UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________
to ___________________
Commission File Number: 000-2409
Com21, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-3201698
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
750 Tasman Drive
Milpitas, California 95035
(408) 953-9100
(Address, including zip code, and telephone number,
including area code, of the registrant's principal
executive offices)
Indicate by check mark whether the registrant (1) has filed
all reports required by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
The number of outstanding shares of the registrant's Common
Stock, $0.001 par value, was 18,562,903 as of September 30,
1998.
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COM21, INC.
INDEX
PART I: FINANCIAL INFORMATION Page
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Item 1 Financial Statements
Condensed Balance Sheets - September 30, 1998 and 3
December 31, 1997
Condensed Statements of Operations - Three and Nine 4
Month periods ended September 30, 1998 and 1997
Condensed Statements of Cash Flows - Nine Months 5
Ended September 30, 1998 and 1997
Notes to Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II: OTHER INFORMATION
Item 1 Legal Proceedings 26
Item 2 Changes in Securities and Use of Proceeds 27
Item 3 Defaults Upon Senior Securities 27
Item 4 Submission of Matters to a Vote of Security Holders 27
Item 5 Other Information 28
Item 6 Exhibits and Reports on Form 8-K 28
Signatures 28
</TABLE>
This report contains certain forward-looking statements that
involve risks and uncertainties, including statements
regarding the Company's strategy, financial performance and
revenue sources. The Company's actual results could differ
materially from the results anticipated in these forward-
looking statements as a result of certain factors set forth
under "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Risk Factors" and
elsewhere in this report.
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements
<TABLE><CAPTION>
COM21, INC.
CONDENSED BALANCE SHEETS
(In thousands, except share and par value amounts)
(Unaudited)
September 30, December 31,
1998 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 43,542 $ 17,950
Short-term investments 23,926 -
Accounts receivable (net of allowances of 7,004 5,036
$790 and $121)
Inventories 5,434 2,643
Prepaid expenses and other 831 430
---------- ----------
Total current assets 80,737 26,059
Property and equipment, net 5,788 5,311
Other assets 256 203
---------- ----------
Total assets $ 86,781 $ 31,573
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,628 $ 2,832
Accrued compensation and related benefits 974 871
Deferred revenue 1,212 1,004
Other current liabilities 2,947 619
Current portion of capital lease and debt
obligations 1,289 1,210
---------- ----------
Total current liabilities 10,050 6,536
Deferred rent 279 246
Capital lease obligations 1,125 1,320
Debt obligations 18 188
---------- ----------
Total liabilities 11,472 8,290
Stockholders' equity:
Convertible preferred stock, $0.001 par value;
5,000,000 shares and 22,000,000 shares
authorized at September 30, 1998 and
December 31, 1997; none and 9,957,604 issued
and outstanding, at September 30, 1998 and
December 31, 1997 - 10
Common stock, $0.001 par value, 40,000,000
shares and 35,000,000 shares authorized at
September 30, 1998 and December 31, 1997;
18,562,903 and 2,772,139 issued and outstanding
at September 30, 1998 and December 31, 1997 19 3
Additional paid-in capital 121,625 58,722
Deferred stock compensation (91) (116)
Unrealized gain on securities 6 -
Accumulated deficit (46,250) (35,336)
---------- ----------
Total Equity 75,309 23,283
---------- ----------
Total liabilities and $ 86,781 $ 31,573
stockholders' equity ========== ==========
See notes to condensed financial statements.
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COM21, INC
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE><CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
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Revenues:
Product revenues $ 13,686 $ 5,577 $ 29,417 $ 8,455
License fees - related party - - - 500
--------- --------- --------- ---------
Total revenues 13,686 5,577 29,417 8,955
Cost of product revenues 8,486 2,986 18,940 4,506
--------- --------- --------- ---------
Gross profit 5,200 2,591 10,477 4,449
--------- --------- --------- ---------
Operating expenses:
Research and development 4,692 3,309 13,362 9,478
Sales and marketing 2,615 1,363 6,722 3,378
General and administrative 1,286 432 2,681 1,204
--------- --------- --------- ---------
Total operating expenses 8,593 5,104 22,765 14,060
--------- --------- --------- ---------
Loss from operations (3,393) (2,513) (12,288) (9,611)
Total other income, net 915 34 1,388 53
--------- --------- --------- ---------
Loss before income taxes (2,478) (2,479) (10,900) (9,558)
Provision for income taxes 5 2 14 14
--------- --------- --------- ---------
Net loss $ (2,483) $ (2,481) $(10,914) $ (9,572)
========= ========= ========= =========
Net loss per share,
basic and diluted $ (0.14) $ (0.23) $ (0.72) $ (1.00)
========= ========= ========= =========
Shares used in computation, 18,338 10,926 15,260 9,599
basic and diluted ========= ========= ========= =========
See notes to condensed financial statements.
</TABLE>
COM21, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE><CAPTION>
Nine Months Ended
September 30,
-------------------------
1998 1997
---------- ----------
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Cash used in operating activities:
Net loss $ (10,914) $ (9,572)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,517 1,408
Interest expense-warrants - 72
Deferred rent 33 157
Gain on sale of investments (27) -
Changes in operating assets and liabilities:
Accounts receivable (1,968) (3,963)
Inventories (2,791) (1,348)
Prepaid expenses and other (186) (287)
Other assets (53) (98)
Accounts payable 796 205
Accrued compensation and related benefits 103 1,364
Deferred revenue 208 70
Other current liabilities 2,328 144
---------- ----------
Net cash used in operating activities: (9,954) (11,848)
Cash used in investing activities:
Purchases of investments (28,950) -
Proceeds from sale of investments 5,057 -
Purchases of property and equipment (2,294) (1,837)
---------- ----------
Net cash used in investing activities: (26,187) (1,837)
Cash flows from financing activities:
Proceeds from issuance of stock, net 62,909 22,558
Proceeds from issuance of debt obligations - 2,100
Repayments under capital lease obligations (792) (538)
Repayments on debt obligations (384) (2,112)
---------- ----------
Net cash provided by financing activities 61,733 22,008
Net change in cash and cash equivalents 25,592 8,323
Cash and cash equivalents at beginning of period 17,950 12,427
---------- ----------
Cash and cash equivalents at end of period $ 43,542 $ 20,750
========== ==========
Noncash investing and financing activities:
Property and equipment acquired under
capital lease $ 675 $ 589
========= ==========
Deferred stock compensation $ - $ 136
========= ==========
Issuance of warrants in connection with $ - $ 72
debt obligations ========= ==========
Assets acquired through lease financing $ 215 $ -
========= ==========
See notes to condensed financial statements
</TABLE>
COM21, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 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.
Unaudited Interim Financial Statements - The accompanying
unaudited financial statements have been prepared by the
Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant
to such rules and regulations. In the opinion of management,
these unaudited consolidated financial statements include all
adjustments necessary for a fair presentation of the
Company's financial position as of September 30, 1998, the
results of operations for the three and nine months ended
September 30, 1998 and 1997 and cash flows for the nine
months ended September 30, 1998 and 1997.
The results of operations for the three and nine months ended
September 30, 1998 may not necessarily be indicative of the
results to be expected for the fiscal year ending December
31, 1998. These financial statements should be read in
conjunction with the financial statements and the
accompanying notes included in the Company's Registration
Statement on Form S-1 (No. 333-48107), including the related
prospectus dated May 21, 1998 as filed with the SEC.
Net Loss Per Share - In the fourth quarter of 1997, the
Company adopted the 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
shareholders by the weighted average of common shares
outstanding for the period. In addition, all outstanding
shares of preferred stock that were converted to shares of
common stock in the initial public offering are included in
the computation of outstanding common shares even when the
effect is anti-dilutive. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to
issue common 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.
2. Comprehensive Loss
In the first quarter of 1998, the Company adopted SFAS No.
130, "Reporting Comprehensive Income" requiring an enterprise
to report, by major components and as a single total, the
change in net assets during the period from non-owner
sources. The Company's comprehensive loss is comprised of
net loss and unrealized gains on marketable securities held
as available for sale investments. Comprehensive loss was
$2,477,000 and $2,481,000, respectively, for the three month
periods ended September 30, 1998 and September 30, 1997, and
$10,908,000 and $9,572,000, respectively, for the nine month
periods ended September 30, 1998 and September 30, 1997.
3. Investments
The Company invests certain of its excess cash in debt
instruments of the U.S. government and its agencies, and of
high quality corporate issuers. All highly liquid
instruments with an original maturity of three months or less
are considered cash equivalents; those with original
maturities greater than three months are considered short-
term investments and those with maturities greater than
twelve months from the balance sheet date are considered
long-term investments. The Company classifies investment
securities in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
At September 30, 1998 the Company's investments were all
classified as available-for-sale and consisted primarily of
obligations of the U.S. government ($39,487,000) and U.S.
corporate securities ($24,894,000). As of September 30,
1998, all of the Company's investments were due within one
year.
4. Inventories
Inventories consist of :
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September 30, December 31,
1998 1997
------------- -------------
(In thousands)
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Raw materials and sub-assemblies $ 632 $ 633
Work-in-process 1,453 980
Finished goods 3,349 1,030
------------- -------------
$ 5,434 $ 2,643
============= =============
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5. Stockholders' equity
In May, 1998, the Company completed its initial public stock
offering and issued 5,750,000 shares (including 750,000
shares issued in connection with the exercise of the
underwriters' allotment option) of its Common Stock to the
public at a price of $12.00 per share. The Company received
net proceeds of approximately $62.8 million in cash. As of
the closing date of the offering, all of the convertible
preferred stock outstanding was converted into an aggregate
of 9,957,604 shares of common stock.
6. 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 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 as
U.S. Patent No. Re. 35,774 (the "774 patent"). Formal
discovery commenced on July 17, 1998. On about September 15,
1998, Hybrid filed an amended complaint that adds allegations
against the company of willful infringement of the 774
patent. On September 24, 1998, the parties agreed to an
order staying all proceedings in the litigation until January
4, 1999. The Court entered the order regarding stay of
proceedings on September 29, 1998. The Company has received
opinions of its patent counsel that the claims of the Hybrid
patents, including the claims set forth in Hybrid's 774
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 774 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.
PART I: FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in this discussion and analysis, including
statements regarding the Company's strategy, financial
performance and revenue sources, are forward-looking
statements based on current expectations and entail various
risks and uncertainties that could cause actual results to
differ materially from those expressed in such forward-
looking statements. The Company's actual results could
differ materially from the results anticipated in these
forward-looking statements as a result of certain factors set
forth under "Risk Factors" and elsewhere in this report.
Readers are urged to carefully review and consider the
various disclosures made by the Company in this report and in
the Company's other reports filed with the SEC, including the
Company's Registration Statement on Form S-1 (No. 333-48107)
and the related prospectus dated May 21, 1998 as filed with
the SEC, that attempt to advise interested parties of certain
risks and factors that may affect the Company's business.
Readers are cautioned not to place undue reliance on these
forward-looking statements to reflect events or circumstances
occurring after the date hereof. The following discussion
should be read in conjunction with the Company's financial
statements and notes thereto.
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 cable modems, headend equipment,
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.
The Company's revenues consist primarily of sales of cable
modems, headend equipment 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 continue 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 September 30, 1998 an aggregate of approximately $1.5
million has been recognized as technology licensing fees and
royalties pursuant to this agreement and approximately $1.0
million remains as deferred revenue to be recognized at the
expiration of the royalty period on December 31, 1998.
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 DOCSIS compliant products become widely
available from multiple vendors.
DOCSIS, the Data Over Cable Service Interface Specification
project, is a listing of vendor independent specifications
managed by Cablelabs and begun by Multimedia Cable Network
System (MCNS) Partners, L.P., a consortium of major cable
television system operators, that seeks to make the equipment
supporting data communications services over Hybrid Fiber
Coax (HFC) interoperable. Interoperability of cable
networking equipment will lead to greater competition as the
market for interoperable cable modems is opened to multiple
vendors and greater price competition.
Com21 tests and assembles headend equipment in the Company's
facility in Milpitas, California. The Company outsources
turnkey manufacturing of its cable modems 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 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.
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 September 30, 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 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 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 incurs legal costs related to
its defense of the Hybrid litigation, adds personnel and
incurs additional costs related to the growth of its business
and operation as a public company.
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. The
Company has initiated its efforts to prepare its internal
systems for the year 2000. The Company is also assessing the
capability of its products to handle the year 2000 and is
currently addressing product issues. 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. The
Company is also contacting critical suppliers of products and
services to determine that the suppliers' operations and the
products and they provide are year 2000 compliant or to
monitor their progress toward year 2000 compliance. 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."
Results of Operations
Total Revenues - Total revenues increased 145% from $5.6
million in the third quarter of 1997 to $13.7 million in the
third quarter of 1998, and increased 228% from $9.0 million
for the first nine months of 1997 to $29.4 million for the
first nine months of 1998. Both cable modems and headend
products experienced sales growth over the comparable quarter
and nine month period in the prior year as demand for the
Company's products continued to be strong. Cable modem
revenue increased at a greater rate than headend products as
the Company's installed base of headend products was able to
support a greater number of cable modems. Cable modem sales
accounted for 62.6% of total revenue in the third quarter of
1998 as compared to 31.5% in the third quarter of 1997 and
cable modem sales accounted for 53.5% of revenue in the nine
months ended September 30, 1998 as compared to 28.7% for the
nine months ended September 30, 1997. Headend product sales
accounted for 36.4% of total revenue in the third quarter of
1998 as compared to 57.2% in the third quarter of 1997 and
headend product sales accounted for 44.8% of revenue in the
nine months ended September 30, 1998 as compared to 60.5% for
the nine months ended September 30, 1997. The remaining
balance of revenue is related to the Company's network
management software. The average sales price of cable modems
continued to gradually decline during the third quarter of
1998 due to competitive pricing pressure. The Company
anticipates that average sales prices of cable modems will
continue to decline at a faster rate in the face of
competition and the adoption of industry standards such as
DOCSIS. During the quarter ended September 30, 1998
international sales accounted for 51% of total revenues,
decreasing from the 70% of international sales in the third
quarter of 1997. This decrease was primarily due to a
greater proportional increase in sales of all products to
large domestic cable companies.
Gross Margins - Gross margins decreased from 46.5% in the
third quarter of 1997 to 38.0% in the third quarter of 1998,
and decreased from 49.7% for the first nine months of 1997 to
35.6% for the first nine months of 1998. The decrease is due
primarily to a shift in product mix from the higher margin
headend equipment to the lower margin cable modems. The
decrease in margin during the periods was partially offset by
a decrease in the cost of cable modems as the Company's cable
modem cost reduction program led to lower costs of modems
during the quarter. The benefits obtained as a result of
this cost reduction program were partially offset by a
decrease in the average sales price of cable modems. The
Company is continuing its focus on cost reduction efforts on
cable modems and anticipates continued benefits obtained as a
result of this program. These benefits are expected to be
partially offset by decreases in the average sales price of
modems.
Research and Development - Research and development expenses
increased 42% from $3.3 million in the third quarter of 1997
to $4.7 million in the third quarter of 1998, and increased
41% from $9.5 million for the first nine months of 1997 to
$13.4 million for the first nine months of 1998. The
increase was attributable to higher costs related primarily
to increased personnel and equipment related costs. The
Company expects these expenses to increase in absolute
dollars in the future as the Company continues its investment
in research and development.
Sales and Marketing - Sales and marketing expenses increased
92% from $1.4 million in the third quarter of 1997 to $2.6
million in the third quarter of 1998, and increased 99% from
$3.4 million for the first nine months of 1997 to $6.7
million for the first nine months of 1998. The increase was
attributable to higher costs associated with increased
personnel, commissions on increased sales, consulting and
more trade advertising and promotion. The Company increased
its sales and marketing headcount with domestic sales and
support staff and with international sales personnel. The
Company intends to pursue sales and marketing campaigns
aggressively and expand its sales presence domestically and
internationally, and therefore expects these expenses to
increase in absolute dollars in the future.
General and Administrative - General and administrative
expenses increased 198% from $0.4 million in the
third quarter of 1997 to $1.3 million in the third quarter of
1998, and increased 123% from $1.2 million for the first nine
months of 1997 to $2.7 million for the first nine months of
1998. The increase was attributable to higher legal expenses,
increased salary costs and higher consulting costs related to
recruiting. The Company expects general and administrative
expenses to increase in absolute dollars as the Company
continues to incur legal costs related to litigation, adds
personnel and incurs additional costs related to the growth
of its business.
Total Other Income, Net - Total other income, net increased
from $34,000 in the third quarter of 1997 to $915,000 in the
third quarter of 1998, and increased from $53,000 for the
first nine months of 1997 to $1.4 million for the first nine
months of 1998. The increase was attributable to earnings on
higher cash balances available during the first nine months
of 1998, due primarily to the net cash received of $62.8
million from the Company's initial public offering of common
stock in May 1998.
Liquidity and Capital Resources
At September 30, 1998 the Company's cash and cash equivalents
and short-term investments were $67.5 million, compared to
$18.0 million at December 31, 1997, an increase of $49.5
million. The increase is primarily a result of cash
generated from financing activities of $61.7 million during
the period largely resulting from the $62.8 million in net
proceeds received from the initial public offering of the
Company's common stock in May 1998. These cash flows were
partially offset by cash outflows from operating activities
of $10.0 million primarily driven by a $10.9 million net
loss for the nine months ended September 30, 1998 and cash
used in investing in property and equipment of $2.3 million.
The Company's capital requirements primarily relate to the
working capital requirements and investments in property and
equipment. The Company has funded its operations primarily
through its initial public offering of common stock and
private sales of common and preferred stock.
At September 30, 1998, 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 may increase its capital expenditures and may
increase lease commitments consistent with anticipated growth
in operations, infrastructure and personnel. The Company
intends to 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 current cash and cash
equivalents, will be sufficient to meet its anticipated cash
requirements for the next twelve months, although the Company
may seek to raise additional capital during that time period.
Risk Factors
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 September 30,
1998, the Company had an accumulated deficit of approximately
$46.3 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.
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, a modulation technology
developed by one of the Company's competitors is now
commercially available. 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. 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.
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. 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 and Digital and Video Broadcast
Organization ("DAVIC/DVB"), Data Over Cable Service Interface
Specification (DOCSIS), Institute of Electrical and
Electronics Engineers, Inc. ("IEEE") or Internet Engineering
Task Force ("IETF"), and other relevant standards bodies. The
Company expects the DOCSIS standard to achieve substantial
market acceptance, and the Company is currently developing
DOCSIS compliant products. When such standards become
widespread and if 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 DOCSIS standard is likely to cause aggressive
price competition and further, such adoption could result in
lower sales of headend products and licensing of the network
management software by the Company. Any such aggressive 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.
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 announcement or introduction of
new services and products by the Company and its competitors
and the timely introduction of DOCSIS compliant products by
the Company; (iii) the Company's ability to manage inventory
and fulfillment operations; (iv) 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;
(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.
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
modems in the foreseeable future, as headends become more
broadly deployed and as DOCSIS compliant products are
deployed by cable operators. As a result, the Company expects
to experience continued downward price pressure on its gross
margin in part offset by cost reduction programs. 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.
Early Stage of Market for Cable Modems; Unproven Widespread
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 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. 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 or their internet data service provider certify the
Company's products for integration into their systems. There
can be no assurance that certification of the Company's
products will occur in a timely manner, if at all, or that
the Company, in order for its products to be certified 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 a widespread 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 currently depends
on cable operators to purchase its headend equipment and
cable modems and to market data transmission service to end-
users. Cable 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.
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 DOCSIS will cause increased competition, which is
likely to negatively affect the Company's gross margin.
Competitors may more quickly develop DOCSIS compliant
products. Current customers of the Company that move to the
DOCSIS platform could choose alternative cable modem
suppliers, or choose to purchase DOCSIS 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
Networks, Inc. ("Hybrid"), General Instrument Corporation,
Motorola, Inc., Terayon Communication Systems, Inc., Samsung
Electronics Company, LTD and Zenith Electronics Corporation,
as well as some large consumer electronics companies, such as
Matsushita Electronic Industrial Co., Ltd. (which markets
products under the brand name Panasonic), Sony Corp., Thomson
Consumer Electronics International S.A. and Toshiba America,
Inc. 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. As the DOCSIS 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.
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
projected product introduction of DOCSIS compliant products
have already affected sales cycles, as most domestic cable
operators have chosen to delay large scale deployment of
cable modems until DOCSIS 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 DOCSIS will cause increased price
competition for cable modems. However, there can be no
assurance that the Company will be able to continually 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 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 January, 1998 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 as U.S. Patent No. Re. 35,774 (the "774 patent").
Formal discovery commenced on July 17, 1998. On about
September 15, 1998, Hybrid filed an amended complaint that
adds allegations against the company of willful infringement
of the 774 patent. On September 24, 1998, the parties agreed
to an order staying all proceedings in the litigation until
January 4, 1999. The Court entered the order regarding stay
of proceedings on September 29, 1998. The Company has
received opinions of its patent counsel that the claims of
the Hybrid patents, including the claims set forth in
Hybrid's 774 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 774 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. In addition, Celestica, a contract manufacturer for
the Company, has been named in the suit and the Company has
agreed to indemnify Celestica for costs related to this
litigation. 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.
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.
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 DOCSIS compliant modem the Company
is working with Cisco to ensure the interoperability of this
modem with Cisco's previously announced DOCSIS 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, the Company relies upon CMC Industries, Inc.
("CMC") for the manufacture of printed circuit assemblies for
its headend products and upon 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 some materials needed to produce modems and headend
equipment can be between eight and 16 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.
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. For
example, 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 equipment in the future. The
Company has entered into long term supply contracts to ensure
sources of supply for various components necessary to
manufacture the Company's products and anticipates entering
into additional long-term supply contracts. However, if the
Company fails 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 several companies, including Stanford Telecommunications,
Inc. and Broadcom Corp., suppliers of modulation and
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,
supplier of HP Openview software; Wind River Systems,
supplier of embedded software; and Objectivity, Inc.,
supplier of an object database. If any of 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. During the nine
months ended September 30, 1998, revenues attributable the
Company's top three customers, TCI, Siemens and Philips,
accounted for 29%, 16% and 15% 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 DOCSIS specification is
emerging for the North American market with potential
deployment internationally and the Company's success in
penetrating this market will depend on its ability to
successfully develop, introduce in a timely manner and market
DOCSIS 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, require long development
cycles and are dependent in some cases on sole source
suppliers. 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.
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
consumer purchase model. Accordingly, the Company anticipates
that it will shift a greater amount of focus to selling its
modems directly to consumer selling channels. 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
distribution 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 - During the nine
months ended September 30, 1998, revenues attributable to
international customers accounted for 49% of total revenues.
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 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/DVB 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 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.
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 its
financial systems. The Company also relies, directly or
indirectly, on the external systems of business enterprises
such as customers and suppliers. The Company has initiated
its efforts to prepare its internal systems for the year
2000. The Company is also assessing the capability of its
products to handle the year 2000 and is currently addressing
product issues. 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. The Company is also contacting
critical suppliers of products and services to determine that
the suppliers' operations and the products and they provide
are year 2000 compliant or to monitor their progress toward
year 2000 compliance. 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.
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 expected could have a material
adverse affect on the Company's business, operating results
and financial condition.
Volatility of Stock Price - The trading price of the
Company's Common Stock could be subject to wide fluctuations
in response to quarter to quarter variations in results of
operations, announcements of technological innovations or new
products by the Company or its competitors, general
conditions in the telecommunications and data communications
equipment markets, changes in earnings estimates or buy/sell
recommendations by analysts or other events or factors. In
addition, the public stock markets have experienced extreme
price and trading volume volatility, particularly in high
technology sectors of the market. This volatility has
significantly affected the market prices of securities of
many technology companies for reasons frequently unrelated to
the operating performance
PART II: OTHER INFORMATION
Item 1 Legal Proceedings
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 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 as
U.S. Patent No. Re. 35,774 (the "774 patent"). Formal
discovery commenced on July 17, 1998. On about September 15,
1998, Hybrid filed an amended complaint that adds allegations
against the company of willful infringement of the 774
patent. On September 24, 1998, the parties agreed to an
order staying all proceedings in the litigation until January
4, 1999. The Court entered the order regarding stay of
proceedings on September 29, 1998. The Company has received
opinions of its patent counsel that the claims of the Hybrid
patents, including the claims set forth in Hybrid's 774
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 774 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.
Item 2 Changes in Securities and Use of Proceeds
(d) Use of Proceeds from Sales of Registered Securities. On
May 21, 1998, the Company completed an initial public
offering of its Common Stock, $0.001 par value. The managing
underwriters in the Offering were Deutsche Bank Securities
formerly Deutsche Morgan Grenfell, Inc., Merrill Lynch & Co.
and Dain Rauscher Wessels (the "Underwriters"). The shares
of Common Stock sold in the Offering were registered under
the Securities Act of 1933, as amended, on a Registration
Statement on Form S-1 (the "Registration Statement") (Reg.
No. 333-48107) that was declared effective by the SEC on
May 21, 1998. The Offering commenced on May 22, 1998 after
all 5,000,000 shares of Common Stock registered under the
Registration Statement were sold at a price of $12.00 per
share. The Underwriters exercised an overallotment option of
750,000 shares on May 29, 1998. All 750,000 overallotment
shares were sold at a price of $12.00 per share. The
aggregate price of the Offering amount registered was
$69,000,000. In connection with the Offering, the Company
paid an aggregate of $4,830,000 in underwriting discounts and
commissions to the Underwriters. In addition, the following
table sets forth an estimate of all expenses incurred in
connection with the Offering, other than underwriting
discounts and commissions. All amounts shown are estimated
except for the registration fees of the SEC and the National
Association of Securities Dealers, Inc. ("NASD").
<TABLE><CAPTION>
<S> <C>
SEC Registration fee $ 20,355
NASD filing fee 5,560
Nasdaq National Market listing fee 95,000
Printing and engraving expenses 300,000
Legal fees and expenses 515,000
Accounting fees and expenses 425,000
Blue Sky fees and expenses 5,000
Transfer Agent and Registrar fees 2,500
Miscellaneous 10,585
------------
Total 1,379,000
============
</TABLE>
After deducting the underwriting discounts and commissions
and the estimated Offering expenses described above, the
Company received net proceeds from the Offering of
approximately $62,791,000. As of September 30, 1998, the
Company has used the net proceeds from its initial public
offering of Common Stock of the Company to invest in short-
term and long-term, interest bearing, investment grade
securities and has used its existing cash balances to fund
the general operations of the Company. The proceeds will be
used for general corporate purposes, including working
capital and product development. A portion of the net
proceeds may also be used to acquire or invest in
complementary business or products or to obtain the right to
use complementary technologies. The Company has no
agreements or commitments with respect to any such
acquisition or investments and the Company is not currently
engaged in any material negotiations with respect to any such
transaction. None of the Company's net proceeds of the
Offering were paid directly or indirectly to any director,
officer, general partner of the Company or their associates,
persons owning 10% or more of any class of equity securities
of the Company, or an affiliate of the Company.
Item 3 Defaults upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K.
a) Exhibits
<TABLE><CAPTION>
Exhibit
Number Description
------- ---------------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
b) Reports on Form 8-K
None
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
Com21, Inc.
By: /s/ David L. Robertson
-------------------------------
David L. Robertson
Chief Financial Officer
Vice President, Finance
Date: November 2, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 43,542
<SECURITIES> 23,926
<RECEIVABLES> 7,794
<ALLOWANCES> (790)
<INVENTORY> 5,434
<CURRENT-ASSETS> 80,737
<PP&E> 5,788
<DEPRECIATION> 0
<TOTAL-ASSETS> 86,781
<CURRENT-LIABILITIES> (10,050)
<BONDS> (18)
0
0
<COMMON> (19)
<OTHER-SE> (75,290)
<TOTAL-LIABILITY-AND-EQUITY> (86,781)
<SALES> 13,686
<TOTAL-REVENUES> 13,686
<CGS> 8,486
<TOTAL-COSTS> 8,486
<OTHER-EXPENSES> 8,593
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,478)
<INCOME-TAX> 5
<INCOME-CONTINUING> (2,483)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,483)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
