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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
AMENDMENT NO. 1
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NUMBER: 000-2409
COM21, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3201698
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) 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)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of outstanding shares of the registrant's Common Stock, $0.001
par value, was 27,382,044 as of March 31, 2001.
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COM21, INC.
INDEX
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets -- March 31, 2001 and
December 31, 2000........................................... 1
Condensed Consolidated Statements of Operations and
Comprehensive Loss -- Three Months Ended March 31, 2001 and
2000........................................................ 2
Condensed Consolidated Statements of Cash Flows -- Three
Months Ended March 31, 2001 and 2000........................ 3
Notes to Condensed Consolidated Financial Statements........ 4
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations................................... 10
Quantitative and Qualitative Disclosures About Market
Item 3. Risk........................................................ 24
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 25
Item 2. Changes in Securities and Use of Proceeds................... 25
Item 3. Defaults Upon Senior Securities............................. 25
Item 4. Submission of Matters to a Vote of Security Holders......... 25
Item 5. Other Information........................................... 25
Item 6. Exhibits and Reports on Form 8-K............................ 25
Signature............................................................ 26
In addition to historical information, this quarterly report on Form 10-Q
contains forward-looking statements including statements regarding our strategy,
financial performance and revenue sources that involve a number of risks and
uncertainties, including those discussed below at Risk Factors. While this
outlook represents our current judgment on the future direction of the business,
such risks and uncertainties could cause actual results to differ materially
from any future performance suggested below. Readers are cautioned not to place
undue reliance on the forward-looking statements, which speak only as of the
date of this Form 10-Q/A. Com21 undertakes no obligation to publicly release any
revision's to forward-looking statements to reflect events or circumstances
arising after the date of this document. See Risk Factors below and in the
annual report on Form 10-K filed with the SEC on April 2, 2001.
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COM21, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
(UNAUDITED)
ASSETS
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Current assets:
Cash and cash equivalents................................. $ 21,837 $ 25,237
Restricted cash........................................... 10,245 11,250
Short-term investments.................................... 881 9,427
Accounts receivable:
Trade.................................................. 30,267 40,609
Other.................................................. 4,931 10,159
Inventories............................................... 27,826 33,960
Prepaid expenses and other................................ 2,808 4,188
--------- ---------
Total current assets.............................. 98,795 134,830
Investments................................................. 2,000 2,000
Property and equipment, net................................. 16,240 16,690
Intangible assets, net...................................... 57,622 60,057
Other assets................................................ 788 788
--------- ---------
Total Assets...................................... $ 175,445 $ 214,365
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 25,326 $ 48,543
Accrued compensation and related benefits................. 3,680 4,447
Other current liabilities................................. 6,466 7,045
Current portion of capital lease and debt obligations..... 10,557 11,312
Total current liabilities......................... 46,029 71,347
Deferred rent............................................... 428 371
Capital lease and debt obligations.......................... 382 9
--------- ---------
Total liabilities................................. 46,839 71,727
--------- ---------
Stockholders' equity:
Common stock, $0.001 par value, 160,000,000 shares
authorized; 27,382,044 and 24,679,217 issued and
outstanding at March 31, 2001 and December 31, 2000.... 27 25
Additional paid-in capital................................ 271,932 263,803
Deferred stock compensation............................... (5,091) (5,839)
Accumulated deficit....................................... (137,134) (115,072)
Accumulated other comprehensive loss...................... (1,128) (279)
--------- ---------
Total stockholders' equity........................ 128,606 142,638
--------- ---------
Total Liabilities and Stockholders' Equity........ $ 175,445 $ 214,365
========= =========
See notes to condensed consolidated financial statements.
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COM21, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------
2001 2000
-------- -------
Revenues.................................................... $ 32,789 $41,556
Cost of revenues............................................ 29,131 28,992
Amortization of intangible assets........................... 758 --
-------- -------
Gross profit................................................ 2,900 12,564
-------- -------
Operating expenses:
Research and development.................................. 9,481 8,290
Sales and marketing....................................... 7,452 6,121
General and administrative................................ 4,635 1,718
Amortization of intangible assets......................... 2,641 --
Stock-based compensation, primarily in research and
development............................................ 1,010 275
-------- -------
Total operating expenses.......................... 25,219 16,404
-------- -------
Loss from operations........................................ (22,319) (3,840)
Other income, net........................................... 276 1,439
-------- -------
Loss before income taxes.................................... (22,043) (2,401)
Income taxes................................................ 19 22
-------- -------
Net loss.................................................... (22,062) (2,423)
Other comprehensive loss, net of tax:
Unrealized loss on available-for-sale investments......... (849) (204)
-------- -------
Comprehensive loss.......................................... $(22,911) $(2,627)
======== =======
Net loss per share, basic and diluted....................... $ (0.87) $ (0.11)
======== =======
Shares used in computation, basic and diluted............... 25,493 21,763
======== =======
See notes to condensed consolidated financial statements.
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COM21, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(22,062) $ (2,423)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock-based compensation.................................. 1,010 275
Depreciation and amortization............................. 4,947 1,113
Deferred rent............................................. 57 (3)
Gain on sales and maturities of investments............... -- (234)
Changes in operating assets and liabilities:
Accounts receivable -- trade.............................. 10,342 (7,009)
Accounts receivable -- other.............................. 5,228 --
Inventories............................................... 6,134 (1,845)
Prepaid expenses and other................................ 1,380 (2,835)
Accounts payable.......................................... (23,217) 5,187
Accrued compensation and related benefits................. (767) (46)
Other current liabilities................................. (579) 700
-------- --------
Net cash used in operating activities....................... (17,527) (7,120)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments.................................... -- (37,129)
Proceeds from sale of investments........................... 7,700 78,487
Purchases of property and equipment......................... (721) (1,585)
-------- --------
Net cash provided by investing activities................... 6,979 39,773
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private equity financing, net................. 6,864 --
Proceeds from exercise of stock options..................... 42 1,847
Repayments under capital lease obligations.................. (130) (159)
Repayments on debt obligations.............................. (633) --
Reduction in restricted cash................................ 1,005 --
-------- --------
Net cash provided by financing activities................... 7,148 1,688
-------- --------
Net change in cash and cash equivalents..................... (3,400) 34,341
Cash and cash equivalents at beginning of period............ 25,237 16,499
-------- --------
Cash and cash equivalents at end of period.................. $ 21,837 $ 50,840
======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized loss on available-for-sale investments........... $ (849) $ (170)
======== ========
Property acquired under capital leases...................... $ 381 $ --
======== ========
Additional common stock related to GADline acquisition...... $ 963 $ --
======== ========
Deferred stock compensation................................. $ -- $ 2,644
======== ========
See notes to condensed consolidated financial statements.
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COM21, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have
been prepared by Com21 pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC) for interim financial statements. Certain
information and footnote disclosures normally included in annual consolidated
financial statements prepared using accounting principles generally accepted in
the United States of America have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, these unaudited condensed
consolidated financial statements include all adjustments necessary (consisting
of normal, recurring adjustments) for a fair presentation of Com21's financial
position as of March 31, 2001, the results of its operations for the three
months ended March 31, 2001 and 2000 and its cash flows for the three months
ended March 31, 2001 and 2000.
The results of operations for the three months ended March 31, 2001 are not
necessarily indicative of the results to be expected for the full fiscal year
ending December 31, 2001. These financial statements should be read in
conjunction with the consolidated financial statements and the accompanying
notes included in Com21's Form 10-K dated April 2, 2001 as filed with the SEC.
Certain prior year amounts in the accompanying financial statements have
been reclassified to conform to current year presentation. These
reclassifications had no effect on the financial position, results of operations
or cash flows for any of the periods presented.
2. SIGNIFICANT ACCOUNTING POLICIES
New Accounting Standard -- On January 1, 2001, Com21 adopted Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Under SFAS No. 133, certain contracts that were not formerly considered
derivatives may now meet the definition of a derivative. The adoption of SFAS
No. 133 had no impact on Com21's consolidated financial position, results of
operations or cash flows.
Intangible Assets -- Intangible assets, including goodwill, are amortized
on a straight-line basis over useful lives of three to five years. Com21
evaluates goodwill for impairment using a discounted cash flows method whenever
events or changes in circumstances indicate that the carrying amount of goodwill
may not be recoverable. In situations where goodwill is considered to be
associated with the entire enterprise, impairment is assessed based on
discounted enterprise cash flows without interest charges, consistent with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of."
Revenue Recognition -- Com21 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. For
product revenue, this generally occurs at the time of shipment to both resellers
and end-users. Estimated sales returns and warranty costs, based on historical
experience by product, are recorded at the time the product revenue is
recognized.
Com21 accounts for revenue on software transactions under the principles of
Statement of Position (SOP) 97-2, "Software Revenue Recognition," as amended,
which requires, among other things, revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. Revenue for software licenses is
recognized when SOP 97-2 criteria are met which is generally upon delivery
provided that collection is probable. Software support and maintenance are
deferred and amortized over the maintenance period on a straight-line basis. In
an
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COM21, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
arrangement that includes both license fees and maintenance, amounts related to
maintenance are allocated based on vendor-specific objective evidence.
Vendor-specific objective evidence is based on the price when maintenance is
sold separately, or, when not sold separately, the price is established by
management having the relevant authority. Where discounts are offered, a
proportionate amount of that discount is applied to each element included in the
arrangement based on each element's fair value.
3. INVENTORIES
Inventories consist of (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Raw materials and sub-assemblies............................ $ 9,285 $10,363
Work-in-process............................................. 6,085 5,477
Finished goods.............................................. 12,456 18,120
------- -------
Total............................................. $27,826 $33,960
======= =======
4. LINE OF CREDIT
In December 2000, Com21 entered into a revolving line of credit agreement,
for working capital purposes, which allows Com21 to borrow up to the lesser of
$20,000,000 or 65% of Com21's eligible domestic and foreign accounts receivable.
At March 31, 2001, Com21 had $10,000,000 of principal outstanding under the
agreement. Borrowings under the line are secured by substantially all the assets
of Com21 and bear annual interest at the prime rate (8.00% at March 31, 2001)
plus 0.25%, which is payable monthly. The line expires on November 30, 2001 at
which time all outstanding borrowings and unpaid interest are due. The agreement
requires Com21 to comply with certain financial covenants which include
maintaining a minimum tangible effective net worth of $70,000,000; a maximum
debt-to-worth ratio of 1.00:1.00; a minimum quick ratio of 1.00:1.00; maximum
net loss of $11,000,000 excluding non-cash charges and one time costs and
expenses; and minimum unrestricted cash of $5,000,000. At March 31, 2001, Com21
did not meet the maximum net loss covenant. A waiver for this violation was
received on April 19, 2001.
5. COMMITMENTS AND LITIGATION
Com21's contract manufacturers have obtained or have on order substantial
amounts of inventory to meet Com21's revenue forecasts. If future shipments do
not consume the committed inventory, the contract manufacturers have the right
to charge for the fixed amount of excess inventories as well as a variable
amount for inventory carrying costs. These inventory commitments have a term of
less than one year as the revenue forecasts provided to the contract
manufacturers are for less than one year. For the three months ended March 31,
2001, Com21 purchased approximately $18 million under the arrangement, and at
March 31, 2001, the remaining commitment totaled approximately $69.0 million.
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; thus, Com21 does
not believe that an unfavorable resolution will have a negative impact on
Com21's business, operating results or financial condition.
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COM21, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
6. STOCKHOLDERS' EQUITY
Net Loss Per Share -- The following is a reconciliation of the numerators
and denominators of the basic and diluted net loss per share (EPS) computations
(in thousands, except per share amounts):
THREE MONTHS ENDED
MARCH 31,
-------------------
2001 2000
-------- -------
Net Loss (Numerator):
Net loss, basic and diluted............................... $(22,062) $(2,423)
-------- -------
Shares (Denominator):
Weighted average common shares outstanding................ 25,738 21,790
Weighted average common shares outstanding subject to
repurchase or forfeiture............................... (245) (27)
-------- -------
Shares used in computation, basic and diluted............. 25,493 21,763
-------- -------
Net loss per share, basic and diluted....................... $ (0.87) $ (0.11)
======== =======
During the three months ended March 31, 2001 and 2000, Com21 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 March 31, 2001: 245,106
outstanding shares of common stock subject to repurchase or forfeiture; warrants
to purchase 2,525,000 shares of common stock; and options to purchase 6,139,473
shares of common stock.
Common Stock -- In January 2001, Com21 issued an additional 175,124 shares
of common stock to GADline shareholders upon completion of predefined
development milestones included in the share purchase agreement. The common
stock was valued on the measurement date at $963,000. This amount was recorded
as additional goodwill in the first quarter of 2001 and will be amortized over
the remaining life of the intangible asset. All remaining unearned milestone
shares expired during the quarter ended March 31, 2001.
In January 2001, certain product development milestones defined in the
BitCom Agreement were met resulting in the issuance of an additional 50,000
shares of Com21 common stock to former BitCom employees valued on the
measurement date at $263,000. This amount was recorded as stock-based
compensation in the first quarter of 2001. All remaining unearned milestone
shares expired during the quarter ended March 31, 2001.
Com21 completed a $7,650,615 equity financing with Fletcher International
Limited, or Fletcher. Pursuant to a subscription agreement, dated February 28,
2001, Fletcher agreed to purchase approximately 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 2,450,000 shares of the Registrant's common stock. The offer and sale
of these securities were not registered under the Securities Act of 1933, as
amended, pursuant to the exemption provided by Regulation D and these securities
may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements. The warrant is immediately
exercisable and remains exercisable for a period of seven years from the date of
issuance at the exercise price of $9.0951 per share. The number of shares
issuable upon exercise of the warrant and the exercise price per share are
subject to adjustment upon the occurrence of events set forth in the warrant
including: the issuance of additional securities at a price below the greater of
the market price of the common stock and the exercise price of the warrant or
the declaration of a stock split, dividend, consolidation, recombination,
reclassification or similar transaction. The fair value of the warrant is
approximately $2,500,000 and is recorded as additional
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COM21, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
paid in capital. Com21 determined the value of the warrant using the
Black-Scholes option pricing model over the contractual term of the warrant with
the following assumptions: stock volatility, 75%; risk free interest rate, 5.4%;
and no dividends during the expected term. Net proceeds from the private equity
financing were $6,864,000.
Common Stock Warrants -- During 2000, as consideration for services
provided under two product development agreements, Com21 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 warrants are immediately exercisable until
expiration (25,000 warrants expire in May 2001 and 50,000 warrants expire in
January 2002). The value of these warrants in the amount of $832,000 was
recognized as research and development expense for the year ended December 31,
2000. Com21 determined the value of the warrants using the Black-Scholes option
pricing model over the contractual term of the warrants with the following
assumptions: stock volatility, 75%; risk free interest rate, 6.5%; and no
dividends during the expected term. These warrants remained outstanding at March
31, 2001.
Deferred Stock Compensation -- During 2000, Com21 accelerated all remaining
unvested options to nonemployees, thereby creating a measurement date. On the
measurement date, Com21 recorded the fair value of the remaining deferred stock
compensation as compensation expense in the year ended December 31, 2000. The
aggregate compensation expense related to these awards was $645,000. Com21
determined the value of the awards using the Black-Scholes option pricing model
over the contractual term of the options with the following weighted average
assumptions: stock volatility, 75%; risk free interest rate, 6.5%; and no
dividends during the expected term. Com21 did not issue nonstatutory options to
nonemployees during the quarter ended March 31, 2001.
7. SEGMENT INFORMATION
For purposes of segment reporting, Com21 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. The Voice Products segment, based
primarily in Israel, develops, manufactures, and markets telephony products for
use on cable plants.
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COM21, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
The following tables are the financial results the chief operating decision
maker, as defined by SFAS No. 131, utilizes in evaluating the performance of
Com21's reportable segments (in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
------- -------
Revenues:
ATM products........................................... $20,381 $32,530
DOCSIS products........................................ 11,907 9,026
Voice products......................................... 501 --
------- -------
Total.......................................... $32,789 $41,556
======= =======
Cost of Revenues:
ATM products........................................... $15,508 $20,042
DOCSIS products........................................ 12,688 8,950
Voice products......................................... 1,693 --
------- -------
Total.......................................... $29,889 $28,992
======= =======
Gross Profit
ATM products........................................... $ 4,873 $12,488
DOCSIS products........................................ (781) 76
Voice products......................................... (1,192) --
------- -------
Total.......................................... $ 2,900 $12,564
======= =======
Com21'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 three months
ended March 31, 2001 and 2000, Com21 recorded product revenue from sales of
headend equipment, cable modems and network management software as follows:
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
------- -------
Headend equipment........................................ $ 4,638 $ 5,489
Cable modems............................................. 27,952 35,697
Network management software.............................. 199 370
------- -------
Product revenues......................................... $32,789 $41,556
======= =======
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COM21, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
8. MAJOR CUSTOMERS
The following table summarizes total revenues and net trade accounts
receivable for customers which accounted for 10% or more of net revenues or net
trade accounts receivable:
REVENUES
ACCOUNTS ------------
RECEIVABLE THREE MONTHS
------------ ENDED
MARCH 31, MARCH 31,
------------ ------------
CUSTOMER 2001 2000 2001 2000
-------- ---- ---- ---- ----
A................................................ 12% -- 18% --
B................................................ 15% -- 14% --
C................................................ -- 11% -- 16%
D................................................ -- 16% -- 12%
9. SUBSEQUENT EVENT
On April 19, 2001, Com21 announced its intent to restructure the company
which includes the divestiture of its Voice Products Division in Israel
(formerly known as GADline), and the closure of the Maryland Development Center
(formerly known as BitCom). Com21 expects to incur between $80 million and $85
million in restructuring charges in the second quarter of 2001, of which $2
million to $4 million will be cash related.
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PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion in conjunction with Com21's
unaudited condensed consolidated financial statements and notes thereto. 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.
Readers are referred to the "Risk Factors" section contained in Com21's Annual
Report on Form 10-K dated April 2, 2001 and to the "Risk Factors" section
contained herein which identify important risk factors that could cause actual
results to differ from those contained in the forward looking statements.
OVERVIEW
Com21, Inc., is a leading global supplier of broadband access solutions.
Com21's products enable domestic and international cable operators to provide
high-speed, cost-effective Internet access; reduce operating costs; and maximize
revenue opportunities in a variety of subscriber markets -- including private
homes, corporate telecommuters, and small businesses. We develop and sell
headend equipment, subscriber cable modems, and network management software to
support the Asynchronous Transfer Mode, or ATM, Data Over Cable System Interface
Specification, or DOCSIS and Digital Video Broadcasting, or DVB standards. In
the North American market, we sell directly to cable operators such as AT&T,
Charter Communications, Comcast, Cox Communications, and systems integrators
such as HSA. Internationally, we sell primarily to systems integrators such as
Siemens and Telindus, who in turn sell to cable operators.
During the first half of 2000, cable modem manufacturers experienced
shortages and long lead times for component materials such as flash memory and
capacitors. Due to these shortages, the production of cable modems was
constrained. We placed substantial orders for component material to ensure we
would meet our anticipated build plan, especially for our DOXport 1110 modem
that we commenced shipping late in the third quarter of 2000. We believe cable
operators also overbought in the second and third quarters of 2000 to ensure
they had sufficient product to meet subscriber demand. During the fourth quarter
of 2000, the order rates from cable operators and corresponding revenues dropped
sharply resulting in lower demand as cable operators started to balance and
bring down their inventory levels. This slow down in sales in the fourth quarter
of 2000 caused our finished goods inventory levels to increase substantially.
During the first quarter of 2001, inventory declined 18% as we reduced the build
rate of our contract manufacturers and managed our inventory levels. With the
slow down in shipments, our contract manufacturers have begun charging us for
the carrying cost of inventory, and we also anticipate that we will be charged
for excess inventory.
Additionally, at the end of 2000, cable operators began to lengthen their
accounts payable payments cycles as they managed their working capital more
tightly. Although we believe that distribution of cable modems will continue to
increase, as subscriber growth for high speed access is forecasted to increase
in 2001, some cable operators delayed ordering new equipment in early 2001 in
order to use the existing levels of inventory which caused a sequential decrease
in the amount of product that we shipped in North America in the first quarter
of 2001. Due to this oversupply of inventory by some manufacturers, price
competition has become more intense which resulted in lower average selling
prices and gross margin pressures, especially on DOCSIS modems. We believe these
factors are likely to depress revenues and margins, and are likely to cause
inventory levels to remain higher than historical levels due to lower shipment
rates. During the first quarter of 2001, we reduced the number of days of sales
outstanding from 90 days as of December 31, 2000 to 83 days as of March 31,
2001, by using more aggressive collection efforts. We anticipate that accounts
receivable balances will remain at a relatively high level compared to
historical levels as cable operators manage working capital tightly.
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In January 2001, we announced a number of programs to reduce operating
expenses. These included terminating a project to develop a DVB headend,
focusing our engineering efforts on fewer projects, and eliminating certain
marketing programs. This resulted in a reduction in personnel in these areas
along with some associated administrative and support functions. We also
transferred engineering and marketing efforts related to our ATM product line to
a lower cost development center in Ireland which was completed during the first
quarter of 2001.
We made two acquisitions in 2000 to secure necessary product development
resources (BitCom) and expertise particularly in cable telephony products
(GADline). Because of changing market dynamics in April 2001, we determined that
the most cost effective relationship would be for Com21 to have only a minority
interest in GADline.
In April 2001, we decided to focus our development efforts and reduce
overhead costs. We have closed down the Maryland Development Center (formerly
know as BitCom) and have moved all development to our two centers in Milpitas,
California and Cork, Ireland. Additionally, we began a program to consolidate
our Milpitas corporate office into one building.
In April 2001, we announced that due to the tight capital market we were
unable to secure sufficient funding for the Wireless Business Unit. We have
closed this business unit and terminated all related personnel.
We estimate that the restructuring charges related to the close down of the
Wireless Business Unit and the Maryland Development Center, the costs of taking
a minority interest in GADline, consolidating facilities in Milpitas, and the
resulting impairment charge related to the long-term assets of GADline and
BitCom could approximate between $80 million to $85 million in the second
quarter 2001.
In the future, we may continue to reduce operating expenses to accommodate
potentially decreased revenues or gross margins, or discontinue some development
programs and product lines. This could result in reductions in work force,
restructuring charges, write downs of inventory carrying values or provisions
for the impairment of long-lived assets. Any of these factors could affect our
financial position, results of operations, cash flows or stock price.
We completed a $7,650,615 equity financing with Fletcher International
Limited (Fletcher). Pursuant to a subscription agreement, dated February 28,
2001, Fletcher agreed to purchase approximately 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 2,450,000 shares of Com21's common stock. The offer and sale of these
securities were not registered under the Securities Act of 1933, as amended,
pursuant to the exemption provided by Regulation D and these securities may not
be offered or sold in the United States absent registration or an applicable
exemption from registration requirements. The warrant is immediately exercisable
and remains exercisable for a period of seven years from the date of issuance at
the exercise price of $9.0951 per share. The number of shares issuable upon
exercise of the warrant and the exercise price per share are subject to
adjustment upon the occurrence of events listed in the warrant including: the
issuance of additional securities at a price below the greater of the market
price of the common stock and the exercise price of the warrant or the
declaration of a stock split, dividend, consolidation, recombination,
reclassification or similar transaction. The fair value of the warrant is
approximately $2,500,000 and is recorded as additional paid in capital. Net
proceeds from the private equity financing were $6,864,000.
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. We can also be reached at
our Web site http://www.Com21.com. The contents of our website are not part of
this report.
RESULTS OF OPERATIONS
Total Revenues -- Total revenues decreased by 21% to $32.8 million in the
first quarter of 2001 from $41.6 million in the first quarter of 2000. The
decrease in revenues is due to a continuing industry-wide downturn in broadband
equipment purchases as cable operators balanced inventories and capital
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expenditures. Although unit sales of all our cable modem products increased a
modest 4% from the first quarter of 2000, the product mix shifted to include
higher volumes of the lower priced DOCSIS modems with lower volumes of the ATM
products being shipped. Additionally, the average sales price of all cable
modems declined from the first quarter of 2000 due to heavy price competition
especially for the DOCSIS modems. The mix change combined with the decreasing
average selling prices resulted in the lower revenue level for the first quarter
of 2001. We anticipate that the averages sales price of modems will continue to
decline during 2001.
Cable modem revenues accounted for 85% of total revenues in the first
quarter of 2001 as compared to 86% of total revenues in the first quarter of
2000.
During the quarter ended March 31, 2001, international sales accounted for
82% of total revenues, increasing from the 65% in the first quarter of 2000. In
the first quarter of 2001, we saw lower shipments in North America because of
inventory rebalancing and severe competition for business.
In the first quarter of 2000, revenues attributable to AT&T and Philips
accounted for 16% and 12% of total revenues, respectively. In the first quarter
of 2001, revenues attributable to Telindus and Itochu accounted for 18% and 14%,
respectively.
Gross Margins -- Gross margins decreased from 30.2% in the first quarter of
2000 to 8.8% in the first quarter of 2001. The decrease in margins is primarily
due to the following factors:
- The sale of more DOCSIS modems, which have lower gross margins than our
proprietary ATM modem. DOCSIS cable modem shipments increased from 49,000
units or 32% of total Com21 modem shipments in first quarter 2000 to
87,000 units or 54% of total Com21 modems shipped in first quarter 2001.
The adoption of the DOCSIS-based standard has caused considerable price
pressure due to the number of competitors in the marketplace.
- Sales of high cost OEM DOCSIS modems and first generation GADline modems
at clearance prices resulting in negative gross margins.
- Decline in the average sale prices of our ATM modems.
- Write down of certain of our component inventory to market.
- Amortization of intangible assets as a result of the GADline acquisition.
During 2001 we anticipate continued pressure on margins due to the
following:
- Increased sales of our DOCSIS cable modems. As these lower margin modems
continue to become a higher percentage of our total revenues, we
anticipate our total margin percentage will decline.
- Competitive pricing offered by entrenched suppliers to move inventory and
increase market share. As the industry continues to move toward
standardization of technology, we anticipate increased pricing pressure.
- We are taking steps to counter the impact of this price erosion by
continuing modem cost reduction programs.
Research and Development -- Research and development expenses increased 14%
from $8.3 million in the first quarter of 2000 to $9.5 million in the first
quarter of 2001. The increase was attributable to higher costs related primarily
to increased personnel, consulting and project related costs. In 2001, we
anticipate that research and development expenses will be less than the 2000
level by about $14.0 to $16.0 million. This decline is due to an anticipated
reduced number of personnel and elimination of certain development programs as
we refocus our development efforts on key technology initiatives.
Sales and Marketing -- Sales and marketing expenses increased 22% from $6.1
million in the first quarter of 2000 to $7.5 million in the first quarter of
2001. The increase was primarily due to higher costs associated with increased
personnel in the sales and marketing organizations. In 2001, we anticipate that
marketing expenses will be less than the 2000 level by about $5.0 to $7.0
million. This decline is due to
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anticipated personnel reductions and a decrease in expenditures on marketing
programs in our effort to reduce operating expenses.
General and Administrative -- General and administrative expenses increased
170% from $1.7 million in the first quarter of 2000 to $4.6 million in the first
quarter of 2001. The increase from the first quarter of 2000 to the first
quarter of 2001 was related to higher personnel related costs, increased rent,
inclusion of expenses of our GADline acquisition, professional fees, and
insurance costs. In subsequent quarters of 2001, we anticipate that general and
administrative expenses will decline between $600,000 to $1.0 million from the
first quarter of 2001. This decline is due to anticipated personnel reductions
and general decrease in discretionary expenses in our effort to reduce operating
expenses. Overall however, general and administrative expenses for 2001 are
anticipated to be $3.0 to $5.0 million higher than 2000.
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 three months ended March 31, 2001. For the
GADline and BitCom acquisitions, we recorded intangible assets of $67.7 million,
which is being amortized, on a straight-line basis over useful lives of three to
five years.
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 and 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 is being amortized to
expense over the vesting period of the individual options.
Total Other Income, Net -- Total other income, net decreased from $1.4
million in the first quarter of 2000 to $300,000 million in the first quarter of
2001. The decrease was attributable to lower interest income on a declining cash
and investments balance during 2000 and 2001.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, our cash, cash equivalents, restricted cash and
short-term investments were $33.0 million, compared to $45.9 million at December
31, 2000, a decrease of $13.0 million. The decrease during the quarter is
primarily a result of cash used in operations of $17.5 million and cash used for
investing in the purchase of property and equipment of $721,000. Cash outflows
from operations is due primarily to a net loss of $16.0 million after non-cash
items offset by a decrease to accounts receivable, inventories and other assets
of $23.1 million and a decrease to accounts payable, accrued compensation and
related benefits, and other current liabilities of $24.6 million. During the
quarter, we raised $6.9 million net of related costs in a private equity
financing and paid debt obligations of $763,000. Additionally, we had an
unrealized loss on our short-term investments which reduced the carrying value
by $849,000.
During 2000, we generated a net loss of $56.1 million and for the three
months ended March 31, 2001, the net loss was $22.1 million. If we do not
increase revenues, improve 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 included reducing our workforce in December 2000 and February 2001, the
shutting down of our Maryland Development Center and the Wireless Business Unit
both in April 2001, and the announced sale of our Voice Product Division
(formerly GADline). Management continues to monitor market conditions to assess
the need to take further action, if necessary. Any subsequent actions may result
in additional work force reductions, restructuring charges, discontinuation of
product lines, and provisions for impairment of long-lived assets which could
materially adversely affect our results of operations and stock price.
At March 31, 2001, we had working capital of approximately $52.8 million.
While we have not changed our credit, collections and delinquencies policy, the
market decline during the second half of 2000 caused us to have difficulties in
receiving payment within our normal payment terms of net 30 days. However during
the first quarter of 2001, we were able to reduce the investment in accounts
receivable by
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reducing the average collection period and days of sales outstanding from 90
days as of December 31, 2000 to 83 days at March 31, 2001 by using more
aggressive collection efforts. While we were able to reduce our finished goods
inventory, we expect inventory levels to remain higher over the next two
quarters as we convert raw material to finished goods and then ship it to
customers. Our accounts payable decreased due to a pay down of amounts due to
our contract manufacturers. We expect that our investments in accounts
receivable and inventories will continue to represent a significant portion of
working capital.
Our principal source of liquidity as of March 31, 2001, consisted of
approximately $32.1 million of cash and cash equivalents, of which $10.2 million
is restricted. We have executed a standby letter of credit for our contract
manufacturer, Celestica. If we fail to pay their invoices within 30 days,
Celestica can secure payment against the standby letter of credit. At March 31,
2001, we had outstanding borrowing of approximately $10.0 million under our line
of credit, which expires November 30, 2001. The agreement requires Com21 to
comply with certain financial covenants which include maintaining a minimum
tangible effective net worth of $70,000,000; a maximum debt-to-worth ratio of
1.00:1.00; a minimum quick ratio of 1.00:1.00; maximum net loss of $11,000,000
excluding non-cash charges and one time costs and expenses; and minimum
unrestricted cash of $5,000,000. At March 31, 2001, Com21 did not meet the
maximum net loss covenant. A waiver for this violation was received on April 19,
2001.
To the extent that our financial resources are insufficient to fund
activities and repay our debts, additional funds may be required. These
alternatives may include the sale of additional stock, additional lines of
credit, and the divestiture of certain business assets. There can be no
assurance, however, that any additional financing will be available to us on
acceptable terms, or at all, when required. If additional funds are raised by
issuing equity securities, significant dilution to existing stockholders may
result given the current price of our stock. If additional funds are not
available, we may be required to delay, scale back, or eliminate one or more of
our research and development or manufacturing programs. The inability to obtain
such financing could have a material adverse effect on our business, financial
condition, and results of operations.
Given the size and working capital needs of our business and our recent
history of losses, and the steps we are taking to reduce these losses and manage
our working capital, we judge our current liquidity situation to be adequate for
the next twelve months. At present, we have no material commitment for capital
equipment purchases. However, our contract manufacturers have obtained or have
on order substantial amounts of inventory to meet our revenue forecasts. If
future shipments do not consume the committed inventory, the contract
manufacturers have the right to charge us for the fixed amount of excess
inventories and a variable amount for inventory carrying costs. These inventory
commitments have a term of less than one year as the revenue forecasts provided
to the contract manufacturers are for less than one year. For the three months
ended March 31, 2001, we purchased approximately $18.0 million under the
obligations, and at March 31, 2001, the remaining commitment totaled
approximately $69.0 million. We believe that within the next 12 months,
shipments of our modem products will generate sufficient orders to relieve our
commitment to our contract manufacturers.
RISK FACTORS
COM21 MAY BE CHARGED FOR EXCESS INVENTORY HELD OR ON ORDER WITH OUR CONTRACT
MANUFACTURERS WHICH WOULD REDUCE OUR GROSS MARGIN.
Our contract manufacturers have obtained or have on order substantial
amounts of inventory to meet our revenues forecasts. If our future shipments do
not use up this inventory, these contract manufacturers have the right to charge
us for inventory carrying costs and to bill us for any excess component and
finished goods inventory. Through April 2001, we have been billed for inventory
carrying charges of approximately $600,000. As of the end of April 2001, our two
largest contract manufacturers had approximately $65.0 million of on hand
inventory and purchase commitments for materials and components which are used
to manufacture our products. We must fulfill these obligations even if demand
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for our products is lower than we anticipate which could reduce our working
capital and have a negative impact on our financial position. We believe that
within the next 12 months shipments of our modem products will create sufficient
orders to relieve our commitment to our contract manufacturers.
WE MUST REDUCE THE COST OF OUR CABLE MODEMS TO REMAIN COMPETITIVE.
Some of our competitors have assets and annual revenues that far exceed
ours and because of their financial status are able to offer cable modem
products at lower prices than we can offer cable modems. As headend equipment
becomes more widely distributed, the price of cable modems and related equipment
will continue to decrease. In particular, the adoption of industry standards,
such as the data-over-cable service interface specification, or DOCSIS, standard
in North America, has caused increased price competition for cable modems. To
remain competitive, we may have to lower the price of our modems in anticipation
of planned product cost reductions of our DOCSIS modems. We may not be able to
continually reduce the costs of manufacturing our cable modems or to secure
component parts at a low enough cost to enable us to lower our modem prices and
to compete effectively. As we perform on our cost reduction program, we may not
be able to continue to certify our DOCSIS modems in a timely manner by various
standards bodies including CableLabs. If we are unable to continue to reduce the
manufacturing costs of our cable modems, our gross margin and operating results
could be harmed.
COM21'S MARKET IS HIGHLY COMPETITIVE AND HAS MANY ESTABLISHED COMPETITORS.
The market for our products is intensely competitive, rapidly evolving and
subject to rapid technological change. Our competitors include Motorola, Inc.,
Toshiba America, Inc., 3Com Corporation, RCA/Thomson, Terayon Communication
Systems, Cisco Systems, Inc., and Nortel Network, Inc.
We believe that our business is affected by the following competitive
factors:
- cost;
- ease of installation;
- technical support and service;
- breadth of product line;
- 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 at below cost to reduce excess inventories causing severe price
competition.
WE MAY BE UNABLE TO OBTAIN ADDITIONAL CAPITAL NEEDED TO OPERATE AND GROW OUR
BUSINESS, WHICH COULD WEAKEN OUR FINANCIAL CONDITION AND MAKE US UNABLE TO
DEVELOP OUR TECHNOLOGIES AND PRODUCTS.
If our financial resources are insufficient to fund our activities and
repay our debt, additional funds will be required. We cannot assure you that any
additional financing will be available on terms acceptable to us, or at all,
when required by us. If additional funds are raised by issuing equity
securities, significant dilution to existing shareholders may result given the
current price of our common stock. If additional funds are not available, we may
be required to delay, scale back, or eliminate one or more of our research and
development or manufacturing programs.
During 2000, we had a net loss of approximately $56.1 million and for the
three months ended March 31, 2001, the net loss was $22.1 million. If we do not
increase revenues, improve gross margins and
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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 included reductions in our
workforce in December 2000 and February 2001, the shutting down of our Maryland
development center and the wireless business unit both in April 2001, and the
announced sale of our voice systems division, formerly GADline. Management
continues to monitor market conditions to assess the need to take further
action, if necessary. 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 materially adversely
affect our results of operations and stock price.
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 far 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
material adverse effect on operations if this inventory is not used or becomes
obsolete. This risk could be realized in inventory write-downs 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. As part of
our focus on customer support, we are evaluating a manufacturing error in one of
our cable modem products. We plan to test this product to determine the rate of
failure and, if necessary, we may repair a number of units. We have not
determined the potential costs of repairing these products. We believe this is
an issue with the manufacturing process of one of our contract manufacturers.
However, if we are not successful in negotiating with our contract manufacturer
to cover these costs, we may be subject to additional costs to repair or replace
these products in future periods. Defects, errors, or failures in our other
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 amounts that we have reserved for these events. Although Com21 has 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 have a material adverse effect on our business, operating
results and financial condition by forcing us to use cash and personnel
resources. This would limit our ability to grow and would decrease our revenues.
COM21'S STOCK PRICE IS HIGHLY VOLATILE AND BROAD MARKET FLUCTUATIONS MAY
ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
The trading price of our common stock has fluctuated significantly since
our initial public offering in May 1998. The common stock price has fluctuated
between $47 per share and $2 per share in the last twelve month period. The
price of our common stock could continue to be subject to wide fluctuations in
response to a variety of factors including:
- variations in quarterly earnings,
- announcements of technological innovations or new products by Com21 or
our competitors,
- announcements by certification and standards bodies,
- the state of Com21's patents or proprietary rights, and
- changes in financial estimates by securities analysts.
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Additionally, the stock market is volatile. This volatility has
particularly affected the stock price of many high technology companies and,
often, has been unrelated or disproportionate to the operating performance of
these companies. Our stock price has declined significantly and our stock price
may continue to decline because of these broad market and industry factors,
regardless of our actual operating performance. Additionally, Com21 may choose
to structure acquisitions or other transactions by issuing additional Com21
common stock, or warrants or options to purchase Com21 common stock that would
dilute common stock outstanding. Although Com21 management believes these types
of transactions will increase the overall value of Com21, these transactions may
initially decrease the market price of our common stock.
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.
Total revenues for any future quarter are difficult to predict. Delays in
the product distribution schedule of one or more of Com21's cable operator
customers would likely reduce Com21's operating results for a particular period.
Factors that could cause Com21's revenues to fluctuate include:
- pressure to reduce prices;
- variations in the timing of orders and shipments of Com21's products;
- variations in the size of orders by Com21's customers;
- new product introductions by Com21 or by competitors;
- delays in certifying standards-based products;
- general economic conditions and economic conditions specific to the cable
and electronic data transmission industries;
- cable operators financial ability to purchase our products; and
- delays in obtaining CableLabs and 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:
- pressures to reduce prices;
- changes in the cost of inventory;
- the sales mix within a product group, especially between proprietary and
DOCSIS modems;
- component prices we secure from our vendors;
- the average selling prices of our products;
- the effectiveness of our cost reduction efforts;
- the sales mix between our headend equipment and cable modems; and
- the volume of products manufactured.
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Additionally, our inability to reduce inventory levels may result in
substantial inventory-related charges including marking component inventory to
current market prices because of falling component prices, and increasing excess
and obsolescence reserves because of slow moving inventory.
A reduction in gross margins would harm our operating results and reduce
the amount of cash flow from operations. Additionally, if operating results did
not satisfy the expectations of analysts or investors, the trading price of
Com21's common stock would likely decline.
COM21 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
do not require collateral or other security to support customer receivables. We
may require letters of credit from a customer before shipping an order if we
determine that the customer has not proven itself to be creditworthy. Due to the
overall market decline during the second half of 2000, we have had difficulties
in receiving payment within our net 30 day payment terms resulting in an
increase in the number of days of sales outstanding as compared to the first
half of 2000. Our days sales outstanding increased from 57 days at June 30, 2000
to 83 days at March 31, 2001.
COM21 IS DEPENDENT ON KEY PERSONNEL AND THE SUCCESSFUL TRANSITION OF PRODUCT
MARKETING AND DEVELOPMENT ACTIVITIES TO OUR CORK IRELAND FACILITY.
Our future operating results depend greatly upon the continued contribution
of key technical and senior management personnel. Competition for these
personnel, especially in the United States, is intense and Com21 may not be
successful in attracting or retaining these personnel. Only a limited number of
persons with the requisite skills to serve in these positions may exist and it
may be increasingly difficult for us to hire these personnel. However, there is
less competition for these skilled workers in other countries. In February 2001,
we began the transfer of the research and development, product management and
marketing functions for Com21's proprietary ComUNITY Access product line to our
facility in Cork, Ireland. This transfer was nearly complete as of May 2001. We
are making 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 or our inability to successfully transfer technical,
marketing or support knowledge to Cork personnel may affect our ability to
provide timely development and support activities for the ComUNITY Access
product line. Loss of personnel or the inability to transfer knowledge could
delay our product development programs and our research and development efforts.
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.
Com21 contracts 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, in
sufficient volumes and to meet production and delivery schedules. Dependence on
third-party manufacturers presents a number of risks including:
- not taking sufficient credit exposure on new product bids;
- lowering available credit limits;
- not providing sufficient payment terms;
- failure to meet delivery schedules;
- not building product meeting our quality standards;
- less than satisfactory manufacturing yields and costs;
- building product to meet our demand;
- difficulty in planning mix of units to be produced; and
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- 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
have no long-term contracts or arrangements with any of our vendors that
guarantee product availability, the continuation of particular payment terms, or
the extension of credit limits. In the first half of 2000, we experienced supply
problems for components material, including flash memory, which limited our
ability to fulfill customer orders and had the effect of decreasing our revenues
for that period. We may also experience manufacturing or supply problems in the
future. 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 product could decrease
our revenues.
COM21'S 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 technical 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. Additionally, 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 prior to availability of
new product, market acceptance of new products, undetected defects in new
products, and availability of 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 would be reduced.
COM21 MAY NOT BE SUCCESSFUL IN ATTRACTING AND RETAINING KEY PERSONNEL AND
MANAGEMENT.
Our future success depends, to a significant extent, on the ability of our
management to operate effectively, both individually and as a group. 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. We have experienced higher
turnover recently than in prior years and over the past five months have had to
lay off a number of employees, which may impact employee morale. We do not
maintain key person life insurance on our key personnel. The loss of the
services of any of our key management or personnel, the inability to attract or
retain
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qualified personnel in the future or delays in hiring required personnel,
particularly engineers, could negatively affect our business by slowing research
and development efforts and delaying product development programs.
THE DIVESTITURE AND CLOSING OF COM21'S MARYLAND AND ISRAELI OPERATING UNITS MAY
CREATE UNFORESEEN RISKS.
In April 2001, we announced the closing of the BitCom operation, also
called the Maryland development center, and the sale of our majority interest in
GADline, also known as the voice systems division in Israel, in a management
buyout. The process of closing down and selling off these operations is risky
and may create unforeseen operating difficulties and expenditures.
COM21 HAS A SHORT OPERATING HISTORY, HAS NOT YET MADE A PROFIT AND EXPECTS TO
INCUR LOSSES IN THE FUTURE.
We have not made a profit and we expect to continue to operate at a loss
through fiscal year 2001. To achieve and subsequently maintain profitable
operations, we must successfully design, develop, test, manufacture, introduce,
market and distribute our 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 technology 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 make sufficient revenues and gross margins, we
may not achieve, or be able to sustain, profitability.
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 technology 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 does meet 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.
Different standards are emerging in different parts of the world. In North
America, the DOCSIS standard has achieved substantial market acceptance. Cable
Television Laboratories performs certification for the DOCSIS standard. The
DOCSIS standard is an evolving standard and becomes more complex and more
difficult to comply with as it evolves. As we continue to enhance and develop
our DOCSIS products to meet the evolving DOCSIS standards, we may incur
additional costs. Additionally, we cannot assure you that enhancements or new
DOCSIS products will be CableLabs certified. Even if these products are
certified, we cannot assure you that they will be accepted by the market. In
Europe, there is movement by some cable operators towards either a digital video
broadcast, or DVB, standard or a European DOCSIS standard. We have developed DVB
cable modems, but we cannot assure you that these products will meet the
evolving standards or receive certification. Additionally, Com21 cannot assure
you that if a European DOCSIS standard obtains widespread acceptance, Com21 will
be able to produce a cable modem to meet
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these specifications. The emergence or evolution of industry standards, either
through adoption by official standards committees or widespread use by cable
operators or telephone companies could require Com21 to redesign our products.
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 Com21's products. If any of these new technologies or
standards achieve widespread market acceptance, any failure by Com21 to develop
new products or enhancements, or to address these new technologies or standards,
could harm our business.
THE ADOPTION OF STANDARDS COULD RESULT IN LOWER SALES OF COM21'S PROPRIETARY
PRODUCTS.
The widespread adoption of DOCSIS, DVB, European DOCSIS or other standards
could cause aggressive competition in the cable modem market and result in lower
sales of Com21's proprietary products which do not meet these standards. As
cable operators move to standards based products, sales of Com21's proprietary
headend products, and revenues from licensing of our network management software
could decrease if our products do not meet the appropriate standards. This could
reduce our gross margin and operating results.
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. In North America, due to the
DOCSIS standard achieving widespread market acceptance, 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 operator's 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 materially
adversely affect our business, operating results and financial condition. As
large consumer electronics companies enter the cable modem market, their
well-established retail distribution capabilities and brand would provide them
with a significant competitive advantage.
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 28K
or 56K modem;
- Digital subscriber line/asymmetric digital subscriber line -- a digital
high-speed modem connection offered by telephone companies, this is 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 similar
to cell phones (Digital subscriber line/asymmetric digital subscriber
line and cable modems can operate in a wireless environment); and
- 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
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products if these alternatives are viewed as providing faster access, greater
reliability, increased cost-effectiveness or other advantages.
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, trademark and
trade secret laws, and contractual restrictions on disclosure. 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 our 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.
Also, due to the rapid pace of technological change in the cable modem industry,
many of our products rely on key technologies developed by third parties, and we
may not be able to continue to obtain licenses from these third parties on
favorable terms, if at all.
OUR PRODUCTS MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES,
WHICH 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 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.
OUR FAILURE TO MANAGE OUR OPERATIONS COULD SLOW OUR GROWTH RATE OR GIVE RISE TO
INEFFICIENCIES WHICH WOULD REDUCE OUR REVENUES.
To drive costs out of our business and improve our operating efficiencies,
we may be required to:
- improve existing and implement new operational, financial and management
information controls, reporting systems and procedures;
- hire, train and manage additional qualified personnel;
- expand and upgrade our core technologies; and
- effectively manage multiple relationships with our customers, suppliers
and other third parties.
Additionally, we must be able to continue to recruit and retain personnel,
and failure to do so would result in our not achieving our operational goals.
Also, our management team may not be able to achieve the rapid execution
necessary to fully exploit the market for our products and services. In the
future, we may experience difficulties meeting the demand for our products and
services. We cannot assure you that our systems, procedures or controls will be
adequate to support the anticipated growth in our operations or that we will be
able to achieve the operational efficiencies needed to be competitive. Any
failure could
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materially cause us not to meet our operating revenues and cost objectives and
weaken our financial position.
COM21 DEPENDS ON STRATEGIC RELATIONSHIPS, AND 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, develop 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'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. In the first quarter
of 2001, our top five customers accounted for 52% 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, our systems integrators could
develop and manufacture products that compete with us and cease distributing 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 are controlled
by a relatively small number of companies. 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.
COM21 IS SUBJECT TO RISKS OF OPERATING IN INTERNATIONAL MARKETS.
For the first quarter of 2001, international sales accounted for 82% of
total 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. To increase revenues in international markets, we will need to
continue to establish foreign operations, to hire additional personnel to run
these operations and to maintain good relations with our foreign systems
integrators and distributors. If we are unable to successfully do so, our growth
in international sales will be limited which would reduce our operating results.
Additionally, international operations involve a number of risks not typically
present in domestic operations, including:
- changes in regulatory requirements;
- costs and risks of distributing systems in foreign countries;
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- licenses, tariffs and other trade barriers;
- political and economic instability;
- difficulties in staffing and managing foreign operations;
- potentially adverse tax consequences;
- difficulties in obtaining governmental approvals for products;
- the burden of complying with a wide variety of complex foreign laws and
treaties;
- the imposition of legislation and regulations on the import and export of
high technology products;
- fluctuations in foreign currency; and
- the possibility of difficult accounts receivable collections.
THE INDUSTRY IN WHICH COM21 COMPETES IS SUBJECT TO CONSOLIDATION.
There has been a trend toward industry consolidation for several years,
which is expected to continue through 2001. We expect this trend toward industry
consolidation to continue as companies attempt to strengthen or hold their
market positions in an evolving industry. We believe that industry consolidation
may provide increasingly stronger competitors that are better able to compete.
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 customers or secure additional
customers, our business could decrease.
THE LOCATION OF COM21'S FACILITIES SUBJECTS US TO THE RISK OF EARTHQUAKES AND
OTHER NATURAL DISASTERS.
Com21's corporate headquarters, including some of our 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity. Com21 maintains an investment portfolio
consisting mainly of government and corporate debt obligations purchased with an
average maturity of less than one year. 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 March 31, 2001, 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 is also subject to interest rate risk as of March 31, 2001, related
to variable rate debt obligations totaling $10,397,000. The variable rates debt
obligations are linked to the prime rate and the LIBOR rate and any increases in
such market interest rates will increase the repayment obligation. If market
rate were to increase immediately and uniformly by 10 percent from levels at
March 31, 2001, the fair value of the repayment obligation would increase by
$40,000.
Com21 also has fixed rate debt obligations of approximately $542,000 at
March 31, 2001, that have no interest rate risk. The fixed rates on such
obligations ranged from 7% to 12% during the first quarter of 2001.
Market Price Risk. Com21 is also exposed to market price risk on
investments in marketable equity securities held as available-for-sale
investments. These investments are in publicly traded companies and
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private companies in the volatile high-technology industry sector. A 50% adverse
change in the equity price would result in an approximate $1,441,000 decrease in
the fair value of the investments in the marketable equity security as of March
31, 2001.
Foreign Currency Risk. To date, our international sales have been
denominated solely in U.S. dollars, and accordingly, we have not been exposed to
foreign currency exchange rate fluctuations related to sales transactions.
However, the functional currency of our subsidiaries in Ireland and Israel is
the U.S. dollar and as the local accounts are maintained in Irish pounds and
Israeli new shekels, we are subject 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 position or results of operations.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 8, 2000, Telepoint, Inc. filed a demand for arbitration against
Com21 and BitCom, Inc., which Com21 acquired in July 2000, with the American
Arbitration Association (No. 72Y 181 812 00 HLT). Telepoint, a customer of
BitCom, claims damages of $10 million and is seeking injunctive relief based on
several causes of action. Telepoint's claims center around a development
agreement between Telepoint and BitCom whereby BitCom was to develop a digital
radio in exchange for payment of $180,000 (and royalties). Com21 believes this
claim is without merit and intends to defend it vigorously. An unfavorable
resolution of this case could have a negative impact on our business, results of
operations, or financial condition.
In September 2000, Com21 issued a purchase order to Ambit Microsystems
Corporation for purchase of OEM cable modems which was later canceled because
delivery dates were not met. On February 27, 2001, Com21 received notice of
breach of contract by Ambit requesting Com21 to submit a settlement proposal.
Ambit has not made a formal claim for damages. Com21 believes the basis for this
request is without merit.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On February 14, 2001, Com21 filed a report on Form 8-K which announced its
earnings for the fourth quarter ended December 31, 2000.
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On March 7, 2001, Com21 filed a report on Form 8-K which announced that it
had entered into a definitive agreement to complete an equity financing with
Fletcher International Limited.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to the report to be signed on its
behalf by the undersigned thereunto duly authorized.
Com21, Inc.
Date: June 25, 2001 By: /s/ RALPH MARIMON
Vice President of Finance
and Corporate Secretary
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