". SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. The adoption of SFAS No. 141 had no effect on Com21's consolidated financial position, results of operations or cash flows.
On January 1, 2002, Com21 adopted SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets after their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather tested at least annually for impairment. In accordance with SFAS No. 142, Com21 ceased amortizing goodwill totaling $3,570,000 as of the beginning of fiscal 2002.
During the second quarter of 2002, we reevaluated the goodwill due to indicators of impairment including substantial decreases in ATM related revenues and future projections. Com21 performed a valuation of the ATM reporting unit and allocated the fair value to all of the assets and liabilities of that unit, including any unrecognized intangible assets. Based on this allocation, there was no excess fair value over the amounts assigned to the unit's assets and liabilities, and therefore no implied goodwill. As a result of this valuation, we wrote off the remaining goodwill of $3,570,000, associated with the ATM business unit.
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On January 1, 2002, Com21 adopted SFAS No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The adoption of SFAS No. 144 had no impact on Com21's consolidated financial position, results of operations or cash flows.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. The Company will adopt the provisions of SFAS 146 for exit or disposal activities that are initiated after December 31, 2002.
In November 2002, the EITF reached a consensus on Issue No. 00-21 "Accounting for Revenue Arrangements with Multiple Deliverables". The EITF concluded that revenue arrangements with multiple elements should be divided into separate units of accounting if the deliverables in the arrangement have value to the customer on a standalone basis, if there is objective and reliable evidence of the fair value of the undelivered elements, and as long as there are no rights of return or additional performance guarantees by the Company. The provisions of EITF Issue No. 00-21 will be effective for fiscal periods beginning after June 15, 2003. We are currently determining what effect, if any, the provisions of EITF Issue No. 00-21 will have on our operating results or financial condition.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN No. 45 elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees it has issued and clarifies the accounting for such guarantees. We adopted the disclosure requirements of FIN No. 45 in the fourth quarter of fiscal 2002 (see Note 8 in the consolidated financial statements concerning the reserve for warranty costs). The recognition and measurement provisions will be applied to guarantees issued or modified after December 31, 2002. We have not yet determined the impact, if any, of the adoption of FIN No. 45.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123". SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the related existing disclosure requirements. As more fully described in Notes 1 and 10, the Company accounts for its stock-based compensation under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". We will adopt the disclosure provisions of SFAS No. 148 in the first quarter of fiscal year 2003. We have not yet determined the effect that the transition provisions of SFAS No. 148 would have on our operating results or financial position, if any.
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2. Investments
The amortized cost and the fair value of available-for-sale securities are presented in the tables below:
| December 31, 2001 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| Amortized Cost | Unrealized Holding Gains (Losses) | Fair Value | ||||||||
| (in thousands) | ||||||||||
Corporate equity securities | $ | 2,037 | $ | — | $ | 2,037 | |||||
Reported as: | |||||||||||
Short-term investments | $ | 37 | |||||||||
Long-term investments | 2,000 | ||||||||||
Total | $ | 2,037 | |||||||||
| December 31, 2002 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| Amortized Cost | Unrealized Holding Gains | Fair Value | ||||||||
| (in thousands) | ||||||||||
Corporate equity securities | $ | 1,037 | $ | 49 | $ | 1,086 | |||||
Reported as: | |||||||||||
Short-term investments | $ | 86 | |||||||||
Long-term investments | 1,000 | ||||||||||
Total | $ | 1,086 | |||||||||
During 2002, the Company recorded $1,000,000 related to the impairment of our investment in a privately held company during our periodic review of our investments for impairment. During our review in the first quarter of 2002, we noted the company we invested in had its financial position severely weakened due to slow demand for its products during 2002. Additionally, our investment was not liquid as we had no ability to transfer or sell the shares without the company's approval and therefore we had no way to receive partial value for our investment. As the company's financial position was weak, and we had no way of extracting value from the shares, we judged that the investment had an impairment of value that was other than temporary and therefore the investment was written off during the first quarter of 2002.
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3. Inventories
Inventories consist of:
| December 31, | |||||
---|---|---|---|---|---|---|
| 2001 | 2002 | ||||
| (in thousands) | |||||
Raw materials and sub-assemblies | $ | 5,719 | $ | 1,690 | ||
Work-in-process | 909 | 1,502 | ||||
Finished goods | 11,707 | 5,082 | ||||
$ | 18,335 | $ | 8,274 | |||
4. Property and Equipment
Property and equipment consists of:
| December 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2001 | 2002 | ||||||
| (in thousands) | |||||||
Equipment under capital lease | $ | 476 | $ | 476 | ||||
Computer equipment and software | 12,445 | 12,373 | ||||||
Production equipment | 7,768 | 7,554 | ||||||
Leasehold improvements | 1,021 | 904 | ||||||
Furniture and fixtures | 1,167 | 1,147 | ||||||
22,877 | 22,454 | |||||||
Accumulated depreciation and amortization | (15,512 | ) | (18,194 | ) | ||||
Total | $ | 7,365 | $ | 4,260 | ||||
Accumulated amortization on equipment under capital lease as of December 31, 2001 and 2002 was $161,000 and $306,000, respectively.
5. Acquisitions
In July 2000, the Company acquired GADline, Ltd., or GADline, a developer and manufacturer of fully managed networking solutions that deliver high-speed data and telephony services over a hybrid fiber coaxial infrastructure, and BitCom, Inc. (BitCom), an engineering consulting and development company specializing in wired and wireless telecommunications, satellite and networking engineering. Both transactions were accounted for as purchases.
To acquire GADline, the Company issued 2,281,750 shares of Com21 common stock with a fair value of $67,342,000 to the GADline shareholders and converted all outstanding GADline options into options to purchase 168,193 shares of Com21 common stock with a fair value of $3,205,000. In addition, the Company assumed the operating assets and liabilities of GADline and incurred acquisition expenses of $3,060,000. In connection with the acquisition, the Company recorded $61,112,000 of intangible assets which were amortized over useful lives of three to five years. The Company also recorded a one-time charge of $8,823,000 in 2000 for purchased in-process technology.
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To acquire BitCom, the Company paid $4,000,000 in cash to the BitCom shareholders, converted all outstanding BitCom options into options to purchase 100,000 shares of Com21 common stock with a fair value of $1,478,000, and paid acquisition expenses of $200,000. In connection with the acquisition, the Company recorded $5,636,000 of intangible assets which are being amortized over a five-year useful life.
Unaudited Pro Forma Financial Results
The operating results of GADline and BitCom have been included in the accompanying consolidated statement of operations and comprehensive loss since their acquisition date. The following unaudited pro forma consolidated results of operations have been prepared assuming the acquisitions occurred at the beginning of December 31, 2000. The following unaudited pro forma financial information is not necessarily indicative of the actual results that would have occurred had the acquisitions been completed at the beginning of 2000, nor is it indicative of future operating results (in thousands except per share data):
Total revenues | $ | 196,824 | ||
Net loss | $ | (59,384 | ) | |
Net loss per share, basic and diluted | $ | (2.44 | ) | |
Shares used in computation, basic and diluted | 24,346 |
The pro forma results of operations give effect to certain adjustments, including amortization of purchased intangibles, goodwill, and deferred stock compensation associated with the acquisition. The $8,823,000 charge, in 2000, for purchased in-process research and development has been excluded from the pro forma results, as it is a material non-recurring charge.
6. Goodwill and Other Intangible Assets
On January 1, 2002, Com21 adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." In accordance with SFAS No. 142, we ceased amortizing goodwill
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totaling $3,570,000 as of the beginning of fiscal 2002. The following table presents the impact of SFAS No. 142 on net loss and net loss per share had the standard been in effect beginning of 2000:
| 2000 | 2001 | 2002 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands except per share amounts) | ||||||||||
Net loss, as reported | $ | (56,056 | ) | $ | (126,252 | ) | $ | (38,123 | ) | ||
Add back amortization of: | |||||||||||
Goodwill | 4,815 | 4,696 | — | ||||||||
Tradename and workforce in place previously classified as intangible asset | 321 | 268 | — | ||||||||
Net loss, as adjusted | $ | (50,920 | ) | $ | (121,288 | ) | $ | (38,123 | ) | ||
Net loss per share, basic and diluted, as reported | $ | (2.42 | ) | $ | (4.67 | ) | $ | (1.35 | ) | ||
Add back amortization of: | |||||||||||
Goodwill | 0.21 | 0.17 | — | ||||||||
Tradename and workforce in place previously classified as intangible asset | 0.01 | 0.01 | — | ||||||||
Net loss per share, basic and diluted, as adjusted | $ | (2.20 | ) | $ | (4.49 | ) | $ | (1.35 | ) | ||
We performed our transition impairment test of goodwill as of January 1, 2002 and determined that there was no impairment upon adoption of SFAS No. 142. During the second quarter of 2002, we reevaluated the goodwill due to indicators of impairment including substantial decreases in ATM related revenues and future projections. Com21 performed a valuation of the ATM reporting unit and allocated the determined fair value to all of the assets and liabilities of that unit, including any unrecognized intangible assets. Based on this allocation, there was no excess fair value over the amounts assigned to the unit's assets and liabilities, and therefore no implied goodwill. As a result of this valuation, we wrote off the remaining goodwill of $3,570,000, associated with the ATM business unit.
7. Debt Obligations
Debt obligations consist of:
| December 31, | |||||
---|---|---|---|---|---|---|
| 2001 | 2002 | ||||
| (in thousands) | |||||
Line of credit | $ | 6,000 | $ | — | ||
Notes payable | — | 11,504 | ||||
Total | $ | 6,000 | $ | 11,504 | ||
Line of Credit—Com21 entered into a borrowing agreement in December 2001 which consisted of a revolving line of credit for working capital purposes, and a $10,000,000 letter of credit facility which can be utilized as security for a contract manufacturer. The letter of credit facility was drawn by one of the contract manufacturers in July 2002. The revolving line of credit was cancelled by both parties in August 2002.
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Notes Payable—In March 2002, Com21 executed two promissory notes with its two contract manufacturers for all net accounts payable owed to the contract manufacturer and all excess materials purchased by the contract manufacturer for Com21's product. These notes totaled $22,518,000, bore interest at an average rate ranging from 8% to 10% and mature in December 2003 and May 2004. During July 2002, the letter of credit for $10,000,000 was drawn by one of the contract manufacturers, reducing both the restricted cash and the related note payable by $10,000,000. At December 31, 2002, Com21 had $11,504,000 outstanding under the notes, which is due in monthly installments though December 31, 2003 and May 30, 2004.
We are currently in default on both of the promissory notes, as we did not make scheduled payments. We are continuing to record an accrual for interest associated with the promissory notes as we are seeking to renegotiate the notes with the contract manufacturer and resolve the matter.
In connection with the above contract manufacturer agreements, we issued warrants to purchase a total of 350,000 shares of common stock at a weighted average price of $1.22 per share. The warrants are immediately exercisable and expire in March 2005. The fair value of these warrants in the amount of $219,000 was recognized as cost of revenues in the accompanying condensed consolidated statement of operations and comprehensive loss for the first quarter of 2002. Com21 determined the fair value of the warrants using the Black-Scholes option pricing model over the contractual terms of the warrants with the following weighted average assumptions: stock volatility, 75%; risk free interest rate, 3.89%; and no dividends during the contractual terms. None of the warrants have been exercised, and all remain outstanding at December 31, 2002.
8. Accrued Warranties
Com21 sells product under warranty. The warranty for modems are for five years, and for system related products are for one year. A summary of the accrued warranty, which is part of other current liabilities, for the year ended December 31, 2002 is as follows (in thousands):
| December 31, 2001 | Provision | Utilized | December 31, 2002 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Accrued warranty | $ | 1,223 | $ | 1,973 | $ | (2,737 | ) | $ | 459 | |||
9. Restructuring Charges
During 2001, Com21 announced a number of programs to reduce operating expenses. These programs were designed to prioritize Com21's initiatives around high-growth areas of the business, focus on profit contribution and reduce expenses and capital spending. These restructuring programs included workforce reductions, reorganization and closure of certain business functions and consolidation of excess facilities. As a result of the restructuring efforts, Com21 recorded restructuring charges totaling $69,320,000 and $3,775,000 for the year ended December 31, 2001 and 2002, respectively.
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A summary of the accrued restructuring charges for the year ended December 31, 2001 and 2002 are as follows (in thousands):
| 2001 Restructuring Provision | Utilized | Balance at December 31, 2001 | ||||||
---|---|---|---|---|---|---|---|---|---|
Workforce reduction | $ | 1,212 | $ | (1,142 | ) | $ | 70 | ||
Closure of Maryland development center | 4,704 | (4,704 | ) | — | |||||
Spin-off of voice system division | 55,647 | (55,647 | ) | — | |||||
Exiting excess facilities | 7,757 | (2,645 | ) | 5,112 | |||||
Total | $ | 69,320 | $ | (64,138 | ) | $ | 5,182 | ||
| Balance at December 31, 2001 | Provision | Utilized | Balance at December 31, 2002 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Workforce reduction | $ | 70 | $ | 545 | $ | (580 | ) | $ | 35 | |||
Closure of excess facilities | 5,112 | 3,480 | (232 | ) | 8,360 | |||||||
Total | $ | 5,182 | $ | 4,025 | $ | (812 | ) | $ | 8,395 | |||
Workforce Reduction—The restructuring programs resulted in the reduction of approximately 143 and 60 employees, respectively, across all business functions and operating units, including employees of the wireless business unit, Maryland development center and corporate headquarters during 2001 and 2002. The remaining $35,000 accrual at December 31, 2002 related to severance and fringe benefits to be disbursed in the first quarter of 2003.
Closure of the Wireless Business Unit—In April 2001, Com21 ceased development in its wireless business unit to focus efforts on projects with shorter development cycles. All wireless employees were terminated and the facility located in Long Island, New York was closed in May 2001. The restructuring charges associated with this action are included within the "workforce reduction" and "exiting of excess facilities" in the table above.
Closure of the Maryland Development Center (formerly known as BitCom)—As Com21 consolidated its facilities and focused on reducing expenses, the development of ATM products was transferred from the Maryland development center to the facility in Cork, Ireland in April 2001. The Maryland development center was then closed and all employees terminated in May 2001. This closure resulted in a restructuring charge in 2001 of $4,704,000 resulting primarily from the acceleration of deferred stock compensation related to stock awards given to employees upon termination.
Spin-off of the Voice Systems Division (formerly known as GADline)—In June 2001, Com21 sold the voice systems division to the division's management team and recorded a restructuring charge of $55,647,000. Of the amount, $36,028,000 related to the impairment of goodwill, measured as the amount by which the carrying amount exceeded the present value of the estimated future cash flows for goodwill. The goodwill originated in 2000 in the GADline acquisition. The goodwill related primarily to voice technology still in development at the time of the acquisition. Com21 does not plan to continue to fund this technology, to develop alternative technology or to integrate any existing GADline voice technology in
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future products. As there would be no future benefit to Com21 from the GADline business, the remaining net book value of $36,028,000 of goodwill was written off at the time of the sale.
Through a review of Com21's existing product portfolio and future product roadmap, management determined at the time of the sale, the technologies purchased from GADline were not and would not be utilized in Com21 products subsequent to the sale. The technology behind GADline products included a cable modem designed by GADline, and an end-to-end network system providing voice and data services over cable television lines. As Com21 will not integrate these technologies into its product portfolio, and the rights to these technologies and these products were sold to the purchasers of the voice systems division, the intangible asset of $12,374,000 associated with the purchased technology was written off.
In connection with the sale, the Company also wrote off $2,351,000 of acquired intangibles associated with acquired workforce-in-place, tradename and customer base, as Com21 expects no future cash flows associated with these intangible assets.
The remaining $4,894,000 of the charge associated with the sale of the voice systems division includes a cash payment to the buyers of $1,570,000, which was paid at the time of separation and disposal of net intangible assets. In 2001, the Company determined that a note receivable from GADline of $250,000 was not collectible; therefore, the amount was written off and charged to restructuring expense. During 2002, the Company received a payment for the note that was recorded as an offset to restructuring expense.
Exiting of Excess Facilities—In connection with the restructure actions, the Company exited the wireless business unit facility in Long Island, New York; the Maryland development center in Germantown, Maryland; and a building in Milpitas, California in the second quarter of 2001. Com21 recorded a charge of $7,757,000 related primarily to the net rental expense on non-cancelable leases, the write-off of fixed assets and leasehold improvements associated with the exit activity. Amounts accrued in association to non-cancelable leases relate only to the items that the Company believes it will be obligated to pay but does not include amounts for related late payment charges. The Company believes it will be obligated to pay but does not include amounts for related late payment charges. As a result of changing real estate market conditions in California, Com21 revised the assumptions related to the timeframe to sublease the Milpitas building, resulting in an additional provision of $3,115,000 in 2002 which was offset by a $135,000 reversal of the accrual for the Long Island facility resulting from entering into a sublease agreement with a third party.
In the first quarter of 2002, Com21 identified excess facility spaces in The Netherlands and the Ireland offices and made the excess capacity available for sublease. As a result, Com21 recorded an additional charge of $374,000 related primarily to the net rental expense on non-cancelable leases and the write-off of leasehold improvements associated with the buildings. As a result of changing real estate market conditions, Com21 revised the assumptions in the fourth quarter of 2002 related to the timeframe to sublease the Netherlands and Ireland offices, resulting in an additional provision of $127,000 in 2002.
We expect to pay the remaining accrued lease obligations of $5,818,000, net of estimated sublease income, over the next eight years.
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9. Commitments and Contingencies
The Company leases its facilities and certain equipment under noncancelable capital and operating leases. The Company leases its primary facilities under a noncancelable operating lease which expires in August 2004.
In 2000, the Company's Irish subsidiary entered into two operating lease agreements for research and development facilities with terms of 20 years and 25 years. Under both leases, rental payments are subject to review and renegotiation every five years. The subsidiary can also terminate the leases, subject to penalty provisions, at the end of the tenth year on the 20-year lease and at the end of the fifth or tenth years on the 25-year lease.
Future minimum lease payments under capital and operating leases and the present value of minimum lease payments under capital leases as of December 31, 2002 are as follows:
Year Ending December 31, | Capital Leases | Operating Leases | ||||
---|---|---|---|---|---|---|
| (in thousands) | |||||
2003 | $ | 172 | $ | 4,103 | ||
2004 | 37 | 3,920 | ||||
2005 | — | 2,088 | ||||
2006 | — | 173 | ||||
2007 | — | 173 | ||||
Thereafter | — | 577 | ||||
Future minimum lease payments | 209 | $ | 11,034 | |||
Amounts representing interest (9% to 11%) | (12 | ) | ||||
Present value of future minimum lease payments | $ | 197 | ||||
The Company subleases certain of its office to third parties. If the subleasees fail to make the payments, the Company would be liable for an additional $640,000 over the next three years.
Rent expense incurred under the operating leases was $2,924,000, $3,014,000 and $1,312,000 for the years ended December 31, 2000, 2001 and 2002, respectively. Rent expense under the facilities leases is recognized on a straight-line basis over the term of the leases. The difference between the amounts paid and the amounts expensed is classified as deferred rent in the accompanying consolidated balance sheets.
On March 11, 2002, Com21 signed an agreement with its major chip supplier to cancel a purchase order for $10,354,000 worth of chips in exchange for an exclusive relationship on certain components over a two-year period with no specified volume commitment.
In March 2002, Com21 cancelled all outstanding purchase orders with its two contract manufacturers. In connection with the cancellation, we signed promissory notes for existing payables to the vendors and for certain materials held by the vendors. Com21 is currently in default on the promissory notes to both contract manufacturers, as scheduled payments were not made. We are seeking to renegotiate the notes with the contract manufacturers and resolve the matter.
The Company is subject to various legal proceedings and claims that arise in the normal course of business. The Company does not believe that any current litigation or claims will have a material adverse effect on the Company's business, operating results or financial condition.
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10. Stockholders' Equity
During the third quarter of 2002, Com21's board of directors adopted a stockholder rights plan and distributed one right for each outstanding share of common stock held by stockholders of record as of August 7, 2002. The rights plan was put in place to prevent a take-over without first negotiating with our board of directors.
Common Stock Warrants
During 2000, as consideration for services provided under two product development agreements, the Company issued warrants to purchase a total of 75,000 shares of common stock at a weighted average exercise price of $20.40 per share. The fair value of these warrants in the amount of $832,000 was recognized as research and development expense in 2000. The Company determined the fair value of the awards using the Black-Scholes option pricing model over the contractual term of the warrants with the following weighted average assumptions: stock volatility, 75%; risk free interest rate, 6.5%; and no dividends during the expected term. The warrants were expired at December 31, 2002.
In connection with the renegotiations with the two former contract manufacturers agreement, we issued warrants to purchase a total of 350,000 shares of common stock at a weighted average price of $1.22 per share. The warrants are immediately exercisable until expiration in March 2005. The fair value of these warrants in the amount of $219,000 was recognized as cost of revenues in the first quarter of 2002. Com21 determined the fair value of the warrants using the Black-Scholes option pricing model over the contractual terms of the warrants with the following weighted average assumptions: stock volatility, 75%; risk free interest rate, 3.89%; and no dividends during the contractual terms. None of the warrants have been exercised, and all remain outstanding at December 31, 2002.
Common Stock
In 2001, Com21 issued an additional 194,726 shares of common stock to former GADline shareholders upon completion of certain predefined development milestones included in the share purchase agreement. The common stock was valued on the measurement date at $1,070,000 and recorded as additional goodwill. All remaining unearned milestone shares expired during the quarter ended March 31, 2001.
In 2001, Com21 issued an additional 50,000 shares of common stock to former BitCom employees upon completion of certain product development milestones defined in the purchase agreement. These shares were valued on the measurement date at $263,000 and recorded as stock-based compensation. All remaining unearned milestone shares expired during the quarter ended March 31, 2001.
In 2001, Com21 completed an equity financing with Fletcher International Limited (Fletcher). Pursuant to a subscription agreement, dated February 28, 2001, Fletcher agreed to purchase 2,450,000 shares of Com21's common stock at a price of $3.1227 per share and a warrant to acquire up to an additional 3,505,981 shares of Com21's common stock. The warrants are exercisable for a period of seven years from the date of issuance at the exercise price of $9.0951 per share. The proceeds from the financing were allocated to the common stock and the warrants based on their relative fair values. Com21 determined the fair value of the warrants using the Black-Scholes option pricing model over the contractual term of the warrants with the following weighted average assumptions: stock volatility, 75%;
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risk free interest rate, 5.4%; and no dividends during the expected term. Net cash proceeds from the private equity financing were $6,864,000.
In 2001, Com21 issued 50,000 shares of common stock to an employee in lieu of a bonus. These shares were valued on the measurement date at $127,000 and recorded as stock-based compensation.
Net Loss Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted net loss per share computations:
| Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2000 | 2001 | 2002 | ||||||||
| (in thousands, except per share amounts) | ||||||||||
Net Loss (Numerator): | |||||||||||
Net loss, basic and diluted | $ | (56,056 | ) | $ | (126,252 | ) | $ | (38,123 | ) | ||
Shares (Denominator): | |||||||||||
Weighted average common shares outstanding | 23,256 | 27,232 | 28,290 | ||||||||
Weighted average common shares outstanding subject to repurchase or forfeiture | (133 | ) | (201 | ) | — | ||||||
Shares used in computation, basic and diluted | 23,123 | 27,031 | 28,290 | ||||||||
Net loss per share, basic and diluted | $ | (2.42 | ) | $ | (4.67 | ) | $ | (1.35 | ) | ||
During 2000, 2001 and 2002, the Company had securities outstanding which could potentially dilute basic EPS in the future, but were excluded in the computation of diluted EPS in such periods, as their effect would have been antidilutive due to the net loss reported in such periods. Such outstanding securities consist of the following at December 31, 2002: warrants to purchase 3,855,981 shares of common stock; and options to purchase 5,979,960 shares of common stock.
Equity Plans
Under the 1998 Stock Incentive Plan (the 1998 Stock Plan), the Company is authorized to issue shares of common stock to employees, directors and consultants under five separate programs: Discretionary Option, Stock Issuance, Salary Investment Option Grant, Automatic Option Grant and Director Fee Option Grant. The number of shares reserved for issuance under the 1998 Stock Plan automatically increases at the beginning of each calendar year by an amount equal to 5% of the total number of shares of common stock outstanding at the end of the preceding year (1,419,718 shares on January 2, 2003). The Discretionary Option Program of the 1998 Stock Plan provides for the grant of incentive stock options and nonstatutory stock options to employees, directors and consultants at prices not less than the fair market value at the date of grant. These options generally vest and become exercisable for 25% after the first 12 months from the date of grant and then ratably over a 36-month period thereafter. Options granted under the 1998 Stock Plan generally expire ten years from the date of grant.
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Under the 2000 Stock Option Plan (the 2000 Stock Plan), the Company is authorized to issue up to 3,000,000 shares of common stock to employees, directors and consultants as discretionary option awards. The 2000 Stock Plan only provides for common stock issuance under a Discretionary Option Program which provides for awards under terms that are substantially comparable to stock option awards under the 1998 Stock Plan.
Stock option activity under the equity plans was as follows:
| Shares Available for Grant | Number of Shares | Weighted Average Exercise Price | ||||
---|---|---|---|---|---|---|---|
Balances, January 1, 2000 (1,124,453 shares vested at a weighted average price of $5.03 per share) | 101,154 | 3,903,129 | $ | 13.85 | |||
Reserved | 2,580,959 | — | — | ||||
Granted (weighted average fair value of $12.54 per share) | (4,556,623 | ) | 4,556,623 | 19.75 | |||
Canceled | 2,119,892 | (2,119,892 | ) | 19.10 | |||
Repurchased | 196,733 | — | — | ||||
Exercised | — | (637,472 | ) | 5.47 | |||
Balances, December 31, 2000 (1,147,269 shares vested at a weighted average price of $10.90 per share) | 442,115 | 5,702,388 | 17.55 | ||||
Reserved | 2,734,417 | — | — | ||||
Granted (weighted average fair value of $1.20 per share) | (5,373,638 | ) | 5,373,638 | 1.92 | |||
Canceled | 4,167,355 | (4,167,355 | ) | 13.67 | |||
Repurchased | 440 | — | — | ||||
Exercised | — | (387,347 | ) | 0.59 | |||
Direct issuance of common stock from plan | (50,000 | ) | — | — | |||
Balances, December 31, 2001 (1,806,722 shares vested at a weighted average price of $15.79 per share) | 1,920,689 | 6,521,324 | 8.17 | ||||
Reserved | 1,405,340 | — | — | ||||
Granted (weighted average fair value of $0.55 per share) | (3,188,746 | ) | 3,188,746 | 0.91 | |||
Canceled | 3,613,124 | (3,613,124 | ) | 7.40 | |||
Repurchased | — | — | — | ||||
Exercised | — | (116,986 | ) | 0.99 | |||
Direct issuance of common stock from plan | — | — | — | ||||
Balances, December 31, 2002 | 3,750,407 | 5,979,960 | $ | 4.90 | |||
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Additional information regarding options outstanding at December 31, 2002 is as follows:
| Options Outstanding | Vested Options | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life (years) | Weighted Average Exercise Price | Number Vested | Weighted Average Exercise Price | |||||||
$0.16-$0.23 | 129,500 | 9.8 | $ | 0.17 | 100,000 | $ | 0.16 | |||||
$0.35-$0.45 | 44,500 | 9.5 | 0.38 | 30,583 | 0.35 | |||||||
$0.62-$0.93 | 1,592,472 | 9.1 | 0.91 | 549,468 | 0.90 | |||||||
$0.94-$1.22 | 2,708,980 | 8.8 | 1.02 | 1,895,663 | 1.01 | |||||||
$1.80-$2.00 | 68,000 | 8.4 | 1.98 | 62,915 | 1.99 | |||||||
$2.38-$3.31 | 12,750 | 7.7 | 2.91 | 6,280 | 2.98 | |||||||
$4.19-$5.72 | 280,436 | 8.1 | 4.26 | 114,803 | 4.30 | |||||||
$6.60-$9.00 | 79,115 | 6.7 | 7.52 | 74,446 | 7.47 | |||||||
$10.75-$16.13 | 474,150 | 7.3 | 13.68 | 335,937 | 13.73 | |||||||
$17.13-$24.81 | 381,724 | 7.1 | 21.20 | 289,949 | 21.11 | |||||||
$26.19-$35.06 | 116,000 | 6.9 | 30.18 | 96,275 | 30.15 | |||||||
$47.63-$73.50 | 92,333 | 7.2 | 54.02 | 82,943 | 53.74 | |||||||
$0.16-$73.50 | 5,979,960 | 8.5 | $ | 4.90 | 3,639,262 | $ | 5.97 | |||||
Under the 1998 Stock Purchase Plan (the 1998 Purchase Plan), eligible employees may elect to have salary withholdings of up to 10% of their base compensation to purchase shares of common stock at a price equal to 85% of the lower of the market value of the stock at the beginning or end of defined purchase periods (April and October of each year). Shares issued under the 1998 Purchase Plan were 92,556, 295,998 and 170,537 in 2000, 2001 and 2002 at weighted average prices of $10.22, $1.30 and $0.47 per share, respectively. The weighted average fair value of the shares issued under the 1998 Purchase Plan in 2000, 2001 and 2002 was $11.14, $0.47 and $0.17 per share, respectively.
At December 31, 2002, the Company had 652,599 shares of its common stock reserved for future issuance under the 1998 Purchase Plan.
Deferred Stock Compensation
During 2000, the Company issued nonstatutory options to nonemployees for the purchase of 72,500 shares of common stock at weighted average exercise prices of $36.41 per share. Such options originally vested over a period of one to five years, and in accordance with SFAS No. 123, and its related interpretations, the Company accounted for these awards under the fair value method and as variable awards. Accordingly, the Company recorded deferred compensation expense at the grant date equal to the fair value of the options (using the Black-Scholes option pricing model) on the grant date and adjusted the deferred compensation expense at the end of each period. The related amortization of deferred compensation expense, which was recognized over the vesting period, was also adjusted accordingly.
In December 2000, the Company accelerated all remaining unvested awards to nonemployees, thereby creating a measurement date. On the measurement date, the Company recorded the fair value associated with the remaining deferred stock compensation as compensation expense in 2000. The aggregate
57
compensation expense related to these awards in 2000 was $645,000. Com21 determined the value of the awards using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, contractual term; stock volatility, 75%; risk free interest rate, 6.5%; and no dividends during the expected term.
During 2000, 2001 and 2002, the Company issued nonstatutory options to nonemployees for the purchase of 28,000, 135,000 and 80,000 shares of common stock at weighted average exercise prices of $25.69, $1.03 and $0.63 per share, respectively. Such options were issued for services provided and were immediately vested and exercisable. Accordingly, the Company recorded the $226,000, $57,000 and $40,000 fair value of such awards (using the Black-Scholes option pricing model) as stock compensation expense.
In accordance with FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, the Company recorded the intrinsic value, measured as the difference between the grant price and fair market value on the acquisition consummation date, of unvested options assumed in the GADline acquisition as deferred compensation expense. Such deferred stock compensation, which aggregated $727,000, was recorded as a separate component of stockholders' equity and was amortized over the vesting term of the related options. In connection with the sale of the voice systems division (formerly GADline) in 2001, the unvested options were forfeited by the employees, and accordingly, the Company reversed the remaining unamortized deferred compensation expense associated with these awards.
In connection with the BitCom acquisition, the Company granted 245,000 shares of restricted common stock to former BitCom employees who executed employment agreements with Com21. The shares are released from restriction, in proportionate amounts, at each of the three anniversary dates of the acquisition. The Company recorded deferred compensation expense of $6,049,000, as a separate component of stockholders' equity, for the fair value of the common shares on the issuance date and amortized the amount over the three-year vesting period. In connection with the closure of the Maryland development center (formerly BitCom) in 2001, the Company released the restricted shares to the terminated employees as part of their severance arrangements. Accordingly, the Company recognized the remaining unamortized amount as a part of restructuring charges in 2001.
Additional Stock Plan Information
Since the Company continues to account for its stock-based awards to employees using the intrinsic value method in accordance with APB No. 25, SFAS No. 123 requires the disclosure of pro forma net income (loss) and EPS had the Company adopted the fair value method. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's fair value calculations on stock-based awards to employees were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, 4.5 years from the date of grant; stock volatility, 75%; risk-free interest rate, 6.0% in 2000, 4.5% in 2001, and 3.6% in 2002; and no dividends during the expected term. The Company's calculations are based on a single option award valuation approach, and forfeitures are
58
recognized as they occur. The Company's fair value calculations on stock-based awards under the 1998 Purchase Plan were also made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, six months; stock volatility, 75%; risk free interest rate, 5.4% in 2000, 4.5% in 2001 and 1.8% in 2002; and no dividends during the expected term. If the computed fair values of the employee awards had been amortized to expense over the vesting period of the awards, pro forma net loss would have been $(73,045,000) ($(3.16) per share, basic and diluted) in 2000, $(150,911,000) ($(5.58) per share, basic and diluted) in 2001, and $(62,621,000) ($(2.21) per share, basic and diluted) in 2002.
11. Income Taxes
Income tax expense for the years ended December 31, 2000, 2001 and 2002 consisted solely of state franchise taxes.
Differences between income taxes computed by applying the statutory federal income tax rate to the loss before income taxes and the provision for income taxes consist of the following:
| Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2000 | 2001 | 2002 | |||||||
| (in thousands) | |||||||||
Income taxes computed at 35% U.S. statutory rate | $ | (19,612 | ) | $ | (44,182 | ) | $ | (13,278 | ) | |
State income taxes | 22 | 19 | 186 | |||||||
Tax credits | (5,059 | ) | (1,113 | ) | (412 | ) | ||||
Foreign losses for which no benefit may be realized | 6,110 | 1,833 | 249 | |||||||
Non-deductible acquisition charges | 1,178 | 15,227 | 1,249 | |||||||
Non-deductible stock compensation | 1,700 | 69 | 14 | |||||||
Change in valuation allowance | 16,196 | 26,002 | 12,904 | |||||||
Other | (513 | ) | 2,164 | (726 | ) | |||||
Provision for income taxes | $ | 22 | $ | 19 | $ | 186 | ||||
The components of deferred income tax assets are as follows:
| December 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2001 | 2002 | ||||||
| (in thousands) | |||||||
Deferred tax assets: | ||||||||
Accruals and reserves not currently deductible | $ | 7,085 | $ | 12,065 | ||||
Capitalized research and development costs | 4,073 | 3,584 | ||||||
Net operating loss carryforwards | 42,418 | 50,935 | ||||||
Tax credit carryforwards | 13,358 | 13,166 | ||||||
Capital loss carryforwards | 5,461 | 5,191 | ||||||
Depreciation | (477 | ) | (119 | ) | ||||
Total gross deferred tax assets | 71,918 | 84,822 | ||||||
Valuation allowance | (71,918 | ) | (84,822 | ) | ||||
Total deferred tax assets | $ | — | $ | — | ||||
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The increase of $12,904,000 in the valuation allowance during the year ended December 31, 2002 was primarily a result of increased net operating loss and tax credit carryforwards generated in 2002. The Company provided a full valuation allowance against the deferred tax assets based on the Company's evaluation of the likelihood of realization of future tax benefits resulting from the deferred tax assets.
As of December 31, 2002, the Company had available for carryforward net operating losses for federal and state income tax purposes of $135,711,000 and $59,626,000, respectively. Federal net operating loss carryforwards will expire if not utilized beginning in the years 2009 through 2022. State net operating loss carryforwards will expire if not utilized beginning in the years 2004 through 2012.
As of December 31, 2002, the Company had available for carryforward research and experimental tax credits for federal and state income tax purposes of $7,620,000 and $4,909,000, respectively. Federal research and experimentation tax credit carryforwards expire from 2009 through 2022. The Company also had $638,000 in California manufacturers investment credits which expire from 2005 through 2012, and capital loss carryforwards of $13,400,000 for federal and state income tax purposes which will expire in 2006.
Current Federal and California tax laws include substantial restrictions on the utilization of net operating losses and tax credits in the event of an "ownership change" of a corporation. Accordingly, the Company's ability to utilize net operating loss and tax credit carryforwards may be limited as a result of such "ownership change". Such a limitation could result in the expiration of carryforwards before they are utilized.
12. Major Customers
The following table summarizes net revenues and net trade accounts receivable for unaffiliated customers which accounted for 10% or more of net revenues or net trade accounts receivable:
| Accounts Receivable December 31, | Revenues Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Customer | |||||||||||
2001 | 2002 | 2000 | 2001 | 2002 | |||||||
A | 21 | % | — | 11 | % | 25 | % | 23 | % | ||
B | — | 10 | % | — | — | 12 | % | ||||
C | — | — | 10 | % | 10 | % | — | ||||
D | — | 10 | % | — | — | — | |||||
E | — | 11 | % | — | — | — | |||||
F | — | — | 12 | % | — | 12 | % |
13. Related Party Transactions
For the year ended December 31, 2000, net revenues included sales to a customer of $1,567,000 (with related cost of revenues of $1,225,000) of which a member of the Company's Board of Directors was an executive officer, and sales to a customer of $555,000 (with related cost of revenues of $363,000) in which the Company has an equity investment in during 2000. As of December 31, 2000, accounts receivable included amounts from these customers of $278,000 and $334,000, respectively.
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For the year ended December 31, 2001, net revenues included sales to a customer of $42,000 (with related cost of revenues of $58,000) in which the Company has an equity investment. As of December 31, 2001, accounts receivable included amounts from this customer of $63,000.
There were no related party transactions or balances at December 31, 2002.
14. Employee Benefit Plan
The Company has a defined contribution retirement plan (the Retirement Plan), which has been determined by the Internal Revenue Service to be qualified under Section 401(k) of the Internal Revenue Code of 1986. The Retirement Plan covers essentially all full-time employees. Eligible employees may make voluntary contributions to the Retirement Plan up to 15% of their annual compensation. The Company has not made any employer contributions to the Retirement Plan.
15. Segment Information
For the years ended December 31, 2000, 2001 and 2002, the Company recorded revenue from customers throughout the world. The following presents net revenues for the years ended December 31, 2000, 2001 and 2002 and long-lived assets as of December 31, 2001 and 2002 attributed to significant countries (in thousands):
| 2000 | 2001 | 2002 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net Revenues* | Net Revenues* | Long-Lived Assets** | Net Revenues* | Long-Lived Assets** | |||||||||||
United States | $ | 64,365 | $ | 28,495 | $ | 7,266 | $ | 18,105 | $ | 3,973 | ||||||
The Netherlands | 44,848 | 40,185 | 366 | 18,146 | 131 | |||||||||||
Other Europe | 26,015 | 17,588 | 1,840 | 7,947 | 1,247 | |||||||||||
Japan | 30,761 | 26,059 | — | 7,188 | — | |||||||||||
Canada | 12,580 | 4,968 | — | 2,145 | — | |||||||||||
Asia | 10,626 | 34 | 48 | 477 | 75 | |||||||||||
South/Central America | 4,222 | 5,419 | — | 2,204 | — | |||||||||||
Australia/New Zealand | 566 | 13 | — | 16 | — | |||||||||||
Total | $ | 193,983 | $ | 122,761 | $ | 9,520 | $ | 56,228 | $ | 5,426 | ||||||
- *
- Net revenues are attributed to countries based on invoicing location of customer.
- **
- Long-lived assets exclude net intangible assets resulting from acquisitions of $3,570,000 in 2001.
For purposes of segment reporting, the Company aggregates operating segments that have similar economic characteristics and meet the aggregation criteria of SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information. Based on such criteria, there are three operating and reportable segments: ATM Products, DOCSIS Products and Voice Products. The ATM Products segment develops, manufactures, and markets the proprietary cable modems, ATM headend equipment and network management software. The DOCSIS Products segment develops, manufactures, and markets DOCSIS cable modems for both home and office. The Voice Products segment, based primarily in Israel, developed, manufactured, and marketed voice over Internet cable modems and was sold during 2001.
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The following tables are the financial results the chief operating decision maker, as defined by SFAS No. 131, utilizes in evaluating the performance of the Company's reportable segments:
| Years Ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2000 | 2001 | 2002 | |||||||||
| (in thousands) | |||||||||||
Revenues: | ||||||||||||
ATM Products | $ | 125,037 | $ | 78,727 | $ | 32,276 | ||||||
DOCSIS Products | 67,170 | 43,381 | 23,952 | |||||||||
Voice Products | 1,776 | 653 | — | |||||||||
Total | $ | 193,983 | $ | 122,761 | $ | 56,228 | ||||||
Cost of Revenues: | ||||||||||||
ATM Products | $ | 85,557 | $ | 58,460 | $ | 20,199 | ||||||
DOCSIS Products | 62,315 | 49,458 | 25,102 | |||||||||
Voice Products | 1,931 | 2,042 | — | |||||||||
Charges due to change in contract manufacturers | — | — | 9,674 | |||||||||
Write off of discontinued product iventory | — | 5,602 | 3,246 | |||||||||
Amortization of intangible assets | 1,516 | 1,264 | — | |||||||||
Total | $ | 151,319 | $ | 116,826 | $ | 58,221 | ||||||
Gross Profit | ||||||||||||
ATM Products | $ | 39,480 | $ | 20,267 | $ | 12,077 | ||||||
DOCSIS Products | 4,855 | (6,077 | ) | (1,150 | ) | |||||||
Voice Products | (155 | ) | (1,389 | ) | — | |||||||
Cost of change in contract manufacturers** | — | — | (9,674 | ) | ||||||||
Write off of discontinued product inventory** | — | (5,602 | ) | (3,246 | ) | |||||||
Amortization of intangible assets** | (1,516 | ) | (1,264 | ) | — | |||||||
Total | $ | 42,664 | $ | 5,935 | $ | (1,993 | ) | |||||
- **
- Cost of change in contract manufacturers, write off of discontinued product inventory and amortization of intangible assets are not presented by segment.
The Company's product lines differ primarily based on product functions. Headend equipment controls the flow of data communications between cable modems and an external network, such as the Internet or a corporate network. Cable modems send and receive data over coaxial cable. Network management software facilitates provisioning, fault isolation, network configuration, field inventory, auto-discovery and performance for the headend equipment. For the years ended December 31, 2000, 2001
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and 2002, the Company recorded net revenues from sales of headend equipment, cable modems and network management software as follows:
| Years Ended December 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
| 2000 | 2001 | 2002 | ||||||
| (in thousands) | ||||||||
Headend Equipment | $ | 27,583 | $ | 19,456 | $ | 6,775 | |||
Cable Modems | 165,641 | 102,983 | 48,842 | ||||||
Network Management Software | 759 | 322 | 611 | ||||||
Net Revenues | $ | 193,983 | $ | 122,761 | $ | 56,228 | |||
16. Selected Quarterly Financial Results (Unaudited)
The following tables set forth selected quarterly results of operations for the years ended December 31, 2001 and 2002:
| Quarters Ended | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Mar. 31, 2001 | Jun. 30, 2001* | Sep. 30, 2001 | Dec. 31, 2001 | |||||||||
| (in thousands, except per share amounts) | ||||||||||||
Net revenues | $ | 32,789 | $ | 34,121 | $ | 30,096 | $ | 25,755 | |||||
Gross profit | 2,900 | 1,563 | 405 | 1,067 | |||||||||
Loss from operations | (22,319 | ) | (82,550 | ) | (11,113 | ) | (10,248 | ) | |||||
Net loss | (22,062 | ) | (82,425 | ) | (10,653 | ) | (11,112 | ) | |||||
Net loss per share, basic and diluted | $ | (0.87 | ) | $ | (3.02 | ) | $ | (0.39 | ) | $ | (0.40 | ) | |
Shares used in computation, basic and diluted | 25,493 | 27,268 | 27,484 | 27,877 |
| Quarters Ended | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Mar. 31, 2002 | Jun. 30, 2002 | Sep. 30, 2002 | Dec. 31, 2002 | |||||||||
| (in thousands, except per share amounts) | ||||||||||||
Net revenues | $ | 24,200 | $ | 13,187 | $ | 12,715 | $ | 6,126 | |||||
Gross profit | (5,971 | ) | 1,426 | 2,778 | (226 | ) | |||||||
Loss from operations | (16,412 | ) | (8,770 | ) | (3,242 | ) | (7,231 | ) | |||||
Net loss | (17,569 | ) | (9,273 | ) | (3,500 | ) | (7,781 | ) | |||||
Net loss per share, basic and diluted | $ | (0.62 | ) | $ | (0.33 | ) | $ | (0.12 | ) | $ | (0.27 | ) | |
Shares used in computation, basic and diluted | 28,178 | 28,290 | 28,323 | 28,370 |
- *
- The results of operations for the quarter ended June 30, 2001, include a restructuring charge of $67,450,000.
17. Subsequent Event
On February 21, 2003, our securities were delisted from the Nasdaq SmallCap Market and are now traded on the Over the Counter Bulletin Board.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEMS 10. DIRECTORS AND EXECUTIVE OFFICERS OF COM21, INC.
The following table sets forth certain information regarding the Directors of Com21 as of February 1, 2003:
Name | Age | Position | Director Since | |||
---|---|---|---|---|---|---|
George Merrick | 55 | President, Chief Executive Officer and Director | 2001 | |||
Paul Baran | 76 | Chairman of the Board | 1992 | |||
James R. Gagnard | 56 | President and Chief Executive Officer Of Questra Corporation | 2001 | |||
Susan H. Nycum | 67 | Retired Partner at Baker & McKenzie | 2001 | |||
Daniel J. Pike | 51 | Chief Technology Officer of GCI Cable and Entertainment | 2000 | |||
James J. Spilker, Jr | 69 | Chairman of the Board and Acting Chief Executive Officer of Rosum Corp | 2001 |
George A. Merrick. Mr. Merrick, age 55, has served as President and Chief Executive Officer of Com21 since October 2001 and has been a Director since May 2001. Before joining Com21, Mr. Merrick was the Chief Executive Officer of Advanced Rendering Technology, a computer graphics company, from September 1997 to September 2001. Prior to that, he was Vice President of Dynatech Corp., a technology holding company, and President of Visual Communications Technologies Group from September 1994 to September 1997. Mr. Merrick also served in several executive capacities with Ampex Corporation, a data and video recording and processing company, starting in 1978 as a General Manager for Ampex Switcher Co, a startup acquired by Ampex Corporation. From 1987 to 1990 he served as Vice President of Ampex Corporation, and President of its Video Systems Subsidiary. From 1990 to 1994 he served as Ampex's Executive Vice President and spokesman on HDTV. Additionally, from 1989 to 1990, he served as President of Ampex Corporation's Recording Systems Subsidiary. Mr. Merrick has also served on the board of the Montreux Television Symposium and MIT's Center for Advanced Television Studies. Mr. Merrick received a B.S. in Marketing and Finance from San Jose State University.
Paul Baran. Mr. Baran, age 76, has been the Chairman of the Board since Com21's inception in June 1992 and is presently retired. Mr. Baran has received several awards including the Franklin Institute's Bower Prize for Science (2001) for his invention of packet switching. Other awards include the Institute of Electronics and Electrical Engineering, Inc. ("IEEE") Internet Award (2000), the Business Journal Entrepreneurial Award in Technology (1999), the Marconi International Fellowship Award (1991), the IEEE Alexander Graham Bell Medal (1990), the ACM SIG/Communications Award (1989) and the IEEE Communications Society Edwin Armstrong Award (1987). He co-founded seven companies, of which five went public. He holds 30 U.S. patents and is a Life Fellow of the IEEE, a Fellow of the AAAS and a member of the U.S. National Academy of Engineers. Mr. Baran received an M.S. in Computers from the University of California, Los Angeles, a B.S. in Electrical Engineering, a Dr.Sci. in Engineering (Hon.) from Drexel University and Ph.D. in Policy Analysis (Hon.) from the RAND Graduate School.
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James R. Gagnard. Mr. Gagnard, age 56, has been a Director of Com21 since May 2001. Mr. Gagnard has been President and Chief Executive Officer of Questra Corporation, an enterprise software company, since September 2001. From September 1999 to September 2001, he was an interim-CEO consultant to enterprise software companies, including Eletter, Inc., where he served as President and Chief Executive Officer from September 2000 to June 2001. Mr. Gagnard also served as President and Chief Executive Officer at Diffusion, Inc., a private Internet based application provider, from September 1996 to September 1999 and Trinzic Corporation, a public software and services company, from January 1990 to August 1995. At Pansophic Systems, Inc., Mr. Gagnard served as Senior Vice President and General Manager from 1987 to 1990; Vice President, International Operations from 1985 to 1987 and Vice President, European Operations from 1982 to 1985. Mr. Gagnard received a B.S.E.E. from Illinois Institute of Technology.
Susan H. Nycum. Ms. Nycum, age 67, has been a Director of Com21 since May 2001. Ms. Nycum was a Partner at the law firm of Baker & McKenzie from 1987 until her retirement in June, 2002. She was a member of the Intellectual Property/Information Technology/E-Commerce Practice Group. Ms. Nycum has been Chairman of the American Bar Association Section of Science and Technology, President of the Computer Law Association, and Chair of the International Bar Association's Committees on Software Protection and Computer Abuse. She served twice as an ABA appointed member of the National Conference of Lawyers and Scientists from 1978 to 1984 and from 1991 to 1994. She is the only lawyer to be elected a Fellow of the Association for Computing Machinery. Ms. Nycum is also a member of the American Arbitration Association Large Complex Case Panel, both arbitration and mediation, a fellow of the American Bar Foundation and a fellow of the American Bar Association College of Law Practice Management. She also serves as governor of the International Council for Computer Communication. Ms. Nycum received an A.B. from Ohio Wesleyan University and a J.D. from Duquesne University Law School.
Daniel J. Pike. Mr. Pike, age 51, has been a Director of Com21 since March 2000. Mr. Pike is currently Chief Technology Officer at General Communication, Inc. (GCI) Cable and Entertainment. From November 2000 until March 2003, he was Chief Technology Officer at Classic Communications, Inc., and a senior advisor to @Security Broadband Corp., a private broadband start-up, since September 2000. Prior to that he served as a Senior Vice President of Science and Technology at Prime Cable from 1982 to September 2000. Mr. Pike was the recipient of the 1994 Communications Technology Service in Technology Award and received the NCTA Vanguard Award for Science and Technology in 1991. He is a Senior Member of the IEEE and SCTE while holding membership on the CableLabs Board of Directors, NCTA Engineering Committee, Cable Television Pioneers, Society of Motion Picture and Television Engineers and the Advisory Board of Communications Technology. Mr. Pike received a B.S. and a M.S. from Oklahoma State University.
James J. Spilker, Jr. Dr. Spilker, age 69, has been a Director of Com21 since February 2000. Dr. Spilker has been Chairman of the Board of Rosum Corporation, a private telecommunications company, since January 2001. In addition, he is currently serving as Rosum's Acting CEO. Since June 2000, he has served as Professor, Consultant, Department of Electrical Engineering, Network Research Center and Center for International Security and Cooperation at Stanford University. Dr. Spilker is a co-founder of Stanford Telecommunications, Inc., where he was Chairman of the Board from 1973 until December 1999 when he sold the company. From December 1999 to June 2000 he was a private consultant. He also served as President and Chief Executive Officer of Stanford Telecommunications, Inc., from August 1981 to June 1995. Dr. Spilker is a member of the National Academy of Engineering of the United States and a Life Fellow of the IEEE. Dr. Spilker received a B.S., M.S. and Ph.D. in Electrical Engineering from Stanford University.
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Board and Committee Meetings
The Board held eight (8) meetings and acted by written consent three (3) times during the fiscal year ended December 31, 2002. The Board has an audit committee and a compensation committee. Each of the directors attended 75% or more of the aggregate of (i) the total number of meetings of the Board (held during the period which he was a director) and (ii) the total number of meetings held by all committees of the Board on which such director served (held during the period in which he was a director) during the fiscal year ended December 31, 2002.
Audit Committee. The audit committee is primarily responsible for approving the services performed by Com21's independent auditors and reviewing the auditor's reports regarding Com21's accounting practices and systems of internal accounting controls. The Audit Committee operates under an Audit Committee Charter, adopted as revised on January 22, 2003; a copy of the charter is attached hereto as Addendum A. The committee currently consists of three directors, Mr. Baran, Mr. Pike and Dr. Spilker. The audit committee held four (4) meetings and acted by written consent one (1) time during the fiscal year ended December 31, 2002. From May 2001 to September 2002, Ms. Susan Nycum served as a member of the audit committee. Ms. Nycum acted by written consent one (1) time and attended three (3) audit committee meetings during 2002. In September, 2002, Mr. Pike replaced Ms. Nycum on the audit committee. Mr. Pike participated in one (1) meeting of the audit committee during 2002. Mr. Baran and Dr. Spilker participated in all four (4) meetings of the audit committee in 2002. The Board has determined that all members of the audit committee are "independent" as that term is defined in Rule 4200 of the listing standards of the National Association of Securities Dealers.
Compensation Committee. The compensation committee is primarily responsible for reviewing and approving Com21's general compensation policy and setting compensation levels for Com21's executive officers. The committee also administers Com21's incentive compensation plans. The committee currently consists of two directors, Mr. Gagnard and Dr. Spilker. The compensation committee held no meetings and acted by written consent two (2) times during the fiscal year ended December 31, 2002. The compensation committee has appointed a secondary committee to the compensation committee that consists of one person. Currently, Mr. Merrick is the sole member of the secondary committee and during 2002, the secondary committee acted by written consent twenty-five (25) times.
Director Compensation
Since January 1, 2001, Com21 has paid $1,000 to each director each time he or she is present and participating at a regularly scheduled meeting of the Board. Com21 also pays each director $1,000 for his or her presence and participation at each of the meetings of the audit committee and compensation committee of the Board, provided such committee meeting does not occur on the same day as a regularly scheduled meeting of the Board. Mr. Baran did not accept such compensation for his service on the audit committee or for his attendance at regular meetings of the Board.
Under the Automatic Option Grant Program as currently in effect under Com21's 1998 Stock Incentive Plan, each individual who first joins the Board as a non-employee director will also receive, at the time of such initial election or appointment, an automatic option grant to purchase 25,000 shares of common stock, provided such person has not previously been in Com21's employ. In addition, as currently in effect, on the date of each annual stockholders meeting each individual who continues to serve as a non-employee Board member will automatically be granted an option to purchase 10,000 shares of common stock, provided that such individual has served on the Board for at least six months. Each automatic option grant for the non-employee Board members will have a term of 10 years, subject to earlier termination following the optionee's cessation of Board service. Each automatic option grant will be immediately exercisable for all of the option shares. Any unvested shares purchased under the option will be subject to repurchase by Com21, at the exercise price paid per share, should the optionee cease Board service prior to vesting in those shares.
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Each grant under the Automatic Option Grant Program will have an exercise price per share equal to the fair market value per share of Com21's common stock on the grant date. The shares subject to each initial automatic option grant will vest over a four-year period in successive equal annual installments upon the individual's completion of each year of Board service measured from the option grant date. Each annual automatic option grant will vest over a two-year period in successive equal annual installments upon the individual's completion of each year of Board service measured from the option grant date. However, the shares subject to each automatic option grant will immediately vest in full upon certain changes in control or ownership of Com21 or upon the optionee's death or disability while a Board member.
At the 2002 stockholders' annual meeting, the stockholders approved a proposal whereby each non-employee director who joins the Board on or after May 16, 2002 will receive an automatic option grant of 25,000 shares (an increase from 15,000 shares) of common stock and each individual who continues to serve as a non-employee Board member will automatically be granted an option to purchase 10,000 shares (an increase from 5,000 shares) of common stock. The stockholders also approved a special one-time grant of an option to purchase 10,000 shares of common stock to each continuing non-employee director.
The following Board members received an option to purchase 10,000 shares of common stock at an exercise price per share of $0.89, the fair market value per share of common stock on the date of the 2002 stockholders' annual meeting, pursuant to Com21's Automatic Option Grant Program: Paul Baran, James R. Gagnard, Susan H. Nycum, Daniel J. Pike, and James J. Spilker.
The following Board members received a special one-time grant of an option to purchase 10,000 shares of common stock at an exercise price of $0.89, the fair market value per share of common stock on the date of the 2002 stockholders' annual meeting pursuant to a proposal approved by the stockholders at that meeting: Paul Baran, James R. Gagnard, Susan H. Nycum, Daniel J. Pike, and James J. Spilker. Each option is immediately exercisable but any shares purchased prior to vesting in those shares are subject to repurchase by Com21, at the exercise price paid per share, upon optionee's cessation of Board service. Each 10,000 share special one-time option grant vests over a two-year period in successive equal annual installments upon the individual's completion of each year of Board service measured from the option grant date.
In addition to receiving compensation related to Board service, Ms. Nycum was paid the aggregate amount of $71,000 for consulting services provided to the company. The services included the review and evaluation of administrative functions including legal, human resources, facilities management and the review of documents, including legal documents, policies and procedures.
Indemnification
Com21 is currently in the process of entering into indemnification agreements with all of its current directors, as well as certain officers, with the exception of Mr. Baran who has an existing indemnification agreement. These agreements require Com21, among other things, to indemnify a director, or officer as the case may be, against expenses (including attorneys' fees), judgments, fines and settlements paid by such individual in connection with any action, suit or proceeding arising out of such individual's status or service as a director or officer of Com21 (other than liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest). The agreements also require Com21 to advance expenses incurred by an indemnified party in connection with any proceeding against such individual with respect to which such individual may be entitled to indemnification by Com21.
Compensation Committee Interlocks and Insider Participation
The members of the compensation committee of Com21's Board are Mr. Gagnard and Dr. Spilker. No executive officer of Com21 serves on the Board or compensation committee of any entity that has one or more executive officers serving as a member of Com21's Board or compensation committee.
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The following table sets forth certain information regarding the executive officers of Com21 as of February 1, 2003:
Name | Age | Position | ||
---|---|---|---|---|
George Merrick | 55 | President, Chief Executive Officer and Director | ||
Ralph Marimon | 45 | Chief Financial Officer, Vice President, Finance and Administration, and Corporate Secretary |
George Merrick. Mr. Merrick has served as President and Chief Executive Officer of Com21 since October 2001 and has been a Director since May 2001. Before joining Com21, Mr. Merrick was the Chief Executive Officer of Advanced Rendering Technology, a computer graphics company, from September 1997 to September 2001. Prior to that, he was Vice President of Dynatech Corp., a technology holding company, and President of Visual Communications Technologies Group from September 1994 to September 1997. Mr. Merrick also served in several executive capacities with Ampex Corporation, a data and video recording and processing company, starting in 1978 as a General Manager for Ampex Switcher Co, a startup acquired by Ampex Corporation. From 1987 to 1990 he served as Vice President of Ampex Corporation, and President of its Video Systems Subsidiary. From 1990 to 1994 he served as Ampex's Executive Vice President and spokesman on HDTV. Additionally, from 1989 to 1990, he served as President of Ampex Corporation's Recording Systems Subsidiary. Mr. Merrick has also served on the board of the Montreux Television Symposium and MIT's Center for Advanced Television Studies. Mr. Merrick received a B.S. in Marketing and Finance from San Jose State University.
Ralph Marimon. Mr. Marimon has been Chief Financial Officer of Com21 since November 2001 and Vice President, Finance and Administration and Corporate Secretary since May 2001, previously serving as Vice President and Corporate Controller since August 2000. Mr. Marimon joined Com21 in June 1999 as Corporate Controller. Prior to joining Com21, Mr. Marimon spent eleven years with KLA-Tencor Corporation, a semiconductor equipment company, serving in various controller and accounting roles including Group Controller, Wafer Inspection Group from January 1998 to June 1999 and Senior Controller, Wizard/SemSpec/VIPER Product Divisions from June 1996 to January 1998. He also held financial positions with Ungermann Bass Corp., Finnigan Corp., and National Semiconductor Corp. Mr. Marimon received a B.A. in Economics from the University of California, Los Angeles and a Masters of Management in Finance and Accounting from the J.L. Kellogg Graduate School of Management at Northwestern University.
COMPLIANCE WITH SECTION 16
OF THE SECURITIES EXCHANGE ACT OF 1934
The members of the Board, the executive officers of Com21 and persons who hold more than 10% of Com21's outstanding common stock are subject to the reporting requirements of Section 16 of the Securities Exchange Act of 1934 which require them to file reports with respect to their ownership of the common stock and their transactions in such common stock. Based upon (i) the copies of Section 16 reports which Com21 received from such persons for their 2002 Fiscal Year transactions in the common stock and their common stock holdings, and (ii) the written representations received from one or more of such persons that no annual Form 5 reports were required to be filed by them for the 2002 Fiscal Year, Com21 believes that all reporting requirements under Section 16 for such fiscal year were met in a timely manner by its directors, executive officers and greater than ten percent beneficial owners except that an amended Form 4 was filed by Paul Baran to include a purchase of 10,000 shares inadvertently omitted from a previously filed Form 4 reporting other purchases on the same date.
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ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the compensation of (i) Com21's Chief Executive Officer, (ii) the one (1) other most highly compensated executive officer of Com21 who served as an executive officers of Com21 during fiscal year 2002 (the "Last Fiscal Year") and whose total annual salary and bonus during such fiscal year exceeded $100,000, and (iii) three (3) additional executive officers for whom disclosure would have been required but for the fact that the individual was not serving as an executive officer at the end of the Last Fiscal Year (collectively, the "Named Executive Officers").
| | | | Long-Term Compensation | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Annual Compensation | | |||||||||||
Name and Principal Position | Securities Underlying Options Granted (#)(1) | All Other Compensation ($) | |||||||||||
Year | Salary | Bonus | |||||||||||
George Merrick(2) President and Chief Executive Officer | 2002 2001 2000 | $ $ | 287,321 51,925 — | — — — | 25,386 800,000 — | — — — | |||||||
Ralph Marimon(3) Chief Financial Officer, Vice President, Finance and Administration and Corporate Secretary | 2002 2001 2000 | $ $ $ | 177,191 159,705 136,000 | $ $ | — 2,000 35,000 | 165,656 122,000 27,000 | — — — | ||||||
Jeff Jarvis(4) Chief Operating Officer | 2002 2001 2000 | $ $ | 152,637 188,478 — | $ | — 40,000 — | 216,924 310,000 — | $ | 7,239 — — | |||||
John R. Pickens(5) Vice President, Technology and Chief Technical Officer | 2002 2001 2000 | $ $ $ | 192,354 201,033 156,000 | $ | — — 55,000 | 88,462 70,000 130,000 | $ | 8,107 — — | |||||
Ehsan Rashid(6) Senior Vice President, Marketing and Chief Strategy Officer | 2002 2001 2000 | $ $ $ | 207,629 203,846 140,957 | $ | — — 30,752 | 217,346 205,000 95,000 | $ | 57,821 — — |
- (1)
- All options were granted under Com21's 1998 Stock Incentive Plan or 2000 Stock Option Plan. See "Option Grants in Last Fiscal Year" for a description of these options.
- (2)
- Mr. Merrick joined Com21 as President and Chief Executive Officer in October 2001. His annualized salary for 2002 was $300,014. Mr. Merrick participated in a Voluntary Pay Reduction Program during 2002 that resulted in a total salary reduction of $12,693 over the eleven pay period duration of the program.
- (3)
- Mr. Marimon has been employed by Com21 since June 1999 and was appointed Vice President, Finance and Administration, Chief Financial Officer and Corporate Secretary in 2001. His annualized salary for 2002 was $185,016. Mr. Marimon participated in a Voluntary Pay Reduction Program during 2002 that resulted in a total salary reduction of $7,825 over the eleven pay period duration of the Program.
- (4)
- Mr. Jarvis joined Com21 in January 2001 and left the company in September 2002. His annualized salary for 2002 was $200,018. Mr. Jarvis participated in a Voluntary Pay Reduction Program during 2002 that resulted in a total salary reduction of $8,462 over the eleven pay period duration of the
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Program. Mr. Jarvis left the company in September 2002. He received a total of $7,239 in connection with his termination of employment for unused vacation, personal and sick time pay.
- (5)
- Dr. Pickens had been employed by Com21 since November 1996. His annualized salary for 2002 was $200,018. Dr. Pickens participated in a Voluntary Pay Reduction Program during 2002 that resulted in a total salary reduction of $4,231 over the eleven pay period duration of the Program. Dr. Pickens left the company in November 2002. He received $8,107 in connection with his termination of employment for unused vacation, personal and sick time pay.
- (6)
- Mr. Rashid joined Com21 in January 2000. His annualized salary for 2002 was $205,000. Mr. Rashid participated in a Voluntary Pay Reduction Program during 2002 that resulted in a total salary reduction of $8,673 over the eleven pay period duration of the program. Mr. Rashid left the company in September 2002. He received a total of $57,821 in connection with his termination of employment. Of this, $23,654 was for unused vacation, personal and sick time pay and $34,167 was severance pay.
OPTION GRANTS IN LAST FISCAL YEAR
| | | | | Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term($)(4) | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Percent of Total Options Granted to Employees in Fiscal Year (%)(2) | | | ||||||||
| Number of Securities Underlying Options Granted(#)(1) | | | |||||||||
Name | Exercise Price($)(3) | | ||||||||||
Expiration Date | 5% | 10% | ||||||||||
George Merrick | 25,386 | 0.80 | 1.00 | 02/14/2012 | 15,965 | 40,459 | ||||||
Ralph Marimon | 100,000 50,000 15,656 | 3.14 1.57 0.49 | 0.93 0.93 1.00 | 03/03/2012 03/03/2012 02/14/2012 | 58,487 29,244 9,846 | 148,218 74,109 24,952 | ||||||
Jeff Jarvis | 130,000 70,000 16,924 | 4.08 2.20 0.53 | 0.93 0.93 1.00 | 12/31/2002 12/31/2002 12/31/2002 | 6,045 3,255 846 | 12,090 6,510 1,692 | ||||||
John R. Pickens | 50,000 30,000 8,462 | 1.57 0.94 0.27 | 0.93 0.93 1.00 | 02/28/2003 02/28/2003 02/28/2003 | 2,325 1,395 423 | 4,650 2,790 846 | ||||||
Ehsan Rashid | 130,000 70,000 17,346 | 4.08 2.20 0.54 | 0.93 0.93 1.00 | 12/31/2002 12/31/2002 12/31/2002 | 6,045 3,255 867 | 12,090 6,510 1,735 |
- (1)
- The options granted to the Named Executive Officers in the Last Fiscal Year vest as follows:
- •
- The 25,386 share option grant to Mr. Merrick on February 15, 2002 was granted under the 1998 Stock Incentive Plan, pursuant to Mr. Merrick's participation in the Voluntary Pay Reduction Program, whereby each participant received a grant at the rate of two (2) shares per $1.00 of gross pay reduction. The stock options became fully vested and exercisable for one hundred percent (100%) of the option shares on July 26, 2002.
Mr. Merrick's Grants:
- •
- Mr. Marimon's 15,656 share option grant was granted on February 15, 2002 under the 1998 Stock Incentive Plan, pursuant to Mr. Marimon's participation in the Voluntary Pay Reduction Program, whereby each participant received a grant at the rate of two (2) shares per $1.00 of gross pay
Mr. Marimon's Grants:
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- •
- Mr. Marimon's 100,000 share option grant, which was granted on March 4, 2002 under the 1998 Stock Incentive Plan, vests as follows: Twenty-five percent (25%) of the option shares vest upon optionee's completion of one year of service from the date of grant (March 4, 2003) and the balance of the option shares will vest in thirty-six (36) successive equal monthly installments upon optionee's completion of each additional month of service over the thirty-six (36) month period thereafter.
- •
- Mr. Marimon's 50,000 share option grant, which was granted on March 4, 2002 under the 1998 Stock Incentive Plan, vested for fifty percent (50%) of the option shares on October 4, 2002; the remaining fifty percent (50%) will vest on March 4, 2003.
reduction. The stock options became fully vested and exercisable for one hundred percent (100%) of the option shares on July 26, 2002.
- •
- Mr. Jarvis' 16,924 share option grant was granted on February 15, 2002 under the 1998 Stock Incentive Plan, pursuant to Mr. Jarvis' participation in the Voluntary Pay Reduction Program, whereby each participant received a grant at the rate of two (2) shares per $1.00 of gross pay reduction. The stock options became fully vested and exercisable for one hundred percent (100%) of the option shares on July 26, 2002.
- •
- Mr. Jarvis' 130,000 share option grant was granted on March 4, 2002 under the 1998 Stock Incentive Plan and was to have vested as follows: Twenty-five percent (25%) of the option shares upon optionee's completion of one (1) year of service measured from the date of grant (March 4, 2003) and the balance of the option shares in thirty-six (36) successive equal monthly installments upon optionee's completion of each additional month of service over the thirty-six (36) month period thereafter. Mr. Jarvis terminated his employment with Com21 on September 30, 2002 prior to vesting in any of the option shares.
- •
- Mr. Jarvis' 70,000 share option grant was granted on March 4, 2002 under the 1998 Stock Incentive Plan and was to have vested as follows: Fifty percent (50%) of the option shares on October 4, 2002; with the remaining fifty percent (50%) to vest on March 4, 2003. Mr. Jarvis terminated his employment with Com21 on September 30, 2002 prior to vesting in any of the option shares.
- •
- Dr. Pickens' 8,462 share option grant was granted on February 15, 2002 under the 1998 Stock Incentive Plan, pursuant to Dr. Pickens' participation in the Voluntary Pay Reduction Program, whereby each participant received a grant at the rate of two (2) shares per $1.00 of gross pay reduction. The stock options became fully vested and exercisable for one hundred percent (100%) of the option shares on July 26, 2002.
- •
- Dr. Pickens' 50,000 share option grant was granted on March 4, 2002 under the 1998 Stock Incentive Plan and was to have vested as follows: Twenty-five percent (25%) of the option shares upon optionee's completion of one (1) year of service measured from the date of grant (March 4, 2003) and the balance of the option shares in thirty-six (36) successive equal monthly installments upon optionee's completion of each additional month of service over the thirty-six (36) month period thereafter. Dr. Pickens terminated his employment with Com21 on November 29, 2002 prior to vesting in any of the option shares.
- •
- Dr. Pickens' 30,000 share option grant was granted on March 4, 2002 under the 1998 Stock Incentive Plan. Fifty percent (50%) of the option shares vested on October 4, 2002; the remaining fifty percent (50%) of the option shares were to have vested on March 4, 2003. Dr. Pickens terminated his employment with Com21 on November 29, 2002 prior to vesting in the second fifty percent (50%) of the option grant.
Mr. Jarvis' Grants:
Dr. Pickens' Grants:
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- •
- Mr. Rashid's 17,346 share option grant was granted on February 15, 2002 under the 1998 Stock Incentive Plan, pursuant to Mr. Rashid's participation in the Voluntary Pay Reduction Program, whereby each participant received a grant at the rate of two (2) shares per $1.00 of gross pay reduction. The stock options became fully vested and exercisable for one hundred percent (100%) of the option shares on July 26, 2002.
- •
- Mr. Rashid's 130,000 share option grant was granted on March 4, 2002 under the 1998 Stock Incentive Plan and was to have vested as follows: Twenty-five percent (25%) of the option shares upon optionee's completion of one (1) year of service measured from the date of grant (March 4, 2003) and the balance of the option shares in thirty-six (36) successive equal monthly installments upon optionee's completion of each additional month of service over the thirty-six (36) month period thereafter. Mr. Rashid terminated his employment with Com21 on September 30, 2002 prior to vesting in any of the option shares.
- •
- Mr. Rashid's 70,000 share option grant was granted on March 4, 2002 under the 1998 Stock Incentive Plan and was to have vested as follows: Fifty percent (50%) of the option shares on October 4, 2002; with the remaining fifty percent (50%) to vest on March 4, 2003. Mr. Rashid terminated his employment with Com21 on September 30, 2002 prior to vesting in any of the option shares.
Mr. Rashid's Grants:
However, each of the option grants will immediately become exercisable for an additional number of shares in the event the Company is acquired by a merger or asset sale, unless the options are assumed by the acquiring entity, or in the event there is a hostile change in control or ownership of the Company. In addition, certain option grants contain a provision that provides for the automatic acceleration of outstanding options upon the involuntary termination of the optionee's service with the Company within eighteen (18) months following a change in control. Each option described in this footnote one has a maximum term of ten (10) years subject to earlier termination in the event of the optionee's cessation of service with Com21.
- (2)
- Based on an aggregate of 3,188,746 options granted to employees, consultants and directors, including the Named Executive Officers of Com21 during the fiscal year ended December 31, 2002.
- (3)
- The exercise price per share of each option grant was equal to the fair market value of the common stock on the date of grant as determined by the price at the close of market as reported by Nasdaq. Under both the 1998 Plan and the 2000 Plan, the exercise price can be paid by means of a promissory note payable to the Company, but only to the extent authorized by the plan administrator.
- (4)
- The potential realizable value is calculated based on the term of the option at its time of grant, which is ten years. It is calculated assuming that the fair market value of Com21's common stock on the date of grant appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price unless the Named Executive Officer terminated employment with Com21 during the fiscal year. There can be no assurance provided to any executive officer or other holder of Com21's common stock that the actual stock price appreciation over the ten-year option term will be at the assumed 5% and 10% levels or at any other defined level. Unless the market price of the common stock appreciates over the option term, no value will be realized from those option grants which were made to the Named Executive Officers with an exercise price equal to the fair market value of the option shares on the grant date.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND LAST FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning option exercises and option holdings for the Last Fiscal Year with respect to the Named Executive Officers. No options or stock appreciation rights were exercised by any such individual during such year, and no stock appreciation rights were outstanding on December 31, 2002.
| | | Number of Securities Underlying Unexercised Options at Fiscal Year-End (#) | Value of Unexercised In-the-Money Options at Fiscal Year-End ($)(5) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Name | Shares Acquired on Exercise (#)(1) | Value Realized ($)(2) | ||||||||||
Exercisable(3) | Unexercisable(4) | Exercisable | Unexercisable | |||||||||
George Merrick | — | — | 542,052 | 283,334 | — | — | ||||||
Ralph Marimon | — | — | 168,526 | 164,130 | — | — | ||||||
Jeff Jarvis | — | — | — | — | — | — | ||||||
John R. Pickens | — | — | 226,833 | — | — | — | ||||||
Ehsan Rashid | — | — | — | — | — | — |
- (1)
- During the Fiscal Year ended December 31, 2002, no shares were exercised by Named Executive Officers.
- (2)
- Based on the fair market value of the purchased option shares at the time of exercise less the option exercise price paid for those shares.
- (3)
- Each of the options was granted under Com21's 1995 Stock Option Plan that was incorporated into Com21's 1998 Stock Incentive Plan, under the Com21 1998 Stock Incentive Plan or under the Com21 2000 Stock Option Plan. Each of the options granted under the Com21 1995 Stock Option Plan were immediately exercisable, but all shares purchased under the options were subject to vesting requirements and subject to repurchase by Com21 at the original exercise price paid per share upon the optionee's cessation of service prior to vesting in such shares. For those options granted under the Com21 1995 Stock Option Plan, the repurchase right lapsed with respect to 25% of the option shares upon completion of one year of service from the vesting commencement date and the balance in a series of equal monthly installments over the next 36 months of service thereafter. Options granted under all of the plans have a maximum term of ten years, subject to earlier termination in the event of the optionee's cessation of service with Com21. All outstanding options granted under the 1995 Stock Option Plan are now fully vested.
Mr. Merrick's 542,052 outstanding exercisable options include 11,250 repurchasable options as a result of a 15,000 share option grant which was granted on May 17, 2001 under the Automatic Grant Program of the 1998 Stock Incentive Plan in connection with his election to the Board. The options from that grant are immediately exercisable and subject to repurchase at the original exercise price paid per share upon the optionee's cessation of service prior to vesting in such shares.
Mr. Marimon was vested in all 168,526 shares of the outstanding exercisable options.
Dr. Pickens was vested in all 226,833 shares of his outstanding exercisable options. Dr. Pickens terminated his employment with Com21 on November 29, 2002. Accordingly, all unvested options were canceled on that date. Dr. Pickens has a period of three (3) months (commencing with the date of cessation of Service) during which to exercise all vested options. Any vested options not exercised on or before February 28, 2003 will be canceled.
Mr. Jarvis and Mr. Rashid each terminated his employment with Com21 on September 30, 2002. Accordingly, all unvested options were canceled on that date. Mr. Jarvis and Mr. Rashid had a period of three (3) months (commencing with the date of cessation of Service) during which to exercise all vested options. Neither Mr. Jarvis nor Mr. Rashid exercised any of their options during the three
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month period after which all remaining options were canceled. As of December 31, 2002 there were no options available to either individual.
- (4)
- Please refer to footnote (1) under Option Grants in Last Fiscal Year for vesting schedules and origin of grants.
- (5)
- Based on $0.22 per share, the fair market value of the Common Stock on December 31, 2002, less the exercise price payable for those shares.
Employment Arrangements and Change of Control Provisions
Com21 does not have any existing employment agreements with any executive officer named in the Summary Compensation Table. However, each of Mr. Merrick and Mr. Marimon has executed an Executive Change of Control Agreement that provides for continued payment of salary, as well as company paid continuation of his group employee benefit coverage, for twelve (12) months if he is terminated by Com21 for a reason other than good cause or if he terminates employment for good reason within twelve (12) months following a change of control.
Each of the option grants under Com21's stock option plans will immediately become exercisable for an additional number of shares in the event Com21 is acquired by a merger or asset sale, unless the options are assumed by the acquiring entity, or in the event there is a hostile change in control or ownership of Com21, in which event the option grant may be surrendered for cash. In addition, certain option grants contain a provision that provides for the automatic acceleration of outstanding options upon the involuntary termination of the optionee's service with Com21 with eighteen (18) months following a change of control.
FEES BILLED TO COM21 BY DELOITTE & TOUCHE LLP DURING FISCAL YEAR 2002
Audit Fees:
The aggregate fees billed by Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu and their respective affiliates (collectively "D&T") for professional services rendered for the audit of Com21's annual financial statements for the year ended December 31, 2002, and for the review of the financial statements included in Com21's quarterly reports on Form 10-Q for that fiscal year totaled $243,892.
Financial Information Systems Design and Implementation Fees:
Com21 did not engage D&T to provide professional services to Com21 relating to financial information systems design and implementation during fiscal year 2002.
All Other Fees:
The aggregate fees billed by D&T during Com21's 2002 fiscal year for all other professional services rendered to Com21 were $143,445, including audit related services of approximately $46,393, and tax consulting services of $97,052. Audit related services generally include fees for consents, review of registration statements, statutory audits of subsidiaries and assistance with responses to SEC comment letters.
In connection with the standards of independence of Com21's external auditors promulgated by the Securities and Exchange Commission, during Com21's 2003 fiscal audit year, the audit committee will consider in advance of the provision of any non-audit services by Com21's independent accountants whether the provision of such services is compatible with maintaining the independence of Com21's external auditors.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND RELATED STOCKHOLDER MATTERS
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth, as of December 31, 2002, certain information related to our compensation plans under which shares of Class A Common Stock of Com21 are authorized for issuance:
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||
---|---|---|---|---|---|---|---|---|
| (a) | (b) | (c) | |||||
Equity compensation plans approved by security holders | 5,979,960 | (1) | $ | 4.90 | 4,402,978 | (2) | ||
Equity compensation plans not approved by security holders | 3,885,980 | (3) | $ | 8.38 | 0 | |||
Total | 9,865,940 | $ | 13.28 | 4,402,978 | ||||
- (1)
- Represents 4,463,702 options issued and outstanding under the Com21, 1998 Stock Incentive Plan and 1,516,258 options issued and outstanding under the Com21, 2000 Stock Option Plan as of December 31, 2002.
- (2)
- Represents 2,284,751 options remaining available for grant under the Com21, 1998 Stock Incentive Plan, 1,465,628 options remaining available for grant under the Com21, 2000 Stock Option Plan and 652,599 shares available for issuance under the Com21, 1998 Employee Stock Purchase Plan as of December 31, 2002.
- (3)
- Includes outstanding warrants held by Fletcher International Limited pursuant to a financing closed in 2001, and Celestica International and Flextronics International issued in connection with the termination of manufacturing contracts.
INFORMATION REGARDING STOCK OWNERSHIP
The following table sets forth certain information known to Com21 with respect to the beneficial ownership of Com21's common stock as of March 1, 2003, except as noted in the footnotes below by (i) all persons who are beneficial owners of five percent (5%) or more of Com21's common stock; (ii) each director; (iii) Com21's Named Executive Officers; and (iv) all directors and executive officers as a group.
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Unless otherwise indicated, each of the stockholders has sole voting and investment power with respect to the shares beneficially owned, subject to community property laws, where applicable.
| Shares Beneficially Owned(2) | |||
---|---|---|---|---|
Name and Address of Beneficial Owner(1) | ||||
Number | Percent | |||
George Merrick(3) | 690,385 | 2.4 | ||
Paul Baran(4) | 1,392,845 | 4.9 | ||
Ralph Marimon(5) | 235,458 | * | ||
Jeff Jarvis | 0 | * | ||
John R. Pickens | 8,893 | * | ||
Ehsan Rashid | 0 | * | ||
James R. Gagnard(6) | 35,000 | * | ||
Susan H. Nycum(7) | 37,000 | * | ||
Daniel J. Pike(8) | 53,500 | * | ||
James J. Spilker, Jr.(9) | 65,500 | * | ||
All directors and officers as a group (7 persons)(10) | 2,509,688 | 8.8 |
- *
- Less than one percent.
- (1)
- Except as otherwise noted above, the address of each person listed on the table is c/o Com21, Inc., 750 Tasman Drive, Milpitas, California 95035.
- (2)
- Number of shares beneficially owned and the percentage of shares beneficially owned are based on 28,394,371 shares outstanding as of March 1, 2003. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power with respect to such shares. All shares of common stock subject to options currently exercisable or exercisable within 60 days after March 1, 2003 are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of computing the number of shares beneficially owned and the percentage ownership of such person, but are not deemed to be outstanding and to be beneficially owned for the purpose of computing the percentage ownership of any other person. Except as indicated in the footnotes to the table and subject to applicable community property laws, based on information provided by the persons named in the table, such persons have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
- (3)
- Includes 575,385 shares of common stock subject to stock options which are currently exercisable or exercisable within 60 days of March 1, 2003, of which, 11,250 shares of common stock are subject to Com21's right of repurchase.
- (4)
- Includes 1,357,845 shares held in the name of the Paul and Evelyn Baran Trust Agreement dated May 23, 1984. Also includes 35,000 shares of immediately exercisable options, of which, 22,500 shares of common stock are subject to Com21's right of repurchase.
- (5)
- Includes 228,567 shares of common stock subject to stock options which are currently exercisable or exercisable within 60 days of March 1, 2003, of which, no shares of common stock are subject to Com21's right of repurchase.
76
- (6)
- Represents 35,000 shares of common stock subject to stock options which are currently exercisable or exercisable within 60 days of March 1, 2003, of which, 31,250 shares of common stock are subject to Com21's right of repurchase.
- (7)
- Includes 2,000 shares held in the name of the Susan H. Nycum Revocable Trust dated December 2, 1999. Also includes 35,000 shares of immediately exercisable options, of which, 31,250 shares of common stock are subject to Com21's right of repurchase.
- (8)
- Includes 52,500 shares of common stock subject to stock options which are currently exercisable or exercisable within 60 days of March 1, 2003, of which, 26,250 shares of common stock are subject to Com21's right of repurchase.
- (9)
- Includes 62,500 shares of common stock subject to stock options which are currently exercisable or exercisable within 60 days of March 1, 2003, of which, 26,250 shares of common stock are subject to Com21's right of repurchase. Also includes 3,000 shares of common stock owned by Dr. Spilker's wife.
- (10)
- Includes 1,023,952 shares of common stock subject to stock options which are currently exercisable or exercisable within 60 days of March 1, 2003, of which, 148,750 are subject to Com21's right of repurchase.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no related party transactions during 2002.
All future transactions between Com21 and its officers, directors, principal stockholders and affiliates will be approved by a majority of the independent and disinterested members of the Board, and will be on terms no less favorable to Com21 than could be obtained from unaffiliated third parties.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, Com21 carried out an evaluation, under the supervision and with the participation of Com21's management, including Com21's Chief Executive Officer and Chief Financial Officer, of the effectiveness of Com21's disclosure controls and procedures pursuant to the applicable rules promulgated under the Securities and Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Com21's disclosure controls and procedures to record, process, summarize and report financial data are effective in alerting them to material information relating to Com21 required to be included in Com21's periodic Securities and Exchange Commission filings. There has been no significant changes in Com21's internal controls or in other factors that could significantly affect these controls subsequent to the evaluation date.
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ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this annual report:
- 1.
- Consolidated Financial Statements. The following Consolidated Financial Statements of Com21, Inc. and related Independent Auditors' Report are filed as part of this annual report:
Independent Auditor's Report
Consolidated Balance Sheets, as of December 31, 2001 and 2002
For the years ended December 31, 2000, 2001, and 2002:
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
- 2.
- Consolidated Financial Statement Schedules. The following consolidated financial statement schedules of Com21, Inc. are filed as part of this annual report and should be read in conjunction with the Consolidated Financial Statements of Com21, Inc.:
Financial Statement Schedules for the years ended December 31, 2000, 2001, 2002:
Schedule | Page | |
---|---|---|
II—Valuation & Qualifying Accounts | 84 |
Schedules not filed herein are omitted because of the absence of conditions under which they are required or because the information called for is shown in the consolidated financial statements or notes thereto.
- 3.
- Exhibits.
The Exhibits listed on the accompanying Index to Exhibits are filed or incorporated by reference as part of this annual report.
(b) Reports on Form 8-K
On July 22, 2002, Com21 announced the adoption of the Stockholder Right Plan.
On August 6, 2002, Com21 declare a dividend of one preferred share purchase right for each share of the Company's commons stock outstanding on August 7, 2002.
On October 1, 2002, Com21 announced the request to transfer its common stock to the NASDAQ SmallCap Market.
(c) Exhibits
The following exhibit list states, in the case of certain exhibits, a prior SEC filing which contains the exhibit and from which it is incorporated by reference.
78
Index to Exhibits
Number | Exhibit Title | |
---|---|---|
3.1(1 | ) | Registrant's Amended and Restated Certificate of Incorporation. |
3.2(1 | ) | Registrant's Amended and Restated Bylaws. |
4.1(1 | ) | Form of Registrant's Specimen Common Stock Certificate. |
4.2(1 | ) | Amended and Restated Information and Registration Rights Agreement, among the Registrant and the investors and founders named therein, dated July 22, 1997. |
10.1(1 | ) | Lease Agreement between the Registrant, John Arrillaga and Richard T. Peery, dated May 10, 1996. |
10.2+(1 | ) | Technology License and Reseller Agreement between the Registrant and 3Com Corporation, dated March 22, 1996. |
10.3+(1 | ) | Reseller Agreement between the Registrant and 3Com Corporation, dated July 30, 1997. |
10.4+(1 | ) | Hardware and Software Technology License Agreement between the Registrant, Advanced Telecommunications Modules, Limited and Advanced Telecommunications Modules, Inc., dated February 1, 1996. |
10.6*(1 | ) | Registrant's 1998 Stock Incentive Plan. |
10.7*(1 | ) | Registrant's 1998 Employee Stock Purchase Plan. |
10.8(1 | ) | Form of Indemnity Agreement entered into by Registrant with each of its executive officers and directors. |
10.11+(1 | ) | Agreement for Manufacturing Services between the Registrant and Celestica, Inc., dated October 25, 1996. |
10.12+(1 | ) | Wind River Systems, Inc. VxWorks License Agreement, dated May 23, 1997. |
10.13+(1 | ) | Purchase and License Agreement by and between the Registrant and Siemens AG, dated December 2, 1997. |
10.18*(3 | ) | Registrant's 2000 Stock Option Plan. |
10.21(5 | ) | Agreement, dated February 28, 2001, by and between the Registrant and Fletcher International Ltd. |
10.24(7 | ) | Amended and Restated Warrant Certificate dated January 18, 2002, by and between the Registrant and Fletcher International, Ltd. |
10.25(8 | ) | Loan and Security Agreement between Registrant and Silicon Valley Bank dated November 30, 2001. |
10.26(8 | ) | Supply Agreement between the Registrant and Universal Scientific Industrial Co., Ltd., dated December 3, 2001. |
10.27(8 | ) | Amendment to Manufacturing Agreement between the Registrant and Celestica, Inc. and Accompanying Promissory Note and Warrant Certificate, dated March 20, 2002. |
10.28(8 | ) | Amendment to Manufacturing Agreement between the Registrant and Flextronics and Accompanying Note and Warrant Certificate, dated March 29, 2002. |
10.29(8 | ) | Executive Change of Control Agreement. |
21.1 | Subsidiaries. | |
23.1 | Independent Auditors' Consent. | |
99.1 | Certification Pursuant to 18 U.S.C. Section 1350. |
- +
- Confidential treatment has been granted as to a portion of this Agreement.
- *
- Denotes executive compensation plans and arrangements required to be filed as an exhibit to this Form 10-K/A.
- (1)
- Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (File No. 333-48107).
79
- (2)
- Previously filed as an exhibit to the Registrant's Registration Statement on Form S-1 (File No. 333-70945).
- (3)
- Previously filed as an exhibit to the Registrant's Registration Statement on Form S-8 (File No. 333-39898).
- (4)
- Previously filed as an exhibit to the Registrant's Registration Statement on Form S-8 (File No. 333-46144).
- (5)
- Previously filed as an exhibit to the Registrant's Current Report on Form 8-K (File No. 000-24009).
- (6)
- Previously filed as an exhibit to the Registrant's Statement on Form S-3 (File No. 333-58362).
- (7)
- Previously filed as an exhibit to the Registrant's Registration Statement on Form S-3 (File No. 333-81276).
- (8)
- Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K (File No. 000-24009).
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 30, 2003 | COM21, INC. | |||
By: | /s/ GEORGE MERRICK George Merrick President and Chief Executive Officer |
81
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, George Merrick, certify that:
- 1.
- I have reviewed the Annual Report of Com21, Inc. on Form 10-K/A for the year ended December 31, 2002;
- 2.
- Based on my knowledge, this annual 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; and
- 3.
- Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual 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 functions):
- 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 annual 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.
Dated: April 30, 2003
/s/ GEORGE MERRICK George Merrick President, Chief Executive Officer |
82
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ralph Marimon, certify that:
- 1.
- I have reviewed the Annual Report of Com21, Inc. on Form 10-K/A for the year ended December 31, 2002;
- 2.
- Based on my knowledge, this annual 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 annual report; and
- 3.
- Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
- c)
- presented in this annual 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 functions):
- 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 annual 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.
Dated: April 30, 2003
/s/ RALPH MARIMON Ralph Marimon Vice President, Chief Financial Officer |
83
COM21, INC.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(IN THOUSANDS)
| Balance at Beginning of Period | Additions Charged to Costs and Expenses | Deductions | Balance at End of Period | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
2000 | ||||||||||||
Accounts Receivable Allowances* | $ | 1,161 | $ | 1,373 | $ | (1,434 | ) | $ | 1,100 | |||
Inventory Reserve | $ | 2,535 | $ | 7,083 | $ | (3,125 | ) | $ | 6,493 | |||
Warranty Reserve | $ | 952 | $ | 1,666 | $ | (143 | ) | $ | 2,475 | |||
2001 | ||||||||||||
Accounts Receivable Allowances* | $ | 1,100 | $ | 1,648 | $ | (365 | ) | $ | 2,383 | |||
Inventory Reserve | $ | 6,493 | $ | 3,979 | $ | (3,843 | ) | $ | 6,629 | |||
Warranty Reserve | $ | 2,475 | $ | 1,093 | $ | (2,345 | ) | $ | 1,223 | |||
2002 | ||||||||||||
Accounts Receivable Allowances* | $ | 2,383 | $ | 296 | $ | (2,093 | ) | $ | 586 | |||
Inventory Reserve | $ | 6,629 | $ | 12,412 | $ | (2,454 | ) | $ | 16,587 | |||
Warranty Reserve | $ | 1,223 | $ | 1,973 | $ | (2,737 | ) | $ | 459 |
- *
- Deductions for accounts receivable allowances include miscellaneous discounts and price adjustments.
84
Introductory Note
COM21, INC. INDEX
PART I
- ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. CONSOLIDATED SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Com21, Inc. CONSOLIDATED BALANCE SHEETS (In thousands, except share and par value amounts)
Com21, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands, except per share amounts)
Com21, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share amounts)
Com21, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Com21, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2000, 2001 and 2002
PART III
DIRECTORS
MANAGEMENT
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
SUMMARY COMPENSATION TABLE
OPTION GRANTS IN LAST FISCAL YEAR
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND LAST FISCAL YEAR-END OPTION VALUES
FEES BILLED TO COM21 BY DELOITTE & TOUCHE LLP DURING FISCAL YEAR 2002
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
INFORMATION REGARDING STOCK OWNERSHIP
CERTAIN TRANSACTIONS
PART IV
SIGNATURES
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
COM21, INC. SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002 (IN THOUSANDS)