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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1998
REGISTRATION NO. 333-48107
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COM21, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7370 94-3201698
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (INTERNAL REVENUE SERVICE
CLASSIFICATION CODE NUMBER) EMPLOYER IDENTIFICATION NUMBER)
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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)
PETER D. FENNER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COM21, INC.
750 TASMAN DRIVE
MILPITAS, CALIFORNIA 95035
(408) 953-9100
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
COPIES TO:
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THOMAS W. KELLERMAN, ESQ. JEFFREY D. SAPER, ESQ.
ARMANDO CASTRO, ESQ. PATRICK J. SCHULTHEIS, ESQ.
ELIZABETH A. R. YEE, ESQ. ROBERT G. DAY, ESQ.
PETER S. BUCKLAND, ESQ. ANIL P. PATEL, ESQ.
BROBECK, PHLEGER & HARRISON LLP WILSON SONSINI GOODRICH & ROSATI
TWO EMBARCADERO PLACE PROFESSIONAL CORPORATION
2200 GENG ROAD 650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94303 PALO ALTO, CALIFORNIA 94304
(650) 424-0160 (650) 493-9300
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, please check the
following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE
TITLE OF SECURITIES TO BE PRICE OFFERING
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2)
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Common Stock, .001 value per share 5,750,000 shares $12.00 $69,000,000
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AMOUNT OF
TITLE OF SECURITIES REGISTRATION
TO BE REGISTERED FEE(3)
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Common Stock, .001 value per share $20,355
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(1) Includes 750,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a).
(3) Includes $14,927 which was previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A) MAY DETERMINE.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED MAY 20, 1998
COM21 LOGO
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5,000,000 SHARES
COMMON STOCK
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All of the 5,000,000 shares of Common Stock, par value $0.001 per share ("Common
Stock"), offered hereby (the "Offering") are being sold by Com21, Inc. (the
"Company"). Prior to this Offering, there has been no public market for the
Common Stock. It is currently estimated that the initial public offering price
will be between $10.00 and $12.00 per share. See "Underwriting" for a discussion
of the factors considered in determining the initial public offering price. The
Company has applied to have the Common Stock approved for quotation on the
Nasdaq National Market under the symbol "CMTO."
FOR INFORMATION CONCERNING CERTAIN RISK FACTORS WHICH SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS" COMMENCING ON PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share $ $ $
Total(3) $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses estimated at $1,050,000, payable by the Company.
(3) The Company has granted the Underwriters an option, exercisable within
thirty (30) days of the date hereof, to purchase up to 750,000 additional
shares of Common Stock solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
The shares of Common Stock offered hereby are offered by the Underwriters,
subject to prior sale, when, as and if delivered to and accepted by them, and
subject to approval of certain legal matters by counsel and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. Delivery of the shares of
Common Stock offered hereby to the Underwriters is expected to be made in New
York, New York on or about , 1998.
DEUTSCHE MORGAN GRENFELL
MERRILL LYNCH & CO.
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
The date of this Prospectus is , 1998.
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COM21 LOGO
Except as set forth in the financial statements or as otherwise specified
herein, all information in this Prospectus (i) assumes no exercise of the
Underwriters' over-allotment option, (ii) reflects the 1-for-2 reverse split of
the outstanding shares of Common Stock and Preferred Stock, effected May 13,
1998 and (iii) reflects the conversion of all of the Company's outstanding
shares of Preferred Stock into shares of Common Stock upon the effectiveness of
the registration statement related to the Offering made hereby. See
"Underwriting" and "Description of Capital Stock."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS OR OTHERWISE. SUCH ACTIVITIES, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
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PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and Financial Statements and
Notes thereto appearing elsewhere in this Prospectus.
THE COMPANY
Com21, Inc. designs, develops, markets and sells value-added, high-speed
communications solutions for the broadband access market. The Company's ComUNITY
Access system enables cable operators to provide high-speed, cost-effective
Internet access to corporate telecommuter, small office/home office ("SOHO") and
residential users in the U.S. and internationally, and enables them to address
the distinct price, performance, security and other needs of these different
end-user groups. Com21's products include headend equipment, subscriber cable
modems, network management software and noise containment technologies. Cable
operators can use the Company's ComUNITY Access system to increase revenue
opportunities by offering up to 16 different operator-defined transmission rates
at varying price points to multiple markets. The Company's system is designed to
be deployed on a limited capital budget and can be upgraded and scaled as
subscriber penetration grows. The Company's system enables cable operators to
lower their ongoing cost of ownership through cost-effective noise management
and remote cable modem upgrades. The ComUNITY Access system also supports future
features and service offerings, such as desktop video conferencing and cable
telephony applications. The Company is developing an MCNS-compliant modem for
the North American cable market intended primarily to address the basic
requirements of the residential end-user base, which typically tolerates lower
performance and security than the business user. The Company is working with
Cisco to develop interoperable MCNS-compliant products that are expected to be
commercially available in the second half of 1998. In 1997, the Company shipped
approximately 170 ComCONTROLLER headends and more than 12,000 ComPORT modems for
use in 61 locations worldwide. In the North American market, the Company sells
directly to cable operators and has sold systems to major operators such as
Charter Communications, Prime Cable and TCI. Internationally, the Company sells
to systems integrators, including Philips and Siemens, which in turn sell to
cable operators.
The Company was incorporated in Delaware on June 29, 1992. The Company's
principal executive offices are located at 750 Tasman Drive, Milpitas,
California 95035, and its telephone number at that address is (408) 953-9100.
THE OFFERING
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Common Stock offered........................................ 5,000,000 shares
Common Stock to be outstanding after the Offering(1)........ 17,764,512 shares
Use of proceeds............................................. For general corporate purposes, including
working capital, product development and
capital expenditures. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol...................... CMTO
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SUMMARY FINANCIAL DATA
(In thousands)
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THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
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1995 1996 1997 1997 1998
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STATEMENTS OF OPERATIONS DATA:
Total revenues...................................... $ -- $ 1,000 $15,649 $ 500 $ 7,020
Gross profit........................................ -- 1,000 7,277 500 2,344
Total operating expenses............................ 6,922 15,913 20,540 4,365 6,661
Loss from operations................................ (6,922) (14,913) (13,263) (3,865) (4,317)
Net loss............................................ (6,666) (14,471) (13,055) (3,828) (4,232)
</TABLE>
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MARCH 31, 1998
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ACTUAL AS ADJUSTED(2)
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BALANCE SHEETS DATA:
Cash and cash equivalents................................... $14,082 $64,182
Working capital............................................. 15,508 65,608
Total assets................................................ 28,377 78,477
Long-term obligations....................................... 1,441 1,441
Total stockholders' equity.................................. 19,121 69,221
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(1) Based on the number of shares outstanding as of March 31, 1998 and the
automatic conversion of all outstanding shares of Convertible Preferred
Stock into Common Stock. Excludes: (i) 1,420,967 shares of Common Stock
issuable upon exercise of stock options outstanding under the Company's 1998
Stock Incentive Plan at a weighted average exercise price of $2.64 per
share; (ii) 1,102,543 shares of Common Stock reserved for future issuance
under the 1998 Stock Incentive Plan (which includes a 500,000-share increase
in the 1998 Plan approved on April 22, 1998 and from which reserve options
to purchase 505,250 shares at $9.00 per share were granted on April 22,
1998); (iii) 250,000 shares of Common Stock reserved for future issuance
under the 1998 Employee Stock Purchase Plan; and (iv) 46,286 shares of
Common Stock issuable upon the exercise of outstanding warrants at a
weighted average exercise price of $7.76 per share. See "Capitalization,"
"Management -- Option Grants Under the 1998 Stock Incentive Plan,"
"Management -- Benefit Plans" and Notes 6 and 11 of Notes to Financial
Statements.
(2) Adjusted to reflect the sale of 5,000,000 shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $11.00 per
share and after deducting the estimated underwriting discount and the
estimated offering expenses. See "Use of Proceeds" and "Capitalization."
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THE COMPANY
Com21, Inc. (the "Company" or "Com21") designs, develops, markets and sells
value-added, high-speed communications solutions for the broadband access
market. The Company's ComUNITY Access system enables cable operators to provide
high-speed, cost-effective Internet access to corporate telecommuter, small
office/home office ("SOHO") and residential users in the U.S. and
internationally, and enables them to address the distinct price, performance,
security and other needs of these different end-user groups. Com21's products
include headend equipment, subscriber cable modems, network management software
and noise containment technologies.
The volume of data traffic across communications networks has increased
significantly over the last several years with the growth of network-based
communications and electronic commerce. Corporate telecommuters, SOHO and
residential consumer users are increasingly accessing data networks, primarily
the Internet, to communicate, collect and publish information and conduct
business. With the increased dependence on communications networks and the
growing demand for multimedia and other bandwidth-intensive information, slow
transmission speeds have become less tolerable and can negatively affect
business productivity.
Typically, the limiting factor in overall data transmission performance is
the "last mile" of the communications infrastructure. Today there are multiple
technologies that attempt to address the need for digital high-speed last mile
connections, and while each of these technologies has certain advantages, the
cable infrastructure currently provides the highest-available absolute speed,
with peak data transmission speeds of 30 megabits per second ("Mbps") and
"always on" availability providing instant access. Cable operators have already
begun to address the burgeoning market for cable modem Internet service.
Industry sources estimate that there are currently more than 100 commercial
deployments worldwide, including sites in the U.S., Argentina, Australia,
Canada, France, The Netherlands and Switzerland. In the North American cable
market, leading cable operators have developed the Multimedia Cable Network
System ("MCNS") specification to define interoperability standards and to
accelerate the mass market residential adoption of cable modems.
The Company's principal strategy is to provide products that enhance the
value of cable operators' cable modem deployments over the life of the
investment. Cable operators can use the Company's ComUNITY Access system to
increase revenue opportunities by offering up to 16 different operator-defined
transmission rates at varying price points to multiple markets. In a typical
flat-rate cable modem system, all subscribers are charged the same price,
regardless of individual bandwidth service and pricing requirements, which
results in lost revenue to the cable operators. The Company's system is designed
to be deployed on a limited capital budget and can be upgraded and scaled as
subscriber penetration grows. The Company's system enables cable operators to
lower their ongoing cost of ownership through cost-effective noise management
and remote cable modem upgrades.
In addition to the high-speed, always-on and cost advantages of the
ComUNITY Access system, the system also supports future features and service
offerings, such as desktop video conferencing, cable telephony applications and
parallel port modem connectivity. The Company is developing an interoperable
MCNS-compliant modem for the North American cable market. The MCNS specification
is intended to address the basic requirements of the residential end-user base,
which typically tolerates lower performance and security than the business user.
The Company is leveraging its expertise in radio frequency ("RF") and noise
management technology in its MCNS-compliant cable modem and is working with
Cisco Systems, Inc. ("Cisco") to develop interoperable MCNS products that are
expected to be commercially available in the second half of 1998.
In 1997, the Company shipped approximately 170 ComCONTROLLER headends and
more than 12,000 ComPORT modems for use in 61 locations worldwide. In the North
American market, the Company sells directly to cable operators and has sold
systems to major operators such as Charter Communications, Inc. ("Charter"),
Prime Cable and TCI.Net, a subsidiary of Tele-Communications, Inc. ("TCI").
Internationally, the Company sells to systems integrators, including Philips
Broadband Networks ("Philips"), a division of Philips Electronics N.V. , and
Siemens AG ("Siemens"), which in turn sell to cable operators.
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors, in addition to the other information
contained in this Prospectus, should be carefully considered in evaluating the
Company and its business before purchasing the Common Stock offered hereby. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed below and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as those discussed elsewhere in this
Prospectus.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES; NO ASSURANCE OF
PROFITABILITY. The Company did not commence product shipments until April 1997,
and, as a result, has a limited operating history upon which investors may
evaluate the Company and its prospects. The Company has incurred net losses
since its inception and expects to continue to operate at a loss through at
least fiscal 1999. As of March 31, 1998, the Company had an accumulated deficit
of approximately $39.6 million. Because the market for the Company's products is
new and evolving, the Company cannot accurately predict the future growth rate,
if any, or the ultimate size of the data-over-cable market. To achieve
profitable operations on a continuing basis, the Company must successfully
design, develop, test, manufacture, introduce, market and distribute its
products on a broad commercial basis. There can be no assurance that the Company
will ever achieve profitability. The Company's ability to generate future
revenues will depend on a number of factors, many of which are beyond the
Company's control. Such factors include the rate at which cable operators
upgrade their cable infrastructures, the ability of the Company and cable
operators to coordinate timely and effective marketing campaigns with the
availability of such upgrades, the success of the cable operators in marketing
data-over-cable services and the Company's modems to subscribers, the prices
that the cable operators set for data transmission installation service and the
installation of subscriber site equipment, and the rate at which the cable
operators can complete the installations required to initiate service for new
subscribers. As a result of the foregoing factors, the Company is unable to
forecast its revenues or the rate at which the Company's systems will be adopted
by cable operators with any degree of accuracy. Accordingly, there can be no
assurance that the Company will ever achieve, or be able to sustain,
profitability. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's operating
results are likely to fluctuate significantly in the future on a quarterly and
annual basis as a result of a variety of factors, many of which are beyond the
Company's control. Factors that will influence the Company's operating results
include: (i) the Company's ability to retain existing cable operator customers,
to attract new customers at a steady rate, to maintain customer satisfaction and
to obtain significant orders; (ii) the timing of upgrades of cable plants to
hybrid fiber-coaxial ("HFC") and the ability and willingness of cable operators
to deploy cable modems and offer either one-way or two-way data transmission
service; (iii) the Company's ability to manage inventory and fulfillment
operations; (iv) the announcement or introduction of new services and products
by the Company and its competitors and the timely introduction of MCNS-compliant
products by the Company; (v) the Company's product mix; (vi) price competition
or pricing changes in the Internet, cable and telecommunication industries,
pricing of the Company's products and its ability to reduce to the costs of its
products over time; (vii) the level of use of the Internet as a replacement for
private wide area networks; (viii) the Company's ability to develop new products
in a timely and cost-effective manner; (ix) the amount and timing of operating
costs and capital expenditures relating to expansion of the Company's business;
operating results and infrastructure; (x) governmental regulation; and (xi)
general economic conditions and economic conditions specific to the cable and
electronic data transmission industries. In recent quarters the Company has
recognized a substantial portion of its revenues in the last month of each
quarter, and, in particular, within the last two weeks of that month. A
significant portion of the Company's expenses are fixed in advance based in
large part on future revenue forecasts. If revenues are below expectations in
any given period, the adverse impact of such a shortfall may be magnified by
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the Company's inability to adjust spending to compensate for the shortfall.
Therefore, a shortfall in revenues from those expected would have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, the Company plans to increase operating expenses to fund
additional research and development, sales and marketing and general and
administrative activities. To the extent that these expenses are not accompanied
by an increase in revenues, the Company's business, operating results and
financial condition would be materially adversely affected.
The Company anticipates that it will experience decreases in the average
selling price of its cable modem products and that it may experience declines in
the average selling prices of its other products. Any price decline that is not
offset by a decline in the cost of the product could have an adverse effect on
the Company's gross margin. The sales mix of the Company's headend equipment and
modems also affects its gross margin. The Company's modems have a lower gross
margin than does the Company's headend equipment. The Company anticipates that
its sales mix will be increasingly weighted toward lower margin modems in the
foreseeable future, as headends become more broadly deployed and as
MCNS-compliant products are deployed by cable operators. As a result, the
Company expects to experience continued downward pressure on its gross margin.
Due to all of the foregoing factors, it is likely that the Company's operating
results in one or more future periods will fail to meet or exceed the
expectations of securities analysts or investors. In such event, the trading
price of the Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
EARLY STAGE OF MARKET FOR CABLE MODEMS; UNPROVEN ACCEPTANCE OF THE
COMPANY'S PRODUCTS. The Company's success will depend on the timely adoption of
its products by cable operators and end-users. The market for the Company's
products has only recently begun to develop, is rapidly evolving and is
characterized by an increasing number of market entrants that have introduced or
developed, or are in the process of introducing or developing, cable modem
systems, including headend equipment, cable modems and system management
software, that compete with the Company's products. The Company did not commence
product shipments until April 1997. The Company shipped its ComUNITY Access
System for commercial deployment to nine cable operator customers in the second
quarter of 1997, seven cable operator customers in the third quarter of 1997 and
two cable operator customers in the first quarter of 1998. Critical issues
concerning the use of cable modems, including security, reliability, cost, ease
of deployment and administration, and quality of service, remain largely
unresolved and may adversely affect the Company's growth and the market
acceptance of its products. Because the market for the Company's products is new
and evolving, the Company cannot accurately predict the future growth rate, if
any, or the ultimate size of the cable modem market. If the market fails to
develop, or develops more slowly than expected, the Company's business,
operating results and financial condition would be materially adversely
affected. Some cable operators will, prior to purchasing the Company's products,
require that their internal technical personnel certify the Company's products
for integration into their systems. There can be no assurance that any cable
operator will certify the Company's products in a timely manner, if at all, or
that the Company, in order for its products to be certified by any cable
operator, will not have to make significant modifications to its products.
Failure to become certified could render the Company unable to deploy its
products in timely manner, or at all, with one or more cable operators. Any or
all of these possibilities could have a material adverse effect on the Company's
business, operating results and financial condition. There can be no assurance
that the market for cable modems will develop as the Company anticipates, or
that the Company will be able to compete with new entrants to the market should
the market develop. There can be no assurance that the Company's products will
achieve acceptance in their markets, and the failure of the Company's products
to achieve such market acceptance would have a material adverse effect upon the
Company's business, operating results and financial condition.
DEPENDENCE ON CABLE OPERATORS. The Company depends on cable operators to
purchase its headend equipment and cable modems and to market data transmission
service to end-users. Cable
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operators have a limited number of programming channels over which they can
offer services, and there can be no assurance that they will choose to provide
data transmission services to their subscribers. Even if a cable operator
chooses to provide data transmission services, there can be no assurance that it
would choose the Company's products. The future success of services providing
data transmission over cable will depend, in large part, upon the ability of
cable systems to support two-way communications. While many cable operators are
in the process of upgrading, or have announced their intention to upgrade, their
cable infrastructures to HFC to provide increased quality and speed of
transmission and, in certain cases, two-way transmission capabilities, many
cable operators, particularly cable operators in the U.S., have delayed their
planned upgrades. Cable operators have limited experience with such upgrades,
and investments in upgrades place a significant strain on the financial,
managerial, operational and other resources of the cable operators, most of
which are already highly leveraged and face intense competition from telephone
companies, satellite television and broadband wireless system operators. Cable
operators may not have the capital required to upgrade their infrastructure or
to offer new services that require substantial start-up costs. As a result, it
is uncertain whether cable operators will upgrade to HFC or whether they will
offer additional services, such as Internet access in the near term, or at all.
After installation, the Company will be highly dependent on cable operators to
continue to maintain their cable infrastructure in such a manner that the
Company's products will operate at a consistently high performance level and
reliable environment. Accordingly, the success and future growth of the
Company's business will be subject to economic and other factors affecting the
cable television industry generally, particularly the industry's ability to
continue to finance the substantial capital expenditures necessary to use the
Company's products effectively.
Whenever cable operators wish to upgrade their cable plants from coaxial
cable to HFC, they are required to obtain certain city and county permits. There
can be no assurance that such permits will be obtained, or even if they are
obtained, that they will be obtained in a timely and cost-effective manner.
Further, cable operators must periodically renew their franchises with city or
county governments. As a condition of obtaining such renewal, the cable operator
may have to meet certain conditions imposed by the issuing jurisdiction. Meeting
such conditions may cause the cable operator to delay upgrades or the
implementation of data over cable services. The failure of cable operators to
complete these upgrades or implement these services in a timely and satisfactory
manner, or at all, would adversely affect the market for the Company's products.
Although the Company's commercial success depends on the successful and timely
completion of these infrastructure upgrades, cable operators are under no
obligation to upgrade systems or to roll out, market or promote the Company's
products. Any failure to upgrade or delay in upgrading could have a material
adverse effect on the Company's business, operating results and financial
condition.
COMPETING TECHNOLOGIES AND EVOLVING INDUSTRY STANDARDS. The market for
high-speed data transmission services is characterized by several competing
technologies that offer alternative solutions. Competitive technologies include
telco-related wireline technologies that utilize telephone copper twisted-pair
wiring, such as Integrated Services Digital Network ("ISDN") and digital
subscriber line ("DSL") implementations, as well as wireless technologies such
as local multipoint distribution service ("LMDS"), multichannel multipoint
distribution service ("MMDS") and direct broadcast satellite ("DBS"). In
addition, new modulation technologies, such as the synchronous code division
multiple access ("S-CDMA") technology being developed by one of the Company's
competitors, may become commercially available to address upstream noise in
cable plants. Significant market acceptance of alternative solutions for
high-speed data transmission could decrease the demand for the Company's
products if such alternatives are viewed as providing faster access, greater
reliability, increased cost-effectiveness or other advantages over cable
solutions. Because of the ubiquity of the telephone network infrastructure,
competition from telco-related solutions is expected to be intense. There can be
no assurance that cable modem technology will compete effectively against
wireline or wireless technologies in the market for high bandwidth access in the
local loop.
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The Company's headend equipment and cable modem products currently are not
interoperable with the headend equipment and modems of other suppliers of
broadband Internet access products, other than certain cable modems manufactured
by 3Com Corporation ("3Com"). As a result, potential customers who wish to
purchase broadband Internet access products from multiple suppliers may be
reluctant to purchase the Company's products. The emergence or evolution of
industry standards, either through adoption by official standards committees or
widespread use by cable operators or telcos, could require the Company to
redesign its products. The Company's products are not currently in full
compliance with the standards and developing specifications proposed by Digital
Audio Video Interactive Council ("DAVIC"), MCNS, Institute of Electrical and
Electronics Engineers, Inc. ("IEEE") or Internet Engineering Task Force
("IETF"), and other relevant standards bodies. The Company expects the MCNS
standard to achieve substantial market acceptance, and the Company is currently
developing MCNS-compliant products. If such standards become widespread and the
Company's products are not in compliance, the Company's customers and potential
customers may refuse to purchase the Company's products, which would materially
adversely affect its business, operating results and financial condition.
Moreover, different implementations of the same specification could potentially
slow deployment of the Company's products if such different implementations
cause the Company's products to fail to become interoperable with other
companies' products. The anticipated widespread adoption of the MCNS standard is
likely to cause increased price competition in the North American market.
Further, such adoption could result in lower sales of headend products by the
Company in the North American market. Any such increased price competition or
reduction in sales of headend products would result in downward pressure on the
Company's gross margin, which could have a material adverse effect on the
Company's business, operating results and financial condition.
The rapid development of new competing technologies and standards increases
the risk that current or new competitors could develop products that would
reduce the competitiveness of the Company's products. Market acceptance of new
technologies or the failure of the Company to develop and introduce new products
or enhancements directed at new industry standards could have a material adverse
effect on the Company's business, operating results and financial condition.
COMPETITION. The markets for the Company's products are intensely
competitive, rapidly evolving and subject to rapid technological change. The
principal competitive factors in this market include, or are likely to include,
product performance and features, reliability, technical support and service,
relationships with cable system operators and systems integrators, compliance
with industry standards, compatibility with the products of other suppliers,
sales and distribution interoperability, strength of brand name, price,
long-term cost of ownership to cable operators and general industry and economic
conditions. Many of the Company's current and potential competitors have longer
operating histories, greater name recognition and significantly greater
financial, technical, marketing and distribution resources than the Company.
Such competitors may undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and devote substantially more resources to
developing new products than the Company. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not
materially adversely affect the Company's business, operating results and
financial condition. In response to changes in the competitive environment, the
Company may make certain pricing, service, marketing or other strategic
decisions that could have a material adverse effect on the Company's business,
operating results or financial condition. There can be no assurance that the
Company's competitors will not develop enhancements to, or future generations
of, products that will offer price or performance superior to that of the
Company's products. The Company believes that the broad adoption of MCNS will
cause increased competition in the North American market, which is likely to
negatively affect the Company's gross margin. There can be no assurance that
competitors will not more quickly develop MCNS-compliant products than the
Company. Current customers of the Company that move to the MCNS platform could
choose alternative cable modem suppliers or choose to purchase MCNS-compliant
cable modems from multiple suppliers. Such competition could materially
adversely affect the Company's business, operating results and financial
condition.
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The Company's current and potential competitors include 3Com, Cisco, the
LANcity division of Bay Networks, Inc., Hybrid Networks, Inc. ("Hybrid"),
General Instrument Corporation, Motorola, Inc., Terayon Communication Systems
and Zenith Electronics Corporation. Some of these competitors have existing
relationships with many of the Company's prospective customers. There can be no
assurance that the Company will establish relationships with cable operators who
have existing relationships with those competitors, and failure to establish
such relationships could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, the Company
anticipates that some large consumer electronics companies, such as Matsushita
Electronic Industrial Co., Ltd. (which markets products under the brand name
Panasonic)("Matsushita"), Sony Corp., Thomson Consumer Electronics International
S.A. ("Thomson") and Toshiba America, Inc., will likely introduce competitive
cable modem products in the future. As the MCNS specification is adopted for the
North American market, the distribution of cable modems may move into the retail
channel. If this occurs, the large consumer electronics companies could gain a
competitive advantage, due to their well-established retail distribution
capabilities. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive pressures
faced by the Company will not have a material adverse effect on the Company's
business, operating results and financial condition. See
"Business -- Competition."
LENGTHY SALES CYCLE. The sale of the Company's products typically involves
a significant technical evaluation and commitment of capital and other resources
by cable operators, with delays frequently associated with cable operators'
internal procedures to approve large capital expenditures, to engineer
deployment of new technologies within their networks and to test and accept new
technologies that affect key operations. For these and other reasons, the sales
cycle associated with the Company's products is typically lengthy, generally
lasting six to twelve months, and is subject to a number of significant risks,
including cable operators' budgetary constraints and internal acceptance
reviews, that are beyond the Company's control. The announcement and project
product introduction of MCNS-compliant products have already affected sales
cycles, as most domestic cable operators have chosen to delay large scale
deployment of cable modems until MCNS-compliant products are available. Because
of the lengthy sales cycle, if deployments forecasted for a specific cable
operator for a particular period are not realized in that period, the Company's
operating results for that period could be materially adversely affected.
NEED TO REDUCE COST OF MODEMS. Certain of the Company's competitors
currently offer modems at prices lower than those of the Company's modems.
Market acceptance of the Company's products, and the Company's future success,
will depend in significant part on the cost of its modems. The Company expects
that as headend equipment becomes more widely deployed, the price of modems and
other products will decline. In particular, Company believes that the adoption
of industry standards such as MCNS will cause increased price competition for
cable modems. However, there can be no assurance that the Company will be able
to reduce the cost of its modems sufficiently to enable it to compete with other
cable modem suppliers. If the Company is unable to reduce the cost of its cable
modems, its gross margin and profitability would be adversely affected. In order
to address ongoing competitive and pricing pressures, the Company will have to
reduce the cost of manufacturing its cable modems. The Company is dependent on
its manufacturers to secure components at favorable prices, and there can be no
assurance that additional volume purchase or manufacturing arrangements will be
available to the Company on terms that the Company considers acceptable, if at
all. To the extent that the Company enters into a high-volume or long-term
purchase or supply arrangement and subsequently decides that it cannot use the
products or services provided for in the agreement, the Company's business,
operating results and financial condition could be materially adversely
affected.
PATENTS AND PROPRIETARY RIGHTS; PATENT LITIGATION. The Company relies on a
combination of patent, copyright and trademark laws, and on trade secrets and
confidentiality provisions and other contractual provisions to protect its
proprietary rights. These measures afford only limited protection. The Company
currently has five issued U.S. patents and several pending patent applications.
There
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can be no assurance that the Company's means of protecting its proprietary
rights in the U.S. or abroad will be adequate or that competitors will not
independently develop similar technologies. The Company's future success will
depend in part on its ability to protect its proprietary rights to the
technologies used in its principal products. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy aspects
of the Company's products or to obtain and use trade secrets or other
information that the Company regards as proprietary. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights as fully
as do the laws of the U.S. There can be no assurance that any issued patent will
preserve the Company's proprietary position, or that competitors or others will
not develop technologies similar to or superior to the Company's technology.
Failure of the Company to enforce and protect its intellectual property rights
could have a material adverse effect on the Company's business, operating
results and financial condition.
From time to time, third parties, including competitors of the Company,
have asserted patent, copyright and other intellectual property rights to
technologies that are important to the Company. The Company expects that it 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. In this regard, in 1997 the Company received a written notice from
Hybrid in which Hybrid claimed to have patent rights in certain cable modem
technology and requested that the Company review its own products in light of
Hybrid's alleged patent rights to U.S. Patent No. 5,586,121 (the "121 patent")
issued on December 17, 1996 and entitled "Asymmetric Hybrid Access System and
Method" and U.S. Patent No. 5,347,304 (the "304 patent") issued on September 13,
1994 and entitled "Remote Link Adapter for Use in TV Broadcast Data Transmission
Systems" (collectively, the "Hybrid patents"). The Company informed Hybrid that
it believes that the Company's products do not infringe any valid claim of the
Hybrid patents. In January 1998, Hybrid filed an action against the Company in
the U.S. District Court for the Eastern District of Virginia, accusing the
Company of willfully infringing the Hybrid patents, among other claims.
Subsequently, the Company filed suit for declaratory relief against Hybrid in
the U.S. District Court for the Northern District of California asserting that
it does not infringe the Hybrid patents and that the Hybrid patents are invalid.
The Company then filed a motion in the Virginia District Court to transfer the
action filed by Hybrid to the Northern District of California, and that motion
was granted and the actions were consolidated in the Northern District of
California on April 29, 1998. Hybrid's complaint seeks injunctive relief and
unspecified damages, among other relief. Hybrid's complaint also identifies a
pending application for reissuance of the 304 patent to broaden the scope of its
claims, which the U.S. Patent and Trademark Office has allowed for reissuance
with respect to certain claims, and states that once the reissue application is
issued, it will be substituted for the 304 patent in the action. On April 21,
1998, the 304 patent was reissued; however, to date Hybrid has not moved to
amend its complaint. The Company has received opinions of its patent counsel
that the claims of the Hybrid patents, including the claims set forth in
Hybrid's 304 patent as reissued, are either invalid or not infringed by the
Company's products. However, there can be no assurance that some or all of the
Company's products will not ultimately be determined to infringe the Hybrid
patents, including the 304 patent as reissued, and the Company anticipates that
Hybrid will continue to pursue litigation with respect to these claims. The
results of any litigation matter are inherently uncertain. In the event of an
adverse result in the Hybrid litigation, or in any other litigation with third
parties that could arise in the future with respect to intellectual property
rights relevant to the Company's products, the Company could be required to pay
substantial damages, including treble damages if the Company is held to have
willfully infringed, to cease 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. There can be no assurance
that licenses will be available from Hybrid, or any other third party that
asserts intellectual property claims against the Company, on commercially
reasonable terms, or at all. In addition, litigation frequently involves
substantial expenditures and can require significant management attention, even
if the Company ultimately prevails. Accordingly, there can be no assurance that
the Hybrid matter, or any other infringement claim or litigation against or by
the Company, will not have a material adverse effect on the Company's business,
operating results and financial condition.
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Because of the early stage of this litigation, and because Hybrid has
sought unspecified damages, neither the ultimate outcome of this litigation nor
any costs and payments resulting from the litigation or any settlement can
presently be determined. Accordingly, no provision for any loss which may result
from the Hybrid litigation has been recorded in the accompanying financial
statements. "See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business -- Intellectual Property; Patent
Litigation" and Note 11 to Notes to Financial Statements.
MANAGEMENT OF GROWTH. To fully exploit the market for its products and
services, the Company must rapidly execute its sales strategy and develop new
and enhanced products while managing anticipated growth by implementing
effective planning and operating processes. To manage its anticipated growth,
the Company must, among other things, continue to implement and improve its
operational, financial and management information systems, hire and train
additional qualified personnel, continue to expand and upgrade core technologies
and effectively manage multiple relationships with various customers, suppliers
and other third parties. The Company may in the future experience difficulties
meeting the demand for its products and services. The installation and use of
the Company's products requires training. If the Company is unable to provide
training and support for its products, the implementation process will be longer
and customer satisfaction may be lower. There can be no assurance that the
Company's systems, procedures or controls will be adequate to support the
Company's operations or that the Company's management will be able to achieve
the rapid execution necessary to exploit fully the market for the Company's
products and services. Any failure of the Company to manage its growth
effectively could have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and Note 6 to Notes
to Financial Statements.
DEPENDENCE ON KEY PERSONNEL AND HIRING OF ADDITIONAL PERSONNEL. The
Company's future success will depend to a significant extent on the ability of
its management to operate effectively, both individually and as a group. Given
the Company's early stage of development, the Company is dependent on its
ability to retain and motivate high quality personnel, in addition to attracting
new personnel. Competition for qualified personnel in the cable networking
equipment and telecommunications industries is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. The Company believes that there may be only a limited number of
persons with the requisite skills to serve in those positions and it may become
increasingly difficult to hire such persons. The Company is seeking to hire
additional skilled engineers for research and development, who are in short
supply. The Company's business, operating results and financial condition could
be adversely affected if it encounters delays in hiring additional engineers.
Competitors and others have in the past and may in the future attempt to recruit
the Company's employees. The Company does not have employment contracts with any
of its key personnel, nor does it maintain key person life insurance on its key
personnel. The loss of the services of any of the key personnel, the inability
to attract or retain qualified personnel in the future or delays in hiring
required personnel, particularly engineers, could have a material adverse effect
on the Company's business, operating results and financial condition.
DEPENDENCE UPON STRATEGIC RELATIONSHIPS. The Company's business strategy
relies to a significant extent on its strategic relationships with other
companies. These relationships include software license arrangements with third
party vendors pursuant to which the Company incorporates software into its
network management system, as well as marketing arrangements with Philips and
Siemens. Further, in developing an MCNS-compliant modem the Company is working
with Cisco to ensure the interoperability of this modem with Cisco's previously
announced MCNS-compliant Universal Broadband Router. There can be no assurance
that these relationships will be successful or that the Company will continue to
maintain or develop strategic relationships or to replace strategic partners in
the event any such relationships were terminated or that licenses between the
Company and any third party will be renewed or extended at their expiration
dates. The Company's failure to renew or extend a key license or maintain any
strategic relationship could materially and adversely affect the Company's
business, operating results and financial condition.
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON THIRD-PARTY
MANUFACTURING. The Company relies on contract manufacturers for the manufacture
of certain of its products. In particular,
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the Company relies upon CMC Industries, Inc. ("CMC") for the manufacture of
printed circuit assemblies for its headend products and upon Celestica, Inc.
("Celestica") for the manufacture of its modems. The Company maintains only a
limited in-house manufacturing capability for final assembly, testing and
integration of headend products. The Company's future success will depend, in
significant part, on its ability to manufacture, or have others manufacture,
cost-effectively and in volumes sufficient to meet customer demand. There are a
number of risks associated with the Company's dependence upon third party
manufacturers, including, but not limited to, reduced control over delivery
schedules, quality assurance, manufacturing yields and costs, the potential lack
of adequate capacity during periods of excess demand, limited warranties on
products supplied to the Company, increases in prices and the potential
misappropriation of the Company's intellectual property. A manufacturing
disruption could impact the production of the Company's products for a
substantial period of time, which could have a material adverse effect on the
Company's business, operating results and financial condition. The Company has
no long-term contracts or arrangements with any of its vendors that guarantee
the availability of product, the continuation of particular payment terms or the
extension of credit limits. There can be no assurance that the Company will not
experience manufacturing or supply problems in the future from any of its
manufacturers. While to date the Company has not experienced any such
manufacturing supply problems, any such difficulties, if experienced in the
future, could have a material adverse effect on the Company's business,
operating results and financial condition.
In addition, Celestica is a foreign corporation, and the Company may
increase its use of foreign manufacturers in the future. Any foreign or domestic
regulations regarding foreign exports and imports, trade barriers and tariffs
currently in place or imposed in the future could materially and adversely
affect the Company's ability to obtain modems. Because lead times for materials
needed to produce modems and headend equipment can be between eight and 26
weeks, the Company may not be able to meet the demand for its products, which
could adversely affect the Company's ability to support cable operators'
expansion of cable modem service to cable operators' customers. The Company has
had only limited experience manufacturing and arranging for the manufacture of
its products, and there can be no assurance that the Company or any manufacturer
of the Company's products will be successful in increasing its manufacturing
volume. The Company may need to procure additional manufacturing facilities and
equipment, adopt new inventory controls and procedures, substantially increase
its personnel and revise its quality assurance and testing practices, and there
can be no assurance that any of these efforts will be successful. See
"Business -- Manufacturing."
SOLE-SOURCED COMPONENTS AND DEPENDENCY ON KEY SUPPLIERS. Certain parts,
components and equipment used in the Company's products are obtained from sole
sources of supply. The Company has designed its headend equipment to incorporate
a radio frequency modulation chip from one specific vendor, transmit/receive
components from another and the Asynchronous Transfer Mode ("ATM") headend
switch from still another. Additional sole-sourced parts may be incorporated
into the Company's headend equipment in the future. The Company anticipates
entering into long-term supply contracts to ensure sources of supply for various
components necessary to manufacture the Company's products. However, if the
Company fails to able to obtain components in sufficient quantities when
required, this failure could have an adverse impact on the Company's operating
results and financial condition. The Company's suppliers also sell products to
the Company's competitors. There can be no assurance that the Company's
suppliers will not enter into exclusive arrangements with the Company's
competitors, stop selling their products or components to the Company at
commercially reasonable prices or refuse to sell their products or components to
the Company at any price. The Company's inability to obtain sufficient
quantities of sole-sourced components, or to develop alternative sources for
components and/or products would have a material adverse effect on the Company's
business, operating result and financial condition. The Company relies on
Stanford Telecommunications, Inc. and Broadcom Corp., suppliers of demodulation
components; Atmel Corporation, the fabricator of the Company's semiconductor
devices; Virata Limited, formerly Advanced Telecommunications Modules Limited
(ATML), a supplier of ATM switches; and Hewlett-Packard Company, Wind River
Systems and Objectivity, Inc., suppliers of embedded software. If any of
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these manufacturers delay or halt production of any of the Company's products
such failure could have a material adverse effect on the Company's business,
operating results and financial condition.
CUSTOMER CONCENTRATION. The Company's customer base is highly concentrated.
A relatively small number of customers has accounted for a significant portion
of the Company's revenues to date, and the Company expects that this trend will
continue for the foreseeable future. In 1997 and the three months ended March
31, 1998, the top six customers comprised 66% and 85% of the Company's total
revenues, respectively. Further, in 1997, revenues attributable to Philips, 3Com
and Siemens accounted for 21%, 16% and 12% of total revenues, respectively. In
the three months ended March 31, 1998, revenues attributable to TCI, Philips,
Siemens, Prime Cable and Cablecom Holding AG ("Cablecom") accounted for 31%,
13%, 13%, 11% and 10% of total revenues, respectively. The Company expects that
its largest customers in future periods could be different from its largest
customers in prior periods due to a variety of factors, including customers'
deployment schedules and budget considerations. Because a limited number of
cable operators account for a majority of the Company's prospective customers,
the Company's future success will depend upon its ability to establish and
maintain relationships with these companies. Any reduction or delay in sales of
the Company's products to any of these current significant customers could have
a material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that the Company will retain
these current accounts or that it will be able to obtain additional accounts.
Both in the U.S. and internationally, a substantial majority of homes passed are
controlled by a relatively small number of cable operators. The loss of one or
more of the Company's customers or the inability of the Company to successfully
develop relationships with additional significant cable operators could have a
material adverse effect on the Company's business, operating results and
financial condition.
RISKS ASSOCIATED WITH NEW PRODUCT DEVELOPMENT. The market for cable modem
systems and products is characterized by rapidly changing technologies and short
product life cycles. The Company's future success will depend in large part upon
the Company's ability to identify and respond to emerging technological trends
in the market, develop and maintain competitive products, enhance its products
by adding innovative features that differentiate its products from those of its
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. There can be no assurance that product development and
enhancements will not take longer than planned, or that having to rework
portions of the effort will not delay the date of the targeted delivery of
future products. There can be no assurance that the Company's design and
introduction schedules for new products or additions or enhancements to its
existing and future products will be met. The Company's future success will
depend in part upon its ability to enhance its existing products and to develop
and introduce, on a timely basis, new products and features that meet changing
customer requirements and emerging industry standards. In particular, as the
MCNS specification is emerging for the North American market and the Company's
success in penetrating this market will depend on its ability to successfully
develop, introduce in a timely manner and market MCNS-compliant products. In
making new product decisions, the Company must anticipate well in advance future
demand for product features and performance characteristics, as well as
available supporting technologies, manufacturing capacity, industry standards
and competitive product offerings. The technical innovations required for the
Company to remain competitive are inherently complex and require long
development cycles. The Company will be required to continue to invest in
research and development in order to attempt to maintain and enhance its
existing technologies and products, and there can be no assurance that it will
have the funds available to do so, or that such investments will serve the needs
of customers or be compatible with changing technological requirements or
standards. Much of such expenses must be incurred before the technical
feasibility or commercial viability can be ascertained. There can be no
assurance that revenues from future products or product enhancements will be
sufficient to recover the development costs associated with such products or
enhancements.
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NEED TO DEVELOP ADDITIONAL DISTRIBUTION CHANNELS. The Company presently
focuses on selling its products to cable operators and systems integrators. The
Company believes that much of the North American cable modem market may shift to
a retail distribution model. Accordingly, the Company anticipates that it will
shift a greater amount of focus to selling its modems directly to retail
distributors and end users. Thus, it will need to focus its efforts on
developing new distribution channels for its products. There can be no assurance
that the Company will be able to develop such additional distribution channels,
or that, if the Company does establish additional channels, it will have the
capital required or the ability to hire the additional personnel necessary to
foster and enhance such distribution channels. In addition, there can be no
assurance that the Company can form relationships with retail distributors to
establish such a channel. Failure by the Company to establish such channels
could have a material adverse affect on the Company's 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.
RISKS ASSOCIATED WITH INTERNATIONAL MARKETS. In 1997 and the three months
ended March 31, 1998, revenues attributable to international customers accounted
for 64% and 50% of total revenues, respectively. The Company expects that a
significant portion of its sales will continue to be concentrated in
international markets for the foreseeable future. The Company intends to expand
operations in the international markets that it serves currently and to enter
new international markets, which will demand significant management attention
and financial commitment. There can be no assurance that the Company will
successfully expand its international operations. In addition, a successful
expansion by the Company of its international operations and sales in certain
markets will require the Company to develop relationships with international
systems integrators and distributors. There can be no assurance that the Company
will identify, attract or retain suitable international systems integrators or
distributors or, that if such parties are identified, that successful
relationships will result. Further, to increase revenues in international
markets, the Company will need to continue to establish foreign operations, to
hire additional personnel to run such operations and maintain good relations
with its foreign systems integrators and distributors. To the extent that the
Company is unable to successfully do so, the Company's growth in international
sales will be limited. The failure to expand international sales could have a
material adverse effect on the Company's business, operating results and
financial condition.
If other countries begin to regulate the cable modem industry more heavily
or introduce standards or specifications with which the Company's products do
not comply, the Company will be unable to offer products in those countries
until its products comply with such standards or specifications and the Company
may have to incur substantial cost in order to comply with such standards or
specifications. For instance, should the DAVIC standards for ATM-based digital
video be established internationally, the Company will be required to conform
its cable modems in order to compete. Further, many countries do not have
regulations for installation of cable modem systems or for upgrading existing
cable operating systems to accommodate the Company's products. Whether the
Company currently operates in such a country or enters into the market in a
country where no such regulations exist, there can be no assurance that such
regulations will not be proposed at any time, and if imposed, that they would
not place limitations on that country's cable operators' ability to upgrade to
support the Company's products. There can be no assurance that the cable
operators in such countries would be able to comply with such regulations, or
that compliance with such regulations would not require a long, costly process.
The Company's international sales to date have been denominated in U.S.
dollars. The Company does 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 the Company's products more expensive in international
markets. In addition to currency fluctuation risks, international operations
entail a number of risks not typically present in domestic operations. Such
risks include: changes in regulatory requirements; costs and risks of deploying
systems in foreign countries; availability of suitable export
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financing; timing and availability of export licenses; tariffs and other
trade-barriers; political and economic instability; difficulties in staffing and
managing foreign operations; potentially adverse tax consequences; the burden of
complying with a wide variety of complex foreign laws and treaties; difficulties
in managing distributors; difficulties in obtaining governmental approvals for
products; and the possibility of difficult accounts receivable collections.
Distributors' customer purchase agreements may be governed by foreign laws which
may differ significantly from laws of the U.S. The Company is also subject to
the risks associated with the imposition of legislation and regulations relating
to the import or export of high technology products. The Company cannot predict
whether quotas, duties, taxes or other charges or restrictions upon the
importation or exportation of the Company's products will be implemented by the
U.S. or other countries, leading to a reduction in sales and profitability in
that country. 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 the
Company's operating results. Any of these factors could materially and adversely
affect the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISKS ASSOCIATED WITH REGULATION OF INFORMATION SECURITY PRODUCTS. The
Company's products make use of encryption, and are therefore subject to export
restrictions administered by the U.S. Department of Commerce, which permit the
export of encryption products only with the required level of export license.
The Company may therefore be at a disadvantage in competing for international
sales compared to companies located outside the U.S. that are not subject to
such restrictions. International customers may be unwilling to purchase the
Company's products that are eligible for export due to perceptions that such
products are inferior to those marketed within the U.S., may contain
undocumented features which undermine the products' security architecture, or
are required to incorporate security features which are unacceptable to the
customer. Although the Company has been granted all currently required U.S.
export licenses, there can be no assurance that the Company will continue to be
able to secure such licenses in a timely manner in the future, or at all. In
certain foreign countries, the Company's distributors are required to secure
licenses or formal permission before products that incorporate encryption
features can be imported. There can be no assurance the Company's distributors
will make the effort, or be successful in the effort, to obtain the necessary
licenses or permission to import the Company's products into certain countries.
The regime of export administration, and resulting regulations in the U.S. are
in a stage of transition due to political controversy concerning their purposes
and legality. Consequently, the uncertainty concerning the interpretation and
application of such regulations may unduly delay or prevent the export of
Company's products, leading to a loss of revenues and market position.
Recent legislative proposals have indicated the possibility that the
Company's products sold for use within the U.S. may be required to incorporate
certain features to assist law enforcement agencies in recovering suspect
communications. If such proposals are enacted into law, the Company may be
obligated to incur significant expense in complying with such regulations. In
addition, the market opportunities and customer acceptance of the Company's
products could be adversely affected by the Company's compliance with such laws,
leading to a commensurate loss of revenues and market share.
YEAR 2000 COMPLIANCE. Many existing computer systems and applications, and
other control devices, use only two digits to identify a year in the date code
field, and were not designed to account for the upcoming change in the century.
As a result, such systems and applications could fail or create erroneous
results unless corrected so that they can process data related to the year 2000.
The Company relies on its systems, applications and devices in operating and
monitoring all major aspects of its business, including financial systems (such
as general ledger, accounts payable and accounts receivable modules), customer
services, infrastructure, embedded computer chips, networks and
telecommunications equipment and end products. The Company also relies, directly
and indirectly, on external systems of business enterprises such as customers,
suppliers, creditors, financial organiza-
15
<PAGE> 17
tions, and of governmental entities, both domestic and international, for
accurate exchange of data. Despite the Company's efforts to address the year
2000 impact on its internal systems, the Company has not fully identified such
impact or whether it can resolve such impact without disruption of its business
or without incurring significant expense. Based on the information currently
available, the Company believes that the costs associated with the year 2000
issue, and the consequences of incomplete or untimely resolution of the year
2000 issue, will not have a material adverse effect on its business, operating
results and financial condition in any given year. In addition, even if the
internal systems of the Company are not materially affected by the year 2000
issue, the Company could be materially adversely affected through disruption in
the operation of the enterprises with which the Company interacts.
RISKS OF PRODUCT DEFECTS, PRODUCT RETURNS AND PRODUCT LIABILITY. Products
as complex as those offered by the Company frequently contain undetected errors,
defects or failures, especially when first introduced or when new products are
released. In the past, such errors have occurred in the Company's products and
there can be no assurance that errors will not be found in the Company's current
and future products. The occurrence of such errors, defects or failures could
result in delays in installation, product returns and other losses to the
Company or to its cable operators or end-users. Such occurrence could also
result in the loss of or delay in market acceptance of the Company's products,
which could have a material adverse effect on the Company's business, operating
results and financial condition. With respect to any new products introduced,
the Company would have limited experience with the problems that could arise
with such products. Although the Company has not experienced any product
liability claims to date, the sale and support of the Company's products entails
the risk of such claims. A successful product liability claim brought against
the Company could have a material adverse effect on the Company's business,
operating results and financial condition.
GOVERNMENT REGULATIONS. The Company's products are subject to the
regulations of the Federal Communications Commission (the "FCC") and other
federal and state communications regulatory agencies. Changes in the regulatory
environment relating to the Internet connectivity market, including regulatory
changes that, directly or indirectly, affect telecommunications costs, limit
usage of subscriber-related information or increase the likelihood or scope of
competition from telecommunications companies, could affect the prices at which
cable operators sell their services and thus indirectly impact the Company. In
addition, the Company cannot predict the impact, if any, that future regulation
or regulatory changes might have on its business. Regulation of cable television
rates may affect the speed at which the cable operators upgrade their cable
infrastructures to two-way HFC.
Changes in current or future laws or regulations which negatively impact
the Company's products and technologies, in the U.S. or elsewhere, could
materially and adversely affect the Company's business, operating results and
financial condition.
DEPENDENCE ON THE INTERNET. The Company's products will depend in part upon
the increased use of the Internet by corporate telecommuters, SOHOs and
residential consumer users. Businesses are increasingly using the Internet,
intranets and extranets, not only for communication within and outside the firm,
but also to create cost-effective, secure data connections known as virtual
private networks ("VPNs") between corporate sites or remote locations. Critical
issues concerning the commercial use of the Internet, such as ease of access,
security, reliability, cost and quality of service, remain unresolved and may
affect the growth of Internet use, especially in the business and consumer
markets targeted by the Company. Despite growing interest in the commercial
possibilities for the Internet, many businesses have been deterred from adopting
Internet-based data communications systems for a number of reasons, including
inconsistent quality of service, lack of availability of cost-effective,
high-speed service, a limited number of local access points for corporate users,
inability to integrate business applications on the Internet, the need to deal
with multiple and frequently incompatible vendors, inadequate protection of the
confidentiality of stored data and information moving across the Internet and a
lack of tools to simplify Internet access and use. There can be no assurance
that such issues can be resolved and that such concerns can be alleviated.
Failure of the Internet community to address and resolve such problems, to
develop or to develop more slowly than
16
<PAGE> 18
expected could have a material adverse affect on the Company's business,
operating results and financial condition.
POTENTIAL NEED FOR ADDITIONAL CAPITAL. The Company currently anticipates
that the proceeds of the Offering, together with its existing cash balances and
available line of credit and cash flow expected to be generated from future
operations, will be sufficient to meet the Company's liquidity needs for at
least the next twelve months. However, the Company may need to raise additional
funds if its estimates of revenues, working capital and/or capital expenditure
requirements change or prove inaccurate or in order for the Company to respond
to unforeseen technological or marketing hurdles or to take advantage of
unanticipated opportunities. In addition, the Company expects to review
potential acquisitions that would complement its existing product offerings or
enhance its technical capabilities. While the Company has no current agreements
or negotiations underway with respect to any such acquisition, any future
transaction of this nature could require potentially significant amounts of
capital. There can be no assurance that any such funds will be available at the
time or times needed, or available on terms acceptable to the Company. If
adequate funds are not available, or are not available on acceptable terms, the
Company may not be able to take advantage of market opportunities, to develop
new products or otherwise respond to competitive pressures. Such inability could
have a material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CONTROL BY PRINCIPAL STOCKHOLDERS; CERTAIN ANTI-TAKEOVER PROVISIONS. A
substantial majority of the Company's capital stock is held by a limited number
of stockholders. After completion of this Offering, the Company's officers,
directors, five percent or greater stockholders and parties affiliated or
related to such persons, will own approximately 40.1% of the outstanding shares
of Common Stock. Accordingly, such stockholders are likely, for the foreseeable
future, to continue to be able to control major decisions of corporate policy
and determine the outcome of any major transaction or other matter submitted to
the Company's stockholders or Board of Directors, including potential mergers or
acquisitions involving the Company, amendments to the Company's Articles of
Incorporation and other similar transactions. Stockholders other than such
principal stockholders are therefore likely to have little or no influence on
decisions regarding such matters.
Upon completion of this Offering, the Company's Board of Directors will
have the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no current plans to issue shares of Preferred Stock.
The Company is also subject to certain provisions of Delaware law which could
have the effect of delaying, deterring or preventing a change in control of the
Company, including Section 203 of the Delaware General Corporation Law, which
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three years from the date the person
became an interested stockholder unless certain conditions are met. In addition,
the Company's certificate of incorporation and bylaws contain certain provisions
that, together with the ownership position of the officers, directors and their
affiliates, could discourage potential takeover attempts and make more difficult
attempts by stockholders to change management, which could adversely affect the
market price of the Company's Common Stock. See "Principal Stockholders" and
"Description of Capital Stock."
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS. As of March 31, 1998, and
including the conversion of all outstanding shares of Preferred Stock into
Common Stock, there were outstanding 12,764,512 shares of Common Stock held of
record by approximately 176 stockholders. The Offering will provide substantial
benefits to existing stockholders of the Company, particularly the present
directors, executive officers, principal stockholders and their affiliates and
related persons. These
17
<PAGE> 19
benefits include the creation of a public market for the Company's Common Stock,
which will afford them the ability to liquidate their investments, subject in
certain cases to volume limitations and other limitations and restrictions upon
the sale of their Common Stock. See "Risk Factors -- Shares Eligible for Future
Sale." Based upon a public offering price of $11.00 per share and a weighted
average price per share of $4.68 paid by the Company's existing stockholders,
upon the closing of the Offering, the present directors, executive officers,
principal stockholders and their affiliates and related persons will realize an
increase in the aggregate market value of the Common Stock held by them equal to
approximately $46,431,000. See "Principal Stockholders."
MANAGEMENT'S BROAD DISCRETION OVER ALLOCATION OF PROCEEDS OF THE
OFFERING. The net proceeds to the Company from the sale and issuance of the
5,000,000 shares of Common Stock offered hereby are estimated to be
approximately $50.1 million at an assumed initial public offering price of
$11.00 per share after deducting the estimated underwriting discount and the
estimated offering expenses. The primary purposes of this Offering are to obtain
additional capital, create a public market for the Common Stock and facilitate
future access to public markets. The Company expects to use the net proceeds
primarily for general corporate purposes, including working capital, product
development and capital expenditures. A portion of the net proceeds also may be
used to acquire or invest in complementary business or products or to obtain the
right to use complementary technologies. Accordingly, the Company's management
will retain broad discretion as to the allocation of the proceeds of this
Offering. The failure of management to apply such funds effectively could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Use of Proceeds."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of the
Company's Common Stock in the public market after this Offering could adversely
affect the prevailing market price of the Common Stock from time to time and
could impair the Company's ability to raise capital through the sale of equity
or debt securities. In addition to the 5,000,000 shares of Common Stock offered
hereby (assuming no exercise of the Underwriters' over-allotment option), as of
the date of this Prospectus, there will be 12,764,512 shares of Common Stock
outstanding, all of which are restricted shares ("Restricted Shares") under the
Securities Act of 1933, as amended (the "Securities Act"). As of such date, no
Restricted Shares will be eligible for sale in the public market. All 12,764,512
Restricted Shares will be available for sale in the public market following the
expiration of one hundred eighty (180)-day lock-up agreements. In addition, the
holders of warrants for 46,286 shares of Preferred Stock can exercise such
warrants at any time, but such shares cannot be sold until the expiration of the
180-day lock-up period following the date of the Prospectus. Beginning six
months after the date of this Prospectus the holders of 9,957,604 Restricted
Shares and the holders of warrants for 46,286 shares of Common Stock are
entitled to certain rights with respect to registrations of such shares for sale
in the public market, assuming no exercise of the Underwriters' over-allotment
option. If such holders sell in the public market, such sales could have a
material adverse effect on the market price of the Company's Common Stock.
Immediately after this Offering, the Company intends to file a registration
statement on Form S-8 which would allow shares issuable upon exercise of options
under the Company's 1998 Stock Option Plan to be freely tradeable, subject to
compliance with Rule 144 in the case of Affiliates of the Company and except to
the extent that such shares are subject to a market stand-off provision in each
optionee's stock purchase agreement whereby such optionee has agreed not to sell
or otherwise dispose of any shares of Common Stock for a period of one hundred
eighty (180) days after the date of the Prospectus. Such registration would
cover approximately 3,045,080 shares which includes all shares reserved under
the Company's 1998 Stock Incentive Plan and the 1998 Employee Stock Purchase
Plan. All officers and directors and certain stockholders and certain option
holders of the Company have entered into lock-up agreements generally providing
that they will not offer, pledge, sell, contract to sell, grant any option,
right or warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly (or enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of),
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for shares of Common Stock, for a period of one hundred eighty
(180) days after the date of this Prospectus,
18
<PAGE> 20
without the prior written consent of Deutsche Morgan Grenfell Inc. Deutsche
Morgan Grenfell Inc. also may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements. See "Management -- Benefit Plans," "Shares Eligible for Future Sale"
and "Underwriting."
NO PRIOR TRADING MARKET; EXPECTED VOLATILITY OF STOCK PRICE. In recent
years the stock market in general, and the market for shares of high technology
companies in particular, have experienced extreme price fluctuations, which have
often been unrelated to the operating performance of affected companies. The
trading price of the Company's Common Stock is expected to be subject to extreme
fluctuations in response to both business-related issues, such as quarterly
variations in operating results, announcements of new products by the Company or
its competitors and the gain or loss of subscribers, and stock market-related
influences, such as changes in analysts' estimates, the presence or absence of
short-selling of the Company's Common Stock and events affecting other companies
that the market deems to be comparable to the Company. In addition, technology
stocks have from time to time experienced extreme price and volume fluctuations
that often have been unrelated or disproportionate to the operating performance
of these companies. These broad market fluctuations may adversely affect the
trading price of the Company's Common Stock. There can be no assurance that the
trading price of the Company's Common Stock will not decline below its initial
offering price to the public. See "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Common Stock in this
Offering will suffer immediate and substantial dilution of $7.10 per share based
upon an assumed public offering price of $11.00 per share. To the extent that
outstanding options or warrants to purchase the Company's Common Stock are
exercised, there may be further dilution. See "Dilution."
19
<PAGE> 21
USE OF PROCEEDS
The net proceeds to the Company from the sale and issuance of the 5,000,000
shares of Common Stock offered hereby are estimated to be approximately $50.1
million (approximately $57.8 million if the Underwriters' over-allotment option
is exercised in full), at an assumed initial public offering price of $11.00 per
share and after deducting the estimated underwriting discount and the estimated
offering expenses. The Company intends to use the net proceeds for general
corporate purposes, including working capital, product development and capital
expenditures. A portion of the net proceeds may also be used to acquire or
invest in complementary businesses or products or to obtain the right to use
complementary technologies. The Company has no agreements or commitments with
respect to any such acquisition or investment, and the Company is not currently
engaged in any material negotiations with respect to any such transaction.
Pending such uses, the net proceeds of this Offering will be invested in
short-term, interest-bearing, investment grade securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying any cash dividends on its capital stock in
the foreseeable future. The Company currently intends to retain earnings, if
any, for use in its business. The Company's line of credit arrangement prohibits
the payment of dividends by the Company without the lender's prior consent.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998 (i) on an actual basis, (ii) on a pro forma basis to reflect the
conversion of the Preferred Stock into 9,957,604 shares of Common Stock upon the
effectiveness of the registration statement related to this Offering and (iii)
as adjusted to reflect the receipt by the Company of the estimated net proceeds
from the sale of the 5,000,000 shares of Common Stock offered by the Company
hereby at an assumed initial public offering price of $11.00 per share and after
deducting the estimated underwriting discount and the estimated offering
expenses:
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Current portion of long-term obligations.................... $ 1,219 $ 1,219 $ 1,219
-------- -------- ----------
Long-term obligations....................................... $ 1,441 $ 1,441 $ 1,441
-------- -------- ----------
Stockholders' equity:
Preferred Stock, $0.001 par value per share; 22,000,000
shares authorized, actual and pro forma, 5,000,000
shares authorized, as adjusted; 9,957,604 shares issued
and outstanding, actual, no shares issued and
outstanding, pro forma and as adjusted.................. 10 -- --
Common Stock, $0.001 par value per share; 35,000,000
shares authorized, actual and pro forma, 40,000,000
shares authorized, as adjusted; 2,806,908 shares issued
and outstanding, actual, 12,764,512 shares issued and
outstanding, pro forma and 17,764,512 shares issued and
outstanding, as adjusted(1)............................. 3 13 18
Additional paid-in capital................................ 58,784 58,784 108,879
Deferred stock compensation............................... (108) (108) (108)
Accumulated deficit....................................... (39,568) (39,568) (39,568)
-------- -------- ----------
Total stockholders' equity.............................. 19,121 19,121 69,221
-------- -------- ----------
Total capitalization............................... $ 21,781 $ 21,781 $ 71,881
======== ======== ==========
</TABLE>
- ---------------
(1) Excludes: (i) 1,420,967 shares of Common Stock issuable upon exercise of
stock options outstanding under the Company's 1998 Stock Incentive Plan at a
weighted average exercise price of $2.64 per share; (ii) 1,102,543 shares of
Common Stock reserved for future issuance under the Company's 1998 Stock
Incentive Plan (which includes a 500,000-share increase in the 1998 Plan
approved on April 22, 1998 and from which reserve options to purchase
505,250 shares at $9.00 per share were granted on April 22, 1998); (iii)
250,000 shares of Common Stock reserved for future issuance under the 1998
Employee Stock Purchase Plan; and (iv) 46,286 shares of Common Stock
issuable upon the exercise of outstanding warrants at a weighted average
exercise price of $7.76 per share. See "Management -- Option Grants Under
the 1998 Stock Incentive Plan," "Management -- Benefit Plans" and Notes 6
and 11 of Notes to Financial Statements.
20
<PAGE> 22
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1998
was approximately $19,121,000, or $1.50 per share of Common Stock. "Pro forma
net tangible book value per share" represents the amount of total tangible
assets less total liabilities, divided by the number of shares of Common Stock
then outstanding, assuming the conversion of all outstanding shares of Preferred
Stock into shares of Common Stock upon the effectiveness of the registration
statement related to this Offering. After giving effect to the sale by the
Company of the 5,000,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $11.00 per share (after deducting the estimated
underwriting discount and the estimated offering expenses), the Company's pro
forma net tangible book value as of March 31, 1998 would have been $69,221,000,
or $3.90 per share of Common Stock. This represents an immediate increase in pro
forma net tangible book value of $2.40 per share to existing stockholders and an
immediate dilution of $7.10 per share to new public investors. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share as of March
31, 1998............................................... $1.50
Increase per share attributable to new investors.......... 2.40
-----
Pro forma net tangible book value per share after the
Offering.................................................. 3.90
------
Dilution per share to new investors......................... $ 7.10
======
</TABLE>
The following table summarizes, as of March 31, 1998, on the pro forma
basis described above, the difference between the number of shares of Common
Stock purchased from the Company, the total consideration paid and the average
price per share paid by the existing stockholders and by new public investors
purchasing shares of Common Stock in this Offering (before deducting the
estimated underwriting discount and the estimated offering expenses):
<TABLE>
<CAPTION>
WEIGHTED
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 12,764,512 71.9% $ 59,765,634 52.1% $4.68
New investors................ 5,000,000 28.1% 55,000,000 47.9% 11.00
---------- ----- ------------ -----
Total.............. 17,764,512 100.0% $114,765,634 100.0%
========== ===== ============ =====
</TABLE>
The foregoing computations are based on the number of shares of Common
Stock outstanding as of March 31, 1998 and exclude 1,420,967 shares of Common
Stock issuable upon exercise of stock options outstanding under the Company's
1998 Stock Incentive Plan at a weighted average exercise price of $2.64 per
share, 1,102,543 shares of Common Stock reserved for future issuance under the
Company's 1998 Stock Incentive Plan (which includes a 500,000-share increase in
the 1998 Plan approved on April 22, 1998 from which reserve options to purchase
505,250 shares at $9.00 per share were granted on April 22, 1998), 250,000
shares of Common Stock reserved for future issuance under the 1998 Employee
Stock Purchase Plan, and 46,286 shares of Common Stock issuable upon the
exercise of outstanding warrants at an average exercise price of $7.76 per
share. To the extent that any of these options or warrants are exercised, there
could be further dilution to new investors. See "Capitalization,"
"Management -- Option Grants Under the 1998 Stock Incentive Plan,"
"Management -- Benefit Plans," "Description of Capital Stock" and Notes 6 and 11
of Notes to Financial Statements.
21
<PAGE> 23
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The statements of operations data for
each of the years in the three-year period ended December 31, 1997, and the
balance sheets data at December 31, 1996 and 1997, are derived from financial
statements of the Company which have been audited by Deloitte & Touche LLP,
independent auditors, and are included herein. The statements of operations data
for the years ended December 31, 1993 and 1994 and the balance sheets data at
December 31, 1993, 1994 and 1995 are derived from audited financial statements
not included herein. The statements of operations data for the three-month
periods ended March 31, 1997 and 1998 and the balance sheet data at March 31,
1998 are derived from unaudited interim financial statements included elsewhere
in this Prospectus and include, in the opinion of the Company, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's results of operations for those periods and
financial position at that date. The historical results are not necessarily
indicative of the operating results to be expected in the future.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
----- ------ ------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenues........................... $ -- $ -- $ -- $ 1,000 $ 15,649 $ 500 $ 7,020
Cost of total revenues................... -- -- -- -- 8,372 -- 4,676
----- ------ ------- -------- -------- ------- -------
Gross profit......................... -- -- -- 1,000 7,277 500 2,344
Operating expenses:
Research and development............... 79 545 5,233 12,395 13,481 3,128 4,278
Sales and marketing.................... -- -- 770 1,970 5,277 870 1,803
General and administrative............. 60 349 919 1,548 1,782 367 580
----- ------ ------- -------- -------- ------- -------
Total operating expenses................. 139 894 6,922 15,913 20,540 4,365 6,661
Loss from operations..................... (139) (894) (6,922) (14,913) (13,263) (3,865) (4,317)
Total other income....................... -- 58 257 447 229 37 94
----- ------ ------- -------- -------- ------- -------
Loss before income taxes................. (139) (836) (6,665) (14,466) (13,034) (3,828) (4,223)
Income taxes............................. -- 1 1 5 21 -- 9
----- ------ ------- -------- -------- ------- -------
Net loss........................ $(139) $ (837) $(6,666) $(14,471) $(13,055) $(3,828) $(4,232)
===== ====== ======= ======== ======== ======= =======
Net loss per share, basic and
diluted(1)............................. $ -- $(0.54) $ (3.53) $ (7.64) $ (6.15) $ (1.95) $ (1.69)
===== ====== ======= ======== ======== ======= =======
Shares used in computation,
basic and diluted(1)................... -- 1,562 1,887 1,894 2,124 1,968 2,497
===== ====== ======= ======== ======== ======= =======
Pro forma net loss per share, basic and
diluted(2)............................. $ (1.27) $ (0.43) $ (0.34)
======== ======= =======
Shares used in pro forma computation,
basic and diluted(2)................... 10,279 8,909 12,455
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
----- ------ ------- -------- -------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEETS DATA:
Cash and cash equivalents................ $ 7 $2,082 $ 3,273 $ 12,427 $ 17,950 $14,082
Working capital (deficit)................ (321) 2,023 2,328 9,097 19,523 15,508
Total assets............................. 21 2,308 4,606 17,036 31,573 28,377
Long-term obligations.................... -- -- 275 1,292 1,508 1,441
Total stockholders' equity (deficit)..... (307) 2,222 3,288 12,056 23,283 19,121
</TABLE>
- ---------------
(1) The diluted net loss per share computation excludes potential shares of
Common Stock (Convertible Preferred Stock, warrants to purchase Convertible
Preferred Stock, options to purchase Common Stock and Common Stock subject
to repurchase rights held by the Company), as their effect would be
antidilutive. See Note 1 of Notes to Financial Statements for a detailed
explanation of the determination of the shares used in computing basic and
diluted net loss per share.
(2) Includes the weighted average number of shares resulting from the assumed
conversion of all outstanding shares of Convertible Preferred Stock upon the
effectiveness of the registration statement related to this Offering. See
Note 1 of Notes to Financial Statements for a detailed explanation of the
determination of the shares used in computing pro forma net loss per share.
The diluted pro forma net loss per share computation excludes potential
shares of Common Stock (warrants to purchase Convertible Preferred Stock,
options to purchase Common Stock and Common Stock subject to repurchase
rights by the Company).
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's financial statements and notes
thereto included elsewhere in this Prospectus. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in such
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed below and in "Risk Factors" and
"Business," as well as those discussed elsewhere in this Prospectus.
OVERVIEW
Com21, Inc. ("the Company" or "Com21") designs, develops, markets and sells
value-added, high-speed communications solutions for the broadband access
market. The Company's ComUNITY Access system enables cable operators to provide
high-speed, cost-effective Internet access to corporate telecommuter, small
office/home office ("SOHO") and residential users in the U.S. and
internationally, and enables them to address the distinct price, performance,
security and other needs of these different end-user groups. Com21's products
include headend equipment, subscriber cable modems, network management software
and noise containment technologies.
The Company was incorporated in June 1992. From inception through April
1997, the Company's operating activities related primarily to establishing a
research and development organization, testing prototype designs, building
application-specific integrated circuit ("ASIC") design infrastructure,
commencing the staffing of marketing, sales and field service and technical
support organizations and establishing manufacturing relationships. Since the
Company's first customer shipment in April 1997, the Company has also focused on
commencing trials with cable operators, developing customer relationships,
marketing the Com21 brand, investing in field service and customer support,
continuing to develop new products and technologies and to enhance existing
products. Since inception, the Company has incurred significant losses and, as
of March 31, 1998, had an accumulated deficit of $39.6 million. See "Risk
Factors -- Limited Operating History; History of Losses; No Assurance of
Profitability."
The Company's revenues consist primarily of sales of headend equipment,
cable modems and, to a lesser extent, the licensing of network management
software. The Company recognizes revenue upon commercial shipment of its
products. As the cable operators that purchase the Company's products make
data-over-cable services broadly available to their customers, the Company
expects its product mix to shift more heavily toward sales of cable modems.
Pursuant to a Technology License and Reseller Agreement with 3Com (the "3Com
Agreement"), the Company received certain non-refundable technology fees in the
quarters ended June 30, 1996 and March 31, 1997. In addition, the terms of the
3Com Agreement provide that, until December 31, 1998, 3Com is obligated to pay a
per unit royalty fee on sales by 3Com of the first 100,000 cable modems
incorporating the Company's technology. 3Com prepaid $1.0 million of this
obligation in April 1996, and the Company recorded this payment as deferred
revenue. The Company will earn such revenues on the earlier of (i) the sale of
the Company's cable modems by 3Com or (ii) at the expiration of the royalty
period on December 31, 1998. Through March 31, 1998 an aggregate of
approximately $1.5 million has been recognized as technology licensing fees and
royalties pursuant to this agreement. See "Certain Transactions," and Note 9 of
Notes to Financial Statements.
To date, gross margin on sales of headend and related equipment and
software licenses has been significantly higher than gross margin on sales of
cable modems. The Company expects to experience decreasing average selling
prices of its cable modems due to greater competition and price sensitivity of
cable modem sales particularly as interoperable MCNS-compliant products become
widely available from multiple vendors. The Company expects that gross margin on
sales of headend equipment will continue to be higher than gross margin on sales
of cable modems for the foreseeable future. As a result, the Company expects
that gross margin will decline in 1998 as sales of cable modems increase as a
percentage of total product revenues.
Com21 tests and assembles the ComCONTROLLER headend equipment in the
Company's facility in Milpitas, California. Com21 outsources turnkey
manufacturing of the ComPORT cable modem to Celestica, a contract manufacturer
located in Toronto, Canada. The Company has taken, and continues to take, steps
to reduce the manufacturing costs of its cable modem products by consolidating
functionality and
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<PAGE> 25
component parts into ASICs, making them easier to manufacture, using parts the
Company believes will be sold in high volume by a number of vendors. The Company
is also working with Celestica to facilitate more efficient manufacturing of the
Company's cable modems and to enable Com21 to benefit from Celestica's volume
purchasing capability. However, there can be no assurance that such
cost-reduction efforts will be successful. See "Risk Factors -- Need to Reduce
Cost of Modems" and "-- Limited Manufacturing Experience; Dependence on Third
Party Manufacturing."
Research and development expenses consist principally of salaries and
related personnel expenses, consultant fees and prototype expenses related to
the design, development, testing and enhancement of headend equipment, cable
modems and network management software. As of March 31, 1998, all research and
development costs had been expensed as incurred. The Company believes that
continued investment in research and development is critical to attaining its
strategic product and cost reduction objectives and, as a result, expects these
expenses to increase significantly in absolute dollars in the future. Sales and
marketing expenses consist of salaries and related expenses for personnel
engaged in marketing, sales and field service support functions, as well as
trade show and promotional expenditures. The Company intends to pursue sales and
marketing campaigns aggressively and therefore expects these expenses to
increase significantly in absolute dollars in the future. In addition, the
Company expects that it may be required to devote resources to the development
of a retail or other end user sales channel, which would also result in an
increase in sales and marketing expenses. General and administrative expenses
consist primarily of salaries and related expenses for executive, accounting and
administrative personnel, recruiting expenses, professional fees and other
general corporate expenses. The Company expects general and administrative
expenses to increase in absolute dollars as the Company adds personnel and
incurs additional costs related to the growth of its business and operation as a
public company. One of the Company's challenges to future success is its ability
to attract and retain qualified personnel which is partly dependent on the
compensation package the Company can offer these personnel. An important
component of the compensation package offered by the Company is the grant of
stock options. The Board of Directors in granting stock options determines fair
market value of the Common Stock underlying such options on the date of grant
after taking into consideration many factors applicable to the Company's
business environment. See "Risk Factors -- Dependence on Key Personnel and
Hiring of Additional Personnel" and Note 6 of Notes to Financial Statements.
The Company relies on its systems, applications and devices in operating
and monitoring all major aspects of its business, including its financial
systems. The Company also relies, directly or indirectly, on the external
systems of business enterprises such as customers and suppliers. Despite the
Company's efforts to address the year 2000 impact on its internal systems, the
Company has not fully identified such impact or whether it can resolve such
impact without disruption of its business or without incurring significant
expense. Based on the information currently available, the Company believes that
the costs associated with the year 2000 issue, and the consequences of
incomplete or untimely resolution of the year 2000 issue, will not have a
material adverse effect on the Company's business, operating results and
financial condition in any given year. In addition, even if the internal systems
of the Company are not materially affected by the year 2000 issue, the Company's
business, operating results and financial condition could be materially
adversely affected through disruption in the operation of the enterprises with
which the Company interacts. See "Risk Factors -- Year 2000 Compliance."
The Company did not commence product shipments until April 1997, and, as a
result, has a limited operating history upon which investors may evaluate the
Company and its prospects. The Company has incurred net losses since its
inception and expects to continue to operate at a loss through at least fiscal
1999. As of March 31, 1998, the Company had an accumulated deficit of
approximately $39.6 million. Because the market for the Company's products is
new and evolving, the Company cannot accurately predict the future growth rate,
if any, or the ultimate size of the data-over-cable market. To achieve
profitable operations on a continuing basis, the Company must successfully
design, develop, test, manufacture, introduce, market and distribute its
products on a broad commercial basis. There can be no assurance that the Company
will ever achieve profitability. The Company's ability to generate future
revenues will depend on a number of factors, many of which are beyond the
Company's control. Such factors include the rate at which cable operators
upgrade their cable infrastructures, the ability of the Company and cable
operators to coordinate timely and effective marketing campaigns with the
availability of such upgrades, the success of the cable operators in marketing
data-over-cable services and the Company's modems to subscribers, the prices
that the cable operators set for data transmission installation service and the
installation of subscriber site
24
<PAGE> 26
equipment, and the rate at which the cable operators can complete the
installations required to initiate service for new subscribers. As a result of
the foregoing factors, the Company is unable to forecast its revenues or the
rate at which the Company's systems will be adopted by cable operators with any
degree of accuracy. Accordingly, there can be no assurance that the Company will
ever achieve, or be able to sustain, profitability. See "Risk Factors -- Limited
Operating History; History of Losses; No Assurance of Profitability."
From time to time, third parties, including competitors of the Company,
have asserted patent, copyright and other intellectual property rights to
technologies that are important to the Company. In 1997 the Company received a
written notice from Hybrid in which Hybrid claimed to have patent rights in
certain cable modem technology and requested that the Company review its own
products in light of Hybrid's alleged patent rights. In January 1998, Hybrid
filed an action against the Company in the U.S. District Court for the Eastern
District of Virginia, accusing the Company of willfully infringing the Hybrid
patents, among other claims. Subsequently, the Company filed suit for
declaratory relief against Hybrid in the U.S. District Court for the Northern
District of California asserting that it does not infringe the Hybrid patents
and that the Hybrid patents are invalid. The Company then filed a motion in the
Virginia District Court to transfer the action filed by Hybrid to the Northern
District of California, and that motion was granted and the actions were
consolidated in the Northern District of California on April 29, 1998. The
Company has received opinions of its patent counsel that the claims of the
Hybrid patents are either invalid or not infringed by the Company's products.
However, there can be no assurance that some or all of the Company's products
will not ultimately be determined to infringe the Hybrid patents, and the
Company anticipates that Hybrid will continue to pursue litigation with respect
to these claims. The results of any litigation matter are inherently uncertain.
In the event of an adverse result in the Hybrid litigation, the Company could be
required to pay substantial damages, including treble damages if the Company is
held to have willfully infringed, to cease 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. There can be no
assurance that licenses will be available from Hybrid on commercially reasonable
terms, or at all. In addition, litigation frequently involves substantial
expenditures and can require significant management attention, even if the
Company ultimately prevails. Accordingly, there can be no assurance that the
Hybrid matter will not have a material adverse effect on the Company's business,
operating results and financial condition.
Because of the early stage of this litigation and because Hybrid has sought
unspecified damages, neither the ultimate outcome of this litigation nor any
costs and payments resulting from the litigation or any settlement can presently
be determined. Accordingly, no provision for any loss which may result from the
Hybrid litigation has been recorded in the accompanying financial statements.
See "Risk Factors -- Patents and Proprietary Rights," "Business -- Intellectual
Property, Patent Litigation" and Note 11 to Notes to Financial Statements.
On May 13, 1998, the Company filed an amendment to its Amended and Restated
Certificate of Incorporation to effect a one-for-two reverse split of the
outstanding shares of common and convertible preferred stock. All share and per
share amounts in this Prospectus have been adjusted to give effect to the
reverse stock split.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 1997 AND 1998
Total Revenues. Total revenues increased from $500,000 in the first quarter
of 1997 to $7.0 million in the first quarter of 1998. Total revenues for the
first quarter of 1997 consisted entirely of a technology licensing fee of
$500,000 pursuant to the 3Com Agreement. Total revenues for the first quarter of
1998 consisted primarily of sales of headend and related equipment and cable
modems and, to a lesser extent, network management software fees. Total revenues
attributable to international customers accounted for 50% of total revenues for
the first quarter of 1998.
Cost of Total Revenues. The Company did not record product sales in the
first quarter of 1997. Cost of total revenues was $4.7 million in the first
quarter of 1998 and consisted primarily of materials and software technology
fees paid to third parties. For the first quarter of 1998, gross margin was
33.4% as compared to 42.2% in the quarter ended December 31, 1997. The decrease
in gross
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<PAGE> 27
margin was attributable to the decrease in license fees from network management
software and increased sale of cable modems as a percentage of sales.
Research and Development. Research and development expenses increased from
$3.1 million in the first quarter of 1997 to $4.3 million in the first quarter
of 1998. The increase was attributable to higher costs related to increased
personnel, greater consulting costs and higher depreciation as more equipment
was purchased to support added development.
Sales and Marketing. Sales and marketing expenses increased from $870,000
in the first quarter of 1997 to $1.8 million for the same quarter of 1998. The
increase was attributable to higher costs associated with increased personnel,
commissions on sales, consulting and more trade advertising and promotion.
General and Administrative. General and administrative expenses increased
from $367,000 in the first quarter of 1997 to $580,000 for the same quarter of
1998. The increase was attributable to higher legal expenses, higher consulting
costs and increased salary costs.
Total Other Income. Total other income increased from $37,000 in the first
quarter of 1997 to $94,000 for the same quarter of 1998. The increase was
attributable to higher earnings on cash balances available during the first
quarter of 1998.
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Total Revenues. Total revenues increased from $1.0 million in 1996 to $15.6
million in 1997. During 1995, the Company was primarily engaged in product
development and, accordingly, did not record any revenues. Total revenues in
1996 consisted entirely of technology licensing fees from the 3Com Agreement.
Total revenues in 1997 consisted of an additional technology licensing fee of
$500,000 pursuant to the 3Com Agreement and $15.1 million from the sale of
products that commenced in April 1997. A majority of revenues attributable to
product sales during 1997 resulted from sales of headend and related equipment,
cable modems and network management software fees. Revenues attributable to
international customers were 64% of total revenues in 1997. The Company expects
to derive a significant portion of its revenues from international markets for
the foreseeable future. The Company intends to expand operations in the
international markets that it serves currently and to enter new international
markets, which will demand significant management attention and financial
commitment. To date, revenues attributable to international customers have been
denominated in U.S. dollars. The Company does 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 the Company's products more
expensive in international markets. See "Risk Factors -- Risks Associated with
International Markets" and Note 8 of Notes to Financial Statements.
Cost of Total Revenues. Cost of total revenues was $8.4 million in 1997.
The Company commenced product shipments in April 1997 and therefore did not
incur any costs associated with the sale of products in 1995 or 1996. Cost of
total revenues in 1997 consisted primarily of materials cost and software
technology license fees paid to third parties. In 1997 the Company's gross
margin was 46.5%. The Company expects that gross margin will decline in 1998 as
sales of cable modems increase as a percentage of total product revenues.
Research and Development. Research and development expenses increased from
$5.2 million in 1995 to $12.4 million in 1996 and $13.5 million in 1997. The
increases for both 1996 and 1997 were primarily the result of increased
personnel in the Company's research and development organization associated with
product development.
Sales and Marketing. Sales and marketing expenses increased from $770,000
in 1995 to $2.0 million in 1996 and $5.3 million in 1997. The increases for both
1996 and 1997 were primarily due to higher costs associated with increased
personnel in the Company's sales and marketing organizations. The increase in
1997 also reflects the significant costs associated with the increased selling
efforts resulting from the commencement of the commercial shipment of the
Company's
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<PAGE> 28
products in April 1997. These costs include travel expenses, trade shows, print
advertising, public relations and other promotional costs. The Company expects
sales and marketing expenses to increase on both an absolute dollar basis and as
a percentage of sales in 1998 primarily because the Company will incur selling
expenses for twelve months of commercial selling efforts, as opposed to nine
months in 1997.
General and Administrative. General and administrative expenses increased
from $919,000 in 1995 to $1.5 million in 1996 and $1.8 million in 1997. The
increases in both 1996 and 1997 were primarily attributable to increased
personnel in the Company's finance and administrative organization, as well as
increased professional fees.
Total Other Income. Total other income increased from $257,000 in 1995 to
$447,000 in 1996 and decreased to $229,000 in 1997. The increase in 1996 was
primarily attributable to higher earnings on cash balances as a result of higher
average cash and cash equivalents balances in 1996. The decrease in 1997 was
primarily attributable to interest expense associated with capital leases as
well as a charge for the issuance of warrants in connection with establishing a
line of credit, offset in part by higher earnings on increased average cash
balances.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited statements of operations
data in dollars and as a percentage of total revenues for the Company's five
most recent quarters. In management's opinion, this unaudited information has
been prepared on the same basis as the annual financial statements and includes
all adjustments necessary (consisting only of normal recurring adjustments) to
present fairly the unaudited quarterly results. This information should be read
in conjunction with the financial statements and related notes thereto included
elsewhere in this Prospectus. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1997 1998
--------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenues..................... $ 500 $ 2,878 $ 5,577 $ 6,694 $ 7,020
Cost of total revenues............. -- 1,520 2,986 3,866 4,676
------- ------- ------- ------- ---------
Gross profit....................... 500 1,358 2,591 2,828 2,344
Operating expenses:
Research and development......... 3,128 3,041 3,309 4,003 4,278
Sales and marketing.............. 870 1,145 1,363 1,899 1,803
General and administrative....... 367 405 432 578 580
------- ------- ------- ------- ---------
Total operating expenses...... 4,365 4,591 5,104 6,480 6,661
------- ------- ------- ------- ---------
Loss from operations............... (3,865) (3,233) (2,513) (3,652) (4,317)
Total other income (expense)....... 37 (18) 34 176 94
------- ------- ------- ------- ---------
Loss before income taxes........... (3,828) (3,251) (2,479) (3,476) (4,223)
Income taxes....................... -- 12 2 7 9
------- ------- ------- ------- ---------
Net loss........................... $(3,828) $(3,263) $(2,481) $(3,483) $ (4,232)
======= ======= ======= ======= =========
</TABLE>
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<PAGE> 29
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1997 1998
--------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Total revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of total revenues............. -- 52.8 53.5 57.8 66.6
------- ------- ------- ------- ---------
Gross margin....................... 100.0 47.2 46.5 42.2 33.4
Operating expenses:
Research and development......... 625.6 105.6 59.4 59.8 60.9
Sales and marketing.............. 174.0 39.8 24.4 28.4 25.7
General and administrative....... 73.4 14.1 7.8 8.6 8.3
------- ------- ------- ------- ---------
Total operating expenses...... 873.0 159.5 91.6 96.8 94.9
------- ------- ------- ------- ---------
Loss from operations............... (773.0) (112.3) (45.1) (54.6) (61.5)
Total other income (expense)....... 7.4 (0.7) 0.6 2.7 1.3
------- ------- ------- ------- ---------
Loss before income taxes........... (765.6) (113.0) (44.5) (51.9) (60.2)
Income taxes....................... -- 0.4 -- 0.1 0.1
------- ------- ------- ------- ---------
Net loss........................... (765.6)% (113.4)% (44.5)% (52.0)% (60.3)%
======= ======= ======= ======= =========
</TABLE>
Total revenues from inception through March 31, 1997 were limited to
technology licensing fees earned under the 3Com Agreement. The Company commenced
product sales in April 1997, and in the quarters ended June 30, 1997, September
30, 1997, December 31, 1997 and March 31, 1998 recorded total revenues of $2.9
million, $5.6 million, $6.7 million and $7.0 million, respectively. During 1997
and in the three months ended March 31, 1998, revenues attributable to
international customers constituted 64% and 50% of total revenues, respectively.
During 1997 and in the three months ended March 31, 1998, approximately 97% and
100% of the Company's total revenues, respectively, were derived from sales of
headend and related equipment, cable modems and network management software
fees. Cost of total revenues increased sequentially for each quarter presented
on an absolute dollar basis as a result of increased revenues in each period.
Cost of total revenues also increased as a percentage of revenues primarily due
to an increase in sales of cable modems as a percentage of product revenues.
Over the past five quarters, total operating expenses increased in dollar
amount. The Company incurred significant research and development expenses from
inception through March 31, 1997 associated with prototype development and
testing in connection with the headend and cable modem products that were
commercially introduced in April 1997. Research and development expenses
declined in dollar amount in the second quarter of 1997 due to completion of the
Company's initial products but increased in dollar amount in the subsequent two
fiscal quarters due to the development efforts related to new products and the
enhancement of existing products. Sales and marketing expenses increased in
dollar amount in each quarter of 1997 and as a percentage of revenues in the
quarter ended December 31, 1997, as compared to the prior quarter, as a result
of increased personnel and spending on trade shows, print advertising, public
relations and other promotional expenditures to build brand awareness. General
and administrative expenses increased in dollar amount in each quarter presented
as a result of increased salaries, recruiting costs associated with the hiring
of additional personnel and increased professional fees.
The Company's operating results are likely to fluctuate significantly in
the future on a quarterly and annual basis as a result of a variety of factors,
many of which are beyond the Company's control. Factors that will influence the
Company's operating results include: (i) the Company's ability to retain
existing cable operator customers, to attract new customers at a steady rate, to
maintain customer satisfaction and to obtain significant orders; (ii) the timing
of upgrades of cable systems to HFC and the ability and willingness of cable
operators to deploy cable modems and offer either one-way or two-
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<PAGE> 30
way data transmission service; (iii) the Company's ability to manage inventory
and fulfillment operations; (iv) the announcement or introduction of new
services and products by the Company and its competitors and the timely
introduction of MCNS-compliant products by the Company; (v) the Company's
product mix; (vi) price competition or pricing changes in the Internet, cable
and telecommunications industries, pricing of the Company's products and its
ability to reduce to the costs of its products over time; (vii) the level of use
of the Internet as a replacement for private wide area networks; (viii) the
Company's ability to develop new products in a timely and cost-effective manner;
(ix) the amount and timing of operating costs and capital expenditures relating
to expansion of the Company's business, operating results and infrastructure;
(x) governmental regulation; and (xi) general economic conditions and economic
conditions specific to the cable and electronic data transmission industries. In
recent quarters the Company has recognized a substantial portion of its revenues
in the last month of each quarter, and, in particular, within the last two weeks
of that month. A significant portion of the Company's expenses are fixed in
advance based in large part on future revenue forecasts. If revenues are below
expectations in any given period, the adverse impact of the shortfall on the
Company's operating results may be magnified by the Company's inability to
adjust spending to compensate for the shortfall. Therefore, a shortfall in
revenues from those expected would have a material adverse effect on the
Company's business, operating results and financial condition. In addition, the
Company plans to increase operating expenses to fund additional research and
development, sales and marketing and general and administrative activities. To
the extent that these expenses are not accompanied by an increase in revenues,
the Company's business, operating results and financial condition would be
materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private sales of Common Stock and Preferred Stock which, through March 31, 1998,
provided net cash proceeds of approximately $58.6 million. Net cash used in
operating activities in 1996 was $11.6 million and was primarily attributable to
a net loss of $14.5 million, partially offset by $1.0 million in deferred
revenue from the 3Com Agreement, an increase in accounts payable and accrued
expenses, and depreciation and amortization expenses. Cash used in investing
activities in 1996 consisted of $2.3 million in capital expenditures primarily
to support its engineering activities. Cash flows from financing activities were
$23.1 million in 1996 and consisted primarily of $23.2 million of net proceeds
from the issuance of Series F Preferred Stock partially offset by the net
repayment on borrowing arrangements.
Net cash used in operating activities in 1997 was $16.1 million and
resulted primarily from a net loss of $13.1 million and the increase of $5.0
million and $2.6 million in total accounts receivable and inventories,
respectively, offset in part by a total increase of $2.4 million in accounts
payable, accrued expenses and other current liabilities and $2.2 million in
depreciation and amortization expenses. Cash used in investing activities in
1997 consisted of $2.1 million in capital expenditures primarily to support
product development and manufacturing activities. Cash flows from financing
activities in 1997 consisted primarily of net proceeds of $23.7 million from the
issuance of Series E Preferred Stock and Series G Preferred Stock and $530,000
from the sale of Common Stock upon exercise of stock options.
Net cash used in operating activities in the three months ended March 31,
1998 was $3.3 million and resulted primarily from a net loss of $4.2 million and
an increase in total accounts receivable of $1.4 million offset primarily by a
decrease of $974,000 in inventories and an increase of $830,000 in accounts
payable. Cash used in investing activities in the three months ended March 31,
1998 consisted of $389,000 in capital expenditures primarily to support product
development and manufacturing activities. Net cash used in financing activities
in the three months ended March 31, 1998 was $199,000 and consisted primarily of
repayments on debt and capital lease obligations.
In future periods, the Company anticipates significant increases in working
capital on a period-to-period basis primarily as a result of planned increased
product sales and higher relative levels of inventory. The Company contracts for
the manufacture of cable modems and integrated circuit boards
30
<PAGE> 31
on a turnkey basis. The Company has no long-term contracts or arrangements with
any of its vendors that guarantee the availability of product, the continuation
of particular payment terms or the extension of credit limits. The Company's
future success will depend, in significant part, on its ability to manufacture,
or have others manufacture, its products successfully, cost-effectively and in
volumes sufficient to meet customer demand. The Company's dependence upon third
party manufacturers involves a number of risks. See "Risk Factors -- Limited
Manufacturing Experience; Dependence on Third Party Manufacturing."
At March 31, 1998, the Company had $14.1 million of cash and cash
equivalents. In addition, the Company had a $5.0 million line of credit subject
to borrowing base requirements. To date, the Company has not drawn upon its line
of credit. Other than capital lease commitments, the Company has no material
commitments for capital expenditures. However, the Company anticipates it will
increase its capital expenditures and lease commitments consistent with
anticipated growth in operations, infrastructure and personnel. The Company may
establish sales offices and lease additional space, which will require it to
commit to additional lease obligations, purchase equipment and install leasehold
improvements.
The Company believes that the net proceeds from this Offering, together
with its current cash and cash equivalents, will be sufficient to meet its
anticipated cash requirements for at least twelve months, although the Company
may seek to raise additional capital during that time period. The sale of
additional equity or convertible debt securities could result in additional
dilution to the Company's stockholders. There can be no assurance that financing
will be available in amounts or on terms acceptable to the Company, if at all.
See "Risk Factors -- Potential Need for Additional Capital."
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<PAGE> 32
BUSINESS
Com21, Inc. designs, develops, markets and sells value-added, high-speed
communications solutions for the broadband access market. The Company's ComUNITY
Access system enables cable operators to provide high-speed, cost-effective
Internet access to corporate telecommuter, small office/home office ("SOHO") and
residential users in the U.S. and internationally, and enables them to address
the distinct price, performance, security and other needs of these different
end-user groups. Com21's products include headend equipment, subscriber cable
modems, network management software and noise containment technologies. Cable
operators can use the Company's ComUNITY Access system to increase revenue
opportunities by offering up to 16 different operator-defined transmission rates
at varying price points to multiple markets. The Company's system is designed to
be deployed on a limited capital budget and can be upgraded and scaled as
subscriber penetration grows. The Company's system enables cable operators to
lower their ongoing cost of ownership through cost-effective noise management
and remote cable modem upgrades. The ComUNITY Access system also supports future
features and service offerings, such as desktop video conferencing and cable
telephony applications. The Company is developing an MCNS-compliant modem for
the North American cable market intended primarily to address the basic
requirements of the residential end-user base, which typically tolerates lower
performance and security than the business user. The Company is working with
Cisco to develop interoperable MCNS-compliant products that are expected to be
commercially available in the second half of 1998. In 1997, the Company shipped
approximately 170 ComCONTROLLER headends and more than 12,000 ComPORT modems for
use in 61 locations worldwide. In the North American market, the Company sells
directly to cable operators and has sold systems to major operators such as
Charter Communications, Prime Cable and TCI. Internationally, the Company sells
to systems integrators, including Philips and Siemens, which in turn sell to
cable operators.
INDUSTRY BACKGROUND
The volume of data traffic across communications networks has increased
significantly over the last several years due to the proliferation of
network-based communications and electronic commerce. Businesses, ranging from
large corporate enterprises to SOHOs, are increasingly using the Internet,
intranets and extranets, not only for communication within and outside the firm,
but also to create cost-effective secure data connections known as virtual
private networks ("VPNs") between corporate sites or remote locations. VPNs
extend corporate network access to remote employees and external organizations,
including business partners, suppliers and customers. Consumers are increasingly
accessing data networks, primarily the Internet, to communicate, collect and
publish information and conduct retail purchases. Because of its global reach,
accessibility, use of open standards and ability to enable real-time
interaction, the Internet has become a valuable communications medium for both
businesses and consumers.
The Internet and devices used to access it are expected to continue their
rapid growth. International Data Corporation ("IDC") estimates that between 1995
and 1997 the number of devices that had access to the Internet grew from
approximately 15 million to 64 million and anticipates that the number of such
devices will grow to more than 232 million by 2000. Similarly, the available
content and number of users on the Internet is increasing rapidly. IDC estimates
that the number of World Wide Web ("Web") pages grew from approximately 18
million in 1995 to 250 million in 1997 and is expected to increase to 2.3
billion by 2000. The number of Web users in the U.S. is expected to increase
from approximately 29 million in 1997 to 72 million in 2000. A substantial
percentage of worldwide growth is expected to come from Western Europe and Asia,
which is projected to grow from approximately 18 million users in 1997 to 50
million users in 2000. In addition to the substantial increase in the number of
users in recent years, demand has increased among business and consumer users
for high-speed Internet access to multimedia and other bandwidth-intensive
information, consisting of data, voice and video in the form of value-added
services and applications. This has resulted in a growing need for higher
transmission performance
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<PAGE> 33
throughout the Internet. With the increasing dependence on communications
networks and the growing demand for bandwidth-intensive information, existing
transmission speeds have become less tolerable and can negatively affect
business productivity.
Typically, the limiting factor in overall data transmission performance is
the "last mile" of the communications infrastructure. Consisting primarily of
copper twisted-pair wire or coaxial cable, this infrastructure was originally
designed for analog transmission, such as analog voice or one-way analog video
signals, rather than high-speed two-way broadband digital transmission. Today,
there are multiple technologies that attempt to address the need for high-speed
last mile connections, including (i) wireline telephone infrastructure
technologies, such as 56 kilobits per second ("Kbps") dial-up modem
technologies, Integrated Services Digital Network ("ISDN") and asymmetric
digital subscriber line ("ADSL") and other digital subscriber line ("xDSL")
technologies; (ii) wireless infrastructure technologies, such as direct
broadcast satellite ("DBS"), multichannel multipoint distribution service
("MMDS") and local multipoint distribution service ("LMDS"); and (iii) hybrid
fiber-coaxial ("HFC") cable infrastructure technologies such as cable modems.
While each of these technologies has certain advantages, the cable
infrastructure currently provides the highest available transmission speed, with
peak data transmission speeds of 30 megabits per second ("Mbps") and "always-on"
availability providing instant access. In addition, cable infrastructure is
widely available. Paul Kagan Associates, Inc. estimates that at the end of 1997,
cable infrastructure passed approximately 95 million U.S. homes and more than
185 million homes in Western Europe and Asia. Recognizing the opportunity to
capture additional revenues by offering data-over-cable services, cable
operators have begun to address the burgeoning market for cable modem Internet
access. Industry sources estimate that there are currently in excess of 100
initial commercial deployments of cable modem systems worldwide, including sites
in the U.S., Argentina, Australia, Canada, France, The Netherlands and
Switzerland.
To fully realize the benefits of two-way data-over-cable communications,
cable operators must activate a data transmission return path that travels from
subscriber sites upstream to the cable operator through the cable plant.
Previously, cable operators have not been required to activate an upstream
return path because television broadcast only requires downstream transmission.
A critical factor related to two-way cable modem service involves the reduction,
containment and management of "noise" in the upstream return path. Noise
accumulates from subscriber sites on the upstream channel and interferes with
transmission throughout the entire cable plant. Excessive noise impairs the
quality of upstream transmissions and, in certain cases, results in significant
performance degradation. Cable plant noise consists of ambient background noise
in the cable plant itself and specific ingress noise introduced through
subscriber sites as a result of loose fittings and connectors, cracks in coaxial
cable shielding and other physical plant imperfections. Common sources of
ingress noise at subscriber sites include electronic motors in appliances,
consumer electronics devices and office equipment. One approach to dealing with
excessive noise involves signal encoding or modulation techniques that
compensate for higher noise levels. Such techniques, however, typically result
in decreased data transmission rates. Other approaches for identifying and
containing ingress noise, such as the installation of high pass filters at
subscriber sites, are expensive and inefficient because they block upstream
transmission entirely and must be physically removed prior to enabling two-way
cable modem service. Once the high pass filter is removed, ingress noise can
re-enter the system from that site. As a result, reducing noise to the low
tolerance level required by most two-way cable modem systems involves
significant cost and time for the cable operator, often delaying the
commencement of service and the consequent generation of revenue from
subscribers.
Recently, cable operators have begun upgrading their plants to an HFC cable
infrastructure that enables them to offer more channels, to add greater services
and consequently to compete better with DBS television providers' digital video
offerings. HFC cable infrastructure also facilitates reliable upstream data
transmission and contains noise by isolating portions of the network into
smaller distinct nodes. Each node typically serves 500 to 2,000 homes and has a
separate return path. In order to enable data service over HFC, cable operators
must install return path receivers at the headend based
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on the number of nodes to be activated rather than on the number of potential
cable modem subscribers. To reduce the number of return path receivers that
cable operators would otherwise have to purchase, cable operators can recombine
separate return paths. However, the number of return paths that can be combined
is limited by the accumulated noise from each path. As a result, early
deployment costs can be significant compared to the revenues generated by
initial cable modem subscribers.
In order to accelerate time-to-market and revenue generation, and to reduce
initial deployment costs, some cable modem Internet access systems offer one-way
"telephone return" service, with cable transmission downstream and slower
dial-up modem transmission upstream. This approach enables earlier deployment of
cable modem systems by postponing the need to address upstream noise issues and
enables cost-effective determination of which markets are most likely to be
economically feasible for larger-scale, two-way installations. However, with
most currently available cable modems, the eventual upgrade from one-way to
two-way service requires the purchase of a new two-way modem and generally
requires a field service visit to replace and install the dedicated one-way
modem with a two-way modem.
Cable operators are seeking to accelerate the acceptance of cable modem
service by their subscribers. Many major domestic cable operators have
established or invested in value-added data-over-cable services such as @Home
Network ("@Home"), Time Warner Cable's Roadrunner service and US West Media
Group's MediaOne Express service. In addition, several domestic cable operators
have recently cooperated to create the Multimedia Cable Network System ("MCNS")
specification to define multi-vendor interoperable cable modems. This
specification is expected to be widely adopted for the North American consumer
market. While a number of suppliers are developing MCNS-compliant two-way cable
modems, no such modems are currently commercially available.
Beyond the challenges of deploying cable modem Internet services, most
cable modem systems enable operators to offer only a single level of service at
a single monthly rate and do not enable customized features that meet the
special requirements of distinct market segments. Offering a single service and
rate to all subscribers does not permit cable operators to maximize revenue
opportunities. For example, a residential subscriber with only limited access
and speed requirements such as sending and receiving e-mail, may elect not to
subscribe to a 256 Kbps service at $50 per month. In contrast, a business
subscriber who would be willing to pay significantly more for enhanced service,
would pay only the fixed $50 per month rate. The lost revenue opportunity is
particularly acute in business markets, where telecommuting and SOHO users are
generally willing to pay more for the additional speed, security and VPN
features they require.
In addition to data-over-cable service, telephony-over-cable service has
recently been made possible for cable operators due to regulatory changes both
in the U.S. and internationally. Such deregulation has allowed cable operators
to compete in the local telephone market.
The Company believes that there is a significant opportunity for a provider
of a cable modem system solution that would reduce the total cost of deployment
and ownership of a cable modem system and enable different tiers of data
transmission service and other value-added features for distinct market
segments. To reduce the total cost of deployment and ownership, there is a need
for a cable modem system that provides reliable two-way data service on noisy
cable plants without significantly reducing data transmission rates, enables
cable operators to remotely identify sources of ingress noise and manages system
noise in a manner that permits equipment purchases to more closely scale with
subscriber penetration. In order to accelerate time-to-market, such a system
would also provide for cost-effective remote software-based migration of cable
modems from one-way to two-way service. By enabling higher noise tolerance with
a software-based migration path from one-way to two-way service, cable operators
could more rapidly deploy data service and observe penetration patterns in order
to identify prime markets for the service. In addition, the ability to offer
different tiers of service and value-added features such as VPNs and enhanced
security for distinct business and consumer market segments would enable cable
operators to more fully exploit the cable
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modem opportunity. The Company believes that such a system solution would be
attractive to cable operators because it would allow cable operators to increase
revenues and profitability, while lowering deployment cost and risk and
accelerating time-to-market.
THE COM21 SOLUTION
Com21 designs, develops, markets and sells value-added, high-speed
communications solutions for the broadband access market. The Company's ComUNITY
Access system enables cable operators to provide high-speed, cost-effective
Internet access to corporate telecommuter, SOHO and residential users in the
U.S. and internationally, and enables them to address the distinct price,
performance, security and other needs of these different end-user groups.
Com21's products include headend equipment, subscriber cable modems, network
management software and noise containment technologies. The Company's cable
modem systems provide the following key benefits:
Increase Service Revenues. The Company's ComUNITY Access system enables
cable operators to increase revenues by offering up to 16 different cable
operator-defined transmission rates at varying price points to multiple markets.
In a typical flat-rate cable modem system, all subscribers are charged the same
price, regardless of individual bandwidth service and pricing requirements (see
Figure 1), which results in lost revenue opportunities for cable operators. In
addition, the ComUNITY Access system enables cable operators to provide
value-added services, such as multiple VPNs and enhanced security, targeted to
business users. To accommodate future value-added broadband applications, the
Company's underlying ATM-based technology can also enable integrated services
such as toll-quality voice and desktop video.
FIGURE 1.
LOGO
LOGO
Reduce Deployment Costs. The ComUNITY Access system was designed to lower
deployment costs by providing a flexible solution to address the needs of cable
operators and their subscribers at each step of cable modem system deployment.
The Company believes its radio frequency ("RF") technology tolerates a higher
level of background and ingress noise than do other commercially available RF
technologies, thereby avoiding the costs otherwise necessary to limit noise
before deploying two-way cable modem service. The Company is developing a Return
Path Multiplexer ("RPM"), which is expected to be commercially available in
mid-1998, that is designed to reduce the number of return path receivers
required in a cable operator's headend equipment. The RPM will enable cable
operators to purchase less headend equipment initially and then cost-effectively
scale the system over time as subscriber penetration grows.
Accelerate Time-to-Market. The ComUNITY Access system provides a
comprehensive solution that enables cable operators to bring broadband services
to market quickly. In the initial stage of deployment, the ComUNITY Access
system can be implemented as a one-way telephone return system. Upon
implementation of a two-way service, a cable operator can upgrade to a two-way
system with a simple software download to the end-user's existing ComPORT cable
modem. The
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Company is also developing the capability to enable ComPORT cable modems to
communicate to PCs through parallel port interfaces, which will reduce the time
and resources needed to connect modems at subscribers' locations.
Mitigate Deployment Risks. The ComUNITY Access system's comprehensive
solution mitigates deployment risks by enabling cable operators to rapidly
implement data-over-cable service using telephone return service and observe
service penetration patterns. Cable operators can then deploy the capital
necessary to upgrade the plant, and build a larger-scale two-way cable modem
system, only in those markets where they observe sufficient penetration to
warrant such investment.
Reduce Long-Term Cost of Ownership. The ComUNITY Access system reduces the
long-term cost of ownership for cable operators. Because a cable modem system's
operational and maintenance expenses typically exceed the costs of the capital
equipment over the expected life of the system, a system that requires less
plant maintenance will reduce the long-term cost of ownership for cable
operators. The Company's Network Management Provisioning System ("NMAPS") lowers
ongoing operating costs by enabling cable operators to remotely detect, diagnose
and manage network problems from a single workstation. In addition, ComPORT
cable modems can be remotely upgraded with software downloads. The ComUNITY
Access system can be deployed with lower operational overhead because the cable
operator can use the Company's Ingress Noise Blocker ("INB") as an intelligent
filter to prevent ingress noise from contaminating the upstream return path. The
INB opens only to allow data to be transmitted upstream, and is closed
otherwise, preventing aggregation of noise in the upstream return path. The INB
also enables a cable operator to more quickly identify ingress noise sources,
which reduces maintenance costs because a cable operator need not devote
substantial amounts of personnel and resources to the identification of the
source and site of intermittent ingress noise.
Offer Significant Benefits to End-Users. In addition to high-speed,
always-on and cost advantages, the ComUNITY Access system enables cable
operators to offer differentiated services with significant benefits to their
subscriber end users. In addition to value-added services such as VPNs and
enhanced security, each ComPORT cable modem can support up to eight PCs. The
ComUNITY Access system supports multiple protocols, including IP, IPX, AppleTalk
and NETBEUI. ComPORT modems have an expansion slot to accommodate Application
Interface Modules ("AIMs") which can support future features and service
offerings such as desktop video conferencing, cable telephony applications and
parallel port modem connectivity.
THE COM21 STRATEGY
Com21's business strategy includes the following key elements:
Enhance Value to Cable Operators. The Company's principal strategy is to
provide products that enhance the value of cable operators' cable modem
deployments over the life of the investment. Cable operators assess the
viability, and ultimately the success, of an investment in a cable modem system
by considering the cost of initial investment in cable modem equipment, service
reliability, overall operating and maintenance expenses and the service revenues
that can be generated. The Company's ComUNITY Access system is designed to be
deployed on a limited capital budget and can be upgraded and scaled as
subscriber penetration grows. The Company's system enables cable operators to
lower their ongoing cost of ownership through cost-effective noise management
and remote cable modem upgrades. Cable operators can use the Company's system to
increase revenues by offering multiple tiers of service at varying prices to
multiple market segments. As a result of the value provided by its products, the
Company believes it will continue to be able to successfully differentiate and
sell its products based upon tangible benefits delivered to the cable operator.
Leverage Technology Leadership. The Company's ATM cell-based architecture
is the foundation upon which the Company has built an end-to-end Ethernet
broadband communications system with networking advantages. Technological
developments in multi-service scheduling optimization, protocol simulation and
application specific integrated circuit ("ASIC") integration enable the Company
to
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offer a scalable system to deliver tiered service levels, VPNs and low-latency
voice and video applications. Moreover, the Company's internal development of a
network management system, high performance, cost-effective RF
transmitters/receivers and fast RF switching systems lowers the cost to cable
operators of deploying and operating the Company's equipment. The Company
focuses on the development of new value-added features for its products,
including its recently announced RPM, which will enable cable operators to
purchase less headend equipment initially and then scale their systems as
subscriber penetration grows. In addition, the Company is leveraging its RF and
noise management technology in its MCNS-compliant cable modem for the North
American consumer market and is working with Cisco Systems, Inc. ("Cisco") to
develop interoperable MCNS-compliant products.
Aggressively Penetrate Global Markets. The Company believes the market for
cable modem systems is global and has developed strategies to sell its products
in regions where cable is widely available, such as the U.S., Canada, Europe and
Japan, and in regions where cable is being aggressively deployed, such as China
and Latin America. In 1997, the Company shipped approximately 170 ComCONTROLLER
headends and more than 12,000 ComPORT modems for use in 61 locations worldwide.
In the North American market, the Company sells directly to cable operators and
has sold systems to major operators such as Charter Communications, Prime Cable
and TCI. Internationally, the Company sells primarily to systems integrators,
including Philips and Siemens, which in turn sell to cable operators.
Lower Product Costs. While the Company intends to continue to seek premium
prices for its products, it anticipates that the cable modem market will be
characterized by declining prices. As a result, the Company seeks to decrease
product costs, particularly with respect to its end-user modem products. The
Company recently improved its tuner design to decrease manufacturing costs,
integrated its modem design to one printed circuit board and increased its use
of standard components. The Company is working to achieve a higher level of ASIC
integration and improve the design of its products to increase manufacturing
efficiencies. In addition, because product design and manufacturing quality
affect product costs, the Company is working to further enhance its internal
engineering and manufacturing processes and expects to obtain ISO 9001
certification in 1998.
Integrate Toll-Quality Voice. The Company intends to integrate toll-quality
voice capability with the current data capability of the ComUNITY Access system.
The Company's existing products have been designed with the Quality of Service
("QoS") capability to support a toll-quality voice transmission across the
broadband cable plant. Recently, the Company entered into an agreement to
license certain digital telephony technology from e-Net, Inc. ("e-Net"). In the
future, the Company intends to introduce telephony-over-cable capability as an
integrated component of its existing ComUNITY Access system product line.
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PRODUCTS
The Company's product offerings are depicted in the following diagram.
The ComUNITY Access System
The ComUNITY Access system consists of three parts: (i) the ComCONTROLLER,
which is the channel switch located at the cable operator's headend; (ii) the
ComPORT, which is the cable modem located at the subscriber's site; and (iii)
NMAPS, which is the integrated network management software. Additionally, the
Company offers the INB, an intelligent filter used to block noise in the
upstream channel.
The ComCONTROLLER Headend Switch. The ComCONTROLLER controls the flow of
data communications between the ComPORT modems located at a subscriber's site
and an external network, such as the Internet or a corporate network, typically
through routers. The ComCONTROLLER is designed with multiple expansion slots
that can accommodate 10 Ethernet interfaces. The ComCONTROLLER transmits data
downstream at 30 Mbps (using 64 quadrature amplitude modulation ("64QAM")). The
expansion slots enable the addition of up to twelve 2.56 Mbps (using quadrature
phase shift key ("QPSK")) upstream channel modules, scaling the upstream path to
an aggregate throughput of 30 Mbps. The upstream channels can be added on an
incremental, hot-insertion basis, enabling a cable operator to respond rapidly
to system faults. A single ComCONTROLLER is designed to support up to 2,000
ComPORT modems.
ComPORT Cable Modem. The ComPORT cable modem is deployed within a
subscriber's home or office. In addition to its cable connection, the ComPORT is
designed with a 10BaseT Ethernet port for direct connection to the subscriber's
PC Ethernet card or an Ethernet hub for interconnecting up to eight PCs. Each
ComPORT can be used either on a one-way or two-way cable plant and can be
remotely configured for either plant by the Company's NMAPS software. The
ComPORT features an expansion port for the insertion of future modules that will
support applications such as secure IP communications and toll-quality voice.
Network Management and Provisioning System. NMAPS is a network management
software package that facilitates subscriber provisioning, fault isolation,
network configuration, field inventory, auto-discovery and performance for the
ComUNITY Access system. NMAPS enables the cable operator to remotely monitor and
manage the ComUNITY Access system through a graphical user
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interface and to remotely upgrade ComPORT cable modems. NMAPS is a Simple
Network Management Protocol ("SNMP") manager running on a UNIX workstation
connected to the ComCONTROLLER via a separate out-of-band 10BaseT Ethernet
channel. The Company believes that the ability of NMAPS to manage the network
elements of the ComUNITY Access system from a remote site will further reduce
cable operators' long-term cost of ownership by reducing the number of visits
cable operator technicians will need to make to headend and subscriber sites. A
standard PC Web browser can be used to monitor and manage cable modems via an
Internet server application on the NMAPS station. A single NMAPS station can
manage up to 50 ComCONTROLLERs and 100,000 ComPORTs.
The ComUNITY Access system incorporates the following features:
- Multiple Service Levels. The ATM-based architecture provides up to 16
levels of service that can be configured by the cable operator, each with
specified upstream and downstream data rates. This feature enables the
cable operator to tailor data-over-cable service and pricing to different
end-user demands, thereby increasing the ability to capture additional
subscriber revenues by matching supply with demand.
- Robust, High-Speed Architecture. The ComUNITY Access system transmits
downstream traffic at a rate of up to 30 Mbps in one 6 MHz channel. Each
1.8 MHz channel of the upstream spectrum can transmit traffic at a rate
of 2.56 Mbps, and the system enables the cable operator to aggregate up
to twelve upstream channels, permitting total upstream throughput of 30
Mbps.
- One-Way and Two-Way Cable. The ComUNITY Access system can be configured
to support both one-way and two-way cable plants. The ComPORT modem works
with the subscriber's personal computer and a dial-up Internet access
service operated either by the cable operator or an Internet service
provider ("ISP") to enable a one-way system. The ComPORT can be
reconfigured remotely from one-way mode to two-way mode through a
software download without replacing a subscriber's modem.
- Superior Noise Technology. The Company's has developed noise containment
technology which allows the system to tolerate higher levels of noise,
thereby enabling cable operators to install the system on noisy cable
plants that could not otherwise be used for two-way data transmission.
- Multiple Protocols. The ComUNITY Access system supports multiple
protocols include IP, IPX, AppleTalk and NETBEUI.
- Privacy from Other Subscribers. The ComPORT can be configured by the
cable operator to block all non-IP protocols, preventing subscribers on
the same cable network from accidentally gaining access to others' files.
- Data Security. Data Encryption Standard ("DES") encryption and public key
management enable secure upstream and downstream data communications
between the ComCONTROLLER and the ComPORT.
- Enables High-Value Business Networking. The Company's ComUNITY Access
system enables cable operators to establish private, secure sub-networks
within a ComCONTROLLER while providing dedicated bandwidth. These
sub-networks are known as virtual local area networks ("VLANs"). Using
NMAPS, the cable operator can configure secure VPNs for the business
connectivity markets by partitioning the transmission channels into
several VLANs, then assigning cable modems to each VLAN.
- Early Fault Detection. NMAPS offers high network visibility and control
via a suite of configurable alarms, diagnostic tools and performance
monitoring features.
The Ingress Noise Blocker. The INB is an external noise filter designed to
meet the needs of cable operators whose cable networks have excessive ingress
noise and who want to deploy two-way data
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service prior to solving costly overall system noise issues. The INB works with
both two-way HFC and coaxial-only cable plants and attaches to the cable tap
outside the subscriber's site. The INB, which is remotely controlled by the
ComPORT, opens to allow upstream transmission of traffic and closes at all other
times, which limits the ability of noise to enter the system. Because noise
passes through the INB only when data is being transmitted from a subscriber's
site, the INB allows NMAPS to rapidly detect and isolate sources of noise.
Although it is currently necessary for the subscriber to have a ComPORT modem to
control the INB, the Company plans to license the INB control circuitry to other
cable equipment vendors.
Products Under Development
MCNS-Compliant Cable Modem. The Company is leveraging its RF and noise
management technology to develop an MCNS-compliant ComPORT modem for the North
American consumer market. The Company is working with Cisco to ensure the
interoperability of this new modem with Cisco's previously announced
MCNS-compliant Universal Broadband Router. The MCNS-compliant ComPORT is
expected to be commercially available in the second half of 1998.
Return Path Multiplexer. The Company is currently developing the Return
Path Multiplexer ("RPM"), a high-speed, multiport analog switching device which
will allow up to eight upstream return paths to be connected to a single
ComCONTROLLER RF receiver without electrically combining the accumulated noise
from the return paths. The RPM is designed to solve the problem of accumulated
noise inherent in HFC cable installations configured with large numbers of
return paths from distributed fiber nodes. The RPM utilizes a high-speed RF
switching technology that enables it to pass one upstream return path at a time
to the ComCONTROLLER. This technology prevents the noise accumulation that would
otherwise occur if multiple upstream returns were combined at the ComCONTROLLER.
Since the RPM will allow eight upstream connections, the Company believes that
the installation of RPMs on a cable operator's network will reduce the number of
return path receivers required in the cable operator's headend equipment and
therefore reduce the capital costs for a large-scale HFC cable modem deployment.
The RPM is expected to be available in mid-1998.
Mini ComCONTROLLER. The Company is developing a smaller version of the
ComCONTROLLER which will have only three expansion slots for upstream receiver
and Ethernet modules. The Company believes that this smaller headend product
will address the requirements of smaller cable operators and specialized
applications (such as cable systems within a hotel) that cannot justify the
additional expense of the larger ComCONTROLLER. The Mini ComCONTROLLER is
expected to be available in mid-1998.
Parallel Port and Secure IP Modules. The Company is developing a parallel
port interface module and a secure IP module to be inserted in the ComPORT's AIM
expansion slot. The Company believes that the parallel port interface module
will reduce cable operators' long-term cost of ownership by eliminating the time
needed to install a 10BaseT Ethernet card in a subscriber's PC. The Company
believes that the secure IP module will increase cable operators' service
revenues by providing them with an advanced security feature to sell to their
subscribers. The secure IP module is expected to become available in mid-1998,
and the parallel port module is expected to become available by the end of 1998.
Toll-Quality Voice Module and Telephony Gateway. The Company is developing
an AIM module for the ComPORT to allow cable operators to provide toll quality
voice-over-cable through a standard RJ11 telephone interface. In addition, the
Company is developing a telephony gateway for the ComCONTROLLER. The Company
also recently entered into an agreement to license e-Net's digital telephony
technology. In the future, the Company intends to introduce telephony-over-cable
capability as an integrated component of its existing ComUNITY Access system
product line.
The market for cable modem systems and products is characterized by rapidly
changing technologies and short product life cycles. The Company's future
success will depend in part upon its ability to enhance its existing products
and to develop and introduce, on a timely basis, new products
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and features that meet changing customer requirements and emerging industry
standards. The Company's product development efforts are subject to a number of
risks and there can be no assurance that such efforts will result in the
introduction of any new products that achieve market acceptance. See "Risk
Factors -- Risks Associated with New Product Development."
TECHNOLOGY
The Company invests in technology development to enable scalable, reliable
broadband data communications that can accommodate a wide range of applications.
Key technologies include: (i) ATM architecture and ComUNITY Media Access Control
("MAC") and Physical ("PHY") layer protocols, all of which provide the
flexibility and scalability to allow cable operators to build multi-tiered
services and VPNs; (ii) application-specific integrated circuit ("ASIC") based
modem design that allows the Company to provide high-speed, cost-effective,
highly functional products; (iii) high performance RF modulators and
demodulators which allow the cable operator to use the Company's products in a
wider range of cable systems; and (iv) noise mitigation technology, which
addresses many of the cable plant upstream noise problems and reduces the cable
operator's ongoing maintenance and operational costs.
ATM Architecture and ComUNITY Protocols. The ComUNITY Access system has
been designed using a high-performance cell-switching broadband data transport
architecture that optimizes system performance for multiple simultaneous
applications with a variety of requirements for data rates and latency,
including Internet data, toll-quality voice and desktop video. In order to
transport and manage data flows for latency-sensitive applications such as
telephony, video conferencing or interactive games, the ComUNITY Access system
implements an ATM virtual circuit-based data transport protocol upon shared
broadband downstream and upstream channels.
The ComUNITY Protocols are specifically designed to efficiently manage the
ATM cell traffic on the broadband cable television network, taking into account
topological and physical constraints of the two-way cable transmission systems.
For example, the protocol must:(i) provide secure point-to-point communications
in physical media that are inherently insecure broadcast channels; (ii) provide
reliable data delivery in a noisy communications channel; (iii) automatically
calibrate for variations in phase delay and signal attenuation arising from the
condition of the physical cable plant; (iv) minimize simultaneous transmission
from multiple modems to prevent return amplifier saturation and distortion; (v)
efficiently adapt to the traffic load among a large subscriber base so that the
system can grow and still provide high service levels with low overhead costs;
and (vi) provide stable performance under increasing traffic loads and various
traffic types with different QoS requirements. The protocols also provide
flexibility to handle a telephone return capability for applications in a
one-way system. As a result of the work to develop robust low-level protocols,
the ComUNITY Access system can reliably perform in both coaxial systems as well
as modern HFC cable plants.
In addition, the ComUNITY Access system has been designed so that each
cable modem can enable multiple virtual circuits for separate applications,
allowing simultaneous, independent data flows with different performance
requirements. Specifically, a single ComUNITY-based cable modem can
simultaneously provide a high-speed, latency-insensitive 10 Mbps IP-based
Internet connection and a low-speed, short delay, latency-sensitive 64 Kbps link
for a toll-quality voice connection, with both data and voice applications
operating independently.
ASIC-Based Modems. The Company has internally developed a custom ASIC to
implement the major portions of the cable modem functionality, including
ComUNITY protocol control, DES encryption, ATM segmentation and reassembly
("SAR"), packet switching and filtering and multicast control. Because these
functions are integrated into the ASIC, the cable modem can operate at high
speeds without requiring an expensive external processor or ATM SAR components.
As a result, the material cost of the additional ATM and networking
functionality is insignificant, and the Company has been able to decrease the
size of the electronics design and reduce the implementation to a single-sided
printed circuit board.
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High Performance RF Modulator and Demodulator Design. The ComUNITY Access
system's downstream and upstream channels occupy a small portion of the HFC
spectrum and must coexist with existing signals occupied by entertainment
television channels in the 54-750 MHz band as well as other upstream services
such as pay-per-view or cable telephony in the 5-40 MHz band. The RF modulator
design must be accurate enough to convert multi-bit symbols into a multi-level
phase/amplitude signal without creating interference into adjacent channels and
robust enough to perform in noisy upstream environments. The RF demodulator
implementations must be sensitive enough to detect and synchronize a complex QAM
signal in cable systems that induce signal distortions and are susceptible to
spurious environmental noise. QAM encoding is a digital transmission technique
which combines multi-level phase and amplitude modulation to increase the
effective data transmission rate in a communications channel, trading off higher
noise immunity for higher information content. Additionally, these designs must
be cost-effective and self-tuning without the need for expensive, precision
components for manual parametric adjustments during the manufacturing process.
The Company has designed its own RF modem technology that is less sensitive
to operating temperature fluctuations, has higher sensitivity to low signal
levels, has improved tolerance to adjacent TV signals, adapts to channel phase
and noise impairments, and cleanly transmits signals with low spurious noise and
harmonic distortion. The Company expects to continue to enhance its proprietary
RF technology as new 256QAM and 16QAM components become available. This
technology has enabled the Company to sell its internally developed RF modulator
as an integrated component of its ComCONTROLLER product family, whereas most
other commercially available cable modem systems require cable operators to
purchase an external IF-to-RF converter from third-party cable equipment
suppliers.
Noise Mitigation Technology. Reliable system performance in the presence of
a significant level of noise in the upstream channel is a key issue for any
cable modem system. There are two basic ways to minimize the effect of noise on
upstream data transmission: (i) reduce or eliminate noise from the upstream
channel; or (ii) compensate for errors caused by high noise levels using
upstream protocols, modulation schemes or encoding techniques. The Company
utilizes a combination of these techniques.
The Company has developed technology specifically designed to reduce
upstream noise observed by the ComCONTROLLER headend receiver. The INB is a
modem-activated filter attached to the cable tap outside the subscriber's house.
Using the Company's signal-powered dynamic RF filter technology, the INB blocks
upstream noise and only allows return signals when the ComPORT is transmitting
upstream. An industry source has stated that most of the upstream ingress noise
on cable plants originates from sources which inject noise into the cabling
system from the cable tap to a subscriber's television set. A cable plant with
INB technology installed will have a lower level of ingress noise in the
upstream return path, resulting in reduced plant maintenance costs related to
identifying, minimizing and correcting ingress noise problems.
The Company is developing an RPM, which is a high-speed, multiport analog
switching device which allows up to eight upstream return paths to be connected
to a single ComCONTROLLER RF receiver without electrically combining the
accumulated noise from the return paths. The Company has developed high-speed RF
switching technology in the RPM which will allow a control signal from the
ComCONTROLLER to electrically switch from one return path to another to enable a
specified modem using a specific return path to transmit to the ComCONTROLLER.
The Company has also developed control mechanisms and management protocols to
efficiently manage traffic switching through the RPM. To illustrate an RPM
application, an HFC system serving 100,000 homes would require 25 separate
return paths (assuming 500 home fiber nodes and eight return nodes combined).
Without the Company's RPM, the cable operator would have to purchase several
headend units to enable data service for the entire HFC network. Instead, the
cable operator will be able to purchase a single ComCONTROLLER and several RPMs
at a significantly lower cost. The Company's product
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<PAGE> 43
development efforts are subject to a number of risks, and there can be no
assurance that such efforts will result in the successful introduction of the
RPM or any other new products, or that such products will achieve market
acceptance. See "Risk Factors -- Risks Associated with New Product Development."
The ComUNITY Access system incorporates an encoding technique called
Forward Error Correction ("FEC") on upstream, as well as downstream, channels.
FEC is a technique that inserts redundant information into the data stream so
that a certain number of data errors can be detected and corrected. This
technique, coupled with the Company's high performance RF modem design, allows
the Company's cable modems to operate at high data rates with nominal Bit Error
Rate ("BER") of 10(-9) in a cable plant with a Carrier-to-Noise-Ratio ("CNR") of
16dB. This BER performance is substantially better than the MCNS specification
of 10(-9) BER at 25dB CNR. As a result, the Company's products can provide more
reliable data service in noisier cable plants than a modem built to that
specification. More specifically, the 9dB difference in performance lowers noise
sensitivity by a factor of eight.
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<PAGE> 44
CUSTOMERS AND MARKETS
Customers. The Company began commercial shipments of its cable modem
products in April 1997 and in 1997 shipped approximately 170 headend systems
with more than 12,000 cable modems for use in 61 locations worldwide. Fourteen
of these customers have commercially deployed the Company's products while the
remainder are running trials or performing evaluation tests with the products.
In the U.S., the Company sells directly to cable operators. Internationally, the
Company sells primarily to systems integrators, including Philips and Siemens,
who in turn sell to cable operators.
The following table depicts commercial deployments of the ComUNITY Access
system as of March 31, 1998. The Company considers a sale as a commercial
deployment if the cable operator to whom the sale was made has begun offering
data-over-cable services to paying subscribers. "Homes passed" is defined as the
number of homes currently passed by a cable system, as represented to the
Company by each respective cable operator in the chart below, regardless of
whether each such home is currently receiving data-over-cable.
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------
COM21 COMMERCIAL DEPLOYMENTS
- -----------------------------------------------------------------------------------
CUSTOMER LOCATION HOMES PASSED
- -----------------------------------------------------------------------------------
Baerum Kabel-TV Oslo, Norway 36,000
- -----------------------------------------------------------------------------------
Cablecom Holding AG Zurich, Switzerland 200,000
- -----------------------------------------------------------------------------------
CableVision TCI-International Buenos Aires, Argentina 1,200,000
- -----------------------------------------------------------------------------------
Halifax Cable Halifax, Nova Scotia 205,000
- -----------------------------------------------------------------------------------
NV Eneco Rotterdam, The Netherlands 600,000
- -----------------------------------------------------------------------------------
Palo Alto Cable Co-op Palo Alto, California 56,000
- -----------------------------------------------------------------------------------
Spie Trindel Colmar, France 25,000
- -----------------------------------------------------------------------------------
Telindus NV/SA Nyon, Switzerland 80,000
- -----------------------------------------------------------------------------------
Videopole Meudon, France 23,000
- -----------------------------------------------------------------------------------
Cablecom Holding AG Geneva, Switzerland 450,000
- -----------------------------------------------------------------------------------
Charter Communications Pasadena, California 110,000
- -----------------------------------------------------------------------------------
Prime Cable Las Vegas, Nevada 480,000
- -----------------------------------------------------------------------------------
Super Canal Holding Mendoza, Argentina 50,000
- -----------------------------------------------------------------------------------
Telekabel Leeuwarden, The Netherlands 120,000
- -----------------------------------------------------------------------------------
Telia Stofa A/S Horsens, Denmark 200,000
- -----------------------------------------------------------------------------------
Telindus NV/SA Lausanne, Switzerland 200,000
- -----------------------------------------------------------------------------------
Charter Communications Newtown, Connecticut 63,400
- -----------------------------------------------------------------------------------
Prime Cable Chicago, Illinois 460,000
- -----------------------------------------------------------------------------------
TOTAL 4,558,400
=========
- -----------------------------------------------------------------------------------
</TABLE>
The Company did not commence product shipments until April 1997. The
Company's success will depend on the timely adoption of its products by cable
operators and end users. The market for the Company's products has only recently
begun to develop, is rapidly evolving and is characterized by an increasing
number of market entrants that compete or intend to compete with the Company.
The Company shipped its ComUNITY Access System for commercial deployment to nine
cable operator customers in the second quarter of 1997, seven cable operator
customers in the third quarter of 1997 and two cable operator customers in the
first quarter of 1998. There can be no assurance that the market for cable
modems will develop as the Company anticipates or that the Company will be able
to
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<PAGE> 45
compete with new market entrants should the market develop. See "Risk
Factors -- Limited Operating History; History of Losses; No Assurance of
Profitability," "-- Potential Fluctuations in Operating Results," "-- Early
Stage of the Market for Cable Modems; Unproven Acceptance of the Company's
Products" and "Competition."
In 1997, revenues attributable to Philips, 3Com and Siemens accounted for
21%, 16% and 12% of total revenues, respectively. In the three months ended
March 31, 1998, revenues attributable to TCI, Philips, Siemens, Prime Cable and
Cablecom accounted for 31%, 13%, 13%, 11% and 10% of total revenues,
respectively. See "Risk Factors -- Customer Concentration" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In 1997 and the three months ended March 31, 1998, revenues attributable to
international customers constituted 64% and 50% of total revenues, respectively.
The Company believes that its ATM-based system has been adopted more rapidly in
Europe and other international markets because of the greater acceptance of the
benefits of ATM-based technology as well as the more recently upgraded and
installed cable plants. See "Risk Factors -- Risks Associated with International
Markets" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The following customer examples illustrate how certain of the Company's
customers have deployed its products:
Cablevision/TCI-International, Argentina ("Cablevision") is a cable
operator with approximately 1,200,000 homes passed in Buenos Aires. Cablevision
offers a single Internet service priced at $125 per month for two-way service.
Because Cablevision's cable system is not yet completely two-way enabled, it is
also planning to offer one-way (telephone return) service using Com21's
products. Cablevision is marketing a private corporate networking service that
uses Com21's VLAN capability and selling dedicated line connections for business
applications using Com21's QoS capability to provision constant-bit-rate service
per modem. Cablevision uses various features of the ComUNITY Access system to
provide different service products for different subscribers' needs.
Charter, one of the largest cable television operators in the U.S. with
approximately 1.1 million subscribers, has deployed service in the Pasadena,
California area, which passes approximately 300,000 homes. Charter offers
Charter Pipeline, its general Internet service, at prices ranging from $50 per
month to $500 per month with five service tiers, with the following service
levels (upstream/ downstream data rates): (i) "diamond service" (2 Mbps/1 Mbps);
(ii) "platinum service" (1 Mbps/512 Kbps); (iii) "gold service" (768 Kbps/384
Kbps); (iv) "silver service" (512 Kbps/128 Kbps); and (v) "bronze service" (256
Kbps/56 Kbps). In addition to its general Internet access service, Charter has
established a campus local area network ("LAN") extension on its cable network
using the ComUNITY Access system's VLAN capability and provides off-campus
connections to the students and staff of the California Institute of Technology.
Charter also plans to use the ComUNITY Access system's telephone return feature
to provide access for subscribers who are not yet two-way enabled.
Telia Stofa A/S is the second largest cable operator in Denmark with more
than 200,000 homes passed. Telia Stofa is using the ComUNITY Access system to
deliver high-speed data-over-cable service, along with other integrated
services, to residential and business customers, allocating varying levels of
bandwidth to address different subscriber requirements. Telia Stofa gives
residential and business users the option of choosing from three different tiers
of service: StofaNet Private, StofaNet Study and StofaNet Business. This allows
Telia Stofa to charge subscribers according to the bandwidth used, versus a flat
fee, and results in increased revenues. Telia Stofa has indicated that one of
the primary reasons that Telia Stofa selected Com21 was because of the Company's
ability to offer QoS, VLANs and other future integrated services.
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<PAGE> 46
Markets. Com21's products enable cable operators to serve three primary
end-user markets each of which has widely varying speed, service and pricing
requirements. The table below divides these markets by user segment and outlines
their typical access requirements and attributes:
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
TYPICAL ACCESS
SOLUTION
USER SEGMENT ACCESS REQUIREMENT POTENTIAL USED TODAY
APPLICATIONS
- ----------------------------------------------------------------------------------------------
Corporate - Remote access to - Remote LAN access - Analog modem
Telecommuter and corporate LANs and - VPN provisioning (28.8 - 56 Kbps)
Remote Office Intranets - File transfer - ISDN (128 Kbps)
Users - High speed Internet - "Always on" - T-1 (1.54 Mbps)
access Internet access
- High security
- Telephony
enhancements, e.g.,
PBX extension
- Desktop video
conferencing
- ----------------------------------------------------------------------------------------------
SOHO Users - Remote access to - "Always on" - Analog modem
LANs Internet access (28.8 - 56 Kbps)
- High speed Internet - Connectivity to - ISDN (128 Kbps)
access several businesses - Fractional T-1 (384
- Alternate telephone Kbps)
service
- Desktop video
conferencing
- ----------------------------------------------------------------------------------------------
Residential - Low to high speed - Internet access - Analog modem
Consumer Internet Internet access - Web-based (28.8 - 56 Kbps)
Users (Occasional multimedia content, - ISDN (128 Kbps)
and Frequent) e.g. on-line
services
- E-mail, file
transfer
- ----------------------------------------------------------------------------------------------
</TABLE>
Corporate Telecommuter and Remote Office Users. The needs of corporate
telecommuter and remote office business users include high availability,
high-speed access to corporate intranets and corporate LANs. These users also
must interconnect the LANs among their various offices. Such offices may be
co-located, as in the case of a large campus, or remotely located, as in the
case of a sales office or a telecommuter's home. A parallel application for this
business market is the interconnection of remote workers to a central telephone
PBX, distributing voice traffic to users throughout a campus or to a remote
office. Security and reliability are of utmost importance for corporate users.
Other applications which business users may require include desktop video
conferencing and rapid two-way transfer of large data files. Corporate
telecommuters and remote office users are generally willing to pay a premium for
highly reliable, high-speed service with advanced features.
SOHO Users. SOHO businesses increasingly find the Internet an efficient and
cost-effective means to communicate and transact with their customers and
suppliers. The Company believes these businesses require medium-to-high speed
Internet access that is reliable and always available. SOHO users may have a LAN
to connect to cable modem services and may require routing in order to connect
multiple terminals. These businesses may also require desktop video conferencing
capability and connectivity with other businesses. Because these requirements
may be critical to running their business, certain SOHO users are willing to pay
more for higher-quality, secure, reliable service than are residential consumer
Internet users.
Residential Consumer Internet Users. Residential consumer Internet users
generally only require a connection to their ISP, without the same level of
security and reliability required by business users. Frequent users desire
medium-to-high speed access to the Internet for Web browsing and downloading of
multimedia applications and files. Occasional users require low-to-medium speed
access to the Internet on a limited basis for Web browsing, e-mail and on-line
services. Occasional users generally prefer low-cost service, whereas more
frequent users are generally willing to pay a slight premium for higher speed.
46
<PAGE> 47
MANUFACTURING
Com21 tests and assembles its ComCONTROLLER headend equipment in the
Company's facility in Milpitas, California. The Company outsources ComCONTROLLER
printed circuit board assemblies on a turnkey basis to CMC, and performs final
integration and burn-in on-site. The Company configures the headend equipment
and the network management and provisioning software prior to customer shipment.
Com21 outsources turnkey manufacturing of the ComPORT cable modem to
Celestica, a contract manufacturer located in Toronto, Canada. The Company
believes that employing a turnkey manufacturer will enable it to meet
anticipated manufacturing needs and reduce the cost of product procurement.
Together with Celestica, Com21 has developed and implemented a series of product
test methodologies, quality standards and process control parameters.
The Company's engineering team designs ASICs and performs simulation
testing. When the fundamental design is stable, the Company's contract foundry
fabricates the ASIC for prototype testing and upon completion of these tests the
ASIC is manufactured in volume by Atmel. The Company believes its current
manufacturing capabilities can accommodate its requirements through the end of
1999. Warranty and repair support is performed at the Company's Milpitas
facility.
The Company maintains only a limited in-house manufacturing capability for
final assembly, testing and integration of headend products. The Company's
future success will depend, in significant part, on its ability to manufacture,
or have others manufacture, its products cost-effectively and in volumes
sufficient to meet customer demand. There are a number of risks associated with
the Company's dependence upon third party manufacturers, including but not
limited to, reduced control over delivery schedules, quality assurance,
manufacturing yields and costs, the potential lack of adequate capacity during
periods of excess demand, limited warranties on products supplied to the
Company, increases in prices and the potential misappropriation of the Company's
intellectual property. A manufacturing disruption could impact the production of
the Company's products for a substantial period of time, which could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company has no long-term contracts or arrangements with
any of its vendors that guarantee the availability of product, the continuation
of particular payment terms or the extension of credit limits. There can be no
assurance that the Company will not experience supply problems in the future
from any of its manufacturers. Any such difficulties could have a material
adverse effect on the Company's business, operating results and financial
condition.
In addition, Celestica is a foreign corporation, and the Company may
increase its use of foreign manufacturers in the future. Any foreign or domestic
regulations regarding foreign exports and imports, trade barriers and tariffs
currently in place or imposed in the future could materially and adversely
affect the Company's ability to obtain modems. Because lead times for materials
needed to produce modems and headend equipment can be between eight and 26
weeks, the Company may not be able to meet the demand for its products, which
could adversely affect the Company's ability to support cable operators'
expansion of cable modem service to cable operators' customers. The Company has
had only limited experience manufacturing and arranging for the manufacture of
its products, and there can be no assurance that the Company or any manufacturer
of the Company's products will be successful in increasing its manufacturing
volume. The Company may need to procure additional manufacturing facilities and
equipment, adopt new inventory controls and procedures, substantially increase
its personnel and revise its quality assurance and testing practices, and there
can be no assurance that any of these efforts will be successful. See "Risk
Factors -- Limited Manufacturing Experience; Dependence on Third-Party
Manufacturing" and "-- Risks Associated with International Markets."
MARKETING AND SALES
Marketing. Domestically, the Company targets its marketing efforts
primarily at cable operators. The domestic cable industry is comprised of a
limited number of cable operators, and purchase decisions by each cable operator
are typically influenced by the cable operator's technical experts. Direct
marketing activities focus on reaching these technical experts and creating
product awareness and credibility for
47
<PAGE> 48
Com21's systems within the cable operator community. Internationally, the
Company focuses its marketing efforts on supporting its systems integration
partners' marketing programs.
A key factor to building global brand awareness for Com21 products is
promoting the success of the Company's commercial cable modem system
deployments. Com21 also educates cable operators regarding the benefits of
providing tiered services to a diverse subscriber base, ranging from residential
consumers to business users. Com21 is also building its brand name through
continued publicity and referral efforts in both media and industry-centered
activities. Com21 markets its systems through several promotional programs,
including direct mail campaigns to the larger cable operators, editorial
presence in various trade magazines, public speaking opportunities, national
cable trade show participation, Web site-based communication and promotion,
media sponsorships and participation in standards activities.
Sales. The Company has a sales force of nine people in three domestic
locations and The Netherlands. Com21 sells its products in North America
primarily through direct sales efforts to cable operators. Internationally, the
Company sells its products primarily to systems integrators, who sell to cable
operators. The Company's two largest systems integrators are Philips and
Siemens, both of whom have a strong presence in numerous markets. The Company's
systems integrators have established customer bases and relationships with cable
operators. These relationships allow the Company to market and create brand
awareness within each region by selling locally into their respective markets,
and the local presence of the systems integrators bridges cultural and
communication gaps. As of March 31, 1998, the Company had agreements with
systems integrators in Europe, Asia, Latin America and the Pacific Rim.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on increasing
the scalability and performance of its current products, reducing the cable
operator's cost of ownership, enhancing value-added services for subscribers,
reducing costs and supporting emerging cable modem standards. In addition to
enhancements of the current ComUNITY Access system products, the Company has
also focused research and development efforts on new products, including the
MCNS-compliant cable modem, the RPM, the mini ComCONTROLLER, the parallel port
and secure IP AIM modules and the toll-quality voice module and telephony
gateway. See "Products -- Products Under Development." Other developments
underway include a 100BaseT interface with support for spanning tree and
standards-based Institute of Electrical and Electronics Engineering, Inc.
("IEEE") 802.3 VLANs and a 155 Mbps OC-3 ATM interface to provide an integrated
connection to the cable operator's fiber SONET distribution network.
The Company's research and development expenditures were $4.3 million for
the three months ended March 31, 1998, $13.5 million in 1997 and $12.4 million
in 1996. Research and development expenses primarily consist of salaries and
related costs of employees engaged in ongoing research, design and development
of the Company's products and technology.
As of March 31, 1998, Com21 had a team of 73 engineers with expertise in RF
design and electronics, encryption, modulation and demodulation, digital
electronics design, networking, embedded software, ASIC design, and network
management. The engineering team includes three engineers with Ph.D.s and 37
with advanced degrees. The Company is seeking to hire additional skilled
engineers for research and development. The Company's business, operating
results and financial condition could be adversely affected if it encounters
delays in hiring additional engineers. See "Risk Factors -- Dependence on Key
Personnel and Hiring of Additional Personnel."
The Company's future performance depends on a number of factors, including
its ability to identify emerging technological trends in its target markets,
develop and maintain competitive products, enhance its products by adding
innovative features that differentiate its products from those of competitors,
bring products to market on a timely basis at competitive prices, properly
identify target markets and respond effectively to new technological changes or
new product announcements by others. No assurance can be given that the
Company's design and introduction schedules for any additions and enhancements
to its existing and future products will be met, that these products will
achieve market acceptance, or that these
48
<PAGE> 49
products will be able to be sold at average selling prices ("ASPs") that are
favorable to the Company. In evaluating new product decisions, the Company must
anticipate well in advance the future demand for product features and
performance characteristics, as well as available supporting technologies,
manufacturing capacity, industry standards and competitive product offerings.
The Company must also continue to make significant investments in research and
development in order to continually enhance the performance and functionality of
its products to keep pace with competitive products and customer demands for
improved performance, features and functionality. The technical innovations
required for the Company to remain competitive are inherently complex and
require long development cycles. Such innovations must be completed before
developments in networking technologies or standards render them obsolete and
must be sufficiently compelling to induce network equipment vendors to favor
them over alternative technologies. Moreover, the Company must generally incur
substantial research and development costs before the technical feasibility and
commercial viability of a product line can be ascertained. There can be no
assurance that revenues from future products or product enhancements will be
sufficient to recover the development costs associated with such products or
enhancements or that the Company will be able to secure the financial resources
necessary to fund future development. The failure to successfully develop new
products on a timely basis could have a material adverse effect on the Company's
business, operating results and financial condition. See "Risk Factors -- Risks
Associated with New Product Development."
CUSTOMER SERVICE AND TECHNICAL SUPPORT
The Company believes that successful long-term relations with its customers
require a service organization committed to customer satisfaction. As of March
31, 1998, the Company had eleven technical support employees at its
headquarters. The Company requires all new customers to attend a five day
training course prior to receiving and installing a system. Customer personnel
are trained in the installation, maintenance and operation of the ComUNITY
Access system.
In North America, the Company provides direct support by telephone and at
the customers' locations. The Company supplies support 24 hours a day, seven
days a week. Internationally, systems integrators provide first level support,
and the Company provides second level support. The Company maintains a customer
call tracking system that captures and monitors service activities. The Company
is able to identify problems with a customer's ComUNITY Access system via a
dialup analog modem connection or a Web-based management interface to assist
with diagnostics.
COMPETITION
The markets for the Company's products are intensely competitive, rapidly
evolving and subject to rapid technological change. The principal competitive
factors in this market include, or are likely to include, product performance
and features, reliability, technical support and service, relationships with
cable system operators and systems integrators, compliance with industry
standards, compatibility with the products of other suppliers, sales and
distribution interoperability, strength of brand name, price, long-term cost of
ownership to cable operators and general industry and economic conditions. Many
of the Company's current and potential competitors have longer operating
histories, greater name recognition and significantly greater financial,
technical, marketing and distribution resources than the Company. Such
competitors may undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and devote substantially more resources to
developing new products than the Company. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not
materially adversely affect the Company's business, operating results and
financial condition. In response to changes in the competitive environment, the
Company may make certain pricing, service, marketing or other strategic
decisions that could have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
Company's competitors will not develop enhancements to, or future generations
of, products that will offer prices or performance superior to that of the
Company's products. The Company believes that the broad adoption of MCNS will
cause increased competition in the North American market, which is likely to
negatively affect the Company's gross margin. There can be no assurance that
competitors will not more quickly develop MCNS-compliant products than the
Company. Current customers of the Company that move to the MCNS platform could
choose alternative cable modem
49
<PAGE> 50
suppliers or choose to purchase MCNS-compliant cable modems from multiple
suppliers. Such competition could materially adversely affect the Company's
business, operating results and financial condition.
The Company's current and potential competitors include 3Com, Cisco, the
LANcity Division of Bay Networks, Inc., Hybrid, General Instrument Corporation,
Motorola, Inc., Terayon Communication Systems and Zenith Electronics
Corporation. Some of these competitors have existing relationships with many of
the Company's prospective customers. There can be no assurance that the Company
will establish relationships with cable operators who have existing
relationships with those competitors, and failure to establish such
relationships could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, the Company anticipates
that some large consumer electronics companies, such as Matsushita, Sony Corp.,
Thomson and Toshiba America, Inc., will likely introduce competitive cable modem
products in the future. As the MCNS specification is adopted for the North
American market, the distribution of cable modems may move into the retail
channel. If this occurs, the large consumer electronics companies could gain a
competitive advantage, due to their well established retail distribution
capabilities. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive pressures
faced by the Company will not have a material adverse effect on the Company's
business, operating results and financial condition. See "Risk
Factors -- Competition".
In addition to competitive cable modem offerings, the Company also expects
to face intense competition from wireline telco-related and wireless
technologies that provide high bandwidth access in the local loop. Competing
technologies include telco-related xDSL implementations, such as ADSL and high
bit rate digital subscriber line ("HDSL"), wireless offerings such as LMDS, MMDS
and DBS. Because of the ubiquity of the telephone infrastructure, competition
from telco-related wireline solutions is expected to be intense. There can be no
assurance that cable modem technology will compete effectively against wireline
and wireless technologies in the market for high bandwidth access in the local
loop.
INTELLECTUAL PROPERTY; PATENT LITIGATION
The Company relies on a combination of patent, copyright and trademark
laws, and on trade secrets, confidentiality provisions and other contractual
provisions to protect its proprietary rights. These measures afford only limited
protection. The Company currently has five issued U.S. patents and several
pending patent applications. There can be no assurance that the Company's means
of protecting its proprietary rights in the U.S. or abroad will be adequate or
that competitors will not independently develop similar technologies. The
Company's future success will depend in part on its ability to protect its
proprietary rights to the technologies used in its principal products. Despite
the Company's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of the Company's products or to obtain and use trade
secrets or other information that the Company regards as proprietary. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights as fully as do the laws of the U.S. There can be no assurance
that any issued patent will preserve the Company's proprietary position, or that
competitors or others will not develop technologies similar to or superior to
the Company's technology. Failure of the Company to enforce and protect its
intellectual property rights could have a material adverse effect on the
Company's business, operating results and financial condition.
From time to time, third parties, including competitors of the Company,
have asserted patent, copyright and other intellectual property rights to
technologies that are important to the Company. The Company expects that it 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. In this regard, in 1997 the Company received a written notice from
Hybrid in which Hybrid claimed to have patent rights in certain cable modem
technology and requested that the Company review its own products in light of
Hybrid's alleged patent rights to U.S. Patent No. 5,586,121 (the "121 patent")
issued on December 17, 1996 and entitled "Asymmetric Hybrid Access System and
Method" and U.S. Patent No. 5,347,304 (the "304 patent") issued on September 13,
1994 and entitled "Remote Link Adapter for Use in TV Broadcast Data Transmission
Systems" (collectively, the "Hybrid patents"). The Company informed Hybrid that
it believes that the Company's products do not infringe any valid claim of the
Hybrid patents. In January 1998, Hybrid filed an action against the Company in
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<PAGE> 51
the U.S. District Court for the Eastern District of Virginia, accusing the
Company of willfully infringing the Hybrid patents, among other claims.
Subsequently, the Company filed suit for declaratory relief against Hybrid in
the U.S. District Court for the Northern District of California asserting that
it does not infringe the Hybrid patents and that the Hybrid patents are invalid.
The Company then filed a motion in the Virginia District Court to transfer the
action filed by Hybrid to the Northern District of California, and that motion
was granted and the actions were consolidated in the Northern District of
California on April 29, 1998. Hybrid's complaint seeks injunctive relief and
unspecified damages, among other relief. Hybrid's complaint also identifies a
pending application for reissuance of the 304 patent to broaden the scope of its
claims, which the U.S. Patent and Trademark Office has allowed for reissuance
with respect to certain claims, and states that once the reissue application is
issued, it will be substituted for the 304 patent in the action. On April 21,
1998, the 304 patent was reissued; however, to date Hybrid has not moved to
amend its complaint. The Company has received opinions of its patent counsel
that the claims of the Hybrid patents, including the claims set forth in
Hybrid's 304 patent as reissued, are either invalid or not infringed by the
Company's products. However, there can be no assurance that some or all of the
Company's products will not ultimately be determined to infringe the Hybrid
patents, including the 304 patent as reissued, and the Company anticipates that
Hybrid will continue to pursue litigation with respect to these claims. The
results of any litigation matter are inherently uncertain. In the event of an
adverse result in the Hybrid litigation, or in any other litigation with third
parties that could arise in the future with respect to intellectual property
rights relevant to the Company's products, the Company could be required to pay
substantial damages, including treble damages if the Company is held to have
willfully infringed, to cease 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. There can be no assurance
that licenses will be available from Hybrid, or any other third party that
asserts intellectual property claims against the Company, on commercially
reasonable terms, or at all. In addition, litigation frequently involves
substantial expenditures and can require significant management attention, even
if the Company ultimately prevails. Accordingly, there can be no assurance that
the Hybrid matter will not have a material adverse effect on the Company's
business, operating results and financial condition.
Because of the early stage of this litigation, and because Hybrid has
sought unspecified damages, neither the ultimate outcome of this litigation nor
any costs and payments resulting from the litigation or any settlement can
presently be determined. Accordingly, no provision for any loss which may result
from the Hybrid litigation has been recorded in the accompanying financial
statements. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business -- Intellectual Property; Patent Litigation"
and Note 11 to Notes to Financial Statements.
EMPLOYEES
As of March 31, 1998, the Company had a total of 136 full-time employees
and eleven full-time contractors. Of the total number of employees, 73 were in
research and development, 25 in marketing and technical support, 18 in
operations, nine in sales and eleven in administration. The Company's employees
are not represented by any collective bargaining agreement with respect to their
employment by the Company, and the Company has never experienced an organized
work stoppage.
The Company's future success is heavily dependent upon its ability to hire
and retain qualified technical, marketing and management personnel. The
competition for such personnel is intense, particularly for engineering
personnel with related networking and integrated circuit design expertise and
for technical support personnel with networking engineering expertise. See "Risk
Factors -- Dependence on Key Personnel and Hiring of Additional Personnel."
FACILITIES
The Company leases approximately 44,600 square feet of administrative,
research and development, and manufacturing facilities in Milpitas, California.
The Company believes that its current facilities are sufficient to handle the
Company's operations for at least the next nine months. The Company believes
that future growth can be accommodated by obtaining the necessary additional
space. The Company also leases two sales offices, in Denver, Colorado and
Atlanta, Georgia.
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<PAGE> 52
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of March 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- ---- --------
<S> <C> <C>
Peter D. Fenner................... 62 President, Chief Executive Officer and Director
Paul Baran........................ 71 Chairman of the Board of Directors
David L. Robertson................ 56 Chief Financial Officer, Vice President, Finance and
Secretary
William J. Gallagher.............. 54 Vice President, Sales
Buck J. Gee....................... 48 Vice President, Marketing
Michael F. Gordon................. 48 Vice President, Field Services and Customer Support
Kenneth C. Gorman................. 53 Vice President, Engineering
Mark Laubach...................... 42 Chief Technical Officer and Vice President, Technology
Timothy I. Miller................. 43 Vice President, Manufacturing
C. Richard Kramlich............... 62 Director
Scott J. Loftesness............... 50 Director
Robert C. Hawk.................... 58 Director
William R. Hearst III............. 48 Director
Robert A. Hoff.................... 45 Director
Robert W. Wilmot.................. 53 Director
</TABLE>
- ---------------
PETER D. FENNER. Mr. Fenner has been President, Chief Executive Officer and
a Director of the Company since February 1996. From January 1989 through April
1992, he served as President of the Transmission Systems Business Unit of AT&T
Network Systems (Lucent) and Corporate Officer at AT&T. From April 1992 to
February 1996, Mr. Fenner was an independent consultant. From February 1986
through December 1988, Mr. Fenner was Vice President, Product Planning for
AT&T's Network Systems Division. Mr. Fenner is Director of CorNet Information
Ltd. Mr. Fenner received an S.M. from the Sloan School of Management at the
Massachusetts Institute of Technology, where he was a Sloan Fellow, and a B.S.
in Industrial Engineering from Lehigh University.
PAUL BARAN. Mr. Baran has been the Chairman of the Board of Directors since
the Company's inception in June 1992. He is presently retired and is also a
Director of ALOHA Networks, Inc. Mr. Baran was chosen by Communications Week and
Data Communications as one of the top 25 visionaries in the data communications
industry and was recipient of the Electronic Frontier Foundation Pioneer Award
(1993), the Marconi International Fellowship Award (1991), the Institute of
Electronics and Electrical Engineering, Inc. ("IEEE") Alexander Graham Bell
Medal (1990), the ACM SIG/Communications Award (1989) and the IEEE
Communications Society Edwin Armstrong Award (1987). He co-founded Equatorial
Communications, Packet Technologies, Telebit Corporation and Metricom, Inc. Mr.
Baran is a Fellow of the IEEE and a Fellow of the AAAS. Mr. Baran received an
M.S. in both Electrical Engineering and Computers from the University of
California, Los Angeles, and a B.S. in Electrical Engineering from Drexel
University.
DAVID L. ROBERTSON. Mr. Robertson has been Chief Financial Officer and Vice
President, Finance of the Company since April 1995. From March 1993 through
April 1995, Mr. Robertson was the Vice President of Finance and Chief Financial
Officer at Endosonics Corporation, a medical device company. From December 1992
to March 1993, Mr. Robertson was an independent consultant. From November 1990
through December 1992, Mr. Robertson was the Vice President and Chief Financial
Officer at Circadian, Inc., a medical device company. He also participated in
the founding of StrataCom, Inc. and served as a Director of StrataCom for two
years during its early stages.
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<PAGE> 53
Mr. Robertson is a Certified Public Accountant, and received an M.B.A. from the
University of California, Berkeley and a B.A. in economics from the University
of Washington.
WILLIAM J. GALLAGHER. Mr. Gallagher has been Vice President of Sales since
August 1995. From October 1994 to July 1995 he was Vice President of Marketing
at Pacific Gas & Electric Company ("PG&E"), a utility company. From October 1993
to September 1994, Mr. Gallagher was with MCI Telecommunications Corp. as Vice
President, Carrier Services. From August 1991 to September 1994, Mr. Gallagher
was a Vice President and Consultant at San Francisco Consulting Group. He
received a B.A. from the University of New Mexico.
BUCK J. GEE. Mr. Gee has been Vice President of Marketing since November
1994. From September 1993 through October 1994, Mr. Gee was the Manager of the
FDDI Adapters Group at Cisco. From December 1990 through September 1993 he was
Director of Marketing and Director of Business Development for Crescendo
Communications, Inc., a computer networking company. Mr. Gee has also held
engineering and marketing positions at Hewlett-Packard Company, 3Com and
National Semiconductor Corp. He received an M.B.A. from Harvard Business School
and both a B.S. and a M.S. in Electrical Engineering from Stanford University.
MICHAEL F. GORDON. Mr. Gordon has been Vice President of Field Services and
Customer Support since July 1997. From December 1995 through June 1997, he was
an independent technical and management consultant. From February 1992 through
December 1997, Mr. Gordon was the President and Chief Operating Officer of
Telecoupon Network, Inc. a coupon delivery kiosk company. Mr. Gordon received a
B.S. in Computer Science from the University of Michigan.
KENNETH C. GORMAN. Mr. Gorman has been Vice President of Engineering since
July 1995. From April 1992 through June 1995, he was employed at Resound, Inc.,
a consumer health company where he served in various capacities including Vice
President, Engineering. From April 1989 to April 1992 Mr. Gorman was employed at
Sun Microsystems, Inc. ("Sun"). Mr. Gorman received an S.M.E. in Electrical
Engineering from the Massachusetts Institute of Technology and a B.S. in
Electrical Engineering from the University of Kansas.
MARK LAUBACH. Mr. Laubach has been Vice President of Technology and Chief
Technical Officer of the Company since June 1996. He is a co-founder of the
Company and has also been Chief Architect since June 1994. From November 1979 to
June 1994, Mr. Laubach was an engineer at Hewlett-Packard Laboratories, where he
was directly responsible for impacting the international IP over ATM networking
standards. He is a member of the Internet Engineering Task Force ("IETF") and
past chair of the IP over ATM Working Group. Mr. Laubach participates in the ATM
Forum's Residential Broadband working group and is the past liaison to the IEEE
802.14 working group. He participates in the IEEE 802.14 working group and the
SCTE High-Speed Digital Communications standards working group. Mr. Laubach
received both a M.S.C.S. in Computer Engineering and a B.S. in Electrical
Engineering from the University of Delaware.
TIMOTHY I. MILLER. Mr. Miller has been Vice President of Manufacturing
since November 1996 and has been employed by the Company since October 1994.
From November 1990 to September 1994, he was Director of Manufacturing and
Materials at Coactive Computers, a computer software company, where he was
responsible for scheduling and production. Mr. Miller received both a B.S. in
Business Administration and a B.A. from San Jose State University.
C. RICHARD KRAMLICH. Mr. Kramlich has been a Director of the Company since
May 1994. Mr. Kramlich is the co-founder and has been General Partner of New
Enterprise Associates since 1978. He is a Director of Ascend Communications,
Inc., Chalone, Inc., Lumisys, Inc., Macromedia, Inc., Silicon Graphics, Inc.,
and SyQuest Technology. Mr. Kramlich received an M.B.A. from Harvard Business
School and a B.S. from Northwestern University.
SCOTT J. LOFTESNESS. Mr. Loftesness has been a Director of the Company
since its inception in 1992 and is a co-founder of the Company. Mr. Loftesness
is Group Executive of Merchant Systems, First Data Corporation, a credit card
processing and payment system company, where he has been
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<PAGE> 54
employed since June 1994. From September 1991 through June 1994, he was Group
Executive at Visa International. His other prior experience includes senior
management positions with FMR Corp. (a parent of Fidelity Investments) and
International Business Machines Corporation. He is a Director of First Virtual
Holdings and Consensus Development, Inc. Mr. Loftesness attended the University
of California, Berkeley.
ROBERT C. HAWK. Mr. Hawk has been a Director of the Company since January
1997. Mr. Hawk has been an independent business consultant since April 1997.
From April 1996 through March 1997, he was President of U.S. West Multimedia, a
cable Company. From April 1986 through March 1996, he was the President of
Carrier Division, U.S. West Communications, a telecommunications Company. He is
a Director of PairGain Technologies, Premisys Communications, Inc., Xylan Corp.,
Concord Corp., and RADCom Corp. Mr. Hawk received an M.B.A. from the University
of San Francisco and a B.B.A. from the University of Iowa.
WILLIAM R. HEARST III. Mr. Hearst has been a Director of the Company since
April 1998. Mr. Hearst has also been a Director of @Home Corporation ("@Home")
since August 1995 and has served as Vice Chairman of the Board of Directors of
@Home since July 1996. He has been a general partner of KPCB, a venture capital
firm, since January 1995. From May 1995 to July 1996, he was the founding Chief
Executive Officer of @Home. Before joining KPCB, Mr. Hearst was editor and
publisher of the San Francisco Examiner for ten years. He is a Fellow of the
AAAS and a Trustee of the Carnegie Institute of Washington and the California
Academy of Sciences. Mr. Hearst holds an A.B. in mathematics from Harvard
University.
ROBERT A. HOFF. Mr. Hoff has been a Director since the Company's inception
in May 1994. He has been a general partner at CrossPoint Venture Partners
("CrossPoint") since 1983. Mr. Hoff serves as a Director of PairGain Inc., Onyx
Acceptance Corp. and US Web Corporation. Mr. Hoff received an M.B.A. from
Harvard Business School and a B.S. in Business Administration from Bucknell
University.
ROBERT W. WILMOT. Dr. Wilmot has been a Director of the Company since April
1995. Dr. Wilmot has been Chairman at Wilmot Consulting Inc. since May 1995.
From April 1994 to May 1995, Mr. Wilmot was an independent consultant and
investor. From May 1985 through April 1994, he was Chairman at Wilmot
Enterprises Ltd. His other prior positions include Vice President and Managing
Director of Texas Instruments and CEO of International Computers PLC, a computer
company. Dr. Wilmot is a founder of a number of companies including ES2 SA, the
OASiS Group Plc, CMI Ltd., MOVID Technology Inc., Poqet Computer Inc., Vxtreme,
Inc. and Integrity Arts, Inc. He is a Director of Sequent Computer Systems. Dr.
Wilmot received a B.S. in Electrical Engineering from Nottingham University.
The Company has authorized eight directors. Each director is elected for a
period of one year at the Company's annual meeting of stockholders and serves
until the next annual meeting or until his successor is duly elected and
qualified. The executive officers serve at the discretion of the Board of
Directors. There are no family relationships among any of the Company's
directors or executive officers.
COMMITTEES OF THE BOARD OF DIRECTORS
Compensation Committee. The Compensation Committee is primarily responsible
for reviewing and approving the Company's general compensation policies and
setting compensation levels for the Company's executive officers. The committee
also administers the Company's incentive compensation plans. The committee
currently consists of two directors, Mr. Loftesness and Mr. Hoff.
Audit Committee. The Audit Committee is primarily responsible for approving
the services performed by the Company's independent auditors and reviewing the
auditor's reports regarding the Company's accounting practices and systems of
internal accounting controls. The committee currently consists of two directors,
Mr. Wilmot and Mr. Kramlich.
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<PAGE> 55
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Company's Board of
Directors are Mr. Loftesness and Mr. Hoff. No executive officer of the Company
serves on the board of directors or compensation committee of any entity which
has one or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee.
DIRECTOR COMPENSATION
The Company currently does not compensate any member of the Company's Board
of Directors. Members of the Board of Directors will be eligible to receive
discretionary option grants and stock issuances under the 1998 Stock Incentive
Plan. In addition, under the 1998 Stock Incentive Plan non-employee directors
will receive automatic option grants upon becoming directors and on the date of
each annual meeting of stockholders. The 1998 Stock Incentive Plan also contains
a director fee option grant program. Should this program be activated in the
future, each non-employee Board member will have the opportunity to apply all or
a portion of any annual retainer fee otherwise payable in cash to the
acquisition of a below-market option grant. See "Management -- Benefit Plans."
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal year ended December 31, 1997
(the "Last Fiscal Year") certain information with respect to the compensation of
the Company's Chief Executive Officer and each of the four other executive
officers of the Company who were serving as executive officers of the Company at
the end of the Last Fiscal Year and whose total annual salary and bonus during
such fiscal year exceeded $100,000 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION($)
NAME AND ----------------------
PRINCIPAL POSITION YEAR SALARY BONUS
- ----------------------------------------------------------- ----- ----------- -------
<S> <C> <C> <C>
Peter D. Fenner............................................ 1997 $300,040 --
President and Chief Executive Officer
Buck J. Gee................................................ 1997 $144,585 --
Vice President, Marketing
David L. Robertson......................................... 1997 $144,585 --
Chief Financial Officer, Vice President, Finance and
Secretary
William J. Gallagher....................................... 1997 $150,020 $78,065
Vice President, Sales
Kenneth C. Gorman.......................................... 1997 $152,790 $25,000
Vice President, Engineering
</TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No stock options or stock appreciation rights were granted to the Named
Executive Officers during fiscal 1997.
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<PAGE> 56
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND LAST FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning option exercises and
option holdings for the last Fiscal Year with respect to the Named Executive
Officers. Except as set forth below, no options or stock appreciation rights
were exercised by any such individual during such year, and no stock
appreciation rights were outstanding on December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT FISCAL MONEY OPTIONS AT FISCAL
SHARES YEAR-END(#)(2) YEAR-END($)(4)
ACQUIRED ON VALUE --------------------------- -----------------------------
NAME EXERCISE(#)(1)(2) REALIZED($)(3) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------------- -------------- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Peter D. Fenner...... 115,500 $147,450 371,500 -- $2,414,750 --
Buck J. Gee.......... 25,000 $ 62,500 -- -- -- --
David L. Robertson... 39,168 $109,587 15,000 -- $ 91,500 --
William J.
Gallagher.......... -- -- 97,500 -- $ 624,750 --
Kenneth C. Gorman.... 50,000 $ 10,000 -- -- -- --
</TABLE>
- ---------------
(1) As of December 31, 1997, Mr. Fenner was vested in 115,500 of the shares
exercised, Mr. Gee was vested in 7,917 of the shares exercised, Mr.
Robertson was vested in 16,667 of the shares exercised and Mr. Gorman was
vested in 13,125 of the shares exercised.
(2) Each of the Options was granted under the Company's 1995 Stock Option Plan.
Each of the options is immediately exercisable, but any shares purchased
under the options are subject to vesting requirements and may be repurchased
by the Company at the original exercise price paid per share upon the
optionee's cessation of service prior to vesting in such shares. The
repurchase right lapses with respect to 25% of the option shares upon
completion of one year of service from the vesting commencement date and the
balance in a series of equal monthly installments over the next 36 months of
service thereafter. Each option has a maximum term of ten years, subject to
earlier termination in the event of the optionee's cessation of service with
the Company. As of December 31, 1997, Mr. Fenner was vested in 100,665
shares of his outstanding options, Mr. Robertson was vested in 3,750 of his
outstanding options and Mr. Gallagher was vested in 52,187 shares of his
outstanding options.
(3) Based on the fair market value of the purchased option shares at the time of
exercise less the option exercise price paid for those shares.
(4) Based on the fair market value of the option shares at the end of 1997
($6.90 per share) less the option exercise price payable for those shares.
OPTION GRANTS UNDER THE 1998 STOCK INCENTIVE PLAN
Effective April 22, 1998 the Board of Directors authorized the Compensation
Committee to grant options to purchase an aggregate of 505,250 shares of Common
Stock, at a price of $9.00 per share, to certain of the Company's employees,
including executive officers.
BENEFIT PLANS
1998 Stock Incentive Plan. The Company's 1998 Stock Incentive Plan (the
"1998 Plan") is intended to serve as the successor equity incentive program to
the Company's 1995 Stock Option Plan, as amended (the "Predecessor Plan"). The
1998 Plan was adopted by the Board on March 10, 1998 and was subsequently
approved by the stockholders in March 1998. The 1998 Plan became effective on
April 1, 1998 (the "Plan Effective Date").
2,523,510 shares of Common Stock have been authorized for issuance under
the 1998 Plan. Such share reserve consists of the number of shares available for
issuance under the Predecessor Plan on the date the Underwriting Agreement for
this offering is executed (the "Underwriting Date"), including the shares
subject to outstanding options and an increase of 500,000 shares approved by the
Board and the Stockholders on April 22, 1998. This initial reserve may be
increased to the extent any unvested shares of Common Stock issued under the
Predecessor Plan are repurchased by the Company after the Underwriting Date, at
the exercise price paid per share, in connection with the holder's termination
of service, but in no event shall the number of such repurchased shares added to
the reserve exceed 271,570. In addition, the number of shares of Common Stock
reserved for
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<PAGE> 57
issuance under the 1998 Plan will automatically be increased on the first
trading day of each calendar year, beginning in calendar year 1999, by an amount
equal to the lesser of five percent (5%) of the total number of shares of Common
Stock outstanding on the last trading day of the preceding calendar year or
1,500,000 shares. In no event, however, may any one participant in the 1998 Plan
receive option grants, separately exercisable stock appreciation rights or
direct stock issuances for more than 500,000 shares of Common Stock in the
aggregate per calendar year.
On the Underwriting Date, outstanding options and unvested shares issued
under the Predecessor Plan will be incorporated into the 1998 Plan, and no
further option grants will be made under the Predecessor Plan. The incorporated
options and unvested shares will continue to be governed by their existing
terms, unless the Plan Administrator elects to extend one or more features of
the 1998 Plan to those options or unvested shares. Except as otherwise noted
below, the incorporated options have substantially the same terms as will be in
effect for grants made under the Discretionary Option Grant Program of the 1998
Plan.
The 1998 Plan is divided into five separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non-employee Board members and
consultants) may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock at an exercise price not less than
100% of their fair market value on the grant date, (ii) the Stock Issuance
Program under which such individuals may, in the Plan Administrator's
discretion, be issued shares of Common Stock directly, through the purchase of
such shares at a price not less than 100% of their fair market value at the time
of issuance or as a bonus tied to the performance of services, (iii) the Salary
Investment Option Grant Program which may, at the Plan Administrator's sole
discretion, be activated for one or more calendar years and, if so activated,
will allow executive officers and other highly compensated employees the
opportunity to apply a portion of their base salary to the acquisition of
special below-market stock option grants, (iv) the Automatic Option Grant
Program under which option grants will automatically be made at periodic
intervals to eligible non-employee Board members to purchase shares of Common
Stock at an exercise price equal to 100% of their fair market value on the grant
date and (v) the Director Fee Option Grant Program which may, in the Plan
Administrator's sole discretion, be activated for one or more calendar years
and, if so activated, will allow non-employee Board members the opportunity to
apply a portion of the annual retainer fee otherwise payable to them in cash
each year to the acquisition of special below-market option grants.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Compensation Committee. The Compensation Committee as
Plan Administrator will have complete discretion to determine which eligible
individuals are to receive option grants or stock issuances under those
programs, the time or times when such option grants or stock issuances are to be
made, the number of shares subject to each such grant or issuance, the status of
any granted option as either an incentive stock option or a non-statutory stock
option under the Federal tax laws, the vesting schedule to be in effect for the
option grant or stock issuance and the maximum term for which any granted option
is to remain outstanding. However, any discretionary option grants or stock
issuances to members of the Compensation Committee shall be made by a
disinterested majority of the Board. The Compensation Committee will also have
the exclusive authority to select the executive officers and other highly
compensated employees who may participate in the Salary Investment Option Grant
Program in the event that program is activated for one or more calendar years,
but neither the Compensation Committee nor the Board will exercise any
administrative discretion with respect to option grants under the Salary
Investment Option Grant Program or under the Automatic Option Grant or Director
Fee Option Grant Program for the non-employee Board members. All grants under
those three latter programs will be made in strict compliance with the express
provisions of each such program.
The exercise price for the shares of Common Stock subject to option grants
made under the 1998 Plan may be paid in cash or in shares of Common Stock held
for the requisite period to avoid an accounting charge and valued at fair market
value on the exercise date. The option may also be
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<PAGE> 58
exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the Plan Administrator may provide financial assistance
to one or more optionees in the exercise of their outstanding options or the
purchase of their unvested shares by allowing such individuals to deliver a
full-recourse, interest-bearing promissory note in payment of the exercise price
and any associated withholding taxes incurred in connection with such exercise
or purchase.
The Plan Administrator will have the authority to effect the cancellation
of outstanding options under the Discretionary Option Grant Program (including
options incorporated from the Predecessor Plan) in return for the grant of new
options for the same or different number of option shares with an exercise price
per share based upon the fair market value of the Common Stock on the new grant
date.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Common Stock subject to the surrendered option over (ii) the aggregate exercise
price payable for such shares. Such appreciation distribution may be made in
cash or in shares of Common Stock. None of the incorporated options from the
Predecessor Plan contain any stock appreciation rights.
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation will automatically accelerate in full,
and all unvested shares under the Discretionary Option Grant and Stock Issuance
Programs will immediately vest, except to the extent the Company's repurchase
rights with respect to those shares are to be assigned to the successor
corporation. The Plan Administrator will have complete discretion to grant one
or more options under the Discretionary Option Grant Program which will become
fully exercisable for all the option shares in the event those options are
assumed in the acquisition and the optionee's service with the Company or the
acquiring entity involuntarily terminates within a designated period (not to
exceed eighteen months) following such acquisition. The vesting of outstanding
shares under the Stock Issuance Program may be accelerated upon similar terms
and conditions. The Plan Administrator will also have the authority to grant
options which will immediately vest upon an acquisition of the Company, whether
or not those options are assumed by the successor corporation. The Plan
Administrator is also authorized under the Discretionary Option Grant and Stock
Issuance Programs to grant options and to structure repurchase rights so that
the shares subject to those options or repurchase rights will immediately vest
in connection with a change in control of the Company (whether by successful
tender offer for more than fifty percent (50%) of the outstanding voting stock
or by a change in the majority of the Board by reason of one or more contested
elections for Board membership), with such vesting to occur either at the time
of such change in control or upon the subsequent involuntary termination of the
individual's service within a designated period (not to exceed eighteen months)
following such change in control. The options incorporated from the Predecessor
Plan will immediately vest upon an acquisition of the Company by merger or asset
sale, unless those options are assumed or replaced by, and the Company's
repurchase rights assigned to, the successor entity. In addition, certain option
grants to executive officers provide that if the options are assumed in an
acquisition and the Optionee's service is involuntarily terminated within
eighteen months following such acquisition, the option shares will vest in full
and the Company's repurchase rights will lapse. The Plan Administrator will have
the discretion to extend the acceleration provisions of the 1998 Plan to options
outstanding under the Predecessor Plan.
In the event the Plan Administrator elects to activate the Salary
Investment Option Grant Program for one or more calendar years, each executive
officer and other highly compensated employee of the Company selected for
participation may elect, prior to the start of the calendar year, to reduce his
or her base salary for that calendar year by a specified dollar amount not less
than $10,000 nor more than $50,000. If such election is approved by the Plan
Administrator, the individual will automatically be granted, on the first
trading day in January of the calendar year for which that salary reduction is
to be in effect, a non-statutory option to purchase that number of shares of
Common Stock determined
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<PAGE> 59
by dividing the salary reduction amount by two-thirds of the fair market value
per share of Common Stock on the grant date. The option will be exercisable at a
price per share equal to one-third of the fair market value of the option shares
on the grant date. As a result, the total spread on the option shares at the
time of grant (the fair market value of the option shares on the grant date less
the aggregate exercise price payable for those shares) will be equal to the
amount of salary invested in that option. The option will vest and become
exercisable in a series of twelve (12) equal monthly installments over the
calendar year for which the salary reduction is to be in effect and will be
subject to full and immediate vesting upon certain changes in the ownership or
control of the Company.
Under the Automatic Option Grant Program, each individual who first becomes
a non-employee Board member at any time after the completion of this offering
will automatically receive an option grant for 15,000 shares as of the date such
individual joins the Board, provided such individual has not been in the prior
employ of the Company. In addition, on the date of each Annual Stockholders
Meeting held after the Plan Effective Date, each non-employee Board member who
is to continue to serve as a non-employee Board member will automatically be
granted an option to purchase 5,000 shares of Common Stock, provided such
individual has served on the Board for at least six months.
Each automatic grant for the non-employee Board members will have a term of
10 years, subject to earlier termination following the optionee's cessation of
Board service. Each automatic option will be immediately exercisable for all of
the option shares; however, any unvested shares purchased under the option will
be subject to repurchase by the Company, at the exercise price paid per share,
should the optionee cease Board service prior to vesting in those shares. The
shares subject to each initial 15,000-share automatic option grant will vest
over a four-year period in successive equal annual installments upon the
individual's completion of each year of Board service measured from the option
grant date. Each 5,000-share automatic option grant will vest over a two-year
period in successive equal annual installments upon the individual's completion
of each year of Board service measured from the option grant date. However, the
shares subject to each automatic grant will immediately vest in full upon
certain changes in control or ownership of the Company or upon the optionee's
death or disability while a Board member.
Should the Director Fee Option Grant Program be activated in the future,
each non-employee Board member will have the opportunity to apply all or a
portion of any annual retainer fee otherwise payable in cash to the acquisition
of a below-market option grant. The option grant will automatically be made on
the first trading day in January in the year for which the retainer fee would
otherwise be payable in cash. The option will have an exercise price per share
equal to one-third of the fair market value of the option shares on the grant
date, and the number of shares subject to the option will be determined by
dividing the amount of the retainer fee applied to the program by two-thirds of
the fair market value per share of Common Stock on the grant date. As a result,
the total spread on the option (the fair market value of the option shares on
the grant date less the aggregate exercise price payable for those shares) will
be equal to the portion of the retainer fee invested in that option. The option
will vest and become exercisable for the option shares in a series of twelve
(12) equal monthly installments over the calendar year for which the election is
to be in effect. However, the option will become immediately exercisable and
vested for all the option shares upon (i) certain changes in the ownership or
control of the Company or (ii) the death or disability of the optionee while
serving as a Board member.
The shares subject to each option under the Salary Investment Option Grant,
Automatic Option Grant and Director Fee Option Grant Programs will immediately
vest upon (i) an acquisition of the Company by merger or asset sale or (ii) the
successful completion of a tender offer for more than 50% of the Company's
outstanding voting stock or a change in the majority of the Board effected
through one or more contested elections for Board membership.
Limited stock appreciation rights will automatically be included as part of
each grant made under the Automatic Option Grant, Salary Investment Option Grant
and Director Fee Option Grant Programs and may be granted to one or more
officers of the Company as part of their option grants under the
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<PAGE> 60
Discretionary Option Grant Program. Options with such a limited stock
appreciation right may be surrendered to the Company upon the successful
completion of a hostile tender offer for more than 50% of the Company's
outstanding voting stock. In return for the surrendered option, the optionee
will be entitled to a cash distribution from the Company in an amount per
surrendered option share equal to the excess of (i) the highest price per share
of Common Stock paid in connection with the tender offer over (ii) the exercise
price payable for such share.
The Board may amend or modify the 1998 Plan at any time, subject to any
required stockholder approval. The 1998 Plan will terminate on the earliest of
(i) March 9, 2008, (ii) the date on which all shares available for issuance
under the 1998 Plan have been issued as fully-vested shares or (iii) the
termination of all outstanding options in connection with certain changes in
control or ownership of the Company.
1998 Employee Stock Purchase Plan. The Company's 1998 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board on March 10, 1998
and approved by the stockholders in March 1998 and will become effective
immediately upon the execution of the Underwriting Agreement for this offering.
The Purchase Plan is designed to allow eligible employees of the Company and
participating subsidiaries to purchase shares of Common Stock, at semi-annual
intervals, through their periodic payroll deductions under the Purchase Plan,
and a reserve of 250,000 shares of Common Stock has been established for this
purpose.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration for 24 months. However, the initial
offering period will begin on the execution date of the Underwriting Agreement
and will end on the last business day in April 2000. The next offering period
will commence on the first business day in May 2000, and subsequent offering
periods will commence as designated by the Plan Administrator.
Individuals who are eligible employees (scheduled to work more than 20
hours per week for more than 5 calendar months per year) on the start date of
any offering period may enter the Purchase Plan on that start date or on any
subsequent semi-annual entry date (the first business day of May or November
each year). Individuals who become eligible employees after the start date of
the offering period may join the Purchase Plan on any subsequent semi-annual
entry date within that offering period.
Payroll deductions may not exceed 10% of base salary and the accumulated
payroll deductions of each participant will be applied to the purchase of shares
on his or her behalf on each semi-annual purchase date (the last business day in
April and October each year) at a purchase price per share equal to 85% of the
lower of (i) the fair market value of the Common Stock on the participant's
entry date into the offering period or (ii) the fair market value on the
semi-annual purchase date. In no event, however, may any one participant
purchase more than 1,500 shares, nor may all participants in the aggregate
purchase more than 60,000 shares on any one semi-annual purchase date.
Should the fair market value per share of Common Stock on any purchase date
be less than the fair market value per share on the start date of the two-year
offering period, then that offering period will automatically terminate, and a
new two-year offering period will begin on the next business day, with all
participants in the terminated offering to be automatically transferred to the
new offering period.
In the event the Company is acquired by merger or asset sale, all
outstanding purchase rights will automatically be exercised immediately prior to
the effective date of such acquisition. The purchase price will be equal to 85%
of the lower of (i) the fair market value per share of Common Stock on the
participant's entry date into the offering period in which such acquisition
occurs or (ii) the fair market value per share of Common Stock immediately prior
to such acquisition.
The Purchase Plan will terminate on the earlier of (i) the last business
day of April 2008 (ii) the date on which all shares available for issuance under
the Purchase Plan shall have been sold pursuant to purchase rights exercised
thereunder or (iii) the date on which all purchase rights are exercised in
connection with an acquisition of the Company by merger or asset sale.
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<PAGE> 61
The Board may at any time alter, suspend or discontinue the Purchase Plan.
However, certain amendments to the Purchase Plan may require stockholder
approval.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
The Company does not presently have any employment contracts in effect with
the Chief Executive Officer or any other Named Executive Officers. The Company
provides incentives such as salary, benefits and option grants to attract and
retain qualified employees.
In the event that the Company is acquired by merger or asset sale, each
outstanding option held by the Chief Executive Officer or any Named Executive
Officer under the 1998 Plan will automatically accelerate in full, and all
unvested shares held by such individuals under such Plan will immediately vest
in full, except to the extent such options are to be assumed by, and the
Company's repurchase rights with respect to those shares are to be assigned to,
the successor corporation. The Plan Administrator will have the authority to
grant options which will immediately vest upon an acquisition of the Company,
whether or not those options are assumed by the successor corporation. The Plan
Administrator is also authorized under the Discretionary Option Grant and Stock
Issuance Programs to grant options and to structure repurchase rights so that
the shares subject to those options or repurchase rights will immediately vest
in connection with a change in control of the Company (whether by merger or
asset sale, or successful tender offer for more than fifty percent (50%) of the
outstanding voting stock or a change in the majority of the Board by reason of
one or more contested elections for Board membership), with such vesting to
occur either at the time of such change in control or upon the subsequent
termination of the individual's service within a designated period (not to
exceed eighteen months) following such change in control. The options
incorporated from the Predecessor Plan will immediately vest upon an acquisition
of the Company by merger or asset sale, unless those options are assumed by, and
the Company's repurchase rights are assigned to, the successor entity. In
addition, certain options granted to executive officers provide that if the
options are assumed in an acquisition and the Optionee's service is
involuntarily terminated within eighteen months following such acquisition the
option shares will vest in full and the Company's repurchase rights will lapse.
The Plan Administrator will have the discretion to extend the acceleration
provisions of the 1998 Plan to options outstanding under the Predecessor Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of the
Company's directors for monetary damages arising from a breach of their
fiduciary duty as directors, except to the extent otherwise required by the
Delaware General Corporation Law. Such limitation of liability does not affect
the availability of equitable remedies such as injunctive relief or recision.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise discretionary under Delaware
law. The Company has entered into indemnification agreements with its officers
and directors containing provisions that may require the Company, among other
things, to indemnify such officers and directors against certain liabilities
that may arise by reason of their status or service as directors or officers
(other than liabilities arising from willful misconduct of a culpable nature),
to advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified, and to obtain directors' and officers'
insurance if available on reasonable terms.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company where indemnification is required or
permitted.
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<PAGE> 62
CERTAIN TRANSACTIONS
TRANSACTIONS WITH DIRECTORS, OFFICERS AND 5% STOCKHOLDERS
Since the Company's inception, the Company has raised capital primarily
through the sale of its Preferred Stock. In June 1994, the Company sold
1,805,674 shares of Series A Preferred Stock at a price of $1.58 per share. In
September 1994, the Company sold 250,000 shares of Series B Preferred Stock at a
price of $2.00 per share, each share of Series B Preferred Stock was accompanied
by the right to purchase 0.667 shares of Series C Preferred Stock at a price
$3.00 per share. In May 1995, upon the exercise of the Series C Preferred Stock
Warrants, the Company issued 166,667 shares of Series C Preferred Stock for
aggregate consideration of $500,000. In May 1995, the Company sold 1,812,500
shares of Series D Preferred Stock at a price of $4.00 per share, each share of
Series D Preferred Stock was accompanied by the right to purchase 0.20 shares of
Series E Preferred Stock at a price of $4.50 per share. From August 1997 through
December 1997, upon exercise of the Series E Preferred Stock Warrants, the
Company issued 361,908 shares of Series E Preferred Stock for aggregate
consideration of $1.63 million. From April 1996 through July 1996 the Company
sold 2,905,730 shares of Series F Preferred Stock at a price of $8.00 per share.
From July 1997 through September 1997, the Company sold 2,655,125 shares of
Series G Preferred stock at a price of $8.70 per share.
The following table summarizes the shares of Preferred Stock purchased by
executive officers, directors, and 5% stockholders of the Company and persons
associated with them since June 1994. All share numbers reflect the number of
shares purchased by the respective party on an as-converted basis, and includes
292,070 shares of Series F Preferred Stock and 81,339 shares of Series G
Preferred Stock sold by 3Com Corporation to each of the entities affiliated with
CrossPoint Venture Partners LS 1997, Kleiner Perkins Caufield Byers and New
Enterprise Associates for an aggregate of 1,120,222 shares at a per share price
of $9.00 for an aggregate purchase price of $10,082,043.
<TABLE>
<CAPTION>
PREFERRED STOCK
EXECUTIVE OFFICERS, --------------------------------------------------------------------------------
DIRECTORS AND 5% STOCKHOLDERS SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F SERIES G
- ----------------------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Entities affiliated with
CrossPoint Venture
Partners(1)................. 632,910 -- -- 295,888 59,178 386,952 196,282
Entities affiliated with
Kleiner Perkins Caufield and
Byers(2).................... -- -- -- 750,000 150,000 349,135 99,826
Entities affiliated with Paul
and Evelyn Baran Trust
Agreement(3)................ 235,441 -- -- 110,070 22,014 12,500 --
Entities affiliated with New
Enterprise Associates(4).... 632,912 -- -- 295,888 59,178 386,951 541,109
Paul Baran(5)................. 235,441 -- -- 110,070 22,014 12,500 --
Robert C. Hawk................ -- -- -- -- -- 6,250 7,453
Robert A. Hoff(6)............. 632,910 -- -- 295,888 59,178 94,882 114,943
C. Richard Kramlich(7)........ 632,912 -- -- 295,888 59,178 94,881 459,770
Scott J. Loftesness........... 6,329 -- -- 2,960 592 -- 22,989
Robert W. Wilmot(8)........... -- -- -- 62,500 12,500 -- --
</TABLE>
- ---------------
(1) Represents shares purchased by CrossPoint Venture Partners 1993, CrossPoint
Entrepreneurs Fund and CrossPoint Venture Partners LS 1997. Mr. Hoff, a
General Partner of CrossPoint Venture Partners, is a Director of the
Company.
(2) Represents shares purchased by Kleiner Perkins Caufield & Byers VII and KPCB
Information Sciences Zaibatsu Fund II.
(3) Represents shares held by the Paul and Evelyn Baran Trust Agreement dated
May 23, 1984. Mr. Baran is Chairman of the Board of Directors of the
Company.
(4) Represents shares held by New Enterprise Associates VI, Limited Partnership,
New Enterprise Associates VI, L.P. New Enterprise Associates VII, NEA
Venture 1998 L.P. and NEA Presidents Fund L.P. Mr. Kramlich, a Managing
Partner of New Enterprise Associates, is a Director of the Company. Mr.
Kramlich disclaims beneficial ownership of all such shares.
(5) Mr. Baran is co-trustee of the Paul or Evelyn Baran Trust Agreement dated
May 23, 1984 and serves as Chairman of the Company's Board of Directors. Mr.
Baran disclaims beneficial ownership of 500,000 of such shares.
(6) Mr. Hoff, a General Partner of CrossPoint Venture Partners, is a Director of
the Company.
(7) Mr. Kramlich, a General Partner of New Enterprise Associates VI, L.P., is a
Director of the Company. Mr. Kramlich disclaims beneficial ownership of such
shares.
(8) Represents shares purchased by Dr. Wilmot as trustee of a living trust. Dr.
Wilmot is a Director of the Company.
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<PAGE> 63
In February 1996, in connection with the acceptance of his employment
offer, Peter D. Fenner, the Company's President and Chief Executive Officer, was
granted an option to purchase 500,000 shares of Common Stock at an exercise
price of $0.40 per share. The Company also has granted additional options to
certain of its executive officers. Such options are described further in
"Management -- Executive Compensation."
The Company has entered into a Technology License and Reseller Agreement
with 3Com to license certain technology on a nonexclusive basis to 3Com. Under
the terms of this agreement: (i) the Company received a nonrefundable license
fee of $1.0 million in 1996, and (ii) if the Company met certain conditions in
1997, it would be entitled to an additional $500,000 of nonrefundable license
fees. In March 1997, the Company met such conditions and received additional
nonrefundable license fees of $500,000 from 3Com. Such license fees were
recognized as revenue in 1997. In addition, the Company received prepaid
royalties pursuant to the licensing agreement of $1.0 million which have been
deferred and will be recognized ratably upon sale of the first 100,000 units of
product sold by 3Com incorporating the Company's technology. The prepaid
royalties will be earned at the earlier of the sale of the 100,000 cable modems
or the expiration of the royalty period at December 31, 1998. See "Management's
Discussion and Analysis of Financial Conditions and Results of
Operations -- Overview" and Note 9 of Notes to Financial Statements. 3Com was a
greater than five percent stockholder in the Company until it sold all of its
stock to three existing stockholders of the Company on April 21, 1998. See
"-- Transaction Among Stockholders."
The Company believes that all of the transactions set forth herein were
made on terms no less favorable to the Company than could have been obtained
from unaffiliated third parties. All future transactions, including loans (if
any), between the Company and its officers, directors, and principal
stockholders and their affiliates will be approved by a majority of the Board of
Directors, including a majority of the independent and disinterested outside
directors of the Board of Directors, and will be on terms no less favorable to
the Company than could be obtained from unaffiliated third parties.
TRANSACTION AMONG STOCKHOLDERS
On April 21, 1998, 3Com Corporation sold 292,070 shares of Series F
Preferred Stock and 81,339 shares of Series G Preferred Stock to each of the
entities affiliated with CrossPoint Venture Partners, Kleiner Perkins Caufield &
Byers and New Enterprises Associates for an aggregate of 1,120,227 shares at a
per share price of $9.00 per share for an aggregate purchase price of
$10,082,043.
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<PAGE> 64
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
with respect to the beneficial ownership of the Company's Common Stock as of
March 31, 1998 except as noted in the footnotes below by (i) all persons who are
beneficial owners of five percent (5%) or more of the Company's Common Stock,
(ii) each director, (iii) the Company's Named Executive Officers, and (iv) all
directors and executive officers as a group. Unless otherwise indicated, each of
the stockholders has sole voting and investment power with respect to the shares
beneficially owned, subject to community property laws, where applicable.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
BENEFICIALLY
OWNED(2)
NUMBER OF ----------------------
SHARES AFTER
BENEFICIALLY PRIOR TO THE
NAMES AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) OFFERING OFFERING
---------------------------------------- ------------ --------- ---------
<S> <C> <C> <C>
C. Richard Kramlich(3).................................... 1,916,038 15.0% 10.8%
New Enterprise Associates VI, L.P.
2490 Sand Hill Road
Menlo Park, CA 94025
Robert A. Hoff(4)......................................... 1,571,212 12.3 8.8
CrossPoint Venture Partners 1993
18552 MacArthur Boulevard, Suite 400
Irvine, CA 92715
William R. Hearst III(5).................................. 1,349,863 10.6 7.6
Kleiner Perkins Caufield and Byers
2750 Sand Hill Road
Menlo Park, CA 94025
Peter D. Fenner(6)........................................ 506,000 3.9 2.9
Paul and Evelyn Baran Trust Agreement(7).................. 980,025 7.7 5.5
Paul Baran(8)............................................. 980,025 7.7 5.5
David L. Robertson(9)..................................... 90,000 * *
William J. Gallagher(10).................................. 97,500 * *
Buck J. Gee(11)........................................... 90,000 * *
Kenneth C. Gorman(12)..................................... 90,000 * *
Scott J. Loftesness....................................... 287,870 2.3 1.6
Robert C. Hawk(13)........................................ 34,703 * *
Robert W. Wilmot(14)...................................... 112,500 * *
All directors and officers as a group (15 persons)(15).... 7,346,676 55.1 40.1
</TABLE>
- ---------------
* Less than one percent.
(1) Except as otherwise noted below, the address of each person listed on the
table is c/o Com21, Inc. 750 Tasman Drive, Milpitas, California 95035.
(2) Number of shares beneficially owned and the percentage of shares
beneficially owned are based on 12,764,512 shares outstanding as of March
31, 1998. Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission, and includes voting and
investment power with respect to such shares. All shares of Common Stock
subject to options currently exercisable or exercisable within 60 days
after March 31, 1998 are deemed to be outstanding and to be beneficially
owned by the person holding such options for the purpose of computing the
number of shares beneficially owned and the percentage ownership of such
person, but are not deemed to be outstanding and to be beneficially owned
for the purpose of computing the percentage ownership of any other person.
Except as indicated in the footnotes to the table and subject to applicable
community property laws, based on information provided by the persons named
in the table, such persons have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
(3) Includes 1,542,629 shares held by New Enterprise Associates VI, L.P. Also
includes 369,521 shares held by New Enterprise Associates VII, 556 shares
held by NEA Venture 1998 L.P. and 3,333 shares held by NEA Presidents Fund
L.P. which were purchased from 3Com on April 21, 1998. Voting and
dispositive power over the shares is held among all the general partners of
New Enterprise Associates. Mr. Kramlich is a General Partner at New
Enterprise Associates, the General Partner of New Enterprise Associates VI,
L.P., and as such he may be deemed to share voting and investment power
with respect to such shares. However, Mr. Kramlich disclaims beneficial
ownership of all such shares.
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<PAGE> 65
(4) Includes 1,161,579 shares held by CrossPoint Venture Partners 1993 and
36,224 shares held by CrossPoint 1993 Entrepreneurs Fund. Also includes
373,409 shares held by CrossPoint Venture Partners LS 1997 which were
purchased from 3Com on April 21, 1998. Voting and dispositive power over
the shares is held by all the general partners of CrossPoint Venture
Partners. Mr. Hoff is a General Partner at CrossPoint Venture Partners and
as such he may be deemed to share voting and investment power with respect
to such shares. However, Mr. Hoff disclaims beneficial ownership of all
such shares.
(5) Includes 1,316,116 shares held by Kleiner Perkins Caufield & Byers VII and
33,747 shares held by KPCB Information Sciences Zaibatsu Fund II. Also
includes 364,075 shares held by Kleiner Perkins Caufield & Byers VII and
9,336 shares held by KPCB Information Sciences Zaibatsu Fund II which were
purchased from 3Com on April 21, 1998. Voting and dispositive power over
the shares is held by all the general partners of Kleiner Perkins Caufield
& Byers. Mr. Hearst is a General Partner of Kleiner Perkins Caufield &
Byers, and as such he may be deemed to share voting and investment power
with respect to such shares. However, Mr. Hearst disclaims beneficial
ownership of all such shares.
(6) Includes 326,500 shares of Common Stock issuable upon exercise of
immediately exercisable options, 239,583 shares of which are subject to the
Company's right of repurchase.
(7) Includes 600,000 shares held by the Baran Family Limited Partnership and
380,025 shares held under the Paul and Evelyn Baran Trust Agreement dated
May 23, 1984.
(8) Represents 380,025 shares held in the name of the Paul or Evelyn Baran
Trust Agreement dated May 23, 1984 and 600,000 shares held by the Baran
Family Limited Partnership. Mr. Baran is a General Partner of the Baran
Family Limited Partnership, and as such, he may be deemed to share voting
and investment power with respect to such shares. However, Mr. Baran
disclaims beneficial ownership of 500,000 of such shares.
(9) Includes 30,000 shares of Common Stock issuable upon exercise of
immediately exercisable options, 25,313 shares of which are subject to the
Company's right of repurchase. Also includes 60,000 shares acquired
pursuant to the exercise, of which 18,750 shares are subject to the
Company's right of repurchase.
(10) Includes 97,500 shares of Common Stock issuable upon exercise of
immediately exercisable options, 39,219 shares of which are subject to the
Company's right of repurchase.
(11) Includes 15,000 shares of Common Stock issuable upon exercise of
immediately exercisable options, all of which are subject to the Company's
right of repurchase. Also includes 75,000 shares of Common Stock acquired
pursuant to a stock option exercise, of which 15,522 shares are subject to
the Company's right of repurchase.
(12) Includes 15,000 shares of Common Stock issuable upon exercise of
immediately exercisable options, all which are subject to the Company's
right of repurchase. Also includes 75,000 shares of Common Stock were
acquired pursuant to a stock option exercise, 32,188 of which shares are
subject to the Company's right of repurchase.
(13) Includes 15,000 shares of Common Stock acquired pursuant to the exercise,
of which 10,625 are subject to the Company's right of repurchase.
(14) Includes 4,536 shares of the Company's Common Stock subject to the
Company's right of repurchase.
(15) Includes 577,895 shares of Common Stock issuable upon exercise of
immediately exercisable options, of which 495,425 shares are subject to the
Company's right of repurchase.
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<PAGE> 66
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, $0.001 par value per
share and 5,000,000 shares of undesignated Preferred Stock, $0.001 par value per
share. Immediately after completion of this Offering, the Company estimates
there will be an aggregate of 17,764,512 shares of Common Stock issued and
outstanding and approximately 1,926,217 shares of Common Stock issuable upon
exercise of outstanding options. Upon completion of this offering, there will be
no shares of Preferred Stock issued or outstanding.
The following description of the Company's capital stock does not purport
to be complete and is subject to and qualified in its entirety by the Company's
Amended and Restated Certificate of Incorporation and Bylaws and by the
provisions of the applicable Delaware law.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock that may come into existence, the
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of funds
legally available therefor. See "Dividend Policy." In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of Preferred Stock, if any, then
outstanding. The Common Stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and nonassessable, and the shares of Common Stock to be outstanding upon
completion of this Offering will be fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the Preferred Stock in
one or more series and to fix the price, rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting a series or the designation of
such series, without any further vote or action by the Company's stockholders.
The issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders and may adversely affect the
market price, and the voting and other rights, of the holders of Common Stock.
The issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. The Company has no current plans to issue any shares
of Preferred Stock.
WARRANTS
As of March 31, 1998 the Company had outstanding, warrants to purchase
5,154 shares of Series D Preferred Stock at an exercise price of $5.82 per share
and warrants to purchase 41,132 shares of Series F Preferred Stock at an
exercise price of $8.00 per share. Upon the effectiveness of the registration
statement related to this Offering, these outstanding warrants will
automatically convert into warrants to purchase an aggregate of 46,286 shares of
Common Stock at a weighted average exercise price of $7.76 per share.
REGISTRATION RIGHTS
Under the terms of a registration rights agreement, subject to certain
exceptions, if the Company proposes to register any of its shares of Common
Stock under the Securities Act, either for its own account or the account of any
shareholder, in any public offering, certain investors holding Common Stock of
the Company issued or issuable upon conversion of the Company's convertible
securities (the "Registrable Securities") are entitled to notice of such
registration and are entitled to include their Registrable Securities therein.
In addition, the holder or holders of an aggregate of at least 33% of the then
outstanding Registrable Securities shall have the right to require the Company
to file a registration statement on a form, other than Form S-3 under the
Securities Act, in order to register the
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<PAGE> 67
Registrable Securities then held by such holder or holders, provided that, (i)
at least three months have passed since the Company's initial public offering of
shares of Common Stock under a registration statement and (ii) the anticipated
aggregate offering price to the public is at least $7,500,000. Further, a holder
or holders may require the Company to use all reasonable efforts to file
additional registration statements on Form S-3, provided that the Company shall
not be required to file more than two such registration statements in any twelve
month period. The right to include any of the above described Registrable
Securities in any registration is subject to certain limitations and conditions,
including the underwriters' right to limit the number of shares being registered
by all holders. The Company is required to indemnify holders of Registrable
Securities and the underwriters, if any, for such holders under certain
circumstances. In general, the Company is required to bear the expenses of two
requested demand and all piggyback registrations, except for the selling
shareholders' pro rata portion of the underwriting discounts and commissions.
LISTING
The Company's Common Stock has been approved for quotation on the Nasdaq
National Market under the trading symbol "CMTO" upon notice of the effectiveness
of the offering.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of the Common Stock will be Boston
EquiServe.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Certificate of Incorporation and Bylaws. The Company's Certificate of
Incorporation and Bylaws contain certain provisions that, together with the
ownership position of the officers, directors and their affiliates, could
discourage potential takeover attempts and make more difficult, attempts by
stockholders to change management, which could adversely affect the market price
of the Company's Common Stock. Furthermore, the Company's Board of Directors has
the authority to impose various procedural and other requirements that could
make it more difficult for stockholders to effect certain corporate actions. Any
vacancy on the Board of Directors may be filled only by vote of the majority of
directors then in office.
Upon completion of this Offering, the Company's Board of Directors will
have the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the Company
See "Risk Factors -- Control by Principal Stockholders; Certain Anti-Takeover
Provisions."
Section 203 of the Delaware General Corporation Law. Upon the closing of
the Offering, the Company will be subject to Section 203 of the DGCL which
imposes restrictions on business combinations (which include a merger, asset
sale or other transaction resulting in a financial benefit to the interested
stockholder) with interested stockholders (being any person who acquired 15% or
more of the Company's outstanding voting stock). In general, the Company is
prohibited from engaging in business combinations with an interested
stockholder, unless (i) before such person became an interested stockholder, the
Board of Directors of the Company approved the transaction in which the
interested stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the Company outstanding at the time the
transaction commenced (excluding for purposes of determining the number of
shares outstanding stock held by directors who are also officers of the Company
and by employee stock plans that do not provide employees with the rights to
determine confidentiality
67
<PAGE> 68
whether shares held subject to the plan will be tendered in a tender or exchange
offer); or (iii) at or subsequent to the time which such person became an
interested stockholder, the business combination is approved by the Board of
Directors of the Company and authorized at a meeting of stockholders by the
affirmative vote of the holders of two-thirds of the outstanding voting stock of
the Company not owned by the interested stockholder. Under Section 203, the
restrictions described above also do not apply to certain business combinations
proposed by an interested stockholder following the earlier of the announcement
or notification of one of certain extraordinary transactions involving the
Company and a person who had not been an interested stockholder during the
previous three years or who became an interested stockholder with the approval
of the Company's Board of Directors, if such extraordinary transaction is
approved or not opposed by a majority of the directors who are directors prior
to any person becoming an interested stockholder during the previous three years
or who were recommended for election or elected to succeed such directors by a
majority of such directors. By restricting the ability of the Company to engage
in business combinations with an interested person, the application of Section
203 to the Company may provide a barrier to hostile or unwanted takeovers.
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<PAGE> 69
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the shares of
Common Stock of the Company. Future sales of substantial amounts of shares of
Common Stock in the public market could adversely affect prevailing market
prices. Furthermore, since only a limited number of shares will be available for
sale shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock in the public market after the restrictions lapse could adversely
affect the prevailing market price.
Upon completion of this offering, the Company will have outstanding an
aggregate of 17,764,512 shares of Common Stock assuming the issuance of the
5,000,000 shares of Common Stock offered hereby and no exercise of the
Underwriters' over-allotment option. Of the total outstanding shares of Common
Stock, all 5,000,000 shares of Common Stock sold in this offering will be freely
tradeable without restriction or further registration under the Act, unless
purchased by "affiliates" of the Company, as that term is defined in Rule 144
under the Act. The remaining 12,764,512 shares will be "restricted securities"
as defined in Rule 144 (the "Restricted Shares"). The Restricted Shares will be
available for sale in the public market following the expiration of one hundred
eighty (180)-day lock-up agreements. In addition, the holders of warrants for
46,286 shares of Preferred Stock can exercise such warrants at any time, but
such shares cannot be sold until the expiration of the 180-day lock-up period
following the date of the Prospectus. Beginning six months after the date of
this Prospectus the holders of 9,957,604 Restricted Shares and the holders of
warrants for 46,286 shares of Common Stock are entitled to certain rights with
respect to registrations of such shares for sale in the public market, assuming
no exercise of the Underwriters' over-allotment option. If such holders sell in
the public market, such sales could have a material adverse effect on the market
price of the Company's Common Stock.
All of the officers and Directors and certain stockholders and
optionholders of the Company have entered into lock-up agreements generally
providing that they will not offer, pledge, sell, offer to sell, contract to
sell, sell any option or contract to purchase, purchase any option to sell,
grant any option, right or warrant to purchase, or otherwise transfer or dispose
of, directly or indirectly, any of the shares of Common Stock or any securities
convertible into, or exercisable or exchangeable for, Common Stock owned by
them, or enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, for a period of 180 days after the date of this Prospectus, without the
prior written consent of Deutsche Morgan Grenfell Inc., subject to certain
limited exceptions. Deutsche Morgan Grenfell Inc. may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements. Deutsche Morgan Grenfell Inc. currently has no
plans to release any portion of the securities subject to lock-up agreements.
When determining whether or not to release shares from the lock-up agreements,
Deutsche Morgan Grenfell Inc. will consider, among other factors, the
stockholder's reasons for requesting the release, the number of shares for which
the release is being requested and market conditions at the time. Following the
expiration of the 180 day lock-up period, all 12,764,512 shares of Common Stock
will be available for sale in the public market subject to compliance with Rule
144 or Rule 701.
In general, under Rule 144 as currently in effect, an affiliate of the
Company or a person (or persons whose shares are aggregated) who has
beneficially owned restricted securities for at least one (1) year, including
the holding period of any prior owner except an affiliate, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of one percent (1%) of the then outstanding shares of the Company's
Common Stock or the average weekly trading volume of the Company's Common Stock
on the Nasdaq National Market during the four (4) calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the ninety (90) days preceding a sale, and who has beneficially
owned shares for at least two (2) years (including any period of ownership of
preceding non-affiliated
69
<PAGE> 70
holders), would be entitled to sell such shares under Rule 144(k) without regard
to the volume limitations, manner of sale provisions, public information
requirements or notice requirements.
The Company plans to file, after the consummation of the offering made
hereby, a registration statement under the Act covering the 3,045,080 shares of
Common Stock reserved for issuance under its 1998 Stock Incentive Plan and the
1998 Employee Stock Purchase Plan. See "Management -- Benefit Plans." Shares
registered under such registration statement would be available for sale in the
open market in the future unless such shares are subject to vesting restrictions
with the Company or the contractual restrictions described above.
The Company has also agreed not to offer, sell, contract to sell or
otherwise dispose of shares of Common Stock or any securities convertible into
Common Stock for a period of one hundred eighty (180) days after the date of
this Prospectus, without the prior written consent of Deutsche Morgan Grenfell
Inc., subject to certain limited exceptions.
70
<PAGE> 71
UNDERWRITING
Under the terms and subject to conditions contained in an Underwriting
Agreement dated the date hereof (the Underwriting Agreement), the Underwriters
named below (the Underwriters), for whom Deutsche Morgan Grenfell Inc., Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Dain Rauscher Wessels, a division
of Dain Rauscher Incorporated ("Dain Rauscher Wessels") are acting as
Representatives, (the Representatives), have severally agreed to purchase, and
the Company has agreed to sell to them, severally, the respective number of
shares of Common Stock set forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Deutsche Morgan Grenfell Inc. ..............................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ..................................
Dain Rauscher Wessels ......................................
---------
Total............................................. 5,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions.
The Underwriters initially propose to offer a portion of the shares of
Common Stock directly to the public on the terms set forth on the cover page
hereof and a portion to certain dealers at a price that represents a concession
not in excess of $ per share. Any Underwriter may allow, and such dealers may
re-allow, a concession not in excess of $ per share to certain other dealers.
After the initial offering of the shares of Common Stock, the offering price and
other selling terms may from time to time be varied by the Representatives.
The Company has granted to the Underwriters an option, exercisable for
thirty (30) days from the date of this Prospectus, to purchase up to an
aggregate of 750,000 additional shares of Common Stock at the initial public
offering price set forth on the cover page hereof, less underwriting discounts
and commissions. The Underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, made in connection with the
offering of the shares of Common Stock offered hereby. To the extent such option
is exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of Common Stock as the number set forth next to such Underwriter's name
in the preceding table bears to the total number of shares of Common Stock set
forth next to the names of all Underwriters in the preceding table.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend sales to discretionary accounts to exceed five
percent of the total number of shares of Common Stock offered by them.
See "Shares Eligible for Future Sale" for a description of certain
arrangements by which all officers and Directors and certain stockholders and
optionholders of the Company have agreed not to sell or otherwise dispose of
Common Stock or convertible securities of the Company for a period of 180 days
after the date of the final Prospectus without the prior consent of Deutsche
Morgan Grenfell Inc. The Company has agreed in the Underwriting Agreement that
it will not, directly or indirectly, without the prior written consent of
Deutsche Morgan Grenfell Inc., offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option to sell, grant any option,
right or warrant to purchase, or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exchangeable for Common
Stock, for a period of 180 days after the date of the final
71
<PAGE> 72
Prospectus without the consent of Deutsche Morgan Grenfell Inc., except under
certain circumstances.
In order to facilitate the Offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the Offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an Underwriter or a dealer for distributing the
Common Stock in the Offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
At the request of the Company, the Underwriters have reserved for sale at
the initial public offering price to persons designated by the Company a number
of shares of Common Stock not to exceed five percent of the total number of
shares of Common Stock in this Offering. The number of shares available for sale
to the general public will be reduced to the extent such persons purchase these
shares.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, as amended, or will contribute to payments the
Underwriters may be required to make in respect thereof.
Deutsche Morgan Grenfell Inc. acted as the placement agent of a private
placement of Series G Convertible Preferred Stock of the Company and, in
connection with that placement received cash compensation.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiation
between the Company and the Representatives. The principal factors to be
considered in determining the initial public offering price will include the
information set forth in this Prospectus and otherwise available to the
Representatives; the history and the prospects for the industry in which the
Company will compete; the ability of the Company's management; the prospects for
future earnings of the Company; the present state of the Company's development
and its current financial condition; the general condition of the securities
market at the time of the Offering; and the recent market prices of, and the
demand for, publicly traded common stock of generally comparable companies. Each
of the Representatives has informed the Company that it currently intends to
make a market in the shares subsequent to the effectiveness of this Offering,
but there can be no assurance that the Representatives will take any action to
make a market in any securities of the Company.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Brobeck, Phleger & Harrison LLP, Palo
Alto, California. Members of the firm Brobeck, Phleger & Harrison LLP
beneficially own an aggregate of 2,161 shares of the Company's Common Stock.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California.
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<PAGE> 73
EXPERTS
The financial statements as of December 31, 1996 and 1997, and for each of
the three years in the period ended December 31, 1997, included in this
Prospectus and Registration Statement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
CHANGE IN INDEPENDENT AUDITORS
In November 1997, the Company's Board of Directors retained Deloitte &
Touche LLP as its independent auditors and dismissed the Company's former
auditors, KPMG Peat Marwick LLP ("KPMG"). The decision to change independent
auditors was approved by resolution of the Board of Directors. The former
independent auditors' report on the Company's financial statements as of and for
the years ended December 31, 1995 and 1996 did not contain an adverse opinion, a
disclaimer of opinion or any qualifications or modifications related to
uncertainty, limitation of audit scope or application of accounting principles.
The former independent auditors' report does not cover any of the financial
statements of the Company included in this Prospectus. There were no
disagreements with the former independent auditors on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure with respect to the Company's financial statements up through the time
of dismissal that, if not resolved to the former independent auditors'
satisfaction, would have caused them to make reference to the subject matter of
the disagreement in connection with their report. Prior to retaining Deloitte &
Touche LLP, the Company had not consulted with Deloitte & Touche LLP regarding
accounting principles.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement (of which this
Prospectus is a part and which term shall encompass any amendments thereto) on
Form S-1 pursuant to the Securities Act with respect to the Common Stock offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain portions
of which are omitted as permitted by the rules and regulations of the SEC.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete. With respect to any
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matters involved, and each such statement shall be deemed
qualified in its entirety by such reference.
Upon completion of this offering, the Company will be subject to the
information requirements of the Exchange Act, and, in accordance therewith, will
file reports and other information with the SEC. The Registration Statement, the
exhibits and schedules forming a part thereof and the report and other
information filed by the Company with the SEC in accordance with the Exchange
Act may be inspected and copied at the public reference facilities maintained by
the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549; 7 World Trade Center, 13th Floor, New York, New York 10048; and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material can also be obtained at prescribed
rates from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Such material may also be accessed electronically by
means of the SEC's home page on the World Wide Web at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and to make available quarterly reports
containing unaudited summary financial information for the first three fiscal
quarters of each fiscal year.
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<PAGE> 74
GLOSSARY OF TECHNICAL TERMS
10BASET....................... Ethernet standard which applies to the physical
layer of the OSI Reference Model for 10 Mbps
Ethernet over two pairs of category 3, 4 or 5
Unshielded Twisted Pair (UTP) wire.
56-KBPS....................... Equivalent to a single high-speed telephone
service line, capable of transmitting one voice
call or 56 Kbps of data.
ANALOG........................ A from of transmission employing a continuous
electrical signal (rather than a pulsed or
digital system) that varies in frequency and
amplitude.
ADSL.......................... Asymmetric Digital Subscriber Line. A
high-speed technology that enables the transfer
of data over existing copper line.
ASYNCHRONOUS.................. A form of concurrent input and output
communication transmission with no timing
relationship between the two signals.
Slower-speed asynchronous transmission requires
start and stop bits to avoid a dependency on
timing clocks (10 bits to send an 8-bit byte).
ATM........................... Asynchronous Transfer Mode. A fixed length
53-byte packet-based transmission technology
that may be used to transmit data, voice and
video traffic; ATM utilizes cell switching.
BANDWIDTH..................... A range of signal frequencies, measured in
cycles per second or Hertz (Hz). Also refers to
the speed at which data is transmitted,
measured in bits per second (bps).
BER........................... Bit Error Rate. Percentage of received bits in
error compared to the total number of bits
received. Usually expressed as a number to a
power of 10.
BROADBAND COMMUNICATIONS...... A transmission that has a bandwidth greater
than a voice-grade line of 3KHz, usually at
transmission speeds of greater than 1.5 Mbps
(T-1).
CNR........................... Carrier-to-Noise Ratio.
CATV-CABLE TELEVISION......... Community Antenna Television. A community
television system, served by cable and
connected to a common (set of) antenna(s).
CENTRAL OFFICE................ A facility that provides switching services for
telephone calls. A local exchange central
office can switch calls within exchange
groupings that are identified by an area code
and the first three digits of a phone number. A
long-distance carrier central office switches
calls between the long-distance network and the
local exchange central office.
COAXIAL CABLE................. A large-capacity data transmission medium
consisting of insulated wires grouped together
inside an insulated cable. Used for broadband
and baseband communications networks and cable
TV; usually free from most external
interferences and capable of high transmission
rates over long-distances.
DAVIC......................... Digital Audio Video Interactive Council. A
European standards-setting committee.
DES........................... Data Encryption Standard.
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<PAGE> 75
DSL........................... Digital Subscriber Line. Point-to-point public
network access technologies that allow multiple
forms of data, voice and video to be carried
over twisted-pair copper wire on the local loop
between a network service provider's central
office and the customer site at limited
distances.
DBS........................... Direct Broadcast Satellite. A broadband
communications technology that broadcasts
digital television programming from satellites
directly to dish antennas.
DOWNSTREAM.................... The data path from service provider to
customer.
ETHERNET (10BASET)............ Networking standard for the access method
widely used in LANs for connecting devices by
means of copper twisted pair wiring at speeds
of 10 Mbps.
FAST ETHERNET (100BASET)...... An extension to the 10BaseT Ethernet network
access method which operates at 100 Mbps.
FEC........................... Forward Error Correction. A receiver technique
for correcting errors in the received data.
FREQUENCY..................... The number of identical cycles per second,
measured in hertz, of a periodic oscillation or
wave in radio propagation.
GBPS.......................... Gigabits per second. Billion bits per second.
HEADEND....................... The central distribution point in a cable
television system. Typically serves tens to
hundreds of thousands of homes.
HDSL.......................... High Bit Rate Digital Subscriber Line. A
technology that enables high speed transmission
of data over copper wires.
HFC........................... Hybrid Fiber Coax. Upgraded cable plant which
uses a combination of fiber optic cable in the
backbone and coaxial cable in the subscriber
feeder plant.
IC............................ Integrated Circuit.
IEEE.......................... Institute of Electrical and Electronics
Engineers, Inc.
IETF.......................... Internet Engineering Task Force.
ISDN.......................... Integrated Services Digital Network. An
internationally accepted standard for voice,
data and signaling that makes all transmission
circuits end-to end digital and defines a
standard out-of-band signaling system.
KBPS.......................... Kilobits per second. Thousand bits per second.
LAN........................... Local Area Network. A private data
communications network linking a variety of
data services such as computers and printers
within an office or home environment.
LOCAL LOOP.................... A term used to describe the copper cables that
connect a customer's phone to the Central
Office.
LMDS.......................... Local Multipoint Distribution Service. A
broadband wireless communications network that
uses millimeter wave frequencies around 28 to
38 GHz to transmit video and data to residences
over a cellular-like network at distances under
a few miles.
MBPS.......................... Megabits per second.
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MMDS.......................... Multichannel Multipoint Distribution Service. A
broadband wireless communications network that
uses microwave frequencies around 2.5 GHz to
transmit video to residences at distances up to
tens of miles.
MCNS.......................... Multimedia Cable Network System. Industry
specification that defines the technical
requirement for interoperability of high-speed
cable modem and headend equipment.
QAM........................... Quadrature Amplitude Modulation. A digital
modulation technique that allows very efficient
transmission of data over media with limited
available bandwidth.
QPSK.......................... Quadrature Phase Shift Keying. A digital
modulation technique which is widely employed
in direct broadcast satellite transmission
systems.
RF............................ Radio Frequency. The range of electro-magnetic
frequencies above the audio range and below
visible light.
RF MODULATION................. The transmission of a signal through a carrier
frequency.
ROUTER........................ A device for interconnecting local area
networks that have dissimilar operating
protocols but which share a common network
interconnection protocol. A router receives and
transmits data packs between segments in a
network or different networks.
SYNCHRONOUS................... A form of communication transmission with a
direct timing relationship between input and
output signals. The transmitter and receiver
are in sync and signals sent at a fixed rate.
Information is sent in multibyte packets.
S-CDMA........................ Synchronous Code Division Multiple Access. A
digital spectrum technology that codes signals
over the airwaves to accommodate more
transmission streams over a single frequency
band.
T1 LINES...................... Telecommunications lines that operate in North
America at speeds of 1.544 Mbps.
UPSTREAM...................... The data path from the customer to the service
provider.
VLAN.......................... Virtual Local Area Network. The use of a
selected group of computers that are permitted
to communicate directly with each other,
irrespective of their physical location within
a network.
VPN........................... Virtual Private Network. A public data network
that transports private data reliably, securely
and seamlessly to the end user.
XDSL.......................... Other Digital Subscriber Line. Generic
representation of entire family of Digital
Subscriber Line technology spanning data rates
from 128 Kbps to 52 Mbps depending on the
distance between the central office and the
subscriber.
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COM21, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (Unaudited)...................................... F-3
Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997 and the Three Months Ended March 31,
1997 and 1998 (Unaudited)................................. F-4
Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997 and the Three Months
Ended March 31, 1998 (Unaudited).......................... F-5
Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997 and the Three Months Ended March 31,
1997 and 1998 (Unaudited)................................. F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 78
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Com21, Inc.:
We have audited the accompanying balance sheets of Com21, Inc. as of December
31, 1996 and 1997, and the related statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Com21, Inc. as of December 31, 1996 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
January 16, 1998
(March 10, 1998 as to the first through fifth paragraphs of Note 11; April 22,
1998 as to the last two paragraphs of Note 11; and May 13, 1998 as to the
sixth paragraph of Note 11)
F-2
<PAGE> 79
COM21, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, (NOTE 1)
------------------- MARCH 31, MARCH 31,
1996 1997 1998 1998
-------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $12,427.. $ 17,950 $ 14,082 $ 14,082
Accounts receivable:
Trade (net of allowances of $121 and $232 at December 5,657
1997 and March 1998, respectively).................... -- 3,984 5,657
Related parties......................................... -- 1,052 810 810
Inventories............................................... -- 2,643 1,669 1,669
Prepaid expenses and other................................ 281 430 847 847
-------- -------- -------- --------
Total current assets............................... 12,708 26,059 23,065 23,065
Property and Equipment -- Net............................... 4,223 5,311 5,110 5,110
Other Assets................................................ 105 203 202 202
-------- -------- -------- --------
Total Assets....................................... $ 17,036 $ 31,573 $ 28,377 $ 28,377
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 1,220 $ 2,832 $ 3,662 $ 3,662
Accrued compensation and related benefits................. 581 871 913 913
Deferred revenue (principally related party).............. 1,000 1,004 1,088 1,088
Other current liabilities................................. 93 619 675 675
Current portion of capital lease and debt obligations..... 717 1,210 1,219 1,219
-------- -------- -------- --------
Total current liabilities.......................... 3,611 6,536 7,557 7,557
Deferred Rent............................................... 77 246 258 258
Capital Lease Obligations................................... 1,089 1,320 1,292 1,292
Debt Obligations............................................ 203 188 149 149
-------- -------- -------- --------
Total liabilities.................................. 4,980 8,290 9,256 9,256
-------- -------- -------- --------
Commitments and Contingencies(Notes 5 and 11)
Stockholders' Equity:
Convertible preferred stock, none issued and outstanding
on a pro forma basis:
Series A; $0.001 par value; 1,805,674 shares authorized, 2
issued and outstanding; liquidation preference
$2,853................................................ 2 2 --
Series B; $0.001 par value; 250,000 shares authorized, --
issued and outstanding; liquidation preference $500... -- -- --
Series C; $0.001 par value; 166,667 shares authorized, --
issued and outstanding; liquidation preference $500... -- -- --
Series D; $0.001 par value; 1,817,655 shares authorized; 2
1,812,500 shares issued and outstanding; liquidation
preference $7,250..................................... 2 2 --
Series E; $0.001 par value; 362,500 shares authorized; --
361,908 shares issued and outstanding; liquidation
preference $1,629..................................... -- -- --
Series F; $0.001 par value; 3,125,000 shares authorized; 3
2,905,730 shares issued and outstanding; liquidation
preference $23,246.................................... 3 3 --
Series G; $0.001 par value; 3,000,000 shares authorized; 3
2,655,125 shares issued and outstanding; liquidation
preference $23,100.................................... -- 3 --
Common stock, $0.001 par value; 35,000,000 shares 3
authorized; shares issued and outstanding: 1996,
1,998,097; 1997, 2,772,139; March 31, 1998: actual,
2,806,908; pro forma, 12,764,512........................ 2 3 13
Additional paid-in capital................................ 34,328 58,722 58,784 58,784
Deferred stock compensation............................... -- (116) (108) (108)
Accumulated deficit....................................... (22,281) (35,336) (39,568) (39,568)
-------- -------- -------- --------
Total stockholders' equity......................... 12,056 23,283 19,121 19,121
-------- -------- -------- --------
Total Liabilities and Stockholders' Equity......... $ 17,036 $ 31,573 $ 28,377 $ 28,377
======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE> 80
COM21, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- ------------------
1995 1996 1997 1997 1998
------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product ($4,021 and $953 in
1997 and the three months
ended March 31, 1998,
respectively, from
related parties)......... $ -- $ -- $ 15,149 $ -- $ 7,020
License fees -- related
party.................... -- 1,000 500 500 --
------- -------- -------- ------- -------
Total revenues...... -- 1,000 15,649 500 7,020
Cost of Product Revenues
($2,024 and $787 in 1997 and
the three months ended March
31, 1998, respectively, for
related parties)............ -- -- 8,372 -- 4,676
------- -------- -------- ------- -------
Gross Profit.................. -- 1,000 7,277 500 2,344
------- -------- -------- ------- -------
Operating Expenses:
Research and development.... 5,233 12,395 13,481 3,128 4,278
Sales and marketing......... 770 1,970 5,277 870 1,803
General and
administrative........... 919 1,548 1,782 367 580
------- -------- -------- ------- -------
Total operating
expenses.......... 6,922 15,913 20,540 4,365 6,661
------- -------- -------- ------- -------
Loss From Operations.......... (6,922) (14,913) (13,263) (3,865) (4,317)
------- -------- -------- ------- -------
Other Income (Expense):
Interest income............. 264 629 679 125 194
Interest expense............ (5) (185) (396) (88) (85)
Other income (expense) --
net...................... (2) 3 (54) -- (15)
------- -------- -------- ------- -------
Total other
income............ 257 447 229 37 94
------- -------- -------- ------- -------
Loss Before Income Taxes...... (6,665) (14,466) (13,034) (3,828) (4,223)
Income Taxes.................. 1 5 21 -- 9
------- -------- -------- ------- -------
Net Loss...................... $(6,666) $(14,471) $(13,055) $(3,828) $(4,232)
======= ======== ======== ======= =======
Net Loss Per Share, Basic and
Diluted..................... $ (3.53) $ (7.64) $ (6.15) $ (1.95) $ (1.69)
======= ======== ======== ======= =======
Shares Used in Computation,
Basic and Diluted........... 1,887 1,894 2,124 1,968 2,497
======= ======== ======== ======= =======
Pro Forma Net Loss Per Share,
Basic and Diluted (Note 1).. $ (1.27) $ (0.43) $ (0.34)
======== ======= =======
Shares Used in Pro Forma
Computation, Basic and
Diluted (Note 1)............ 10,279 8,909 12,455
======== ======= =======
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE> 81
COM21, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE DEFERRED
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK TOTAL
----------------- ------------------ PAID-IN COMPEN- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL SATION DEFICIT EQUITY
--------- ------ --------- ------ ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1,
1995.................... 2,055,674 $ 2 1,890,542 $2 $ 3,362 $ -- $ (1,144) $ 2,222
Exercise of stock
options................. -- --.. 25,000 -- 10 -- -- 10
Repurchase of shares...... -- --.. (5,500) -- (1) -- -- (1)
Exercise of Series C
preferred warrants...... 166,667 --.. -- -- 500 -- -- 500
Sale of Series D
convertible preferred
stock (net of issuance
costs of $27)........... 1,812,500 2... -- -- 7,221 -- -- 7,223
Net loss.................. -- --.. -- -- -- -- (6,666) (6,666)
--------- --- --------- -- ------- ----- -------- --------
Balances, December 31,
1995.................... 4,034,841 4... 1,910,042 2 11,092 -- (7,810) 3,288
Exercise of stock
options................. -- --.. 102,639 -- 46 -- -- 46
Repurchase of shares...... -- --.. (14,584) -- (3) -- -- (3)
Sale of Series F
convertible preferred
stock (net of issuance
costs of $50)........... 2,905,730 3... -- -- 23,193 -- -- 23,196
Net loss.................. -- --.. -- -- -- -- (14,471) (14,471)
--------- --- --------- -- ------- ----- -------- --------
Balances, December 31,
1996.................... 6,940,571 7... 1,998,097 2 34,328 -- (22,281) 12,056
Exercise of stock
options................. -- --.. 774,042 1 529 -- -- 530
Exercise of Series E
preferred warrants...... 361,908.. -- -- -- 1,629 -- -- 1,629
Issuance of Series F
preferred warrants...... -- --.. -- -- 72 -- -- 72
Sale of Series G
convertible preferred
stock (net of issuance
costs of $1,069)........ 2,655,125 3... -- -- 22,028 -- -- 22,031
Deferred stock
compensation............ -- --.. -- -- 136 (136) -- --
Amortization of deferred
stock compensation...... -- --.. -- -- -- 20 -- 20
Net loss.................. -- --.. -- -- -- -- (13,055) (13,055)
--------- --- --------- -- ------- ----- -------- --------
Balances, December 31,
1997.................... 9,957,604 10.. 2,772,139 3 58,722 (116) (35,336) 23,283
Exercise of stock
options*................ -- --.. 74,810 -- 72 -- -- 72
Repurchase of shares*..... -- --.. (40,041) -- (10) -- -- (10)
Amortization of deferred
stock compensation*..... -- --.. -- -- -- 8 -- 8
Net loss*................. -- --.. -- -- -- -- (4,232) (4,232)
--------- --- --------- -- ------- ----- -------- --------
Balances, March 31,
1998*................... 9,957,604 $10 2,806,908 $3 $58,784 $(108) $(39,568) $ 19,121
========= === ========= == ======= ===== ======== ========
</TABLE>
- ---------------------------
* Unaudited
See Notes to Financial Statements.
F-5
<PAGE> 82
COM21, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED
----------------------------- MARCH 31,
1995 1996 1997 -------------------
------- -------- -------- 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss................................... $(6,666) $(14,471) $(13,055) $(3,828) $(4,232)
Adjustments to reconcile net loss to net
cash used in operating activities:
Interest expense (Note 6)............... -- -- 72 -- --
Depreciation and amortization........... 137 1,042 2,163 398 801
Deferred rent........................... -- 77 169 57 12
Changes in operating assets and
liabilities:
Accounts receivable -- trade.......... -- -- (3,984) -- (1,673)
Accounts receivable -- related
parties............................ -- -- (1,052) (500) 242
Inventories........................... -- -- (2,643) (685) 974
Prepaid expenses and other............ (71) (183) (149) 55 (417)
Other assets.......................... (30) (68) (98) 1 1
Accounts payable...................... 782 379 1,612 28 830
Accrued compensation and related
benefits........................... 49 518 290 (168) 42
Deferred revenue (principally related
party)............................. -- 1,000 4 -- 84
Other current liabilities............. 13 68 526 (20) 56
------- -------- -------- ------- -------
Net Cash Used in Operating Activities... (5,786) (11,638) (16,145) (4,662) (3,280)
------- -------- -------- ------- -------
Cash Used in Investing Activities:
Purchases of property and equipment........ (987) (2,345) (2,085) (300) (389)
------- -------- -------- ------- -------
Cash Flows From Financing Activities:
Net proceeds from issuance of common
stock................................... 9 43 530 49 62
Net proceeds from issuance of preferred
stock................................... 7,723 23,196 23,660 -- --
Proceeds from issuance of debt
obligations............................. 241 250 2,440 340 --
Repayments under capital lease
obligations............................. (8) (232) (607) (167) (182)
Repayments on debt obligations............. -- (120) (2,270) (69) (79)
------- -------- -------- ------- -------
Net Cash Provided by (Used in) Financing
Activities............................ 7,965 23,137 23,753 153 (199)
------- -------- -------- ------- -------
Net Change in Cash and Cash Equivalents...... 1,192 9,154 5,523 (4,809) (3,868)
Cash and Cash Equivalents, Beginning of
period..................................... 2,081 3,273 12,427 12,427 17,950
------- -------- -------- ------- -------
Cash and Cash Equivalents, End of period..... $ 3,273 $ 12,427 $ 17,950 $ 7,618 $14,082
======= ======== ======== ======= =======
Noncash Investing and Financing Activities:
Property and equipment acquired under
capital leases.......................... $ 156 $ 1,722 $ 1,146 $ -- $ 203
======= ======== ======== ======= =======
Deferred stock compensation................ $ -- $ -- $ 136 $ -- $ --
======= ======== ======== ======= =======
Issuance of preferred stock warrants in
connection with debt obligations........ $ -- $ -- $ 72 $ -- $ --
======= ======== ======== ======= =======
Supplemental Cash Flow Information:
Cash paid for income taxes................. $ 1 $ 5 $ 14 $ -- $ 9
======= ======== ======== ======= =======
Cash paid for interest..................... $ 5 $ 182 $ 324 $ 96 $ 85
======= ======== ======== ======= =======
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE> 83
COM21, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business -- Com21, Inc. (the "Company") was incorporated in Delaware in
June 1992. The Company designs, develops, markets and sells value-added,
high-speed communications solutions for the broadband access market. During
1997, the Company exited the development stage for financial reporting purposes
as it completed its initial product development activities and commenced
shipping product.
Financial Statements Estimates -- The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Such estimates include allowances for potentially
uncollectible accounts receivable, lower of cost or market inventory valuation
reserves, warranty costs, sales returns and a valuation allowance for deferred
tax assets. Actual results could differ from those estimates.
Fiscal Period -- Although for presentation purposes the Company has
indicated that its year end is December 31, its fiscal year actually ends on the
last business day of the year. The Company's fiscal years for 1995, 1996 and
1997 ended on December 29, 1995, December 31, 1996, and December 31, 1997,
respectively.
Cash Equivalents -- The Company considers all highly liquid debt
instruments with maturities at the date of purchase of three months or less to
be cash equivalents.
Inventories -- Inventories consist of computer products and sub-assemblies
stated at the lower of cost (first-in, first-out method) or market.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally three to seven years. Amortization of
leasehold improvements and assets recorded under capital lease agreements are
computed using the straight-line method over the shorter of the lease term or
the estimated useful lives of the related assets.
Long-Lived Assets -- On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires long-lived assets to be evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Adoption of SFAS No. 121 did not have a material effect on the
Company's financial position, results of operations or cash flows.
Income Taxes -- The Company accounts for income taxes under an asset and
liability approach. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
operating loss and tax credit carryforwards measured by applying currently
enacted tax laws. Valuation allowances are provided when necessary to reduce net
deferred tax assets to an amount that is more likely than not to be realized.
Certain Significant Risks and Uncertainties -- Financial instruments which
potentially subject the Company to concentrations of credit risk consist
primarily of cash and cash equivalents and accounts receivable. Cash and cash
equivalents are held primarily with one financial institution and consist
primarily of commercial paper and cash in bank accounts. The Company sells its
products primarily to cable operators in North America and primarily to systems
integrators in Europe, and generally does not require its customers to provide
collateral or other security to support accounts receivable. To reduce credit
risk, management performs ongoing credit evaluations of its customers' financial
F-7
<PAGE> 84
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
condition. The Company maintains allowances for estimated potential bad debt
losses. The recorded carrying amount of cash and cash equivalents, accounts
receivable, accounts payable and debt obligations approximate fair value.
The Company's customer base is highly concentrated. A relatively small
number of customers have accounted for a significant portion of the Company's
revenues, and the Company expects that this trend will continue for the
foreseeable future. In 1997 and the three months ended March 31, 1998, the top
six customers comprised 66% and 85%, respectively of the Company's total
revenues.
The Company participates in a dynamic high technology industry and believes
that changes in any of the following areas could have a material adverse effect
on the Company's future financial position, results of operations or cash flows:
advances and trends in new technologies and industry standards; competitive
pressures in the form of new products or price reductions on current products;
changes in product mix; changes in the overall demand for products offered by
the Company; changes in certain strategic relationships or customer
relationships; litigation or claims against the Company based on intellectual
property (Note 11), patent, product, regulatory or other factors; risk
associated with changes in domestic and international economic and/or political
conditions or regulations; availability of necessary components; risks
associated with Year 2000 compliance; and the Company's ability to attract and
retain employees necessary to support its growth.
Revenue Recognition -- The Company recognizes product revenue upon
shipment. Estimated sales returns and warranty costs, based on historical
experience by product, are recorded at the time the product revenue is
recognized. Revenue for software licenses is recognized upon delivery provided
that any remaining obligations are insignificant and collection is probable.
Software support and maintenance revenue are deferred and amortized over the
maintenance period on a straight-line basis. Installation and training revenue
are recognized as services are provided.
Software Development Costs -- Development costs incurred in the research
and development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established, at which time certain development costs required to attain general
production release would be capitalized. To date, the Company's software
development has essentially been completed concurrent with the establishment of
technological feasibility, and, accordingly, no costs have been capitalized.
Stock-Based Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees."
Net Loss Per Share -- In the fourth quarter of 1997, the Company adopted
SFAS No. 128, "Earnings Per Share" which requires a dual presentation of basic
and diluted earnings per share ("EPS"). Basic EPS excludes dilution and is
computed by dividing net income attributable to common stockholders by the
weighted average of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock (convertible preferred stock, warrants to
purchase convertible preferred stock and common stock options using the treasury
stock method) were exercised or converted into common stock. Potential common
shares in the diluted EPS computation are excluded in net loss periods as their
effect would be antidilutive. EPS for all periods have been computed in
accordance with SFAS No. 128.
Pro Forma Net Loss Per Share -- Pro forma net loss per share, basic and
diluted, is computed by dividing net loss attributable to common stockholders by
the weighted average number of common
F-8
<PAGE> 85
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
shares outstanding for the period and the weighted average number of shares
resulting from the assumed conversion of all outstanding shares of convertible
preferred stock.
Unaudited Pro Forma Information -- The unaudited pro forma information in
the accompanying balance sheet reflects the conversion of the outstanding shares
of convertible preferred stock into 9,957,604 shares of common stock upon the
effectiveness of the registration statement relating to the initial public
offering.
Unaudited Interim Financial Information -- The interim financial
information as of March 31, 1998 and for the three months ended March 31, 1997
and 1998 is unaudited and has been prepared on the same basis as the audited
financial statements. In the opinion of management, such unaudited information
includes all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the interim information. Operating results
for the three months ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998.
Recently Adopted Accounting Standards -- In the first quarter of 1998, the
Company adopted SFAS No. 130, "Reporting Comprehensive Income" and Statement of
Position ("SOP") 97-2, "Software Revenue Recognition."
SFAS No. 130 requires an enterprise to report, by major components and as a
single total, the change in net assets during the period from nonowner sources.
For the periods presented, net loss and comprehensive loss were the same.
SOP 97-2 requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on the relative fair
values of the elements. Adoption of this statement did not have a material
impact on the Company's financial position, results of operations and cash
flows.
Recently Issued Accounting Standard -- In June 1997, the Financial
Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
This statement is effective for fiscal year 1998 and adoption will not impact
the Company's financial position, results of operations or cash flows.
2. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and sub-assemblies................. $ 633 $ 476
Work-in-process.................................. 980 588
Finished goods................................... 1,030 605
------ ------
$2,643 $1,669
====== ======
</TABLE>
F-9
<PAGE> 86
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1996 1997 1998
------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Equipment under capital lease........ $ 1,953 $ 3,367 $ 3,644
Computer equipment and software...... 1,997 2,904 3,047
Production equipment................. 1,066 1,931 2,071
Leasehold improvements............... 181 208 230
Furniture and fixtures............... 171 189 199
------- ------- -------
5,368 8,599 9,191
Accumulated depreciation and
amortization....................... (1,145) (3,288) (4,081)
------- ------- -------
$ 4,223 $ 5,311 $ 5,110
======= ======= =======
</TABLE>
Accumulated amortization on capital leases as of December 31, 1996 and 1997
and March 31, 1998 was approximately $376,000, $1,167,000 and $1,445,000,
respectively.
4. DEBT OBLIGATIONS
Debt obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
----- -----
(IN THOUSANDS)
<S> <C> <C>
Unsecured borrowings due July 1, 1998............ $ 169 $ 84
Unsecured borrowings due October 1, 1998......... 202 119
Unsecured borrowings due August 1, 1999.......... -- 257
Unsecured borrowings due November 1, 1999........ -- 81
----- -----
371 541
Current portion.................................. (168) (353)
----- -----
Long-term portion................................ $ 203 $ 188
===== =====
</TABLE>
Notes Payable
The unsecured borrowings were obtained from notes payable issued to a
financing company for the purchase of computer software and equipment.
Borrowings bear interest at an effective interest rate of 16.94% per annum and
are payable in monthly installments with the remaining unpaid principal and
interest due upon the maturity date. There are no debt covenants associated with
the notes payable.
In consideration for the unsecured borrowings due on October 1, 1998 and
August 1, 1999 the Company issued the financing company warrants to purchase
4,688 and 2,125 shares of Series F convertible preferred stock, respectively, at
a price of $8.00 per share. The fair values of the warrants were insignificant
(Note 6).
Future annual maturities on the notes payable at December 31, 1997 are as
follows for the years ending 1998 - $353,000; 1999 - $188,000.
F-10
<PAGE> 87
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
Revolving Line of Credit
In May 1997, the Company entered into a revolving line of credit
arrangement for working capital purposes. Under the arrangement, the Company may
borrow up to the lesser of $5,000,000 or 80% of the Company's eligible domestic
and foreign accounts receivable. Borrowings bear interest at the LIBOR rate
(5.94% at December 31, 1997) plus 4.875% per annum. The arrangement
automatically renews for successive one-year periods until terminated at the
option of either party. Dividends may not be declared by the Company without the
lender's prior consent. As of December 31, 1997, no amounts were outstanding
under the arrangement.
Concurrent with executing the revolving line of credit arrangement, the
Company borrowed an additional $2,000,000 on a note which was repaid in full in
1997.
In consideration for these financing arrangements, the Company issued
warrants to purchase 25,000 shares of Series F convertible preferred stock at a
price of $8.00 per share (Note 6). As described in Note 6, the fair value of
such warrants was $72,000 which was recorded as additional interest expense in
the accompanying statement of operations for 1997.
5. COMMITMENTS
The Company leases its facilities and certain equipment under noncancelable
operating and capital leases. Future minimum lease payments under the Company's
capital and operating leases and the present value of minimum lease payments
under capital leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ------- ---------
(IN THOUSANDS)
<S> <C> <C>
1998......................................... $1,088 $ 763
1999......................................... 878 785
2000......................................... 424 812
2001......................................... 150 839
2002......................................... -- 866
Thereafter..................................... -- 1,499
------ ------
Future minimum lease payments.................. 2,540 $5,564
======
Amounts representing interest (15.0%).......... (363)
------
Present value of future minimum lease
payments..................................... $2,177
======
</TABLE>
In consideration for providing capital lease financing in 1996, the Company
issued warrants to purchase 2,505 shares and 6,814 shares of Series F
convertible preferred stock at a price of $8.00 per share to two financing
companies. The fair values of the warrants were insignificant (Note 6).
Rent expense incurred under the operating leases was approximately
$174,000, $501,000 and $843,000 for the years ended December 31, 1995, 1996 and
1997, respectively. Rent expense under the facilities lease is recognized on a
straight-line basis over the term of the lease. The difference between the
amounts paid and the amounts expensed is classified as deferred rent in the
accompanying balance sheets.
F-11
<PAGE> 88
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
6. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
As of December 31, 1997, the Company was authorized to issue 22,000,000
shares of convertible preferred stock, with a par value of $0.001 per share. The
Company has designated 1,805,674 shares as Series A, 250,000 shares as Series B,
166,667 shares as Series C, 1,817,655 as Series D, 362,500 shares as Series E,
3,125,000 shares as Series F and 3,000,000 shares as Series G.
Significant terms of the convertible preferred stock are as follows:
- Holders of convertible preferred stock are entitled to noncumulative
dividends when and as declared by the Board of Directors. Holders of
outstanding Series A, B, C, D, E, F and G convertible preferred stock are
entitled to a dividend rate of $0.10, $0.12, $0.14, $0.40, $0.44, $0.80
and $0.86 per share per annum, respectively. Preferred stock dividends
are payable before any cash dividend is paid on the common stock.
- Holders of Series A, B, C, D, E, F and G convertible preferred stock have
a liquidation preference of $1.58, $2.00, $3.00, $4.00, $4.50, $8.00 and
$8.70 per share, respectively, plus any declared but unpaid dividends.
The holders of Series D, E, F and G convertible preferred stock have a
priority liquidation preference over Series A, B and C convertible
preferred stock.
- Each share is convertible into one share of common stock, subject to
adjustments for events of dilution, at the option of the holder any time
after the date of issuance.
- Each share has the right to vote equal to the number of shares of common
stock into which it is convertible.
- Shares of Series A, B and C convertible preferred stock will
automatically be converted into common stock either (i) upon completion
of a public offering of common stock with aggregate proceeds greater than
$7,000,000 and at a price per share of not less than $5.00 or (ii) at
such time as the holders of more than 50% of the Series A, B and C
convertible preferred stock, voting as a single class, consent solely to
the conversion of Series A, B and C convertible preferred stock.
- Shares of Series D, E, F and G convertible preferred stock will
automatically be converted into common stock either (i) upon completion
of a public offering of common stock with aggregate proceeds greater than
$10,000,000 and at a price per share of not less than $20.00; (ii) at
such time as the holders of more than 50% of the Series D, E, F and G
convertible preferred stock, voting as a single class, consent solely to
the conversion of Series D, E, F and G convertible preferred stock; or
(iii) at such time as the holders of more than 50% of the Series F
convertible preferred stock consents solely to the conversion of Series F
convertible preferred stock.
F-12
<PAGE> 89
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
Preferred Stock Warrants
At December 31, 1996 and 1997, warrants to purchase 381,661 and 46,286
shares, respectively, of various series of convertible preferred stock were
outstanding and consist of the following:
- In April 1995, in connection with the sale of 1,812,500 shares of Series
D convertible preferred stock at $4.00 per share, purchasers of the
Series D convertible preferred stock were issued warrants to purchase
362,500 shares of Series E convertible preferred stock at $4.50 per
share. In 1997, warrants to purchase 361,908 shares of Series E preferred
stock were exercised, and the remaining warrants expired in November
1997.
- In December 1995, in consideration of capital lease financing provided by
a financing company, the Company issued warrants to purchase 5,154 shares
of Series D convertible preferred stock at a price of $5.82 per share.
The warrants expire in December 2005. All warrants issued were
outstanding at December 31, 1996 and 1997.
- During 1996, in consideration of debt and capital lease financing
provided by two financing companies, the Company issued warrants to
purchase 14,007 shares of Series F convertible preferred stock at a price
of $8.00 per share. The warrants expire in 2006. All warrants issued were
outstanding at December 31, 1996 and 1997.
- During 1997, in consideration of financing arrangements provided, the
Company issued warrants to purchase 27,125 shares of Series F convertible
preferred stock at a price of $8.00 per share. The warrants will expire
in May 2002 (25,000 warrants) and February 2007 (2,125 warrants). All
warrants issued were outstanding at December 31, 1997.
The fair values of the warrants issued in 1995 and 1996, in connection with
debt financing, were insignificant. The fair value of the warrants issued in
1997, in connection with debt financing, was approximately $72,000. Accordingly,
the fair value was recognized as additional interest expense in the accompanying
statement of operations for 1997.
Common Stock
At December 31, 1996 and 1997 and March 31, 1998, the Company had the right
to repurchase 44,301, 320,311 and 271,570 shares of common stock outstanding,
respectively. The number of shares subject to repurchase is reduced over a two-
to four-year vesting period. The Company has the right to repurchase these
shares at the original issuance price.
F-13
<PAGE> 90
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
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):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------- -------------------
1995 1996 1997 1997 1998
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Loss (Numerator):
Net loss, basic and
diluted.......... $(6,666) $(14,471) $(13,055) $(3,828) $(4,232)
------- -------- -------- ------- -------
Shares (Denominator):
Weighted average
common shares
outstanding...... 1,888 1,910 2,244 2,010 2,796
Weighted average
common shares
outstanding
subject to
repurchase....... (1) (16) (120) (42) (299)
------- -------- -------- ------- -------
Shares used in
computation,
basic and
diluted.......... 1,887 1,894 2,124 1,968 2,497
------- -------- -------- ------- -------
Net Loss Per Share,
Basic and Diluted... $ (3.53) $ (7.64) $ (6.15) $ (1.95) $ (1.69)
======= ======== ======== ======= =======
</TABLE>
During 1995, 1996, 1997 and the three-month periods ended March 31, 1997
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 March 31, 1998: 9,957,604 shares of convertible preferred stock; warrants to
purchase 46,286 shares of convertible preferred stock; 271,570 outstanding
shares of common stock subject to repurchase; and options to purchase 1,420,967
shares of common stock.
Stock Option Plan
Under the Company's 1995 Stock Option Plan (the "1995 Plan"), as restated
and amended in January 1998, the Company may grant options to purchase up to
3,750,000 shares of common stock to employees, directors and consultants at
prices not less than the fair market value (as determined by the Board of
Directors) at the date of grant for incentive stock options and not less than
85% of fair market value at the date of grant for nonstatutory stock options.
These options generally expire ten years from the date of grant and are
immediately exercisable. The Company has a right of repurchase (at the option
exercise price) of common stock issued from option exercises for unvested
shares. The right of repurchase generally expires 25% after the first 12 months
from the date of grant and then ratably over a 36-month period. The Board of
Directors in their determination of fair market value takes into consideration
many factors including, but not limited to, the Company's financial performance,
current economic trends, actions by competitors, market maturity, emerging
technologies, near-term backlog and, in certain circumstances, valuation
analyses performed by independent appraisers. These valuation analyses utilize
generally accepted valuation methodologies such as the income and market
approaches to valuing the Company's business.
F-14
<PAGE> 91
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
Stock option activity under the 1995 Plan was as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
SHARES -------------------------------
AVAILABLE NUMBER WEIGHTED AVERAGE
FOR GRANT OF SHARES EXERCISE PRICE
----------- ----------- ----------------
<S> <C> <C> <C>
Balances, January 1, 1995......... -- -- $ --
Reserved.......................... 750,000 -- --
Granted (weighted average fair
value of $0.11)................. (598,250) 598,250 0.39
Canceled.......................... 7,000 (7,000) 0.40
Exercised......................... -- (25,000) 0.40
----------- -----------
Balances, December 31, 1995 (3,130
vested at a weighted average
price of $0.40)................. 158,750 566,250 0.39
Reserved.......................... 1,000,000 -- --
Granted (weighted average fair
value of $0.16)................. (1,171,315) 1,171,315 0.58
Canceled.......................... 44,698 (44,697) 0.62
Exercised......................... -- (102,639) 0.45
----------- -----------
Balances, December 31, 1996
(205,706 vested at a weighted
average price of $0.44)......... 32,133 1,590,229 0.52
Reserved.......................... 500,000 -- --
Granted (weighted average fair
value of $1.29)................. (587,990) 587,990 3.66
Canceled.......................... 75,266 (75,266) 0.64
Exercised......................... -- (774,042) 0.68
----------- -----------
Balances, December 31, 1997....... 19,409 1,328,911 1.80
Reserved.......................... 750,000 -- --
Granted........................... (218,440) 218,440 7.02
Canceled.......................... 51,574 (51,574) 2.08
Exercised......................... -- (74,810) 0.97
----------- -----------
Balances, March 31, 1998.......... 602,543 1,420,967 $2.64
=========== ===========
</TABLE>
Additional information regarding options outstanding at December 31, 1997
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING VESTED OPTIONS
------------------------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE VESTED PRICE
- ----------- ----------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
$0.20-$0.40 628,065 7.9 $0.40 212,821 $0.40
$0.80-$0.88 393,875 8.9 0.81 70,112 0.80
$3.30-$6.90 306,971 9.8 5.96 3,197 6.89
---------- --------
$0.20-$6.90 1,328,911 8.6 $1.80 286,130 $0.57
========== ========
</TABLE>
F-15
<PAGE> 92
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
Deferred Stock Compensation
As discussed in Note 1, the Company accounts for its stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25.
Accordingly, the Company recorded deferred compensation expense equal to the
difference between the grant price and deemed fair value of the Company's common
stock for options granted prior to December 31, 1997. Such deferred compensation
expense aggregated $136,000 and is being amortized to expense over the four-year
vesting period of the options.
Additional Stock Plan Information
Since the Company continues to account for its stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25, SFAS
No. 123, "Accounting for Stock-Based Compensation," requires the disclosure of
pro forma net income (loss) and earnings (loss) per share had the Company
adopted the fair value method as of the beginning of 1995. The Company's
calculations were made using the minimum value pricing model which requires
subjective assumptions, including expected time to exercise, which affects the
calculated values. The following weighted average assumptions were used for
1995, 1996 and 1997: expected life, 5 years; risk-free interest rate, 6.75%; and
no dividends during the expected term. The Company's calculations are based on a
single option award valuation approach, and forfeitures are recognized as they
occur. If the computed fair values of the 1995, 1996 and 1997 awards had been
amortized to expense over the vesting period of the awards, pro forma net loss
would have been approximately $(6,676,000)($(3.54) per share, basic and diluted)
in 1995, $(14,522,000)($(7.67) per share, basic and diluted) in 1996 and
$(13,153,000)($(6.19) per share, basic and diluted) in 1997.
7. INCOME TAXES
Income tax expense for the years ended December 31, 1995, 1996 and 1997
consisted solely of state franchise taxes.
The components of deferred income tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accruals and reserves not currently
deductible........................... $ 133 $ 827
Capitalized start-up costs.............. 966 765
Capitalized research and development
costs................................ -- 890
Net operating loss carryforwards........ 7,930 11,272
Tax credit carryforwards................ 1,181 2,998
Depreciation............................ 162 500
-------- --------
Total gross deferred tax assets........... 10,372 17,252
Valuation allowance....................... (10,372) (17,252)
-------- --------
Total deferred tax assets................. $ -- $ --
======== ========
</TABLE>
The net change in the total valuation allowance for the year ended December
31, 1997 was a net increase of $6,880,000. The increase in the valuation
allowance was primarily a result of increased
F-16
<PAGE> 93
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
net operating loss and tax credit carryforwards generated in 1997 which the
Company provided a full valuation allowance against based on the Company's
evaluation of the likelihood of realization of future tax benefits resulting
from the deferred tax assets.
As of December 31, 1997, the Company had available for carryforward net
operating losses for federal and state income tax purposes of approximately
$28,344,000 and $18,495,000, respectively. Federal net operating loss
carryforwards will expire if not utilized beginning in the years 2009 through
2012. State net operating loss carryforwards will expire if not utilized
beginning in the years 1999 through 2001.
As of December 31, 1997, the Company had available for carryforward
research and experimental tax credits for federal and state income tax purposes
of approximately $1,531,000 and $1,300,000, respectively. Federal research and
experimentation tax credit carryforwards expire from 2009 through 2012. The
Company also had approximately $170,000 in California manufacturers investment
credits.
Current Federal and California tax laws include substantial restrictions on
the utilization of net operating losses and tax credits in the event of an
"ownership change" of a corporation. Accordingly, the Company's ability to
utilize net operating loss and tax credit carryforwards may be limited as a
result of such "ownership change" as defined. Such a limitation could result in
the expiration of carryforwards before they are utilized.
8. MAJOR CUSTOMERS AND EXPORT SALES
Revenues for 1996 resulted from license fee revenue from one preferred
stockholder.
As of December 31, 1997, one unaffiliated customer and one preferred
stockholder represented 24% and 14%, respectively, of total accounts receivable.
Sales to these customers in 1997 represented 21% and 12% of total 1997 revenues,
respectively. In addition, 1997 sales to another preferred stockholder
represented 16% of total 1997 revenues.
Revenues for the three months ended March 31, 1997 resulted from license
fee revenue from one preferred stockholder.
As of March 31, 1998, four unaffiliated customers and one preferred
stockholder represented 34%, 11%, 10%, 10% and 12%, respectively, of total
accounts receivable. Sales to these customers for the three months ended March
31, 1998 represented 31%, 10%, 13%, 11% and 13%, respectively, of total revenues
for the quarter.
Export sales attributable to international customers accounted for 64% and
50% of total revenues for the year ended December 31, 1997 and the three months
ended March 31, 1998, respectively.
9. RELATED PARTY TRANSACTIONS
In March 1996, a preferred stockholder entered into a five-year licensing
agreement with the Company to license certain technology on a nonexclusive
basis. Under the terms of this agreement: (i) the Company received a
nonrefundable license fee of $1,000,000 in 1996 (which accounted for all of 1996
revenues), and (ii) if the Company met certain conditions in 1997, it would be
entitled to an additional $500,000 of nonrefundable license fees. In March 1997,
the Company met such conditions and received additional nonrefundable license
fees of $500,000 from this preferred stockholder. Such license fees were
recognized as revenue in 1997. In addition, the Company received prepaid
royalties pursuant to the licensing agreement of $1,000,000, which have been
F-17
<PAGE> 94
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
deferred and will be recognized ratably upon sale of the first 100,000 units of
product sold by the preferred stockholder incorporating the Company's
technology. The prepaid royalties will be earned at the earlier of the sale of
the 100,000 units of product or the expiration of the royalty period at December
31, 1998. As of December 31, 1997, approximately $993,000 of prepaid royalties
was unrecognized. In addition, this preferred stockholder purchased 876,261
shares of Series F preferred stock for $8.00 per share in 1996.
In 1996, the Company paid a director $22,000 in consulting fees.
For the year ended December 31, 1997, total revenues included sales to
three preferred stockholders of approximately $2,509,000, $1,889,000 and
$123,000 (with related cost of revenues of approximately $999,000, $951,000 and
$74,000, respectively). As of December 31, 1997, accounts receivable included
amounts due from the same three preferred stockholders of approximately
$364,000, $688,000, and $0, respectively.
For the three months ended March 31, 1998, total revenues included sales to
two preferred stockholders of approximately $922,000 and $31,000 (with related
cost of revenues of approximately $772,000 and $15,000, respectively). As of
March 31, 1998, accounts receivable included amounts due from the same two
preferred stockholders of approximately $746,000 and $64,000, respectively.
10. EMPLOYEE BENEFIT PLAN
In 1995, the Company adopted a defined contribution retirement plan (the
"Retirement Plan"), which has been determined by the Internal Revenue Service to
be qualified under Section 401(k) of the Internal Revenue Code of 1986. The
Retirement Plan covers essentially all full-time employees. Eligible employees
may make voluntary contributions to the Retirement Plan up to 15% of their
annual compensation. The Company has not made any employer contributions to the
Retirement Plan.
11. SUBSEQUENT EVENTS
Litigation
In 1997 the Company received a written notice from Hybrid Networks, Inc.
("Hybrid") in which Hybrid claimed to have patent rights in certain cable modem
technology and requested that the Company review its own products in light of
Hybrid's alleged patent rights to U.S. Patent No. 5,586,121 (the "121 patent")
issued on December 17, 1996 and entitled "Asymmetric Hybrid Access System and
Method" and U.S. Patent No. 5,347,304 (the "304 patent") issued on September 13,
1994 and entitled "Remote Link Adapter for Use in TV Broadcast Data Transmission
Systems" (collectively, the "Hybrid patents"). The Company informed Hybrid that
it believes that the Company's products do not infringe any valid claim of the
Hybrid patents. In January 1998, Hybrid filed an action against the Company in
the U.S. District Court for the Eastern District of Virginia, accusing the
Company of willfully infringing the Hybrid patents, among other claims.
Subsequently, the Company filed suit for declaratory relief against Hybrid in
the U.S. District Court for the Northern District of California asserting that
it does not infringe the Hybrid patents and that the Hybrid patents are invalid.
The Company then filed a motion in the Virginia District Court to transfer the
action filed by Hybrid to the Northern District of California, and that motion
was granted and the actions were consolidated in the Northern District of
California on April 29, 1998. Hybrid's complaint seeks injunctive relief and
unspecified damages, among other relief. Hybrid's complaint also identifies a
pending application for reissuance of the 304 patent to broaden the scope of its
claims, which the U.S. Patent and Trademark Office has allowed for reissuance
with respect to certain claims, and states
F-18
<PAGE> 95
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
that once the reissue application is issued, it will be substituted for the 304
patent in the action. On April 21, 1998, the 304 patent was reissued; however,
to date Hybrid has not moved to amend its complaint. The Company has received
opinions of its patent counsel that the claims of the Hybrid patents, including
the claims set forth in Hybrid's 304 patent as reissued, are either invalid or
not infringed by the Company's products. However, there can be no assurance that
some or all of the Company's products will not ultimately be determined to
infringe the Hybrid patents, including the 304 patent as reissued, and the
Company anticipates that Hybrid will continue to pursue litigation with respect
to these claims. The results of any litigation matter are inherently uncertain.
In the event of an adverse result in the Hybrid litigation, or in any other
litigation with third parties that could arise in the future with respect to
intellectual property rights relevant to the Company's products, the Company
could be required to pay substantial damages, including treble damages if the
Company is held to have willfully infringed, to cease 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.
There can be no assurance that licenses will be available from Hybrid, or any
other third party that asserts intellectual property claims against the Company,
on commercially reasonable terms, or at all. In addition, litigation frequently
involves substantial expenditures and can require significant management
attention, even if the Company ultimately prevails. Accordingly, there can be no
assurance that the Hybrid matter will not have a material adverse effect on the
Company's business, operating results and financial condition. Because of the
early stage of this litigation, and because Hybrid has sought unspecified
damages, neither the ultimate outcome of this litigation nor any costs and
payments resulting from the litigation or any settlement can presently be
determined. Accordingly, no provision for any loss which may result from the
Hybrid litigation has been recorded in the accompanying financial statements.
1998 Equity Plans
On March 10, 1998, the Board of Directors adopted, subject to stockholder
approval, the 1998 Stock Incentive Plan (the "1998 Stock Plan") and the 1998
Employee Stock Purchase Plan (the "1998 Purchase Plan").
The 1998 Stock Plan will serve as the successor equity incentive program to
the Company's existing 1995 Plan effective April 1, 1998. A total of 2,023,510
shares of Common Stock have been reserved for issuance under the 1998 Stock
Plan. In addition, the share reserve may be increased up to 271,570 shares for
repurchases of unvested common shares issued under the 1995 Plan. Options
outstanding under the 1995 Plan on the date of execution and final pricing of
the underwriting agreement for the initial public offering will be incorporated
into the 1998 Stock Plan. Such incorporated options will continue to be governed
by their existing terms. Under the 1998 Stock Plan, the Company is authorized to
issue shares of common stock to employees, directors and consultants under five
separate programs: Discretionary Option, Stock Issuance, Salary Investment
Option Grant, Automatic Option Grant and Director Fee Option Grant. The number
of shares reserved for issuance under the 1998 Stock Plan will automatically
increase at the beginning of each calendar year, beginning in 1999, by an amount
equal to 5% of the total number of shares of common stock outstanding at the end
of the preceding year. The Discretionary Option Program of the 1998 Stock Plan
provides for the grant of options under terms comparable to those provided on
options granted under the 1995 Plan except that all options are to be granted at
a price not less than fair market value on the date of grant.
Under the 1998 Purchase Plan, eligible employees are allowed to have salary
withholdings of up to 10% of their base compensation to purchase shares of
common stock at a price equal to 85% of the lower of the market value of the
stock at the beginning or end of defined purchase periods. The
F-19
<PAGE> 96
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
initial purchase period commences upon the execution and final pricing of the
underwriting agreement for the initial public offering of the Company's common
stock. The Company has reserved 250,000 shares of common stock for issuance
under this plan.
Board Resolutions
On March 10, 1998, the Board of Directors adopted, subject to stockholder
approval, a change in the authorized number of shares of the Common and
Convertible Preferred stock to 40,000,000 and 5,000,000, respectively. An
Amended and Restated Certificate of Incorporation will be filed following the
effectiveness of the registration statement relating to the initial public
offering.
On March 10, 1998, the Board of Directors adopted, subject to stockholder
approval (which was received April 21, 1998), a one-for-two reverse split of the
outstanding shares of common and convertible preferred stock. On May 13, 1998,
the Company filed an amendment to its Amended and Restated Certificate of
Incorporation to effect the reverse stock split. All share and per share amounts
in these financial statements have been adjusted to give effect to the reverse
stock split.
On April 22, 1998, the Board of Directors approved an amendment to the 1998
Stock Plan to reserve an additional 500,000 shares for issuance under the 1998
Stock Plan. In addition, the Board of Directors authorized the grant of options
to purchase 505,250 shares of common stock at $9.00 per share. Such grants were
made to employees and officers under the 1998 Stock Plan.
Stockholder Consent
On April 22, 1998, holders of more than 50% of the Series D, E, F and G
convertible preferred stock, voting as a single class, consented to the
automatic conversion of all outstanding shares of Series D, E, F and G
convertible preferred stock into common stock upon the completion of the initial
public offering regardless of the offering price per share.
F-20
<PAGE> 97
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON US
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
The Company........................... 4
Risk Factors.......................... 5
Use of Proceeds....................... 20
Dividend Policy....................... 20
Capitalization........................ 20
Dilution.............................. 21
Selected Financial Data............... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 31
Management............................ 51
Certain Transactions.................. 61
Principal Stockholders................ 63
Description of Capital Stock.......... 65
Shares Eligible for Future Sale....... 68
Underwriting.......................... 70
Legal Matters......................... 71
Experts............................... 72
Change in Independent Auditors........ 72
Additional Information................ 72
Glossary of Technical Terms........... 73
Index to Financial Statements......... F-1
</TABLE>
UNTIL , 1998 (25 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
COM21 LOGO
5,000,000 SHARES
COMMON STOCK
DEUTSCHE MORGAN GRENFELL
MERRILL LYNCH & CO.
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
PROSPECTUS
, 1998
<PAGE> 98
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 20,355
NASD Filing Fee............................................. 7,400
Nasdaq National Market Listing Fee.......................... 71,875
Printing and Engraving Expenses............................. 150,000
Legal Fees and Expenses of the Company...................... 375,000
Accounting Fees and Expenses................................ 400,000
Blue Sky Fees and Expenses.................................. 5,000
Transfer Agent Fees......................................... 15,000
Miscellaneous............................................... 5,370
----------
Total............................................. $1,050,000
==========
</TABLE>
- ---------------
* To be completed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). The Company's Bylaws provides for mandatory
indemnification of its directors and officers and permissible indemnification of
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. The Company's Certificate of Incorporation provides
that, subject to Delaware law, its directors shall not be personally liable for
monetary damages for breach of the directors' fiduciary duty as directors to the
Company and its stockholders. This provision in the Certificate of Incorporation
does not eliminate the directors' fiduciary duty, and in appropriate
circumstances equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director's
duty of loyalty to the Company or its stockholders for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
unlawful under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Company has entered into
indemnification agreements with its officers and directors, a form of which is
filed as Exhibit 10.8 to this Registration Statement (the "Indemnification
Agreements"). The Indemnification Agreements provide the Company's officers and
directors with further indemnification to the maximum extent permitted by the
Delaware General Corporation Law. Reference is also made to Section 6 of the
Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers
and directors of the Company against certain liabilities, and Section 13 of the
Amended and Restated Registration Rights Agreement contained in Exhibit 4.2
hereto, indemnifying certain of the Company's stockholders, including
controlling stockholders, against certain liabilities.
II-1
<PAGE> 99
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1995, the Company has issued and sold the following
securities:
1. The Company issued and sold 916,366 shares of its Common Stock to
employees and consultants for an aggregate purchase price of $644,154
pursuant to the exercise of options under its 1995 Stock Option Plan
(Exhibit 10.5).
2. On May 2, 1995, the Company issued 166,667 shares of its Series C
Preferred Stock upon exercise of certain warrants, for an aggregate
exercise price of $500,000 to several investors.
3. On May 1, 1995, the Company issued and sold an aggregate of 1,812,500
shares of its Series D Preferred Stock and Warrants to purchase an
aggregate of 362,500 shares of its Series E Preferred Stock for an
aggregate purchase price of $7,250,000 to several investors.
4. On December 11, 1995, in connection with an equipment leasing
transaction, the Company issued Warrants to purchase 5,154 shares of
its Series D Preferred Stock, at an exercise price of $5.82 per share,
to Comdisco, Inc.
5. During the period from September 4, 1997 to November 1, 1997, the
Company issued 361,908 shares of its Series E Preferred Stock upon the
exercise of certain warrants, at an aggregate purchase price of
$1,628,586 to several investors.
6. On April 4, 1996, April 22, 1996, May 7, 1996, June 28, 1996, and July
11, 1996, the Company issued and sold an aggregate of 2,905,730 shares
of its Series F Preferred Stock for an aggregate purchase price of
$23,245,840 to several investors.
7. During the period from April 11, 1996 to May 5, 1997, in connection
with an equipment leasing transaction, the Company issued Warrants to
purchase 9,318 shares of its Series F Preferred Stock, at an exercise
price of $8.00 per share, to Comdisco, Inc.
8. On August 30, 1996, in connection with an office equipment lease, the
Company issued Warrants to purchase 6,814 shares of its Series F
Preferred Stock, at an exercise price of $8.00 per share, to
Lindsay-Ferrari.
9. On May 30, 1997, in connection with a credit agreement, the Company
issued Warrants to purchase 25,000 shares of its Series F Preferred
Stock, at an aggregate exercise price of $8.00 per share, to GreyRock
Business Credit, a division of NationsCredit Commercial Corporation.
10. On July 22, 1997, August 11, 1997 and September 12, 1997, the Company
issued and sold an aggregate of 2,655,125 shares of its Series G
Preferred Stock for an aggregate purchase price of $23,099,587 to
several investors. Deutsche Morgan Grenfell Inc. acted as the placement
agent for this transaction and in connection with that placement
received cash compensation.
The issuances described in paragraph 1 were deemed exempt from registration
under the Securities Act in reliance upon Rule 701 promulgated under the
Securities Act. The issuances of the securities described in paragraphs 2
through 10 were deemed to be exempt from registration under the Act in reliance
on Section 4(2) of the Act as transactions by an issuer not involving any public
offering. In addition, the recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access, through their relationships
with the Company, to information about the Company.
II-2
<PAGE> 100
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits listed in the Exhibit Index as filed as part of this
Registration Statement.
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
------ -------------
<S> <C>
1.1* Form of Underwriting Agreement among the Registrant,
Deutsche Morgan Grenfell Inc., Merrill Lynch, Pierce, Fenner
and Smith Incorporated and Wessels, Arnold & Henderson,
L.L.C..
3.1* Registrant's Amended and Restated Certificate of
Incorporation.
3.2* Registrant's Amended and Restated Bylaws.
4.1* Form of Registrant's Specimen Common Stock Certificate.
4.2* Amended and Restated Information and Registration Rights
Agreement, among the Registrant and the investors and
founders named therein, dated July 22, 1997.
5.1* Legal Opinion of Brobeck, Phleger & Harrison LLP, counsel
for the Registrant.
10.1* Lease Agreement between the Company, John Arrillaga and
Richard T. Peery, dated May 10, 1996.
10.2+* Technology License and Reseller Agreement between the
Company and 3Com Corporation, dated March 22, 1996.
10.3+* Reseller Agreement between the Company and 3Com Corporation,
dated July 30, 1997.
10.4+* Hardware and Software Technology License Agreement between
the Company, Advanced Telecommunications Modules, Limited
and Advanced Telecommunications Modules, Inc., dated
February 1, 1996.
10.5* Registrant's 1995 Stock Option Plan.
10.6* Registrant's 1998 Stock Incentive Plan.
10.7* Registrant's 1998 Employee Stock Purchase Plan.
10.8* Form of Indemnity Agreement entered into by Registrant with
each of its executive officers and directors.
10.9* Loan and Security Agreement between Registrant and Greyrock
Business Credit, dated May 30, 1997.
10.10+* International OEM Agreement between the Company, Advanced
Telecommunications Modules, Inc. and Advanced
Telecommunications Modules, Limited, dated March 7, 1996.
10.11+* Agreement for Manufacturing Services between the Company and
Celestica, Inc., dated October 25, 1996.
10.12*+ Wind River Systems, Inc. VxWorks License Agreement.
10.13*+ Purchase and License Agreement by and between the Company
and Siemens AG, dated December 2, 1997.
10.14*+ Distribution Agreement by and between the Company and
Philips Public Telecommunication Systems, dated November 26,
1997.
16.1* Letter from KPMG Peat Marwick LLP regarding Change in
Certifying Accountant.
23.1 Consent of Independent Auditors.
23.2* Consent of Counsel (see Exhibit 5.1).
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment has been requested as to a portion of this Agreement.
II-3
<PAGE> 101
ITEM 17. UNDERTAKINGS
The Company hereby undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Company, Indemnification Agreements entered
into between the Company and its officers and directors, the Underwriting
Agreement, or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer, or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of Prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 102
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-1 and has duly caused this Amendment No. 4
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Milpitas, State of California, on this
20th day of May, 1998.
COM21, INC.
By: /s/ DAVID L. ROBERTSON
------------------------------------
David L. Robertson
Chief Financial Officer, Vice
President, Finance and Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the persons whose signatures
appear below, which persons have signed such Registration Statement in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President, Chief Executive May 20, 1998
- -------------------------------------------------------- Officer (Principal
(Peter D. Fenner) Executive Officer and
Director)
/s/ David L. Robertson Vice President, Finance, May 20, 1998
- -------------------------------------------------------- Chief Financial Officer
(David L. Robertson) (Principal Financial and
Accounting Officer) and
Secretary
* Director May 20, 1998
- --------------------------------------------------------
(Paul Baran)
* Director May 20, 1998
- --------------------------------------------------------
(Robert A. Hoff)
* Director May 20, 1998
- --------------------------------------------------------
(C. Richard Kramlich)
* Director May 20, 1998
- --------------------------------------------------------
(Scott J. Loftesness)
* Director May 20, 1998
- --------------------------------------------------------
(William R. Hearst, III)
* Director May 20, 1998
- --------------------------------------------------------
(Robert C. Hawk)
* Director May 20, 1998
- --------------------------------------------------------
(Robert W. Wilmot)
*By: /s/ DAVID L. ROBERTSON
---------------------------------------------------
David L. Robertson
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 103
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
------ -------------
<S> <C>
1.1* Form of Underwriting Agreement among the Registrant,
Deutsche Morgan Grenfell Inc., Merrill Lynch, Pierce, Fenner
and Smith Incorporated and Wessels, Arnold & Henderson,
L.L.C.
3.1* Registrant's Amended and Restated Certificate of
Incorporation.
3.2* Registrant's Amended and Restated Bylaws.
4.1* Form of Registrant's Specimen Common Stock Certificate.
4.2* Amended and Restated Information and Registration Rights
Agreement, among the Registrant and the investors and
founders named therein, dated July 22, 1997.
5.1* Legal Opinion of Brobeck, Phleger & Harrison LLP, counsel
for the Registrant.
10.1* Lease Agreement between the Company, John Arrillaga and
Richard T. Peery, dated May 10, 1996.
10.2+* Technology License and Reseller Agreement between the
Company and 3Com Corporation, dated March 22, 1996.
10.3+* Reseller Agreement between the Company and 3Com Corporation,
dated July 30, 1997.
10.4+* Hardware and Software Technology License Agreement between
the Company, Advanced Telecommunications Modules, Limited
and Advanced Telecommunications Modules, Inc., dated
February 1, 1996.
10.5* Registrant's 1995 Stock Option Plan.
10.6* Registrant's 1998 Stock Incentive Plan.
10.7* Registrant's 1998 Employee Stock Purchase Plan.
10.8* Form of Indemnity Agreement entered into by Registrant with
each of its executive officers and directors.
10.9* Loan and Security Agreement between Registrant and Greyrock
Business Credit, dated May 30, 1997.
10.10+* International OEM Agreement between the Company, Advanced
Telecommunications Modules, Inc. and Advanced
Telecommunications Modules, Limited, dated March 7, 1996.
10.11+* Agreement for Manufacturing Services between the Company and
Celestica, Inc., dated October 25, 1996.
10.12*+ Wind River Systems, Inc. VxWorks License Agreement.
10.13*+ Purchase and License Agreement by and between the Company
and Siemens AG, dated December 2, 1997.
10.14*+ Distribution Agreement by and between the Company and
Philips Public Telecommunication Systems, dated November 26,
1997.
16.1* Letter from KPMG Peat Marwick LLP regarding Change in
Certifying Accountant.
23.1 Consent of Independent Auditors.
23.2* Consent of Counsel (see Exhibit 5.1).
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment has been requested as to a portion of this Agreement.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Amendment No. 4 to Registration Statement No.
333-48107 of Com21, Inc. on Form S-1 of our report dated January 16, 1998 (March
10, 1998 as to the first through fifth paragraphs of Note 11; April 22, 1998 as
to the last two paragraphs of Note 11; and May 13, 1998 as to the sixth
paragraph of Note 11) appearing in the Prospectus, which is part of the
Registration Statement.
We also consent to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.
Deloitte & Touche LLP
San Jose, California
May 18, 1998
