UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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 Identification No.)
incorporation or organization)
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.
[X] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock, $0.001 par
value, was 21,500,930 as of September 30, 1999.
COM21, INC.
INDEX
PART I: FINANCIAL INFORMATION Page
Item 1 Financial Statements
Condensed Balance Sheets - September 30, 1999 and
December 31, 1998 3
Condensed Statements of Operations and Comprehensive Loss
Three and Nine Month periods ended September 30,
1999 and 1998 4
Condensed Statements of Cash Flows - Nine Months Ended
September 30, 1999 and 1998 5
Notes to Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 23
PART II: OTHER INFORMATION
Item 1 Legal Proceedings 23
Item 2 Changes in Securities and Use of Proceeds 23
Item 3 Defaults Upon Senior Securities 24
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 24
Item 6 Exhibits and Reports on Form 8-K 24
Signature 25
In addition to historical information, this 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" and in the "Risk Factors" section of
Com21's Annual Report on Form 10-K dated March 10, 1999 as filed with the SEC.
While this outlook represents our current judgement 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. Com21 undertakes no obligation to publicly
release any revisions to forward-looking statements to reflect events or
circumstances arising after the date of this document. See "Risk Factors" below
as well as "Risk Factors" in Com21's Annual Report on Form 10-K dated March 10,
1999 as filed with the SEC.
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements
COM21, INC.
CONDENSED BALANCE SHEETS
(In thousands, except share and par value amounts)
(Unaudited)
September 30, December 31,
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $ 35,235 $ 7,135
Short-term investments 75,879 58,609
Accounts receivable 14,530 4,834
Inventories 3,063 5,282
Prepaid expenses and other 1,974 586
--------- ---------
Total current assets 130,681 76,446
Property and equipment, net 7,147 6,247
Other assets 256 255
--------- ---------
Total Assets $138,084 $ 82,948
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,206 $ 4,033
Accrued compensation and related benefits 3,483 1,739
Deferred revenue 369 238
Other current liabilities 1,965 1,232
Current portion of capital lease and debt
obligations 639 1,120
--------- ---------
Total current liabilities 13,662 8,362
Deferred rent 303 284
Capital lease obligations 480 936
--------- ---------
Total liabilities 14,445 9,582
Stockholders' equity:
Common stock, $0.001 par value, 40,000,000
shares authorized; 21,500,930 and 18,685,560
issued and outstanding at September 30, 1999
and December 31, 1998 22 19
Additional paid-in capital 177,982 122,131
Deferred stock compensation (57) (82)
Accumulated deficit (55,014) (48,699)
Accumulated other comprehensive income (loss) 706 (3)
--------- ---------
Total stockholders' equity 123,639 73,366
--------- ---------
Total Liabilities and Stockholders' Equity $138,084 $ 82,948
========= =========
See notes to condensed financial statements.
COM21, INC.
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues $ 25,269 $ 13,686 $ 66,025 $ 29,417
Cost of revenues 16,316 8,486 40,177 18,940
--------- --------- --------- ---------
Gross profit 8,953 5,200 25,848 10,477
--------- --------- --------- ---------
Operating expenses:
Research and development 7,728 4,692 21,657 13,362
Sales and marketing 4,126 2,615 11,319 6,722
General and administrative 1,060 1,286 2,856 2,681
--------- --------- --------- ---------
Total operating expenses 12,914 8,593 35,832 22,765
--------- --------- --------- ---------
Loss from operations (3,961) (3,393) (9,984) (12,288)
Total other income, net 1,420 915 3,724 1,388
--------- --------- --------- ---------
Loss before income taxes (2,541) (2,478) (6,260) (10,900)
Provision for income taxes 0 5 55 14
--------- --------- --------- ---------
Net loss (2,541) (2,483) (6,315) (10,914)
Other comprehensive income, net of tax:
Unrealized gain/(loss)on available
for-sale investments (310) - 709 -
--------- --------- --------- ---------
Comprehensive loss $ (2,851) $ (2,483) $ (5,606) $(10,914)
========= ========= ========= =========
Net loss per share, basic and diluted $ (0.12) $ (0.14) $ (0.30) $ (1.09)
========= ========= ========= =========
Shares used in computation, basic
and diluted 21,426 18,338 20,732 10,045
========= ========= ========= =========
See notes to condensed financial statements
COM21, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
1999 1998
--------- ---------
Cash used in operating activities:
Net loss $ (6,315) $(10,914)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,897 2,517
Deferred rent 19 33
Gain on sales and maturities of investments (1,038) (27)
Changes in operating assets and liabilities:
Accounts receivable (9,696) (1,968)
Inventories 2,219 (2,791)
Prepaid expenses and other (1,388) (186)
Other assets (1) (53)
Accounts payable 3,173 796
Accrued compensation and related benefits 1,744 103
Deferred revenue 131 208
Other current liabilities 733 2,328
--------- ---------
Net cash used in operating activities (7,522) (9,954)
--------- ---------
Cash used in investing activities:
Purchases of investments, net (125,220) (28,950)
Proceeds from sale of investment 109,697 5,057
Purchases of property and equipment (3,772) (2,294)
--------- ---------
Net cash used in investing activities (19,295) (26,187)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of stock, net 55,854 62,909
Repayments under capital lease obligations (739) (792)
Repayments on debt obligations (198) (384)
--------- ---------
Net cash provided by financing activities 54,917 61,733
--------- ---------
Net change in cash and cash equivalents 28,100 25,592
Cash and cash equivalents at beginning of period 7,135 17,950
--------- ---------
Cash and cash equivalents at end of period $ 35,235 $ 43,542
========= =========
Non-cash investing and financing activities:
Property and equipment acquired under capital lease $ - $ 675
========= =========
Unrealized gain on available-for-sale investments $ (709) $ -
========= =========
Assets acquired through lease financing $ - $ 215
========= =========
See notes to condensed financial statements
COM21, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
1. Unaudited Interim Financial Statements
The accompanying unaudited financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, these unaudited financial
statements include all adjustments necessary (consisting of normal, recurring
adjustments) for a fair presentation of Com21's financial position as of
September 30, 1999, the results of operations for the three and nine months
ended September 30, 1999 and 1998 and cash flows for the nine months ended
September 30, 1999 and 1998.
The results of operations for the three and nine months ended September 30,
1999 are not necessarily indicative of the results to be expected for the
fiscal year ending December 31, 1999. These financial statements should be read
in conjunction with the financial statements and the accompanying notes
included in the Company's Form 10-K dated March 10, 1999 as filed with the SEC.
2. Investments
The fair value and the amortized cost of available-for-sale securities at
September 30, 1999 and December 31, 1998 are presented in the tables below (in
thousands):
Unrealized
Amortized Holding Gains Fair
Cost at (Losses) at Value at
9/30/99 9/30/99 9/30/99
--------- --------- ---------
Corporate Bonds and Equity Securities $ 30,073 $ 755 $ 30,828
Government Bonds 45,100 (49) 45,051
--------- --------- ---------
Total $ 75,173 $ 706 $ 75,879
========= ========= =========
Unrealized
Amortized Holding Gains Fair
Cost at (Losses) at Value at
12/31/98 12/31/98 12/31/98
--------- --------- ---------
Corporate Bonds $ 30,803 $ 7 $ 30,810
Government Bonds 27,809 (10) 27,799
--------- --------- ---------
Total $ 58,612 $ (3) $ 58,609
========= ========= =========
Fair values are based on quoted market prices obtained from an independent
broker. Available-for-sale securities are classified as current assets and all
maturities are within one year.
3. Inventories
Inventories consist of (in thousands):
September 30, December 31,
1999 1998
--------- ---------
Raw materials and sub-assemblies $ 437 $ 142
Work-in-process 1,101 1,361
Finished goods 1,525 3,779
--------- ---------
$ 3,063 $ 5,282
========= =========
4. 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 computations (in
thousands, except per share amounts):
Three Months
Ended September 30,
1999 1998
--------- ---------
Net Loss (Numerator):
Net loss, basic and diluted $ (2,541) $ (2,483)
--------- ---------
Shares (Denominator):
Weighted average common shares outstanding 21,477 18,540
Weighted average common shares outstanding
subject to repurchase (51) (202)
--------- ---------
Shares used in computation, basic and diluted 21,426 18,338
--------- ---------
Net Loss Per Share, Basic and Diluted $ (0.12) $ (0.14)
========= =========
Nine Months
Ended September 30,
1999 1998
--------- ---------
Net Loss (Numerator):
Net loss, basic and diluted $ (6,315) $(10,914)
--------- ---------
Shares (Denominator):
Weighted average common shares outstanding 20,814 10,293
Weighted average common shares outstanding
subject to repurchase (82) (248)
--------- ---------
Shares used in computation, basic and diluted 20,732 10,045
--------- ---------
Net Loss Per Share, Basic and Diluted $ (0.30) $ (1.09)
========= =========
During the three months and nine months ended September 30, 1999 and 1998, the
Company had securities outstanding which could potentially dilute basic EPS in
the future, but were excluded in the computation of diluted EPS in such
periods, as their effect would have been antidilutive due to the net loss
reported in such periods. Such outstanding securities consist of the following
at September 30, 1999: warrants to purchase 25,000 shares of common stock;
36,572 outstanding shares of common stock subject to repurchase; and options to
purchase 3,352,295 shares of common stock.
5. Related Party Transactions
In June 1999, the Company invested $1.0 million in the stock of a customer's
initial public offering. Revenue for the third quarter of 1999 and the first
nine months of 1999 included sales to this customer of $2.2 million and $7.1
million, respectively. The related accounts receivable balance for this
customer at September 30, 1999 was $1.8 million.
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 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 March 10, 1999, 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 system solutions for the
broadband access market. Our DOCSIS and ATM-based products enable cable
operators and service providers to have the ability to deliver high-speed,
cost-effective Internet applications to corporate telecommuters, small
businesses, home offices and residential users.
We were incorporated in June 1992 and shipped our first product in April 1997.
We have sold approximately 268,000 cable modems and over 770 head-ends
worldwide.
Results of Operations
Total Revenues - Total revenues increased 85% from $13.7 million in the third
quarter of 1998 to $25.3 million in the third quarter of 1999, and increased
124% from $29.4 million for the first nine months of 1998 to $66.0 million for
the first nine months of 1999. Our revenue growth was principally due to
growth in cable modem revenue over the comparable quarter and nine month period
in the prior year. Cable modem sales accounted for 82% of total revenue in the
third quarter of 1999 as compared to 63% of total revenue in the third quarter
of 1998 and 75% of total revenue for the first nine months of 1999 as compared
to 53% for the first nine months of 1998.
The average sales price of all cable modems declined moderately during the
third quarter of 1999 as our lower priced DOCSIS (standard compliant
modems) products were a greater proportion of total modem related revenue.
We anticipate that the average sales price of cable modems will continue
to decline during the remainder of 1999. The average sales price of
headend equipment also declined moderately in the third quarter of 1999
due principally the mix of product sold. We anticipate that the average
sales price of headend equipment will be relatively stable during the
remainder of 1999.
During the quarter ended September 30, 1999, international sales accounted
for 48% of total revenues, decreasing slightly from the 51% experienced in
the third quarter of 1998. During the nine months ended September 30,
1999, international sales accounted for 46% of total revenues, decreasing
slightly from the 49% experienced in the first nine months of 1998.
Gross Margins - Gross margins decreased from 38.0% in the third quarter of
1998 to 35.4% in the third quarter of 1999, but increased from 35.6%
during the first nine months of 1998 to 39.1% during the first nine months
of 1999. The decrease in margins from the third quarter of 1998 to the
third quarter of 1999 is primarily due to the mix of product. As noted
above cable modem sales accounted for 82% of total revenue in the third
quarter of 1999 as compared to 63% of total revenue in the third quarter
of 1998. Additionally, revenue from our DOCSIS cable modems became a more
significant portion of our total cable modem revenue. Cable modems have
lower margins than our other products and our DOCSIS cable modems
currently have lower margins than our proprietary cable modems. The
increase in margins during the first nine months of 1999 compared to the
first nine months of 1998 is primarily a result of our cable modem cost
reduction programs partially offset by the product mix shift toward cable
modems.
Gross margins decreased sequentially from 39.1% in the second quarter of
1999 to 35.4% in the third quarter of 1999. The decline is primarily
related to product mix. Our cable modem products continued to become a
greater portion of total revenue increasing from 78% of total revenue in
the second quarter of 1999 to 82% of total revenue in the third quarter of
1999 and our DOCSIS cable modems were a greater portion of total cable
modem revenue.
During the fourth quarter of 1999 we anticipate both gross profit and
gross margin percent to decline from:
Increased sales of our DOCSIS cable modems. As these lower margin modems
continue to become a higher percentage of our total revenue, we anticipate
our total margin percent will decline. We do not anticipate making
significant cost reductions to our DOCSIS modems until late in the first
half of 2000.
Price increases of flash memory which is a key component of our cable
modems. Due to a worldwide shortage of flash memory, prices for flash
memory have increased significantly. In order to fulfill demand for our
cable modem products we have made purchases of flash memory on the spot
market at a price that is substantially higher than we have experienced in
the past. We have initiated relationships with additional suppliers of
flash memory and anticipate volume shipments of flash memory from these
suppliers during the first quarter of 2000. While we are currently unsure
of the exact pricing from these additional suppliers, we anticipate that
it will be well below the spot market prices but above the prices that we
had experienced early in 1999.
Competitive pricing offered by an increasing number of cable modem
suppliers entering the market.
Research and Development - Research and development expenses increased
64.7% from $4.7 million in the third quarter of 1998 to $7.7 million in
the third quarter of 1999, and increased 62.1% from $13.4 million during
the first nine months of 1998 to $21.7 million during the first nine
months of 1999. The increase was attributable to higher costs related
primarily to increased consultant and personnel costs. We expect these
expenses to increase in absolute dollars in the future as we continue to
invest in research and development in our basic products and expand into
wireless markets.
Sales and Marketing - Sales and marketing expenses increased 57.8% from
$2.6 million in the third quarter of 1998 to $4.1 million in the third
quarter of 1999, and increased 68.4% from $6.7 million during the first
nine months of 1998 to $11.3 million during the first nine months of 1999.
The increase was primarily due to higher costs associated with increased
personnel in the sales and marketing organizations and added marketing
programs. We expect sales and marketing expenses to continue to increase
in absolute dollars in the future as we develop more marketing programs
and product channels for our DOCSIS products.
General and Administrative - General and administrative expenses decreased
17.6% from $1.3 million in the third quarter of 1998 to $1.1 million in
the third quarter of 1999, but increased 6.5% from $2.7 million during the
first nine months of 1998 to $2.9 million during the first nine months of
1999. The decrease from the third quarter of 1998 to the third quarter of
1999 is due to increased spending during the third quarter of 1998 on
legal fees partially offset by increased spending on personnel during the
third quarter of 1999. The increase from the first nine months of 1998 to
the first nine months of 1999 is related to higher personnel related costs
partially offset by the increased spending on legal fees during the first
nine months of 1998. We expect general and administrative expenses to
show a moderate increase in absolute dollars as we continue to add
personnel and incur additional costs related to the growth of our
business.
Total Other Income, Net - Total other income, net increased from $.9
million in the third quarter of 1998 to $1.4 million in the third quarter
of 1999, and increased from $1.4 million during the first nine months of
1998 to $3.7 million during the first nine months of 1999. The increase
was attributable to earnings on higher cash balances available during the
third quarter and the first nine months of 1999, due primarily to the net
cash received of $62.8 million from the initial public offering of common
stock in May 1998 and the net cash received of $54.3 million from the
secondary offering of common stock in February 1999.
Liquidity and Capital Resources
At September 30, 1999, our cash, cash equivalents and short-term
investments were $111.1 million, compared to $65.7 million at December 31,
1998, an increase of $45.4 million. The increase is primarily a result of
cash generated from financing activities of $54.9 and unrealized gains on
available-for-sale securities of $.7 million. The cash generated from
financing activities is largely the result of the $55.9 million in net
proceeds received from the public offering of common stock in February
1999 and from the exercise of stock options. These cash in-flows and
unrealized gains were partially offset by cash outflows from operating
activities of $6.5 million, excluding the gains on sales and maturities
and investments of $1.0 million, and cash used in investing in property
and equipment of $3.8 million. Our capital requirements primarily relate
to the working capital requirements and investments in property and
equipment. We have funded operations primarily through public offerings
of common stock and private sales of common and preferred stock.
Other than capital lease commitments, we have no material commitments for
capital expenditures. However, we anticipate an increase in capital
expenditures and lease commitments consistent with anticipated growth in
operations, infrastructure and personnel. We intend to establish sales
offices and lease additional space, which will require us to commit to
additional lease obligations, purchase equipment and install leasehold
improvements. We also intend to upgrade and invest in information
technology which will increase capital expenditures.
Going forward, we may make cash investments or exchange Com21 stock for
investments in various companies to secure development resources or access
to various product lines. We may also more aggressively pursue market
opportunities that leverage our technology platform. These activities if
pursued will result in a significant use of cash resources.
We believe our current cash and cash equivalents and short-term
investments will be sufficient to meet anticipated cash requirements for
the next twelve months, although we may seek to raise additional capital
during that time period.
Year 2000 Readiness
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field and cannot
distinguish 21st century dates from 20th century dates. These date code
fields will need to distinguish 21st century dates from 20th century dates
to avoid system failures or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to
process transactions, send invoices or engage in similar normal business
activities. As a result, many companies' software and computer systems may
need to be upgraded or replaced in order to comply with such "Year 2000"
requirements.
Our Year 2000 plan which is currently in progress will determine whether
our products, internal systems, computers and software, and the products
and systems of our critical vendors and suppliers are Year 2000 compliant.
This plan is being implemented in the following four consecutive phases:
I. Inventory and Data Gathering Phase: cataloging of products and systems
and the products and systems of our critical vendors and suppliers;
II. Testing Phase: determining whether cataloged products and systems are
Year 2000 compliant;
III. Replacement Phase: upgrading and replacement of non-compliant
products and systems; and
IV. Monitoring Phase: ongoing testing of our products and systems for Year
2000 compliance.
Our Year 2000 plan has been implemented but not completed. To date,
results of our Year 2000 plan are the following:
Products. We have developed internal tests to ascertain whether our
products are Year 2000 compliant. Based on these tests, we believe our
current products are Year 2000 compliant and, to the extent necessary, all
previously shipped products can be upgraded to become Year 2000 compliant
with currently available software upgrades. We have finished the first
three phases of our Year 2000 plan related to our products and are
continuing on the fourth phase, the monitoring phase, on an on-going basis
through the remainder of 1999.
Vendors. Based on a survey of material vendors and suppliers we have
ascertained our material vendors and suppliers appear to be Year 2000
compliant. We have received confirmations from material vendors
indicating their expectation that the Year 2000 will not materially effect
the supply of product to Com21. We continue to monitor our material
vendors and suppliers concerning Year 2000 compliance. We have finished
the first three phases of our Year 2000 plan related to our material parts
vendors and suppliers and are continuing on the fourth phase, the
monitoring phase, on an on-going basis through the remainder of 1999.
Manufacturing and Infrastructure. We have cataloged and performed a review
of our assembly and test equipment. Based on this survey we do not believe
that there is a material financial impact related to the replacement or
upgrade of any manufacturing or infrastructure equipment or software that
is not Year 2000 compliant. We will continue replacing and upgrading any
non-compliant equipment and software as well as monitoring of any new
equipment or software added. Completion of all four phases of the Year
2000 plan related to our manufacturing equipment and software is expected
to occur by late 1999.
IT Systems. We conducted a survey of our information technology hardware
and software and believe that all Year 2000 non-compliant hardware and
software has been upgraded or replaced. We have finished the first three
phases of our Year 2000 plan related to our IT Systems and are continuing
on with the fourth phase, the monitoring of any additional software. We
believe all four phases of the Year 2000 plan related to IT Systems will
be completed by late 1999.
Although we believe that our Year 2000 plan will identify all of our
material Year 2000 issues, we cannot assure you that we will be able to
identify, evaluate and resolve all these issues.
Costs. We do not currently expect that costs associated with Year 2000
compliance will materially affect our operations or financial position.
However, if we discover Year 2000 problems in the future, we may not be
able to develop, implement, or test remediation or contingency plans in a
timely or cost-effective manner.
Risks. We believe that the risks of noncompliance could accelerate or
delay purchases or replacement of our products and services. Failure of
third party products, such as a breakdown in telephone, electric service
or other utilities, e-mail, voicemail or the World Wide Web could cause a
disruption in cable operators' service to customers. Disruptions in the
services provided by banks, telephone companies and the U.S. Postal
Service could negatively impact our business. Although our products are
undergoing Year 2000 specific testing procedures, they may not contain the
date codes necessary to operate in the year 2000. Any failure of these
products to perform could result in the delay or cancellation of product
orders and the diversion of managerial and technical resources from
product development and other business activities to attend to Year 2000
issues. These events could have a material adverse effect on our business,
operating results and financial condition.
Contingency Plans. Until the completion of our Year 2000 plan, we do not
believe that it is practical to develop comprehensive contingency plans.
Even if these plans are completed and implemented in a timely manner they
may be insufficient to address any third party failures. We cannot assure
you that undetected internal and external Year 2000 issues will not
materially impact our business, financial condition, results of operations
and cash flows. See "Risk Factors - Our failure and the failure of our key
suppliers and customers to be year 2000 compliant could negatively impact
our business."
Risk Factors
You should carefully consider the risks described below before making a
decision to invest in Com21. You may lose all or part of your investment.
The risks and uncertainties described below are not the only ones facing
our company. Readers are referred to additional risks identified in the
"Risk Factors" section contained in Com21's Annual Report on Form 10-K
dated on March 10, 1999 as filed with the SEC.
Our operating results 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.
Our 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 our control. Factors that could cause our revenues to
fluctuate include the following:
- - key component shortages or failures from our suppliers in providing
necessary materials
- - delays in introducing cable modems that are CableLabs certified as
meeting the Data-Over-Cable Service Interface Specification (DOCSIS);
- - variations in the timing of orders and shipments of our products;
- - variations in the size of orders by our customers;
- - new product introductions by us or by competitors;
- - the timing of upgrades of cable plants;
- - variations in capital spending budgets of cable operators;
- - delays in obtaining regulatory approval for commercial deployment of
cable modem systems;
- - general economic conditions and economic conditions specific to the
cable and electronic data transmission industries;
The amount and timing of our operating expenses generally will vary from
quarter to quarter depending on the level of actual and anticipated
business activities. Research and development expenses will vary as we
develop new products.
We have a limited backlog of orders, and total revenues for any future
quarter are difficult to predict. Supply, manufacturing or testing
constraints could result in delays in the delivery of our products. Any
delay in the product deployment schedule of one or more of our cable
operator customers would likely materially adversely affect our operating
results for a particular period.
A variety of factors affect our gross margin, including the following:
- - the sales mix within a product group, proprietary vs. 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;
- - the volume of products manufactured, and
- - the distribution channel or customer mix.
In the past we have experienced declines in the average selling price of
our cable modems and headends. We expect average sales prices of both our
modems and headends will continue to show decreases to meet competitive
pressures, especially those pressures related to the introduction of
DOCSIS modems. In addition, the sales mix between our headend equipment
and modems also affects our gross margin. Sales of our cable modems yield
lower gross margins than do sales of our headend equipment and sales of
our DOCSIS cable modems currently yield lower margins than do sales of our
proprietary cable modems. We anticipate that our sales mix will continue
to be weighted toward cable modems and increasingly toward DOCSIS cable
modems. If the price declines are not offset by a decline in the costs of
manufacturing our cable modems or an increase in sales of higher margin
telephone and office cable modems, our gross margin will be adversely
affected.
Because of these factors, our operating results in one or more future
periods may not meet or exceed the expectations of securities analysts or
investors. In that event, the trading price of our common stock would
likely decline.
We may not be able to produce sufficient quantities of our products
because we obtain certain components from, and depend on, certain key sole
suppliers.
Certain parts, components and equipment used in our products are obtained
from sole sources of supply. For example, our headend equipment
incorporates a radio frequency modulation chip from one specific vendor,
transmitter/receiver components from another, and an Asynchronous Transfer
Mode switch, commonly known as an ATM in the telecommunications industry,
from yet another. Also, our cable modems include sole-sourced chipsets,
filters and other materials. Additional sole-sourced components may be
incorporated into our equipment in the future.
There is currently a worldwide shortage of flash memory, a key component
in our cable modems. In order to fulfill demand for our cable modem
products we plan on making purchases of flash memory on the spot market at
a price that is substantially higher than we have experienced in the past.
If we are unable to purchase flash memory at a high enough volume to meet
demand, we will be unable to produce enough cable modems to meet our
production and delivery schedules. We expect this shortage of flash
memory will continue at least through the remainder of 1999.
We do not have any long term supply contracts to ensure sources of supply.
If we fail to obtain components in sufficient quantities when required,
our business could be harmed. Our suppliers may enter into exclusive
arrangements with our competitors, stop selling their products or
components to us at commercially reasonable prices or refuse to sell their
products or components to us at any price. Our inability to obtain
sufficient quantities of sole-sourced components, or to develop
alternative sources for components and/or products would materially
adversely affect our business. We rely on several companies including:
- - Advanced Micro Devices, Inc., ST Microelectronics, Inc., Hyundai, Inc.,
suppliers of flash memory;
- - Broadcom Corp. and Newbridge Networks, Inc., suppliers of modulation,
demodulation and MAC components;
- - Atmel Corporation, the fabricator of our semiconductor devices;
- - Virata Limited, a supplier of ATM switches;
- - Hewlett-Packard Company, the supplier of HP Openview software;
- - Wind River Systems, Inc., a supplier of embedded software; and
- - Objectivity, Inc., a supplier of object-oriented database software.
If any of these manufacturers or other sole source suppliers delay or halt
production of any of their components, our business, operating results and
financial condition could be materially adversely affected.
We have a short operating history, have incurred net losses since our
inception and expect future losses.
We did not commence product shipments until April 1997. As a result, we
have only a limited operating history upon which you may evaluate us and
our prospects. We have incurred net losses since inception and expect to
continue to operate at a loss through at least fiscal 1999. To achieve
profitable operations on a continuing basis, we must successfully design,
develop, test, manufacture, introduce, market and distribute our products
on a broad commercial basis.
Our ability to generate future revenues will depend on a number of
factors, many of which are beyond our control. These factors include the
following:
- - the rate at which cable operators upgrade their cable plants;
- - our ability and the ability of cable operators to coordinate timely and
effective marketing campaigns with the availability of upgrades;
- - cable operators' success in marketing data-over-cable services and our
modems to subscribers;
- - cable operators' success in setting prices for data transmission
installation service; and
- - cable operators' success and timeliness in the installation of
subscriber site equipment.
Due to these factors, we cannot forecast with any degree of accuracy what
our revenues will be or how quickly cable operators will adopt our
systems. Therefore, we may not achieve, or be able to sustain,
profitability.
We may not be able to produce sufficient quantities of our products
because we depend on third-party manufacturers their suppliers and have
limited manufacturing experience.
We contract for the manufacture of cable modems and integrated circuit
boards on a turnkey basis. CMC Industries and Sanmina build printed
circuit assemblies for our headend products and Celestica manufactures our
cable modems. 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. A number
of risks are associated with our dependence on third-party manufacturers
including:
- - failure to meet our delivery schedules;
- - quality assurance;
- - manufacturing yields and costs;
- - the potential lack of adequate capacity during periods of excess demand;
- - increases in prices and the potential misappropriation of our
intellectual property.
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. We may experience
manufacturing or supply problems in the future. We are dependent on our
manufacturers to secure components at favorable prices, but we may not be
able to obtain additional volume purchase or manufacturing arrangements on
terms that we consider acceptable, if at all. If we enter into a high-
volume or long-term supply arrangement and subsequently decide that we
cannot use the products or services provided for in the agreement, our
business will be harmed. Any such difficulties could harm our
relationships with customers.
Certain of our current proprietary products are not compatible with
products offered by our competitors. Both our proprietary products and
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.
The Data-Over-Cable Service Interface Specification, the DOCSIS standard,
has continued to achieve substantial market acceptance in North America.
Conformance with the DOCSIS standard is being determined through
certification tests performed by CableLabs. On September 2, 1999,
CableLabs announced the result of the latest wave of certification for the
DOCSIS cable modem. Our DOCSIS cable modem was not certified at this
time. During October we submitted cable modems for certification testing
by CableLabs with results to be announced during the second week of
December 1999. The continuing evolution of the DOCSIS standard may cause
us to incur additional costs associated with making our cable modems
compliant with various versions of the standard. We cannot assure you that
our DOCSIS cable modems will be CableLabs certified according to our
anticipated schedule, or that if certified, that it will meet with market
acceptance. Our failure to introduce a CableLabs certified modem could
have an adverse affect on revenues and operations. The results of this
announcement could affect the trading price of our stock.
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 us to redesign current products. Our
current products may not be in full compliance with the following relevant
standards:
- - Data-Over-Cable Service Interface Specification (DOCSIS);
- - Digital Video Broadcast (DVB);
There is a movement by some cable operators in Europe towards the DVB
standard. If DVB achieves market acceptance customers may refuse to
purchase our products. Additionally, different implementations of the same
specification could slow deployment of our products if these differences
cause our products not to be interoperable with other companies' products.
The widespread adoption of DOCSIS, DVB or other standards outside North
America could cause aggressive competition in the cable modem market and
result in lower sales of our ComCONTROLLER headend products and lower
revenues from licensing of our network management software. Any of these
events would adversely affect our gross margin and our operating results.
The development of new competing technologies and standards increases the
risk that current or new competitors could develop products that would
reduce the competitiveness of our products. If any of these new
technologies or standards achieve widespread market acceptance, any
failure by us to develop new products or enhancements, or to address these
new technologies or standards, would harm our business.
Our future success will depend in part upon our ability to enhance our
existing products and to develop and introduce, on a timely basis, new
products and features that meet changing customer requirements and
emerging industry standards.
The market for cable modem systems and products is characterized by
rapidly changing technologies and short product life cycles. Our future
success will depend in large part upon our ability to:
- - identify and respond to emerging technological trends in the market;
- - develop and maintain competitive products;
- - enhance our products by adding innovative features that differentiate
our products from those of our 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.
If our product development and enhancements take longer than planned, the
availability of products would be delayed. Our future success will depend
in part upon our ability to enhance our existing products and to develop
and introduce, on a timely basis, new products and features that meet
changing customer requirements and evolving and emerging industry
standards.
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. 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
customers or be compatible with changing technological requirements or
standards. Most expenses must be incurred before the technical feasibility
or commercial viability can be ascertained. Revenues from future products
or product enhancements may not be sufficient to recover the development
costs associated with the products or enhancements.
We depend on cable operators and cable systems integrators for
substantially all of our sales.
We depend on cable operators and cable systems integrators to purchase our
headend equipment and cable modems and to market data transmission service
to end-users. Cable operators may not have enough programming channels
over which they can offer these services. Even if a cable operator chooses
to provide data transmission services, it may not choose our products to
do so.
Because we rely on cable operators and cable systems integrators to
purchase and market our products, our sales may be unpredictable due to
the varying marketing and deployment efforts of our cable operators and
cable systems integrators.
The future success of services providing data-over-cable transmission
depends upon the ability of cable systems to support two-way
communications. Many cable operators are in the process of upgrading, or
have announced their intention to upgrade, their cable plants to hybrid
fiber coaxial cable, commonly known as HFC in the telecommunications
industry. The timing of this upgrade could affect our sales.
Even after installation, we remain highly dependent on cable operators to
continue to maintain their cable plants so that our products will operate
at a consistently high performance level. Accordingly, the success and
future growth of our business will be subject to economic and other
factors affecting the cable television industry, particularly the
industry's ability to continue to finance the substantial capital
expenditures necessary to use our products effectively.
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, if
the DOCSIS standard achieves widespread market acceptance, we anticipate
that the North American cable modem market will shift to a consumer
purchase model. If this occurs, we will 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. Consequently, 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. To the
extent that large consumer electronics companies enter the cable modem
market, their well-established retail distribution capabilities 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.
The market for high-speed data transmission services has several competing
technologies which offer alternative solutions. Technologies which compete
with our solution are:
- - telephone company-related wireline technologies such as:
dial-up (analog modems);
digital subscriber line, known as DSL , ADSL, among others;
integrated services digital network, known as ISDN; and
- - wireless technologies such as:
local multipoint distribution service, known as LMDS;
multi-channel multipoint distribution service, commonly known as MMDS;
direct satellite; and
orthogonal frequency division multiplexed, commonly known as OFDM.
Because of the widespread reach of telephone networks and the financial
resources of telephone companies, competition from telephone company-
related solutions is expected to be intense. Cable modem technology may
not be able to compete effectively against wireline or wireless
technologies.
In addition, one of our competitors has developed a commercially available
alternative modulation technology. Significant market acceptance of
alternative solutions for high-speed data transmission could decrease the
demand for our products if these alternatives are viewed as providing
faster access, greater reliability, increased cost-effectiveness or other
advantages.
Our market is highly competitive and has many more established
competitors.
The market for our products is intensely competitive, rapidly evolving and
subject to rapid technological change.
Many of our current and potential competitors have been operating longer,
have better name recognition, better 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 and devote
substantially more resources to developing new or enhanced products than
we do. If we fail to become CableLabs certified in a timely manner, our
customers may choose another supplier for CableLabs certified cable
modems, and our business, operating results and financial condition could
be materially adversely affected.
We must reduce the cost of our cable modems to remain competitive.
Certain of our competitors' cable modems are priced lower than our cable
modems. As headend equipment becomes more widely deployed, the price of
cable modems and related equipment will continue to decline. In
particular, the adoption of industry standards, such as the DOCSIS
standard, will cause increased price competition for cable modems.
We may not be able to continually reduce the costs of manufacturing our
cable modems sufficiently to enable us to lower our modem prices and
compete effectively with other cable modem suppliers. If we are unable to
reduce the manufacturing costs of our cable modems, our gross margin and
operating results would be harmed.
Competition for qualified personnel in the cable networking equipment and
telecommunications industries is intense, and we may not be successful in
attracting and retaining these personnel.
Our future success will depend, to a significant extent, on the ability
of our management to operate effectively, both individually and as a
group. We are dependent on our ability to retain and motivate high caliber
personnel, in addition to attracting new personnel. Competition for
qualified personnel in the cable networking equipment and
telecommunications industries is intense, especially in the San Francisco
Bay Area, and we may not be successful in attracting and retaining such
personnel. We expect to add additional personnel in the near future. There
may be only a limited number of people with the requisite skills to serve
in those positions and it may become increasingly difficult to hire these
people. We are actively searching for research and development engineers,
who are in short supply. Our business will suffer if we encounter delays
in hiring these additional engineers.
Competitors and others have in the past and may in the future attempt to
recruit our employees. We do not have employment contracts with any of our
key personnel. We do not maintain key person life insurance on our key
personnel. The loss of the services of any of our key personnel, the
inability to attract or retain qualified personnel in the future or delays
in hiring required personnel, particularly engineers, could negatively
affect our business.
Our failure to adequately protect our proprietary rights may adversely
affect us.
We rely on a combination of patent, copyright and trademark laws, and on
trade secrets and confidentiality provisions and other contractual
provisions to protect our proprietary rights. These measures afford only
limited protection. We currently have eight issued U.S. patents and
several pending patent applications. Our means of protecting our
proprietary rights in the U.S. or abroad may not be adequate and
competitors may independently develop similar technologies. Our future
success will depend in part on our ability to protect our proprietary
rights and the technologies used in our principal products. Despite our
efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use trade secrets
or other information that we regard as proprietary. In addition, the laws
of some foreign countries do not protect our proprietary rights as fully
as do the laws of the U.S. Issued patents may not preserve our proprietary
position. Even if they do, competitors or others may develop technologies
similar to or superior to our own. If we do not enforce and protect our
intellectual property, our business will be harmed.
From time to time, third parties, including our competitors, have asserted
patent, copyright and other intellectual property rights to technologies
that are important to us. We expect that we will increasingly be subject
to infringement claims as the number of products and competitors in the
cable modem market grows and the functionality of products overlaps.
The results of any litigation matter are inherently uncertain. In the
event of an adverse result in any litigation with third parties that could
arise in the future, we could be required to pay substantial damages,
including treble damages if we are held to have willfully infringed, to
halt the manufacture, use and sale of infringing products, to expend
significant resources to develop non-infringing technology, or to obtain
licenses to the infringing technology. Licenses may not be available from
any third party that asserts intellectual property claims against us, on
commercially reasonable terms, or at all. In addition, litigation
frequently involves substantial expenditures and can require significant
management attention, even if we ultimately prevail. For example, in
January 1998, Hybrid Networks filed an action against us, accusing us of
infringing certain of their patents. We settled this matter in the first
quarter of 1999 through a patent cross-license agreement that will not
materially impact our business or results of operations. However, there
can be no assurance that we would be able to successfully resolve similar
incidents in the future.
Our failure to manage growth could adversely affect us.
We have rapidly and significantly expanded our operations and anticipate
that further significant expansion will be required to address potential
growth in our customer base and market opportunities. To manage the
anticipated growth of our operations, we will 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.
We compete in for skilled personnel in a labor market where there is a
shortage of qualified personnel and salary demands are above the norm. We
must be able to continue to recruit and retain personnel, and failure to
do so would result in us not meeting our anticipated growth goals.
In addition, our management team may not be able to achieve the rapid
execution necessary to fully exploit the market for our products and
services.
We may not be able to install management information and control systems
in an efficient and timely manner, and our current or planned personnel,
systems, procedures and controls may not be adequate to support our future
operations.
In the future, we may experience difficulties meeting the demand for our
products and services. The installation and use of our products requires
training. If we are unable to provide training and support for our
products, the implementation process will be longer and customer
satisfaction may be lower. We cannot assure you that our systems,
procedures or controls will be adequate to support the anticipated growth
in our operations. Any failure to manage growth effectively could
materially adversely affect our business, operating results and financial
condition.
We depend on strategic relationships.
Our business strategy relies to a significant extent on our strategic
relationships with other companies. These relationships include:
- - software license arrangements for our network management system;
- - technology licensing agreements for certain products;
- - development and OEM arrangements with certain suppliers for advanced
products;
- - marketing arrangements with Philips, Siemens, and others; and
- - collaboration agreements with suppliers of routers and headend equipment
to ensure the interoperability of our cable modems with these suppliers.
These relationships may not be successful because we may not be able to
continue to maintain, develop or replace them in the event any of these
relationships are terminated. In addition, any failure to renew or extend
any licenses between us and any third party may adversely affect our
business.
Our 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 (which include system integrators)
have accounted for a large part of our revenues to date, and we expect
that this trend will continue. 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' deployment schedules and budget
considerations. In addition certain of our system integrators could
develop and manufacture products that compete with us and therefore could
no longer distribute our products. Because a limited number of cable
operators 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 cable operators. The loss of
one or more of our customers or our inability to successfully develop
relationships with other significant cable operators could cause our
business to suffer.
We are subject to risks associated with operating in international
markets.
We expect that a significant portion of our sales will continue to be in
international markets for the foreseeable future. We intend to expand
operations in our existing international markets and to enter new
international markets, which will demand management attention and
financial commitment. In addition, a successful expansion of our
international operations and sales in certain markets will require us to
develop relationships with international systems integrators and
distributors. We may not be able to identify, attract or retain suitable
international systems integrators or distributors. We may not be able to
successfully expand our international operations.
Furthermore, 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. To the extent that we are unable to
successfully do so, our growth in international sales will be limited and
our operating results could be adversely affected.
Our international sales to date have been denominated in U.S. dollars. We
do not currently engage in any foreign currency hedging transactions. A
decrease in the value of foreign currencies relative to the U.S. dollar
could make our products more expensive in international markets.
In addition to currency fluctuation risks, international operations
involve a number of risks not typically present in domestic operations,
including:
- - changes in regulatory requirements;
- - costs and risks of deploying systems in foreign countries;
- - 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; and
- - the possibility of difficult accounts receivable collections.
We are also subject to the risks associated with the imposition of
legislation and regulations relating to the import or export of high
technology products. We cannot predict whether charges or restrictions
upon the importation or exportation of our products will be implemented by
the U.S. or other countries. Future international activity may result in
sales dominated by foreign currencies. Gains and losses on the conversion
to U.S. dollars of accounts receivable, accounts payable and other
monetary assets and liabilities arising from international operations may
contribute to fluctuations in our operating results. Any of these factors
could materially and adversely affect our business, operating results and
financial condition.
We may be subject to risks associated with acquisitions.
We continually evaluate strategic acquisitions of other businesses and
subscriber accounts. If we were to consummate an acquisition, we would be
subject to a number of risks, including:
- - difficulty in assimilating the acquired operations and personnel;
- - limits on our ability to retain the acquired subscribers;
- - disruption of our ongoing business; and
- - limits on our ability to successfully incorporate acquired technology
and rights into our service offerings and maintain uniform standards,
controls, procedures, and policies.
We may not be able to successfully overcome problems encountered with
potential acquisitions. In addition, an acquisition could materially
adversely affect our operating results by diluting our stockholders'
equity, causing us to incur additional debt, or requiring us to amortize
acquisition expenses and acquired assets.
Our failure and the failure of our key suppliers and customers to be year
2000 compliant would negatively impact our business.
The Year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year. Computer programs
that have this date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices or engage in similar normal business activities.
We are heavily dependent upon the proper functioning of our own computer
or data-dependent systems. This includes, but is not limited to, our
systems in information, business, finance, operations, manufacturing and
service. Any failure or malfunctioning on the part of these or other
systems could adversely affect our business in ways that are not currently
known, quantifiable or otherwise anticipated by us.
We currently have only limited information on the Year 2000 compliance of
key suppliers and customers. The operations of our key suppliers and
customers could be adversely affected in the event they do not
successfully and timely achieve Year 2000 compliance. Our business and
results of operations could experience material adverse effects if our key
suppliers were to experience Year 2000 issues that caused them to delay
manufacturing or shipment of key components to us. In addition, our
results of operations could be materially adversely affected if any of our
key customers encounter Year 2000 issues that cause them to delay or
cancel substantial purchase orders or delivery of our products.
While we have developed a plan to address Year 2000 issues, we may be
unable to complete all phases of the plan in a timely manner or to upgrade
any or all of our major systems in accordance with our plan. Even if we
make upgrades, they may not effectively address the Year 2000 issue. If
required upgrades are not completed in a timely manner or are not
successful, we may be unable to conduct our business or manufacture our
products. The systems of other companies on which our systems rely may not
be converted in a timely manner. The failure to convert by another
company, or the occurrence of a conversion that is incompatible with our
systems would have a material adverse effect on our business. We intend to
establish, but have not yet established a contingency plan detailing
actions that will be taken in the event that the assessment of the Year
2000 issue is not successfully completed on a timely basis. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Year 2000 Readiness."
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 or
failures. These errors have occurred in our products in the past and
additional errors may be expected to occur in our products in the future.
The occurrence of any defects, errors, or failures could result in delays
in installation, product returns and other losses to us or to our cable
operators or end-users. Any of these occurrences could also result in the
loss of or delay in market acceptance of our products, which could have a
material adverse effect on our business, operating results and financial
condition. We would have limited experience with the problems that could
arise with any new products that we introduce.
Although we have not experienced any product liability claims to date, the
sale and support of our products entail the risk of these claims. A
successful product liability claim brought against us could have a
material adverse effect on our business, operating results and financial
condition.
Our 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. In addition, the trading price of
our common stock could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements of technological
innovations or new products by us or our competitors, announcements by
certification and standards bodies, developments with respect to patents
or proprietary rights, changes in financial estimates by securities
analysts and other events or factors. In addition, the stock market has
experienced volatility that has particularly affected the market prices of
equity securities of many high technology companies and that often has
been unrelated or disproportionate to the operating performance of these
companies. These broad market fluctuations may adversely affect the market
price of our common stock.
This Form 10-Q contains forward-looking statements. These statements are
not guarantees of future performance and are subject to certain risks,
uncertainties and other factors, some of which are beyond our control, are
difficult to predict and could cause actual results to differ materially
from those expressed or forecasted in the forward-looking statements.
This Form 10-Q contains forward-looking statements that have been made
under the provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are not historical facts but rather
are based on current expectations, estimates and projections about our
industry, our beliefs, and assumptions. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates" and
variations of these words and similar expressions are intended to identify
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and other
factors, some of which are beyond our control, are difficult to predict
and could cause actual results to differ materially from those expressed
or forecasted in the forward-looking statements. These risks and
uncertainties include those described in "Risk Factors" and elsewhere in
this Form 10-Q as well as in the "Risk Factors" section of the Annual
Report on Form 10-K dated March 10, 1999. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
our management's view only as of the date of this Form 10-Q. We undertake
no obligation to update these statements or publicly release the result of
any revisions to the forward-looking statements that we may make to
reflect events or circumstances after the date of this Form 10-Q or to
reflect the occurrence of unanticipated events.
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity. Com21 maintains a short-term investment
portfolio consisting mainly of government and corporate bonds 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 September 30, 1999,
the fair value of the portfolio would decline by an immaterial amount. We
generally have the ability to hold our fixed income investments until
maturity and therefore we would not expect our operating results or cash
flows to be affected to any significant degree by the effect of a sudden
change in market interest rates on our securities portfolio.
Com21 has fixed rate long-term debt of approximately $480,000 as of
September 30, 1999, and a hypothetical 10 percent decrease in interest
rates would not have a material impact on the fair market value of this
debt. We do not hedge any interest rate exposures.
PART II: OTHER INFORMATION
Item 1 Legal Proceedings
None
Item 2 Changes in Securities and Use of Proceeds
(d) Use of Proceeds from Sales of Registered Securities. On February
23, 1999 the Company completed a public offering of its Common Stock,
$0.001 par value. The managing underwriters in the Offering were Credit
Suisse First Boston Corporation and Dain Rauscher Wessels (the
"Underwriters"). The shares of Common Stock sold in the Offering were
registered under the Securities Act of 1933, as amended, on a Registration
Statement on Form S-1 (the "Registration Statement") (Reg. No. 333-79504)
that was declared effective by the SEC on February 23, 1999. The Offering
commenced on February 23, 1999 after all 3,000,000 shares (of which
2,480,000 shares were offered by the Company and 520,000 shares were
offered by certain selling shareholders) of Common Stock registered under
the Registration Statement were sold at a price of $23.50 per share. The
aggregate price of the Offering amount registered was $70,500,000. In
connection with the Offering, the Company paid an aggregate of $3,690,000
in underwriting discounts and commissions to the Underwriters. In
addition, the following table sets forth an estimate of all expenses
incurred in connection with the Offering, other than underwriting
discounts and commissions. All amounts shown are estimated except for the
registration fees of the SEC and the National Association of Securities
Dealers, Inc. ("NASD").
SEC Registration fee $ 27,038
NASD filing fee 10,226
Nasdaq National Market listing fee 17,500
Printing and engraving expenses 225,000
Legal fees and expenses 340,000
Accounting fees and expenses 160,000
Blue Sky fees and expenses 5,000
Transfer Agent and Registrar fees 10,000
Miscellaneous 105,236
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Total $900,000
After deducting the underwriting discounts and commissions and the
estimated offering expenses described above, Com21 received net proceeds
from the offering of approximately $54,329,600 and the selling
stockholders received $11,580,400. As of September 30, 1999, Com21 has
used the net proceeds from its public offering of Common Stock to invest
in short-term, interest bearing, investment grade securities and has used
its existing cash balances to fund the general operations of the Company.
The proceeds will be used for general corporate purposes, including
working capital and product development. A portion of the net proceeds
may also be used to acquire or invest in complementary business or
products or to obtain the right to use complementary technologies. Com21
has no agreements or commitments with respect to any such acquisition or
investments and is not currently engaged in any material negotiations with
respect to any such transaction. None of Com21's net proceeds of the
offering were paid directly or indirectly to any director, officer,
general partner of Com21 or their associates, persons owning 10% or more
of any class of equity securities of the Com21, or an affiliate of Com21.
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
Exhibit
Number Description
27.1 Financial Data Schedule
b) Reports on Form 8-K
None
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Com21, Inc.
Date: November 12, 1999 By: /s/ David L. Robertson
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David L. Robertson
Chief Financial Officer