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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1998
REGISTRATION NO. 333-48107
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COM21, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7370 94-3201698
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (INTERNAL REVENUE SERVICE
CLASSIFICATION CODE NUMBER) EMPLOYER IDENTIFICATION NUMBER)
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750 TASMAN DRIVE
MILPITAS, CALIFORNIA 95035
(408) 953-9100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
PETER D. FENNER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COM21, INC.
750 TASMAN DRIVE
MILPITAS, CALIFORNIA 95035
(408) 953-9100
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
COPIES TO:
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THOMAS W. KELLERMAN, ESQ. JEFFREY D. SAPER, ESQ.
ARMANDO CASTRO, ESQ. PATRICK J. SCHULTHEIS, ESQ.
ELIZABETH A. R. YEE, ESQ. ROBERT G. DAY, ESQ.
PETER S. BUCKLAND, ESQ. ANIL P. PATEL, ESQ.
BROBECK, PHLEGER & HARRISON LLP WILSON SONSINI GOODRICH & ROSATI
TWO EMBARCADERO PLACE PROFESSIONAL CORPORATION
2200 GENG ROAD 650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94303 PALO ALTO, CALIFORNIA 94304
(650) 424-0160 (650) 493-9300
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, please check the
following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A) MAY DETERMINE.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED APRIL 24, 1998
COM21 LOGO
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4,000,000 SHARES
COMMON STOCK
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All of the 4,000,000 shares of Common Stock, par value $0.001 per share ("Common
Stock"), offered hereby (the "Offering") are being sold by Com21, Inc. (the
"Company"). Prior to this Offering, there has been no public market for the
Common Stock. It is currently estimated that the initial public offering price
will be between $9.00 and $11.00 per share. See "Underwriting" for a discussion
of the factors considered in determining the initial public offering price. The
Company has applied to have the Common Stock approved for quotation on the
Nasdaq National Market under the symbol "CMTO."
FOR INFORMATION CONCERNING CERTAIN RISK FACTORS WHICH SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS" COMMENCING ON PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share $ $ $
Total(3) $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses estimated at $1,050,000, payable by the Company.
(3) The Company has granted the Underwriters an option, exercisable within
thirty (30) days of the date hereof, to purchase up to 600,000 additional
shares of Common Stock solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
The shares of Common Stock offered hereby are offered by the Underwriters,
subject to prior sale, when, as and if delivered to and accepted by them, and
subject to approval of certain legal matters by counsel and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. Delivery of the shares of
Common Stock offered hereby to the Underwriters is expected to be made in New
York, New York on or about , 1998.
DEUTSCHE MORGAN GRENFELL
MERRILL LYNCH & CO.
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
The date of this Prospectus is , 1998.
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COM21 LOGO
Except as set forth in the financial statements or as otherwise specified
herein, all information in this Prospectus (i) assumes no exercise of the
Underwriters' over-allotment option, (ii) reflects a
1-for-2 reverse split of the outstanding shares of Common Stock and Preferred
Stock to be effected prior to the effectiveness of the registration statement
related to the Offering made hereby, and (iii) reflects the conversion of all of
the Company's outstanding shares of Preferred Stock into shares of Common Stock
upon the effectiveness of the registration statement related to the Offering
made hereby. See "Underwriting" and "Description of Capital Stock."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS OR OTHERWISE. SUCH ACTIVITIES, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
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PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and Financial Statements and
Notes thereto appearing elsewhere in this Prospectus.
THE COMPANY
Com21, Inc. designs, develops, markets and sells value-added, high-speed
communications solutions for the broadband access market. The Company's ComUNITY
Access system enables cable operators to provide high-speed, cost-effective
Internet access to corporate telecommuter, small office/home office ("SOHO") and
residential users in the U.S. and internationally, and enables them to address
the distinct price, performance, security and other needs of these different
end-user groups. Com21's products include headend equipment, subscriber cable
modems, network management software and noise containment technologies. Cable
operators can use the Company's ComUNITY Access system to increase revenue
opportunities by offering up to 16 different operator-defined transmission rates
at varying price points to multiple markets. The Company's system is designed to
be deployed on a limited capital budget and can be upgraded and scaled as
subscriber penetration grows. The Company's system enables cable operators to
lower their ongoing cost of ownership through cost-effective noise management
and remote cable modem upgrades. The ComUNITY Access system also supports future
features and service offerings, such as desktop video conferencing and cable
telephony applications. The Company is developing an MCNS-compliant modem for
the North American cable market intended primarily to address the basic
requirements of the residential end-user base, which typically tolerates lower
performance and security than the business user. The Company is working with
Cisco to develop interoperable MCNS-compliant products that are expected to be
commercially available in the second half of 1998. In 1997, the Company shipped
approximately 170 ComCONTROLLER headends and more than 12,000 ComPORT modems for
use in 61 locations worldwide. In the North American market, the Company sells
directly to cable operators and has sold systems to major operators such as
Charter Communications, Prime Cable and TCI. Internationally, the Company sells
to systems integrators, including Philips and Siemens, which in turn sell to
cable operators.
The Company was incorporated in Delaware on June 19, 1992. The Company's
principal executive offices are located at 750 Tasman Drive, Milpitas,
California 95035, and its telephone number at that address is (408) 953-9100.
THE OFFERING
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Common Stock offered........................................ 4,000,000 shares
Common Stock to be outstanding after the Offering(1)........ 16,764,512 shares
Use of proceeds............................................. For general corporate purposes, including
working capital, product development and
capital expenditures. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol...................... CMTO
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SUMMARY FINANCIAL DATA
(In thousands)
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THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
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1995 1996 1997 1997 1998
------- -------- ------- ------- --------
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STATEMENTS OF OPERATIONS DATA:
Total revenues...................................... $ -- $ 1,000 $15,649 $ 500 $ 7,020
Gross profit........................................ -- 1,000 7,277 500 2,344
Total operating expenses............................ 6,922 15,913 20,540 4,365 6,661
Loss from operations................................ (6,922) (14,913) (13,263) (3,865) (4,317)
Net loss............................................ (6,666) (14,471) (13,055) (3,828) (4,232)
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MARCH 31, 1998
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ACTUAL AS ADJUSTED(2)
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BALANCE SHEETS DATA:
Cash and cash equivalents................................... $14,082 $50,232
Working capital............................................. 15,508 51,658
Total assets................................................ 28,377 64,527
Long-term obligations....................................... 1,441 1,441
Total stockholders' equity.................................. 19,121 55,271
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(1) Based on the number of shares outstanding as of March 31, 1998 and the
automatic conversion of all outstanding shares of Convertible Preferred
Stock into Common Stock. Excludes: (i) 1,420,967 shares of Common Stock
issuable upon exercise of stock options outstanding under the Company's 1998
Stock Incentive Plan at a weighted average exercise price of $2.64 per
share; (ii) 1,102,543 shares of Common Stock reserved for future issuance
under the 1998 Stock Incentive Plan (which includes a 500,000-share increase
in the 1998 Plan approved on April 22, 1998 and from which reserve options
to purchase 505,250 shares at $9.00 per share were granted on April 22,
1998); (iii) 250,000 shares of Common Stock reserved for future issuance
under the 1998 Employee Stock Purchase Plan; and (iv) 46,286 shares of
Common Stock issuable upon the exercise of outstanding warrants at a
weighted average exercise price of $7.76 per share. See "Capitalization,"
"Management -- Option Grants Under the 1998 Stock Incentive Plan,"
"Management -- Benefit Plans" and Notes 6 and 11 of Notes to Financial
Statements.
(2) Adjusted to reflect the sale of 4,000,000 shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $10.00 per
share and after deducting the estimated underwriting discount and the
estimated offering expenses. See "Use of Proceeds" and "Capitalization."
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THE COMPANY
Com21, Inc. (the "Company" or "Com21") designs, develops, markets and sells
value-added, high-speed communications solutions for the broadband access
market. The Company's ComUNITY Access system enables cable operators to provide
high-speed, cost-effective Internet access to corporate telecommuter, small
office/home office ("SOHO") and residential users in the U.S. and
internationally, and enables them to address the distinct price, performance,
security and other needs of these different end-user groups. Com21's products
include headend equipment, subscriber cable modems, network management software
and noise containment technologies.
The volume of data traffic across communications networks has increased
significantly over the last several years with the growth of network-based
communications and electronic commerce. Corporate telecommuters, SOHO and
residential consumer users are increasingly accessing data networks, primarily
the Internet, to communicate, collect and publish information and conduct
business. With the increased dependence on communications networks and the
growing demand for multimedia and other bandwidth-intensive information, slow
transmission speeds have become less tolerable and can negatively affect
business productivity.
Typically, the limiting factor in overall data transmission performance is
the "last mile" of the communications infrastructure. Today there are multiple
technologies that attempt to address the need for digital high-speed last mile
connections, and while each of these technologies has certain advantages, the
cable infrastructure currently provides the highest-available absolute speed,
with peak data transmission speeds of 30 megabits per second ("Mbps") and
"always on" availability providing instant access. Cable operators have already
begun to address the burgeoning market for cable modem Internet service.
Industry sources estimate that there are currently more than 100 commercial
deployments worldwide, including sites in the U.S., Argentina, Australia,
Canada, France, The Netherlands and Switzerland. In the North American cable
market, leading cable operators have developed the Multimedia Cable Network
System ("MCNS") specification to define interoperability standards and to
accelerate the mass market residential adoption of cable modems.
The Company's principal strategy is to provide products that enhance the
value of cable operators' cable modem deployments over the life of the
investment. Cable operators can use the Company's ComUNITY Access system to
increase revenue opportunities by offering up to 16 different operator-defined
transmission rates at varying price points to multiple markets. In a typical
flat-rate cable modem system, all subscribers are charged the same price,
regardless of individual bandwidth service and pricing requirements, which
results in lost revenue to the cable operators. The Company's system is designed
to be deployed on a limited capital budget and can be upgraded and scaled as
subscriber penetration grows. The Company's system enables cable operators to
lower their ongoing cost of ownership through cost-effective noise management
and remote cable modem upgrades.
In addition to the high-speed, always-on and cost advantages of the
ComUNITY Access system, the system also supports future features and service
offerings, such as desktop video conferencing, cable telephony applications and
parallel port modem connectivity. The Company is developing an interoperable
MCNS-compliant modem for the North American cable market. The MCNS specification
is intended to address the basic requirements of the residential end-user base,
which typically tolerates lower performance and security than the business user.
The Company is leveraging its expertise in radio frequency ("RF") and noise
management technology in its MCNS-compliant cable modem and is working with
Cisco Systems, Inc. ("Cisco") to develop interoperable MCNS products that are
expected to be commercially available in the second half of 1998.
In 1997, the Company shipped approximately 170 ComCONTROLLER headends and
more than 12,000 ComPORT modems for use in 61 locations worldwide. In the North
American market, the Company sells directly to cable operators and has sold
systems to major operators such as Charter Communications, Inc. ("Charter"),
Prime Cable and TCI.Net, a subsidiary of Tele-Communications, Inc. ("TCI").
Internationally, the Company sells to systems integrators, including Philips
Broadband Networks ("Philips"), a division of Philips Electronics N.V. , and
Siemens AG ("Siemens"), which in turn sell to cable operators.
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors, in addition to the other information
contained in this Prospectus, should be carefully considered in evaluating the
Company and its business before purchasing the Common Stock offered hereby. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed below and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as those discussed elsewhere in this
Prospectus.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES; NO ASSURANCE OF
PROFITABILITY. The Company did not commence product shipments until April 1997,
and, as a result, has a limited operating history upon which investors may
evaluate the Company and its prospects. The Company has incurred net losses
since its inception and expects to continue to operate at a loss through at
least fiscal 1999. As of March 31, 1998, the Company had an accumulated deficit
of approximately $39.6 million. Because the market for the Company's products is
new and evolving, the Company cannot accurately predict the future growth rate,
if any, or the ultimate size of the data-over-cable market. To achieve
profitable operations on a continuing basis, the Company must successfully
design, develop, test, manufacture, introduce, market and distribute its
products on a broad commercial basis. There can be no assurance that the Company
will ever achieve profitability. The Company's ability to generate future
revenues will depend on a number of factors, many of which are beyond the
Company's control. Such factors include the rate at which cable operators
upgrade their cable infrastructures, the ability of the Company and cable
operators to coordinate timely and effective marketing campaigns with the
availability of such upgrades, the success of the cable operators in marketing
data-over-cable services and the Company's modems to subscribers, the prices
that the cable operators set for data transmission installation service and the
installation of subscriber site equipment, and the rate at which the cable
operators can complete the installations required to initiate service for new
subscribers. As a result of the foregoing factors, the Company is unable to
forecast its revenues or the rate at which the Company's systems will be adopted
by cable operators with any degree of accuracy. Accordingly, there can be no
assurance that the Company will ever achieve, or be able to sustain,
profitability. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's operating
results are likely to fluctuate significantly in the future on a quarterly and
annual basis as a result of a variety of factors, many of which are beyond the
Company's control. Factors that will influence the Company's operating results
include: (i) the Company's ability to retain existing cable operator customers,
to attract new customers at a steady rate, to maintain customer satisfaction and
to obtain significant orders; (ii) the timing of upgrades of cable plants to
hybrid fiber-coaxial ("HFC") and the ability and willingness of cable operators
to deploy cable modems and offer either one-way or two-way data transmission
service; (iii) the Company's ability to manage inventory and fulfillment
operations; (iv) the announcement or introduction of new services and products
by the Company and its competitors and the timely introduction of MCNS-compliant
products by the Company; (v) the Company's product mix; (vi) price competition
or pricing changes in the Internet, cable and telecommunication industries,
pricing of the Company's products and its ability to reduce to the costs of its
products over time; (vii) the level of use of the Internet as a replacement for
private wide area networks; (viii) the Company's ability to develop new products
in a timely and cost-effective manner; (ix) the amount and timing of operating
costs and capital expenditures relating to expansion of the Company's business;
operating results and infrastructure; (x) governmental regulation; and (xi)
general economic conditions and economic conditions specific to the cable and
electronic data transmission industries. In recent quarters the Company has
recognized a substantial portion of its revenues in the last month of each
quarter, and, in particular, within the last two weeks of that month. A
significant portion of the Company's expenses are fixed in advance based in
large part on future revenue forecasts. If revenues are below expectations in
any given period, the adverse impact of such a shortfall may be magnified by
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the Company's inability to adjust spending to compensate for the shortfall.
Therefore, a shortfall in revenues from those expected would have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, the Company plans to increase operating expenses to fund
additional research and development, sales and marketing and general and
administrative activities. To the extent that these expenses are not accompanied
by an increase in revenues, the Company's business, operating results and
financial condition would be materially adversely affected.
The Company anticipates that it will experience decreases in the average
selling price of its cable modem products and that it may experience declines in
the average selling prices of its other products. Any price decline that is not
offset by a decline in the cost of the product could have an adverse effect on
the Company's gross margin. The sales mix of the Company's headend equipment and
modems also affects its gross margin. The Company's modems have a lower gross
margin than does the Company's headend equipment. The Company anticipates that
its sales mix will be increasingly weighted toward lower margin modems in the
foreseeable future, as headends become more broadly deployed and as
MCNS-compliant products are deployed by cable operators. As a result, the
Company expects to experience continued downward pressure on its gross margin.
Due to all of the foregoing factors, it is likely that the Company's operating
results in one or more future periods will fail to meet or exceed the
expectations of securities analysts or investors. In such event, the trading
price of the Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
EARLY STAGE OF MARKET FOR CABLE MODEMS; UNPROVEN ACCEPTANCE OF THE
COMPANY'S PRODUCTS. The Company's success will depend on the timely adoption of
its products by cable operators and end-users. The market for the Company's
products has only recently begun to develop, is rapidly evolving and is
characterized by an increasing number of market entrants that have introduced or
developed, or are in the process of introducing or developing, cable modem
systems, including headend equipment, cable modems and system management
software, that compete with the Company's products. The Company did not commence
product shipments until April 1997. The Company shipped its ComUNITY Access
System for commercial deployment to nine cable operator customers in the second
quarter of 1997, seven cable operator customers in the third quarter of 1997 and
two cable operator customers in the first quarter of 1998. Critical issues
concerning the use of cable modems, including security, reliability, cost, ease
of deployment and administration, and quality of service, remain largely
unresolved and may adversely affect the Company's growth and the market
acceptance of its products. Because the market for the Company's products is new
and evolving, the Company cannot accurately predict the future growth rate, if
any, or the ultimate size of the cable modem market. If the market fails to
develop, or develops more slowly than expected, the Company's business,
operating results and financial condition would be materially adversely
affected. Some cable operators will, prior to purchasing the Company's products,
require that their internal technical personnel certify the Company's products
for integration into their systems. There can be no assurance that any cable
operator will certify the Company's products in a timely manner, if at all, or
that the Company, in order for its products to be certified by any cable
operator, will not have to make significant modifications to its products.
Failure to become certified could render the Company unable to deploy its
products in timely manner, or at all, with one or more cable operators. Any or
all of these possibilities could have a material adverse effect on the Company's
business, operating results and financial condition. There can be no assurance
that the market for cable modems will develop as the Company anticipates, or
that the Company will be able to compete with new entrants to the market should
the market develop. There can be no assurance that the Company's products will
achieve acceptance in their markets, and the failure of the Company's products
to achieve such market acceptance would have a material adverse effect upon the
Company's business, operating results and financial condition.
DEPENDENCE ON CABLE OPERATORS. The Company depends on cable operators to
purchase its headend equipment and cable modems and to market data transmission
service to end-users. Cable
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operators have a limited number of programming channels over which they can
offer services, and there can be no assurance that they will choose to provide
data transmission services to their subscribers. Even if a cable operator
chooses to provide data transmission services, there can be no assurance that it
would choose the Company's products. The future success of services providing
data transmission over cable will depend, in large part, upon the ability of
cable systems to support two-way communications. While many cable operators are
in the process of upgrading, or have announced their intention to upgrade, their
cable infrastructures to HFC to provide increased quality and speed of
transmission and, in certain cases, two-way transmission capabilities, many
cable operators, particularly cable operators in the U.S., have delayed their
planned upgrades. Cable operators have limited experience with such upgrades,
and investments in upgrades place a significant strain on the financial,
managerial, operational and other resources of the cable operators, most of
which are already highly leveraged and face intense competition from telephone
companies, satellite television and broadband wireless system operators. Cable
operators may not have the capital required to upgrade their infrastructure or
to offer new services that require substantial start-up costs. As a result, it
is uncertain whether cable operators will upgrade to HFC or whether they will
offer additional services, such as Internet access in the near term, or at all.
After installation, the Company will be highly dependent on cable operators to
continue to maintain their cable infrastructure in such a manner that the
Company's products will operate at a consistently high performance level and
reliable environment. Accordingly, the success and future growth of the
Company's business will be subject to economic and other factors affecting the
cable television industry generally, particularly the industry's ability to
continue to finance the substantial capital expenditures necessary to use the
Company's products effectively.
Whenever cable operators wish to upgrade their cable plants from coaxial
cable to HFC, they are required to obtain certain city and county permits. There
can be no assurance that such permits will be obtained, or even if they are
obtained, that they will be obtained in a timely and cost-effective manner.
Further, cable operators must periodically renew their franchises with city or
county governments. As a condition of obtaining such renewal, the cable operator
may have to meet certain conditions imposed by the issuing jurisdiction. Meeting
such conditions may cause the cable operator to delay upgrades or the
implementation of data over cable services. The failure of cable operators to
complete these upgrades or implement these services in a timely and satisfactory
manner, or at all, would adversely affect the market for the Company's products.
Although the Company's commercial success depends on the successful and timely
completion of these infrastructure upgrades, cable operators are under no
obligation to upgrade systems or to roll out, market or promote the Company's
products. Any failure to upgrade or delay in upgrading could have a material
adverse effect on the Company's business, operating results and financial
condition.
COMPETING TECHNOLOGIES AND EVOLVING INDUSTRY STANDARDS. The market for
high-speed data transmission services is characterized by several competing
technologies that offer alternative solutions. Competitive technologies include
telco-related wireline technologies that utilize telephone copper twisted-pair
wiring, such as Integrated Services Digital Network ("ISDN") and digital
subscriber line ("DSL") implementations, as well as wireless technologies such
as local multipoint distribution service ("LMDS"), multichannel multipoint
distribution service ("MMDS") and direct broadcast satellite ("DBS"). In
addition, new modulation technologies, such as the synchronous code division
multiple access ("S-CDMA") technology being developed by one of the Company's
competitors, may become commercially available to address upstream noise in
cable plants. Significant market acceptance of alternative solutions for
high-speed data transmission could decrease the demand for the Company's
products if such alternatives are viewed as providing faster access, greater
reliability, increased cost-effectiveness or other advantages over cable
solutions. Because of the ubiquity of the telephone network infrastructure,
competition from telco-related solutions is expected to be intense. There can be
no assurance that cable modem technology will compete effectively against
wireline or wireless technologies in the market for high bandwidth access in the
local loop.
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The Company's headend equipment and cable modem products currently are not
interoperable with the headend equipment and modems of other suppliers of
broadband Internet access products, other than certain cable modems manufactured
by 3Com Corporation ("3Com"). As a result, potential customers who wish to
purchase broadband Internet access products from multiple suppliers may be
reluctant to purchase the Company's products. The emergence or evolution of
industry standards, either through adoption by official standards committees or
widespread use by cable operators or telcos, could require the Company to
redesign its products. The Company's products are not currently in full
compliance with the standards and developing specifications proposed by Digital
Audio Video Interactive Council ("DAVIC"), MCNS, Institute of Electrical and
Electronics Engineers, Inc. ("IEEE") or Internet Engineering Task Force
("IETF"), and other relevant standards bodies. The Company expects the MCNS
standard to achieve substantial market acceptance, and the Company is currently
developing MCNS-compliant products. If such standards become widespread and the
Company's products are not in compliance, the Company's customers and potential
customers may refuse to purchase the Company's products, which would materially
adversely affect its business, operating results and financial condition.
Moreover, different implementations of the same specification could potentially
slow deployment of the Company's products if such different implementations
cause the Company's products to fail to become interoperable with other
companies' products. The anticipated widespread adoption of the MCNS standard is
likely to cause increased price competition in the North American market.
Further, such adoption could result in lower sales of headend products by the
Company in the North American market. Any such increased price competition or
reduction in sales of headend products would result in downward pressure on the
Company's gross margin, which could have a material adverse effect on the
Company's business, operating results and financial condition.
The rapid development of new competing technologies and standards increases
the risk that current or new competitors could develop products that would
reduce the competitiveness of the Company's products. Market acceptance of new
technologies or the failure of the Company to develop and introduce new products
or enhancements directed at new industry standards could have a material adverse
effect on the Company's business, operating results and financial condition.
COMPETITION. The markets for the Company's products are intensely
competitive, rapidly evolving and subject to rapid technological change. The
principal competitive factors in this market include, or are likely to include,
product performance and features, reliability, technical support and service,
relationships with cable system operators and systems integrators, compliance
with industry standards, compatibility with the products of other suppliers,
sales and distribution interoperability, strength of brand name, price,
long-term cost of ownership to cable operators and general industry and economic
conditions. Many of the Company's current and potential competitors have longer
operating histories, greater name recognition and significantly greater
financial, technical, marketing and distribution resources than the Company.
Such competitors may undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and devote substantially more resources to
developing new products than the Company. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not
materially adversely affect the Company's business, operating results and
financial condition. In response to changes in the competitive environment, the
Company may make certain pricing, service, marketing or other strategic
decisions that could have a material adverse effect on the Company's business,
operating results or financial condition. There can be no assurance that the
Company's competitors will not develop enhancements to, or future generations
of, products that will offer price or performance superior to that of the
Company's products. The Company believes that the broad adoption of MCNS will
cause increased competition in the North American market, which is likely to
negatively affect the Company's gross margin. There can be no assurance that
competitors will not more quickly develop MCNS-compliant products than the
Company. Current customers of the Company that move to the MCNS platform could
choose alternative cable modem suppliers or choose to purchase MCNS-compliant
cable modems from multiple suppliers. Such competition could materially
adversely affect the Company's business, operating results and financial
condition.
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The Company's current and potential competitors include 3Com, Cisco, the
LANcity division of Bay Networks, Inc., Hybrid Networks, Inc. ("Hybrid"),
General Instrument Corporation, Motorola, Inc., Terayon Communication Systems
and Zenith Electronics Corporation. Some of these competitors have existing
relationships with many of the Company's prospective customers. There can be no
assurance that the Company will establish relationships with cable operators who
have existing relationships with those competitors, and failure to establish
such relationships could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, the Company
anticipates that some large consumer electronics companies, such as Matsushita
Electronic Industrial Co., Ltd. (which markets products under the brand name
Panasonic)("Matsushita"), Sony Corp., Thomson Consumer Electronics International
S.A. ("Thomson") and Toshiba America, Inc., will likely introduce competitive
cable modem products in the future. As the MCNS specification is adopted for the
North American market, the distribution of cable modems may move into the retail
channel. If this occurs, the large consumer electronics companies could gain a
competitive advantage, due to their well-established retail distribution
capabilities. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive pressures
faced by the Company will not have a material adverse effect on the Company's
business, operating results and financial condition. See
"Business -- Competition."
LENGTHY SALES CYCLE. The sale of the Company's products typically involves
a significant technical evaluation and commitment of capital and other resources
by cable operators, with delays frequently associated with cable operators'
internal procedures to approve large capital expenditures, to engineer
deployment of new technologies within their networks and to test and accept new
technologies that affect key operations. For these and other reasons, the sales
cycle associated with the Company's products is typically lengthy, generally
lasting six to twelve months, and is subject to a number of significant risks,
including cable operators' budgetary constraints and internal acceptance
reviews, that are beyond the Company's control. The announcement and project
product introduction of MCNS-compliant products have already affected sales
cycles, as most domestic cable operators have chosen to delay large scale
deployment of cable modems until MCNS-compliant products are available. Because
of the lengthy sales cycle, if deployments forecasted for a specific cable
operator for a particular period are not realized in that period, the Company's
operating results for that period could be materially adversely affected.
NEED TO REDUCE COST OF MODEMS. Certain of the Company's competitors
currently offer modems at prices lower than those of the Company's modems.
Market acceptance of the Company's products, and the Company's future success,
will depend in significant part on the cost of its modems. The Company expects
that as headend equipment becomes more widely deployed, the price of modems and
other products will decline. In particular, Company believes that the adoption
of industry standards such as MCNS will cause increased price competition for
cable modems. However, there can be no assurance that the Company will be able
to reduce the cost of its modems sufficiently to enable it to compete with other
cable modem suppliers. If the Company is unable to reduce the cost of its cable
modems, its gross margin and profitability would be adversely affected. In order
to address ongoing competitive and pricing pressures, the Company will have to
reduce the cost of manufacturing its cable modems. The Company is dependent on
its manufacturers to secure components at favorable prices, and there can be no
assurance that additional volume purchase or manufacturing arrangements will be
available to the Company on terms that the Company considers acceptable, if at
all. To the extent that the Company enters into a high-volume or long-term
purchase or supply arrangement and subsequently decides that it cannot use the
products or services provided for in the agreement, the Company's business,
operating results and financial condition could be materially adversely
affected.
PATENTS AND PROPRIETARY RIGHTS; PATENT LITIGATION. The Company relies on a
combination of patent, copyright and trademark laws, and on trade secrets and
confidentiality provisions and other contractual provisions to protect its
proprietary rights. These measures afford only limited protection. The Company
currently has five issued U.S. patents and several pending patent applications.
There
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can be no assurance that the Company's means of protecting its proprietary
rights in the U.S. or abroad will be adequate or that competitors will not
independently develop similar technologies. The Company's future success will
depend in part on its ability to protect its proprietary rights to the
technologies used in its principal products. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy aspects
of the Company's products or to obtain and use trade secrets or other
information that the Company regards as proprietary. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights as fully
as do the laws of the U.S. There can be no assurance that any issued patent will
preserve the Company's proprietary position, or that competitors or others will
not develop technologies similar to or superior to the Company's technology.
Failure of the Company to enforce and protect its intellectual property rights
could have a material adverse effect on the Company's business, operating
results and financial condition.
From time to time, third parties, including competitors of the Company,
have asserted patent, copyright and other intellectual property rights to
technologies that are important to the Company. The Company expects that it will
increasingly be subject to infringement claims as the number of products and
competitors in the cable modem market grows and the functionality of products
overlaps. In this regard, in 1997 the Company received a written notice from
Hybrid in which Hybrid claimed to have patent rights in certain cable modem
technology and requested that the Company review its own products in light of
Hybrid's alleged patent rights to U.S. Patent No. 5,586,121 (the "121 patent")
issued on December 17, 1996 and entitled "Asymmetric Hybrid Access System and
Method" and U.S. Patent No. 5,347,304 (the "304 patent") issued on September 13,
1994 and entitled "Remote Link Adapter for Use in TV Broadcast Data Transmission
Systems" (collectively, the "Hybrid patents"). The Company informed Hybrid that
it believes that the Company's products do not infringe any valid claim of the
Hybrid patents. In January 1998, Hybrid filed an action against the Company in
the U.S. District Court for the Eastern District of Virginia, accusing the
Company of willfully infringing the Hybrid patents, among other claims.
Subsequently, the Company filed suit for declaratory relief against Hybrid in
the U.S. District Court for the Northern District of California asserting that
it does not infringe the Hybrid patents and that the Hybrid patents are invalid.
The Company then filed a motion in the Virginia District Court to transfer the
action filed by Hybrid to the Northern District of California, and that motion
has been granted. 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. The Company has
received opinions of its patent counsel that the claims of the Hybrid patents,
including the claims currently set forth in Hybrid's 304 reissue patent
application, are either invalid or not infringed by the Company's products.
However, there can be no assurance that some or all of the Company's products
will not ultimately be determined to infringe the Hybrid patents, including the
304 patent as reissued, and the Company anticipates that Hybrid will continue to
pursue litigation with respect to these claims. The results of any litigation
matter are inherently uncertain. In the event of an adverse result in the Hybrid
litigation, or in any other litigation with third parties that could arise in
the future with respect to intellectual property rights relevant to the
Company's products, the Company could be required to pay substantial damages,
including treble damages if the Company is held to have willfully infringed, to
cease the manufacture, use and sale of infringing products, to expend
significant resources to develop non-infringing technology, or to obtain
licenses to the infringing technology. There can be no assurance that licenses
will be available from Hybrid, or any other third party that asserts
intellectual property claims against the Company, on commercially reasonable
terms, or at all. In addition, litigation frequently involves substantial
expenditures and can require significant management attention, even if the
Company ultimately prevails. Accordingly, there can be no assurance that the
Hybrid matter, or any other infringement claim or litigation against or by the
Company, will not have a material adverse effect on the Company's business,
operating results and financial condition.
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
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or any settlement can presently be determined. Accordingly, no provision for any
loss which may result from the Hybrid litigation has been recorded in the
accompanying financial statements. "See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Intellectual
Property; Patent Litigation" and Note 11 to Notes to Financial Statements.
MANAGEMENT OF GROWTH. To fully exploit the market for its products and
services, the Company must rapidly execute its sales strategy and develop new
and enhanced products while managing anticipated growth by implementing
effective planning and operating processes. To manage its anticipated growth,
the Company must, among other things, continue to implement and improve its
operational, financial and management information systems, hire and train
additional qualified personnel, continue to expand and upgrade core technologies
and effectively manage multiple relationships with various customers, suppliers
and other third parties. The Company may in the future experience difficulties
meeting the demand for its products and services. The installation and use of
the Company's products requires training. If the Company is unable to provide
training and support for its products, the implementation process will be longer
and customer satisfaction may be lower. There can be no assurance that the
Company's systems, procedures or controls will be adequate to support the
Company's operations or that the Company's management will be able to achieve
the rapid execution necessary to exploit fully the market for the Company's
products and services. Any failure of the Company to manage its growth
effectively could have a material adverse effect on the Company's business,
operating results and financial condition.
DEPENDENCE ON KEY PERSONNEL AND HIRING OF ADDITIONAL PERSONNEL. The
Company's future success will depend to a significant extent on the ability of
its management to operate effectively, both individually and as a group. Given
the Company's early stage of development, the Company is dependent on its
ability to retain and motivate high quality personnel, in addition to attracting
new personnel. Competition for qualified personnel in the cable networking
equipment and telecommunications industries is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. The Company believes that there may be only a limited number of
persons with the requisite skills to serve in those positions and it may become
increasingly difficult to hire such persons. The Company is seeking to hire
additional skilled engineers for research and development, who are in short
supply. The Company's business, operating results and financial condition could
be adversely affected if it encounters delays in hiring additional engineers.
Competitors and others have in the past and may in the future attempt to recruit
the Company's employees. The Company does not have employment contracts with any
of its key personnel, nor does it maintain key person life insurance on its key
personnel. The loss of the services of any of the key personnel, the inability
to attract or retain qualified personnel in the future or delays in hiring
required personnel, particularly engineers, could have a material adverse effect
on the Company's business, operating results and financial condition.
DEPENDENCE UPON STRATEGIC RELATIONSHIPS. The Company's business strategy
relies to a significant extent on its strategic relationships with other
companies. These relationships include software license arrangements with third
party vendors pursuant to which the Company incorporates software into its
network management system, as well as marketing arrangements with Philips and
Siemens. Further, in developing an MCNS-compliant modem the Company is working
with Cisco to ensure the interoperability of this modem with Cisco's previously
announced MCNS-compliant Universal Broadband Router. There can be no assurance
that these relationships will be successful or that the Company will continue to
maintain or develop strategic relationships or to replace strategic partners in
the event any such relationships were terminated or that licenses between the
Company and any third party will be renewed or extended at their expiration
dates. The Company's failure to renew or extend a key license or maintain any
strategic relationship could materially and adversely affect the Company's
business, operating results and financial condition.
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON THIRD-PARTY
MANUFACTURING. The Company relies on contract manufacturers for the manufacture
of certain of its products. In particular, the Company relies upon CMC
Industries, Inc. ("CMC") for the manufacture of printed circuit
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assemblies for its headend products and upon Celestica, Inc. ("Celestica") for
the manufacture of its modems. The Company maintains only a limited in-house
manufacturing capability for final assembly, testing and integration of headend
products. The Company's future success will depend, in significant part, on its
ability to manufacture, or have others manufacture, cost-effectively and in
volumes sufficient to meet customer demand. There are a number of risks
associated with the Company's dependence upon third party manufacturers,
including, but not limited to, reduced control over delivery schedules, quality
assurance, manufacturing yields and costs, the potential lack of adequate
capacity during periods of excess demand, limited warranties on products
supplied to the Company, increases in prices and the potential misappropriation
of the Company's intellectual property. A manufacturing disruption could impact
the production of the Company's products for a substantial period of time, which
could have a material adverse effect on the Company's business, operating
results and financial condition. The Company has no long-term contracts or
arrangements with any of its vendors that guarantee the availability of product,
the continuation of particular payment terms or the extension of credit limits.
There can be no assurance that the Company will not experience manufacturing or
supply problems in the future from any of its manufacturers. While to date the
Company has not experienced any such manufacturing supply problems, any such
difficulties, if experienced in the future, could have a material adverse effect
on the Company's business, operating results and financial condition.
In addition, Celestica is a foreign corporation, and the Company may
increase its use of foreign manufacturers in the future. Any foreign or domestic
regulations regarding foreign exports and imports, trade barriers and tariffs
currently in place or imposed in the future could materially and adversely
affect the Company's ability to obtain modems. Because lead times for materials
needed to produce modems and headend equipment can be between eight and 26
weeks, the Company may not be able to meet the demand for its products, which
could adversely affect the Company's ability to support cable operators'
expansion of cable modem service to cable operators' customers. The Company has
had only limited experience manufacturing and arranging for the manufacture of
its products, and there can be no assurance that the Company or any manufacturer
of the Company's products will be successful in increasing its manufacturing
volume. The Company may need to procure additional manufacturing facilities and
equipment, adopt new inventory controls and procedures, substantially increase
its personnel and revise its quality assurance and testing practices, and there
can be no assurance that any of these efforts will be successful. See
"Business -- Manufacturing."
SOLE-SOURCED COMPONENTS AND DEPENDENCY ON KEY SUPPLIERS. Certain parts,
components and equipment used in the Company's products are obtained from sole
sources of supply. The Company has designed its headend equipment to incorporate
a radio frequency modulation chip from one specific vendor, transmit/receive
components from another and the Asynchronous Transfer Mode ("ATM") headend
switch from still another. Additional sole-sourced parts may be incorporated
into the Company's headend equipment in the future. The Company anticipates
entering into long-term supply contracts to ensure sources of supply for various
components necessary to manufacture the Company's products. However, if the
Company fails to able to obtain components in sufficient quantities when
required, this failure could have an adverse impact on the Company's operating
results and financial condition. The Company's suppliers also sell products to
the Company's competitors. There can be no assurance that the Company's
suppliers will not enter into exclusive arrangements with the Company's
competitors, stop selling their products or components to the Company at
commercially reasonable prices or refuse to sell their products or components to
the Company at any price. The Company's inability to obtain sufficient
quantities of sole-sourced components, or to develop alternative sources for
components and/or products would have a material adverse effect on the Company's
business, operating result and financial condition. The Company relies on
Stanford Telecommunications, Inc. and Broadcom Corp., suppliers of demodulation
components; Atmel Corporation, the fabricator of the Company's semiconductor
devices; Virata Limited, formerly Advanced Telecommunications Modules Limited
(ATML), a supplier of ATM switches; and Hewlett-Packard Company, Wind River
Systems, Objectivity, Inc. and Vertex Software Corp., suppliers of embedded
software. If any of these manufacturers delay or halt production of any of the
Company's
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products such failure could have a material adverse effect on the Company's
business, operating results and financial condition.
CUSTOMER CONCENTRATION. The Company's customer base is highly concentrated.
A relatively small number of customers has accounted for a significant portion
of the Company's revenues to date, and the Company expects that this trend will
continue for the foreseeable future. In 1997 and the three months ended March
31, 1998, the top six customers comprised 66% and 85% of the Company's total
revenues, respectively. Further, in 1997, revenues attributable to Philips, 3Com
and Siemens accounted for 21%, 16% and 12% of total revenues, respectively. In
the three months ended March 31, 1998, revenues attributable to TCI, Philips,
Siemens, Prime Cable and Cablecom Holding AG ("Cablecom") accounted for 31%,
13%, 13%, 11% and 10% of total revenues, respectively. The Company expects that
its largest customers in future periods could be different from its largest
customers in prior periods due to a variety of factors, including customers'
deployment schedules and budget considerations. Because a limited number of
cable operators account for a majority of the Company's prospective customers,
the Company's future success will depend upon its ability to establish and
maintain relationships with these companies. Any reduction or delay in sales of
the Company's products to any of these current significant customers could have
a material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that the Company will retain
these current accounts or that it will be able to obtain additional accounts.
Both in the U.S. and internationally, a substantial majority of homes passed are
controlled by a relatively small number of cable operators. The loss of one or
more of the Company's customers or the inability of the Company to successfully
develop relationships with additional significant cable operators could have a
material adverse effect on the Company's business, operating results and
financial condition.
RISKS ASSOCIATED WITH NEW PRODUCT DEVELOPMENT. The market for cable modem
systems and products is characterized by rapidly changing technologies and short
product life cycles. The Company's future success will depend in large part upon
the Company's ability to identify and respond to emerging technological trends
in the market, develop and maintain competitive products, enhance its products
by adding innovative features that differentiate its products from those of its
competitors, bring products to market on a timely basis at competitive prices
and respond effectively to new technological changes or new product
announcements by others. There can be no assurance that product development and
enhancements will not take longer than planned, or that having to rework
portions of the effort will not delay the date of the targeted delivery of
future products. There can be no assurance that the Company's design and
introduction schedules for new products or additions or enhancements to its
existing and future products will be met. The Company's future success will
depend in part upon its ability to enhance its existing products and to develop
and introduce, on a timely basis, new products and features that meet changing
customer requirements and emerging industry standards. In particular, as the
MCNS specification is emerging for the North American market and the Company's
success in penetrating this market will depend on its ability to successfully
develop, introduce in a timely manner and market MCNS-compliant products. In
making new product decisions, the Company must anticipate well in advance future
demand for product features and performance characteristics, as well as
available supporting technologies, manufacturing capacity, industry standards
and competitive product offerings. The technical innovations required for the
Company to remain competitive are inherently complex and require long
development cycles. The Company will be required to continue to invest in
research and development in order to attempt to maintain and enhance its
existing technologies and products, and there can be no assurance that it will
have the funds available to do so, or that such investments will serve the needs
of customers or be compatible with changing technological requirements or
standards. Much of such expenses must be incurred before the technical
feasibility or commercial viability can be ascertained. There can be no
assurance that revenues from future products or product enhancements will be
sufficient to recover the development costs associated with such products or
enhancements.
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NEED TO DEVELOP ADDITIONAL DISTRIBUTION CHANNELS. The Company presently
focuses on selling its products to cable operators and systems integrators. The
Company believes that much of the North American cable modem market may shift to
a retail distribution model. Accordingly, the Company anticipates that it will
shift a greater amount of focus to selling its modems directly to retail
distributors and end users. Thus, it will need to focus its efforts on
developing new distribution channels for its products. There can be no assurance
that the Company will be able to develop such additional distribution channels,
or that, if the Company does establish additional channels, it will have the
capital required or the ability to hire the additional personnel necessary to
foster and enhance such distribution channels. In addition, there can be no
assurance that the Company can form relationships with retail distributors to
establish such a channel. Failure by the Company to establish such channels
could have a material adverse affect on the Company's business, operating
results and financial condition. To the extent that large consumer electronics
companies enter the cable modem market, their well established retail
distribution capabilities would provide them with a significant competitive
advantage.
RISKS ASSOCIATED WITH INTERNATIONAL MARKETS. In 1997 and the three months
ended March 31, 1998, revenues attributable to international customers accounted
for 64% and 50% of total revenues, respectively. The Company expects that a
significant portion of its sales will continue to be concentrated in
international markets for the foreseeable future. The Company intends to expand
operations in the international markets that it serves currently and to enter
new international markets, which will demand significant management attention
and financial commitment. There can be no assurance that the Company will
successfully expand its international operations. In addition, a successful
expansion by the Company of its international operations and sales in certain
markets will require the Company to develop relationships with international
systems integrators and distributors. There can be no assurance that the Company
will identify, attract or retain suitable international systems integrators or
distributors or, that if such parties are identified, that successful
relationships will result. Further, to increase revenues in international
markets, the Company will need to continue to establish foreign operations, to
hire additional personnel to run such operations and maintain good relations
with its foreign systems integrators and distributors. To the extent that the
Company is unable to successfully do so, the Company's growth in international
sales will be limited. The failure to expand international sales could have a
material adverse effect on the Company's business, operating results and
financial condition.
If other countries begin to regulate the cable modem industry more heavily
or introduce standards or specifications with which the Company's products do
not comply, the Company will be unable to offer products in those countries
until its products comply with such standards or specifications and the Company
may have to incur substantial cost in order to comply with such standards or
specifications. For instance, should the DAVIC standards for ATM-based digital
video be established internationally, the Company will be required to conform
its cable modems in order to compete. Further, many countries do not have
regulations for installation of cable modem systems or for upgrading existing
cable operating systems to accommodate the Company's products. Whether the
Company currently operates in such a country or enters into the market in a
country where no such regulations exist, there can be no assurance that such
regulations will not be proposed at any time, and if imposed, that they would
not place limitations on that country's cable operators' ability to upgrade to
support the Company's products. There can be no assurance that the cable
operators in such countries would be able to comply with such regulations, or
that compliance with such regulations would not require a long, costly process.
The Company's international sales to date have been denominated in U.S.
dollars. The Company does not currently engage in any foreign currency hedging
transactions. A decrease in the value of foreign currencies relative to the U.S.
dollar could make the Company's products more expensive in international
markets. In addition to currency fluctuation risks, international operations
entail a number of risks not typically present in domestic operations. Such
risks include: changes in regulatory requirements; costs and risks of deploying
systems in foreign countries; availability of suitable export
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financing; timing and availability of export licenses; tariffs and other
trade-barriers; political and economic instability; difficulties in staffing and
managing foreign operations; potentially adverse tax consequences; the burden of
complying with a wide variety of complex foreign laws and treaties; difficulties
in managing distributors; difficulties in obtaining governmental approvals for
products; and the possibility of difficult accounts receivable collections.
Distributors' customer purchase agreements may be governed by foreign laws which
may differ significantly from laws of the U.S. The Company is also subject to
the risks associated with the imposition of legislation and regulations relating
to the import or export of high technology products. The Company cannot predict
whether quotas, duties, taxes or other charges or restrictions upon the
importation or exportation of the Company's products will be implemented by the
U.S. or other countries, leading to a reduction in sales and profitability in
that country. Future international activity may result in sales dominated by
foreign currencies. Gains and losses on the conversion to U.S. dollars of
accounts receivable, accounts payable and other monetary assets and liabilities
arising from international operations may contribute to fluctuations in the
Company's operating results. Any of these factors could materially and adversely
affect the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISKS ASSOCIATED WITH REGULATION OF INFORMATION SECURITY PRODUCTS. The
Company's products make use of encryption, and are therefore subject to export
restrictions administered by the U.S. Department of Commerce, which permit the
export of encryption products only with the required level of export license.
The Company may therefore be at a disadvantage in competing for international
sales compared to companies located outside the U.S. that are not subject to
such restrictions. International customers may be unwilling to purchase the
Company's products that are eligible for export due to perceptions that such
products are inferior to those marketed within the U.S., may contain
undocumented features which undermine the products' security architecture, or
are required to incorporate security features which are unacceptable to the
customer. Although the Company has been granted all currently required U.S.
export licenses, there can be no assurance that the Company will continue to be
able to secure such licenses in a timely manner in the future, or at all. In
certain foreign countries, the Company's distributors are required to secure
licenses or formal permission before products that incorporate encryption
features can be imported. There can be no assurance the Company's distributors
will make the effort, or be successful in the effort, to obtain the necessary
licenses or permission to import the Company's products into certain countries.
The regime of export administration, and resulting regulations in the U.S. are
in a stage of transition due to political controversy concerning their purposes
and legality. Consequently, the uncertainty concerning the interpretation and
application of such regulations may unduly delay or prevent the export of
Company's products, leading to a loss of revenues and market position.
Recent legislative proposals have indicated the possibility that the
Company's products sold for use within the U.S. may be required to incorporate
certain features to assist law enforcement agencies in recovering suspect
communications. If such proposals are enacted into law, the Company may be
obligated to incur significant expense in complying with such regulations. In
addition, the market opportunities and customer acceptance of the Company's
products could be adversely affected by the Company's compliance with such laws,
leading to a commensurate loss of revenues and market share.
YEAR 2000 COMPLIANCE. Many existing computer systems and applications, and
other control devices, use only two digits to identify a year in the date code
field, and were not designed to account for the upcoming change in the century.
As a result, such systems and applications could fail or create erroneous
results unless corrected so that they can process data related to the year 2000.
The Company relies on its systems, applications and devices in operating and
monitoring all major aspects of its business, including financial systems (such
as general ledger, accounts payable and accounts receivable modules), customer
services, infrastructure, embedded computer chips, networks and
telecommunications equipment and end products. The Company also relies, directly
and indirectly, on external systems of business enterprises such as customers,
suppliers, creditors, financial organiza-
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tions, and of governmental entities, both domestic and international, for
accurate exchange of data. Despite the Company's efforts to address the year
2000 impact on its internal systems, the Company has not fully identified such
impact or whether it can resolve such impact without disruption of its business
or without incurring significant expense. Based on the information currently
available, the Company believes that the costs associated with the year 2000
issue, and the consequences of incomplete or untimely resolution of the year
2000 issue, will not have a material adverse effect on its business, operating
results and financial condition in any given year. In addition, even if the
internal systems of the Company are not materially affected by the year 2000
issue, the Company could be materially adversely affected through disruption in
the operation of the enterprises with which the Company interacts.
RISKS OF PRODUCT DEFECTS, PRODUCT RETURNS AND PRODUCT LIABILITY. Products
as complex as those offered by the Company frequently contain undetected errors,
defects or failures, especially when first introduced or when new products are
released. In the past, such errors have occurred in the Company's products and
there can be no assurance that errors will not be found in the Company's current
and future products. The occurrence of such errors, defects or failures could
result in delays in installation, product returns and other losses to the
Company or to its cable operators or end-users. Such occurrence could also
result in the loss of or delay in market acceptance of the Company's products,
which could have a material adverse effect on the Company's business, operating
results and financial condition. With respect to any new products introduced,
the Company would have limited experience with the problems that could arise
with such products. Although the Company has not experienced any product
liability claims to date, the sale and support of the Company's products entails
the risk of such claims. A successful product liability claim brought against
the Company could have a material adverse effect on the Company's business,
operating results and financial condition.
GOVERNMENT REGULATIONS. The Company's products are subject to the
regulations of the Federal Communications Commission (the "FCC") and other
federal and state communications regulatory agencies. Changes in the regulatory
environment relating to the Internet connectivity market, including regulatory
changes that, directly or indirectly, affect telecommunications costs, limit
usage of subscriber-related information or increase the likelihood or scope of
competition from telecommunications companies, could affect the prices at which
cable operators sell their services and thus indirectly impact the Company. In
addition, the Company cannot predict the impact, if any, that future regulation
or regulatory changes might have on its business. Regulation of cable television
rates may affect the speed at which the cable operators upgrade their cable
infrastructures to two-way HFC.
Changes in current or future laws or regulations which negatively impact
the Company's products and technologies, in the U.S. or elsewhere, could
materially and adversely affect the Company's business, operating results and
financial condition.
DEPENDENCE ON THE INTERNET. The Company's products will depend in part upon
the increased use of the Internet by corporate telecommuters, SOHOs and
residential consumer users. Businesses are increasingly using the Internet,
intranets and extranets, not only for communication within and outside the firm,
but also to create cost-effective, secure data connections known as virtual
private networks ("VPNs") between corporate sites or remote locations. Critical
issues concerning the commercial use of the Internet, such as ease of access,
security, reliability, cost and quality of service, remain unresolved and may
affect the growth of Internet use, especially in the business and consumer
markets targeted by the Company. Despite growing interest in the commercial
possibilities for the Internet, many businesses have been deterred from adopting
Internet-based data communications systems for a number of reasons, including
inconsistent quality of service, lack of availability of cost-effective,
high-speed service, a limited number of local access points for corporate users,
inability to integrate business applications on the Internet, the need to deal
with multiple and frequently incompatible vendors, inadequate protection of the
confidentiality of stored data and information moving across the Internet and a
lack of tools to simplify Internet access and use. There can be no assurance
that such issues can be resolved and that such concerns can be alleviated.
Failure of the Internet community to address and resolve such problems, to
develop or to develop more slowly than
16
<PAGE> 18
expected could have a material adverse affect on the Company's business,
operating results and financial condition.
POTENTIAL NEED FOR ADDITIONAL CAPITAL. The Company currently anticipates
that the proceeds of the Offering, together with its existing cash balances and
available line of credit and cash flow expected to be generated from future
operations, will be sufficient to meet the Company's liquidity needs for at
least the next twelve months. However, the Company may need to raise additional
funds if its estimates of revenues, working capital and/or capital expenditure
requirements change or prove inaccurate or in order for the Company to respond
to unforeseen technological or marketing hurdles or to take advantage of
unanticipated opportunities. In addition, the Company expects to review
potential acquisitions that would complement its existing product offerings or
enhance its technical capabilities. While the Company has no current agreements
or negotiations underway with respect to any such acquisition, any future
transaction of this nature could require potentially significant amounts of
capital. There can be no assurance that any such funds will be available at the
time or times needed, or available on terms acceptable to the Company. If
adequate funds are not available, or are not available on acceptable terms, the
Company may not be able to take advantage of market opportunities, to develop
new products or otherwise respond to competitive pressures. Such inability could
have a material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CONTROL BY PRINCIPAL STOCKHOLDERS; CERTAIN ANTI-TAKEOVER PROVISIONS. A
substantial majority of the Company's capital stock is held by a limited number
of stockholders. After completion of this Offering, the Company's officers,
directors, five percent or greater stockholders and parties affiliated or
related to such persons, will own approximately 42.6% of the outstanding shares
of Common Stock. Accordingly, such stockholders are likely, for the foreseeable
future, to continue to be able to control major decisions of corporate policy
and determine the outcome of any major transaction or other matter submitted to
the Company's stockholders or Board of Directors, including potential mergers or
acquisitions involving the Company, amendments to the Company's Articles of
Incorporation and other similar transactions. Stockholders other than such
principal stockholders are therefore likely to have little or no influence on
decisions regarding such matters.
Upon completion of this Offering, the Company's Board of Directors will
have the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no current plans to issue shares of Preferred Stock.
The Company is also subject to certain provisions of Delaware law which could
have the effect of delaying, deterring or preventing a change in control of the
Company, including Section 203 of the Delaware General Corporation Law, which
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three years from the date the person
became an interested stockholder unless certain conditions are met. In addition,
the Company's certificate of incorporation and bylaws contain certain provisions
that, together with the ownership position of the officers, directors and their
affiliates, could discourage potential takeover attempts and make more difficult
attempts by stockholders to change management, which could adversely affect the
market price of the Company's Common Stock. See "Principal Stockholders" and
"Description of Capital Stock."
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS. As of March 31, 1998, and
including the conversion of all outstanding shares of Preferred Stock into
Common Stock, there were outstanding 12,764,512 shares of Common Stock held of
record by approximately 176 stockholders. The Offering will provide substantial
benefits to existing stockholders of the Company, particularly the present
directors, executive officers, principal stockholders and their affiliates and
related persons. These
17
<PAGE> 19
benefits include the creation of a public market for the Company's Common Stock,
which will afford them the ability to liquidate their investments, subject in
certain cases to volume limitations and other limitations and restrictions upon
the sale of their Common Stock. See "Risk Factors -- Shares Eligible for Future
Sale." Based upon a public offering price of $10.00 per share and a weighted
average price per share of $4.68 paid by the Company's existing stockholders,
upon the closing of the Offering, the present directors, executive officers,
principal stockholders and their affiliates and related persons will realize an
increase in the aggregate market value of the Common Stock held by them equal to
approximately $39,084,316. See "Principal Stockholders."
MANAGEMENT'S BROAD DISCRETION OVER ALLOCATION OF PROCEEDS OF THE
OFFERING. The net proceeds to the Company from the sale and issuance of the
4,000,000 shares of Common Stock offered hereby are estimated to be
approximately $36.15 million at an assumed initial public offering price of
$10.00 per share after deducting the estimated underwriting discount and the
estimated offering expenses. The primary purposes of this Offering are to obtain
additional capital, create a public market for the Common Stock and facilitate
future access to public markets. The Company expects to use the net proceeds
primarily for general corporate purposes, including working capital, product
development and capital expenditures. A portion of the net proceeds also may be
used to acquire or invest in complementary business or products or to obtain the
right to use complementary technologies. Accordingly, the Company's management
will retain broad discretion as to the allocation of the proceeds of this
Offering. The failure of management to apply such funds effectively could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Use of Proceeds."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of the
Company's Common Stock in the public market after this Offering could adversely
affect the prevailing market price of the Common Stock from time to time and
could impair the Company's ability to raise capital through the sale of equity
or debt securities. In addition to the 4,000,000 shares of Common Stock offered
hereby (assuming no exercise of the Underwriters' over-allotment option), as of
the date of this Prospectus, there will be 12,764,512 shares of Common Stock
outstanding, all of which are restricted shares ("Restricted Shares") under the
Securities Act of 1933, as amended (the "Securities Act"). As of such date, no
Restricted Shares will be eligible for sale in the public market. All 12,764,512
Restricted Shares will be available for sale in the public market following the
expiration of one hundred eighty (180)-day lock-up agreements. In addition, the
holders of warrants for 46,286 shares of Preferred Stock can exercise such
warrants at any time, but such shares cannot be sold until the expiration of the
180-day lock-up period following the date of the Prospectus. Beginning six
months after the date of this Prospectus the holders of 9,957,604 Restricted
Shares and the holders of warrants for 46,286 shares of Common Stock are
entitled to certain rights with respect to registrations of such shares for sale
in the public market, assuming no exercise of the Underwriters' over-allotment
option. If such holders sell in the public market, such sales could have a
material adverse effect on the market price of the Company's Common Stock.
Immediately after this Offering, the Company intends to file a registration
statement on Form S-8 which would allow shares issuable upon exercise of options
under the Company's 1998 Stock Option Plan to be freely tradeable, subject to
compliance with Rule 144 in the case of Affiliates of the Company and except to
the extent that such shares are subject to a market stand-off provision in each
optionee's stock purchase agreement whereby such optionee has agreed not to sell
or otherwise dispose of any shares of Common Stock for a period of one hundred
eighty (180) days after the date of the Prospectus. Such registration would
cover approximately 3,045,080 shares which includes all shares reserved under
the Company's 1998 Stock Incentive Plan and the 1998 Employee Stock Purchase
Plan. All officers and directors and certain stockholders and certain option
holders of the Company have entered into lock-up agreements generally providing
that they will not offer, pledge, sell, contract to sell, grant any option,
right or warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly (or enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of),
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for shares of Common Stock, for a period of one hundred eighty
(180) days after the date of this Prospectus,
18
<PAGE> 20
without the prior written consent of Deutsche Morgan Grenfell Inc. Deutsche
Morgan Grenfell Inc. also may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements. See "Management -- Benefit Plans," "Shares Eligible for Future Sale"
and "Underwriting."
NO PRIOR TRADING MARKET; EXPECTED VOLATILITY OF STOCK PRICE. In recent
years the stock market in general, and the market for shares of high technology
companies in particular, have experienced extreme price fluctuations, which have
often been unrelated to the operating performance of affected companies. The
trading price of the Company's Common Stock is expected to be subject to extreme
fluctuations in response to both business-related issues, such as quarterly
variations in operating results, announcements of new products by the Company or
its competitors and the gain or loss of subscribers, and stock market-related
influences, such as changes in analysts' estimates, the presence or absence of
short-selling of the Company's Common Stock and events affecting other companies
that the market deems to be comparable to the Company. In addition, technology
stocks have from time to time experienced extreme price and volume fluctuations
that often have been unrelated or disproportionate to the operating performance
of these companies. These broad market fluctuations may adversely affect the
trading price of the Company's Common Stock. There can be no assurance that the
trading price of the Company's Common Stock will not decline below its initial
offering price to the public. See "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Common Stock in this
Offering will suffer immediate and substantial dilution of $6.70 per share based
upon an assumed public offering price of $10.00 per share. To the extent that
outstanding options or warrants to purchase the Company's Common Stock are
exercised, there may be further dilution. See "Dilution."
19
<PAGE> 21
USE OF PROCEEDS
The net proceeds to the Company from the sale and issuance of the 4,000,000
shares of Common Stock offered hereby are estimated to be approximately $36.15
million (approximately $41.7 million if the Underwriters' over-allotment option
is exercised in full), at an assumed initial public offering price of $10.00 per
share and after deducting the estimated underwriting discount and the estimated
offering expenses. The Company intends to use the net proceeds for general
corporate purposes, including working capital, product development and capital
expenditures. A portion of the net proceeds may also be used to acquire or
invest in complementary businesses or products or to obtain the right to use
complementary technologies. The Company has no agreements or commitments with
respect to any such acquisition or investment, and the Company is not currently
engaged in any material negotiations with respect to any such transaction.
Pending such uses, the net proceeds of this Offering will be invested in
short-term, interest-bearing, investment grade securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying any cash dividends on its capital stock in
the foreseeable future. The Company currently intends to retain earnings, if
any, for use in its business. The Company's line of credit arrangement prohibits
the payment of dividends by the Company without the lender's prior consent.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998 (i) on an actual basis, (ii) on a pro forma basis to reflect the
conversion of the Preferred Stock into 9,957,604 shares of Common Stock upon the
effectiveness of the registration statement related to this Offering and (iii)
as adjusted to reflect the receipt by the Company of the estimated net proceeds
from the sale of the 4,000,000 shares of Common Stock offered by the Company
hereby at an assumed initial public offering price of $10.00 per share and after
deducting the estimated underwriting discount and the estimated offering
expenses:
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Current portion of long-term obligations.................... $ 1,219 $ 1,219 $ 1,219
-------- -------- ----------
Long-term obligations....................................... $ 1,441 $ 1,441 $ 1,441
-------- -------- ----------
Stockholders' equity:
Preferred Stock, $0.001 par value per share; 22,000,000
shares authorized, actual and pro forma, 5,000,000
shares authorized, as adjusted; 9,957,604 shares issued
and outstanding, actual, no shares issued and
outstanding, pro forma and as adjusted.................. 10 -- --
Common Stock, $0.001 par value per share; 35,000,000
shares authorized, actual and pro forma, 40,000,000
shares authorized, as adjusted; 2,806,908 shares issued
and outstanding, actual, 12,764,512 shares issued and
outstanding, pro forma and 16,764,512 shares issued and
outstanding, as adjusted(1)............................. 3 13 53
Additional paid-in capital................................ 58,784 58,784 94,894
Deferred stock compensation............................... (108) (108) (108)
Accumulated deficit....................................... (39,568) (39,568) (39,568)
-------- -------- ----------
Total stockholders' equity.............................. 19,121 19,121 55,271
-------- -------- ----------
Total capitalization............................... $ 21,781 $ 21,781 $ 57,931
======== ======== ==========
</TABLE>
- ---------------
(1) Excludes: (i) 1,420,967 shares of Common Stock issuable upon exercise of
stock options outstanding under the Company's 1998 Stock Incentive Plan at a
weighted average exercise price of $2.64 per share; (ii) 1,102,543 shares of
Common Stock reserved for future issuance under the Company's 1998 Stock
Incentive Plan (which includes a 500,000-share increase in the 1998 Plan
approved on April 22, 1998 and from which reserve options to purchase
505,250 shares at $9.00 per share were granted on April 22, 1998); (iii)
250,000 shares of Common Stock reserved for future issuance under the 1998
Employee Stock Purchase Plan; and (iv) 46,286 shares of Common Stock
issuable upon the exercise of outstanding warrants at a weighted average
exercise price of $7.76 per share. See "Management -- Option Grants Under
the 1998 Stock Incentive Plan," "Management -- Benefit Plans" and Notes 6
and 11 of Notes to Financial Statements.
20
<PAGE> 22
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1998
was approximately $19,121,000, or $1.50 per share of Common Stock. "Pro forma
net tangible book value per share" represents the amount of total tangible
assets less total liabilities, divided by the number of shares of Common Stock
then outstanding, assuming the conversion of all outstanding shares of Preferred
Stock into shares of Common Stock upon the effectiveness of the registration
statement related to this Offering. After giving effect to the sale by the
Company of the 4,000,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $10.00 per share (after deducting the estimated
underwriting discount and the estimated offering expenses), the Company's pro
forma net tangible book value as of March 31, 1998 would have been $55,271,000,
or $3.30 per share of Common Stock. This represents an immediate increase in pro
forma net tangible book value of $1.80 per share to existing stockholders and an
immediate dilution of $6.70 per share to new public investors. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $10.00
Pro forma net tangible book value per share as of March
31, 1998............................................... $1.50
Increase per share attributable to new investors.......... 1.80
-----
Pro forma net tangible book value per share after the
Offering.................................................. 3.30
------
Dilution per share to new investors......................... $ 6.70
======
</TABLE>
The following table summarizes, as of March 31, 1998, on the pro forma
basis described above, the difference between the number of shares of Common
Stock purchased from the Company, the total consideration paid and the average
price per share paid by the existing stockholders and by new public investors
purchasing shares of Common Stock in this Offering (before deducting the
estimated underwriting discount and the estimated offering expenses):
<TABLE>
<CAPTION>
WEIGHTED
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 12,764,512 76.1% $59,765,634 59.9% $4.68
New investors.................. 4,000,000 23.9% 40,000,000 40.1% 10.00
---------- ----- ----------- -----
Total................ 16,764,512 100.0% $99,765,634 100.0%
========== ===== =========== =====
</TABLE>
The foregoing computations are based on the number of shares of Common
Stock outstanding as of March 31, 1998 and exclude 1,420,967 shares of Common
Stock issuable upon exercise of stock options outstanding under the Company's
1998 Stock Incentive Plan at a weighted average exercise price of $2.64 per
share, 1,102,543 shares of Common Stock reserved for future issuance under the
Company's 1998 Stock Incentive Plan (which includes a 500,000-share increase in
the 1998 Plan approved on April 22, 1998 from which reserve options to purchase
505,250 shares at $9.00 per share were granted on April 22, 1998), 250,000
shares of Common Stock reserved for future issuance under the 1998 Employee
Stock Purchase Plan, and 46,286 shares of Common Stock issuable upon the
exercise of outstanding warrants at an average exercise price of $7.76 per
share. To the extent that any of these options or warrants are exercised, there
could be further dilution to new investors. See "Capitalization,"
"Management -- Option Grants Under the 1998 Stock Incentive Plan,"
"Management -- Benefit Plans," "Description of Capital Stock" and Notes 6 and 11
of Notes to Financial Statements.
21
<PAGE> 23
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The statements of operations data for
each of the years in the three-year period ended December 31, 1997, and the
balance sheets data at December 31, 1996 and 1997, are derived from financial
statements of the Company which have been audited by Deloitte & Touche LLP,
independent auditors, and are included herein. The statements of operations data
for the years ended December 31, 1993 and 1994 and the balance sheets data at
December 31, 1993, 1994 and 1995 are derived from audited financial statements
not included herein. The statements of operations data for the three-month
periods ended March 31, 1997 and 1998 and the balance sheet data at March 31,
1998 are derived from unaudited interim financial statements included elsewhere
in this Prospectus and include, in the opinion of the Company, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's results of operations for those periods and
financial position at that date. The historical results are not necessarily
indicative of the operating results to be expected in the future.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
----- ------ ------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenues........................... $ -- $ -- $ -- $ 1,000 $ 15,649 $ 500 $ 7,020
Cost of total revenues................... -- -- -- -- 8,372 -- 4,676
----- ------ ------- -------- -------- ------- -------
Gross profit......................... -- -- -- 1,000 7,277 500 2,344
Operating expenses:
Research and development............... 79 545 5,233 12,395 13,481 3,128 4,278
Sales and marketing.................... -- -- 770 1,970 5,277 870 1,803
General and administrative............. 60 349 919 1,548 1,782 367 580
----- ------ ------- -------- -------- ------- -------
Total operating expenses................. 139 894 6,922 15,913 20,540 4,365 6,661
Loss from operations..................... (139) (894) (6,922) (14,913) (13,263) (3,865) (4,317)
Total other income....................... -- 58 257 447 229 37 94
----- ------ ------- -------- -------- ------- -------
Loss before income taxes................. (139) (836) (6,665) (14,466) (13,034) (3,828) (4,223)
Income taxes............................. -- 1 1 5 21 -- 9
----- ------ ------- -------- -------- ------- -------
Net loss........................ $(139) $ (837) $(6,666) $(14,471) $(13,055) $(3,828) $(4,232)
===== ====== ======= ======== ======== ======= =======
Net loss per share, basic and
diluted(1)............................. $ -- $(0.54) $ (3.53) $ (7.64) $ (6.15) $ (1.95) $ (1.69)
===== ====== ======= ======== ======== ======= =======
Shares used in computation,
basic and diluted(1)................... -- 1,562 1,887 1,894 2,124 1,968 2,497
===== ====== ======= ======== ======== ======= =======
Pro forma net loss per share, basic and
diluted(2)............................. $ (1.27) $ (0.43) $ (0.34)
======== ======= =======
Shares used in pro forma computation,
basic and diluted(2)................... 10,279 8,909 12,455
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
----- ------ ------- -------- -------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEETS DATA:
Cash and cash equivalents................ $ 7 $2,082 $ 3,273 $ 12,427 $ 17,950 $14,082
Working capital (deficit)................ (321) 2,023 2,328 9,097 19,523 15,508
Total assets............................. 21 2,308 4,606 17,036 31,573 28,377
Long-term obligations.................... -- -- 275 1,292 1,508 1,441
Total stockholders' equity (deficit)..... (307) 2,222 3,288 12,056 23,283 19,121
</TABLE>
- ---------------
(1) The diluted net loss per share computation excludes potential shares of
Common Stock (Convertible Preferred Stock, warrants to purchase Convertible
Preferred Stock, options to purchase Common Stock and Common Stock subject
to repurchase rights held by the Company), as their effect would be
antidilutive. See Note 1 of Notes to Financial Statements for a detailed
explanation of the determination of the shares used in computing basic and
diluted net loss per share.
(2) Includes the weighted average number of shares resulting from the assumed
conversion of all outstanding shares of Convertible Preferred Stock upon the
effectiveness of the registration statement related to this Offering. See
Note 1 of Notes to Financial Statements for a detailed explanation of the
determination of the shares used in computing pro forma net loss per share.
The diluted pro forma net loss per share computation excludes potential
shares of Common Stock (warrants to purchase Convertible Preferred Stock,
options to purchase Common Stock and Common Stock subject to repurchase
rights by the Company).
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's financial statements and notes
thereto included elsewhere in this Prospectus. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in such
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed below and in "Risk Factors" and
"Business," as well as those discussed elsewhere in this Prospectus.
OVERVIEW
Com21, Inc. ("the Company" or "Com21") designs, develops, markets and sells
value-added, high-speed communications solutions for the broadband access
market. The Company's ComUNITY Access system enables cable operators to provide
high-speed, cost-effective Internet access to corporate telecommuter, small
office/home office ("SOHO") and residential users in the U.S. and
internationally, and enables them to address the distinct price, performance,
security and other needs of these different end-user groups. Com21's products
include headend equipment, subscriber cable modems, network management software
and noise containment technologies.
The Company was incorporated in June 1992. From inception through April
1997, the Company's operating activities related primarily to establishing a
research and development organization, testing prototype designs, building
application-specific integrated circuit ("ASIC") design infrastructure,
commencing the staffing of marketing, sales and field service and technical
support organizations and establishing manufacturing relationships. Since the
Company's first customer shipment in April 1997, the Company has also focused on
commencing trials with cable operators, developing customer relationships,
marketing the Com21 brand, investing in field service and customer support,
continuing to develop new products and technologies and to enhance existing
products. Since inception, the Company has incurred significant losses and, as
of March 31, 1998, had an accumulated deficit of $39.6 million. See "Risk
Factors -- Limited Operating History; History of Losses; No Assurance of
Profitability."
The Company's revenues consist primarily of sales of headend equipment,
cable modems and, to a lesser extent, the licensing of network management
software. The Company recognizes revenue upon commercial shipment of its
products. As the cable operators that purchase the Company's products make
data-over-cable services broadly available to their customers, the Company
expects its product mix to shift more heavily toward sales of cable modems.
Pursuant to a Technology License and Reseller Agreement with 3Com (the "3Com
Agreement"), the Company received certain non-refundable technology fees in the
quarters ended June 30, 1996 and March 31, 1997. In addition, the terms of the
3Com Agreement provide that, until December 31, 1998, 3Com is obligated to pay a
per unit royalty fee on sales by 3Com of the first 100,000 cable modems
incorporating the Company's technology. 3Com prepaid $1.0 million of this
obligation in April 1996, and the Company recorded this payment as deferred
revenue. The Company will earn such revenues on the earlier of (i) the sale of
the Company's cable modems by 3Com or (ii) at the expiration of the royalty
period on December 31, 1998. Through March 31, 1998 an aggregate of
approximately $1.5 million has been recognized as technology licensing fees and
royalties pursuant to this agreement. See "Certain Transactions," and Note 9 of
Notes to Financial Statements.
To date, gross margin on sales of headend and related equipment and
software licenses has been significantly higher than gross margin on sales of
cable modems. The Company expects to experience decreasing average selling
prices of its cable modems due to greater competition and price sensitivity of
cable modem sales particularly as interoperable MCNS-compliant products become
widely available from multiple vendors. The Company expects that gross margin on
sales of headend equipment will continue to be higher than gross margin on sales
of cable modems for the foreseeable future. As a result, the Company expects
that gross margin will decline in 1998 as sales of cable modems increase as a
percentage of total product revenues.
Com21 tests and assembles the ComCONTROLLER headend equipment in the
Company's facility in Milpitas, California. Com21 outsources turnkey
manufacturing of the ComPORT cable modem to Celestica, a contract manufacturer
located in Toronto, Canada. The Company has taken, and continues to take, steps
to reduce the manufacturing costs of its cable modem products by
23
<PAGE> 25
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. See "Risk
Factors -- Need to Reduce Cost of Modems" and "-- Limited Manufacturing
Experience; Dependence on Third Party Manufacturing."
Research and development expenses consist principally of salaries and
related personnel expenses, consultant fees and prototype expenses related to
the design, development, testing and enhancement of headend equipment, cable
modems and network management software. As of March 31, 1998, all research and
development costs had been expensed as incurred. The Company believes that
continued investment in research and development is critical to attaining its
strategic product and cost reduction objectives and, as a result, expects these
expenses to increase significantly in absolute dollars in the future. Sales and
marketing expenses consist of salaries and related expenses for personnel
engaged in marketing, sales and field service support functions, as well as
trade show and promotional expenditures. The Company intends to pursue sales and
marketing campaigns aggressively and therefore expects these expenses to
increase significantly in absolute dollars in the future. In addition, the
Company expects that it may be required to devote resources to the development
of a retail or other end user sales channel, which would also result in an
increase in sales and marketing expenses. General and administrative expenses
consist primarily of salaries and related expenses for executive, accounting and
administrative personnel, recruiting expenses, professional fees and other
general corporate expenses. The Company expects general and administrative
expenses to increase in absolute dollars as the Company adds personnel and
incurs additional costs related to the growth of its business and operation as a
public company.
The Company relies on its systems, applications and devices in operating
and monitoring all major aspects of its business, including its financial
systems. The Company also relies, directly or indirectly, on the external
systems of business enterprises such as customers and suppliers. Despite the
Company's efforts to address the year 2000 impact on its internal systems, the
Company has not fully identified such impact or whether it can resolve such
impact without disruption of its business or without incurring significant
expense. Based on the information currently available, the Company believes that
the costs associated with the year 2000 issue, and the consequences of
incomplete or untimely resolution of the year 2000 issue, will not have a
material adverse effect on the Company's business, operating results and
financial condition in any given year. In addition, even if the internal systems
of the Company are not materially affected by the year 2000 issue, the Company's
business, operating results and financial condition could be materially
adversely affected through disruption in the operation of the enterprises with
which the Company interacts. See "Risk Factors -- Year 2000 Compliance."
The Company did not commence product shipments until April 1997, and, as a
result, has a limited operating history upon which investors may evaluate the
Company and its prospects. The Company has incurred net losses since its
inception and expects to continue to operate at a loss through at least fiscal
1999. As of March 31, 1998, the Company had an accumulated deficit of
approximately $39.6 million. Because the market for the Company's products is
new and evolving, the Company cannot accurately predict the future growth rate,
if any, or the ultimate size of the data-over-cable market. To achieve
profitable operations on a continuing basis, the Company must successfully
design, develop, test, manufacture, introduce, market and distribute its
products on a broad commercial basis. There can be no assurance that the Company
will ever achieve profitability. The Company's ability to generate future
revenues will depend on a number of factors, many of which are beyond the
Company's control. Such factors include the rate at which cable operators
upgrade their cable infrastructures, the ability of the Company and cable
operators to coordinate timely and effective marketing campaigns with the
availability of such upgrades, the success of the cable operators in marketing
data-over-cable services and the Company's modems to subscribers, the prices
that the cable operators set for data transmission installation service and the
installation of subscriber site 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
24
<PAGE> 26
able to sustain, profitability. See "Risk Factors -- Limited Operating History;
History of Losses; No Assurance of Profitability."
From time to time, third parties, including competitors of the Company,
have asserted patent, copyright and other intellectual property rights to
technologies that are important to the Company. In 1997 the Company received a
written notice from Hybrid in which Hybrid claimed to have patent rights in
certain cable modem technology and requested that the Company review its own
products in light of Hybrid's alleged patent rights. In January 1998, Hybrid
filed an action against the Company in the U.S. District Court for the Eastern
District of Virginia, accusing the Company of willfully infringing the Hybrid
patents, among other claims. Subsequently, the Company filed suit for
declaratory relief against Hybrid in the U.S. District Court for the Northern
District of California asserting that it does not infringe the Hybrid patents
and that the Hybrid patents are invalid. The Company then filed a motion in the
Virginia District Court to transfer the action filed by Hybrid to the Northern
District of California, and that motion has been granted. The Company has
received opinions of its patent counsel that the claims of the Hybrid patents
are either invalid or not infringed by the Company's products. However, there
can be no assurance that some or all of the Company's products will not
ultimately be determined to infringe the Hybrid patents, and the Company
anticipates that Hybrid will continue to pursue litigation with respect to these
claims. The results of any litigation matter are inherently uncertain. In the
event of an adverse result in the Hybrid litigation, the Company could be
required to pay substantial damages, including treble damages if the Company is
held to have willfully infringed, to cease the manufacture, use and sale of
infringing products, to expend significant resources to develop non-infringing
technology, or to obtain licenses to the infringing technology. There can be no
assurance that licenses will be available from Hybrid on commercially reasonable
terms, or at all. In addition, litigation frequently involves substantial
expenditures and can require significant management attention, even if the
Company ultimately prevails. Accordingly, there can be no assurance that the
Hybrid matter will not have a material adverse effect on the Company's business,
operating results and financial condition.
Because of the early stage of this litigation and because Hybrid has sought
unspecified damages, neither the ultimate outcome of this litigation nor any
costs and payments resulting from the litigation or any settlement can presently
be determined. Accordingly, no provision for any loss which may result from the
Hybrid litigation has been recorded in the accompanying financial statements.
See "Risk Factors -- Patents and Proprietary Rights," "Business -- Intellectual
Property, Patent Litigation" and Note 11 to Notes to Financial Statements.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 1997 AND 1998
Total Revenues. Total revenues increased from $500,000 in the first quarter
of 1997 to $7.0 million in the first quarter of 1998. Total revenues for the
first quarter of 1997 consisted entirely of a technology licensing fee of
$500,000 pursuant to the 3Com Agreement. Total revenues for the first quarter of
1998 consisted primarily of sales of headend and related equipment and cable
modems and, to a lesser extent, network management software fees. Total revenues
attributable to international customers accounted for 50% of total revenues for
the first quarter of 1998.
Cost of Total Revenues. The Company did not record product sales in the
first quarter of 1997. Cost of total revenues was $4.7 million in the first
quarter of 1998 and consisted primarily of materials and software technology
fees paid to third parties. For the first quarter of 1998, gross margin was
33.4% as compared to 42.2% in the quarter ended December 31, 1997. The decrease
in gross margin was attributable to the decrease in license fees from network
management software and increased sale of cable modems as a percentage of sales.
Research and Development. Research and development expenses increased from
$3.1 million in the first quarter of 1997 to $4.3 million in the first quarter
of 1998. The increase was attributable to higher costs related to increased
personnel, greater consulting costs and higher depreciation as more equipment
was purchased to support added development.
25
<PAGE> 27
Sales and Marketing. Sales and marketing expenses increased from $870,000
in the first quarter of 1997 to $1.8 million for the same quarter of 1998. The
increase was attributable to higher costs associated with increased personnel,
commissions on sales, consulting and more trade advertising and promotion.
General and Administrative. General and administrative expenses increased
from $367,000 in the first quarter of 1997 to $580,000 for the same quarter of
1998. The increase was attributable to higher legal expenses, higher consulting
costs and increased salary costs.
Total Other Income. Total other income increased from $37,000 in the first
quarter of 1997 to $94,000 for the same quarter of 1998. The increase was
attributable to higher earnings on cash balances available during the first
quarter of 1998.
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Total Revenues. Total revenues increased from $1.0 million in 1996 to $15.6
million in 1997. During 1995, the Company was primarily engaged in product
development and, accordingly, did not record any revenues. Total revenues in
1996 consisted entirely of technology licensing fees from the 3Com Agreement.
Total revenues in 1997 consisted of an additional technology licensing fee of
$500,000 pursuant to the 3Com Agreement and $15.1 million from the sale of
products that commenced in April 1997. A majority of revenues attributable to
product sales during 1997 resulted from sales of headend and related equipment,
cable modems and network management software fees. Revenues attributable to
international customers were 64% of total revenues in 1997. The Company expects
to derive a significant portion of its revenues from international markets for
the foreseeable future. The Company intends to expand operations in the
international markets that it serves currently and to enter new international
markets, which will demand significant management attention and financial
commitment. To date, revenues attributable to international customers have been
denominated in U.S. dollars. The Company does not currently engage in any
foreign currency hedging transactions. A decrease in the value of foreign
currencies relative to the U.S. dollar could make the Company's products more
expensive in international markets. See "Risk Factors -- Risks Associated with
International Markets" and Note 8 of Notes to Financial Statements.
Cost of Total Revenues. Cost of total revenues was $8.4 million in 1997.
The Company commenced product shipments in April 1997 and therefore did not
incur any costs associated with the sale of products in 1995 or 1996. Cost of
total revenues in 1997 consisted primarily of materials cost and software
technology license fees paid to third parties. In 1997 the Company's gross
margin was 46.5%. The Company expects that gross margin will decline in 1998 as
sales of cable modems increase as a percentage of total product revenues.
Research and Development. Research and development expenses increased from
$5.2 million in 1995 to $12.4 million in 1996 and $13.5 million in 1997. The
increases for both 1996 and 1997 were primarily the result of increased
personnel in the Company's research and development organization associated with
product development.
Sales and Marketing. Sales and marketing expenses increased from $770,000
in 1995 to $2.0 million in 1996 and $5.3 million in 1997. The increases for both
1996 and 1997 were primarily due to higher costs associated with increased
personnel in the Company's sales and marketing organizations. The increase in
1997 also reflects the significant costs associated with the increased selling
efforts resulting from the commencement of the commercial shipment of the
Company's products in April 1997. These costs include travel expenses, trade
shows, print advertising, public relations and other promotional costs. The
Company expects sales and marketing expenses to increase on both an absolute
dollar basis and as a percentage of sales in 1998 primarily because the Company
will incur selling expenses for twelve months of commercial selling efforts, as
opposed to nine months in 1997.
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<PAGE> 28
General and Administrative. General and administrative expenses increased
from $919,000 in 1995 to $1.5 million in 1996 and $1.8 million in 1997. The
increases in both 1996 and 1997 were primarily attributable to increased
personnel in the Company's finance and administrative organization, as well as
increased professional fees.
Total Other Income. Total other income increased from $257,000 in 1995 to
$447,000 in 1996 and decreased to $229,000 in 1997. The increase in 1996 was
primarily attributable to higher earnings on cash balances as a result of higher
average cash and cash equivalents balances in 1996. The decrease in 1997 was
primarily attributable to interest expense associated with capital leases as
well as a charge for the issuance of warrants in connection with establishing a
line of credit, offset in part by higher earnings on increased average cash
balances.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited statements of operations
data in dollars and as a percentage of total revenues for the Company's five
most recent quarters. In management's opinion, this unaudited information has
been prepared on the same basis as the annual financial statements and includes
all adjustments necessary (consisting only of normal recurring adjustments) to
present fairly the unaudited quarterly results. This information should be read
in conjunction with the financial statements and related notes thereto included
elsewhere in this Prospectus. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1997 1998
--------- -------- ------------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenues................................. $ 500 $ 2,878 $ 5,577 $ 6,694 $ 7,020
Cost of total revenues......................... -- 1,520 2,986 3,866 4,676
------- ------- ------- ------- ---------
Gross profit................................... 500 1,358 2,591 2,828 2,344
Operating expenses:
Research and development..................... 3,128 3,041 3,309 4,003 4,278
Sales and marketing.......................... 870 1,145 1,363 1,899 1,803
General and administrative................... 367 405 432 578 580
------- ------- ------- ------- ---------
Total operating expenses................... 4,365 4,591 5,104 6,480 6,661
------- ------- ------- ------- ---------
Loss from operations........................... (3,865) (3,233) (2,513) (3,652) (4,317)
Total other income (expense)................... 37 (18) 34 176 94
------- ------- ------- ------- ---------
Loss before income taxes....................... (3,828) (3,251) (2,479) (3,476) (4,223)
Income taxes................................... -- 12 2 7 9
------- ------- ------- ------- ---------
Net loss....................................... $(3,828) $(3,263) $(2,481) $(3,483) $ (4,232)
======= ======= ======= ======= =========
AS A PERCENTAGE OF TOTAL REVENUES:
Total revenues................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of total revenues......................... -- 52.8 53.5 57.8 66.6
------- ------- ------- ------- ---------
Gross margin................................... 100.0 47.2 46.5 42.2 33.4
Operating expenses:
Research and development..................... 625.6 105.6 59.4 59.8 60.9
Sales and marketing.......................... 174.0 39.8 24.4 28.4 25.7
General and administrative................... 73.4 14.1 7.8 8.6 8.3
------- ------- ------- ------- ---------
Total operating expenses................... 873.0 159.5 91.6 96.8 94.9
------- ------- ------- ------- ---------
Loss from operations........................... (773.0) (112.3) (45.1) (54.6) (61.5)
Total other income (expense)................... 7.4 (0.7) 0.6 2.7 1.3
------- ------- ------- ------- ---------
Loss before income taxes....................... (765.6) (113.0) (44.5) (51.9) (60.2)
Income taxes................................... -- 0.4 -- 0.1 0.1
------- ------- ------- ------- ---------
Net loss....................................... (765.6)% (113.4)% (44.5)% (52.0)% (60.3)%
======= ======= ======= ======= =========
</TABLE>
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<PAGE> 29
Total revenues from inception through March 31, 1997 were limited to
technology licensing fees earned under the 3Com Agreement. The Company commenced
product sales in April 1997, and in the quarters ended June 30, 1997, September
30, 1997, December 31, 1997 and March 31, 1998 recorded total revenues of $2.9
million, $5.6 million, $6.7 million and $7.0 million, respectively. During 1997
and in the three months ended March 31, 1998, revenues attributable to
international customers constituted 64% and 50% of total revenues, respectively.
During 1997 and in the three months ended March 31, 1998, approximately 97% and
100% of the Company's total revenues, respectively, were derived from sales of
headend and related equipment, cable modems and network management software
fees. Cost of total revenues increased sequentially for each quarter presented
on an absolute dollar basis as a result of increased revenues in each period.
Cost of total revenues also increased as a percentage of revenues primarily due
to an increase in sales of cable modems as a percentage of product revenues.
Over the past five quarters, total operating expenses increased in dollar
amount. The Company incurred significant research and development expenses from
inception through March 31, 1997 associated with prototype development and
testing in connection with the headend and cable modem products that were
commercially introduced in April 1997. Research and development expenses
declined in dollar amount in the second quarter of 1997 due to completion of the
Company's initial products but increased in dollar amount in the subsequent two
fiscal quarters due to the development efforts related to new products and the
enhancement of existing products. Sales and marketing expenses increased in
dollar amount in each quarter of 1997 and as a percentage of revenues in the
quarter ended December 31, 1997, as compared to the prior quarter, as a result
of increased personnel and spending on trade shows, print advertising, public
relations and other promotional expenditures to build brand awareness. General
and administrative expenses increased in dollar amount in each quarter presented
as a result of increased salaries, recruiting costs associated with the hiring
of additional personnel and increased professional fees.
The Company's operating results are likely to fluctuate significantly in
the future on a quarterly and annual basis as a result of a variety of factors,
many of which are beyond the Company's control. Factors that will influence the
Company's operating results include: (i) the Company's ability to retain
existing cable operator customers, to attract new customers at a steady rate, to
maintain customer satisfaction and to obtain significant orders; (ii) the timing
of upgrades of cable systems to HFC and the ability and willingness of cable
operators to deploy cable modems and offer either one-way or two-way data
transmission service; (iii) the Company's ability to manage inventory and
fulfillment operations; (iv) the announcement or introduction of new services
and products by the Company and its competitors and the timely introduction of
MCNS-compliant products by the Company; (v) the Company's product mix; (vi)
price competition or pricing changes in the Internet, cable and
telecommunications industries, pricing of the Company's products and its ability
to reduce to the costs of its products over time; (vii) the level of use of the
Internet as a replacement for private wide area networks; (viii) the Company's
ability to develop new products in a timely and cost-effective manner; (ix) the
amount and timing of operating costs and capital expenditures relating to
expansion of the Company's business, operating results and infrastructure; (x)
governmental regulation; and (xi) general economic conditions and economic
conditions specific to the cable and electronic data transmission industries. In
recent quarters the Company has recognized a substantial portion of its revenues
in the last month of each quarter, and, in particular, within the last two weeks
of that month. A significant portion of the Company's expenses are fixed in
advance based in large part on future revenue forecasts. If revenues are below
expectations in any given period, the adverse impact of the shortfall on the
Company's operating results may be magnified by the Company's inability to
adjust spending to compensate for the shortfall. Therefore, a shortfall in
revenues from those expected would have a material adverse effect on the
Company's business, operating results and financial condition. In addition, the
Company plans to increase operating expenses to fund additional research and
development, sales and marketing and general and administrative activities. To
the extent that these expenses are not accompanied by an increase in revenues,
the Company's business, operating results and financial condition would be
materially adversely affected.
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<PAGE> 30
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private sales of Common Stock and Preferred Stock which, through March 31, 1998,
provided net cash proceeds of approximately $58.6 million. Net cash used in
operating activities in 1996 was $11.6 million and was primarily attributable to
a net loss of $14.5 million, partially offset by $1.0 million in deferred
revenue from the 3Com Agreement, an increase in accounts payable and accrued
expenses, and depreciation and amortization expenses. Cash used in investing
activities in 1996 consisted of $2.3 million in capital expenditures primarily
to support its engineering activities. Cash flows from financing activities were
$23.1 million in 1996 and consisted primarily of $23.2 million of net proceeds
from the issuance of Series F Preferred Stock partially offset by the net
repayment on borrowing arrangements.
Net cash used in operating activities in 1997 was $16.1 million and
resulted primarily from a net loss of $13.1 million and the increase of $5.0
million and $2.6 million in total accounts receivable and inventories,
respectively, offset in part by a total increase of $2.4 million in accounts
payable, accrued expenses and other current liabilities and $2.2 million in
depreciation and amortization expenses. Cash used in investing activities in
1997 consisted of $2.1 million in capital expenditures primarily to support
product development and manufacturing activities. Cash flows from financing
activities in 1997 consisted primarily of net proceeds of $23.7 million from the
issuance of Series E Preferred Stock and Series G Preferred Stock and $530,000
from the sale of Common Stock upon exercise of stock options.
Net cash used in operating activities in the three months ended March 31,
1998 was $3.3 million and resulted primarily from a net loss of $4.2 million and
an increase in total accounts receivable of $1.4 million offset primarily by a
decrease of $974,000 in inventories and an increase of $830,000 in accounts
payable. Cash used in investing activities in the three months ended March 31,
1998 consisted of $389,000 in capital expenditures primarily to support product
development and manufacturing activities. Net cash used in financing activities
in the three months ended March 31, 1998 was $199,000 and consisted primarily of
repayments on debt and capital lease obligations.
In future periods, the Company anticipates significant increases in working
capital on a period-to-period basis primarily as a result of planned increased
product sales and higher relative levels of inventory. The Company contracts for
the manufacture of cable modems and integrated circuit boards on a turnkey
basis. The Company has no long-term contracts or arrangements with any of its
vendors that guarantee the availability of product, the continuation of
particular payment terms or the extension of credit limits. The Company's future
success will depend, in significant part, on its ability to manufacture, or have
others manufacture, its products successfully, cost-effectively and in volumes
sufficient to meet customer demand. The Company's dependence upon third party
manufacturers involves a number of risks. See "Risk Factors -- Limited
Manufacturing Experience; Dependence on Third Party Manufacturing."
At March 31, 1998, the Company had $14.1 million of cash and cash
equivalents. In addition, the Company had a $5.0 million line of credit subject
to borrowing base requirements. To date, the Company has not drawn upon its line
of credit. Other than capital lease commitments, the Company has no material
commitments for capital expenditures. However, the Company anticipates it will
increase its capital expenditures and lease commitments consistent with
anticipated growth in operations, infrastructure and personnel. The Company may
establish sales offices and lease additional space, which will require it to
commit to additional lease obligations, purchase equipment and install leasehold
improvements.
The Company believes that the net proceeds from this Offering, together
with its current cash and cash equivalents, will be sufficient to meet its
anticipated cash requirements for at least twelve months, although the Company
may seek to raise additional capital during that time period. The sale of
additional equity or convertible debt securities could result in additional
dilution to the Company's stockholders. There can be no assurance that financing
will be available in amounts or on terms acceptable to the Company, if at all.
See "Risk Factors -- Potential Need for Additional Capital."
29
<PAGE> 31
BUSINESS
Com21, Inc. designs, develops, markets and sells value-added, high-speed
communications solutions for the broadband access market. The Company's ComUNITY
Access system enables cable operators to provide high-speed, cost-effective
Internet access to corporate telecommuter, small office/home office ("SOHO") and
residential users in the U.S. and internationally, and enables them to address
the distinct price, performance, security and other needs of these different
end-user groups. Com21's products include headend equipment, subscriber cable
modems, network management software and noise containment technologies. Cable
operators can use the Company's ComUNITY Access system to increase revenue
opportunities by offering up to 16 different operator-defined transmission rates
at varying price points to multiple markets. The Company's system is designed to
be deployed on a limited capital budget and can be upgraded and scaled as
subscriber penetration grows. The Company's system enables cable operators to
lower their ongoing cost of ownership through cost-effective noise management
and remote cable modem upgrades. The ComUNITY Access system also supports future
features and service offerings, such as desktop video conferencing and cable
telephony applications. The Company is developing an MCNS-compliant modem for
the North American cable market intended primarily to address the basic
requirements of the residential end-user base, which typically tolerates lower
performance and security than the business user. The Company is working with
Cisco to develop interoperable MCNS-compliant products that are expected to be
commercially available in the second half of 1998. In 1997, the Company shipped
approximately 170 ComCONTROLLER headends and more than 12,000 ComPORT modems for
use in 61 locations worldwide. In the North American market, the Company sells
directly to cable operators and has sold systems to major operators such as
Charter Communications, Prime Cable and TCI. Internationally, the Company sells
to systems integrators, including Philips and Siemens, which in turn sell to
cable operators.
INDUSTRY BACKGROUND
The volume of data traffic across communications networks has increased
significantly over the last several years due to the proliferation of
network-based communications and electronic commerce. Businesses, ranging from
large corporate enterprises to SOHOs, are increasingly using the Internet,
intranets and extranets, not only for communication within and outside the firm,
but also to create cost-effective secure data connections known as virtual
private networks ("VPNs") between corporate sites or remote locations. VPNs
extend corporate network access to remote employees and external organizations,
including business partners, suppliers and customers. Consumers are increasingly
accessing data networks, primarily the Internet, to communicate, collect and
publish information and conduct retail purchases. Because of its global reach,
accessibility, use of open standards and ability to enable real-time
interaction, the Internet has become a valuable communications medium for both
businesses and consumers.
The Internet and devices used to access it are expected to continue their
rapid growth. International Data Corporation ("IDC") estimates that between 1995
and 1997 the number of devices that had access to the Internet grew from
approximately 15 million to 64 million and anticipates that the number of such
devices will grow to more than 232 million by 2000. Similarly, the available
content and number of users on the Internet is increasing rapidly. IDC estimates
that the number of World Wide Web ("Web") pages grew from approximately 18
million in 1995 to 250 million in 1997 and is expected to increase to 2.3
billion by 2000. The number of Web users in the U.S. is expected to increase
from approximately 29 million in 1997 to 72 million in 2000. A substantial
percentage of worldwide growth is expected to come from Western Europe and Asia,
which is projected to grow from approximately 18 million users in 1997 to 50
million users in 2000. In addition to the substantial increase in the number of
users in recent years, demand has increased among business and consumer users
for high-speed Internet access to multimedia and other bandwidth-intensive
information, consisting of data, voice and video in the form of value-added
services and applications. This has resulted in a growing need for higher
transmission performance
30
<PAGE> 32
throughout the Internet. With the increasing dependence on communications
networks and the growing demand for bandwidth-intensive information, existing
transmission speeds have become less tolerable and can negatively affect
business productivity.
Typically, the limiting factor in overall data transmission performance is
the "last mile" of the communications infrastructure. Consisting primarily of
copper twisted-pair wire or coaxial cable, this infrastructure was originally
designed for analog transmission, such as analog voice or one-way analog video
signals, rather than high-speed two-way broadband digital transmission. Today,
there are multiple technologies that attempt to address the need for high-speed
last mile connections, including (i) wireline telephone infrastructure
technologies, such as 56 kilobits per second ("Kbps") dial-up modem
technologies, Integrated Services Digital Network ("ISDN") and asymmetric
digital subscriber line ("ADSL") and other digital subscriber line ("xDSL")
technologies; (ii) wireless infrastructure technologies, such as direct
broadcast satellite ("DBS"), multichannel multipoint distribution service
("MMDS") and local multipoint distribution service ("LMDS"); and (iii) hybrid
fiber-coaxial ("HFC") cable infrastructure technologies such as cable modems.
While each of these technologies has certain advantages, the cable
infrastructure currently provides the highest available transmission speed, with
peak data transmission speeds of 30 megabits per second ("Mbps") and "always-on"
availability providing instant access. In addition, cable infrastructure is
widely available. Paul Kagan Associates, Inc. estimates that at the end of 1997,
cable infrastructure passed approximately 95 million U.S. homes and more than
185 million homes in Western Europe and Asia. Recognizing the opportunity to
capture additional revenues by offering data-over-cable services, cable
operators have begun to address the burgeoning market for cable modem Internet
access. Industry sources estimate that there are currently in excess of 100
initial commercial deployments of cable modem systems worldwide, including sites
in the U.S., Argentina, Australia, Canada, France, The Netherlands and
Switzerland.
To fully realize the benefits of two-way data-over-cable communications,
cable operators must activate a data transmission return path that travels from
subscriber sites upstream to the cable operator through the cable plant.
Previously, cable operators have not been required to activate an upstream
return path because television broadcast only requires downstream transmission.
A critical factor related to two-way cable modem service involves the reduction,
containment and management of "noise" in the upstream return path. Noise
accumulates from subscriber sites on the upstream channel and interferes with
transmission throughout the entire cable plant. Excessive noise impairs the
quality of upstream transmissions and, in certain cases, results in significant
performance degradation. Cable plant noise consists of ambient background noise
in the cable plant itself and specific ingress noise introduced through
subscriber sites as a result of loose fittings and connectors, cracks in coaxial
cable shielding and other physical plant imperfections. Common sources of
ingress noise at subscriber sites include electronic motors in appliances,
consumer electronics devices and office equipment. One approach to dealing with
excessive noise involves signal encoding or modulation techniques that
compensate for higher noise levels. Such techniques, however, typically result
in decreased data transmission rates. Other approaches for identifying and
containing ingress noise, such as the installation of high pass filters at
subscriber sites, are expensive and inefficient because they block upstream
transmission entirely and must be physically removed prior to enabling two-way
cable modem service. Once the high pass filter is removed, ingress noise can
re-enter the system from that site. As a result, reducing noise to the low
tolerance level required by most two-way cable modem systems involves
significant cost and time for the cable operator, often delaying the
commencement of service and the consequent generation of revenue from
subscribers.
Recently, cable operators have begun upgrading their plants to an HFC cable
infrastructure that enables them to offer more channels, to add greater services
and consequently to compete better with DBS television providers' digital video
offerings. HFC cable infrastructure also facilitates reliable upstream data
transmission and contains noise by isolating portions of the network into
smaller distinct nodes. Each node typically serves 500 to 2,000 homes and has a
separate return path. In order to enable data service over HFC, cable operators
must install return path receivers at the headend based
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on the number of nodes to be activated rather than on the number of potential
cable modem subscribers. To reduce the number of return path receivers that
cable operators would otherwise have to purchase, cable operators can recombine
separate return paths. However, the number of return paths that can be combined
is limited by the accumulated noise from each path. As a result, early
deployment costs can be significant compared to the revenues generated by
initial cable modem subscribers.
In order to accelerate time-to-market and revenue generation, and to reduce
initial deployment costs, some cable modem Internet access systems offer one-way
"telephone return" service, with cable transmission downstream and slower
dial-up modem transmission upstream. This approach enables earlier deployment of
cable modem systems by postponing the need to address upstream noise issues and
enables cost-effective determination of which markets are most likely to be
economically feasible for larger-scale, two-way installations. However, with
most currently available cable modems, the eventual upgrade from one-way to
two-way service requires the purchase of a new two-way modem and generally
requires a field service visit to replace and install the dedicated one-way
modem with a two-way modem.
Cable operators are seeking to accelerate the acceptance of cable modem
service by their subscribers. Many major domestic cable operators have
established or invested in value-added data-over-cable services such as @Home
Network ("@Home"), Time Warner Cable's Roadrunner service and US West Media
Group's MediaOne Express service. In addition, several domestic cable operators
have recently cooperated to create the Multimedia Cable Network System ("MCNS")
specification to define multi-vendor interoperable cable modems. This
specification is expected to be widely adopted for the North American consumer
market. While a number of suppliers are developing MCNS-compliant two-way cable
modems, no such modems are currently commercially available.
Beyond the challenges of deploying cable modem Internet services, most
cable modem systems enable operators to offer only a single level of service at
a single monthly rate and do not enable customized features that meet the
special requirements of distinct market segments. Offering a single service and
rate to all subscribers does not permit cable operators to maximize revenue
opportunities. For example, a residential subscriber with only limited access
and speed requirements such as sending and receiving e-mail, may elect not to
subscribe to a 256 Kbps service at $50 per month. In contrast, a business
subscriber who would be willing to pay significantly more for enhanced service,
would pay only the fixed $50 per month rate. The lost revenue opportunity is
particularly acute in business markets, where telecommuting and SOHO users are
generally willing to pay more for the additional speed, security and VPN
features they require.
In addition to data-over-cable service, telephony-over-cable service has
recently been made possible for cable operators due to regulatory changes both
in the U.S. and internationally. Such deregulation has allowed cable operators
to compete in the local telephone market.
The Company believes that there is a significant opportunity for a provider
of a cable modem system solution that would reduce the total cost of deployment
and ownership of a cable modem system and enable different tiers of data
transmission service and other value-added features for distinct market
segments. To reduce the total cost of deployment and ownership, there is a need
for a cable modem system that provides reliable two-way data service on noisy
cable plants without significantly reducing data transmission rates, enables
cable operators to remotely identify sources of ingress noise and manages system
noise in a manner that permits equipment purchases to more closely scale with
subscriber penetration. In order to accelerate time-to-market, such a system
would also provide for cost-effective remote software-based migration of cable
modems from one-way to two-way service. By enabling higher noise tolerance with
a software-based migration path from one-way to two-way service, cable operators
could more rapidly deploy data service and observe penetration patterns in order
to identify prime markets for the service. In addition, the ability to offer
different tiers of service and value-added features such as VPNs and enhanced
security for distinct business and consumer market segments would enable cable
operators to more fully exploit the cable
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modem opportunity. The Company believes that such a system solution would be
attractive to cable operators because it would allow cable operators to increase
revenues and profitability, while lowering deployment cost and risk and
accelerating time-to-market.
THE COM21 SOLUTION
Com21 designs, develops, markets and sells value-added, high-speed
communications solutions for the broadband access market. The Company's ComUNITY
Access system enables cable operators to provide high-speed, cost-effective
Internet access to corporate telecommuter, SOHO and residential users in the
U.S. and internationally, and enables them to address the distinct price,
performance, security and other needs of these different end-user groups.
Com21's products include headend equipment, subscriber cable modems, network
management software and noise containment technologies. The Company's cable
modem systems provide the following key benefits:
Increase Service Revenues. The Company's ComUNITY Access system enables
cable operators to increase revenues by offering up to 16 different cable
operator-defined transmission rates at varying price points to multiple markets.
In a typical flat-rate cable modem system, all subscribers are charged the same
price, regardless of individual bandwidth service and pricing requirements (see
Figure 1), which results in lost revenue opportunities for cable operators. In
addition, the ComUNITY Access system enables cable operators to provide
value-added services, such as multiple VPNs and enhanced security, targeted to
business users. To accommodate future value-added broadband applications, the
Company's underlying ATM-based technology can also enable integrated services
such as toll-quality voice and desktop video.
FIGURE 1.
LOGO
LOGO
Reduce Deployment Costs. The ComUNITY Access system was designed to lower
deployment costs by providing a flexible solution to address the needs of cable
operators and their subscribers at each step of cable modem system deployment.
The Company believes its radio frequency ("RF") technology tolerates a higher
level of background and ingress noise than do other commercially available RF
technologies, thereby avoiding the costs otherwise necessary to limit noise
before deploying two-way cable modem service. The Company is developing a Return
Path Multiplexer ("RPM"), which is expected to be commercially available in
mid-1998, that is designed to reduce the number of return path receivers
required in a cable operator's headend equipment. The RPM will enable cable
operators to purchase less headend equipment initially and then cost-effectively
scale the system over time as subscriber penetration grows.
Accelerate Time-to-Market. The ComUNITY Access system provides a
comprehensive solution that enables cable operators to bring broadband services
to market quickly. In the initial stage of deployment, the ComUNITY Access
system can be implemented as a one-way telephone return system. Upon
implementation of a two-way service, a cable operator can upgrade to a two-way
system with a simple software download to the end-user's existing ComPORT cable
modem. The
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Company is also developing the capability to enable ComPORT cable modems to
communicate to PCs through parallel port interfaces, which will reduce the time
and resources needed to connect modems at subscribers' locations.
Mitigate Deployment Risks. The ComUNITY Access system's comprehensive
solution mitigates deployment risks by enabling cable operators to rapidly
implement data-over-cable service using telephone return service and observe
service penetration patterns. Cable operators can then deploy the capital
necessary to upgrade the plant, and build a larger-scale two-way cable modem
system, only in those markets where they observe sufficient penetration to
warrant such investment.
Reduce Long-Term Cost of Ownership. The ComUNITY Access system reduces the
long-term cost of ownership for cable operators. Because a cable modem system's
operational and maintenance expenses typically exceed the costs of the capital
equipment over the expected life of the system, a system that requires less
plant maintenance will reduce the long-term cost of ownership for cable
operators. The Company's Network Management Provisioning System ("NMAPS") lowers
ongoing operating costs by enabling cable operators to remotely detect, diagnose
and manage network problems from a single workstation. In addition, ComPORT
cable modems can be remotely upgraded with software downloads. The ComUNITY
Access system can be deployed with lower operational overhead because the cable
operator can use the Company's Ingress Noise Blocker ("INB") as an intelligent
filter to prevent ingress noise from contaminating the upstream return path. The
INB opens only to allow data to be transmitted upstream, and is closed
otherwise, preventing aggregation of noise in the upstream return path. The INB
also enables a cable operator to more quickly identify ingress noise sources,
which reduces maintenance costs because a cable operator need not devote
substantial amounts of personnel and resources to the identification of the
source and site of intermittent ingress noise.
Offer Significant Benefits to End-Users. In addition to high-speed,
always-on and cost advantages, the ComUNITY Access system enables cable
operators to offer differentiated services with significant benefits to their
subscriber end users. In addition to value-added services such as VPNs and
enhanced security, each ComPORT cable modem can support up to eight PCs. The
ComUNITY Access system supports multiple protocols, including IP, IPX, AppleTalk
and NETBEUI. ComPORT modems have an expansion slot to accommodate Application
Interface Modules ("AIMs") which can support future features and service
offerings such as desktop video conferencing, cable telephony applications and
parallel port modem connectivity.
THE COM21 STRATEGY
Com21's business strategy includes the following key elements:
Enhance Value to Cable Operators. The Company's principal strategy is to
provide products that enhance the value of cable operators' cable modem
deployments over the life of the investment. Cable operators assess the
viability, and ultimately the success, of an investment in a cable modem system
by considering the cost of initial investment in cable modem equipment, service
reliability, overall operating and maintenance expenses and the service revenues
that can be generated. The Company's ComUNITY Access system is designed to be
deployed on a limited capital budget and can be upgraded and scaled as
subscriber penetration grows. The Company's system enables cable operators to
lower their ongoing cost of ownership through cost-effective noise management
and remote cable modem upgrades. Cable operators can use the Company's system to
increase revenues by offering multiple tiers of service at varying prices to
multiple market segments. As a result of the value provided by its products, the
Company believes it will continue to be able to successfully differentiate and
sell its products based upon tangible benefits delivered to the cable operator.
Leverage Technology Leadership. The Company's ATM cell-based architecture
is the foundation upon which the Company has built an end-to-end Ethernet
broadband communications system with networking advantages. Technological
developments in multi-service scheduling optimization, protocol simulation and
application specific integrated circuit ("ASIC") integration enable the Company
to
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offer a scalable system to deliver tiered service levels, VPNs and low-latency
voice and video applications. Moreover, the Company's internal development of a
network management system, high performance, cost-effective RF
transmitters/receivers and fast RF switching systems lowers the cost to cable
operators of deploying and operating the Company's equipment. The Company
focuses on the development of new value-added features for its products,
including its recently announced RPM, which will enable cable operators to
purchase less headend equipment initially and then scale their systems as
subscriber penetration grows. In addition, the Company is leveraging its RF and
noise management technology in its MCNS-compliant cable modem for the North
American consumer market and is working with Cisco Systems, Inc. ("Cisco") to
develop interoperable MCNS-compliant products.
Aggressively Penetrate Global Markets. The Company believes the market for
cable modem systems is global and has developed strategies to sell its products
in regions where cable is widely available, such as the U.S., Canada, Europe and
Japan, and in regions where cable is being aggressively deployed, such as China
and Latin America. In 1997, the Company shipped approximately 170 ComCONTROLLER
headends and more than 12,000 ComPORT modems for use in 61 locations worldwide.
In the North American market, the Company sells directly to cable operators and
has sold systems to major operators such as Charter Communications, Prime Cable
and TCI. Internationally, the Company sells primarily to systems integrators,
including Philips and Siemens, which in turn sell to cable operators.
Lower Product Costs. While the Company intends to continue to seek premium
prices for its products, it anticipates that the cable modem market will be
characterized by declining prices. As a result, the Company seeks to decrease
product costs, particularly with respect to its end-user modem products. The
Company recently improved its tuner design to decrease manufacturing costs,
integrated its modem design to one printed circuit board and increased its use
of standard components. The Company is working to achieve a higher level of ASIC
integration and improve the design of its products to increase manufacturing
efficiencies. In addition, because product design and manufacturing quality
affect product costs, the Company is working to further enhance its internal
engineering and manufacturing processes and expects to obtain ISO 9001
certification in 1998.
Integrate Toll-Quality Voice. The Company intends to integrate toll-quality
voice capability with the current data capability of the ComUNITY Access system.
The Company's existing products have been designed with the Quality of Service
("QoS") capability to support a toll-quality voice transmission across the
broadband cable plant. Recently, the Company entered into an agreement to
license certain digital telephony technology from e-Net, Inc. ("e-Net"). In the
future, the Company intends to introduce telephony-over-cable capability as an
integrated component of its existing ComUNITY Access system product line.
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PRODUCTS
The Company's product offerings are depicted in the following diagram.
The ComUNITY Access System
The ComUNITY Access system consists of three parts: (i) the ComCONTROLLER,
which is the channel switch located at the cable operator's headend; (ii) the
ComPORT, which is the cable modem located at the subscriber's site; and (iii)
NMAPS, which is the integrated network management software. Additionally, the
Company offers the INB, an intelligent filter used to block noise in the
upstream channel.
The ComCONTROLLER Headend Switch. The ComCONTROLLER controls the flow of
data communications between the ComPORT modems located at a subscriber's site
and an external network, such as the Internet or a corporate network, typically
through routers. The ComCONTROLLER is designed with multiple expansion slots
that can accommodate 10 Ethernet interfaces. The ComCONTROLLER transmits data
downstream at 30 Mbps (using 64 quadrature amplitude modulation ("64QAM")). The
expansion slots enable the addition of up to twelve 2.56 Mbps (using quadrature
phase shift key ("QPSK")) upstream channel modules, scaling the upstream path to
an aggregate throughput of 30 Mbps. The upstream channels can be added on an
incremental, hot-insertion basis, enabling a cable operator to respond rapidly
to system faults. A single ComCONTROLLER is designed to support up to 2,000
ComPORT modems.
ComPORT Cable Modem. The ComPORT cable modem is deployed within a
subscriber's home or office. In addition to its cable connection, the ComPORT is
designed with a 10BaseT Ethernet port for direct connection to the subscriber's
PC Ethernet card or an Ethernet hub for interconnecting up to eight PCs. Each
ComPORT can be used either on a one-way or two-way cable plant and can be
remotely configured for either plant by the Company's NMAPS software. The
ComPORT features an expansion port for the insertion of future modules that will
support applications such as secure IP communications and toll-quality voice.
Network Management and Provisioning System. NMAPS is a network management
software package that facilitates subscriber provisioning, fault isolation,
network configuration, field inventory, auto-discovery and performance for the
ComUNITY Access system. NMAPS enables the cable operator to remotely monitor and
manage the ComUNITY Access system through a graphical user
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interface and to remotely upgrade ComPORT cable modems. NMAPS is a Simple
Network Management Protocol ("SNMP") manager running on a UNIX workstation
connected to the ComCONTROLLER via a separate out-of-band 10BaseT Ethernet
channel. The Company believes that the ability of NMAPS to manage the network
elements of the ComUNITY Access system from a remote site will further reduce
cable operators' long-term cost of ownership by reducing the number of visits
cable operator technicians will need to make to headend and subscriber sites. A
standard PC Web browser can be used to monitor and manage cable modems via an
Internet server application on the NMAPS station. A single NMAPS station can
manage up to 50 ComCONTROLLERs and 100,000 ComPORTs.
The ComUNITY Access system incorporates the following features:
- Multiple Service Levels. The ATM-based architecture provides up to 16
levels of service that can be configured by the cable operator, each with
specified upstream and downstream data rates. This feature enables the
cable operator to tailor data-over-cable service and pricing to different
end-user demands, thereby increasing the ability to capture additional
subscriber revenues by matching supply with demand.
- Robust, High-Speed Architecture. The ComUNITY Access system transmits
downstream traffic at a rate of up to 30 Mbps in one 6 MHz channel. Each
1.8 MHz channel of the upstream spectrum can transmit traffic at a rate
of 2.56 Mbps, and the system enables the cable operator to aggregate up
to twelve upstream channels, permitting total upstream throughput of 30
Mbps.
- One-Way and Two-Way Cable. The ComUNITY Access system can be configured
to support both one-way and two-way cable plants. The ComPORT modem works
with the subscriber's personal computer and a dial-up Internet access
service operated either by the cable operator or an Internet service
provider ("ISP") to enable a one-way system. The ComPORT can be
reconfigured remotely from one-way mode to two-way mode through a
software download without replacing a subscriber's modem.
- Superior Noise Technology. The Company's has developed noise containment
technology which allows the system to tolerate higher levels of noise,
thereby enabling cable operators to install the system on noisy cable
plants that could not otherwise be used for two-way data transmission.
- Multiple Protocols. The ComUNITY Access system supports multiple
protocols include IP, IPX, AppleTalk and NETBEUI.
- Privacy from Other Subscribers. The ComPORT can be configured by the
cable operator to block all non-IP protocols, preventing subscribers on
the same cable network from accidentally gaining access to others' files.
- Data Security. Data Encryption Standard ("DES") encryption and public key
management enable secure upstream and downstream data communications
between the ComCONTROLLER and the ComPORT.
- Enables High-Value Business Networking. The Company's ComUNITY Access
system enables cable operators to establish private, secure sub-networks
within a ComCONTROLLER while providing dedicated bandwidth. These
sub-networks are known as virtual local area networks ("VLANs"). Using
NMAPS, the cable operator can configure secure VPNs for the business
connectivity markets by partitioning the transmission channels into
several VLANs, then assigning cable modems to each VLAN.
- Early Fault Detection. NMAPS offers high network visibility and control
via a suite of configurable alarms, diagnostic tools and performance
monitoring features.
The Ingress Noise Blocker. The INB is an external noise filter designed to
meet the needs of cable operators whose cable networks have excessive ingress
noise and who want to deploy two-way data
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service prior to solving costly overall system noise issues. The INB works with
both two-way HFC and coaxial-only cable plants and attaches to the cable tap
outside the subscriber's site. The INB, which is remotely controlled by the
ComPORT, opens to allow upstream transmission of traffic and closes at all other
times, which limits the ability of noise to enter the system. Because noise
passes through the INB only when data is being transmitted from a subscriber's
site, the INB allows NMAPS to rapidly detect and isolate sources of noise.
Although it is currently necessary for the subscriber to have a ComPORT modem to
control the INB, the Company plans to license the INB control circuitry to other
cable equipment vendors.
Products Under Development
MCNS-Compliant Cable Modem. The Company is leveraging its RF and noise
management technology to develop an MCNS-compliant ComPORT modem for the North
American consumer market. The Company is working with Cisco to ensure the
interoperability of this new modem with Cisco's previously announced
MCNS-compliant Universal Broadband Router. The MCNS-compliant ComPORT is
expected to be commercially available in the second half of 1998.
Return Path Multiplexer. The Company is currently developing the Return
Path Multiplexer ("RPM"), a high-speed, multiport analog switching device which
will allow up to eight upstream return paths to be connected to a single
ComCONTROLLER RF receiver without electrically combining the accumulated noise
from the return paths. The RPM is designed to solve the problem of accumulated
noise inherent in HFC cable installations configured with large numbers of
return paths from distributed fiber nodes. The RPM utilizes a high-speed RF
switching technology that enables it to pass one upstream return path at a time
to the ComCONTROLLER. This technology prevents the noise accumulation that would
otherwise occur if multiple upstream returns were combined at the ComCONTROLLER.
Since the RPM will allow eight upstream connections, the Company believes that
the installation of RPMs on a cable operator's network will reduce the number of
return path receivers required in the cable operator's headend equipment and
therefore reduce the capital costs for a large-scale HFC cable modem deployment.
The RPM is expected to be available in mid-1998.
Mini ComCONTROLLER. The Company is developing a smaller version of the
ComCONTROLLER which will have only three expansion slots for upstream receiver
and Ethernet modules. The Company believes that this smaller headend product
will address the requirements of smaller cable operators and specialized
applications (such as cable systems within a hotel) that cannot justify the
additional expense of the larger ComCONTROLLER. The Mini ComCONTROLLER is
expected to be available in mid-1998.
Parallel Port and Secure IP Modules. The Company is developing a parallel
port interface module and a secure IP module to be inserted in the ComPORT's AIM
expansion slot. The Company believes that the parallel port interface module
will reduce cable operators' long-term cost of ownership by eliminating the time
needed to install a 10BaseT Ethernet card in a subscriber's PC. The Company
believes that the secure IP module will increase cable operators' service
revenues by providing them with an advanced security feature to sell to their
subscribers. The secure IP module is expected to become available in mid-1998,
and the parallel port module is expected to become available by the end of 1998.
Toll-Quality Voice Module and Telephony Gateway. The Company is developing
an AIM module for the ComPORT to allow cable operators to provide toll quality
voice-over-cable through a standard RJ11 telephone interface. In addition, the
Company is developing a telephony gateway for the ComCONTROLLER. The Company
also recently entered into an agreement to license e-Net's digital telephony
technology. In the future, the Company intends to introduce telephony-over-cable
capability as an integrated component of its existing ComUNITY Access system
product line.
The market for cable modem systems and products is characterized by rapidly
changing technologies and short product life cycles. The Company's future
success will depend in part upon its ability to enhance its existing products
and to develop and introduce, on a timely basis, new products
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and features that meet changing customer requirements and emerging industry
standards. The Company's product development efforts are subject to a number of
risks and there can be no assurance that such efforts will result in the
introduction of any new products that achieve market acceptance. See "Risk
Factors -- Risks Associated with New Product Development."
TECHNOLOGY
The Company invests in technology development to enable scalable, reliable
broadband data communications that can accommodate a wide range of applications.
Key technologies include: (i) ATM architecture and ComUNITY Media Access Control
("MAC") and Physical ("PHY") layer protocols, all of which provide the
flexibility and scalability to allow cable operators to build multi-tiered
services and VPNs; (ii) application-specific integrated circuit ("ASIC") based
modem design that allows the Company to provide high-speed, cost-effective,
highly functional products; (iii) high performance RF modulators and
demodulators which allow the cable operator to use the Company's products in a
wider range of cable systems; and (iv) noise mitigation technology, which
addresses many of the cable plant upstream noise problems and reduces the cable
operator's ongoing maintenance and operational costs.
ATM Architecture and ComUNITY Protocols. The ComUNITY Access system has
been designed using a high-performance cell-switching broadband data transport
architecture that optimizes system performance for multiple simultaneous
applications with a variety of requirements for data rates and latency,
including Internet data, toll-quality voice and desktop video. In order to
transport and manage data flows for latency-sensitive applications such as
telephony, video conferencing or interactive games, the ComUNITY Access system
implements an ATM virtual circuit-based data transport protocol upon shared
broadband downstream and upstream channels.
The ComUNITY Protocols are specifically designed to efficiently manage the
ATM cell traffic on the broadband cable television network, taking into account
topological and physical constraints of the two-way cable transmission systems.
For example, the protocol must:(i) provide secure point-to-point communications
in physical media that are inherently insecure broadcast channels; (ii) provide
reliable data delivery in a noisy communications channel; (iii) automatically
calibrate for variations in phase delay and signal attenuation arising from the
condition of the physical cable plant; (iv) minimize simultaneous transmission
from multiple modems to prevent return amplifier saturation and distortion; (v)
efficiently adapt to the traffic load among a large subscriber base so that the
system can grow and still provide high service levels with low overhead costs;
and (vi) provide stable performance under increasing traffic loads and various
traffic types with different QoS requirements. The protocols also provide
flexibility to handle a telephone return capability for applications in a
one-way system. As a result of the work to develop robust low-level protocols,
the ComUNITY Access system can reliably perform in both coaxial systems as well
as modern HFC cable plants.
In addition, the ComUNITY Access system has been designed so that each
cable modem can enable multiple virtual circuits for separate applications,
allowing simultaneous, independent data flows with different performance
requirements. Specifically, a single ComUNITY-based cable modem can
simultaneously provide a high-speed, latency-insensitive 10 Mbps IP-based
Internet connection and a low-speed, short delay, latency-sensitive 64 Kbps link
for a toll-quality voice connection, with both data and voice applications
operating independently.
ASIC-Based Modems. The Company has internally developed a custom ASIC to
implement the major portions of the cable modem functionality, including
ComUNITY protocol control, DES encryption, ATM segmentation and reassembly
("SAR"), packet switching and filtering and multicast control. Because these
functions are integrated into the ASIC, the cable modem can operate at high
speeds without requiring an expensive external processor or ATM SAR components.
As a result, the material cost of the additional ATM and networking
functionality is insignificant, and the Company has been able to decrease the
size of the electronics design and reduce the implementation to a single-sided
printed circuit board.
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High Performance RF Modulator and Demodulator Design. The ComUNITY Access
system's downstream and upstream channels occupy a small portion of the HFC
spectrum and must coexist with existing signals occupied by entertainment
television channels in the 54-750 MHz band as well as other upstream services
such as pay-per-view or cable telephony in the 5-40 MHz band. The RF modulator
design must be accurate enough to convert multi-bit symbols into a multi-level
phase/amplitude signal without creating interference into adjacent channels and
robust enough to perform in noisy upstream environments. The RF demodulator
implementations must be sensitive enough to detect and synchronize a complex QAM
signal in cable systems that induce signal distortions and are susceptible to
spurious environmental noise. QAM encoding is a digital transmission technique
which combines multi-level phase and amplitude modulation to increase the
effective data transmission rate in a communications channel, trading off higher
noise immunity for higher information content. Additionally, these designs must
be cost-effective and self-tuning without the need for expensive, precision
components for manual parametric adjustments during the manufacturing process.
The Company has designed its own RF modem technology that is less sensitive
to operating temperature fluctuations, has higher sensitivity to low signal
levels, has improved tolerance to adjacent TV signals, adapts to channel phase
and noise impairments, and cleanly transmits signals with low spurious noise and
harmonic distortion. The Company expects to continue to enhance its proprietary
RF technology as new 256QAM and 16QAM components become available. This
technology has enabled the Company to sell its internally developed RF modulator
as an integrated component of its ComCONTROLLER product family, whereas most
other commercially available cable modem systems require cable operators to
purchase an external IF-to-RF converter from third-party cable equipment
suppliers.
Noise Mitigation Technology. Reliable system performance in the presence of
a significant level of noise in the upstream channel is a key issue for any
cable modem system. There are two basic ways to minimize the effect of noise on
upstream data transmission: (i) reduce or eliminate noise from the upstream
channel; or (ii) compensate for errors caused by high noise levels using
upstream protocols, modulation schemes or encoding techniques. The Company
utilizes a combination of these techniques.
The Company has developed technology specifically designed to reduce
upstream noise observed by the ComCONTROLLER headend receiver. The INB is a
modem-activated filter attached to the cable tap outside the subscriber's house.
Using the Company's signal-powered dynamic RF filter technology, the INB blocks
upstream noise and only allows return signals when the ComPORT is transmitting
upstream. An industry source has stated that most of the upstream ingress noise
on cable plants originates from sources which inject noise into the cabling
system from the cable tap to a subscriber's television set. A cable plant with
INB technology installed will have a lower level of ingress noise in the
upstream return path, resulting in reduced plant maintenance costs related to
identifying, minimizing and correcting ingress noise problems.
The Company is developing an RPM, which is a high-speed, multiport analog
switching device which allows up to eight upstream return paths to be connected
to a single ComCONTROLLER RF receiver without electrically combining the
accumulated noise from the return paths. The Company has developed high-speed RF
switching technology in the RPM which will allow a control signal from the
ComCONTROLLER to electrically switch from one return path to another to enable a
specified modem using a specific return path to transmit to the ComCONTROLLER.
The Company has also developed control mechanisms and management protocols to
efficiently manage traffic switching through the RPM. To illustrate an RPM
application, an HFC system serving 100,000 homes would require 25 separate
return paths (assuming 500 home fiber nodes and eight return nodes combined).
Without the Company's RPM, the cable operator would have to purchase several
headend units to enable data service for the entire HFC network. Instead, the
cable operator will be able to purchase a single ComCONTROLLER and several RPMs
at a significantly lower cost. The Company's product
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development efforts are subject to a number of risks, and there can be no
assurance that such efforts will result in the successful introduction of the
RPM or any other new products, or that such products will achieve market
acceptance. See "Risk Factors -- Risks Associated with New Product Development."
The ComUNITY Access system incorporates an encoding technique called
Forward Error Correction ("FEC") on upstream, as well as downstream, channels.
FEC is a technique that inserts redundant information into the data stream so
that a certain number of data errors can be detected and corrected. This
technique, coupled with the Company's high performance RF modem design, allows
the Company's cable modems to operate at high data rates with nominal Bit Error
Rate ("BER") of 10(-9) in a cable plant with a Carrier-to-Noise-Ratio ("CNR") of
16dB. This BER performance is substantially better than the MCNS specification
of 10(-9) BER at 25dB CNR. As a result, the Company's products can provide more
reliable data service in noisier cable plants than a modem built to that
specification. More specifically, the 9dB difference in performance lowers noise
sensitivity by a factor of eight.
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<PAGE> 43
CUSTOMERS AND MARKETS
Customers. The Company began commercial shipments of its cable modem
products in April 1997 and in 1997 shipped approximately 170 headend systems
with more than 12,000 cable modems for use in 61 locations worldwide. Fourteen
of these customers have commercially deployed the Company's products while the
remainder are running trials or performing evaluation tests with the products.
In the U.S., the Company sells directly to cable operators. Internationally, the
Company sells primarily to systems integrators, including Philips and Siemens,
who in turn sell to cable operators.
The following table depicts commercial deployments of the ComUNITY Access
system as of March 31, 1998. The Company considers a sale as a commercial
deployment if the cable operator to whom the sale was made has begun offering
data-over-cable services to paying subscribers. "Homes passed" is defined as the
number of homes currently passed by a cable system, as represented to the
Company by each respective cable operator in the chart below, regardless of
whether each such home is currently receiving data-over-cable.
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------
COM21 COMMERCIAL DEPLOYMENTS
- -----------------------------------------------------------------------------------
CUSTOMER LOCATION HOMES PASSED
- -----------------------------------------------------------------------------------
Baerum Kabel-TV Oslo, Norway 36,000
- -----------------------------------------------------------------------------------
Cablecom Holding AG Zurich, Switzerland 200,000
- -----------------------------------------------------------------------------------
CableVision TCI-International Buenos Aires, Argentina 1,200,000
- -----------------------------------------------------------------------------------
Halifax Cable Halifax, Nova Scotia 205,000
- -----------------------------------------------------------------------------------
NV Eneco Rotterdam, The Netherlands 600,000
- -----------------------------------------------------------------------------------
Palo Alto Cable Co-op Palo Alto, California 56,000
- -----------------------------------------------------------------------------------
Spie Trindel Colmar, France 25,000
- -----------------------------------------------------------------------------------
Telindus NV/SA Nyon, Switzerland 80,000
- -----------------------------------------------------------------------------------
Videopole Meudon, France 23,000
- -----------------------------------------------------------------------------------
Cablecom Holding AG Geneva, Switzerland 450,000
- -----------------------------------------------------------------------------------
Charter Communications Pasadena, California 110,000
- -----------------------------------------------------------------------------------
Prime Cable Las Vegas, Nevada 480,000
- -----------------------------------------------------------------------------------
Super Canal Holding Mendoza, Argentina 50,000
- -----------------------------------------------------------------------------------
Telekabel Leeuwarden, The Netherlands 120,000
- -----------------------------------------------------------------------------------
Telia Stofa A/S Horsens, Denmark 200,000
- -----------------------------------------------------------------------------------
Telindus NV/SA Lausanne, Switzerland 200,000
- -----------------------------------------------------------------------------------
Charter Communications Newtown, Connecticut 63,400
- -----------------------------------------------------------------------------------
Prime Cable Chicago, Illinois 460,000
- -----------------------------------------------------------------------------------
TOTAL 4,558,400
=========
- -----------------------------------------------------------------------------------
</TABLE>
The Company did not commence product shipments until April 1997. The
Company's success will depend on the timely adoption of its products by cable
operators and end users. The market for the Company's products has only recently
begun to develop, is rapidly evolving and is characterized by an increasing
number of market entrants that compete or intend to compete with the Company.
The Company shipped its ComUNITY Access System for commercial deployment to nine
cable operator customers in the second quarter of 1997, seven cable operator
customers in the third quarter of 1997 and two cable operator customers in the
first quarter of 1998. There can be no assurance that the market for cable
modems will develop as the Company anticipates or that the Company will be able
to
42
<PAGE> 44
compete with new market entrants should the market develop. See "Risk
Factors -- Limited Operating History; History of Losses; No Assurance of
Profitability," "-- Potential Fluctuations in Operating Results," "-- Early
Stage of the Market for Cable Modems; Unproven Acceptance of the Company's
Products" and "Competition."
In 1997, revenues attributable to Philips, 3Com and Siemens accounted for
21%, 16% and 12% of total revenues, respectively. In the three months ended
March 31, 1998, revenues attributable to TCI, Philips, Siemens, Prime Cable and
Cablecom accounted for 31%, 13%, 13%, 11% and 10% of total revenues,
respectively. See "Risk Factors -- Customer Concentration" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In 1997 and the three months ended March 31, 1998, revenues attributable to
international customers constituted 64% and 50% of total revenues, respectively.
The Company believes that its ATM-based system has been adopted more rapidly in
Europe and other international markets because of the greater acceptance of the
benefits of ATM-based technology as well as the more recently upgraded and
installed cable plants. See "Risk Factors -- Risks Associated with International
Markets" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The following customer examples illustrate how certain of the Company's
customers have deployed its products:
Cablevision/TCI-International, Argentina ("Cablevision") is a cable
operator with approximately 1,200,000 homes passed in Buenos Aires. Cablevision
offers a single Internet service priced at $125 per month for two-way service.
Because Cablevision's cable system is not yet completely two-way enabled, it is
also planning to offer one-way (telephone return) service using Com21's
products. Cablevision is marketing a private corporate networking service that
uses Com21's VLAN capability and selling dedicated line connections for business
applications using Com21's QoS capability to provision constant-bit-rate service
per modem. Cablevision uses various features of the ComUNITY Access system to
provide different service products for different subscribers' needs.
Charter, one of the largest cable television operators in the U.S. with
approximately 1.1 million subscribers, has deployed service in the Pasadena,
California area, which passes approximately 300,000 homes. Charter offers
Charter Pipeline, its general Internet service, at prices ranging from $50 per
month to $500 per month with five service tiers, with the following service
levels (upstream/ downstream data rates): (i) "diamond service" (2 Mbps/1 Mbps);
(ii) "platinum service" (1 Mbps/512 Kbps); (iii) "gold service" (768 Kbps/384
Kbps); (iv) "silver service" (512 Kbps/128 Kbps); and (v) "bronze service" (256
Kbps/56 Kbps). In addition to its general Internet access service, Charter has
established a campus local area network ("LAN") extension on its cable network
using the ComUNITY Access system's VLAN capability and provides off-campus
connections to the students and staff of the California Institute of Technology.
Charter also plans to use the ComUNITY Access system's telephone return feature
to provide access for subscribers who are not yet two-way enabled.
Telia Stofa A/S is the second largest cable operator in Denmark with more
than 200,000 homes passed. Telia Stofa is using the ComUNITY Access system to
deliver high-speed data-over-cable service, along with other integrated
services, to residential and business customers, allocating varying levels of
bandwidth to address different subscriber requirements. Telia Stofa gives
residential and business users the option of choosing from three different tiers
of service: StofaNet Private, StofaNet Study and StofaNet Business. This allows
Telia Stofa to charge subscribers according to the bandwidth used, versus a flat
fee, and results in increased revenues. Telia Stofa has indicated that one of
the primary reasons that Telia Stofa selected Com21 was because of the Company's
ability to offer QoS, VLANs and other future integrated services.
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<PAGE> 45
Markets. Com21's products enable cable operators to serve three primary
end-user markets each of which has widely varying speed, service and pricing
requirements. The table below divides these markets by user segment and outlines
their typical access requirements and attributes:
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
TYPICAL ACCESS
SOLUTION
USER SEGMENT ACCESS REQUIREMENT POTENTIAL USED TODAY
APPLICATIONS
- ----------------------------------------------------------------------------------------------
Corporate - Remote access to - Remote LAN access - Analog modem
Telecommuter and corporate LANs and - VPN provisioning (28.8 - 56 Kbps)
Remote Office Intranets - File transfer - ISDN (128 Kbps)
Users - High speed Internet - "Always on" - T-1 (1.54 Mbps)
access Internet access
- High security
- Telephony
enhancements, e.g.,
PBX extension
- Desktop video
conferencing
- ----------------------------------------------------------------------------------------------
SOHO Users - Remote access to - "Always on" - Analog modem
LANs Internet access (28.8 - 56 Kbps)
- High speed Internet - Connectivity to - ISDN (128 Kbps)
access several businesses - Fractional T-1 (384
- Alternate telephone Kbps)
service
- Desktop video
conferencing
- ----------------------------------------------------------------------------------------------
Residential - Low to high speed - Internet access - Analog modem
Consumer Internet Internet access - Web-based (28.8 - 56 Kbps)
Users (Occasional multimedia content, - ISDN (128 Kbps)
and Frequent) e.g. on-line
services
- E-mail, file
transfer
- ----------------------------------------------------------------------------------------------
</TABLE>
Corporate Telecommuter and Remote Office Users. The needs of corporate
telecommuter and remote office business users include high availability,
high-speed access to corporate intranets and corporate LANs. These users also
must interconnect the LANs among their various offices. Such offices may be
co-located, as in the case of a large campus, or remotely located, as in the
case of a sales office or a telecommuter's home. A parallel application for this
business market is the interconnection of remote workers to a central telephone
PBX, distributing voice traffic to users throughout a campus or to a remote
office. Security and reliability are of utmost importance for corporate users.
Other applications which business users may require include desktop video
conferencing and rapid two-way transfer of large data files. Corporate
telecommuters and remote office users are generally willing to pay a premium for
highly reliable, high-speed service with advanced features.
SOHO Users. SOHO businesses increasingly find the Internet an efficient and
cost-effective means to communicate and transact with their customers and
suppliers. The Company believes these businesses require medium-to-high speed
Internet access that is reliable and always available. SOHO users may have a LAN
to connect to cable modem services and may require routing in order to connect
multiple terminals. These businesses may also require desktop video conferencing
capability and connectivity with other businesses. Because these requirements
may be critical to running their business, certain SOHO users are willing to pay
more for higher-quality, secure, reliable service than are residential consumer
Internet users.
Residential Consumer Internet Users. Residential consumer Internet users
generally only require a connection to their ISP, without the same level of
security and reliability required by business users. Frequent users desire
medium-to-high speed access to the Internet for Web browsing and downloading of
multimedia applications and files. Occasional users require low-to-medium speed
access to the Internet on a limited basis for Web browsing, e-mail and on-line
services. Occasional users generally prefer low-cost service, whereas more
frequent users are generally willing to pay a slight premium for higher speed.
44
<PAGE> 46
MANUFACTURING
Com21 tests and assembles its ComCONTROLLER headend equipment in the
Company's facility in Milpitas, California. The Company outsources ComCONTROLLER
printed circuit board assemblies on a turnkey basis to CMC, and performs final
integration and burn-in on-site. The Company configures the headend equipment
and the network management and provisioning software prior to customer shipment.
Com21 outsources turnkey manufacturing of the ComPORT cable modem to
Celestica, a contract manufacturer located in Toronto, Canada. The Company
believes that employing a turnkey manufacturer will enable it to meet
anticipated manufacturing needs and reduce the cost of product procurement.
Together with Celestica, Com21 has developed and implemented a series of product
test methodologies, quality standards and process control parameters.
The Company's engineering team designs ASICs and performs simulation
testing. When the fundamental design is stable, the Company's contract foundry
fabricates the ASIC for prototype testing and upon completion of these tests the
ASIC is manufactured in volume by Atmel. The Company believes its current
manufacturing capabilities can accommodate its requirements through the end of
1999. Warranty and repair support is performed at the Company's Milpitas
facility.
The Company maintains only a limited in-house manufacturing capability for
final assembly, testing and integration of headend products. The Company's
future success will depend, in significant part, on its ability to manufacture,
or have others manufacture, its products cost-effectively and in volumes
sufficient to meet customer demand. There are a number of risks associated with
the Company's dependence upon third party manufacturers, including but not
limited to, reduced control over delivery schedules, quality assurance,
manufacturing yields and costs, the potential lack of adequate capacity during
periods of excess demand, limited warranties on products supplied to the
Company, increases in prices and the potential misappropriation of the Company's
intellectual property. A manufacturing disruption could impact the production of
the Company's products for a substantial period of time, which could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company has no long-term contracts or arrangements with
any of its vendors that guarantee the availability of product, the continuation
of particular payment terms or the extension of credit limits. There can be no
assurance that the Company will not experience supply problems in the future
from any of its manufacturers. Any such difficulties could have a material
adverse effect on the Company's business, operating results and financial
condition.
In addition, Celestica is a foreign corporation, and the Company may
increase its use of foreign manufacturers in the future. Any foreign or domestic
regulations regarding foreign exports and imports, trade barriers and tariffs
currently in place or imposed in the future could materially and adversely
affect the Company's ability to obtain modems. Because lead times for materials
needed to produce modems and headend equipment can be between eight and 26
weeks, the Company may not be able to meet the demand for its products, which
could adversely affect the Company's ability to support cable operators'
expansion of cable modem service to cable operators' customers. The Company has
had only limited experience manufacturing and arranging for the manufacture of
its products, and there can be no assurance that the Company or any manufacturer
of the Company's products will be successful in increasing its manufacturing
volume. The Company may need to procure additional manufacturing facilities and
equipment, adopt new inventory controls and procedures, substantially increase
its personnel and revise its quality assurance and testing practices, and there
can be no assurance that any of these efforts will be successful. See "Risk
Factors -- Limited Manufacturing Experience; Dependence on Third-Party
Manufacturing" and "-- Risks Associated with International Markets."
MARKETING AND SALES
Marketing. Domestically, the Company targets its marketing efforts
primarily at cable operators. The domestic cable industry is comprised of a
limited number of cable operators, and purchase decisions by each cable operator
are typically influenced by the cable operator's technical experts. Direct
marketing activities focus on reaching these technical experts and creating
product awareness and credibility for
45
<PAGE> 47
Com21's systems within the cable operator community. Internationally, the
Company focuses its marketing efforts on supporting its systems integration
partners' marketing programs.
A key factor to building global brand awareness for Com21 products is
promoting the success of the Company's commercial cable modem system
deployments. Com21 also educates cable operators regarding the benefits of
providing tiered services to a diverse subscriber base, ranging from residential
consumers to business users. Com21 is also building its brand name through
continued publicity and referral efforts in both media and industry-centered
activities. Com21 markets its systems through several promotional programs,
including direct mail campaigns to the larger cable operators, editorial
presence in various trade magazines, public speaking opportunities, national
cable trade show participation, Web site-based communication and promotion,
media sponsorships and participation in standards activities.
Sales. The Company has a sales force of nine people in three domestic
locations and The Netherlands. Com21 sells its products in North America
primarily through direct sales efforts to cable operators. Internationally, the
Company sells its products primarily to systems integrators, who sell to cable
operators. The Company's two largest systems integrators are Philips and
Siemens, both of whom have a strong presence in numerous markets. The Company's
systems integrators have established customer bases and relationships with cable
operators. These relationships allow the Company to market and create brand
awareness within each region by selling locally into their respective markets,
and the local presence of the systems integrators bridges cultural and
communication gaps. As of March 31, 1998, the Company had agreements with
systems integrators in Europe, Asia, Latin America and the Pacific Rim.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on increasing
the scalability and performance of its current products, reducing the cable
operator's cost of ownership, enhancing value-added services for subscribers,
reducing costs and supporting emerging cable modem standards. In addition to
enhancements of the current ComUNITY Access system products, the Company has
also focused research and development efforts on new products, including the
MCNS-compliant cable modem, the RPM, the mini ComCONTROLLER, the parallel port
and secure IP AIM modules and the toll-quality voice module and telephony
gateway. See "Products -- Products Under Development." Other developments
underway include a 100BaseT interface with support for spanning tree and
standards-based Institute of Electrical and Electronics Engineering, Inc.
("IEEE") 802.3 VLANs and a 155 Mbps OC-3 ATM interface to provide an integrated
connection to the cable operator's fiber SONET distribution network.
The Company's research and development expenditures were $4.3 million for
the three months ended March 31, 1998, $13.5 million in 1997 and $12.4 million
in 1996. Research and development expenses primarily consist of salaries and
related costs of employees engaged in ongoing research, design and development
of the Company's products and technology.
As of March 31, 1998, Com21 had a team of 73 engineers with expertise in RF
design and electronics, encryption, modulation and demodulation, digital
electronics design, networking, embedded software, ASIC design, and network
management. The engineering team includes three engineers with Ph.D.s and 37
with advanced degrees. The Company is seeking to hire additional skilled
engineers for research and development. The Company's business, operating
results and financial condition could be adversely affected if it encounters
delays in hiring additional engineers. See "Risk Factors -- Dependence on Key
Personnel and Hiring of Additional Personnel."
The Company's future performance depends on a number of factors, including
its ability to identify emerging technological trends in its target markets,
develop and maintain competitive products, enhance its products by adding
innovative features that differentiate its products from those of competitors,
bring products to market on a timely basis at competitive prices, properly
identify target markets and respond effectively to new technological changes or
new product announcements by others. No assurance can be given that the
Company's design and introduction schedules for any additions and enhancements
to its existing and future products will be met, that these products will
achieve market acceptance, or that these
46
<PAGE> 48
products will be able to be sold at average selling prices ("ASPs") that are
favorable to the Company. In evaluating new product decisions, the Company must
anticipate well in advance the future demand for product features and
performance characteristics, as well as available supporting technologies,
manufacturing capacity, industry standards and competitive product offerings.
The Company must also continue to make significant investments in research and
development in order to continually enhance the performance and functionality of
its products to keep pace with competitive products and customer demands for
improved performance, features and functionality. The technical innovations
required for the Company to remain competitive are inherently complex and
require long development cycles. Such innovations must be completed before
developments in networking technologies or standards render them obsolete and
must be sufficiently compelling to induce network equipment vendors to favor
them over alternative technologies. Moreover, the Company must generally incur
substantial research and development costs before the technical feasibility and
commercial viability of a product line can be ascertained. There can be no
assurance that revenues from future products or product enhancements will be
sufficient to recover the development costs associated with such products or
enhancements or that the Company will be able to secure the financial resources
necessary to fund future development. The failure to successfully develop new
products on a timely basis could have a material adverse effect on the Company's
business, operating results and financial condition. See "Risk Factors -- Risks
Associated with New Product Development."
CUSTOMER SERVICE AND TECHNICAL SUPPORT
The Company believes that successful long-term relations with its customers
require a service organization committed to customer satisfaction. As of March
31, 1998, the Company had eleven technical support employees at its
headquarters. The Company requires all new customers to attend a five day
training course prior to receiving and installing a system. Customer personnel
are trained in the installation, maintenance and operation of the ComUNITY
Access system.
In North America, the Company provides direct support by telephone and at
the customers' locations. The Company supplies support 24 hours a day, seven
days a week. Internationally, systems integrators provide first level support,
and the Company provides second level support. The Company maintains a customer
call tracking system that captures and monitors service activities. The Company
is able to identify problems with a customer's ComUNITY Access system via a
dialup analog modem connection or a Web-based management interface to assist
with diagnostics.
COMPETITION
The markets for the Company's products are intensely competitive, rapidly
evolving and subject to rapid technological change. The principal competitive
factors in this market include, or are likely to include, product performance
and features, reliability, technical support and service, relationships with
cable system operators and systems integrators, compliance with industry
standards, compatibility with the products of other suppliers, sales and
distribution interoperability, strength of brand name, price, long-term cost of
ownership to cable operators and general industry and economic conditions. Many
of the Company's current and potential competitors have longer operating
histories, greater name recognition and significantly greater financial,
technical, marketing and distribution resources than the Company. Such
competitors may undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and devote substantially more resources to
developing new products than the Company. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not
materially adversely affect the Company's business, operating results and
financial condition. In response to changes in the competitive environment, the
Company may make certain pricing, service, marketing or other strategic
decisions that could have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
Company's competitors will not develop enhancements to, or future generations
of, products that will offer prices or performance superior to that of the
Company's products. The Company believes that the broad adoption of MCNS will
cause increased competition in the North American market, which is likely to
negatively affect the Company's gross margin. There can be no assurance that
competitors will not more quickly develop MCNS-compliant products than the
Company. Current customers of the Company that move to the MCNS platform could
choose alternative cable modem
47
<PAGE> 49
suppliers or choose to purchase MCNS-compliant cable modems from multiple
suppliers. Such competition could materially adversely affect the Company's
business, operating results and financial condition.
The Company's current and potential competitors include 3Com, Cisco, the
LANcity Division of Bay Networks, Inc., Hybrid, General Instrument Corporation,
Motorola, Inc., Terayon Communication Systems and Zenith Electronics
Corporation. Some of these competitors have existing relationships with many of
the Company's prospective customers. There can be no assurance that the Company
will establish relationships with cable operators who have existing
relationships with those competitors, and failure to establish such
relationships could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, the Company anticipates
that some large consumer electronics companies, such as Matsushita, Sony Corp.,
Thomson and Toshiba America, Inc., will likely introduce competitive cable modem
products in the future. As the MCNS specification is adopted for the North
American market, the distribution of cable modems may move into the retail
channel. If this occurs, the large consumer electronics companies could gain a
competitive advantage, due to their well established retail distribution
capabilities. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive pressures
faced by the Company will not have a material adverse effect on the Company's
business, operating results and financial condition. See "Risk
Factors -- Competition".
In addition to competitive cable modem offerings, the Company also expects
to face intense competition from wireline telco-related and wireless
technologies that provide high bandwidth access in the local loop. Competing
technologies include telco-related xDSL implementations, such as ADSL and high
bit rate digital subscriber line ("HDSL"), wireless offerings such as LMDS, MMDS
and DBS. Because of the ubiquity of the telephone infrastructure, competition
from telco-related wireline solutions is expected to be intense. There can be no
assurance that cable modem technology will compete effectively against wireline
and wireless technologies in the market for high bandwidth access in the local
loop.
INTELLECTUAL PROPERTY; PATENT LITIGATION
The Company relies on a combination of patent, copyright and trademark
laws, and on trade secrets, confidentiality provisions and other contractual
provisions to protect its proprietary rights. These measures afford only limited
protection. The Company currently has five issued U.S. patents and several
pending patent applications. There can be no assurance that the Company's means
of protecting its proprietary rights in the U.S. or abroad will be adequate or
that competitors will not independently develop similar technologies. The
Company's future success will depend in part on its ability to protect its
proprietary rights to the technologies used in its principal products. Despite
the Company's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of the Company's products or to obtain and use trade
secrets or other information that the Company regards as proprietary. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights as fully as do the laws of the U.S. There can be no assurance
that any issued patent will preserve the Company's proprietary position, or that
competitors or others will not develop technologies similar to or superior to
the Company's technology. Failure of the Company to enforce and protect its
intellectual property rights could have a material adverse effect on the
Company's business, operating results and financial condition.
From time to time, third parties, including competitors of the Company,
have asserted patent, copyright and other intellectual property rights to
technologies that are important to the Company. The Company expects that it will
increasingly be subject to infringement claims as the number of products and
competitors in the cable modem market grows and the functionality of products
overlaps. In this regard, in 1997 the Company received a written notice from
Hybrid in which Hybrid claimed to have patent rights in certain cable modem
technology and requested that the Company review its own products in light of
Hybrid's alleged patent rights to U.S. Patent No. 5,586,121 (the "121 patent")
issued on December 17, 1996 and entitled "Asymmetric Hybrid Access System and
Method" and U.S. Patent No. 5,347,304 (the "304 patent") issued on September 13,
1994 and entitled "Remote Link Adapter for Use in TV Broadcast Data Transmission
Systems" (collectively, the "Hybrid patents"). The Company informed Hybrid that
it believes that the Company's products do not infringe
48
<PAGE> 50
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 has been granted. 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. The Company has received opinions of its patent counsel that the
claims of the Hybrid patents, including the claims currently set forth in
Hybrid's 304 reissue patent application, are either invalid or not infringed by
the Company's products. However, there can be no assurance that some or all of
the Company's products will not ultimately be determined to infringe the Hybrid
patents, including the 304 patent as reissued, and the Company anticipates that
Hybrid will continue to pursue litigation with respect to these claims. The
results of any litigation matter are inherently uncertain. In the event of an
adverse result in the Hybrid litigation, or in any other litigation with third
parties that could arise in the future with respect to intellectual property
rights relevant to the Company's products, the Company could be required to pay
substantial damages, including treble damages if the Company is held to have
willfully infringed, to cease the manufacture, use and sale of infringing
products, to expend significant resources to develop non-infringing technology,
or to obtain licenses to the infringing technology. There can be no assurance
that licenses will be available from Hybrid, or any other third party that
asserts intellectual property claims against the Company, on commercially
reasonable terms, or at all. In addition, litigation frequently involves
substantial expenditures and can require significant management attention, even
if the Company ultimately prevails. Accordingly, there can be no assurance that
the Hybrid matter will not have a material adverse effect on the Company's
business, operating results and financial condition.
Because of the early stage of this litigation, and because Hybrid has
sought unspecified damages, neither the ultimate outcome of this litigation nor
any costs and payments resulting from the litigation or any settlement can
presently be determined. Accordingly, no provision for any loss which may result
from the Hybrid litigation has been recorded in the accompanying financial
statements. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business -- Intellectual Property; Patent Litigation"
and Note 11 to Notes to Financial Statements.
EMPLOYEES
As of March 31, 1998, the Company had a total of 136 full-time employees
and eleven full-time contractors. Of the total number of employees, 73 were in
research and development, 25 in marketing and technical support, 18 in
operations, nine in sales and eleven in administration. The Company's employees
are not represented by any collective bargaining agreement with respect to their
employment by the Company, and the Company has never experienced an organized
work stoppage.
The Company's future success is heavily dependent upon its ability to hire
and retain qualified technical, marketing and management personnel. The
competition for such personnel is intense, particularly for engineering
personnel with related networking and integrated circuit design expertise and
for technical support personnel with networking engineering expertise. See "Risk
Factors -- Dependence on Key Personnel and Hiring of Additional Personnel."
FACILITIES
The Company leases approximately 44,600 square feet of administrative,
research and development, and manufacturing facilities in Milpitas, California.
The Company believes that its current facilities are sufficient to handle the
Company's operations for at least the next nine months. The Company believes
that future growth can be accommodated by obtaining the necessary additional
space. The Company also leases two sales offices, in Denver, Colorado and
Atlanta, Georgia.
49
<PAGE> 51
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of March 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- ---- --------
<S> <C> <C>
Peter D. Fenner................... 62 President, Chief Executive Officer and Director
Paul Baran........................ 71 Chairman of the Board of Directors
David L. Robertson................ 56 Chief Financial Officer, Vice President, Finance and
Secretary
William J. Gallagher.............. 54 Vice President, Sales
Buck J. Gee....................... 48 Vice President, Marketing
Michael F. Gordon................. 48 Vice President, Field Services and Customer Support
Kenneth C. Gorman................. 53 Vice President, Engineering
Mark Laubach...................... 42 Chief Technical Officer and Vice President, Technology
Timothy I. Miller................. 43 Vice President, Manufacturing
C. Richard Kramlich............... 62 Director
Scott J. Loftesness............... 50 Director
Robert C. Hawk.................... 58 Director
William R. Hearst III............. 48 Director
Robert A. Hoff.................... 45 Director
Robert W. Wilmot.................. 53 Director
</TABLE>
- ---------------
PETER D. FENNER. Mr. Fenner has been President, Chief Executive Officer and
a Director of the Company since February 1996. From January 1989 through April
1992, he served as President of the Transmission Systems Business Unit of AT&T
Network Systems (Lucent) and Corporate Officer at AT&T. From April 1992 to
February 1996, Mr. Fenner was an independent consultant. From February 1986
through December 1988, Mr. Fenner was Vice President, Product Planning for
AT&T's Network Systems Division. Mr. Fenner is Director of CorNet Information
Ltd. Mr. Fenner received an S.M. from the Sloan School of Management at the
Massachusetts Institute of Technology, where he was a Sloan Fellow, and a B.S.
in Industrial Engineering from Lehigh University.
PAUL BARAN. Mr. Baran has been the Chairman of the Board of Directors since
the Company's inception in June 1992. He is presently retired and is also a
Director of ALOHA Networks, Inc. Mr. Baran was chosen by Communications Week and
Data Communications as one of the top 25 visionaries in the data communications
industry and was recipient of the Electronic Frontier Foundation Pioneer Award
(1993), the Marconi International Fellowship Award (1991), the Institute of
Electronics and Electrical Engineering, Inc. ("IEEE") Alexander Graham Bell
Medal (1990), the ACM SIG/Communications Award (1989) and the IEEE
Communications Society Edwin Armstrong Award (1987). He co-founded Equatorial
Communications, Packet Technologies, Telebit Corporation and Metricom, Inc. Mr.
Baran is a Fellow of the IEEE and a Fellow of the AAAS. Mr. Baran received an
M.S. in both Electrical Engineering and Computers from the University of
California, Los Angeles, and a B.S. in Electrical Engineering from Drexel
University.
DAVID L. ROBERTSON. Mr. Robertson has been Chief Financial Officer and Vice
President, Finance of the Company since April 1995. From March 1993 through
April 1995, Mr. Robertson was the Vice President of Finance and Chief Financial
Officer at Endosonics Corporation, a medical device company. From December 1992
to March 1993, Mr. Robertson was an independent consultant. From November 1990
through December 1992, Mr. Robertson was the Vice President and Chief Financial
Officer at Circadian, Inc., a medical device company. He also participated in
the founding of StrataCom, Inc. and served as a Director of StrataCom for two
years during its early stages.
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<PAGE> 52
Mr. Robertson is a Certified Public Accountant, and received an M.B.A. from the
University of California, Berkeley and a B.A. in economics from the University
of Washington.
WILLIAM J. GALLAGHER. Mr. Gallagher has been Vice President of Sales since
August 1995. From October 1994 to July 1995 he was Vice President of Marketing
at Pacific Gas & Electric Company ("PG&E"), a utility company. From October 1993
to September 1994, Mr. Gallagher was with MCI Telecommunications Corp. as Vice
President, Carrier Services. From August 1991 to September 1994, Mr. Gallagher
was a Vice President and Consultant at San Francisco Consulting Group. He
received a B.A. from the University of New Mexico.
BUCK J. GEE. Mr. Gee has been Vice President of Marketing since November
1994. From September 1993 through October 1994, Mr. Gee was the Manager of the
FDDI Adapters Group at Cisco. From December 1990 through September 1993 he was
Director of Marketing and Director of Business Development for Crescendo
Communications, Inc., a computer networking company. Mr. Gee has also held
engineering and marketing positions at Hewlett-Packard Company, 3Com and
National Semiconductor Corp. He received an M.B.A. from Harvard Business School
and both a B.S. and a M.S. in Electrical Engineering from Stanford University.
MICHAEL F. GORDON. Mr. Gordon has been Vice President of Field Services and
Customer Support since July 1997. From December 1995 through June 1997, he was
an independent technical and management consultant. From February 1992 through
December 1997, Mr. Gordon was the President and Chief Operating Officer of
Telecoupon Network, Inc. a coupon delivery kiosk company. Mr. Gordon received a
B.S. in Computer Science from the University of Michigan.
KENNETH C. GORMAN. Mr. Gorman has been Vice President of Engineering since
July 1995. From April 1992 through June 1995, he was employed at Resound, Inc.,
a consumer health company where he served in various capacities including Vice
President, Engineering. From April 1989 to April 1992 Mr. Gorman was employed at
Sun Microsystems, Inc. ("Sun"). Mr. Gorman received an S.M.E. in Electrical
Engineering from the Massachusetts Institute of Technology and a B.S. in
Electrical Engineering from the University of Kansas.
MARK LAUBACH. Mr. Laubach has been Vice President of Technology and Chief
Technical Officer of the Company since June 1996. He is a co-founder of the
Company and has also been Chief Architect since June 1994. From November 1979 to
June 1994, Mr. Laubach was an engineer at Hewlett-Packard Laboratories, where he
was directly responsible for impacting the international IP over ATM networking
standards. He is a member of the Internet Engineering Task Force ("IETF") and
past chair of the IP over ATM Working Group. Mr. Laubach participates in the ATM
Forum's Residential Broadband working group and is the past liaison to the IEEE
802.14 working group. He participates in the IEEE 802.14 working group and the
SCTE High-Speed Digital Communications standards working group. Mr. Laubach
received both a M.S.C.S. in Computer Engineering and a B.S. in Electrical
Engineering from the University of Delaware.
TIMOTHY I. MILLER. Mr. Miller has been Vice President of Manufacturing
since November 1996 and has been employed by the Company since October 1994.
From November 1990 to September 1994, he was Director of Manufacturing and
Materials at Coactive Computers, a computer software company, where he was
responsible for scheduling and production. Mr. Miller received both a B.S. in
Business Administration and a B.A. from San Jose State University.
C. RICHARD KRAMLICH. Mr. Kramlich has been a Director of the Company since
May 1994. Mr. Kramlich is the co-founder and has been General Partner of New
Enterprise Associates since 1978. He is a Director of Ascend Communications,
Inc., Chalone, Inc., Lumisys, Inc., Macromedia, Inc., Silicon Graphics, Inc.,
and SyQuest Technology. Mr. Kramlich received an M.B.A. from Harvard Business
School and a B.S. from Northwestern University.
SCOTT J. LOFTESNESS. Mr. Loftesness has been a Director of the Company
since its inception in 1992 and is a co-founder of the Company. Mr. Loftesness
is Group Executive of Merchant Systems, First Data Corporation, a credit card
processing and payment system company, where he has been
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<PAGE> 53
employed since June 1994. From September 1991 through June 1994, he was Group
Executive at Visa International. His other prior experience includes senior
management positions with FMR Corp. (a parent of Fidelity Investments) and
International Business Machines Corporation. He is a Director of First Virtual
Holdings and Consensus Development, Inc. Mr. Loftesness attended the University
of California, Berkeley.
ROBERT C. HAWK. Mr. Hawk has been a Director of the Company since January
1997. Mr. Hawk has been an independent business consultant since April 1997.
From April 1996 through March 1997, he was President of U.S. West Multimedia, a
cable Company. From April 1986 through March 1996, he was the President of
Carrier Division, U.S. West Communications, a telecommunications Company. He is
a Director of PairGain Technologies, Premisys Communications, Inc., Xylan Corp.,
Concord Corp., and RADCom Corp. Mr. Hawk received an M.B.A. from the University
of San Francisco and a B.B.A. from the University of Iowa.
WILLIAM R. HEARST III. Mr. Hearst has been a Director of the Company
since April 1998. Mr. Hearst has also been a Director of @Home Corporation
("@Home") since August 1995 and has served as Vice Chairman of the Board of
Directors of @Home since July 1996. He has been a general partner of KPCB, a
venture capital firm, since January 1995. From May 1995 to July 1996, he was
the founding Chief Executive Officer of @Home. Before joining KPCB, Mr. Hearst
was editor and publisher of the San Francisco Examiner for ten years. He is a
Fellow of the AAAS and a Trustee of the Carnegie Institute of Washington and
the California Academy of Sciences. Mr. Hearst holds an A.B. in mathematics
from Harvard University.
ROBERT A. HOFF. Mr. Hoff has been a Director since the Company's inception
in May 1994. He has been a general partner at CrossPoint Venture Partners
("CrossPoint") since 1983. Mr. Hoff serves as a Director of PairGain Inc., Onyx
Acceptance Corp. and US Web Corporation. Mr. Hoff received an M.B.A. from
Harvard Business School and a B.S. in Business Administration from Bucknell
University.
ROBERT W. WILMOT. Dr. Wilmot has been a Director of the Company since April
1995. Dr. Wilmot has been Chairman at Wilmot Consulting Inc. since May 1995.
From April 1994 to May 1995, Mr. Wilmot was an independent consultant and
investor. From May 1985 through April 1994, he was Chairman at Wilmot
Enterprises Ltd. His other prior positions include Vice President and Managing
Director of Texas Instruments and CEO of International Computers PLC, a computer
company. Dr. Wilmot is a founder of a number of companies including ES2 SA, the
OASiS Group Plc, CMI Ltd., MOVID Technology Inc., Poqet Computer Inc., Vxtreme,
Inc. and Integrity Arts, Inc. He is a Director of Sequent Computer Systems. Dr.
Wilmot received a B.S. in Electrical Engineering from Nottingham University.
The Company has authorized eight directors. Each director is elected for a
period of one year at the Company's annual meeting of stockholders and serves
until the next annual meeting or until his successor is duly elected and
qualified. The executive officers serve at the discretion of the Board of
Directors. There are no family relationships among any of the Company's
directors or executive officers.
COMMITTEES OF THE BOARD OF DIRECTORS
Compensation Committee. The Compensation Committee is primarily responsible
for reviewing and approving the Company's general compensation policies and
setting compensation levels for the Company's executive officers. The committee
also administers the Company's incentive compensation plans. The committee
currently consists of two directors, Mr. Loftesness and Mr. Hoff.
Audit Committee. The Audit Committee is primarily responsible for approving
the services performed by the Company's independent auditors and reviewing the
auditor's reports regarding the Company's accounting practices and systems of
internal accounting controls. The committee currently consists of two directors,
Mr. Wilmot and Mr. Kramlich.
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<PAGE> 54
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Company's Board of
Directors are Mr. Loftesness and Mr. Hoff. No executive officer of the Company
serves on the board of directors or compensation committee of any entity which
has one or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee.
DIRECTOR COMPENSATION
The Company currently does not compensate any member of the Company's Board
of Directors. Members of the Board of Directors will be eligible to receive
discretionary option grants and stock issuances under the 1998 Stock Incentive
Plan. In addition, under the 1998 Stock Incentive Plan non-employee directors
will receive automatic option grants upon becoming directors and on the date of
each annual meeting of stockholders. The 1998 Stock Incentive Plan also contains
a director fee option grant program. Should this program be activated in the
future, each non-employee Board member will have the opportunity to apply all or
a portion of any annual retainer fee otherwise payable in cash to the
acquisition of a below-market option grant. See "Management -- Benefit Plans."
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal year ended December 31, 1997
(the "Last Fiscal Year") certain information with respect to the compensation of
the Company's Chief Executive Officer and each of the four other executive
officers of the Company who were serving as executive officers of the Company at
the end of the Last Fiscal Year and whose total annual salary and bonus during
such fiscal year exceeded $100,000 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION($)
NAME AND ----------------------
PRINCIPAL POSITION YEAR SALARY BONUS
- ----------------------------------------------------------- ----- ----------- -------
<S> <C> <C> <C>
Peter D. Fenner............................................ 1997 $300,040 --
President and Chief Executive Officer
Buck J. Gee................................................ 1997 $144,585 --
Vice President, Marketing
David L. Robertson......................................... 1997 $144,585 --
Chief Financial Officer, Vice President, Finance and
Secretary
William J. Gallagher....................................... 1997 $150,020 $78,065
Vice President, Sales
Kenneth C. Gorman.......................................... 1997 $152,790 $25,000
Vice President, Engineering
</TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No stock options or stock appreciation rights were granted to the Named
Executive Officers during fiscal 1997.
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<PAGE> 55
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND LAST FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning option exercises and
option holdings for the last Fiscal Year with respect to the Named Executive
Officers. Except as set forth below, no options or stock appreciation rights
were exercised by any such individual during such year, and no stock
appreciation rights were outstanding on December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT FISCAL MONEY OPTIONS AT FISCAL
SHARES YEAR-END(#)(2) YEAR-END($)(4)
ACQUIRED ON VALUE --------------------------- -----------------------------
NAME EXERCISE(#)(1)(2) REALIZED($)(3) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------------- -------------- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Peter D. Fenner...... 115,500 $147,450 371,500 -- $2,414,750 --
Buck J. Gee.......... 25,000 $ 62,500 -- -- -- --
David L. Robertson... 39,168 $109,587 15,000 -- $ 91,500 --
William J.
Gallagher.......... -- -- 97,500 -- $ 624,750 --
Kenneth C. Gorman.... 50,000 $ 10,000 -- -- -- --
</TABLE>
- ---------------
(1) As of December 31, 1997, Mr. Fenner was vested in 115,000 of the shares
exercised, Mr. Gee was vested in 7,917 of the shares exercised, Mr.
Robertson was vested in 16,667 of the shares exercised and Mr. Gorman was
vested in 13,125 of the shares exercised.
(2) Each of the Options was granted under the Company's 1995 Stock Option Plan.
Each of the options is immediately exercisable, but any shares purchased
under the options are subject to vesting requirements and may be repurchased
by the Company at the original exercise price paid per share upon the
optionee's cessation of service prior to vesting in such shares. The
repurchase right lapses with respect to 25% of the option shares upon
completion of one year of service from the vesting commencement date and the
balance in a series of equal monthly installments over the next 36 months of
service thereafter. Each option has a maximum term of ten years, subject to
earlier termination in the event of the optionee's cessation of service with
the Company. As of December 31, 1997, Mr. Fenner was vested in 100,665
shares of his outstanding options, Mr. Robertson was vested in 3,750 of his
outstanding options and Mr. Gallagher was vested in 52,187 shares of his
outstanding options.
(3) Based on the fair market value of the purchased option shares at the time of
exercise less the option exercise price paid for those shares.
(4) Based on the fair market value of the option shares at the end of 1997
($6.90 per share) less the option exercise price payable for those shares.
OPTION GRANTS UNDER THE 1998 STOCK INCENTIVE PLAN
Effective April 22, 1998 the Board of Directors authorized the Compensation
Committee to grant options to purchase an aggregate of 505,250 shares of Common
Stock, at a price of $9.00 per share, to certain of the Company's employees,
including executive officers.
BENEFIT PLANS
1998 Stock Incentive Plan. The Company's 1998 Stock Incentive Plan (the
"1998 Plan") is intended to serve as the successor equity incentive program to
the Company's 1995 Stock Option Plan, as amended (the "Predecessor Plan"). The
1998 Plan was adopted by the Board on March 10, 1998 and was subsequently
approved by the stockholders in March 1998. The 1998 Plan became effective on
April 1, 1998 (the "Plan Effective Date").
2,523,510 shares of Common Stock have been authorized for issuance under
the 1998 Plan. Such share reserve consists of the number of shares available for
issuance under the Predecessor Plan on the date the Underwriting Agreement for
this offering is executed (the "Underwriting Date"), including the shares
subject to outstanding options and an increase of 500,000 shares approved by the
Board and the Stockholders on April 22, 1998. This initial reserve may be
increased to the extent any unvested shares of Common Stock issued under the
Predecessor Plan are repurchased by the Company after the Underwriting Date, at
the exercise price paid per share, in connection with the holder's termination
of service, but in no event shall the number of such repurchased shares added to
the reserve exceed 271,570. In addition, the number of shares of Common Stock
reserved for
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<PAGE> 56
issuance under the 1998 Plan will automatically be increased on the first
trading day of each calendar year, beginning in calendar year 1999, by an amount
equal to the lesser of five percent (5%) of the total number of shares of Common
Stock outstanding on the last trading day of the preceding calendar year or
1,500,000 shares. In no event, however, may any one participant in the 1998 Plan
receive option grants, separately exercisable stock appreciation rights or
direct stock issuances for more than 500,000 shares of Common Stock in the
aggregate per calendar year.
On the Underwriting Date, outstanding options and unvested shares issued
under the Predecessor Plan will be incorporated into the 1998 Plan, and no
further option grants will be made under the Predecessor Plan. The incorporated
options and unvested shares will continue to be governed by their existing
terms, unless the Plan Administrator elects to extend one or more features of
the 1998 Plan to those options or unvested shares. Except as otherwise noted
below, the incorporated options have substantially the same terms as will be in
effect for grants made under the Discretionary Option Grant Program of the 1998
Plan.
The 1998 Plan is divided into five separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non-employee Board members and
consultants) may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock at an exercise price not less than
100% of their fair market value on the grant date, (ii) the Stock Issuance
Program under which such individuals may, in the Plan Administrator's
discretion, be issued shares of Common Stock directly, through the purchase of
such shares at a price not less than 100% of their fair market value at the time
of issuance or as a bonus tied to the performance of services, (iii) the Salary
Investment Option Grant Program which may, at the Plan Administrator's sole
discretion, be activated for one or more calendar years and, if so activated,
will allow executive officers and other highly compensated employees the
opportunity to apply a portion of their base salary to the acquisition of
special below-market stock option grants, (iv) the Automatic Option Grant
Program under which option grants will automatically be made at periodic
intervals to eligible non-employee Board members to purchase shares of Common
Stock at an exercise price equal to 100% of their fair market value on the grant
date and (v) the Director Fee Option Grant Program which may, in the Plan
Administrator's sole discretion, be activated for one or more calendar years
and, if so activated, will allow non-employee Board members the opportunity to
apply a portion of the annual retainer fee otherwise payable to them in cash
each year to the acquisition of special below-market option grants.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Compensation Committee. The Compensation Committee as
Plan Administrator will have complete discretion to determine which eligible
individuals are to receive option grants or stock issuances under those
programs, the time or times when such option grants or stock issuances are to be
made, the number of shares subject to each such grant or issuance, the status of
any granted option as either an incentive stock option or a non-statutory stock
option under the Federal tax laws, the vesting schedule to be in effect for the
option grant or stock issuance and the maximum term for which any granted option
is to remain outstanding. However, any discretionary option grants or stock
issuances to members of the Compensation Committee shall be made by a
disinterested majority of the Board. The Compensation Committee will also have
the exclusive authority to select the executive officers and other highly
compensated employees who may participate in the Salary Investment Option Grant
Program in the event that program is activated for one or more calendar years,
but neither the Compensation Committee nor the Board will exercise any
administrative discretion with respect to option grants under the Salary
Investment Option Grant Program or under the Automatic Option Grant or Director
Fee Option Grant Program for the non-employee Board members. All grants under
those three latter programs will be made in strict compliance with the express
provisions of each such program.
The exercise price for the shares of Common Stock subject to option grants
made under the 1998 Plan may be paid in cash or in shares of Common Stock held
for the requisite period to avoid an accounting charge and valued at fair market
value on the exercise date. The option may also be
55
<PAGE> 57
exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the Plan Administrator may provide financial assistance
to one or more optionees in the exercise of their outstanding options or the
purchase of their unvested shares by allowing such individuals to deliver a
full-recourse, interest-bearing promissory note in payment of the exercise price
and any associated withholding taxes incurred in connection with such exercise
or purchase.
The Plan Administrator will have the authority to effect the cancellation
of outstanding options under the Discretionary Option Grant Program (including
options incorporated from the Predecessor Plan) in return for the grant of new
options for the same or different number of option shares with an exercise price
per share based upon the fair market value of the Common Stock on the new grant
date.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Common Stock subject to the surrendered option over (ii) the aggregate exercise
price payable for such shares. Such appreciation distribution may be made in
cash or in shares of Common Stock. None of the incorporated options from the
Predecessor Plan contain any stock appreciation rights.
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation will automatically accelerate in full,
and all unvested shares under the Discretionary Option Grant and Stock Issuance
Programs will immediately vest, except to the extent the Company's repurchase
rights with respect to those shares are to be assigned to the successor
corporation. The Plan Administrator will have complete discretion to grant one
or more options under the Discretionary Option Grant Program which will become
fully exercisable for all the option shares in the event those options are
assumed in the acquisition and the optionee's service with the Company or the
acquiring entity involuntarily terminates within a designated period (not to
exceed eighteen months) following such acquisition. The vesting of outstanding
shares under the Stock Issuance Program may be accelerated upon similar terms
and conditions. The Plan Administrator will also have the authority to grant
options which will immediately vest upon an acquisition of the Company, whether
or not those options are assumed by the successor corporation. The Plan
Administrator is also authorized under the Discretionary Option Grant and Stock
Issuance Programs to grant options and to structure repurchase rights so that
the shares subject to those options or repurchase rights will immediately vest
in connection with a change in control of the Company (whether by successful
tender offer for more than fifty percent (50%) of the outstanding voting stock
or by a change in the majority of the Board by reason of one or more contested
elections for Board membership), with such vesting to occur either at the time
of such change in control or upon the subsequent involuntary termination of the
individual's service within a designated period (not to exceed eighteen months)
following such change in control. The options incorporated from the Predecessor
Plan will immediately vest upon an acquisition of the Company by merger or asset
sale, unless those options are assumed or replaced by, and the Company's
repurchase rights assigned to, the successor entity. In addition, certain option
grants to executive officers provide that if the options are assumed in an
acquisition and the Optionee's service is involuntarily terminated within
eighteen months following such acquisition, the option shares will vest in full
and the Company's repurchase rights will lapse. The Plan Administrator will have
the discretion to extend the acceleration provisions of the 1998 Plan to options
outstanding under the Predecessor Plan.
In the event the Plan Administrator elects to activate the Salary
Investment Option Grant Program for one or more calendar years, each executive
officer and other highly compensated employee of the Company selected for
participation may elect, prior to the start of the calendar year, to reduce his
or her base salary for that calendar year by a specified dollar amount not less
than $10,000 nor more than $50,000. If such election is approved by the Plan
Administrator, the individual will automatically be granted, on the first
trading day in January of the calendar year for which that salary reduction is
to be in effect, a non-statutory option to purchase that number of shares of
Common Stock determined
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<PAGE> 58
by dividing the salary reduction amount by two-thirds of the fair market value
per share of Common Stock on the grant date. The option will be exercisable at a
price per share equal to one-third of the fair market value of the option shares
on the grant date. As a result, the total spread on the option shares at the
time of grant (the fair market value of the option shares on the grant date less
the aggregate exercise price payable for those shares) will be equal to the
amount of salary invested in that option. The option will vest and become
exercisable in a series of twelve (12) equal monthly installments over the
calendar year for which the salary reduction is to be in effect and will be
subject to full and immediate vesting upon certain changes in the ownership or
control of the Company.
Under the Automatic Option Grant Program, each individual who first becomes
a non-employee Board member at any time after the completion of this offering
will automatically receive an option grant for 15,000 shares as of the date such
individual joins the Board, provided such individual has not been in the prior
employ of the Company. In addition, on the date of each Annual Stockholders
Meeting held after the Plan Effective Date, each non-employee Board member who
is to continue to serve as a non-employee Board member will automatically be
granted an option to purchase 5,000 shares of Common Stock, provided such
individual has served on the Board for at least six months.
Each automatic grant for the non-employee Board members will have a term of
10 years, subject to earlier termination following the optionee's cessation of
Board service. Each automatic option will be immediately exercisable for all of
the option shares; however, any unvested shares purchased under the option will
be subject to repurchase by the Company, at the exercise price paid per share,
should the optionee cease Board service prior to vesting in those shares. The
shares subject to each initial 15,000-share automatic option grant will vest
over a four-year period in successive equal annual installments upon the
individual's completion of each year of Board service measured from the option
grant date. Each 5,000-share automatic option grant will vest over a two-year
period in successive equal annual installments upon the individual's completion
of each year of Board service measured from the option grant date. However, the
shares subject to each automatic grant will immediately vest in full upon
certain changes in control or ownership of the Company or upon the optionee's
death or disability while a Board member.
Should the Director Fee Option Grant Program be activated in the future,
each non-employee Board member will have the opportunity to apply all or a
portion of any annual retainer fee otherwise payable in cash to the acquisition
of a below-market option grant. The option grant will automatically be made on
the first trading day in January in the year for which the retainer fee would
otherwise be payable in cash. The option will have an exercise price per share
equal to one-third of the fair market value of the option shares on the grant
date, and the number of shares subject to the option will be determined by
dividing the amount of the retainer fee applied to the program by two-thirds of
the fair market value per share of Common Stock on the grant date. As a result,
the total spread on the option (the fair market value of the option shares on
the grant date less the aggregate exercise price payable for those shares) will
be equal to the portion of the retainer fee invested in that option. The option
will vest and become exercisable for the option shares in a series of twelve
(12) equal monthly installments over the calendar year for which the election is
to be in effect. However, the option will become immediately exercisable and
vested for all the option shares upon (i) certain changes in the ownership or
control of the Company or (ii) the death or disability of the optionee while
serving as a Board member.
The shares subject to each option under the Salary Investment Option Grant,
Automatic Option Grant and Director Fee Option Grant Programs will immediately
vest upon (i) an acquisition of the Company by merger or asset sale or (ii) the
successful completion of a tender offer for more than 50% of the Company's
outstanding voting stock or a change in the majority of the Board effected
through one or more contested elections for Board membership.
Limited stock appreciation rights will automatically be included as part of
each grant made under the Automatic Option Grant, Salary Investment Option Grant
and Director Fee Option Grant Programs and may be granted to one or more
officers of the Company as part of their option grants under the
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<PAGE> 59
Discretionary Option Grant Program. Options with such a limited stock
appreciation right may be surrendered to the Company upon the successful
completion of a hostile tender offer for more than 50% of the Company's
outstanding voting stock. In return for the surrendered option, the optionee
will be entitled to a cash distribution from the Company in an amount per
surrendered option share equal to the excess of (i) the highest price per share
of Common Stock paid in connection with the tender offer over (ii) the exercise
price payable for such share.
The Board may amend or modify the 1998 Plan at any time, subject to any
required stockholder approval. The 1998 Plan will terminate on the earliest of
(i) March 9, 2008, (ii) the date on which all shares available for issuance
under the 1998 Plan have been issued as fully-vested shares or (iii) the
termination of all outstanding options in connection with certain changes in
control or ownership of the Company.
1998 Employee Stock Purchase Plan. The Company's 1998 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board on March 10, 1998
and approved by the stockholders in March 1998 and will become effective
immediately upon the execution of the Underwriting Agreement for this offering.
The Purchase Plan is designed to allow eligible employees of the Company and
participating subsidiaries to purchase shares of Common Stock, at semi-annual
intervals, through their periodic payroll deductions under the Purchase Plan,
and a reserve of 250,000 shares of Common Stock has been established for this
purpose.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration for 24 months. However, the initial
offering period will begin on the execution date of the Underwriting Agreement
and will end on the last business day in April 2000. The next offering period
will commence on the first business day in May 2000, and subsequent offering
periods will commence as designated by the Plan Administrator.
Individuals who are eligible employees (scheduled to work more than 20
hours per week for more than 5 calendar months per year) on the start date of
any offering period may enter the Purchase Plan on that start date or on any
subsequent semi-annual entry date (the first business day of May or November
each year). Individuals who become eligible employees after the start date of
the offering period may join the Purchase Plan on any subsequent semi-annual
entry date within that offering period.
Payroll deductions may not exceed 10% of base salary and the accumulated
payroll deductions of each participant will be applied to the purchase of shares
on his or her behalf on each semi-annual purchase date (the last business day in
April and October each year) at a purchase price per share equal to 85% of the
lower of (i) the fair market value of the Common Stock on the participant's
entry date into the offering period or (ii) the fair market value on the
semi-annual purchase date. In no event, however, may any one participant
purchase more than 1,500 shares, nor may all participants in the aggregate
purchase more than 60,000 shares on any one semi-annual purchase date.
Should the fair market value per share of Common Stock on any purchase date
be less than the fair market value per share on the start date of the two-year
offering period, then that offering period will automatically terminate, and a
new two-year offering period will begin on the next business day, with all
participants in the terminated offering to be automatically transferred to the
new offering period.
In the event the Company is acquired by merger or asset sale, all
outstanding purchase rights will automatically be exercised immediately prior to
the effective date of such acquisition. The purchase price will be equal to 85%
of the lower of (i) the fair market value per share of Common Stock on the
participant's entry date into the offering period in which such acquisition
occurs or (ii) the fair market value per share of Common Stock immediately prior
to such acquisition.
The Purchase Plan will terminate on the earlier of (i) the last business
day of April 2008 (ii) the date on which all shares available for issuance under
the Purchase Plan shall have been sold pursuant to purchase rights exercised
thereunder or (iii) the date on which all purchase rights are exercised in
connection with an acquisition of the Company by merger or asset sale.
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<PAGE> 60
The Board may at any time alter, suspend or discontinue the Purchase Plan.
However, certain amendments to the Purchase Plan may require stockholder
approval.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
The Company does not presently have any employment contracts in effect with
the Chief Executive Officer or any other Named Executive Officers. The Company
provides incentives such as salary, benefits and option grants to attract and
retain qualified employees.
In the event that the Company is acquired by merger or asset sale, each
outstanding option held by the Chief Executive Officer or any Named Executive
Officer under the 1998 Plan will automatically accelerate in full, and all
unvested shares held by such individuals under such Plan will immediately vest
in full, except to the extent such options are to be assumed by, and the
Company's repurchase rights with respect to those shares are to be assigned to,
the successor corporation. The Plan Administrator will have the authority to
grant options which will immediately vest upon an acquisition of the Company,
whether or not those options are assumed by the successor corporation. The Plan
Administrator is also authorized under the Discretionary Option Grant and Stock
Issuance Programs to grant options and to structure repurchase rights so that
the shares subject to those options or repurchase rights will immediately vest
in connection with a change in control of the Company (whether by merger or
asset sale, or successful tender offer for more than fifty percent (50%) of the
outstanding voting stock or a change in the majority of the Board by reason of
one or more contested elections for Board membership), with such vesting to
occur either at the time of such change in control or upon the subsequent
termination of the individual's service within a designated period (not to
exceed eighteen months) following such change in control. The options
incorporated from the Predecessor Plan will immediately vest upon an acquisition
of the Company by merger or asset sale, unless those options are assumed by, and
the Company's repurchase rights are assigned to, the successor entity. In
addition, certain options granted to executive officers provide that if the
options are assumed in an acquisition and the Optionee's service is
involuntarily terminated within eighteen months following such acquisition the
option shares will vest in full and the Company's repurchase rights will lapse.
The Plan Administrator will have the discretion to extend the acceleration
provisions of the 1998 Plan to options outstanding under the Predecessor Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of the
Company's directors for monetary damages arising from a breach of their
fiduciary duty as directors, except to the extent otherwise required by the
Delaware General Corporation Law. Such limitation of liability does not affect
the availability of equitable remedies such as injunctive relief or recision.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise discretionary under Delaware
law. The Company has entered into indemnification agreements with its officers
and directors containing provisions that may require the Company, among other
things, to indemnify such officers and directors against certain liabilities
that may arise by reason of their status or service as directors or officers
(other than liabilities arising from willful misconduct of a culpable nature),
to advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified, and to obtain directors' and officers'
insurance if available on reasonable terms.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company where indemnification is required or
permitted.
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<PAGE> 61
CERTAIN TRANSACTIONS
TRANSACTIONS WITH DIRECTORS, OFFICERS AND 5% STOCKHOLDERS
Since the Company's inception, the Company has raised capital primarily
through the sale of its Preferred Stock. In June 1994, the Company sold
1,805,674 shares of Series A Preferred Stock at a price of $1.58 per share. In
September 1994, the Company sold 250,000 shares of Series B Preferred Stock at a
price of $2.00 per share, each share of Series B Preferred Stock was accompanied
by the right to purchase 0.667 shares of Series C Preferred Stock at a price
$3.00 per share. In May 1995, upon the exercise of the Series C Preferred Stock
Warrants, the Company issued 166,667 shares of Series C Preferred Stock for
aggregate consideration of $500,000. In May 1995, the Company sold 1,812,500
shares of Series D Preferred Stock at a price of $4.00 per share, each share of
Series D Preferred Stock was accompanied by the right to purchase 0.20 shares of
Series E Preferred Stock at a price of $4.50 per share. From August 1997 through
December 1997, upon exercise of the Series E Preferred Stock Warrants, the
Company issued 361,908 shares of Series E Preferred Stock for aggregate
consideration of $1.63 million. From April 1996 through July 1996 the Company
sold 2,905,730 shares of Series F Preferred Stock at a price of $8.00 per share.
From July 1997 through September 1997, the Company sold 2,655,125 shares of
Series G Preferred stock at a price of $8.70 per share.
The following table summarizes the shares of Preferred Stock purchased by
executive officers, directors, and 5% stockholders of the Company and persons
associated with them since June 1994. All share numbers reflect the number of
shares purchased by the respective party on an as-converted basis, and includes
292,070 shares of Series F Preferred Stock and 81,339 shares of Series G
Preferred Stock sold by 3Com Corporation to each of the entities affiliated with
CrossPoint Venture Partners LS 1997, Kleiner Perkins Caufield Byers and New
Enterprise Associates for an aggregate of 1,120,222 shares at a per share price
of $9.00 for an aggregate purchase price of $10,082,043.
<TABLE>
<CAPTION>
PREFERRED STOCK
EXECUTIVE OFFICERS, --------------------------------------------------------------------------------
DIRECTORS AND 5% STOCKHOLDERS SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F SERIES G
- ----------------------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Entities affiliated with
CrossPoint Venture
Partners(1)................. 632,910 -- -- 295,888 59,178 386,952 196,282
Entities affiliated with
Kleiner Perkins Caufield and
Byers(2).................... -- -- -- 750,000 150,000 349,135 99,826
Entities affiliated with Paul
and Evelyn Baran Trust
Agreement(3)................ 235,441 -- -- 110,070 22,014 12,500 --
Entities affiliated with New
Enterprise Associates(4).... 632,912 -- -- 295,888 59,178 386,951 541,109
Paul Baran(5)................. 235,441 -- -- 110,070 22,014 12,500 --
Robert C. Hawk................ -- -- -- -- -- 6,250 7,453
Robert A. Hoff(6)............. 632,910 -- -- 295,888 59,178 94,882 114,943
C. Richard Kramlich(7)........ 632,912 -- -- 295,888 59,178 94,881 459,770
Scott J. Loftesness........... 6,329 -- -- 2,960 592 -- 22,989
Robert W. Wilmot(8)........... -- -- -- 62,500 12,500 -- --
</TABLE>
- ---------------
(1) Represents shares purchased by CrossPoint Venture Partners 1993, CrossPoint
Entrepreneurs Fund and CrossPoint Venture Partners LS 1997. Mr. Hoff, a
General Partner of CrossPoint Venture Partners, is a Director of the
Company.
(2) Represents shares purchased by Kleiner Perkins Caufield & Byers VII and KPCB
Information Sciences Zaibatsu Fund II.
(3) Represents shares held by the Paul and Evelyn Baran Trust Agreement dated
May 23, 1984. Mr. Baran is Chairman of the Board of Directors of the
Company.
(4) Represents shares held by New Enterprise Associates VI, Limited Partnership,
New Enterprise Associates VI, L.P. New Enterprise Associates VII, NEA
Venture 1998 L.P. and NEA Presidents Fund L.P. Mr. Kramlich, a Managing
Partner of New Enterprise Associates, is a Director of the Company. Mr.
Kramlich disclaims beneficial ownership of all such shares.
(5) Mr. Baran is co-trustee of the Paul or Evelyn Baran Trust Agreement dated
May 23, 1984 and serves as Chairman of the Company's Board of Directors. Mr.
Baran disclaims beneficial ownership of 500,000 of such shares.
(6) Mr. Hoff, a General Partner of CrossPoint Venture Partners, is a Director of
the Company.
(7) Mr. Kramlich, a General Partner of New Enterprise Associates VI, L.P., is a
Director of the Company. Mr. Kramlich disclaims beneficial ownership of such
shares.
(8) Represents shares purchased by Dr. Wilmot as trustee of a living trust. Dr.
Wilmot is a Director of the Company.
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<PAGE> 62
In February 1996, in connection with the acceptance of his employment
offer, Peter D. Fenner, the Company's President and Chief Executive Officer, was
granted an option to purchase 500,000 shares of Common Stock at an exercise
price of $0.40 per share. The Company also has granted additional options to
certain of its executive officers. Such options are described further in
"Management -- Executive Compensation."
The Company has entered into a Technology License and Reseller Agreement
with 3Com to license certain technology on a nonexclusive basis to 3Com. Under
the terms of this agreement: (i) the Company received a nonrefundable license
fee of $1.0 million in 1996, and (ii) if the Company met certain conditions in
1997, it would be entitled to an additional $500,000 of nonrefundable license
fees. In March 1997, the Company met such conditions and received additional
nonrefundable license fees of $500,000 from 3Com. Such license fees were
recognized as revenue in 1997. In addition, the Company received prepaid
royalties pursuant to the licensing agreement of $1.0 million which have been
deferred and will be recognized ratably upon sale of the first 100,000 units of
product sold by 3Com incorporating the Company's technology. The prepaid
royalties will be earned at the earlier of the sale of the 100,000 cable modems
or the expiration of the royalty period at December 31, 1998. See "Management's
Discussion and Analysis of Financial Conditions and Results of
Operations -- Overview" and Note 9 of Notes to Financial Statements. 3Com is a
greater than five percent stockholder in the Company.
The Company believes that all of the transactions set forth herein were
made on terms no less favorable to the Company than could have been obtained
from unaffiliated third parties. All future transactions, including loans (if
any), between the Company and its officers, directors, and principal
stockholders and their affiliates will be approved by a majority of the Board of
Directors, including a majority of the independent and disinterested outside
directors of the Board of Directors, and will be on terms no less favorable to
the Company than could be obtained from unaffiliated third parties.
TRANSACTION AMONG STOCKHOLDERS
On April 21, 1998, 3Com Corporation sold 292,070 shares of Series F
Preferred Stock and 81,339 shares of Series G Preferred Stock to each of the
entities affiliated with CrossPoint Venture Partners, Kleiner Perkins Caufield &
Byers and New Enterprises Associates for an aggregate of 1,120,227 shares at a
per share price of $9.00 per share for an aggregate purchase price of
$10,082,043.
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<PAGE> 63
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
with respect to the beneficial ownership of the Company's Common Stock as of
March 31, 1998 except as noted in the footnotes below by (i) all persons who are
beneficial owners of five percent (5%) or more of the Company's Common Stock,
(ii) each director and nominee for director, (iii) the Company's Named Executive
Officers, and (iv) all directors and executive officers as a group. Unless
otherwise indicated, each of the stockholders has sole voting and investment
power with respect to the shares beneficially owned, subject to community
property laws, where applicable.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
BENEFICIALLY
OWNED(2)
NUMBER OF ----------------------
SHARES AFTER
BENEFICIALLY PRIOR TO THE
NAMES AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) OFFERING OFFERING
---------------------------------------- ------------ --------- ---------
<S> <C> <C> <C>
New Enterprise Associates VI, L.P.(3)..................... 1,916,038 15.0% 11.4%
2490 Sand Hill Road
Menlo Park, CA 94025
CrossPoint Venture Partners 1993(4)....................... 1,571,212 12.3 9.4
18552 MacArthur Boulevard, Suite 400
Irvine, CA 92715
Kleiner Perkins Caufield and Byers(5)..................... 1,349,863 10.6 8.1
2750 Sand Hill Road
Menlo Park, CA 94025
Peter D. Fenner(6)........................................ 506,000 3.9 3.0
Paul and Evelyn Baran Trust Agreement(7).................. 980,025 7.7 5.8
Paul Baran(8)............................................. 980,025 7.7 5.8
David L. Robertson(9)..................................... 90,000 * *
William J. Gallagher(10).................................. 97,500 * *
Buck J. Gee(11)........................................... 90,000 * *
Kenneth C. Gorman(12)..................................... 90,000 * *
C. Richard Kramlich(13)................................... 1,916,038 15.0 11.4
Scott J. Loftesness....................................... 287,870 2.3 1.7
Robert C. Hawk(14)........................................ 34,703 * *
William R. Hearst III(15)................................. 1,349,863 10.6 8.1
Robert A. Hoff(16)........................................ 1,571,212 12.3 9.4
Robert W. Wilmot(17)...................................... 112,500 * *
---------
All directors and officers as a group (15 persons)(18).... 7,346,676 55.1 42.6
</TABLE>
- ---------------
* Less than one percent.
(1) Except as otherwise noted below, the address of each person listed on the
table is c/o Com21, Inc. 750 Tasman Drive, Milpitas, California 95035.
(2) Number of shares beneficially owned and the percentage of shares
beneficially owned are based on 12,764,512 shares outstanding as of March
31, 1998. Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission, and includes voting and
investment power with respect to such shares. All shares of Common Stock
subject to options currently exercisable or exercisable within 60 days
after March 31, 1998 are deemed to be outstanding and to be beneficially
owned by the person holding such options for the purpose of computing the
number of shares beneficially owned and the percentage ownership of such
person, but are not deemed to be outstanding and to be beneficially owned
for the purpose of computing the percentage ownership of any other person.
Except as indicated in the footnotes to the table and subject to applicable
community property laws, based on information provided by the persons named
in the table, such persons have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
(3) Includes 1,542,629 shares held by New Enterprise Associates VI, L.P. Also
includes 369,521 shares held by New Enterprise Associates VII, 556 shares
held by NEA Venture 1998 L.P. and 3,333 shares held by NEA Presidents Fund
L.P. which were purchased from 3Com on April 21, 1998. Voting and
dispositive power over the shares is held among all the general partners of
New Enterprise Associates.
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<PAGE> 64
(4) Includes 1,161,579 shares held by CrossPoint Venture Partners 1993 and
36,224 shares held by CrossPoint 1993 Entrepreneurs Fund. Also includes
373,409 shares held by CrossPoint Venture Partners LS 1997 which were
purchased from 3Com on April 21, 1998. Voting and dispositive power over
the shares is held by all the general partners of CrossPoint Venture
Partners.
(5) Includes 1,316,116 shares held by Kleiner Perkins Caufield & Byers VII and
33,747 shares held by KPCB Information Sciences Zaibatsu Fund II. Also
includes 364,075 shares held by Kleiner Perkins Caufield & Byers VII and
9,336 shares held by KPCB Information Sciences Zaibatsu Fund II which were
purchased from 3Com on April 21, 1998. Voting and dispositive power over
the shares is held by all the general partners of Kleiner Perkins Caufield
& Byers.
(6) Includes 326,500 shares of Common Stock issuable upon exercise of
immediately exercisable options, 239,583 shares of which are subject to the
Company's right of repurchase.
(7) Includes 600,000 shares held by the Baran Family Limited Partnership and
380,025 shares held under the Paul and Evelyn Baran Trust Agreement dated
May 23, 1984.
(8) Represents 380,025 shares held in the name of the Paul or Evelyn Baran
Trust Agreement dated May 23, 1984 and 600,000 shares held by the Baran
Family Limited Partnership. Mr. Baran is a General Partner of the Baran
Family Limited Partnership, and as such, he may be deemed to share voting
and investment power with respect to such shares. However, Mr. Baran
disclaims beneficial ownership of 500,000 of such shares.
(9) Includes 30,000 shares of Common Stock issuable upon exercise of
immediately exercisable options, 25,313 shares of which are subject to the
Company's right of repurchase. Also includes 60,000 shares acquired
pursuant to the exercise, of which 18,750 shares are subject to the
Company's right of repurchase.
(10) Includes 97,500 shares of Common Stock issuable upon exercise of
immediately exercisable options, 39,219 shares of which are subject to the
Company's right of repurchase.
(11) Includes 15,000 shares of Common Stock issuable upon exercise of
immediately exercisable options, all of which are subject to the Company's
right of repurchase. Also includes 75,000 shares of Common Stock acquired
pursuant to a stock option exercise, of which 15,522 shares are subject to
the Company's right of repurchase.
(12) Includes 15,000 shares of Common Stock issuable upon exercise of
immediately exercisable options, all which are subject to the Company's
right of repurchase. Also includes 75,000 shares of Common Stock were
acquired pursuant to a stock option exercise, 32,188 of which shares are
subject to the Company's right of repurchase.
(13) Represents 1,542,629 shares held by New Enterprise Associates VI, L.P.,
369,521 shares held by New Enterprise Associates VII, 1,111 shares held by
NEA Venture 1998 L.P. and 3,333 shares held by NEA Presidents Fund L.P. Mr.
Kramlich is a General Partner at New Enterprise Associates, the General
Partner of New Enterprise Associates VI, L.P., and as such he may be deemed
to share voting and investment power with respect to such shares. However,
Mr. Kramlich disclaims beneficial ownership of all such shares.
(14) Includes 15,000 shares of Common Stock acquired pursuant to the exercise,
of which 10,625 are subject to the Company's right of repurchase.
(15) Includes 1,316,116 shares held by Kleiner Perkins Caufield & Byers VII and
33,747 shares held by KPCB Information Sciences Zaibatsu Fund II. Also
includes 364,075 shares held by Kleiner Perkins Caufield & Byers VII and
9,336 shares held by KPCB Information Sciences Zaibatsu Fund II. Mr. Hearst
is a General Partner of Kleiner Perkins Caufield & Byers, and, as such, he
may be deemed to share voting and investment power with respect to such
shares. However, Mr. Hearst disclaims beneficial ownership of all such
shares.
(16) Represents 1,161,579 shares held by CrossPoint Venture Partners 1993,
36,224 shares held by CrossPoint 1993 Entrepreneurs Fund and 373,409 shares
held by CrossPoint Venture Partners LS 1997. Mr. Hoff is a General Partner
at CrossPoint Venture Partners and as such may be deemed to share voting
and investment power with respect to such shares. However, Mr. Hoff
disclaims beneficial ownership of such shares.
(17) Includes 4,536 shares of the Company's Common Stock subject to the
Company's right of repurchase.
(18) Includes 577,895 shares of Common Stock issuable upon exercise of
immediately exercisable options, of which 495,425 shares are subject to the
Company's right of repurchase.
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<PAGE> 65
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, $0.001 par value per
share and 5,000,000 shares of undesignated Preferred Stock, $0.001 par value per
share. Immediately after completion of this Offering, the Company estimates
there will be an aggregate of 16,764,512 shares of Common Stock issued and
outstanding and approximately 1,926,217 shares of Common Stock issuable upon
exercise of outstanding options. Upon completion of this offering, there will be
no shares of Preferred Stock issued or outstanding.
The following description of the Company's capital stock does not purport
to be complete and is subject to and qualified in its entirety by the Company's
Amended and Restated Certificate of Incorporation and Bylaws and by the
provisions of the applicable Delaware law.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock that may come into existence, the
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of funds
legally available therefor. See "Dividend Policy." In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of Preferred Stock, if any, then
outstanding. The Common Stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and nonassessable, and the shares of Common Stock to be outstanding upon
completion of this Offering will be fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the Preferred Stock in
one or more series and to fix the price, rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting a series or the designation of
such series, without any further vote or action by the Company's stockholders.
The issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders and may adversely affect the
market price, and the voting and other rights, of the holders of Common Stock.
The issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. The Company has no current plans to issue any shares
of Preferred Stock.
WARRANTS
As of March 31, 1998 the Company had outstanding, warrants to purchase
5,154 shares of Series D Preferred Stock at an exercise price of $5.82 per share
and warrants to purchase 41,132 shares of Series F Preferred Stock at an
exercise price of $8.00 per share. Upon the effectiveness of the registration
statement related to this Offering, these outstanding warrants will
automatically convert into warrants to purchase an aggregate of 46,286 shares of
Common Stock at a weighted average exercise price of $7.76 per share.
REGISTRATION RIGHTS
Under the terms of a registration rights agreement, subject to certain
exceptions, if the Company proposes to register any of its shares of Common
Stock under the Securities Act, either for its own account or the account of any
shareholder, in any public offering, certain investors holding Common Stock of
the Company issued or issuable upon conversion of the Company's convertible
securities (the "Registrable Securities") are entitled to notice of such
registration and are entitled to include their Registrable Securities therein.
In addition, the holder or holders of an aggregate of at least 33% of the then
outstanding Registrable Securities shall have the right to require the Company
to file a registration statement on a form, other than Form S-3 under the
Securities Act, in order to register the
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<PAGE> 66
Registrable Securities then held by such holder or holders, provided that, (i)
at least three months have passed since the Company's initial public offering of
shares of Common Stock under a registration statement and (ii) the anticipated
aggregate offering price to the public is at least $7,500,000. Further, a holder
or holders may require the Company to use all reasonable efforts to file
additional registration statements on Form S-3, provided that the Company shall
not be required to file more than two such registration statements in any twelve
month period. The right to include any of the above described Registrable
Securities in any registration is subject to certain limitations and conditions,
including the underwriters' right to limit the number of shares being registered
by all holders. The Company is required to indemnify holders of Registrable
Securities and the underwriters, if any, for such holders under certain
circumstances. In general, the Company is required to bear the expenses of two
requested demand and all piggyback registrations, except for the selling
shareholders' pro rata portion of the underwriting discounts and commissions.
LISTING
An application has been made to have the Common Stock approved for
quotation on the Nasdaq National Market under the trading symbol "CMTO."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of the Common Stock will be Boston
EquiServe.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Certificate of Incorporation and Bylaws. The Company's Certificate of
Incorporation and Bylaws contain certain provisions that, together with the
ownership position of the officers, directors and their affiliates, could
discourage potential takeover attempts and make more difficult, attempts by
stockholders to change management, which could adversely affect the market price
of the Company's Common Stock. Furthermore, the Company's Board of Directors has
the authority to impose various procedural and other requirements that could
make it more difficult for stockholders to effect certain corporate actions. Any
vacancy on the Board of Directors may be filled only by vote of the majority of
directors then in office.
Upon completion of this Offering, the Company's Board of Directors will
have the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the Company
See "Risk Factors -- Control by Principal Stockholders; Certain Anti-Takeover
Provisions."
Section 203 of the Delaware General Corporation Law. Upon the closing of
the Offering, the Company will be subject to Section 203 of the DGCL which
imposes restrictions on business combinations (which include a merger, asset
sale or other transaction resulting in a financial benefit to the interested
stockholder) with interested stockholders (being any person who acquired 15% or
more of the Company's outstanding voting stock). In general, the Company is
prohibited from engaging in business combinations with an interested
stockholder, unless (i) before such person became an interested stockholder, the
Board of Directors of the Company approved the transaction in which the
interested stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the Company outstanding at the time the
transaction commenced (excluding for purposes of determining the number of
shares outstanding stock held by directors who are also officers of the Company
and by employee stock plans that do not provide employees with the rights to
determine confidentiality
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<PAGE> 67
whether shares held subject to the plan will be tendered in a tender or exchange
offer); or (iii) at or subsequent to the time which such person became an
interested stockholder, the business combination is approved by the Board of
Directors of the Company and authorized at a meeting of stockholders by the
affirmative vote of the holders of two-thirds of the outstanding voting stock of
the Company not owned by the interested stockholder. Under Section 203, the
restrictions described above also do not apply to certain business combinations
proposed by an interested stockholder following the earlier of the announcement
or notification of one of certain extraordinary transactions involving the
Company and a person who had not been an interested stockholder during the
previous three years or who became an interested stockholder with the approval
of the Company's Board of Directors, if such extraordinary transaction is
approved or not opposed by a majority of the directors who are directors prior
to any person becoming an interested stockholder during the previous three years
or who were recommended for election or elected to succeed such directors by a
majority of such directors. By restricting the ability of the Company to engage
in business combinations with an interested person, the application of Section
203 to the Company may provide a barrier to hostile or unwanted takeovers.
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<PAGE> 68
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the shares of
Common Stock of the Company. Future sales of substantial amounts of shares of
Common Stock in the public market could adversely affect prevailing market
prices. Furthermore, since only a limited number of shares will be available for
sale shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock in the public market after the restrictions lapse could adversely
affect the prevailing market price.
Upon completion of this offering, the Company will have outstanding an
aggregate of 16,764,512 shares of Common Stock assuming the issuance of the
4,000,000 shares of Common Stock offered hereby and no exercise of the
Underwriters' over-allotment option. Of the total outstanding shares of Common
Stock, all 4,000,000 shares of Common Stock sold in this offering will be freely
tradeable without restriction or further registration under the Act, unless
purchased by "affiliates" of the Company, as that term is defined in Rule 144
under the Act. The remaining 12,764,512 shares will be "restricted securities"
as defined in Rule 144 (the "Restricted Shares"). The Restricted Shares will be
available for sale in the public market following the expiration of one hundred
eighty (180)-day lock-up agreements. In addition, the holders of warrants for
46,286 shares of Preferred Stock can exercise such warrants at any time, but
such shares cannot be sold until the expiration of the 180-day lock-up period
following the date of the Prospectus. Beginning six months after the date of
this Prospectus the holders of 9,957,604 Restricted Shares and the holders of
warrants for 46,286 shares of Common Stock are entitled to certain rights with
respect to registrations of such shares for sale in the public market, assuming
no exercise of the Underwriters' over-allotment option. If such holders sell in
the public market, such sales could have a material adverse effect on the market
price of the Company's Common Stock.
All of the officers and Directors and certain stockholders and
optionholders of the Company have entered into lock-up agreements generally
providing that they will not offer, pledge, sell, offer to sell, contract to
sell, sell any option or contract to purchase, purchase any option to sell,
grant any option, right or warrant to purchase, or otherwise transfer or dispose
of, directly or indirectly, any of the shares of Common Stock or any securities
convertible into, or exercisable or exchangeable for, Common Stock owned by
them, or enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, for a period of 180 days after the date of this Prospectus, without the
prior written consent of Deutsche Morgan Grenfell Inc., subject to certain
limited exceptions. Deutsche Morgan Grenfell Inc. may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements. Deutsche Morgan Grenfell Inc. currently has no
plans to release any portion of the securities subject to lock-up agreements.
When determining whether or not to release shares from the lock-up agreements,
Deutsche Morgan Grenfell Inc. will consider, among other factors, the
stockholder's reasons for requesting the release, the number of shares for which
the release is being requested and market conditions at the time. Following the
expiration of the 180 day lock-up period, all 12,764,512 shares of Common Stock
will be available for sale in the public market subject to compliance with Rule
144 or Rule 701.
In general, under Rule 144 as currently in effect, an affiliate of the
Company or a person (or persons whose shares are aggregated) who has
beneficially owned restricted securities for at least one (1) year, including
the holding period of any prior owner except an affiliate, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of one percent (1%) of the then outstanding shares of the Company's
Common Stock or the average weekly trading volume of the Company's Common Stock
on the Nasdaq National Market during the four (4) calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the ninety (90) days preceding a sale, and who has beneficially
owned shares for at least two (2) years (including any period of ownership of
preceding non-affiliated
67
<PAGE> 69
holders), would be entitled to sell such shares under Rule 144(k) without regard
to the volume limitations, manner of sale provisions, public information
requirements or notice requirements.
The Company plans to file, after the consummation of the offering made
hereby, a registration statement under the Act covering the 3,045,080 shares of
Common Stock reserved for issuance under its 1998 Stock Incentive Plan and the
1998 Employee Stock Purchase Plan. See "Management -- Benefit Plans." Shares
registered under such registration statement would be available for sale in the
open market in the future unless such shares are subject to vesting restrictions
with the Company or the contractual restrictions described above.
The Company has also agreed not to offer, sell, contract to sell or
otherwise dispose of shares of Common Stock or any securities convertible into
Common Stock for a period of one hundred eighty (180) days after the date of
this Prospectus, without the prior written consent of Deutsche Morgan Grenfell
Inc., subject to certain limited exceptions.
68
<PAGE> 70
UNDERWRITING
Under the terms and subject to conditions contained in an Underwriting
Agreement dated the date hereof (the Underwriting Agreement), the Underwriters
named below (the Underwriters), for whom Deutsche Morgan Grenfell Inc., Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Dain Rauscher Wessels, a division
of Dain Rauscher Incorporated ("Dain Rauscher Wessels") are acting as
Representatives, (the Representatives), have severally agreed to purchase, and
the Company has agreed to sell to them, severally, the respective number of
shares of Common Stock set forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Deutsche Morgan Grenfell Inc. ..............................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ..................................
Dain Rauscher Wessels ......................................
---------
Total............................................. 4,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions.
The Underwriters initially propose to offer a portion of the shares of
Common Stock directly to the public on the terms set forth on the cover page
hereof and a portion to certain dealers at a price that represents a concession
not in excess of $ per share. Any Underwriter may allow, and such dealers may
re-allow, a concession not in excess of $ per share to certain other dealers.
After the initial offering of the shares of Common Stock, the offering price and
other selling terms may from time to time be varied by the Representatives.
The Company has granted to the Underwriters an option, exercisable for
thirty (30) days from the date of this Prospectus, to purchase up to an
aggregate of 600,000 additional shares of Common Stock at the initial public
offering price set forth on the cover page hereof, less underwriting discounts
and commissions. The Underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, made in connection with the
offering of the shares of Common Stock offered hereby. To the extent such option
is exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of Common Stock as the number set forth next to such Underwriter's name
in the preceding table bears to the total number of shares of Common Stock set
forth next to the names of all Underwriters in the preceding table.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend sales to discretionary accounts to exceed five
percent of the total number of shares of Common Stock offered by them.
See "Shares Eligible for Future Sale" for a description of certain
arrangements by which all officers and Directors and certain stockholders and
optionholders of the Company have agreed not to sell or otherwise dispose of
Common Stock or convertible securities of the Company for a period of 180 days
after the date of the final Prospectus without the prior consent of Deutsche
Morgan Grenfell Inc. The Company has agreed in the Underwriting Agreement that
it will not, directly or indirectly, without the prior written consent of
Deutsche Morgan Grenfell Inc., offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option to sell, grant any option,
right or warrant to purchase, or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exchangeable for Common
Stock, for a period of 180 days after the date of the final
69
<PAGE> 71
Prospectus without the consent of Deutsche Morgan Grenfell Inc., except under
certain circumstances.
In order to facilitate the Offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the Offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an Underwriter or a dealer for distributing the
Common Stock in the Offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
At the request of the Company, the Underwriters have reserved for sale at
the initial public offering price to persons designated by the Company a number
of shares of Common Stock not to exceed five percent of the total number of
shares of Common Stock in this Offering. The number of shares available for sale
to the general public will be reduced to the extent such persons purchase these
shares.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, as amended, or will contribute to payments the
Underwriters may be required to make in respect thereof.
Deutsche Morgan Grenfell Inc. acted as the placement agent of a private
placement of Series G Convertible Preferred Stock of the Company and, in
connection with that placement received cash compensation.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiation
between the Company and the Representatives. The principal factors to be
considered in determining the initial public offering price will include the
information set forth in this Prospectus and otherwise available to the
Representatives; the history and the prospects for the industry in which the
Company will compete; the ability of the Company's management; the prospects for
future earnings of the Company; the present state of the Company's development
and its current financial condition; the general condition of the securities
market at the time of the Offering; and the recent market prices of, and the
demand for, publicly traded common stock of generally comparable companies. Each
of the Representatives has informed the Company that it currently intends to
make a market in the shares subsequent to the effectiveness of this Offering,
but there can be no assurance that the Representatives will take any action to
make a market in any securities of the Company.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Brobeck, Phleger & Harrison LLP, Palo
Alto, California. Members of the firm Brobeck, Phleger & Harrison LLP
beneficially own an aggregate of 2,161 shares of the Company's Common Stock.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California.
70
<PAGE> 72
EXPERTS
The financial statements as of December 31, 1996 and 1997, and for each of
the three years in the period ended December 31, 1997, included in this
Prospectus and Registration Statement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
CHANGE IN INDEPENDENT AUDITORS
In November 1997, the Company's Board of Directors retained Deloitte &
Touche LLP as its independent auditors and dismissed the Company's former
auditors, KPMG Peat Marwick LLP ("KPMG"). The decision to change independent
auditors was approved by resolution of the Board of Directors. The former
independent auditors' report on the Company's financial statements as of and for
the years ended December 31, 1995 and 1996 did not contain an adverse opinion, a
disclaimer of opinion or any qualifications or modifications related to
uncertainty, limitation of audit scope or application of accounting principles.
The former independent auditors' report does not cover any of the financial
statements of the Company included in this Prospectus. There were no
disagreements with the former independent auditors on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure with respect to the Company's financial statements up through the time
of dismissal that, if not resolved to the former independent auditors'
satisfaction, would have caused them to make reference to the subject matter of
the disagreement in connection with their report. Prior to retaining Deloitte &
Touche LLP, the Company had not consulted with Deloitte & Touche LLP regarding
accounting principles.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement (of which this
Prospectus is a part and which term shall encompass any amendments thereto) on
Form S-1 pursuant to the Securities Act with respect to the Common Stock offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain portions
of which are omitted as permitted by the rules and regulations of the SEC.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete. With respect to any
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matters involved, and each such statement shall be deemed
qualified in its entirety by such reference.
Upon completion of this offering, the Company will be subject to the
information requirements of the Exchange Act, and, in accordance therewith, will
file reports and other information with the SEC. The Registration Statement, the
exhibits and schedules forming a part thereof and the report and other
information filed by the Company with the SEC in accordance with the Exchange
Act may be inspected and copied at the public reference facilities maintained by
the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549; 7 World Trade Center, 13th Floor, New York, New York 10048; and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material can also be obtained at prescribed
rates from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Such material may also be accessed electronically by
means of the SEC's home page on the World Wide Web at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and to make available quarterly reports
containing unaudited summary financial information for the first three fiscal
quarters of each fiscal year.
71
<PAGE> 73
GLOSSARY OF TECHNICAL TERMS
10BASET....................... Ethernet standard which applies to the physical
layer of the OSI Reference Model for 10 Mbps
Ethernet over two pairs of category 3, 4 or 5
Unshielded Twisted Pair (UTP) wire.
56-KBPS....................... Equivalent to a single high-speed telephone
service line, capable of transmitting one voice
call or 56 Kbps of data.
ANALOG........................ A from of transmission employing a continuous
electrical signal (rather than a pulsed or
digital system) that varies in frequency and
amplitude.
ADSL.......................... Asymmetric Digital Subscriber Line. A
high-speed technology that enables the transfer
of data over existing copper line.
ASYNCHRONOUS.................. A form of concurrent input and output
communication transmission with no timing
relationship between the two signals.
Slower-speed asynchronous transmission requires
start and stop bits to avoid a dependency on
timing clocks (10 bits to send an 8-bit byte).
ATM........................... Asynchronous Transfer Mode. A fixed length
53-byte packet-based transmission technology
that may be used to transmit data, voice and
video traffic; ATM utilizes cell switching.
BANDWIDTH..................... A range of signal frequencies, measured in
cycles per second or Hertz (Hz). Also refers to
the speed at which data is transmitted,
measured in bits per second (bps).
BER........................... Bit Error Rate. Percentage of received bits in
error compared to the total number of bits
received. Usually expressed as a number to a
power of 10.
BROADBAND COMMUNICATIONS...... A transmission that has a bandwidth greater
than a voice-grade line of 3KHz, usually at
transmission speeds of greater than 1.5 Mbps
(T-1).
CNR........................... Carrier-to-Noise Ratio.
CATV-CABLE TELEVISION......... Community Antenna Television. A community
television system, served by cable and
connected to a common (set of) antenna(s).
CENTRAL OFFICE................ A facility that provides switching services for
telephone calls. A local exchange central
office can switch calls within exchange
groupings that are identified by an area code
and the first three digits of a phone number. A
long-distance carrier central office switches
calls between the long-distance network and the
local exchange central office.
COAXIAL CABLE................. A large-capacity data transmission medium
consisting of insulated wires grouped together
inside an insulated cable. Used for broadband
and baseband communications networks and cable
TV; usually free from most external
interferences and capable of high transmission
rates over long-distances.
DAVIC......................... Digital Audio Video Interactive Council. A
European standards-setting committee.
DES........................... Data Encryption Standard.
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<PAGE> 74
DSL........................... Digital Subscriber Line. Point-to-point public
network access technologies that allow multiple
forms of data, voice and video to be carried
over twisted-pair copper wire on the local loop
between a network service provider's central
office and the customer site at limited
distances.
DBS........................... Direct Broadcast Satellite. A broadband
communications technology that broadcasts
digital television programming from satellites
directly to dish antennas.
DOWNSTREAM.................... The data path from service provider to
customer.
ETHERNET (10BASET)............ Networking standard for the access method
widely used in LANs for connecting devices by
means of copper twisted pair wiring at speeds
of 10 Mbps.
FAST ETHERNET (100BASET)...... An extension to the 10BaseT Ethernet network
access method which operates at 100 Mbps.
FEC........................... Forward Error Correction. A receiver technique
for correcting errors in the received data.
FREQUENCY..................... The number of identical cycles per second,
measured in hertz, of a periodic oscillation or
wave in radio propagation.
GBPS.......................... Gigabits per second. Billion bits per second.
HEADEND....................... The central distribution point in a cable
television system. Typically serves tens to
hundreds of thousands of homes.
HDSL.......................... High Bit Rate Digital Subscriber Line. A
technology that enables high speed transmission
of data over copper wires.
HFC........................... Hybrid Fiber Coax. Upgraded cable plant which
uses a combination of fiber optic cable in the
backbone and coaxial cable in the subscriber
feeder plant.
IC............................ Integrated Circuit.
IEEE.......................... Institute of Electrical and Electronics
Engineers, Inc.
IETF.......................... Internet Engineering Task Force.
ISDN.......................... Integrated Services Digital Network. An
internationally accepted standard for voice,
data and signaling that makes all transmission
circuits end-to end digital and defines a
standard out-of-band signaling system.
KBPS.......................... Kilobits per second. Thousand bits per second.
LAN........................... Local Area Network. A private data
communications network linking a variety of
data services such as computers and printers
within an office or home environment.
LOCAL LOOP.................... A term used to describe the copper cables that
connect a customer's phone to the Central
Office.
LMDS.......................... Local Multipoint Distribution Service. A
broadband wireless communications network that
uses millimeter wave frequencies around 28 to
38 GHz to transmit video and data to residences
over a cellular-like network at distances under
a few miles.
MBPS.......................... Megabits per second.
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<PAGE> 75
MMDS.......................... Multichannel Multipoint Distribution Service. A
broadband wireless communications network that
uses microwave frequencies around 2.5 GHz to
transmit video to residences at distances up to
tens of miles.
MCNS.......................... Multimedia Cable Network System. Industry
specification that defines the technical
requirement for interoperability of high-speed
cable modem and headend equipment.
QAM........................... Quadrature Amplitude Modulation. A digital
modulation technique that allows very efficient
transmission of data over media with limited
available bandwidth.
QPSK.......................... Quadrature Phase Shift Keying. A digital
modulation technique which is widely employed
in direct broadcast satellite transmission
systems.
RF............................ Radio Frequency. The range of electro-magnetic
frequencies above the audio range and below
visible light.
RF MODULATION................. The transmission of a signal through a carrier
frequency.
ROUTER........................ A device for interconnecting local area
networks that have dissimilar operating
protocols but which share a common network
interconnection protocol. A router receives and
transmits data packs between segments in a
network or different networks.
SYNCHRONOUS................... A form of communication transmission with a
direct timing relationship between input and
output signals. The transmitter and receiver
are in sync and signals sent at a fixed rate.
Information is sent in multibyte packets.
S-CDMA........................ Synchronous Code Division Multiple Access. A
digital spectrum technology that codes signals
over the airwaves to accommodate more
transmission streams over a single frequency
band.
T1 LINES...................... Telecommunications lines that operate in North
America at speeds of 1.544 Mbps.
UPSTREAM...................... The data path from the customer to the service
provider.
VLAN.......................... Virtual Local Area Network. The use of a
selected group of computers that are permitted
to communicate directly with each other,
irrespective of their physical location within
a network.
VPN........................... Virtual Private Network. A public data network
that transports private data reliably, securely
and seamlessly to the end user.
XDSL.......................... Other Digital Subscriber Line. Generic
representation of entire family of Digital
Subscriber Line technology spanning data rates
from 128 Kbps to 52 Mbps depending on the
distance between the central office and the
subscriber.
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COM21, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (Unaudited)...................................... F-3
Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997 and the Three Months Ended March 31,
1997 and 1998 (Unaudited)................................. F-4
Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997 and the Three Months
Ended March 31, 1998 (Unaudited).......................... F-5
Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997 and the Three Months Ended March 31,
1997 and 1998 (Unaudited)................................. F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 77
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Com21, Inc.:
We have audited the accompanying balance sheets of Com21, Inc. as of December
31, 1996 and 1997, and the related statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Com21, Inc. as of December 31, 1996 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
San Jose, California
January 16, 1998
(March 10, 1998 as to the first through fifth paragraphs of Note 11; April 22,
1998 as to the last two paragraphs of Note 11; and , 1998 as to the
sixth paragraph of Note 11)
------------------------
To the Board of Directors and Stockholders of
Com21, Inc.:
The financial statements included herein have been adjusted to give effect to
the one-for-two reverse common and convertible preferred stock split as
described in the sixth paragraph of Note 11 to the financial statements. The
above report is in the form that will be signed by Deloitte & Touche LLP upon
the effectiveness of such event assuming that from April 22, 1998 to the
effective date of such event, no other events shall have occurred that would
affect the accompanying financial statements or notes thereto.
DELOITTE & TOUCHE LLP
San Jose, California
April 22, 1998
F-2
<PAGE> 78
COM21, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, (NOTE 1)
------------------- MARCH 31, MARCH 31,
1996 1997 1998 1998
-------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $12,427.. $ 17,950 $ 14,082 $ 14,082
Accounts receivable:
Trade (net of allowances of $121 and $232 at December 5,657
1997 and March 1998, respectively).................... -- 3,984 5,657
Related parties......................................... -- 1,052 810 810
Inventories............................................... -- 2,643 1,669 1,669
Prepaid expenses and other................................ 281 430 847 847
-------- -------- -------- --------
Total current assets............................... 12,708 26,059 23,065 23,065
Property and Equipment -- Net............................... 4,223 5,311 5,110 5,110
Other Assets................................................ 105 203 202 202
-------- -------- -------- --------
Total Assets....................................... $ 17,036 $ 31,573 $ 28,377 $ 28,377
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 1,220 $ 2,832 $ 3,662 $ 3,662
Accrued compensation and related benefits................. 581 871 913 913
Deferred revenue (principally related party).............. 1,000 1,004 1,088 1,088
Other current liabilities................................. 93 619 675 675
Current portion of capital lease and debt obligations..... 717 1,210 1,219 1,219
-------- -------- -------- --------
Total current liabilities.......................... 3,611 6,536 7,557 7,557
Deferred Rent............................................... 77 246 258 258
Capital Lease Obligations................................... 1,089 1,320 1,292 1,292
Debt Obligations............................................ 203 188 149 149
-------- -------- -------- --------
Total liabilities.................................. 4,980 8,290 9,256 9,256
-------- -------- -------- --------
Commitments and Contingencies(Notes 5 and 11)
Stockholders' Equity:
Convertible preferred stock, none issued and outstanding
on a pro forma basis:
Series A; $0.001 par value; 1,805,674 shares authorized, 2
issued and outstanding; liquidation preference
$2,853................................................ 2 2 --
Series B; $0.001 par value; 250,000 shares authorized, --
issued and outstanding; liquidation preference $500... -- -- --
Series C; $0.001 par value; 166,667 shares authorized, --
issued and outstanding; liquidation preference $500... -- -- --
Series D; $0.001 par value; 1,817,655 shares authorized; 2
1,812,500 shares issued and outstanding; liquidation
preference $7,250..................................... 2 2 --
Series E; $0.001 par value; 362,500 shares authorized; --
361,908 shares issued and outstanding; liquidation
preference $1,629..................................... -- -- --
Series F; $0.001 par value; 3,125,000 shares authorized; 3
2,905,730 shares issued and outstanding; liquidation
preference $23,246.................................... 3 3 --
Series G; $0.001 par value; 3,000,000 shares authorized; 3
2,655,125 shares issued and outstanding; liquidation
preference $23,100.................................... -- 3 --
Common stock, $0.001 par value; 35,000,000 shares 3
authorized; shares issued and outstanding: 1996,
1,998,097; 1997, 2,772,139; March 31, 1998: actual,
2,806,908; pro forma, 12,764,512........................ 2 3 13
Additional paid-in capital................................ 34,328 58,722 58,784 58,784
Deferred stock compensation............................... -- (116) (108) (108)
Accumulated deficit....................................... (22,281) (35,336) (39,568) (39,568)
-------- -------- -------- --------
Total stockholders' equity......................... 12,056 23,283 19,121 19,121
-------- -------- -------- --------
Total Liabilities and Stockholders' Equity......... $ 17,036 $ 31,573 $ 28,377 $ 28,377
======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE> 79
COM21, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- ------------------
1995 1996 1997 1997 1998
------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product ($4,021 and $953 in
1997 and the three months
ended March 31, 1998,
respectively, from
related parties)......... $ -- $ -- $ 15,149 $ -- $ 7,020
License fees -- related
party.................... -- 1,000 500 500 --
------- -------- -------- ------- -------
Total revenues...... -- 1,000 15,649 500 7,020
Cost of Product Revenues
($2,024 and $787 in 1997 and
the three months ended March
31, 1998, respectively, for
related parties)............ -- -- 8,372 -- 4,676
------- -------- -------- ------- -------
Gross Profit.................. -- 1,000 7,277 500 2,344
------- -------- -------- ------- -------
Operating Expenses:
Research and development.... 5,233 12,395 13,481 3,128 4,278
Sales and marketing......... 770 1,970 5,277 870 1,803
General and
administrative........... 919 1,548 1,782 367 580
------- -------- -------- ------- -------
Total operating
expenses.......... 6,922 15,913 20,540 4,365 6,661
------- -------- -------- ------- -------
Loss From Operations.......... (6,922) (14,913) (13,263) (3,865) (4,317)
------- -------- -------- ------- -------
Other Income (Expense):
Interest income............. 264 629 679 125 194
Interest expense............ (5) (185) (396) (88) (85)
Other income (expense) --
net...................... (2) 3 (54) -- (15)
------- -------- -------- ------- -------
Total other
income............ 257 447 229 37 94
------- -------- -------- ------- -------
Loss Before Income Taxes...... (6,665) (14,466) (13,034) (3,828) (4,223)
Income Taxes.................. 1 5 21 -- 9
------- -------- -------- ------- -------
Net Loss...................... $(6,666) $(14,471) $(13,055) $(3,828) $(4,232)
======= ======== ======== ======= =======
Net Loss Per Share, Basic and
Diluted..................... $ (3.53) $ (7.64) $ (6.15) $ (1.95) $ (1.69)
======= ======== ======== ======= =======
Shares Used in Computation,
Basic and Diluted........... 1,887 1,894 2,124 1,968 2,497
======= ======== ======== ======= =======
Pro Forma Net Loss Per Share,
Basic and Diluted (Note 1).. $ (1.27) $ (0.43) $ (0.34)
======== ======= =======
Shares Used in Pro Forma
Computation, Basic and
Diluted (Note 1)............ 10,279 8,909 12,455
======== ======= =======
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE> 80
COM21, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE DEFERRED
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK TOTAL
----------------- ------------------ PAID-IN COMPEN- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL SATION DEFICIT EQUITY
--------- ------ --------- ------ ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1,
1995.................... 2,055,674 $ 2 1,890,542 $2 $ 3,362 $ -- $ (1,144) $ 2,222
Exercise of stock
options................. -- --.. 25,000 -- 10 -- -- 10
Repurchase of shares...... -- --.. (5,500) -- (1) -- -- (1)
Exercise of Series C
preferred warrants...... 166,667 --.. -- -- 500 -- -- 500
Sale of Series D
convertible preferred
stock (net of issuance
costs of $27)........... 1,812,500 2... -- -- 7,221 -- -- 7,223
Net loss.................. -- --.. -- -- -- -- (6,666) (6,666)
--------- --- --------- -- ------- ----- -------- --------
Balances, December 31,
1995.................... 4,034,841 4... 1,910,042 2 11,092 -- (7,810) 3,288
Exercise of stock
options................. -- --.. 102,639 -- 46 -- -- 46
Repurchase of shares...... -- --.. (14,584) -- (3) -- -- (3)
Sale of Series F
convertible preferred
stock (net of issuance
costs of $50)........... 2,905,730 3... -- -- 23,193 -- -- 23,196
Net loss.................. -- --.. -- -- -- -- (14,471) (14,471)
--------- --- --------- -- ------- ----- -------- --------
Balances, December 31,
1996.................... 6,940,571 7... 1,998,097 2 34,328 -- (22,281) 12,056
Exercise of stock
options................. -- --.. 774,042 1 529 -- -- 530
Exercise of Series E
preferred warrants...... 361,908.. -- -- -- 1,629 -- -- 1,629
Issuance of Series F
preferred warrants...... -- --.. -- -- 72 -- -- 72
Sale of Series G
convertible preferred
stock (net of issuance
costs of $1,069)........ 2,655,125 3... -- -- 22,028 -- -- 22,031
Deferred stock
compensation............ -- --.. -- -- 136 (136) -- --
Amortization of deferred
stock compensation...... -- --.. -- -- -- 20 -- 20
Net loss.................. -- --.. -- -- -- -- (13,055) (13,055)
--------- --- --------- -- ------- ----- -------- --------
Balances, December 31,
1997.................... 9,957,604 10.. 2,772,139 3 58,722 (116) (35,336) 23,283
Exercise of stock
options*................ -- --.. 74,810 -- 72 -- -- 72
Repurchase of shares*..... -- --.. (40,041) -- (10) -- -- (10)
Amortization of deferred
stock compensation*..... -- --.. -- -- -- 8 -- 8
Net loss*................. -- --.. -- -- -- -- (4,232) (4,232)
--------- --- --------- -- ------- ----- -------- --------
Balances, March 31,
1998*................... 9,957,604 $10 2,806,908 $3 $58,784 $(108) $(39,568) $ 19,121
========= === ========= == ======= ===== ======== ========
</TABLE>
- ---------------------------
* Unaudited
See Notes to Financial Statements.
F-5
<PAGE> 81
COM21, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED
----------------------------- MARCH 31,
1995 1996 1997 -------------------
------- -------- -------- 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss................................... $(6,666) $(14,471) $(13,055) $(3,828) $(4,232)
Adjustments to reconcile net loss to net
cash used in operating activities:
Interest expense (Note 6)............... -- -- 72 -- --
Depreciation and amortization........... 137 1,042 2,163 398 801
Deferred rent........................... -- 77 169 57 12
Changes in operating assets and
liabilities:
Accounts receivable -- trade.......... -- -- (3,984) -- (1,673)
Accounts receivable -- related
parties............................ -- -- (1,052) (500) 242
Inventories........................... -- -- (2,643) (685) 974
Prepaid expenses and other............ (71) (183) (149) 55 (417)
Other assets.......................... (30) (68) (98) 1 1
Accounts payable...................... 782 379 1,612 28 830
Accrued compensation and related
benefits........................... 49 518 290 (168) 42
Deferred revenue (principally related
party)............................. -- 1,000 4 -- 84
Other current liabilities............. 13 68 526 (20) 56
------- -------- -------- ------- -------
Net Cash Used in Operating Activities... (5,786) (11,638) (16,145) (4,662) (3,280)
------- -------- -------- ------- -------
Cash Used in Investing Activities:
Purchases of property and equipment........ (987) (2,345) (2,085) (300) (389)
------- -------- -------- ------- -------
Cash Flows From Financing Activities:
Net proceeds from issuance of common
stock................................... 9 43 530 49 62
Net proceeds from issuance of preferred
stock................................... 7,723 23,196 23,660 -- --
Proceeds from issuance of debt
obligations............................. 241 250 2,440 340 --
Repayments under capital lease
obligations............................. (8) (232) (607) (167) (182)
Repayments on debt obligations............. -- (120) (2,270) (69) (79)
------- -------- -------- ------- -------
Net Cash Provided by (Used in) Financing
Activities............................ 7,965 23,137 23,753 153 (199)
------- -------- -------- ------- -------
Net Change in Cash and Cash Equivalents...... 1,192 9,154 5,523 (4,809) (3,868)
Cash and Cash Equivalents, Beginning of
period..................................... 2,081 3,273 12,427 12,427 17,950
------- -------- -------- ------- -------
Cash and Cash Equivalents, End of period..... $ 3,273 $ 12,427 $ 17,950 $ 7,618 $14,082
======= ======== ======== ======= =======
Noncash Investing and Financing Activities:
Property and equipment acquired under
capital leases.......................... $ 156 $ 1,722 $ 1,146 $ -- $ 203
======= ======== ======== ======= =======
Deferred stock compensation................ $ -- $ -- $ 136 $ -- $ --
======= ======== ======== ======= =======
Issuance of preferred stock warrants in
connection with debt obligations........ $ -- $ -- $ 72 $ -- $ --
======= ======== ======== ======= =======
Supplemental Cash Flow Information:
Cash paid for income taxes................. $ 1 $ 5 $ 14 $ -- $ 9
======= ======== ======== ======= =======
Cash paid for interest..................... $ 5 $ 182 $ 324 $ 96 $ 85
======= ======== ======== ======= =======
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE> 82
COM21, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business -- Com21, Inc. (the "Company") was incorporated in Delaware in
June 1992. The Company designs, develops, markets and sells value-added,
high-speed communications solutions for the broadband access market. During
1997, the Company exited the development stage for financial reporting purposes
as it completed its initial product development activities and commenced
shipping product.
Financial Statements Estimates -- The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Such estimates include allowances for potentially
uncollectible accounts receivable, lower of cost or market inventory valuation
reserves, warranty costs, sales returns and a valuation allowance for deferred
tax assets. Actual results could differ from those estimates.
Fiscal Period -- Although for presentation purposes the Company has
indicated that its year end is December 31, its fiscal year actually ends on the
last business day of the year. The Company's fiscal years for 1995, 1996 and
1997 ended on December 29, 1995, December 31, 1996, and December 31, 1997,
respectively.
Cash Equivalents -- The Company considers all highly liquid debt
instruments with maturities at the date of purchase of three months or less to
be cash equivalents.
Inventories -- Inventories consist of computer products and sub-assemblies
stated at the lower of cost (first-in, first-out method) or market.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally three to seven years. Amortization of
leasehold improvements and assets recorded under capital lease agreements are
computed using the straight-line method over the shorter of the lease term or
the estimated useful lives of the related assets.
Long-Lived Assets -- On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires long-lived assets to be evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Adoption of SFAS No. 121 did not have a material effect on the
Company's financial position, results of operations or cash flows.
Income Taxes -- The Company accounts for income taxes under an asset and
liability approach. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
operating loss and tax credit carryforwards measured by applying currently
enacted tax laws. Valuation allowances are provided when necessary to reduce net
deferred tax assets to an amount that is more likely than not to be realized.
Certain Significant Risks and Uncertainties -- Financial instruments which
potentially subject the Company to concentrations of credit risk consist
primarily of cash and cash equivalents and accounts receivable. Cash and cash
equivalents are held primarily with one financial institution and consist
primarily of commercial paper and cash in bank accounts. The Company sells its
products primarily to cable operators in North America and primarily to systems
integrators in Europe, and generally does not require its customers to provide
collateral or other security to support accounts receivable. To reduce credit
risk, management performs ongoing credit evaluations of its customers' financial
F-7
<PAGE> 83
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
condition. The Company maintains allowances for estimated potential bad debt
losses. The recorded carrying amount of cash and cash equivalents, accounts
receivable, accounts payable and debt obligations approximate fair value.
The Company's customer base is highly concentrated. A relatively small
number of customers have accounted for a significant portion of the Company's
revenues, and the Company expects that this trend will continue for the
foreseeable future. In 1997 and the three months ended March 31, 1998, the top
six customers comprised 66% and 85%, respectively of the Company's total
revenues.
The Company participates in a dynamic high technology industry and believes
that changes in any of the following areas could have a material adverse effect
on the Company's future financial position, results of operations or cash flows:
advances and trends in new technologies and industry standards; competitive
pressures in the form of new products or price reductions on current products;
changes in product mix; changes in the overall demand for products offered by
the Company; changes in certain strategic relationships or customer
relationships; litigation or claims against the Company based on intellectual
property (Note 11), patent, product, regulatory or other factors; risk
associated with changes in domestic and international economic and/or political
conditions or regulations; availability of necessary components; risks
associated with Year 2000 compliance; and the Company's ability to attract and
retain employees necessary to support its growth.
Revenue Recognition -- The Company recognizes product revenue upon
shipment. Estimated sales returns and warranty costs are recorded at the time
the product revenue is recognized. Revenue for software licenses is recognized
upon delivery provided that any remaining obligations are insignificant and
collection is probable. Software support and maintenance revenue are deferred
and amortized over the maintenance period on a straight-line basis. Installation
and training revenue are recognized as services are provided.
Software Development Costs -- Development costs incurred in the research
and development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established, at which time certain development costs required to attain general
production release would be capitalized. To date, the Company's software
development has essentially been completed concurrent with the establishment of
technological feasibility, and, accordingly, no costs have been capitalized.
Stock-Based Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees."
Net Loss Per Share -- In the fourth quarter of 1997, the Company adopted
SFAS No. 128, "Earnings Per Share" which requires a dual presentation of basic
and diluted earnings per share ("EPS"). Basic EPS excludes dilution and is
computed by dividing net income attributable to common stockholders by the
weighted average of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock (convertible preferred stock, warrants to
purchase convertible preferred stock and common stock options using the treasury
stock method) were exercised or converted into common stock. Potential common
shares in the diluted EPS computation are excluded in net loss periods as their
effect would be antidilutive. EPS for all periods have been computed in
accordance with SFAS No. 128.
Pro Forma Net Loss Per Share -- Pro forma net loss per share, basic and
diluted, is computed by dividing net loss attributable to common stockholders by
the weighted average number of common
F-8
<PAGE> 84
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
shares outstanding for the period and the weighted average number of shares
resulting from the assumed conversion of all outstanding shares of convertible
preferred stock.
Unaudited Pro Forma Information -- The unaudited pro forma information in
the accompanying balance sheet reflects the conversion of the outstanding shares
of convertible preferred stock into 9,957,604 shares of common stock upon the
effectiveness of the registration statement relating to the initial public
offering.
Unaudited Interim Financial Information -- The interim financial
information as of March 31, 1998 and for the three months ended March 31, 1997
and 1998 is unaudited and has been prepared on the same basis as the audited
financial statements. In the opinion of management, such unaudited information
includes all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the interim information. Operating results
for the three months ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998.
Recently Adopted Accounting Standards -- In the first quarter of 1998, the
Company adopted SFAS No. 130, "Reporting Comprehensive Income" and Statement of
Position ("SOP") 97-2, "Software Revenue Recognition."
SFAS No. 130 requires an enterprise to report, by major components and as a
single total, the change in net assets during the period from nonowner sources.
For the periods presented, net loss and comprehensive loss were the same.
SOP 97-2 requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on the relative fair
values of the elements. Adoption of this statement did not have a material
impact on the Company's financial position, results of operations and cash
flows.
Recently Issued Accounting Standard -- In June 1997, the Financial
Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
This statement is effective for fiscal year 1998 and adoption will not impact
the Company's financial position, results of operations or cash flows.
2. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and sub-assemblies................. $ 633 $ 476
Work-in-process.................................. 980 588
Finished goods................................... 1,030 605
------ ------
$2,643 $1,669
====== ======
</TABLE>
F-9
<PAGE> 85
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1996 1997 1998
------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Equipment under capital lease........ $ 1,953 $ 3,367 $ 3,644
Computer equipment and software...... 1,997 2,904 3,047
Production equipment................. 1,066 1,931 2,071
Leasehold improvements............... 181 208 230
Furniture and fixtures............... 171 189 199
------- ------- -------
5,368 8,599 9,191
Accumulated depreciation and
amortization....................... (1,145) (3,288) (4,081)
------- ------- -------
$ 4,223 $ 5,311 $ 5,110
======= ======= =======
</TABLE>
Accumulated amortization on capital leases as of December 31, 1996 and 1997
and March 31, 1998 was approximately $376,000, $1,167,000 and $1,445,000,
respectively.
4. DEBT OBLIGATIONS
Debt obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
----- -----
(IN THOUSANDS)
<S> <C> <C>
Unsecured borrowings due July 1, 1998............ $ 169 $ 84
Unsecured borrowings due October 1, 1998......... 202 119
Unsecured borrowings due August 1, 1999.......... -- 257
Unsecured borrowings due November 1, 1999........ -- 81
----- -----
371 541
Current portion.................................. (168) (353)
----- -----
Long-term portion................................ $ 203 $ 188
===== =====
</TABLE>
Notes Payable
The unsecured borrowings were obtained from notes payable issued to a
financing company for the purchase of computer software and equipment.
Borrowings bear interest at an effective interest rate of 16.94% per annum and
are payable in monthly installments with the remaining unpaid principal and
interest due upon the maturity date.
In consideration for the unsecured borrowings due on October 1, 1998 and
August 1, 1999 the Company issued the financing company warrants to purchase
4,688 and 2,125 shares of Series F convertible preferred stock, respectively, at
a price of $8.00 per share. The fair values of the warrants were insignificant
(Note 6).
Future annual maturities on the notes payable at December 31, 1997 are as
follows for the years ending 1998 - $353,000; 1999 - $188,000.
F-10
<PAGE> 86
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
Revolving Line of Credit
In May 1997, the Company entered into a revolving line of credit
arrangement for working capital purposes. Under the arrangement, the Company may
borrow up to the lesser of $5,000,000 or 80% of the Company's eligible domestic
and foreign accounts receivable. Borrowings bear interest at the LIBOR rate
(5.94% at December 31, 1997) plus 4.875% per annum. The arrangement
automatically renews for successive one-year periods until terminated at the
option of either party. Dividends may not be declared by the Company without the
lender's prior consent. As of December 31, 1997, no amounts were outstanding
under the arrangement.
Concurrent with executing the revolving line of credit arrangement, the
Company borrowed an additional $2,000,000 on a note which was repaid in full in
1997.
In consideration for these financing arrangements, the Company issued
warrants to purchase 25,000 shares of Series F convertible preferred stock at a
price of $8.00 per share (Note 6). As described in Note 6, the fair value of
such warrants was $72,000 which was recorded as additional interest expense in
the accompanying statement of operations for 1997.
5. COMMITMENTS
The Company leases its facilities and certain equipment under noncancelable
operating and capital leases. Future minimum lease payments under the Company's
capital and operating leases and the present value of minimum lease payments
under capital leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ------- ---------
(IN THOUSANDS)
<S> <C> <C>
1998......................................... $1,088 $ 763
1999......................................... 878 785
2000......................................... 424 812
2001......................................... 150 839
2002......................................... -- 866
Thereafter..................................... -- 1,499
------ ------
Future minimum lease payments.................. 2,540 $5,564
======
Amounts representing interest (15.0%).......... (363)
------
Present value of future minimum lease
payments..................................... $2,177
======
</TABLE>
In consideration for providing capital lease financing in 1996, the Company
issued warrants to purchase 2,505 shares and 6,814 shares of Series F
convertible preferred stock at a price of $8.00 per share to two financing
companies. The fair values of the warrants were insignificant (Note 6).
Rent expense incurred under the operating leases was approximately
$174,000, $501,000 and $843,000 for the years ended December 31, 1995, 1996 and
1997, respectively. Rent expense under the facilities lease is recognized on a
straight-line basis over the term of the lease. The difference between the
amounts paid and the amounts expensed is classified as deferred rent in the
accompanying balance sheets.
F-11
<PAGE> 87
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
6. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
As of December 31, 1997, the Company was authorized to issue 22,000,000
shares of convertible preferred stock, with a par value of $0.001 per share. The
Company has designated 1,805,674 shares as Series A, 250,000 shares as Series B,
166,667 shares as Series C, 1,817,655 as Series D, 362,500 shares as Series E,
3,125,000 shares as Series F and 3,000,000 shares as Series G.
Significant terms of the convertible preferred stock are as follows:
- Holders of convertible preferred stock are entitled to noncumulative
dividends when and as declared by the Board of Directors. Holders of
outstanding Series A, B, C, D, E, F and G convertible preferred stock are
entitled to a dividend rate of $0.10, $0.12, $0.14, $0.40, $0.44, $0.80
and $0.86 per share per annum, respectively. Preferred stock dividends
are payable before any cash dividend is paid on the common stock.
- Holders of Series A, B, C, D, E, F and G convertible preferred stock have
a liquidation preference of $1.58, $2.00, $3.00, $4.00, $4.50, $8.00 and
$8.70 per share, respectively, plus any declared but unpaid dividends.
The holders of Series D, E, F and G convertible preferred stock have a
priority liquidation preference over Series A, B and C convertible
preferred stock.
- Each share is convertible into one share of common stock, subject to
adjustments for events of dilution, at the option of the holder any time
after the date of issuance.
- Each share has the right to vote equal to the number of shares of common
stock into which it is convertible.
- Shares of Series A, B and C convertible preferred stock will
automatically be converted into common stock either (i) upon completion
of a public offering of common stock with aggregate proceeds greater than
$7,000,000 and at a price per share of not less than $5.00 or (ii) at
such time as the holders of more than 50% of the Series A, B and C
convertible preferred stock, voting as a single class, consent solely to
the conversion of Series A, B and C convertible preferred stock.
- Shares of Series D, E, F and G convertible preferred stock will
automatically be converted into common stock either (i) upon completion
of a public offering of common stock with aggregate proceeds greater than
$10,000,000 and at a price per share of not less than $20.00; (ii) at
such time as the holders of more than 50% of the Series D, E, F and G
convertible preferred stock, voting as a single class, consent solely to
the conversion of Series D, E, F and G convertible preferred stock; or
(iii) at such time as the holders of more than 50% of the Series F
convertible preferred stock consents solely to the conversion of Series F
convertible preferred stock.
Preferred Stock Warrants
At December 31, 1996 and 1997, warrants to purchase 381,661 and 46,286
shares, respectively, of various series of convertible preferred stock were
outstanding and consist of the following:
F-12
<PAGE> 88
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
- In April 1995, in connection with the sale of 1,812,500 shares of Series
D convertible preferred stock at $4.00 per share, purchasers of the
Series D convertible preferred stock were issued warrants to purchase
362,500 shares of Series E convertible preferred stock at $4.50 per
share. In 1997, warrants to purchase 361,908 shares of Series E preferred
stock were exercised, and the remaining warrants expired in November
1997.
- In December 1995, in consideration of capital lease financing provided by
a financing company, the Company issued warrants to purchase 5,154 shares
of Series D convertible preferred stock at a price of $5.82 per share.
The warrants expire in December 2005. All warrants issued were
outstanding at December 31, 1996 and 1997.
- During 1996, in consideration of debt and capital lease financing
provided by two financing companies, the Company issued warrants to
purchase 14,007 shares of Series F convertible preferred stock at a price
of $8.00 per share. The warrants expire in 2006. All warrants issued were
outstanding at December 31, 1996 and 1997.
- During 1997, in consideration of financing arrangements provided, the
Company issued warrants to purchase 27,125 shares of Series F convertible
preferred stock at a price of $8.00 per share. The warrants will expire
in May 2002 (25,000 warrants) and February 2007 (2,125 warrants). All
warrants issued were outstanding at December 31, 1997.
The fair values of the warrants issued in 1995 and 1996, in connection with
debt financing, were insignificant. The fair value of the warrants issued in
1997, in connection with debt financing, was approximately $72,000. Accordingly,
the fair value was recognized as additional interest expense in the accompanying
statement of operations for 1997.
Common Stock
At December 31, 1996 and 1997 and March 31, 1998, the Company had the right
to repurchase 44,301, 320,311 and 271,570 shares of common stock outstanding,
respectively. The number of shares subject to repurchase is reduced over a two-
to four-year vesting period. The Company has the right to repurchase these
shares at the original issuance price.
Net Loss Per Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted net loss per share computations (in thousands, except per
share amounts):
F-13
<PAGE> 89
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------- -------------------
1995 1996 1997 1997 1998
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Loss (Numerator):
Net loss, basic and
diluted.......... $(6,666) $(14,471) $(13,055) $(3,828) $(4,232)
------- -------- -------- ------- -------
Shares (Denominator):
Weighted average
common shares
outstanding...... 1,888 1,910 2,244 2,010 2,796
Weighted average
common shares
outstanding
subject to
repurchase....... (1) (16) (120) (42) (299)
------- -------- -------- ------- -------
Shares used in
computation,
basic and
diluted.......... 1,887 1,894 2,124 1,968 2,497
------- -------- -------- ------- -------
Net Loss Per Share,
Basic and Diluted... $ (3.53) $ (7.64) $ (6.15) $ (1.95) $ (1.69)
======= ======== ======== ======= =======
</TABLE>
During 1995, 1996, 1997 and the three-month periods ended March 31, 1997
and 1998, the Company had securities outstanding which could potentially dilute
basic EPS in the future, but were excluded in the computation of diluted EPS in
such periods, as their effect would have been antidilutive due to the net loss
reported in such periods. Such outstanding securities consist of the following
at March 31, 1998: 9,957,604 shares of convertible preferred stock; warrants to
purchase 46,286 shares of convertible preferred stock; 271,570 outstanding
shares of common stock subject to repurchase; and options to purchase 1,420,967
shares of common stock.
Stock Option Plan
Under the Company's 1995 Stock Option Plan (the "1995 Plan"), as restated
and amended in January 1998, the Company may grant options to purchase up to
3,750,000 shares of common stock to employees, directors and consultants at
prices not less than the fair market value (as determined by the Board of
Directors) at the date of grant for incentive stock options and not less than
85% of fair market value at the date of grant for nonstatutory stock options.
These options generally expire ten years from the date of grant and are
immediately exercisable. The Company has a right of repurchase (at the option
exercise price) of common stock issued from option exercises for unvested
shares. The right of repurchase generally expires 25% after the first 12 months
from the date of grant and then ratably over a 36-month period.
F-14
<PAGE> 90
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
Stock option activity under the 1995 Plan was as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
SHARES -------------------------------
AVAILABLE NUMBER WEIGHTED AVERAGE
FOR GRANT OF SHARES EXERCISE PRICE
----------- ----------- ----------------
<S> <C> <C> <C>
Balances, January 1, 1995......... -- -- $ --
Reserved.......................... 750,000 -- --
Granted (weighted average fair
value of $0.11)................. (598,250) 598,250 0.39
Canceled.......................... 7,000 (7,000) 0.40
Exercised......................... -- (25,000) 0.40
----------- -----------
Balances, December 31, 1995 (3,130
vested at a weighted average
price of $0.40)................. 158,750 566,250 0.39
Reserved.......................... 1,000,000 -- --
Granted (weighted average fair
value of $0.16)................. (1,171,315) 1,171,315 0.58
Canceled.......................... 44,698 (44,697) 0.62
Exercised......................... -- (102,639) 0.45
----------- -----------
Balances, December 31, 1996
(205,706 vested at a weighted
average price of $0.44)......... 32,133 1,590,229 0.52
Reserved.......................... 500,000 -- --
Granted (weighted average fair
value of $1.29)................. (587,990) 587,990 3.66
Canceled.......................... 75,266 (75,266) 0.64
Exercised......................... -- (774,042) 0.68
----------- -----------
Balances, December 31, 1997....... 19,409 1,328,911 1.80
Reserved.......................... 750,000 -- --
Granted........................... (218,440) 218,440 7.02
Canceled.......................... 51,574 (51,574) 2.08
Exercised......................... -- (74,810) 0.97
----------- -----------
Balances, March 31, 1998.......... 602,543 1,420,967 $2.64
=========== ===========
</TABLE>
Additional information regarding options outstanding at December 31, 1997
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING VESTED OPTIONS
------------------------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE VESTED PRICE
- ----------- ----------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
$0.20-$0.40 628,065 7.9 $0.40 212,821 $0.40
$0.80-$0.88 393,875 8.9 0.81 70,112 0.80
$3.30-$6.90 306,971 9.8 5.96 3,197 6.89
---------- --------
$0.20-$6.90 1,328,911 8.6 $1.80 286,130 $0.57
========== ========
</TABLE>
F-15
<PAGE> 91
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
Deferred Stock Compensation
As discussed in Note 1, the Company accounts for its stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25.
Accordingly, the Company recorded deferred compensation expense equal to the
difference between the grant price and deemed fair value of the Company's common
stock for options granted prior to December 31, 1997. Such deferred compensation
expense aggregated $136,000 and is being amortized to expense over the four-year
vesting period of the options.
Additional Stock Plan Information
Since the Company continues to account for its stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25, SFAS
No. 123, "Accounting for Stock-Based Compensation," requires the disclosure of
pro forma net income (loss) and earnings (loss) per share had the Company
adopted the fair value method as of the beginning of 1995. The Company's
calculations were made using the minimum value pricing model which requires
subjective assumptions, including expected time to exercise, which affects the
calculated values. The following weighted average assumptions were used for
1995, 1996 and 1997: expected life, 5 years; risk-free interest rate, 6.75%; and
no dividends during the expected term. The Company's calculations are based on a
single option award valuation approach, and forfeitures are recognized as they
occur. If the computed fair values of the 1995, 1996 and 1997 awards had been
amortized to expense over the vesting period of the awards, pro forma net loss
would have been approximately $(6,676,000)($(3.54) per share, basic and diluted)
in 1995, $(14,522,000)($(7.67) per share, basic and diluted) in 1996 and
$(13,153,000)($(6.19) per share, basic and diluted) in 1997.
7. INCOME TAXES
Income tax expense for the years ended December 31, 1995, 1996 and 1997
consisted solely of state franchise taxes.
The components of deferred income tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accruals and reserves not currently
deductible........................... $ 133 $ 827
Capitalized start-up costs.............. 966 765
Capitalized research and development
costs................................ -- 890
Net operating loss carryforwards........ 7,930 11,272
Tax credit carryforwards................ 1,181 2,998
Depreciation............................ 162 500
-------- --------
Total gross deferred tax assets........... 10,372 17,252
Valuation allowance....................... (10,372) (17,252)
-------- --------
Total deferred tax assets................. $ -- $ --
======== ========
</TABLE>
The net change in the total valuation allowance for the year ended December
31, 1997 was a net increase of $6,880,000. The increase in the valuation
allowance was primarily a result of increased
F-16
<PAGE> 92
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
net operating loss and tax credit carryforwards generated in 1997 which the
Company provided a full valuation allowance against based on the Company's
evaluation of the likelihood of realization of future tax benefits resulting
from the deferred tax assets.
As of December 31, 1997, the Company had available for carryforward net
operating losses for federal and state income tax purposes of approximately
$28,344,000 and $18,495,000, respectively. Federal net operating loss
carryforwards will expire if not utilized beginning in the years 2009 through
2012. State net operating loss carryforwards will expire if not utilized
beginning in the years 1999 through 2001.
As of December 31, 1997, the Company had available for carryforward
research and experimental tax credits for federal and state income tax purposes
of approximately $1,531,000 and $1,300,000, respectively. Federal research and
experimentation tax credit carryforwards expire from 2009 through 2012. The
Company also had approximately $170,000 in California manufacturers investment
credits.
Current Federal and California tax laws include substantial restrictions on
the utilization of net operating losses and tax credits in the event of an
"ownership change" of a corporation. Accordingly, the Company's ability to
utilize net operating loss and tax credit carryforwards may be limited as a
result of such "ownership change" as defined. Such a limitation could result in
the expiration of carryforwards before they are utilized.
8. MAJOR CUSTOMERS AND EXPORT SALES
Revenues for 1996 resulted from license fee revenue from one preferred
stockholder.
As of December 31, 1997, one unaffiliated customer and one preferred
stockholder represented 24% and 14%, respectively, of total accounts receivable.
Sales to these customers in 1997 represented 21% and 12% of total 1997 revenues,
respectively. In addition, 1997 sales to another preferred stockholder
represented 16% of total 1997 revenues.
Revenues for the three months ended March 31, 1997 resulted from license
fee revenue from one preferred stockholder.
As of March 31, 1998, four unaffiliated customers and one preferred
stockholder represented 34%, 11%, 10%, 10% and 12%, respectively, of total
accounts receivable. Sales to these customers for the three months ended March
31, 1998 represented 31%, 10%, 13%, 11% and 13%, respectively, of total revenues
for the quarter.
Export sales attributable to international customers accounted for 64% and
50% of total revenues for the year ended December 31, 1997 and the three months
ended March 31, 1998, respectively.
9. RELATED PARTY TRANSACTIONS
In March 1996, a preferred stockholder entered into a five-year licensing
agreement with the Company to license certain technology on a nonexclusive
basis. Under the terms of this agreement: (i) the Company received a
nonrefundable license fee of $1,000,000 in 1996 (which accounted for all of 1996
revenues), and (ii) if the Company met certain conditions in 1997, it would be
entitled to an additional $500,000 of nonrefundable license fees. In March 1997,
the Company met such conditions and received additional nonrefundable license
fees of $500,000 from this preferred stockholder. Such license fees were
recognized as revenue in 1997. In addition, the Company received prepaid
royalties pursuant to the licensing agreement of $1,000,000, which have been
F-17
<PAGE> 93
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
deferred and will be recognized ratably upon sale of the first 100,000 units of
product sold by the preferred stockholder incorporating the Company's
technology. The prepaid royalties will be earned at the earlier of the sale of
the 100,000 units of product or the expiration of the royalty period at December
31, 1998. As of December 31, 1997, approximately $993,000 of prepaid royalties
was unrecognized. In addition, this preferred stockholder purchased 876,261
shares of Series F preferred stock for $8.00 per share in 1996.
In 1996, the Company paid a director $22,000 in consulting fees.
For the year ended December 31, 1997, total revenues included sales to
three preferred stockholders of approximately $2,509,000, $1,889,000 and
$123,000 (with related cost of revenues of approximately $999,000, $951,000 and
$74,000, respectively). As of December 31, 1997, accounts receivable included
amounts due from the same three preferred stockholders of approximately
$364,000, $688,000, and $0, respectively.
For the three months ended March 31, 1998, total revenues included sales to
two preferred stockholders of approximately $922,000 and $31,000 (with related
cost of revenues of approximately $772,000 and $15,000, respectively). As of
March 31, 1998, accounts receivable included amounts due from the same two
preferred stockholders of approximately $746,000 and $64,000, respectively.
10. EMPLOYEE BENEFIT PLAN
In 1995, the Company adopted a defined contribution retirement plan (the
"Retirement Plan"), which has been determined by the Internal Revenue Service to
be qualified under Section 401(k) of the Internal Revenue Code of 1986. The
Retirement Plan covers essentially all full-time employees. Eligible employees
may make voluntary contributions to the Retirement Plan up to 15% of their
annual compensation. The Company has not made any employer contributions to the
Retirement Plan.
11. SUBSEQUENT EVENTS
Litigation
In 1997 the Company received a written notice from Hybrid Networks, Inc.
("Hybrid") in which Hybrid claimed to have patent rights in certain cable modem
technology and requested that the Company review its own products in light of
Hybrid's alleged patent rights to U.S. Patent No. 5,586,121 (the "121 patent")
issued on December 17, 1996 and entitled "Asymmetric Hybrid Access System and
Method" and U.S. Patent No. 5,347,304 (the "304 patent") issued on September 13,
1994 and entitled "Remote Link Adapter for Use in TV Broadcast Data Transmission
Systems" (collectively, the "Hybrid patents"). The Company informed Hybrid that
it believes that the Company's products do not infringe any valid claim of the
Hybrid patents. In January 1998, Hybrid filed an action against the Company in
the U.S. District Court for the Eastern District of Virginia, accusing the
Company of willfully infringing the Hybrid patents, among other claims.
Subsequently, the Company filed suit for declaratory relief against Hybrid in
the U.S. District Court for the Northern District of California asserting that
it does not infringe the Hybrid patents and that the Hybrid patents are invalid.
The Company then filed a motion in the Virginia District Court to transfer the
action filed by Hybrid to the Northern District of California, and that motion
has been granted. Hybrid's complaint seeks injunctive relief and unspecified
damages, among other relief. Hybrid's complaint also identifies a pending
application for reissuance of the 304 patent to broaden the scope of its claims,
which the U.S. Patent and Trademark Office has allowed for reissuance with
respect to certain claims, and states
F-18
<PAGE> 94
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
that once the reissue application is issued, it will be substituted for the 304
patent in the action. The Company has received opinions of its patent counsel
that the claims of the Hybrid patents, including the claims currently set forth
in Hybrid's 304 reissue patent application, are either invalid or not infringed
by the Company's products. However, there can be no assurance that some or all
of the Company's products will not ultimately be determined to infringe the
Hybrid patents, including the 304 patent as reissued, and the Company
anticipates that Hybrid will continue to pursue litigation with respect to these
claims. The results of any litigation matter are inherently uncertain. In the
event of an adverse result in the Hybrid litigation, or in any other litigation
with third parties that could arise in the future with respect to intellectual
property rights relevant to the Company's products, the Company could be
required to pay substantial damages, including treble damages if the Company is
held to have willfully infringed, to cease the manufacture, use and sale of
infringing products, to expend significant resources to develop non-infringing
technology, or to obtain licenses to the infringing technology. There can be no
assurance that licenses will be available from Hybrid, or any other third party
that asserts intellectual property claims against the Company, on commercially
reasonable terms, or at all. In addition, litigation frequently involves
substantial expenditures and can require significant management attention, even
if the Company ultimately prevails. Accordingly, there can be no assurance that
the Hybrid matter will not have a material adverse effect on the Company's
business, operating results and financial condition. Because of the early stage
of this litigation, and because Hybrid has sought unspecified damages, neither
the ultimate outcome of this litigation nor any costs and payments resulting
from the litigation or any settlement can presently be determined. Accordingly,
no provision for any loss which may result from the Hybrid litigation has been
recorded in the accompanying financial statements.
1998 Equity Plans
On March 10, 1998, the Board of Directors adopted, subject to stockholder
approval, the 1998 Stock Incentive Plan (the "1998 Stock Plan") and the 1998
Employee Stock Purchase Plan (the "1998 Purchase Plan").
The 1998 Stock Plan will serve as the successor equity incentive program to
the Company's existing 1995 Plan effective April 1, 1998. A total of 2,023,510
shares of Common Stock have been reserved for issuance under the 1998 Stock
Plan. In addition, the share reserve may be increased up to 271,570 shares for
repurchases of unvested common shares issued under the 1995 Plan. Options
outstanding under the 1995 Plan on the date of execution and final pricing of
the underwriting agreement for the initial public offering will be incorporated
into the 1998 Stock Plan. Such incorporated options will continue to be governed
by their existing terms. Under the 1998 Stock Plan, the Company is authorized to
issue shares of common stock to employees, directors and consultants under five
separate programs: Discretionary Option, Stock Issuance, Salary Investment
Option Grant, Automatic Option Grant and Director Fee Option Grant. The number
of shares reserved for issuance under the 1998 Stock Plan will automatically
increase at the beginning of each calendar year, beginning in 1999, by an amount
equal to 5% of the total number of shares of common stock outstanding at the end
of the preceding year. The Discretionary Option Program of the 1998 Stock Plan
provides for the grant of options under terms comparable to those provided on
options granted under the 1995 Plan except that all options are to be granted at
a price not less than fair market value on the date of grant.
Under the 1998 Purchase Plan, eligible employees are allowed to have salary
withholdings of up to 10% of their base compensation to purchase shares of
common stock at a price equal to 85% of the lower of the market value of the
stock at the beginning or end of defined purchase periods. The
F-19
<PAGE> 95
COM21, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
initial purchase period commences upon the execution and final pricing of the
underwriting agreement for the initial public offering of the Company's common
stock. The Company has reserved 250,000 shares of common stock for issuance
under this plan.
Board Resolutions
On March 10, 1998, the Board of Directors adopted, subject to stockholder
approval, a change in the authorized number of shares of the Common and
Convertible Preferred stock to 40,000,000 and 5,000,000, respectively. An
Amended and Restated Certificate of Incorporation will be filed following the
effectiveness of the registration statement relating to the initial public
offering.
On March 10, 1998, the Board of Directors adopted, subject to stockholder
approval (which was received April 21, 1998), a one-for-two reverse split of the
outstanding shares of common and convertible preferred stock. The stock split
will occur upon the effectiveness of the registration statement relating to the
initial public offering. All share and per share amounts in these financial
statements have been adjusted to give effect to the reverse stock split.
On April 22, 1998, the Board of Directors approved an amendment to the 1998
Stock Plan to reserve an additional 500,000 shares for issuance under the 1998
Stock Plan. In addition, the Board of Directors authorized the grant of options
to purchase 505,250 shares of common stock at $9.00 per share. Such grants were
made to employees and officers under the 1998 Stock Plan.
Stockholder Consent
On April 22, 1998, holders of more than 50% of the Series D, E, F and G
convertible preferred stock, voting as a single class, consented to the
automatic conversion of all outstanding shares of Series D, E, F and G
convertible preferred stock into common stock upon the completion of the initial
public offering regardless of the offering price per share.
F-20
<PAGE> 96
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON US
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
The Company........................... 4
Risk Factors.......................... 5
Use of Proceeds....................... 20
Dividend Policy....................... 20
Capitalization........................ 20
Dilution.............................. 21
Selected Financial Data............... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 30
Management............................ 50
Certain Transactions.................. 60
Principal Stockholders................ 62
Description of Capital Stock.......... 64
Shares Eligible for Future Sale....... 67
Underwriting.......................... 69
Legal Matters......................... 70
Experts............................... 71
Change in Independent Auditors........ 71
Additional Information................ 71
Glossary of Technical Terms........... 72
Index to Financial Statements......... F-1
</TABLE>
UNTIL , 1998 (25 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
COM21 LOGO
4,000,000 SHARES
COMMON STOCK
DEUTSCHE MORGAN GRENFELL
MERRILL LYNCH & CO.
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
PROSPECTUS
, 1998
<PAGE> 97
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 14,927
NASD Filing Fee............................................. 5,560
Nasdaq National Market Listing Fee.......................... 71,875
Printing and Engraving Expenses............................. 150,000
Legal Fees and Expenses of the Company...................... 375,000
Accounting Fees and Expenses................................ 400,000
Blue Sky Fees and Expenses.................................. 5,000
Transfer Agent Fees......................................... 15,000
Miscellaneous............................................... 12,638
----------
Total............................................. $1,050,000
==========
</TABLE>
- ---------------
* To be completed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). The Company's Bylaws provides for mandatory
indemnification of its directors and officers and permissible indemnification of
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. The Company's Certificate of Incorporation provides
that, subject to Delaware law, its directors shall not be personally liable for
monetary damages for breach of the directors' fiduciary duty as directors to the
Company and its stockholders. This provision in the Certificate of Incorporation
does not eliminate the directors' fiduciary duty, and in appropriate
circumstances equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director's
duty of loyalty to the Company or its stockholders for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
unlawful under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Company has entered into
indemnification agreements with its officers and directors, a form of which is
filed as Exhibit 10.8 to this Registration Statement (the "Indemnification
Agreements"). The Indemnification Agreements provide the Company's officers and
directors with further indemnification to the maximum extent permitted by the
Delaware General Corporation Law. Reference is also made to Section 6 of the
Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers
and directors of the Company against certain liabilities, and Section 13 of the
Amended and Restated Registration Rights Agreement contained in Exhibit 4.2
hereto, indemnifying certain of the Company's stockholders, including
controlling stockholders, against certain liabilities.
II-1
<PAGE> 98
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1995, the Company has issued and sold the following
securities:
1. The Company issued and sold 916,366 shares of its Common Stock to
employees and consultants for an aggregate purchase price of $644,154
pursuant to the exercise of options under its 1995 Stock Option Plan
(Exhibit 10.5).
2. On May 2, 1995, the Company issued 166,667 shares of its Series C
Preferred Stock upon exercise of certain warrants, for an aggregate
exercise price of $500,000 to several investors.
3. On May 1, 1995, the Company issued and sold an aggregate of 1,812,500
shares of its Series D Preferred Stock and Warrants to purchase an
aggregate of 362,500 shares of its Series E Preferred Stock for an
aggregate purchase price of $7,250,000 to several investors.
4. On December 11, 1995, in connection with an equipment leasing
transaction, the Company issued Warrants to purchase 5,154 shares of
its Series D Preferred Stock, at an exercise price of $5.82 per share,
to Comdisco, Inc.
5. During the period from September 4, 1997 to November 1, 1997, the
Company issued 361,908 shares of its Series E Preferred Stock upon the
exercise of certain warrants, at an aggregate purchase price of
$1,628,586 to several investors.
6. On April 4, 1996, April 22, 1996, May 7, 1996, June 28, 1996, and July
11, 1996, the Company issued and sold an aggregate of 2,905,730 shares
of its Series F Preferred Stock for an aggregate purchase price of
$23,245,840 to several investors.
7. During the period from April 11, 1996 to May 5, 1997, in connection
with an equipment leasing transaction, the Company issued Warrants to
purchase 9,318 shares of its Series F Preferred Stock, at an exercise
price of $8.00 per share, to Comdisco, Inc.
8. On August 30, 1996, in connection with an office equipment lease, the
Company issued Warrants to purchase 6,814 shares of its Series F
Preferred Stock, at an exercise price of $8.00 per share, to
Lindsay-Ferrari.
9. On May 30, 1997, in connection with a credit agreement, the Company
issued Warrants to purchase 25,000 shares of its Series F Preferred
Stock, at an aggregate exercise price of $8.00 per share, to GreyRock
Business Credit, a division of NationsCredit Commercial Corporation.
10. On July 22, 1997, August 11, 1997 and September 12, 1997, the Company
issued and sold an aggregate of 2,655,125 shares of its Series G
Preferred Stock for an aggregate purchase price of $23,099,587 to
several investors. Deutsche Morgan Grenfell Inc. acted as the placement
agent for this transaction and in connection with that placement
received cash compensation.
The issuances described in paragraph 1 were deemed exempt from registration
under the Securities Act in reliance upon Rule 701 promulgated under the
Securities Act. The issuances of the securities described in paragraphs 2
through 10 were deemed to be exempt from registration under the Act in reliance
on Section 4(2) of the Act as transactions by an issuer not involving any public
offering. In addition, the recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access, through their relationships
with the Company, to information about the Company.
II-2
<PAGE> 99
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits listed in the Exhibit Index as filed as part of this
Registration Statement.
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
------ -------------
<S> <C>
1.1* Form of Underwriting Agreement among the Registrant,
Deutsche Morgan Grenfell Inc., Merrill Lynch, Pierce, Fenner
and Smith Incorporated and Wessels, Arnold & Henderson,
L.L.C..
3.1 Registrant's Amended and Restated Certificate of
Incorporation.
3.2 Registrant's Amended and Restated Bylaws.
4.1 Form of Registrant's Specimen Common Stock Certificate.
4.2 Amended and Restated Information and Registration Rights
Agreement, among the Registrant and the investors and
founders named therein, dated July 22, 1997.
5.1 Legal Opinion of Brobeck, Phleger & Harrison LLP, counsel
for the Registrant.
10.1* Lease Agreement between the Company, John Arrillaga and
Richard T. Peery, dated May 10, 1996.
10.2*+ Technology License and Reseller Agreement between the
Company and 3Com Corporation, dated March 22, 1996.
10.3*+ Reseller Agreement between the Company and 3Com Corporation,
dated July 30, 1997.
10.4*+ Hardware and Software Technology License Agreement between
the Company, Advanced Telecommunications Modules, Limited
and Advanced Telecommunications Modules, Inc., dated
February 1, 1996.
10.5* Registrant's 1995 Stock Option Plan.
10.6* Registrant's 1998 Stock Incentive Plan.
10.7* Registrant's 1998 Employee Stock Purchase Plan.
10.8* Form of Indemnity Agreement entered into by Registrant with
each of its executive officers and directors.
10.9* Loan and Security Agreement between Registrant and Greyrock
Business Credit, dated May 30, 1997.
10.10*+ International OEM Agreement between the Company, Advanced
Telecommunications Modules, Inc. and Advanced
Telecommunications Modules, Limited, dated March 7, 1996.
10.11*+ Agreement for Manufacturing Services between the Company and
Celestica, Inc., dated October 25, 1996.
10.12*+ Wind River Systems, Inc. VxWorks License Agreement.
10.13+ Purchase and License Agreement by and between the Company
and Siemens AG, dated December 2, 1997.
10.14+ Distribution Agreement by and between the Company and
Philips Public Telecommunication Systems, dated ,
1997.
16.1 Letter from KPMG Peat Marwick LLP regarding Change in
Certifying Accountant.
23.1 Consent of Independent Auditors.
23.2 Consent of Counsel (see Exhibit 5.1).
24.1* Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment has been requested as to a portion of this Agreement.
II-3
<PAGE> 100
ITEM 17. UNDERTAKINGS
The Company hereby undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Company, Indemnification Agreements entered
into between the Company and its officers and directors, the Underwriting
Agreement, or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer, or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of Prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 101
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-1 and has duly caused this Amendment No. 1
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Milpitas, State of California, on this
24th day of April, 1998.
COM21, INC.
By: /s/ DAVID L. ROBERTSON
------------------------------------
David L. Robertson
Chief Financial Officer, Vice
President, Finance and Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the persons whose signatures
appear below, which persons have signed such Registration Statement in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President, Chief Executive April 24, 1998
- -------------------------------------------------------- Officer (Principal
(Peter D. Fenner) Executive Officer and
Director)
/s/ David L. Robertson Vice President, Finance, April 24, 1998
- -------------------------------------------------------- Chief Financial Officer
(David L. Robertson) (Principal Financial and
Accounting Officer) and
Secretary
* Director April 24, 1998
- --------------------------------------------------------
(Paul Baran)
* Director April 24, 1998
- --------------------------------------------------------
(Robert A. Hoff)
* Director April 24, 1998
- --------------------------------------------------------
(C. Richard Kramlich)
* Director April 24, 1998
- --------------------------------------------------------
(Scott J. Loftesness)
/s/ William R. Hearst, III Director April 24, 1998
- --------------------------------------------------------
(William R. Hearst, III)
* Director April 24, 1998
- --------------------------------------------------------
(Robert C. Hawk)
* Director April 24, 1998
- --------------------------------------------------------
(Robert W. Wilmot)
*By: /s/ DAVID L. ROBERTSON
---------------------------------------------------
David L. Robertson
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 102
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints, jointly and severally, Peter D. Fenner and David
L. Robertson, and each one of them, his true and lawful attorneys-in-fact and
agents, each with full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to sign any
registration statement for the same offering covered by this Registration
Statement that is to be effective upon filing pursuant to Rule 462(b)
promulgated under the Securities Act of 1933, as amended, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming that each of said
attorneys-in-fact and agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated.
<TABLE>
<C> <S> <C>
/s/ William R. Hearst, III Director April 24, 1998
- --------------------------------------------------------
(William R. Hearst, III)
</TABLE>
II-6
<PAGE> 103
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
------ -------------
<S> <C>
1.1* Form of Underwriting Agreement among the Registrant,
Deutsche Morgan Grenfell Inc., Merrill Lynch, Pierce, Fenner
and Smith Incorporated and Wessels, Arnold & Henderson,
L.L.C.
3.1 Registrant's Amended and Restated Certificate of
Incorporation.
3.2 Registrant's Amended and Restated Bylaws.
4.1 Form of Registrant's Specimen Common Stock Certificate.
4.2* Amended and Restated Information and Registration Rights
Agreement, among the Registrant and the investors and
founders named therein, dated July 22, 1997.
5.1 Legal Opinion of Brobeck, Phleger & Harrison LLP, counsel
for the Registrant.
10.1* Lease Agreement between the Company, John Arrillaga and
Richard T. Peery, dated May 10, 1996.
10.2*+ Technology License and Reseller Agreement between the
Company and 3Com Corporation, dated March 22, 1996.
10.3*+ Reseller Agreement between the Company and 3Com Corporation,
dated July 30, 1997.
10.4*+ Hardware and Software Technology License Agreement between
the Company, Advanced Telecommunications Modules, Limited
and Advanced Telecommunications Modules, Inc., dated
February 1, 1996.
10.5* Registrant's 1995 Stock Option Plan.
10.6* Registrant's 1998 Stock Incentive Plan.
10.7* Registrant's 1998 Employee Stock Purchase Plan.
10.8* Form of Indemnity Agreement entered into by Registrant with
each of its executive officers and directors.
10.9* Loan and Security Agreement between Registrant and Greyrock
Business Credit, dated May 30, 1997.
10.10*+ International OEM Agreement between the Company, Advanced
Telecommunications Modules, Inc. and Advanced
Telecommunications Modules, Limited, dated March 7, 1996.
10.11*+ Agreement for Manufacturing Services between the Company and
Celestica, Inc., dated October 25, 1996.
10.12*+ Wind River Systems, Inc. VxWorks License Agreement.
10.13+ Purchase and License Agreement by and between the Company
and Siemens AG, dated December 2, 1997.
10.14+ Distribution Agreement by and between the Company and
Philips Public Telecommunication Systems, signed in November
1997.
16.1 Letter from KPMG Peat Marwick LLP regarding Change in
Certifying Accountant.
23.1 Consent of Independent Auditors.
23.2 Consent of Counsel (see Exhibit 5.1).
24.1* Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment has been requested as to a portion of this Agreement.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
COM21, INC.
Com21, Inc., (the "Corporation") a corporation organized and existing
under and by virtue of the general Corporation Law of the State of Delaware,
hereby certifies as follows:
FIRST: The name of the corporation is Com21, Inc. and that corporation
was originally incorporated on June 29, 1992 pursuant to the General Corporation
Law.
SECOND: This Amended and Restated Certificate of Incorporation has been
duly adopted in accordance with the provisions of Sections 245 and 242 of the
General Corporation Law of the State of Delaware by the directors and
stockholders of the Corporation and is set forth in its entirety as follows:
ARTICLE I
The name of the corporation is Com21, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 32 Loockerman Square, Suite L-100, Dover, Delaware 19901, County of
Kent. The name of its registered agent at such address is The Prentice-Hall
Corporation System, Inc.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware (the "GCL").
ARTICLE IV
A. Classes of Stock. The Corporation is authorized to issue two classes
of
<PAGE> 2
stock, to be designated, respectively, "Common Stock" and "Preferred Stock." The
total number of shares that the Corporation is authorized to issue is Forty Five
Million (45,000,000) shares. Forty Million (40,000,000) shares shall be Common
Stock, par value $0.001 per share and Five Million (5,000,000) shares shall be
Preferred Stock, par value $0.001 per share.
B. Rights, Preferences and Restrictions of Preferred Stock. Without
further stockholder approval, the Preferred Stock authorized by this Amended and
Restated Certificate of Incorporation may be issued from time to time in one or
more series. The Board of Directors is hereby authorized to fix or alter the
powers, preferences, rights and restrictions granted to or imposed upon each
series of Preferred Stock, and the number of shares constituting any such series
and the designation thereof, or of any of them. The powers, preferences, rights
and restrictions of any such additional series may be subordinated to, pari
passu with (including, without limitation, inclusion in provisions with respect
to liquidation and acquisition preferences, redemption and/or approval of
matters by vote), or senior to any of those of any present or future class or
series of Preferred Stock or Common Stock. The Board of Directors is also
authorized to increase or decrease the number of shares of any series prior or
subsequent to the issue of that series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series shall
be so decreased, the shares constituting such decrease shall resume the status
which they had prior to the adoption of the resolution originally fixing the
number of shares of such series.
C. Common Stock.
1. Dividend Rights. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the Corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. Liquidation Rights. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, after distribution of
the preferential amounts to be distributed to the holders of shares of the
Preferred Stock, the holders of shares of the Common Stock shall be entitled to
receive all of the remaining assets of the Corporation available for
distribution to its stockholders, ratably in proportion to the number of shares
of the Common Stock held by them.
3. Redemption. The Common Stock is not redeemable.
4. Voting Rights. The holder of each share of Common Stock shall have
the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with the Bylaws of this Corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
<PAGE> 3
ARTICLE V
Except as otherwise provided in this Amended and Restated Certificate of
Incorporation, in furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of the Corporation.
ARTICLE VI
In furtherance and not in limitation of the powers conferred by statute
and subject to the provisions of Article VII:
A. The Board of Directors of the Corporation is expressly authorized to
adopt, amend, alter, or repeal the Bylaws of the Corporation.
B. Elections of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
C. Meetings of stockholders may be held within or without the State of
Delaware as the Bylaws may provide. The books of the Corporation may be kept at
such place within or without the State of Delaware as the Bylaws of the
Corporation may provide or as may be designated from time to time by the Board
of Directors of the Corporation.
ARTICLE VII
A director of this Corporation, to the full extent permitted by the GCL
as it now exists or as it may hereafter be amended, shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director. Neither any amendment nor repeal of this Article
NINTH, nor the adoption of any provision of this Amended and Restated
Certificate of Incorporation inconsistent with this Article NINTH, shall
eliminate or reduce the effect of this Article NINTH in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article
NINTH, would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision. If the GCL is amended after approval by the stockholders
of this Article NINTH to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of the Corporation shall be eliminated or limited to the fullest extent
permitted by the GCL as so amended.
Any repeal or modification of the foregoing provisions of this Article
NINTH by the stockholders of the Corporation shall not adversely affect any
right or protection of a director of the Corporation existing at the time of
such repeal or modification.
<PAGE> 4
ARTICLE VIII
To the full extent permitted by the GCL and any other applicable law,
this Corporation is also authorized to provide indemnification of, and
advancement of expenses to, such directors, officers, employees and agents
through Bylaw provisions, agreements with such persons, vote of stockholders or
disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the GCL, subject only to
limits created by applicable Delaware law (statutory or non-statutory), with
respect to actions for breach of duty to this Corporation, its stockholders, and
others.
Any repeal or modification of any of the foregoing provisions of this
Article TENTH shall not adversely affect any right or protection of a director,
officer, agent or other person existing at the time of, or increase the
liability of any director of this Corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to such repeal or
modification.
ARTICLE IX
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation.
<PAGE> 5
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be signed by Peter D. Fenner, its President, and
attested to by David L. Robertson, its Chief Financial Officer and Secretary, on
this __ day of April, 1998.
COM21,INC.
By:
------------------------------------
Peter D. Fenner
President and Chief Executive Officer
ATTEST:
- -------------------------------------
David L. Robertson,
Chief Financial Officer and Secretary
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
COM21, INC.
(As Amended March __, 1998)
A Delaware Corporation
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of Com21, Inc. (the
"Corporation") in the State of Delaware shall be at 1209 Orange Street,
Wilmington, New Castle Country. The name of the Corporation's registered agent
at such address shall be The Corporation Trust Company.
Section 2. Other Offices. The Corporation may also have offices at such
other places, both within and without the State of Delaware, as the Company's
Board of Directors may from time to time determine or the business of the
Corporation may require.
ARTICLE II
MEETING OF STOCKHOLDERS
Section 1. Place and Time of Meetings. An annual meeting of the
stockholders shall be held for the purpose of electing directors and conducting
such other business as may come before the meeting. The date, time and place of
the annual meeting shall be determined by resolution of the Board of Directors.
Special meetings of stockholders for any other purpose may be held at such time
and place, within or without the State of Delaware, as shall be stated in the
notice of the meeting or in a duly executed waiver of notice thereof. Special
meetings of the stockholders may be called by the President for any purpose and
shall be called by the President or Secretary at the request in writing of a
majority of the Board of Directors, or at the request in writing of stockholders
owning at least fifty percent (50%) of the entire capital stock of the
Corporation issued and outstanding and entitled to vote. Such request shall
state the purpose or purposes of the proposed meeting.
Section 2. Notice. Written or printed notice of every annual or special
meeting of the stockholders, stating the place, date, time, and, in the case of
special meetings, the purpose or purposes of such meeting, shall be given to
each stockholder entitled to vote at such meeting not less than 10 nor more than
60 days before the date of the meeting. All such notices shall be delivered,
either personally or by mail, by or at the direction of the Board of Directors,
the
<PAGE> 2
Chairman of the Board or the Secretary, and if mailed, such notice shall be
deemed to be delivered when deposited in the United States mail addressed to the
stockholder at his or her address as it appears on the records of the
Corporation, with postage prepaid. Business transacted at any special meeting of
stockholders shall be limited to the purpose stated in the notice.
Section 3. Stockholders List. The officer having charge of the stock ledger
of the Corporation shall make, at least 10 days before every meeting of the
stockholders, a complete list of the stockholders entitled to vote at such
meeting arranged in alphabetical order, specifying the address of and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least 10 days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
Section 4. Quorum. The holders of a majority of the stock issued and
outstanding, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business,
except as otherwise provided by statute or by the certificate of incorporation.
If a quorum is not present, the holders of the shares present in person or
represented by proxy at the meeting and entitled to vote thereat, shall have the
power, by the affirmative vote of the holders of a majority of such shares, to
adjourn the meeting to another time and/or place. Unless the adjournment is for
more than thirty days or unless a new record date is set for the adjourned
meeting, no notice of the adjourned meeting need be given to any stockholder,
provided that the time and place of the adjourned meeting were announced at the
meeting at which the adjournment was taken. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting.
Section 5. Vote Required. When a quorum is present or represented by proxy
at a meeting, the vote of the holders of a majority of the shares present in
person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which, by express provisions of an
applicable statute or of the certificate of incorporation, a different vote is
required, in which case such express provision shall govern and control the
decision of such question.
Section 6. Voting Rights. Except as otherwise provided in the certificate
of incorporation and subject to Section 3 of Article VI hereof, every
stockholder shall, at every meeting of the stockholders, be entitled to one vote
in person or by proxy for each share of capital stock held by such stockholder,
except that no proxy shall be voted after three years from its date, unless such
proxy provides for a longer period.
Section 7. Nomination of Directors. Nominations for election to the Board
of Directors must be made by the Board of Directors or by any stockholder of any
outstanding class of capital stock of the Corporation entitled to vote for the
election of directors.
2.
<PAGE> 3
Nominations, other than those made by the Board of Directors of the Corporation,
must be preceded by notification in writing received by the Secretary of the
Corporation not less than twenty (20) days nor more than sixty (60) days prior
to any meeting of stockholders called for the election of directors. Such
notification shall contain the written consent of each proposed nominee to serve
as a director if so elected and the following information as to each proposed
nominee and as to each person, acting alone or in conjunction with one or more
other persons as a partnership, limited partnership, syndicate or other group,
who participates or is expected to participate in making such nomination or in
organizing, directing or financing such nomination or solicitation of proxies to
vote for the nominee:
(a) the name, age, residence, address, and business address of each
proposed nominee and of each such person;
(b) the principal occupation or employment, the name, type of business
and address of the corporation or other organization in which such employment is
carried on of each proposed nominee and of each such person;
(c) the amount of stock of the Corporation owned beneficially, either
directly or indirectly, by each proposed nominee and each such person; and
(d) a description of any arrangement or understanding of each proposed
nominee and of each such person with each other or any other person regarding
future employment or any future transaction to which the Corporation will or may
be a party.
The presiding officer of the meeting shall have the authority to determine
and declare to the meeting that a nomination not preceded by notification made
in accordance with the foregoing procedure shall be disregarded.
Section 8. At any meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (a) pursuant to the
Corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the Corporation who is a stockholder of
record at the time of giving of the notice provided for in this Bylaw, who shall
be entitled to vote at such meeting and who complies with the notice procedures
set forth in this Bylaw.
For business to be properly brought before any meeting by a stockholder
pursuant to clause (c) of this Section 8, the stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not less than twenty (20) days
nor more than sixty (60) days prior to the date of the meeting. A stockholder's
notice to the Secretary shall set forth as to each matter the stockholder
proposes to bring before the meeting (a) a brief description of the business
desired to be brought before the meeting and the reasons for conducting such
business at the meeting, (b) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such business, and the name
and address of the beneficial owner, if any, on whose behalf the proposal is
made, (c) the class and number of shares of the Corporation which are owned
3.
<PAGE> 4
beneficially and of record by such stockholder of record and by the beneficial
owner, if any, on whose behalf of the proposal is made and (d) any material
interest of such stockholder of record and the beneficial owner, if any, on
whose behalf the proposal is made in such business.
Notwithstanding anything in these bylaws to the contrary, no business shall
be conducted at a meeting except in accordance with the procedures set forth in
this Section 8. The presiding officer of the meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting and in accordance with the procedures prescribed by
this Section 8, and if such person should so determine, such person shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted. Notwithstanding the foregoing provisions of
this Section 8, a stockholder shall also comply with all applicable requirements
of the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder with respect to the matters set forth in this Section 8.
Section 9. Effective upon the closing of the Corporation's initial public
offering of securities pursuant to a registration statement filed under the
Securities Act of 1933, as amended, the stockholders of the Corporation may not
take action by written consent without a meeting but must take any such actions
at a duly called annual or special meeting in accordance with these bylaws and
the certificate of incorporation.
ARTICLE III
DIRECTORS
Section 1. Number, Election and Term of Office. The Board of Directors
shall be eight (8) in number. The number of directors may be fixed at any time
by the affirmative vote of a majority of the stockholders or by the affirmative
vote of a majority of the directors at a regular or special meeting called for
that purpose, provided, however, that no vote to decrease the number of the
directors of the Corporation shall shorten the term of any incumbent director.
The directors shall be elected at the annual meeting of stockholders,
except as provided in Section 3 of this Article III, and each director elected
shall hold office until the next annual meeting of stockholders and until a
successor is duly elected and qualified or until his or her death, resignation
or removal as hereinafter provided. Directors need not be stockholders.
Section 2. Removal. Any director or the entire Board of Directors may be
removed at any time, with or without cause, by the holders of a majority of the
shares of stock of the Corporation then entitled to vote at an election of
directors, except as otherwise provided by statute.
Section 3. Vacancies. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by a
majority of the directors then in office, though less than a quorum, and each
director so chosen shall hold office until
4.
<PAGE> 5
the next annual meeting of stockholders and until a successor is duly elected
and qualified or until his or her earlier death, resignation or removal as
hereinafter provided. If there are no directors in office, then an election of
directors may be held in the manner provided by statute.
Section 4. Place of Meetings. The Board of Directors of the Corporation may
hold meetings, both regular and special, either within or without the State of
Delaware.
Section 5. Annual Meeting. The first meeting of each newly elected Board of
Directors shall be held at such time and place as shall be fixed by the vote of
the stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 6. Other Meetings and Notice. Regular meetings of the Board of
Directors may be held without notice at such time and at such place as shall
from time to time be determined by the Board. Special meetings of the Board of
Directors may be called by or at the request of the President or the Chairman of
the Board on at least 12 hours notice to each director either personally, or by
telephone, telegram or facsimile. In like manner and on like notice, the
President or Secretary must call a special meeting upon the written request of a
majority of directors unless the Board consists of only one director, in which
case special meetings shall be called by the President or Secretary in like
manner and on like notice on the written request of the sole director. A written
waiver of notice, signed by the person entitled thereto, whether before or after
the time of the meeting stated therein, shall be deemed equivalent to notice.
Section 7. Quorum. A majority of the total number of directors shall
constitute a quorum for the transaction of business. The vote of a majority of
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors. If a quorum is not present at any meeting of the Board
of Directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
Section 8. Committees. The Board of Directors may, by resolution passed by
a majority of the whole Board, designate one or more committees. Each committee
shall consist of one or more of the directors of the Corporation, which, to the
extent provided in such resolution and not otherwise limited by statute, shall
have and may exercise all the powers and authority of the Board of Directors in
the management of the business and affairs of the Corporation, and may authorize
the seal of the Corporation to be affixed to all papers that may require it; but
no such committee shall have the power or authority in reference to amending the
certificate of incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the
5.
<PAGE> 6
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
bylaws of the Corporation; and, unless the resolution or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock. The Board
of Directors may designate one or more directors as alternate members of any
committee who may replace any absent or disqualified member at any meeting of
the committee. Such committee or committees shall have such name or names as may
be determined from time to tine by resolution adopted by the Board of Directors.
Each committee shall keep regular minutes of its meetings and shall report the
same to the directors when required.
Section 9. Informal Action. Any action required or permitted to be taken at
any meeting of the Board of Directors, or of any committee thereof, may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in writing and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
Section 10. Participation in Meetings. Unless otherwise restricted by the
certificate of incorporation or these bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or any committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at the meeting.
Section 11. Compensation of Directors. Unless otherwise restricted by the
certificate of incorporation or these bylaws, the Board of Directors shall have
the authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director. No such payment shall preclude any
director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
ARTICLE IV
OFFICERS
Section 1. Number. The officers of the Corporation shall be elected by the
Board of Directors and shall consist of a President, a Secretary, a Treasurer,
and such other Vice Presidents, Assistant Secretaries and Assistant Treasurers
as may be deemed necessary or desirable by the Board of Directors. Any number of
offices may be held by the same person. The Board of Directors may elect from
among its members a Chairman of the Board and a Vice Chairman of the Board. The
Board of Directors may also appoint such other officers and agents as it shall
deem necessary who shall hold their offices for such terms and shall exercise
such powers and perform such duties as shall be determined by the Board.
6.
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Section 2. Election and Term of Office. The officers of the Corporation
shall be elected annually by the Board of Directors at the first meeting of the
Board of Directors held after each annual meeting of stockholders. If the
election of officers shall not be held at such meeting, such election shall be
held as soon thereafter as may be convenient. Vacancies may be filled or new
offices created and filled at any meeting of the Board of Directors. Each
officer shall hold office until the next annual meeting of the Board of
Directors and until a successor is duly elected and qualified or until his or
her earlier death, resignation or removal as hereinafter provided.
Section 3. Removal. Any officer or agent elected by the Board of Directors
may be removed by the affirmative vote of a majority of the Board of Directors
whenever, in its judgment, the best interests of the Corporation would be served
thereby, but such removal shall be without prejudice to the contract rights, if
any, of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the Board
of Directors for the unexpired portion of the term by the Board of Directors
then in office.
Section 5. Compensation. Compensation of all officers shall be fixed by the
Board of Directors, and no officer shall be prevented from receiving such
compensation by virtue of the fact that he or she is also a director of the
Corporation. The salaries of agents of the Corporation shall, unless fixed by
the Board, be fixed by the President or any Vice President of the Corporation.
Section 6. Chairman of the Board. The Chairman of the Board, if any, shall
preside at all meetings of the Board of Directors and of the stockholders at
which he shall be present. He or she shall have and may exercise such powers as
are, from time to time, assigned to him by the Board and as may be provided by
law. In the absence of the Chairman of the Board, the Vice Chairman of the
Board, if any, shall preside at all meetings of the Board of Directors and of
the stockholders at which he shall be present. He shall have and may exercise
such powers as are, from time to time, assigned to him by the Board and as may
be provided by law.
Section 7. The President. The President shall be the chief executive
officer of the Corporation. In the absence of the Chairman and Vice Chairman of
the Board, the President shall preside at all meetings of the Board of Directors
and all meetings of the stockholders and shall have such other powers and
perform such duties as are specified in these bylaws and as may from time to
time be assigned to him or her by the Board of Directors. In the event there is
a deadlock among directors, the President shall be empowered to cast the
deciding vote.
The President shall have general and active management of the business of
the Corporation and shall see that all orders and resolutions of the Board of
Directors are carried into effect. The President shall execute bonds, mortgages
and other contracts requiring a seal, under the seal of the Corporation, except
where required or permitted by law to be otherwise signed and executed and
except where the signing and execution thereof shall be expressly
7.
<PAGE> 8
delegated by the Board of Directors to some other officer or agent of the
Corporation. The President shall have general powers of supervision and shall be
the final arbitrator of all differences between officers of the Corporation,
subject only to the Board of Directors.
Section 8. Vice Presidents. The Vice President, if any (or in the event
there be more than one Vice President, the Vice Presidents in the order
designated by the directors, or in the absence of any designation, then in the
order of their election), shall, in the absence or upon the disability of the
President, perform the duties and exercise the powers of the President and shall
perform such other duties and have such other powers as the Board of Directors
may, from time to time, determine or these bylaws may prescribe.
Section 9. The Secretary and Assistant Secretaries. The Secretary shall
attend all meetings of the Board of Directors and all meetings of the
stockholders and record all the proceedings of the meetings of the Corporation
and the Board of Directors in a book to be kept for that purpose and shall
perform like duties for the standing committees when required. The Secretary
shall give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the Board of Directors; shall perform such other duties as
may be prescribed by the Board of Directors or President, under whose
supervision he or she shall be; shall have custody of the corporate seal of the
Corporation, if any there be; and the Secretary, or an Assistant Secretary, if
any (or in the event there be more than one, the Assistant Secretaries in the
order designated by the directors or in the absence of any designation, then in
the order of their election), shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by his or her
signature or by the signature of such Assistant Secretary. The Board of
Directors may give general authority to any other officer to affix the seal of
the Corporation and to attest the affixing by his or her signature. The
Assistant Secretary, if any (or in the event there be more than one, the
Assistant Secretaries in the order designated by the directors, or in the
absence of any designation, then in the order of their election), shall, in the
absence or disability of the Secretary, perform the duties and exercise the
powers of the Secretary and shall perform such other duties and have such other
powers as the Board of Directors may from time to time prescribe.
Section 10. The Treasurer and Assistant Treasurer. The Treasurer shall be
the chief financial officer of the Corporation; shall have the custody of the
corporate funds and securities; shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation; shall deposit
all monies and other valuable effects in the name and to the credit of the
Corporation as may be ordered by the Board of Directors, taking proper vouchers
for such disbursements; and shall render to the President and the Board of
Directors, at its regular meeting or when the Board of Directors so requires, an
account of the Corporation. If required by the Board of Directors, the Treasurer
shall give the Corporation a bond (which shall be rendered every six years) in
such sums and with such surety or sureties as shall be satisfactory to the Board
of Directors for the faithful performance of the duties of the office of
Treasurer and for the restoration to the Corporation, in case of death,
resignation, retirement, or removal from office, of all books, papers, vouchers,
money, and other property of whatever kind in the possession or under the
control of the Treasurer belonging to the Corporation. The Assistant Treasurer,
if any (or in the event there be more than one, the Assistant Treasurers in the
order designated by the directors, or in the absence of any
8.
<PAGE> 9
designation, then in the order of their election), shall, in the absence of
disability of the Treasurer, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
Section 11. Other Officers, Assistant Officers and Agents. Officers,
assistant officers and agents, if any, other than those whose duties are
provided for in these bylaws, shall have such authority and perform such duties
as may from time to time be prescribed by resolution of the Board of Directors.
ARTICLE V
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
Section 1. The Corporation shall indemnify its officers and directors to
the full extent and in the manner permitted by the General Corporation Law of
Delaware against expenses (including attorneys' fees), judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with any proceeding arising by reason of the fact such person is or was an
officer or director of the Corporation. Reasonable expenses incurred by a
director or officer of the Corporation in defending a civil or criminal action,
suit or proceeding by reason of the fact that he or she is or was a director or
officer of the Corporation (or was serving at the Corporation's request as a
director or officer of another corporation, partnership, joint venture, trust or
other enterprise) shall be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of a statement from
such director or officer requesting such advance and an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that he or she is not entitled to be indemnified by the
Corporation as authorized by relevant sections of the General Corporation Law of
Delaware.
The Corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
employees and agents (in addition to directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an employee or agent of the
Corporation. For purposes of this Section, an "employee" or "agent" of the
Corporation includes any person (i) who is or was an employee or agent of the
Corporation, or (ii) who is or was serving at the request of the Corporation as
an employee or agent of another corporation, partnership, joint venture, trust
or other enterprise.
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the Delaware General Corporation Law is hereafter amended
to authorize,
9.
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with the approval of a corporation's stockholders, further reductions in the
liability of the corporation's directors for breach of fiduciary duty, then a
director of the Corporation shall not be liable for any such breach to the
fullest extent permitted by the Delaware General Corporation Law as so amended.
Any repeal or modification of the foregoing provisions of this Article V,
Section 1 by the stockholders of the Corporation shall not adversely affect any
right or protection of a director of the Corporation existing at the time of
such repeal or modification.
The Corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provisions of the General Corporation Law of Delaware.
The foregoing rights of indemnification shall not be deemed exclusive of
any other rights to which any director or officer may be entitled apart from the
provisions of this Article V.
Section 2. The indemnification and advancement of expenses provided by, or
granted pursuant to this Article V shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. Form. Every holder of stock in the Corporation shall be entitled
to have a certificate signed by or in the name of the Corporation by, the
Chairman of the Board or by the President or a Vice President, and by the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary
of the Corporation, certifying the number of shares owned by him or her in the
Corporation. Where a certificate is signed (1) by a transfer agent or an
assistant transfer agent other than the Corporation or its employee or (2) by a
registrar, other than the Corporation or its employee, the signature of any such
chairman of the Board, Chief Executive Officer, President, Vice President,
Secretary, or Assistant Secretary may be facsimile. In case any officer who has
signed, or whose facsimile signature has been used on, any such certificate
shall cease to be such officer of the Corporation, whether because of death,
resignation or otherwise, before such certificate has been delivered by the
Corporation, such certificate may nevertheless be issued and delivered as though
the person who signed such certificate or whose facsimile signature has been
used on any such certificate had not ceased to be such officer of the
Corporation. All certificates for shares shall be consecutively numbered or
otherwise identified. The name of the person to whom the shares represented
thereby are issued, with the number of shares and date of issue, shall be
entered in the books
10.
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of the Corporation. All certificates surrendered to the Corporation for transfer
shall be canceled, and no new certificate shall be issued in replacement until
the former certificate for a like number of shares shall have been surrendered
or canceled, except as otherwise provided in Section 2 with respect to lost,
stolen or destroyed certificates.
If the Corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the Corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate that the Corporation shall issue to represent such class or
series of stock, a statement that the Corporation will furnish without charge to
each stockholder who so requests the powers, designation, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
Section 2. Lost Certificates. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. When authorizing such issue of a new certificate,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen, or destroyed
certificate, or his or her legal representative, to give the Corporation a bond
in such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
Section 3. Fixing a Record Date. The Board of Directors may fix in advance
a date, not more than sixty nor less than ten days preceding the date of any
meeting of stockholders, or the date for the payment of any dividend, or the
date for the allotment of rights, or the date when any change or conversion or
exchange of capital stock shall go into effect, or a date in connection with
obtaining any consent, as a record date for the determination of the
stockholders entitled to notice of, and to vote at, any such meeting, and any
adjournment thereof, or entitled to receive payment of any such dividends or to
any such allotment to rights, or to exercise the rights in respect to any such
change, conversion, or exchange of capital stock, or to give such consent, and
in such case such stockholders and only such stockholders as shall be
stockholders of record on the date so fixed shall be entitled to such notice of,
and to vote at, such meeting and any adjournment thereof, or to receive payment
of such dividends or to receive such allotment of rights, or to exercise such
rights, or to give such consent, as the case may be notwithstanding any transfer
of any stock on the books of the Corporation after any such record date fixed as
aforesaid. If no record date is fixed, the time for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given, or
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held. The time for determining stockholders for stock of
the Corporation, subject
11.
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to the provisions of the certificate of incorporation, if any, may be declared
by the Board of Directors at any regular or special meeting pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock
subject to the provisions of the certificate of incorporation. Before payment of
any dividend there may be set aside out of any funds of the Corporation
available for dividends such sum or sums as the directors from time to time, in
their absolute discretion, think proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the Corporation, or for such other purpose as the directors shall
think in the best interests of the Corporation, and the directors may modify or
abolish any such reserve in the manner in which it was created.
Section 4. Securities Owned by Corporation. Voting securities in any other
corporation or other enterprise held by the Corporation shall be voted by the
President, unless the Board of Directors specifically confers authority to vote
with respect thereto, which may be general or confined to specific instances,
upon some other person or officer. Any person authorized to vote securities
shall have the power to appoint proxies, with general power of substitution.
Section 5. Registered Stockholders. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on the books as the owner of
shares and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
ARTICLE VII
MISCELLANEOUS
Section 1. Dividends. Subject to the provisions of the certificate of
incorporation, the Board of Directors may, out of funds legally available
therefor at any regular or special meeting, declare dividends upon the capital
stock of the Corporation as and when they deem expedient. Before declaring any
dividend, there may be set apart out of any funds of the Corporation available
for dividends such sum as the directors from time to time in their discretion
deem proper for working capital or as a reserve fund to meet other contingencies
or for equalizing dividends or for such other purposes as the directors shall
deem conducive to the interests of the Corporation.
Section 2. Fiscal Year. The fiscal year of the Corporation shall be
determined by the Board of Directors.
Section 3. Checks. All checks or demands for money and notes of the
Corporation shall be signed by such officer or such other person as the Board of
Directors may from time to time designate.
12.
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Section 4. Notice and Waiver of Notice. Whenever any notice is required to
be given, personal notice shall not be necessary unless expressly so stated, and
any notice so required shall be deemed to be sufficient if given by depositing
the same in the United States mail, first class mail (air-mail to an address
outside of the United States), postage prepaid, addressed to the person entitled
thereto at his or her address as it appears on the records of the Corporation,
in which case such notice shall be deemed given on the day of such mailing,
unless it is notice of a director's meeting, in which case such notice shall be
deemed given three days after the date of such mailing. Notice may also be given
personally, against receipt, or by telegram, telex or similar communication and
notice so given shall be deemed given when so delivered personally or when
delivered for transmission.
Whenever any notice whatsoever is required or permitted to be given under
the provisions of any law, or under the provisions of the certificate of
incorporation or these bylaws, a waiver thereof in writing, signed by the person
or persons entitled to such notice, whether before or after the time such notice
is required to be given, shall be deemed equivalent thereto. A telegram, telex
or similar communication waiving any such notice sent by a person entitled to
notice shall be deemed equivalent to a waiver in writing signed by such person.
Neither the business nor the purpose of any meeting need be specified in any
waiver.
Section 5. Seal. The Board of Directors may adopt a corporate seal having
inscribed thereon the name of the Corporation, the year of its organization and
the words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE VIII
AMENDMENTS
These bylaws may be amended, altered or repealed and new bylaws adopted at
any meeting of the Board of Directors by a majority vote. The fact that the
power to adopt, amend, alter or repeal the bylaws has been conferred upon the
Board of Directors shall not divest the stockholders of the same powers.
13.
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EXHIBIT 4.1
COM21
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK COMMON STOCK
THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR STATEMENTS
IN BOSTON, MA OR NEW YORK, NY RELATING TO RIGHTS,
PRIVILEGES AND RESTRICTIONS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE, OF
-------------
COM21, INC.
-------------
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Register.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ DAVID L. ROBERTSON /s/ PETER D. FENNER
- ------------------------------ ------------------------------
David L. Robertson Peter D. Fenner
Vice President and President and
Chief Financial Officer Chief Executive Officer
-------------
COM21, INC.
CORPORATE SEAL
DELAWARE
-------------
COUNTERSIGNED AND REGISTERED:
BankBoston, N.A.
Transfer Agent and Registrar
By: /s/ M. PENEZIC
----------------------------
M. Penezic
<PAGE> 1
EXHIBIT 5.1
April 24, 1998
Com21, Inc.
750 Tasman Drive
Milpitas, California 95035
Re: Registration Statement on Form S-1
File No. 333-48107
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 originally
filed by Com21, Inc. (the "Company") with the Securities and Exchange Commission
(the "Commission") on March 17, 1998, as thereafter amended or supplemented
(the "Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended, of 4,000,000 shares of the Company's Common
Stock (the "Shares"). The Shares include an over-allotment option granted to the
Underwriters to purchase 600,000 additional Shares and are to be sold to the
Underwriters as described in such Registration Statement for resale to the
public. As your counsel in connection with this transaction, we have examined
the proceedings taken and are familiar with the proceedings proposed to be taken
by you in connection with the sale and issuance of the Shares.
It is our opinion that, upon conclusion of the proceedings being
taken or contemplated by us, as your counsel, to be taken prior to the issuance
of the Shares, the Shares, when issued and sold in the manner described in the
Registration Statement, will be validly issued, fully paid and nonassessable.
We consent to the use of this Opinion as an exhibit to said
Registration Statement, and further consent to the use of our name wherever
appearing in said Registration Statement, including the prospectus constituting
a part thereof, and in any amendment thereto.
Very truly yours,
/s/ Brobeck, Phleger & Harrison LLP
Brobeck, Phleger & Harrison LLP
<PAGE> 1
SIEMENS AG
PURCHASE AND LICENSE AGREEMENT
This Purchase and License Agreement (the "Agreement") is entered
into as of the Effective Date by and between COM21, Inc. ("COM21"), with offices
at 750 Tasman Drive, Milpitas, California 95035, USA and Siemens AG, Public
Communication Networks Group ("Siemens"), Munich, with offices at Hofmannstrasse
51 D-81359 Munchen, Germany.
1. INTRODUCTION
1.1 COM21 has developed certain cable TV data interfaces with
associated firmware and software, all of which are collectively referred to in
this Agreement as "Products" and more particularly described in Exhibit A
hereto.
1.2 Siemens wishes to purchase (or license, as applicable) the
Products from COM21 and sell, lease or otherwise dispose of the Products through
itself and its Subsidiary Companies throughout the world.
1.3 COM21 shall supply Siemens with Products and associated
documentation and shall provide the services subject to the terms and conditions
of this Agreement.
2. LIST OF EXHIBITS
The following Exhibits are attached to and incorporated into and
made a part of this Agreement
a) Description/Specification of Products..............Exhibit A
b) Prices and Discounts...............................Exhibit B
c) COM21 Support Terms and Conditions.................Exhibit C
d) COM21 Warranty and Service Policy..................Exhibit D
3. DEFINITIONS
"Cable Modem Product" means, collectively, the COM21 subscriber-end
data over cable modem and enhancements, upgrades and new versions thereof
manufactured by or on behalf of COM21 (but not manufactured by Siemens).
"COM21 Headend Product" means, collectively, the COM21 headend
controller unit and enhancements, upgrades and new versions thereof manufactured
by or on behalf of COM21 (but not manufactured by Siemens).
<PAGE> 2
"Confidential Information" means information relating to the
business or anticipated business of either party including, but not limited to,
trade secrets, know-how, inventions (whether patentable or not), ideas,
improvements, works of authorship, derivative works, modifications, product
development plans, forecasts, strategies, names and expertise of employees and
consultants, techniques, processes, algorithms, software programs, schematics,
designs, contracts, customer lists, financial information, sales and marketing
plans and all other business and technical information. In particular, but
without limitation, the Software source code shall be the Confidential
Information of COM21.
"Effective Date" means the last date on which a party has executed
this Agreement.
"End-User" means a cable owner or operator, Multiple Systems
Operator, program provider or any holding company or Subsidiary Company thereof
or any other person or entity that provides or has plans to provide data or
cable services.
"Epidemic Failure" means an identical fault of 10% of the Products
delivered to Siemens hereunder during a thirty-six (36) month period which
failed to comply with the warranty set forth in Section 14.1.
"Products" means collectively the Cable Modem Product, COM21 Headend
Product and the Software, as more particularly described in Exhibit A.
"Software" means, collectively, the COM21 network management
applications programs and other software for the COM21 Headend Product and COM21
modem image software and other software for the Cable Modem Product, in object
code form, as described in Exhibit A, and enhancements, upgrades and new
versions thereof.
"Subsidiary Company" means any entity which is owned or controlled
directly or indirectly by a party hereto as to fifty percent (50%) or more of
the issued shares and/or voting rights entitled to vote for the election of
directors or other governing authority or otherwise having power to control such
entity's general activities, but only for so long as such ownership or control
shall continue.
"Territory" means every country in the world, excluding the Republic
of South Korea and the Democratic Peoples' Republic of Korea (North Korea).
"Update" means a change or addition to the Software ( including,
without limitation, modifications and revisions) that correct errors, problems
or defects or that provide corrections. An Update is denoted by the third digit
of release number. For example, version 2.1.1 would be an Update of version 2.l.
4. PRODUCTS
2.
<PAGE> 3
4.1 Subject to all the terms and conditions of this Agreement, COM21
hereby appoints Siemens for the term of this Agreement as a non-exclusive
distributor of the Products only within the Territory. Products may be
distributed by Siemens and, if so appointed by Siemens, by its Subsidiary
Companies and other third parties which may act as subdistributors of Siemens.
The appointment of third parties other than Subsidiary Companies of Siemens as
subdistributors shall require COM21's prior written consent. Notwithstanding the
foregoing any such Subsidiary Company and third party subdistributor shall be
bound in writing to all the restrictions on Siemens contained in this Agreement
and Siemens shall ensure in its written contracts with such Subsidiary Companies
and third party subdistributors compliance by the Subsidiary Company or third
party subdistributor, as the case may be, with such restrictions. In addition,
Siemens shall provide in its written contracts with all third party
subdistributors of the Products that COM21 is a third party beneficiary of such
contract for the purpose of enforcing such restrictions.
(i) Siemens shall indemnify and hold COM21 harmless from and
against all liabilities, damages, losses, costs and expenses caused by the
failure of any Subsidiary Company or third party subdistributor appointed by
Siemens to comply with restrictions on Siemens contained in this Agreement.
Siemens' obligation of indemnity pursuant to this subparagraph 4.1(i) arising
from a third party, subdistributor's failure to comply with such restrictions
shall subject to the liability limitations set forth in Section 27 below,
provided Siemens (i) promptly notifies COM21 of any such noncompliance of which
Siemens becomes aware and (ii) uses its best efforts to mitigate the effect of
such non-compliance exercising such rights as Siemens may have available at law
or in equity including, without limitation, termination of the third party
subdistributor's appointment and ceasing supply of Products to such
subdistributor. In the event that Siemens fails to take legal action against a
third party subdistributor within thirty (30) days after first becoming aware of
such subdistributor's non-compliance with applicable restrictions, COM21 shall
may elect, but shall have no obligation, to undertake its own action or
proceeding against such third party subdistributor and Siemens shall provide
COM21 with reasonable assistance and cooperation in connection with such action
or proceeding.
4.2 Subject to all the terms and conditions of this Agreement, COM21
hereby grants to Siemens the following non-exclusive, sublicensable (to Siemens'
Subsidiary Companies and appointed third party subdistributors only) and
non-transferable licenses within the Territory:
(i) a license to use the Software solely for Siemens' and
Siemens' Subsidiary Companies' internal purposes in connection with the
installation, commissioning, testing and operation of the Products;
(ii) a license to distribute and sublicense the Software to
End-Users only for use with the Products; and
3.
<PAGE> 4
(iii) a license to copy, or have copied, Software Updates
provided to Siemens by COM21 for incorporation into the hardware of the Products
marketed in accordance with Section 4.1 above.
4.3 Siemens may distribute the Products only to persons and entities
located and taking delivery within the Territory. Siemens acknowledges and
understands that COM21 has granted Dacom International and Dacom, Inc. exclusive
rights to distribute the Products in the Republic of South Korea and, when
distribution becomes legally permissible, in the Democratic Peoples' Republic of
Korea (North Korea) (the "Excluded Territory"). Therefore, no distribution of
the Products shall be made by Siemens, any Subsidiary Company or other sales
outlet to any person or entity where Siemens, such Subsidiary Company or other
sales outlet knows or has reason to believe that the ultimate end user of such
Product is located within the Excluded Territory. COM21 will notify Siemens if
COM21 becomes aware of any distribution of the Products into the Excluded
Territory, directly or indirectly, by Siemens or any Subsidiary Company or other
sales outlet. Upon receipt of such notification from COM21, Siemens will use its
best efforts to retrieve, within thirty (30) days, all shipments of the
Products, and terminate all future distribution of the Products, in the Excluded
Territory. COM21 shall be entitled to terminate this agreement immediately if
Siemens fails to successfully retrieve all such Products.
(i) Siemens shall indemnify and hold COM21 harmless from all
liabilities, damages, losses, costs and expenses caused by distribution of the
Products in the Excluded Territory by a Subsidiary Company or other sales
outlet. Siemens' obligation of indemnity pursuant to this subparagraph 4.3(i)
arising from distribution of the Products in the Excluded Territory by a third
party subdistributor or other sales outlet shall be subject to the liability
limitations set forth in Section 27 below, provided Siemens uses its best
efforts to terminate such distribution of the Products by exercising such rights
as Siemens may have available at law or in equity including, without limitation,
termination of the third party subdistributor's appointment and ceasing supply
of Products to such subdistributor.
4.4 In addition to the rights granted under Section 4.2 above,
Siemens, its Subsidiary Companies and appointed third party subdistributors
shall have the right to entitle End-Users of the Products to transfer the rights
under Software sublicenses, subject to Sections 4.6 and 4.8, with a transfer of
the Products, provided Siemens and such Subsidiary Companies use commercially
best efforts to ensure that such End-User does not retain any copies of the
Software that were not separately sublicensed by Siemens, its Subsidiary
Companies or appointed third party subdistributors.
4.5 The Software contains valuable confidential and proprietary
information and trade secrets of COM21 and its licensees which have not been
published or otherwise placed in the public domain. Siemens shall not authorize
nor permit any of its Subsidiary Companies, other sales outlets, licensees or
any other third party to disassemble or reverse engineer or decompile the
Software or otherwise attempt to learn the source code or the internal
structure, sequence or
4.
<PAGE> 5
organization of the Software, algorithms or underlying ideas contained in the
Software, except as specifically authorized by applicable compulsory law.
4.6 As between the parties, COM21 retains and shall exclusively own
all title to, and except as expressly and unambiguously licensed herein, all
rights (including all patent rights, copyright rights, mask work rights, trade
secret rights, contract rights and all other intellectual property and
proprietary rights anywhere in the world) and interest in the Software, any
other software or firmware contained in the Products and all modifications,
improvements and derivative works (by whomever produced) thereof and
Documentation (as defined in Section 11); provided, however, COM21 shall have no
rights hereunder to any software or computer code developed by or for Siemens
using the application programming interfaces contained in the Software.
4.7 Siemens shall not, without prior written consent of COM21,
delete, alter, obscure, modify or fail to reproduce in and on any copy of the
Software, the name of such Software and any copyright or other proprietary
notices appearing in or on such Software provided by COM21. The same shall
apply, subject to Section 11, third paragraph, and Section 17.2 with respect to
Documentation and training materials provided by COM21.
4.8 All sublicenses granted by Siemens shall provide adequate
protection for COM21's intellectual property rights in the Software. Siemens
shall distribute and sublicense, or permit a transfer of the rights regarding
Software under a sublicense, the Software licensed to Siemens hereunder to
End-Users under terms and conditions no less protective with regard to such
Software as Siemens licenses its own software to End-Users. All copies of the
Software are licensed according to Sections 4.2 and 4.4 and not sold.
5. TERM OF AGREEMENT
The initial term of this Agreement shall commence on the Effective
Date and continue in effect for a period of (5) five years. This Agreement may
be renewed for successive one (1) year renewal terms upon prior written
agreement of the parties.
6. FORECASTS
On the Effective Date, and at least every two (2) months thereafter,
Siemens shall provide COM21 with a twelve (12)-month forecast in writing of
orders for Products to be placed with COM21 for delivery during each of the
twelve (12) succeeding months (or such lesser number of months remaining during
the term of this Agreement). If any change in the forecast is known by Siemens,
Siemens will promptly update the forecast to reflect such change and provide the
updated forecasts to COM21. Each such forecast shall represent Siemens' best
estimate of its monthly requirements for Products during the period of the
forecast but shall be advisory only and shall not be binding on Siemens.
5.
<PAGE> 6
7. ORDERING PROCEDURE
7.1 Siemens shall order Products by issuing written orders
("Orders") to COM21 at the address for COM21 stated in Section 30 below.
7.2 Orders shall be governed by the terms of this Agreement.
Different or additional terms contained in any Order shall be subject to written
acceptance by COM21.
7.3 COM21 shall accept or reject Orders received from Siemens within
three (3) business days of receipt of such Order. COM21 shall have no liability
to Siemens with respect to any Order which is not accepted by COM21.
COM21 may reject an Order only to the extent it exceeds the
forecasts as per Article 6 by more than thirty (30%), is otherwise not in
conformance with the terms and conditions this Agreement or otherwise imposes
unreasonable or likely unattainable commercial terms on COM21.
Acceptance or rejection of an Order must be sent by fax followed by
letter to the Siemens department which issues the Order.
7.4 Siemens shall not submit any Order in an amount less than TWO
THOUSAND DOLLARS (US$2,000); provided, however, Siemens shall use its best
commercially reasonable efforts to ensure that each Order submitted to COM21 is
in an amount of not less than TWENTY THOUSAND DOLLARS (US$20,000).
8. PRICES
8.1 [*]
Prices are EXW (ExWorks, Incoterms 1990). COM21's shipping dock and
include COM21's standard commercial packaging.
The prices for spare parts shall reflect COM21's manufacturing
and/or acquisition costs of the respective parts plus reasonable margins.
[*] Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
6.
<PAGE> 7
8.2 COM21 shall have the right, in its sole discretion from time to
time, to change such prices within thirty (30) days' prior written notice. In
the event of a price decrease, new prices will apply to all shipments made after
such notice period. In the event of a price increase, new prices will apply to
all Orders accepted by COM21 after the notice period. New increased prices will
not apply to Orders placed before the date of the notice and to Orders resulting
from quotations made by Siemens or a Subsidiary Company within the one hundred
and eighty (180) day period preceding the date of the notice.
9. DELIVERY
9.1 Delivery times ("Delivery Time") for the Products shall be:
Complete units of Products: 8 weeks
Spare parts: 6 weeks
after acceptance by COM21 of an Order.
Delivery Times for repaired or replaced parts of Products shall be
fifteen (15) days after receipt by COM21 of faulty parts returned by Siemens.
9.2 Siemens shall be entitled to place emergency orders for minor
quantities one (1) Headend Product and ten (10) units of Cable Modem Product per
emergency order by giving notice by fax (with written confirmation sent by
mail). For purposes of this Section 9.2, an Emergency Order is an Order placed
by Siemens in response to an urgent End User request arising out of
extraordinary circumstances. COM21 will use commercially reasonable efforts to
ship Products pursuant to an Emergency Order, not to exceed two (2) Emergency
Orders per month or twelve (12) Emergency Orders in any consecutive twelve (12)
month period, within two (2) days of COM21's acceptance of the Emergency Order.
9.3 Should circumstances arise that may result in a delayed delivery
by COM21, COM21 shall promptly notify Siemens of such circumstances.
In the event of COM21's delay in delivery of Products beyond the
times, set forth above in 9.1, except by reason of Force Majeure, Siemens shall
be entitled to a payment in the amount of [*] of the purchase price of the
delayed Products for each business day the Products are delayed not to exceed
[*] of the total purchase price of such Products.
In the event the delay exceeds two (2) months, Siemens shall, in
addition to the aforestated rights, be entitled to cancel the order wholly or in
part without incurring any liability. COM21 shall indemnify and hold harmless
Siemens against direct damages resulting from such cancellation, provided
Siemens has exercised its best efforts to minimize such direct damages and
[*] Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
7.
<PAGE> 8
excluding consequential and incidental damages and damages resulting from
procurement of substitute goods or Siemens' negligence or wilful misconduct.
9.4 Delivery shall be ExWorks (EXW, Incoterms 1990), COM21's
shipping dock. Title to the Products (other than Software) and risk of loss
shall pass to Siemens upon delivery to the carrier at such shipping dock.
Shipping charges shall be paid by Siemens. Insurance coverage on all shipments
is the sole responsibility of Siemens.
10. DEMONSTRATION COM21 PRODUCTS
In order to accommodate the deployment of cable modems COM21 provide
equipment to Siemens for demonstration, testing and service purposes as follows:
Munchen World-Wide Support:
Upon Siemens' request, COM21 will provide demonstration equipment
for Siemens Munchen world-wide support as follows:
<TABLE>
<CAPTION>
ITEMS COST (TRANSFER PRICE) TO SIEMENS
- ----- --------------------------------
<S> <C>
10 ComPORTS COM21's fully burden manufacturing cost only
2 ComCONTROLLER COM21's fully burden manufacturing cost only
2 NMAPS No charge for license
</TABLE>
The above prices include upgrade fees to keep the software and
hardware at the current and newest technical level.
Subsidiary Companies:
Upon Siemens' request, COM21 will provide demonstration equipment
for Subsidiary Companies of Siemens as follows:
<TABLE>
<CAPTION>
ITEMS COST (TRANSFER PRICE) TO SIEMENS
- ----- --------------------------------
<S> <C>
10 ComPORTS COM21's current price list for demo
equipment and current price list for extended
hardware warrant contracts
ComCONTROLLER COM21's current price list for demo
equipment and current price list for extended
hardware warrant contracts
</TABLE>
8.
<PAGE> 9
<TABLE>
<S> <C>
NMAPS No charge for license and upgrade fees
</TABLE>
If one year after purchasing the demonstration system, the
Subsidiary Company wins contracts for accumulated more than 2,000 cable modems,
COM21 will agree to provide the Subsidiary Company a credit equal to fifty
percent of the amount of the demonstration system purchased for the site
including software and hardware upgrade maintenance fees paid. Such refund will
be done only once per Subsidiary Company. In order to assist Siemens, Munchen
World-Wide Support and Siemens Subsidiary Companies in maintaining adequate
product support, sales and marketing capabilities for future versions of the
Products and new COM21 products, COM21 agrees that all terms and conditions set
forth above shall apply also to new Product versions and Product lines that
COM21 makes commercially available.
11. DOCUMENTATION AND ACCESSORY
COM21 shall, upon execution of this Agreement, provide Siemens, free
of charge, one (1) set of the documentation associated with each of the Products
(the "Documentation"). Additional copies of the Documentation will be available
for purchase by Siemens.
All Documentation for a Product shall comply with COM21's most
recent technical standards for such Product and shall be updated to include
Product modifications. COM21 shall provide Siemens without delay and free of
charge one (1) copy of all updates of the Documentation for each Product
supplied by COM21 hereunder when COM21 makes such updates generally available to
its other resellers. The foregoing obligation shall apply not only during the
term of this Agreement but also after its expiry for such time as such Products
are used by End-Users or its Subsidiary Companies. In addition, COM21 shall use
commercially reasonable efforts during the term of this Agreement to promptly
provide Siemens, before the next generally available update without delay and
free of charge, information about changes in the Documentation for Products
supplied by COM21 hereunder.
Siemens shall be entitled to copy, modify (as long as the meaning of
the content is not changed), translate and use COM21's Documentation, subject to
the terms and conditions of this Agreement. Siemens may attach to such
Documentation its own copyright notices and supply any copied, modified or
translated Documentation to End-Users, Subsidiary Companies and other resellers.
Siemens shall make commercially reasonable efforts to promptly provide COM21,
free of charge, one (1) copy of any and all such modifications and translations
of the Documentation made by or on behalf of Siemens. Where Siemens is entitled
to allow sublicensing, it may sublicense the rights set forth in this paragraph
to its resellers and sublicensees.
12. TERMS OF PAYMENT
12.1 Payment shall be effected in US dollars and shall be due thirty
(30) days after receipt of COM21's invoice.
9.
<PAGE> 10
Payment shall not constitute acceptance of the Products by Siemens.
12.2 In the event that Siemens does not render undisputed payments
at the due dates thereof, COM21 shall be entitled to interest on such delayed
payments at an interest rate of one percent (1%) per month or, if lower, the
maximum rate permitted under applicable law.
12.3 Siemens will pay all charges pursuant to ExWorks (EXW,
Incoterms 1990) including, without limitation, transportation charges and
insurance premiums, taxes not relating to Com21's income (subject to Section 13)
and all government permit fees, license fees, customs fees and similar fees,
duties and other governmental assessments in connection with this Agreement and
the performance of COM21's or Siemens' obligations hereunder.
12.4 COM21 shall not invoice any value-added-tax to Siemens.
13. TAXES
13.1 Except as otherwise provided in Sections 12.3 and 12.4 above
the principle shall apply that any party shall bear and pay the taxes, charges
and other duties imposed on it.
In particular the following shall apply:
(i) Any and all taxes, charges and/or other duties
(hereinafter "Taxes") imposed by the laws of the Federal Republic of Germany on
COM21 with respect to any payments to be made by Siemens to COM21 under or in
connection with this Agreement shall be borne and paid by COM21. If required by
the laws of the Federal Republic of Germany, Siemens shall deduct Taxes imposed
in Germany on payments to be made by Siemens under or in connection with this
Agreement. Taxes imposed by the Federal Republic of Germany on such payments and
shall pay over to the proper German tax authorities any and all amounts withheld
by Siemens from payments to COM21.
(ii) To the extent the Double Taxation Convention between the
Federal Republic of Germany and the United States of America allows COM21 to
credit Taxes imposed on and paid by COM21 according to the laws of the Federal
Republic of Germany against Taxes imposed on and to be paid by COM21 according
to the laws of the United States of America, Siemens shall provide to COM21
official tax receipts issued by the German tax authorities or other
documentation evidencing the payment by Siemens on behalf of COM21 of Taxes
imposed by the Federal Republic of Germany on payments made by Siemens to COM21
under or in connection with this Agreement, the sum total of Taxes reflected on
such official tax receipts or other documentation to equal the sum of all
amounts withheld by Siemens pursuant to this Section 13.
(iii) To the extent the Double Taxation Convention between the
Federal Republic of Germany and the United States of America entitles COM21 to
claim a reduction of or an exemption from Taxes imposed on and to be paid by
COM21 according to the laws of the Federal
10.
<PAGE> 11
Republic of Germany, Siemens shall use all reasonable efforts to support COM21
in obtaining a tax reduction/exemption certificate (or the like) from the German
tax authorities if so requested by COM21, to validate such a claim by COM21 for
tax reduction of or exemption from Taxes imposed on or to be paid by COM21
according to the laws of the Federal Republic of Germany. As long as Siemens has
not received a copy of such tax reduction/exemption certificate, Siemens shall
be entitled to deduct the full amount of Taxes from the payments to be made to
COM21 and to pay over to the proper German tax authorities the amount required
by the laws of the Federal Republic of Germany to be withheld absent any
entitlement to a reduction of or exemption from Taxes imposed by the Federal
Republic of Germany.
14. WARRANTY
14.1 COM21 warrants only to Siemens that:
(i) on the date of delivery, COM21 holds title to the Products
free and clear of any security interest, lien or encumbrances and that the
hardware portions of the Cable Modem Product and COM21 Headend Product are newly
manufactured, contain new parts, comply with the requirements stated in Article
14 below;
(ii) for a period of fifteen (15) months from the date of
shipment to Siemens of each Modem Product and copy of the Software, and for a
period of eighteen (18) months from the date shipment to Siemens, each COM21
Headend Product (the "Warranty Period"), conforms with COM21's published
specifications for such Product (attached hereto in Exhibit A), and each Product
is free from material defects in design, material and workmanship;
(iii) the media provided by COM21 containing the Software is
free from physical defects; and
(iv) that the Software substantially conforms with COM21's
published specifications for the Software, as set forth in Exhibit A and, to the
best of COM21's knowledge as of the Effective Date, the Software delivered by
COM21 is free from viruses.
14.2 Siemens may purchase an extended warranty for the Cable Modem
Product and the COM21 Headend Product and extended maintenance for the Software
as stated in Exhibit D.
14.3 Siemens shall handle and be responsible for all warranty
returns of the Products from its direct and indirect customers. Siemens shall
notify COM21 within the Warranty Period of Products obtained from COM21 which do
not comply with the above warranty and shall obtain a Return Materials
Authorization ("RMA") number from COM21. At the time COM21 issues the RMA number
to Siemens, COM21 will notify Siemens of the freight forwarder to be used for
shipment back to Siemens of returned and repaired Products. Products returned
(by Siemens only)
11.
<PAGE> 12
to COM21 during the Warranty Period (as shown by appropriate documentation) will
be repaired or replaced, at COM21's option, and delivered as stated in Exhibit D
at no cost to Siemens. Alternatively, Siemens may, at the expense of COM21,
replace the Products having failed to conform to the warranty with Products in
stock and COM21 shall replenish such stock following COM21's receipt of the
defective Products. COM21 will bear the cost of freight and insurance of
returned and repaired Products, such freight forwarder to be selected by COM21.
All returned Products must be secured by sufficient packaging, which shall
conspicuously bear the RMA number Siemens obtains from COM21 prior to return.
The Warranty Period for a Product following repair or replacement of such
Product shall continue for the longer of ninety (90) days or remainder of the
Warranty Period beginning after return shipment of the replaced or repaired
Product.
In the event the failure rate of any delivery lot exceeds ten
percent (10%) of the lot and subject to verification by COM21, COM21 shall
replace the entire lot free of charge on an Emergency Order Basis.
If any Software including firmware supplied by COM21 hereunder fails
to conform to the warranty in clause (iv) above and such failure is
reproducible, COM21 shall correct the Software at no cost to Siemens in
accordance with the error correction procedure set out in Exhibit E hereto.
14.4 After expiration of the Warranty Period, COM21 will repair
Products within fifteen (15) business days after COM21's receipt of the
defective Product, on a time and materials basis at prices and charges as set
forth in Exhibit C and such prices and charges shall not be higher than those
provided by COM21 to third parties. COM21 will warrant such out-of-warranty
repair of COM21 Products for a period of ninety (90) days from the date of
repair, pursuant to the terms of Section 14.5.
14.5 The warranty set forth in Section 14.1 above does not extend to
any Product that (i) is modified or altered, (ii) is not maintained to COM21's
maintenance recommendations, (iii) is operated in a manner other than that
specified by COM21, (iv) has its serial number removed or altered or (iv) is
treated with abuse, negligence or other improper treatment including, without
limitation, use outside the recommended environment), Siemens' sole remedy with
respect to any warranty or defect is as stated in Section 14.3 above. Siemens is
fully responsible for satisfaction of its End-Users and will be responsible for
all claims, damages, settlements, expenses and attorneys' fees incurred by COM21
with respect to Siemens' End-Users or their claims beyond COM21's above warranty
obligation to Siemens, except for product liability claims arising from a design
or manufacturing defect in an unmodified Product for which COM21 shall be
responsible.
14.6 COM21 warrants to Siemens that the Documentation provided to
Siemens hereunder is the current version of the Documentation and is complete,
technically accurate and that COM21 is entitled to grant the rights under
Documentation in accordance with the terms of this Agreement. If Documentation
supplied by COM21 hereunder materially fails to conform with this
12.
<PAGE> 13
warranty, COM21 will, as Siemens' sole remedy, correct such Documentation
pursuant to the terms set forth in Exhibit E hereto
14.7 SUBJECT TO THE INDEMNIFICATION SET FORTH IN SECTIONS 18.1 AND
18.2 AND THE WARRANTIES IN THIS SECTION 14, COM21 MAKES NO OTHER WARRANTIES WITH
RESPECT TO THE PRODUCTS, THE DOCUMENTATION OR ANY SERVICES AND DISCLAIMS ALL
OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT. FURTHER, COM21 DOES NOT
WARRANT, GUARANTEE OR MAKE ANY REPRESENTATIONS REGARDING THE USE, OR THE RESULTS
OF THE USE, OF THE PRODUCTS OR DOCUMENTATION IN TERMS OF CORRECTNESS, ACCURACY,
RELIABILITY OR OTHERWISE.
14.8 Siemens' Representations and Warranties. Except as expressly
and unambiguously provided herein, Siemens represents, warrants and agrees not
to modify, create any derivative work of, or include in any other software or
make any copies of the Software or any software or firmware contained in the
COM21 Products or copies or any portion thereof.
15. TECHNICAL APPROVAL BY AUTHORITIES
15.1 For the purposes of this Article 15 the "Approval Authorities"
shall mean the body or bodies having responsibility for approving the Products
for connection to communications networks in any country, except the Excluded
Territory.
15.2 The Products delivered by COM21 shall substantially comply with
the requirements of the Approval Authorities in the following countries:
<TABLE>
<S> <C>
Europe Austria, Belgium, Denmark, France,
Germany, Italy, Netherlands, Portugal,
Spain, Switzerland
Asia Taiwan
North America Canada, USA
South America Brazil, Chile, Colombia, Venezuela
</TABLE>
On Siemens' request COM21 shall make commercially reasonable efforts
to modify the Products to become compliant also with the requirements of the
Approval Authorities in other countries identified by Siemens. The details of
such modifications (including, without limitation, costs, schedule for
completion and scope of the modifications) will be agreed to between the parties
on a case by case basis.
13.
<PAGE> 14
16. CANCELLATION/POSTPONEMENT OF ORDERS
16.1 Siemens shall be entitled to cancel Orders wholly or partially
at any time by giving written notice to COM21. Except where the cancellation is
caused by reasons attributable to COM21 or attributable to Force Majeure, COM21
shall be entitled to the following payments (excluding any further claims
whatsoever) in connection with any cancellation of a Purchase Order by Siemens:
a) where notice of cancellation is given up to thirty (30)
days before the scheduled Delivery Time, the payments will be equivalent to
twenty percent (20%) of the value of the part of the Order(s) canceled; and
b) where notice of cancellation is given more than thirty (30)
days, but less than sixty (60) days, before the scheduled Delivery Time, the
Payment will be equivalent to ten percent (10%) of the value of the part of the
Order(s) canceled.
16.2 Siemens may postpone the agreed delivery dates up to ninety
(90) days, at no charge, provided COM21 shall be notified of the postponement in
writing more than thirty (30) days before the Schedule Delivery time. However,
if an Order is postponed more than ninety (90) days or if it is postponed twice,
it will be deemed canceled.
17. TECHNICAL TRAINING AND SUPPORT
17.1 Upon Siemens' request COM21 shall train experts of Siemens, its
Subsidiary Companies or End-Users in the installation, testing, commissioning,
operation, repairs and maintenance of the Products. Such training will be given
for each Product. COM21's trainers shall provide Siemens' trainees with adequate
training materials (training documentation and additional used material like CBT
or video clips), such materials being part of the Documentation. The details of
such training, e.g., date, duration, location, number of trainees, etc. will be
agreed upon by the parties on a case by case basis reasonably in advance. In any
event the training shall commence not later than four (4) weeks after Siemens'
request.
All reasonable travel, meal and lodging expenses incurred by COM21
in connection with the training shall be borne by Siemens for training that is
conducted at Siemens' facilities. Siemens shall pay the fees stated. in Exhibit
A for all training exceeding ten (10) Siemens' trainees for each course.
17.2 COM21 shall provide to Siemens a set of reproducible training
materials, in either tangible or electronic form, including such materials as
usually utilized by COM21 when instructing its own End Users (e.g., video clips)
for a onetime set-up fee of FIVE THOUSAND DOLLARS ($5,000). Such training
materials shall be in English and, if available, also in German. Siemens shall
be entitled to copy, modify (as long as the meaning of the content is not
changed) and
14.
<PAGE> 15
translate such training materials and to affix Siemens' copyright
notices, in addition to COM21's copyright notices, to any copy of such
materials. Siemens, its Subsidiary Companies and other sales outlets may utilize
any copy of COM21's training materials for performing its own training courses
for their own End-Users. Siemens shall make commercially reasonable efforts to
provide COM21 with one (1) copy of any and all modifications and translations
produced by Siemens of the training materials.
17.3 COM21 shall provide second level support to Siemens of the
Products pursuant to the terms and conditions set forth in the COM21 Support
Terms and Conditions in Exhibit C hereto. Such support shall be at no expense to
Siemens, except that Siemens shall reimburse COM21 for all travel, lodging and
meal expenses of COM21 personnel performing on-site support at an End-User's
facility.
17.4 COM21 shall, at Siemens' reasonable request, provide reasonable
support for Siemens' and its Subsidiary Companies' sales effort by, for example
and not by way of limitation, making presentations to Customers, providing
technical information concerning Products, supplying references and giving tours
of plant. During the first six (6) months of the Initial term, this support will
be provided at no additional cost to Siemens. Thereafter the Parties will agree
upon the amount payable by Siemens before the sales support services are
provided by Seller.
18. PATENT, COPYRIGHTS AND TRADEMARKS
18.1 Siemens shall inform COM21 in writing without delay if a third
party brings a claim regarding the infringement of its protective rights (e.g.,
patent, trademark, copyright, mask work, trade secret or other similar rights)
by any of the Products.
Siemens shall not concede the validity of, or settle, such a claim
from any third party without the prior written consent of COM21. COM21 shall
defend, indemnify and hold Siemens and its officers, directors. employees and
agents harmless from liability resulting from infringement by the Product of any
United States, European Community or Japanese patent or design patent issued as
of the first date of delivery to Siemens of the applicable Product or any United
States, European Community or Japanese copyright or infringement of any United
States or European Community trademark resulting from Siemens' use of the Marks
(as defined in Section 21) as permitted hereunder, provided COM21 is promptly
notified of any and all threats, claims and proceedings related thereto, given
reasonable assistance in connection therewith and has sole control over the
defense and all negotiations for a settlement or compromise; COM21 will not be
responsible for any settlement it does not approve in writing. The foregoing
obligation of COM21 does not apply with respect to any Product or portions or
components thereof (i) not supplied by COM21, (ii) made in whole or in part in
accordance to Siemens' specifications and where the infringement relates to
these specifications, (iii) which is modified after shipment by COM21, (iv)
combined with other products, processes or materials not supplied by COM21,
where the infringement relates to such combination, (v) where Siemens continues
allegedly infringing activity after being
15.
<PAGE> 16
notified thereof or after being informed of modifications that would have
avoided the alleged infringement, or (vi) where Siemens' use of the Product is
incident to an infringement not resulting primarily from the Product or is not
strictly in accordance with the licenses granted hereunder. Siemens will
indemnify COM21 and its officers, directors, employees and agents from all
damages, settlements, attorneys' fees and expenses related to a claim of
infringement excluded from COM21's indemnity obligation by the foregoing
sentence.
18.2 In the event a Product is finally determined by a court of
competent jurisdiction to infringe the rights of a third party, COM21 shall be
obligated. at its sole option and cost, either:
a) to acquire from the third party entitled to dispose of the
respective protective rights, the right of use required for the purposes of this
Agreement; or
b) to replace such infringing Products or parts thereof by
non-infringing ones complying with COM21's published specifications for such
Product, which Siemens shall accept as full and complete satisfaction (subject
to indemnification under Section 18.1) for any claims it might have against
COM21 arising from such infringement.
18.3 COM21's obligation of indemnification under Sections 18.1 and
18.2 with respect to liability from infringement of any third party European
Community or Japanese patent, design patent, copyright or trademark shall not
exceed the amount in aggregate paid to COM21 by Siemens for sales of the
Products in the country in which the infringement occurred during the twelve
(12) month period prior to the date such liability arose. For purposes of this
Agreement, a European Community patent, trademark and/or copyright is any such
statutory right that is enforceable in the territory of the European Community
and/or member states of the European Patent Convention.
18.4 THE FOREGOING IS IN LIEU OF ANY WARRANTIES OF
NONINFRINGEMENT, WHICH ARE HEREBY DISCLAIMED.
19. TERMINATION AND PROVISIONS AFTER TERMINATION
19.1 This Agreement may by written notice be forthwith terminated by
either party having such right as herein provided - and save of any other rights
such party may have-upon the occurrence of either one or more of the following
events stated below:
a) by either party in the event that the other party
voluntarily files a petition in bankruptcy or has such a petition involuntarily
filed against it (which petition is not discharged within ninety (90) days after
filing), or is placed in an insolvency proceeding, or if an order is issued
appointing a receiver or trustee or a levy or attachment is made against a
substantial
16.
<PAGE> 17
portion of its assets which order shall not be vacated, or set aside within
ninety (90) days from date of issuance, or if any assignment for the benefit of
its creditors is made;
b) by either party in the event that the other has failed in
the performance of any material contractual obligation herein contained,
provided that such default is not remedied within sixty (60) days after written
notice to such party specifying the nature of such default and requiring remedy
of the same (except in the event of a breach of Sections 4.5, 14.8 or 20 in
which case termination shall be effective immediately upon notice);
c) if the other ceases to do business, or otherwise terminates
business operations; provided, however, that the acquisition of all or
substantially all of a party's stock, assets or business shall not be grounds
for termination of this Agreement; or
d) If the other shall fail to promptly secure or renew any
license, registration, permit, authorization or approval for this Agreement or
the conduct of its business in the manner contemplated by this Agreement or if
any such license, registration, permit, authorization or approval is revoked or
suspended and not reinstated within sixty (60) days.
19.2 This Agreement may be terminated by COM21 with respect to a
Siemens Subsidiary Company immediately by written notice to Siemens upon the
occurrence of any of the following events:
a) In the event that the Subsidiary Company voluntarily files
a petition in bankruptcy or has such petition involuntarily filed against it
(which petition is not discharged within ninety (90) days after filing), or is
placed in an insolvency proceeding, or if an order is issued appointing a
receiver or trustee or a levy or attachment is made against a substantial
portion of its assets which order shall not be vacated, or set aside within
ninety (90) days from date of issuance, or if any assignment for the benefit of
its predictors is made;
b) In the event that the Subsidiary Company has failed in the
performance of any material contractual obligation herein contained, provided
that such default is not remedied within sixty (60) days after written notice to
such party specifying the nature of such default and requiring remedy of the
same (except in the event of a breach of Sections 4.5, 14.8 or 20 in which case
termination shall be effective immediately upon notice);
c) If the Subsidiary Company ceases to do business, or
otherwise terminates its business operations; provided, however, that the
acquisition of all or substantially all of the Subsidiary Company's stock,
assets or business shall not be grounds for termination of this Agreement; or
d) If the Subsidiary Company shall fail to promptly secure or
renew any license, registration, permit, authorization or approval for this
Agreement or the conduct of its
17.
<PAGE> 18
business in the manner contemplated by this Agreement or if any such license,
registration, permit, authorization or approval is revoked or suspended and not
reinstated within sixty (60) days.
19.3 Except in the event of a termination by COM21 pursuant to
Section 19.1 (a) or (b), COM21 shall continue for a period of six (6) months
following termination of this Agreement, to supply to Siemens Products according
to the terms of this Agreement to such extent as required by Siemens to fulfill
all commitments to End-Users involving the Products which Siemens has undertaken
prior to notice of termination of this Agreement, provided that Siemens promptly
notifies COM21 in writing of such commitments.
19.4 For a period of five (5) years after termination of this
Agreement, except in the event of a termination by COM21 pursuant to Section
19.1(a) or (b), COM21 shall supply to Siemens, in accordance with the terms and
conditions in effect at the time of termination of the Agreement, Products
required by Siemens for the expansion of the existing End-User systems in which
Products are already used, provided Siemens identifies in writing all End-Users
for whom such Products are required. If COM21 wishes to discontinue the
manufacture of such Products before the end of said five-year period after
termination or expiration of this Agreement, COM21 shall notify Siemens thereof
and the parties will mutually agree upon the terms.
19.5 After termination of this Agreement, except in the event of a
termination by COM21 pursuant to Section 19.1(a) or (b), COM21 shall be obliged
to supply spare parts to Siemens for a period of seven (7) years after the last
delivery by COM21 to Siemens of the Products for which such spare parts are
used. Such supply shall be in accordance with the terms and conditions in effect
at the time of termination of this Agreement. After such seven (7) year period,
the parties shall consult with each other whether or not to continue this
obligation, on the terms to be mutually agreed upon by the parties, in
consideration of the quantity of remaining Products installed with Siemens'
End-Users.
19.6 Termination is not the sole remedy under this Agreement and,
whether or not termination is effected, all other remedies will remain
available.
19.7 Except as otherwise provided in Sections 19.2, 19.3 or 19.4,
upon any termination of this Agreement by COM21.
(i) All licenses granted to Siemens and Siemens Subsidiary
Companies hereunder shall immediately terminate, and Siemens shall discontinue
all distribution of the Products and use of the Marks; and
(ii) Siemens may keep one (1) copy of the Software in object
code form to be used solely for support of its installed base of Products as of
the date of termination and Siemens shall have a limited license only to the
extent necessary for Siemens to support the installed base of Products.
18.
<PAGE> 19
Except as otherwise provided herein, upon termination of this
Agreement, each party shall, within fifteen (15) days of the effective date of
any termination, return to the other or destroy all manifestations of the other
party's Confidential Information and any and all other materials in such party's
possession which had been furnished to it by the other party pursuant to this
Agreement, and such party shall warrant in writing to the other within thirty
(30) days after termination or expiration that all such materials have been
returned or destroyed.
19.8 Termination of this Agreement shall not relieve Siemens and
COM21 from their obligations to pay any sums accrued and payable hereunder. The
parties agree that their respective rights, obligations and duties under
Sections 4.5, 4.6, 12, 14.7, 19.6, 19.7, 19.8, 20, and 25 39 as well as any
rights, obligations and duties which by their nature extend beyond the
termination or expiration of this Agreement shall survive any termination or
expiration of this Agreement.
19.9 Each party understands that the rights of termination hereunder
are absolute. Neither party shall incur any liability whatsoever for any damage,
loss or expenses of any kind suffered or incurred by the other (or for any
compensation to the other) arising from or incident to any termination of this
Agreement by such party which complies with the terms of this Agreement whether
or not such party is aware of any such damage, loss or expenses.
20. CONFIDENTIAL INFORMATION
20.1 Each party (the "Receiving Party") shall, at all times, both
during the term of this Agreement and thereafter for a period of five (5) years,
keep in confidence as a fiduciary all of the other party's (the "Disclosing
Party") Confidential Information received by the Receiving Party irrespective of
the medium such information or data is embedded. Such Confidential Information
has to be - when disclosed in tangible form - marked as "Confidential" or
similar legend by the Disclosing Party before disclosing to the Receiving Party
or has to be - when disclosed orally or visually - summarized in writing by the
Disclosing Party and said summary will be given to the Receiving Party within
thirty (30) days of the subject oral or visual disclosure. In case of
disagreement, the Receiving Party must make any objections to the contents of
the summary in writing within thirty (80) days of receipt. The Receiving Party
shall not use the Confidential Information of the Disclosing Party other than as
expressly permitted under the terms of this Agreement or by a separate written
agreement. The Receiving Party shall take all reasonable steps to prevent
unauthorized disclosure or use of the Disclosing Party's Confidential
information and to prevent it from falling into the public domain or into the
possession of unauthorized persons. The Receiving Party shall not disclose
Confidential Information of the Disclosing Party to any person or entity other
than its officers, employees, consultants and subsidiaries who need access to
such Confidential Information in order to perform its obligations under this
Agreement and who have entered into written confidentiality agreements which
protect the Confidential Information of the Disclosing Party. The Receiving
Party shall immediately give notice to the Disclosing Party of any unauthorized
use or disclosure of Disclosing Party's Confidential Information. The Receiving
Party
19.
<PAGE> 20
agrees to assist the Disclosing Party to remedy such unauthorized use or
disclosure of its Confidential Information. With regard to the Software, the
five (5) year limitation shall not apply. The obligations of confidentiality
shall not apply to any information the Receiving Party can document:
(i) is or becomes available to the public or to the industry
without the fault or negligence of the Receiving Party;
(ii) was in the possession of the Receiving Party prior to
disclosure by the Disclosing Party;
(iii) is subsequently lawfully received from a third party
without restriction on further disclosure;
(iv) has been independently developed by the Receiving Party
without use of the Disclosing Party's Confidential Information by employees or
agents who have not had any access to such Confidential Information;
(v) is not in writing and marked with a legend indicating the
same is proprietary, private or confidential, or if disclosed in non-tangible
form, is not summarized in writing and marked "Confidential" or "Proprietary"
within thirty (30) days of the Disclosing Party's disclosures; or
(vi) is required to be disclosed by any law or regulation, or
by the decree of any competent tribunal; provided that the Disclosing Party
shall limit its disclosure to the information required to be disclosed and shall
use its best efforts to provide the maximum possible notice to the other party
prior to such disclosure and assist such party in seeking protection of the
information to be disclosed.
Notwithstanding anything to the contrary, the Software source code
and any and all firmware contained in the Products shall be deemed to be COM21's
Confidential Information disclosed to Siemens subject to the confidentially
restrictions of this Section 20.1.
20.2 Both parties agree to treat the terms of this Agreement as
confidential under paragraph 20.1.
21. TRADEMARKS AND TRADE NAMES
21.1 Siemens recognizes that COM21 is the owner of the trademarks
and trade names connoting COM21 which may elect to use in the promotion and sale
of the Products and that Siemens has no property rights or interest in or to
such trademarks and trade names.
20.
<PAGE> 21
21.2 COM21 and Siemens agree not to use each other's trademarks,
brand name, or logo in any manner, unless otherwise authorized in writing by the
other.
21.3 Depending on the requirements for marketing to a particular
customer End-User or in a particular market, Cable Modem Products shall be
badged with all or any of the following trademarks, as may be set forth in an
Order:
a) COM21; or
b) Siemens; or
c) Any other trademark or designation mutually agreed upon by
the parties.
Siemens is entitled to use COM21's trademarks (hereinafter referred
to as the "Marks") in advertisements, price lists, commercial notices, business
correspondence, cartons, packing, sales literature, manuals, displays and signs
relating to the Products. In case Siemens uses the marks Siemens will use all
commercially reasonable efforts to use the then current Marks used by COM21 for
the Products. Siemens will undertake to identify COM21 in written material
(e.g., in form of a footnote) as the owner of the Marks and shall obtain COM21's
prior written approval of all materials bearing a Mark, which approval will not
be unreasonably withheld. COM21 will be deemed to have approved such use if
Siemens does not receive notice of disapproval within ten (10) days after
COM21's receipt of a request for approval.
21.4 Siemens acknowledges that the ownership of the Marks is in
COM21 and agrees that it will do nothing inconsistent with such ownership by
COM21 (including, without limitation, registration of any of the Marks without
COM21's prior written consent) and that any use of the Marks by Siemens shall
inure to the benefit of COM21.
21.5 Siemens agrees that this Agreement does not give Siemens any
further right, title or interest than stated above to use the Marks and Siemens
undertakes - as far as legally permissible - not to attack the validity or title
of COM21 to the Marks nor assist anyone from doing so.
21.6 Siemens shall not use during the lifetime of this Agreement any
trademark, product name, logo or other designation colorably imitating or
confusingly similar to any of the Marks.
21.7 Siemens agrees that it will call to the attention of COM21 any
use of designations by any third party which Siemens reasonably considers might
be an infringement of a Mark. However, COM21 shall have the sole right to decide
whether or not proceedings shall be brought against such third parties at
COM21's expense. COM21 shall be entitled to any and all amounts awarded in such
proceedings. In any event, Siemens agrees to cooperate fully with COM21
21.
<PAGE> 22
to whatever extent necessary to prosecute such action, including, without
limitation, submitting proof of use and providing formal declarations with
regard to use of the Marks.
21.8 On the request of Siemens, COM21 and Siemens will mutually
discuss and agree upon the filing of any application for trademark protection of
the Marks and the responsibility of each party for the costs of such filing.
COM21 will furnish Siemens with a complete list of all applications and
registrations for the Marks in order to put Siemens into a position to decide
whether or not additional trademark protection is required.
22. CHANGES TO PRODUCTS AND NEW PRODUCTS
22.1 COM21 reserves the right to change or modify any Product at any
time only to the extent it does not materially adversely affect compliance of
such Product with the requirements stated in Article 15 and does not materially
adversely affect the form, fitness, functions, safety, reliability, performance
and/or maintainability of such Product detailed in the specifications set forth
in Exhibit A of this Agreement. If COM21 for whatever reason intends to make
technical changes to a Product, COM21 shall use commercially reasonable efforts
to notify Siemens at least ninety (90) days in advance, stating in writing the
type of changes, the reasons for them and the effects and consequences resulting
therefrom.
All changes in respect of the Product must be substantiated by
sufficiently complete documentation commensurate with the nature of the change,
e.g., by a field change bulletin relating to engineering, manufacturing or
retrofitting.
22.2 If Siemens, for whatever reason, requests technical changes to
a Product, COM21 and Siemens shall negotiate in good faith an agreement to
implement such changes. Changes of Products due to End-User fault reports
showing Epidemic Failures shall be provided by COM21 free, of charge. In the
event of an Epidemic Failure of a Product, COM21 will, within thirty (30) days
following COM21's confirmation of the existence of the Epidemic Failure, correct
such Epidemic Failure or provide Siemens with a written action plan for
correction of such Epidemic Failure.
22.3 Changes to Products which are necessary due to End-User
requirements shall be implemented by COM21 subject to terms and conditions to be
mutually agreed upon in writing.
22.4 Changes to Products affecting their compliance with the
requirements stated in Article 15 or their form, fitness, functions, safety,
reliability, performance and/or maintainability detailed in the specifications
set forth in Exhibit A of this Agreement shall be implemented by COM21 subject
to terms and conditions to be mutually agreed upon in writing.
22.5 Regarding changes as per this Article 22, COM21 shall at its
own expense, and upon Siemens' request, submit to Siemens, as a bailee, free of
charge a minimum of three (3)
22.
<PAGE> 23
samples of modified Products for testing purposes for a reasonable period of
time to be agreed upon by Siemens and COM21. All Products furnished by COM21 to
Siemens under this Section 22.5 ("Bailed Property") shall: (i) be clearly marked
or tagged as COM21's property; (ii) be and remain personal property and not
become a fixture to real property; (iii) be subject to inspection by COM21 at
any time; (iv) be used only for testing by Siemens; (v) be kept free of liens
and encumbrances; (vi) be kept separate from other materials, tools or property
of or held by Siemens; (vii) not be modified in any manner by Siemens; and
(viii) shall be stored in a safe place and environment. In the event Siemens
uses the Bailed Property for any purpose other than to conduct testing as
specified herein without COM21's prior written consent, Siemens agrees to
purchase such Bailed Property at COM21's list price for such Bailed Property.
COM21 shall retain all rights, title and interest in and to the Bailed Property,
and Siemens agrees to treat and maintain the Bailed Property with at least the
same degree of care as Siemens uses with respect to its own valuable equipment.
Siemens shall bear all risk of loss or damage to the Bailed Property until it is
returned to COM21. After such tests Siemens shall, in its sole discretion, buy
or return the Bailed Property to COM21 in good condition, normal wear and tear
excepted. The cost of the return shipment shall be borne by COM21 if the change
is within the scope of Article 22.1, otherwise the cost of the return shipment
shall be borne by Siemens. Siemens waives any illegal or equitable right it may
have to withhold the Bailed Property and Siemens agrees to execute all documents
or instruments evidencing COM21's ownership of the Bailed Property and as COM21
may from time to time request.
22.6 If during the term of this Agreement, COM21 intends to
introduce a new Product replacing Products or designed or fit to supersede the
Products, COM21 shall inform Siemens thereof as soon as possible, but in any
event not less than ninety (90) days prior to such introduction, and shall
transmit to Siemens the specifications of such new Product. Upon Siemens request
COM21 shall provide test samples of new products in accordance with Article 22.5
above. Siemens may request and COM21 shall upon such request substitute the
Products with new products at mutually agreed upon prices.
22.7 COM21 reserves the right to discontinue any Product at any
time, provided that COM21 uses its best efforts to provide Siemens twelve (12)
months prior notice of discontinuation. Notwithstanding the above, if a
compatible Product is not commercially available from COM21, then Siemens may,
at its option, (a) elect to manufacture the discontinued Product pursuant to a
separate written agreement executed by the parties granting Siemens the right to
manufacture the Products or (b) elect to place a final purchase order for any
quantity of the discontinued Product to be supplied by COM21 in one or more
deliveries.
23. SAFETY SPECIFICATIONS/CE-LABEL
COM21 represents and warrants that the Products conform to
applicable EC directives in the current revision:
89/336/EEC
23.
<PAGE> 24
73/23/EEC
91/263/EEC
93/68/EEC
92/31/EEC
COM21 guarantees that the statements in the EC Declaration of
Conformity are correct and is responsible to affix the CE Mark pursuant to said
directives.
COM21 shall reimburse Siemens for all expenses approved by COM21 in
writing and for all direct damages incurred by Siemens in connection with
noncompliance by COM21 with said EC directives including, but not limited to,
resulting from mandatory recalls of the Products or other immediately remedial
action, provided COM21 is promptly notified in writing of any such
non-compliance, COM21 is permitted to assume sole control of correcting such
non-compliant Products and Siemens uses its best efforts to mitigate its damages
resulting from such noncompliance of the Products.
COM21 will remain in compliance with the current versions of the
European Community directives applicable to the Products, provided Siemens gives
COM21 reasonable prior, written notice of any changes to such directives of
which Siemens becomes aware, and further provided that COM21 shall have a
reasonable amount of time to make modifications to the affected Products in
order to comply with any such new or amended directives.
24. CENTURY COMPLIANCE
24.1 When used in this Agreement with initial capital letters., the
following terms have the respective meanings given below:
"Procured System" means the computer software, computer firmware,
computer hardware (whether general or special purpose), documentation, data, and
other similar or related items of the automated, computerized and software
system, or any component part thereof, as originally provided by COM21 to
Siemens pursuant to this Agreement, unmodified by any party other than COM21
pursuant hereto.
"Calendar Related" refers to date values based on the Gregorian
calendar as defined in Encyclopaedia Britannica, 15th edition, 1982, page 602,
and to all uses of those date values described in the Procured System
documentation.
"Date Data" means any Calendar Related data in the inclusive range
January 1, 1900 through December 31, 2050 that the Procured System uses in any
manner.
24.
<PAGE> 25
"System Date" means any Calendar Related date value in the inclusive
range from January 1, 1985 through December 31, 2035 (including the transition
between such values) that the Procured System will be able to use as its current
date while operating.
"Century Compliant" means that the Procured System satisfies the
requirements set forth in Sections 1.2, 1.3, and 1.4 below.
"Century Non-Compliant" means any failure of the Procured System to
be Century Compliant.
24.2 COM21 represents that Calendar Related processing by the
Procured System of the Date Data or of any System Date will not cause the
Procured System to cease to operate substantially in accordance with the
Procured System documentation.
24.3 COM21 further represents that all data fields for the Date Data
contained in the Procured System are four digit fields capable of indicating
century and millennium.
24.4 COM21 further represents that no change in the System Date
(including the change from the year 1999 to the year 2000) will cause the
Procured System to cease to operate substantially in accordance with the
Procured System documentation.
24.5 Notwithstanding any provision to the contrary set forth in this
Agreement, COM21 makes no representation or warranty that the Procured System
shall be Century Compliant when operating in conjunction with any computer
software, computer firmware, computer hardware, or any combination of the
foregoing supplied by third parties.
24.6 This Section 1 shall survive the expiration or earlier
termination of this Agreement.
24.7 Century Noncompliance Remedy. In the event that the Procured
System is Century Non-Compliant in any material respect, COM21 shall use
commercially reasonable efforts to modify or replace the Procured System, or
applicable component thereof, to correct the Century Noncompliance. If COM21 is
unable, through the use of commercially reasonable efforts, to modify or replace
the Procured System to correct the Century Noncompliance, COM21 shall refund to
Siemens the license fee paid by Siemens to COM21 hereunder. The remedy set forth
in this Section 2.0 shall be Siemens' sole remedy for Century Noncompliance of
the Procured System.
24.8 Noncompliance Notice. In the event COM21 (i) becomes aware of a
Century Noncompliance in the Procured System or (ii) begins any significant
effort to conform the Procured System to any international, governmental,
industrial, or other standard (proposed or adopted) regarding Calendar Related
data and/or processing, COM21 shall promptly inform Siemens of same.
25.
<PAGE> 26
COM21 shall respond promptly and in reasonable detail to reasonable inquiries by
Siemens with respect to (i) any Century Noncompliance in the Procured System or
(ii) such standards.
25. FORCE MAJEURE
Neither Party to this Agreement shall be held responsible for the
performance of any obligations under this Agreement (except payment obligations
and obligations under Section 20) provided such performance is hindered or
prevented by any circumstances of Force Majeure which are deemed to include war,
riot, strike, lockout, flood, earthquake or other natural catastrophes or
national or local Government regulations and provided the party frustrated
notifies the other party without delay in writing at the beginning and end of
any such circumstances. The party frustrated shall use every endeavor to
minimize the hindrance or prevention of such fulfillment. Upon the ending of
such circumstance, the frustrated party shall without delay resume the
fulfillment of its obligations including any obligations, the performance of
which was interrupted thereby.
26. EXPORTS
COM21 shall not be obliged to perform deliveries, orders and other
obligations under this Agreement if that performance is hindered by the
applicable export laws and regulations of the European Community, the United
States of America or other countries.
With respect to those Products which include materials or technology
originating from the United States of America, which COM21 will identify in the
individual delivery documents, Siemens agrees that it will comply with all
restrictions, export laws and regulations of the United States of America, or
foreign agency or authority, and not to export, or allow the export or reexport
of any Product, Confidential information or any direct product thereof in
violation of any such restrictions, laws or regulations, or, without all
required licenses and authorizations, to Cuba, Libya, North Korea, Iran, Iraq or
Rwanda or to any Group D:l or E:2 country (or any national of such country)
specified in the then current Supplement No. 1 to Part 774 of the U.S. Export
Administration Regulations (or any successor supplement or regulations).
27. LIMITED LIABILITY
EXCEPT AS OTHERWISE PROVIDED BELOW, AND EXCEPT THAT CLAUSES (1) AND
(11) WILL NOT LIMIT SIEMENS' OBLIGATIONS OF INDEMNITY UNDER SECTION 4.1 OR 4.3
(EXCEPT AS OTHERWISE PROVIDED IN SECTIONS 4.1, AND 4.3) OR EITHER PARTY'S
OBLIGATIONS UNDER SECTION 18.1 OR 32, AND NOTWITHSTANDING ANYTHING ELSE IN THIS
AGREEMENT OR OTHERWISE, NO PARTY HERETO WILL BE LIABLE WITH RESPECT TO ANY
SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT
LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR (I) ANY AMOUNTS IN EXCESS OF IN
THE AGGREGATE OF THE AMOUNTS PAID TO IT (IN THE CASE OF COM21) OR (IN THE
26.
<PAGE> 27
CASE OF SIEMENS) PAID OR OWED BY IT HEREUNDER DURING THE TWELVE (12) MONTH
PERIOD PRIOR TO DATE THE CAUSE OF ACTION AROSE, OR (II) ANY INCIDENTAL OR
CONSEQUENTIAL DAMAGES, LOST PROFITS OR LOST DATA OR (III) COST OF PROCUREMENT OF
SUBSTITUTE GOODS, TECHNOLOGY OR SERVICES. EACH PARTY SHALL HAVE NO LIABILITY FOR
ANY FAILURE OR DELAY DUE TO MATTERS BEYOND ITS REASONABLE CONTROL. THE
LIMITATIONS OF THIS SECTION 27 SHALL NOT APPLY TO A PARTY'S (I) BREACH OF
SECTION 20 OR (II) WILFUL ACTIONS OF SIEMENS, ITS SUBSIDIARY COMPANIES OR THIRD
PARTY DISTRIBUTORS APPOINTED BY SIEMENS BEYOND THE SCOPE OF ANY OF THE LICENSE
GRANTS HEREUNDER OR TO SIEMENS' (III) BREACH OF SECTION 4.5 OR 14.8.
28. SUBSTANTIVE LAW
This Agreement shall be governed by and construed under the laws of
the State of New York and the United States of America without regard to
conflicts of laws provisions thereof and provisions providing for awards of
punitive damages and without regard to the United Nations Convention on
Contracts for the International Sale of Goods.
Except that the parties shall be entitled to seek injunctive or
other equitable relief from a court pending arbitration to prevent irreparable
harm, any dispute, controversy, or claim arising out of or in relation to this
Agreement or at law, or the breach, termination or invalidity thereof shall be
finally settled by binding arbitration in accordance with the International
Rules of the American Arbitration Association ("AAA"), by three arbitrators, one
of which shall be appointed by COM21, of which shall be appointed by Siemens,
and one of which shall be appointed by the AAA. The place of arbitration shall
be Toronto, Canada and the arbitration proceedings shall be conducted in the
English language. The award rendered shall be final and binding upon each party
to this Agreement. Judgment upon the award may be entered in any court having
jurisdiction, or application may be made to such court for judicial acceptance
of the award and/or an order of enforcement as the case may be.
29. SEVERABILITY
If any provisions of this Agreement shall be held invalid, illegal
or unenforceable, the validity, legality or enforceability of the remaining
provisions shall not in any way be affected or impaired thereby. COM21 and
Siemens shall use reasonable efforts to replace any invalid, illegal or
unenforceable provision by a legal, valid and enforceable provision which comes
as close as possible to the original intent of the parties,
30. NOTICES
All notices under this Agreement must be in writing and sent by
confirmed telex or telecopy with written verification of successful
transmission, delivered by a major commercial
27.
<PAGE> 28
international rapid delivery service with tracking capabilities and written
verification of receipt, mailed by certified or registered mail, postage
prepaid, return receipt requested to a party at the address set forth below, or
at such other place of which the other part(ies) has notified in accordance with
the provision of this Section 29. If not received sooner, notice by mail shall
be deemed received five (5) days after deposit in the U.S. or German mails.
If to COM21: COM21, Inc.
750 Tasman Drive
Milpitas, CA 94043
U.S.A.
Telecopy: (408) 953-9299
Attention: President
If to Siemens: Siemens AG
ON AN X
Hofmannstra(beta)e 51
D-81359 Munchen
Telecopy: +49 89 - 722 - 21534
Attention: Lothar Schmid
General Manager Coax Products Subdivision
With respect to any notices to COM21 pursuant to Section 19 above,
Siemens shall send a copy of such notice to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
Telecopy: (415) 496-2885
Attention: Thomas Kellerman, Esq.
31. INJUNCTIVE RELIEF
It is expressly agreed that a material breach of this Agreement (a
breach of Section 20 shall be deemed a material breach of this Agreement) by a
party would cause irreparable harm to the non-breaching party and that a remedy
at law would be inadequate. Therefore, in addition to any and all remedies
available at law, the non-breaching party shall be entitled to seek an
injunction or other equitable remedies in all legal proceedings without
requirement of posting of any bond in the event of any threatened or actual
violations of any or all of the provisions hereof.
32. RELATIONSHIP OF THE PARTIES
28.
<PAGE> 29
The parties hereto expressly understand and agree that they are
independent contractors in the performance of each and every part of this
Agreement, and except as otherwise provided in this Agreement, are solely
responsible for all of their employees and agents and their labor costs and
expenses arising in connection therewith and are responsible for and will
indemnify each other from any and all claims, liabilities, damages, debts,
settlements, costs, attorneys' fees, expenses and liabilities of any type
whatsoever that may arise on account of their activities, or those of their
employees or agents (including, without limitation, direct and indirect
subdistributors) including, without limitation, providing or breaching
representations or warranties towards End-Users or failure to protect COM21's
ownership interest in the Products). COM21 is in no manner associated with or
otherwise connected with the distribution of Products by Siemens under this
Agreement, nor with Siemens' employment of other persons or incurring of other
expenses. Except as expressly provided herein, COM21 shall have no right to
exercise any control whatsoever over the activities or operations of Siemens.
33. ASSIGNMENT
This Agreement and the rights hereunder are not transferable or
assignable by Siemens without the prior written consent of COM21. Any attempted
assignment, delegation or other transfer, of this Agreement or of any rights or
obligations hereunder contrary to this Section 32 shall be a material breach of
this Agreement by Siemens, shall be void and shall be of no force or effect.
34. SUCCESSORS AND ASSIGNS
This Agreement shall inure to the benefit of, and be binding upon,
the parties and their respective successors and assigns.
35. REMEDIES
Except as otherwise expressly stated in this Agreement, the rights
and remedies of a party set forth herein with respect to failure of the other to
comply with the terms of this Agreement (including, without limitation, rights
of termination of this Agreement) are not exclusive, the exercise thereof shall
not constitute an election of remedies and the aggrieved party shall in all
events be entitled to seek whatever additional remedies may be available in law
or in equity.
36. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of
which be deemed an original, but all of which together shall constitute one and
the same instrument. If this Agreement is executed in counterparts, no signatory
hereto snail be bound until all the parties named below have duly executed or
caused to be duly executed a counterpart of this Agreement.
29.
<PAGE> 30
37. ENTIRE AGREEMENT; MODIFICATIONS
This Agreement, including any Exhibits and Addenda hereto,
constitutes the entire Agreement of the parties and supersedes all prior
communications, representations, agreements or understandings, either verbal or
written, between the parties with respect to the subject matter hereof. This
Agreement may not be altered, modified, amended or otherwise changed except by
supplemental written agreement signed by duly authorized officers of both
parties. In the event of any conflict between the terms contained in this
Agreement and the terms contained in any exhibit hereto, the terms of this
Agreement shall prevail.
38. WAIVER
A waiver by either party of any default by the other party shall not
be deemed to be a continuing waiver or a waiver of any other default or of any
other provision of this Agreement, but shall apply solely to the instance to
which the waiver is directed.
39. CONSTRUCTION OF AGREEMENT
This Agreement has been negotiated by the respective parties hereto
and their attorneys and the language hereof shall not be construed for or
against any party.
40. HEADINGS
The section headings contained herein are for convenience of
reference only and shall not be used in interpreting or construing this
Agreement.
30.
<PAGE> 31
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the Effective Date.
COM21, INC. SIEMENS AG
By: By:
----------------------------- -----------------------------------
Name: Name:
--------------------------- ---------------------------------
Title: Title:
-------------------------- --------------------------------
Date: Date:
--------------------------- ---------------------------------
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
Date:
---------------------------------
31.
<PAGE> 32
EXHIBIT A
DESCRIPTION/SPECIFICATION OF PRODUCTS
A-1.
<PAGE> 33
EXHIBIT B
PRICES AND DISCOUNTS AS OF 12/2/97
This Exhibit will be updated every [*] based upon the [*] stated in
section 8.1 of the contract.
COMPORT cable modems transfer price including Siemens discount:
<TABLE>
<S> <C>
CP1000 [*]
CP1100 [*]
</TABLE>
COMCONTROLLER AND SOFTWARE
The following headend hardware and software products [*] their
respective list prices excluding the headend support/spares kit:
<TABLE>
<S> <C>
CC2100 ComCONTROLLER Ch/Sw/DPS/Tx/Rx/CC/EM (USD)
CC2100A ComCONTROLLER Ch/Sw/DPS/Tx/Rx/CC/EM (USD)
CC2110 ComCONTROLLER Ch/Sw/DPS/Tx/Rx/CC/EM (Int'l)
CC2110A ComCONTROLLER Ch/Sw/DPS/Tx/Rx/CC/EM (Int'l)
CC2101 ComCONTROLLER Ch/Sw/DPS/Tx/Rx/CC/EM (USD)
CC2111 ComCONTROLLER Ch/Sw/DPS/Tx/Rx/CC/EM (Int'l)
CC2102 ComCONTROLLER Ch/Sw/DPS/Tx/CC/EM (USD)
CC2112 ComCONTROLLER Ch/Sw/DPS/Tx/CC/EM (Int'l)
CC2120 ComCONTROLLER Expansion Chassis (USD)
CC2121 ComCONTROLLER Expansion Chassis (Int'l)
CC0101 ComCONTROLLER Tx RF Module
CC0100 ComCONTROLLER Transmit Main (US Domestic)
CC0110 ComCONTROLLER Transmit Main (International)
CC0200 comCONTROLLER Receive Card (US Domestic)
CC0210 comCONTROLLER Receive Card (International)
CC0300 ComCONTROLLER CC Card
CC0400 ComCONTROLLER 10BT Card (4K Addresses)
CC0401 ComCONTROLLER 10BT Card (8K Addresses)
CC0500 ComCONTROLLER ATM Switch (spare)
CC0520 ATM switch upgrade for CC2100/CC2110
CC0521 ATM switch upgrade for CC2100A/CC2110A
CC0600 ComCONTROLLER 110V/220V Power Supply (spare)
CC0700 ComCONTROLLER Mini-Chassis Back plane (spare)
CC0800 ComCONTROLLER Mini-Chassis Cabling, Assembly
CC0801 ComCONTROLLER Interconnect Module
</TABLE>
[*] Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
<PAGE> 34
<TABLE>
<S> <C>
CC0802 ComCONTROLLER ATM switch extender
CC0810 ComCONTROLLER Fan Assembly
CC0811 ComCONTROLLER Face Plate
CC0900 ComCONTROLLER Main Interconnect Module (MIM)
CC0901 ComCONTROLLER Expansion Interconnect Module (EIM)
SOFTWARE
CS3100 NMAPS Software License (US)
CS3000 NMAPS Software License (Int'l)
CS0300 HCX System Software License (US)
CS0310 HCX System Software License (International)
CS3101 NMAPS Lite Software (US)
CS3001 NMAPS Lite Software (Int'l)
CS0101 NMAPS Software License Key for NMAPS Lite
CS0102 NMAPS Network Management Application for NMAPS Lite
CS0103 NMAPS Remote Web Based Management Application
CS0104 HP Openview Entry Level Network Node Manager
NOTE: THE FOLLOWING COM21 SERVICES [*]
TRAINING, SUPPORT, SET PRICES AND WARRANTY PRICES
CX9010 Off Site Support
CX9020 On Site Support
CX9025 System Installation
CX9030 Technical Training (5 days)
CX9031 Technical Training (5 days) for more than 6 people
CX9032 Technical Training at Reseller or End User facility
CX9603 ComCONTROLLER Headend Support/Spares Kit (USD)
CX9604 ComCONTROLLER Headend Support/Spares Kit (Int'l)
CX9100 12 month 24 hours x7 days Service Contract for ComCONTROLLER
CX9200 12 month Extended Maintenance Contract for NMAPS and System Software at
time of purchase
CX9201 12 month Extended Maintenance Contract for NMAPS Lite and System Software
at time of purchase
CX9202 12 month Extended Maintenance Contract for NMAPS and System Software
after time of shipment but before 12 month standard warranty expires
CX9203 12 month Extended Maintenance Contract for NMAPS Lite and System
Software after time of shipment but before 12 month standard
warranty expires
CX9500 ComPORT 24 Month Extended Warranty at time of purchase
CX9550 ComPORT 24 Month Extended Warranty after time of shipment but before
standard warranty expires
</TABLE>
[*] Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
B-2.
<PAGE> 35
<TABLE>
<S> <C>
CX9510 ComCONTROLLER 24 Month Extended Warranty at time of purchase
CX9560 ComCONTROLLER 24 Month Extended Warranty after time of shipment but
before standard warranty expires
DOCUMENTATION AND LITERATURE
CD8100 Technical Publication Set (CD8110, CD8120 and CD8140)
CD8110 Technical Reference Manual
CD8120 Installation, Operation and Maintenance Manual
CD8140 NMAPS Command Reference Manual
CD8141 NMAPS Quick Reference Guide
CD8151 ComPORT Quick Reference Guide
CD8500 Product Overview Brochure
CD8510 ComPORT Data Sheet
CD8520 ComCONTROLLER Data Sheet
CD8530 NMAPS Data Sheet
</TABLE>
B-3.
<PAGE> 36
EXHIBIT C
COM21 SOFTWARE SUPPORT SERVICES
TERMS AND CONDITIONS
The following terms and conditions relate to and are incorporated
into the Agreement. Capitalized terms not defined in Section 1 below have the
same meaning as in the Agreement.
1. DEFINITIONS
Unless defined otherwise herein, capitalized terms used in these Support
Services Terms and Conditions shall have the same meaning as set forth in
the Agreement.
"Critical Error" means the Software crashes or a significant number of
End-Users or single-key end-users of the Cable Modem Product are unable to
use the Software because of replicatable Errors in the Software, causing
significant inconvenience or dissatisfaction to such End-Users or
end-users as the case may be.
"Error" means an error in the Software which significantly degrades the
Software's performance or function.
"Error Correction" means the use of commercially diligent efforts to
correct Errors.
"Fix" means the repair or replacement of object or executable code
versions of the Software to remedy an Error.
"Minor Error" means that a small number of End-Users are experiencing a
replicatable Error in the Software that limits some functionality of the
Software or that Siemens' technical support personnel, after using
commercially diligent efforts to provide a solution, require COM21's
assistance.
"Moderate Error" means End-Users are able to use the Software but a small
number of End-Users experience Errors in the Software causing significant
inconvenience to those End-Users due to some loss of functionality of the
Software.
"Support Services" means COM21 support services as described in Section 3.
"Telephone Support" means technical support telephone assistance provided
by COM21 to the Technical Support Contact during COM21's normal business
hours.
<PAGE> 37
"Workaround" means a change in the procedures followed or data supplied by
Company to avoid an Error without substantially impairing use of Software
by End-Users.
2. COVERAGE
Subject to the terms hereof, COM21 will provide Support Services to
Siemens for the Software.
3. SUPPORT SERVICES
Support Services consist of Error Correction as specified in Section
6 hereof provided to the "Technical Support Contact" designated by Siemens as
responsible for communications between the parties regarding the Support
Services hereunder. Upon detection of any Error, Siemens agrees to provide COM21
a listing of output and any other data, that COM21 may reasonably request in
order to reproduce the operating conditions similar to those present when the
Error occurred.
4. FEES AND PAYMENT
For Support Services after the Initial Term, Siemens shall pay COM21
the applicable Support Services fee as listed in the then-current COM21 price
list, Support Services fees will be billed on an annual basis, payable in
advance. Siemens shall be responsible for all taxes associated with Support
Services other than U.S. taxes based on COM21's net income. Siemens' payment is
due within thirty (30) days of receipt of COM21's invoice. In the event Siemens
fails to pay COM21 on the due date, then to reinstate or renew Support Services
(if allowed by COM21), Siemens must first pay COM21 the annual Support Services
fee and the reinstatement charge listed in the then-current COM21 price list.
5. ERROR CORRECTION
COM21 shall exercise commercially diligent efforts to correct any
Error reported by Siemens in the Software in accordance with the priority level
reasonably assigned to such Error by Siemens.
a) Critical Errors. In the event of a Critical Error, COM21 will
respond to Critical Errors by assigning a technician to investigate the Error
within four (4) hours from the time Siemens reports the Error to COM21. COM21
will provide Siemens information and a proposal for the correction of such Error
no later than twenty-four (24) hours from the time the Error was first reported
to COM21. COM21 shall use its commercially reasonable efforts to provide a
Workaround or a Fix that solves or reduces the severity of the Error within 48
hours from the time Siemens first reports the Error. In the case where COM21 is
to provide a Fix, COM21 will do so ninety percent
C-2
<PAGE> 38
(90%) of the time within thirty (30) days following COM21's identification and
replication of the Error.
b) Moderate Errors. In the event of a Moderate Error, COM21 will
respond to all Moderate Errors by assigning a technician to investigate such
Error within four (4) hours from the time Siemens reports the Error to COM21.
COM21 will provide a Workaround within fourteen (14) days or will Fix the Error
ninety percent (90%) of the time within ninety (90) days following COM21's
identification and replication of the Error.
c) Minor Errors. In the event of a Minor Error, COM21 will respond
to requests for information within eight (8) hours and, if appropriate, use
commercially diligent efforts to provide an upgrade of the Software providing a
Workaround or a Fix for the Error within one hundred eighty (180) days of
Siemens' reporting of such Error.
If COM21 believes that a problem reported by Siemens may not be due
to an Error in the Software, COM21 will so notify Siemens. At that time, Siemens
may (1) instruct COM21 to proceed with problem determination at its possible
expense as set forth below or (2) instruct COM21 that Siemens does not wish the
problem pursued at its possible expense. If Siemens requests that COM21 proceed
with problem determination at its possible expense and COM21 determines that the
error was not due to an Error in the Software, Siemens shall pay COM21, at
COM21's then-current and standard consulting rates, for all work performed in
connection with such determination, plus reasonable related expenses incurred
therewith. Siemens shall not be liable for (i) problem determination or repair
to the extent problems are due to Errors in the Software or (ii) work performed
under this paragraph in excess of its instructions or (iii) work performed after
Siemens has notified COM21 that it no longer wishes work on the problem
determination to be continued at its possible expense (such notice shall be
deemed given when actually received by COM21). If Siemens instructs COM21 that
it does not wish the problem pursued at its possible expense or if such
determination requires effort in excess of Siemens' instructions, COM21 may, at
its sole discretion, elect not to investigate the error with no liability
therefor.
6. EXCLUSIONS
COM21 shall have no obligation to support:
a) Software that has been altered, damaged or modified or Software
or any portion thereof has been incorporated with or into other software; or
b) COM21 software that is not the then current release or any
release which has been replaced by the then current release of the same
Software; or
c) Problems in the Software that are caused by Siemens' negligence,
abuse or misapplication, misuse or other causes beyond the control of COM21.
C-3.
<PAGE> 39
COM21 shall have no liability for any changes in hardware (other
than the COM21 Headend Product or the Cable Modem Product) which may be
necessary to use the Software due to a Workaround.
7. LIMITATION OF LIABILITY
COM21's liability for damages from any cause of action whatsoever
relating to COM21's agreement to provide Support Services shall be limited to
ONE HUNDRED THOUSAND DOLLARS (US$100,000).
8. THESE TERMS AND CONDITIONS CONSTITUTE A SERVICE CONTRACT AND NOT A WARRANTY
FOR THE SOFTWARE. THE SOFTWARE AND ALL MATERIALS RELATED TO THE SOFTWARE ARE
SUBJECT EXCLUSIVELY TO THE WARRANTIES SET FORTH IN THE AGREEMENT. THIS EXHIBIT
IS AN ADDITIONAL PART OF THE AGREEMENT AND DOES NOT CHANGE OR SUPERSEDE ANY TERM
OF THE AGREEMENT EXCEPT TO THE EXTENT UNAMBIGUOUSLY CONTRARY THERETO.
C-4.
<PAGE> 40
EXHIBIT D
COM21 WARRANTY AND SERVICE POLICY
PURPOSE
This document summarizes the terms and conditions of COM21 Warranty
and Service offerings for COM21 hardware and software products supplied to
reseller.
HARDWARE WARRANTIES
STANDARD HARDWARE WARRANTY POLICY
COM21 warrants that the hardware portion of the ComCONTROLLER and
ComPORT products will materially conform to the specifications applicable to
such product and will be free from material defects in materials and workmanship
under normal and proper use for one (1) year from the date of COM21's shipment.
COM21's sole liability under this warranty is, at the option of COM21, to repair
or replace a COM21 hardware product that does not conform with the foregoing
warranty. This warranty shall not apply any damage or defect arising as a result
of neglect, improper installation, alteration, accident, or improper use of a
COM21 hardware product. This warranty is specifically in lieu of, and COM21
disclaims, all other warranties, express or implied, including, without
limitation, any warranty for merchantability, fitness for a particular purpose
and non-infringement. COM21 will not be liable for any incidental or
consequential damages or for the cost of substitute goods, services or
technology.
OTHER POLICY TERMS:
- ComCONTROLLER and ComPORT products are covered for twelve (12)
months from date of COM21's shipment at no charge.
- $50 no trouble found charge for units that are returned, but are
determined by COM21 to conform with the warranty.
- reseller pays shipping charges to COM21; COM21 pays return shipping
charges unless no trouble found, then reseller pays return shipping
charges unless otherwise agreed to by COM21.
- COM21 sends the repaired or replaced hardware units to reseller
within fifteen (15) working days after COM21's receipt of the
defective products covered under warranty unless otherwise agreed
to.
<PAGE> 41
- A COM21 Return Material Authorization number must be obtained from
COM21 Technical Support for all warranty and non-warranty repairs
prior to return of hardware products.
POST-WARRANTY HARDWARE EQUIPMENT SUPPORT
After expiration of the one (1)-year hardware warranty period, COM21
will repair COM21 hardware products on a time and materials basis on the terms
and at the prices shown in the "COM21 Services" Section. COM21 will warrant such
out-of-warranty repair of COM21 hardware products for a period of ninety (90)
days from the date of COM21's shipment to reseller unless otherwise agreed to.
COMPORT EXTENDED WARRANTY
The ComPORT extended warranty extends standard hardware warranty for
ComPORT cable modems and power supply for an additional twenty-four (24) months.
The price is [*] modem at time of purchase or [*] purchased before the standard
hardware warranty expires. This extended warranty cannot be renewed or further
extended.
COMCONTROLLER EXTENDED WARRANTY
ComCONTROLLER extended warranty can be purchased for any
ComCONTROLLER product or sub-system and it extends standard hardware warranty
for an additional twenty-four (24) months. The warranty price is [*] of the
COM21 list price of theComCONTROLLER product or sub-system, if the warranty is
purchased at time of purchase, and is [*] if the warranty is purchased within
the twelve (12) month standard hardware warranty period. This extended warranty
cannot be renewed or further extended.
ORDER NUMBER AND PRICE OF HARDWARE WARRANTIES:
<TABLE>
<CAPTION>
Order Description Price
- -----------------------------------------------------------------------------------
<S> <C> <C>
CX9500 ComPORT Extended Warranty (Time of [*]
purchase). Not renewable. No discounts are
available
CX9550 ComPORT Extended Warranty (Within 12 [*]
months). Not renewable. No discounts are
available
CX9510 ComCONTROLLER Extended Warranty (Time [*]
of purchase). Not renewable. No discounts are
available.
</TABLE>
[*] Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
D-2.
<PAGE> 42
<TABLE>
<S> <C> <C>
CX9560 ComCONTROLLER Extended Warranty (Within [*]
12 months). Nonrenewable. No discounts are
available.
</TABLE>
SOFTWARE WARRANTY, SUPPORT AND MAINTENANCE CONTRACTS
COM21'S SOFTWARE WARRANTY
The warranty period for software media is ninety (90) days. The
COM21 software products are provided "as is" without warranty of any kind,
including, without limitation, any warranty of merchantability, fitness for a
particular purpose and non-infringement. Further, COM21 does not warrant,
guarantee, or make any representations regarding the use, or the results of the
use, of the licensed COM21 software products in terms of correctness, accuracy,
reliability, or that the licensed products are or will be error free unless
otherwise agreed to by COM21.
SOFTWARE SUPPORT POLICY
COM21 will provide telephone technical support for the current
shipping version of the COM21 software and its immediate prior release. For
example, if COM21 is shipping NMAPS v2.3, then COM21 would provide telephone
support for NMAPS v2.3 and version 2.2. If a customer was still using NMAPS
v2.1, COM21 would not provide support except to instruct the customer that it
must upgrade to the current shipping version, which in this case would be v2.3,
and then COM21 could determine if the customer's problem was resolved by the
current shipping release or if error still exists. If the error is not resolved
by the current shipping release, then COM21 would then provide technical support
to resolve or mitigate the error.
COM21 will respond to Critical Errors by assigning a technician to
investigate the error within four (4) hours from the time customer reports the
error to COM21. COM21 will provide customer information and a proposal for the
correction of such error no later than twenty-four (24) hours from the time the
error was first reported to COM21. COM21 will use commercially reasonable
efforts to provide a Workaround within forty-eight (48) hours from the time
customer first reports the Error.
COM21 will use its commercially reasonable efforts to provide
Workaround for moderate or minor errors within forty-eight (48) hours from the
time customer first reports the error to COM21, patches, i.e., software which
corrects or removes a reproducible anomaly or "bug", will not be provided for
these types of Errors. COM21 will use commercially reasonable efforts to correct
and/or fix moderate or minor errors in the next update or upgrade of COM21
software.
[*] Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
D-3.
<PAGE> 43
SOFTWARE MAINTENANCE CONTRACTS AND UPGRADES*
Maintenance contracts for COM21 software have a twelve (12)-month
term beginning on the date of shipment by Com21, renewable annually.
COM21 encourages its resellers to purchase software maintenance for
the COM21 software. The benefits of annual software maintenance are no-charge
upgrades including all new product features to all major releases of the COM21
software and all maintenance releases during the twelve (12) month term of the
maintenance contract. If purchased separately, the combined cost of these
upgrades and maintenance release will be more than the annual price of software
maintenance.
COM21 encourages its resellers to offer customers the extended
software maintenance program with all others of COM21 software. The two examples
below illustrate the difference in price for maintenance of the COM21 software
with and without the extended software maintenance program in place.
a) If a customer purchases a software maintenance contract at time of
purchase of COM21 software. the price will be [*] of the list price of
NMAPS and [*] of the list price of the System software (per
ComCONTROLLER). Once the customer has purchased maintenance, it must
purchase maintenance for all subsequent purchases of software and
comCONTROLLER units in order for such software and ComCONTROLLER units to
be covered under the maintenance program. For example, if a customer
purchases NMAPS, one ComCONTROLLER including the System software and
maintenance on 9/l/97, the software is covered until 8/31/98. If the
customer purchases a new ComCONTROLLER including System software on
12/1/97, it must purchase the maintenance for the System software. As a
result, the NMAPS and System software that was purchased on 9/1/97 will
be covered by the maintenance contract until 8/31/98 and the System
software purchased on 12/1/97 will be covered by the maintenance contract
until 11/30/98. If software maintenance is purchased after the date of
purchase of the COM21 software, but within ninety (90) days, then the
price is [*] of the list price of the COM21 software for which
maintenance is purchased.
b) A customer that does not purchase maintenance will receive maintenance
(bug-fix) releases but not any upgrade or new feature of any component of
the COM21 ComUNITY Access
- -------
*Major Release: A comprehensive software release that has significant new
features to provide additional functionality or performance.
MAINTENANCE RELEASE: Periodic revisions to major releases
which may include performance improvements, support for new
hardware, new software features, and/or bug fixes.
[*] Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
D-4.
<PAGE> 44
system. For example, an upgrade would be NMAPS or the System software
moving from 2.1 to 2.2 or from 2.2 to 2.3. An example of a maintenance
release would be moving from version 2.1 to 2.1.1. Under this scenario, if
a customer purchased a new upgrade, it would pay [*] of the list price of
the upgrade. Although for one upgrade, this price is less than the annual
fee for maintenance purchasing two or more upgrades separately per year
will cost more than the annual maintenance fee. COM21 is currently planning
to release at least upgrades annually, who has purchased NMAPS v2.1 and
does not purchase the upgrade to v2.2 charged [*] for the upgrade from
v2.1 to v2.3.
ORDER NUMBER AND PRICE FOR SOFTWARE MAINTENANCE PRODUCTS:
<TABLE>
<CAPTION>
Order Number Description Price
------------ ----------- -----
<S> <C> <C>
CX9200 ComUNITY Access Software Maintenance [*]
contract; includes free maintenance
upgrades for a year (Time of purchase, per
NMAPS and System Software License).
Renewable
CX9201 ComUNITY Access Software Maintenance [*]
contract; includes free maintenance
upgrades for a year (Time of purchase, per
NMAPS Lite and System Software
License). Renewable
CX9202 ComUNITY Access Software Maintenance [*]
contract; includes free maintenance
upgrades for a year (Within 90 days, per
NMAPS and System Software License).
Renewable
CX9203 ComUNITY Access Software Maintenance [*]
contract; includes free maintenance
upgrades for a year (Within 90 days, per
NMAPS Lite and System Software
License). Renewable
</TABLE>
SERVICE OFFERINGS
Standard Service Policy
At no charge, COM21 offers the following support to reseller.
- (M-F) 7AM to 7PM PST telephone support, after hours message
support.
- Next business day response.
[*]Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
D-5.
<PAGE> 45
- On site support requires a customer PO, minimum charge for
a service call is [*]
1 Order number, and price for service and service packages
<TABLE>
<CAPTION>
Order
Number Description Price
- -----------------------------------------------------------------------------
<S> <C> <C>
CX9010 Remote site support; 5 x 12 M-F [*]
Technical Telephone Support (after 12
month warranty period)
X9020 On site support, [*] [*]
[*]
CS9025 System installation rate, [*] [*]
[*]
</TABLE>
Training and Support
COM21 offers the following training and support for its customers:
<TABLE>
<CAPTION>
Order Number Description Price
- -----------------------------------------------------------------------------------
<S> <C> <C>
CX9010 Remote site support; 5 x 12 M-F Technical [*]
Telephone Support (after 12 month warranty
period)
CX9020 On site support,[*] [*]
[*]
CX9025 System installation rate, [*] [*]
[*]
CX9030 Technical training (5 day train the trainer at [*]
COM21 facility) up to six attendees.
CX9031 Technical training (5 day train the trainer at [*]
COM21 facility) for 7-10 attendees.
CX9032 Technical training at customer facility (plus [*]
travel and living expenses billed at cost).
</TABLE>
1 Support Packages
[*] Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
D-6.
<PAGE> 46
<TABLE>
<CAPTION>
Order Number Description Price
- ----------------------------------------------------------------------------------
<S> <C> <C>
CX9603 North American Headend Support Kit [*]
which includes one TxRF Module, one Tx
Main Module (56 bit DES encryption), one
Rx Module (56 bit DES encryption), one
CC Module, one Ethernet Module, and one
Fan Tray Assembly. It does not include
Power Supply Module, or the ATM switch
fabric. For these products to be used as
spares, contact COM21 for pricing.
CX9604 International Headend Support Kit which [*]
includes one TxRF Module, one Tx Main Module
(40 bit DES encryption), one Rx Module (40 bit
DES encryption), one CC Module, one Ethernet
Module, and one Fan Tray Assembly. It does not
include Power Supply Module, or the ATM switch
fabric. For these products to be used as spares,
contact COM21 for pricing.
</TABLE>
Note, that the North American and International Headend support kit does not
include Power Supply Module, or the ATM switch fabric. If customer/resellers
want to purchase the Power Supply Module and/or the ATM switch fabric as spares,
they need to contact COM21 for pricing.
COM21 ENCOURAGES ITS SALES FORCE TO OFFER CUSTOMERS THE ATM SWITCH FABRIC,
AND/OR POWER SUPPLY WITH THE HEADEND SUPPORT KIT. THE DISCOUNT FOR THE ATM
SWITCH FABRIC AND/OR POWER SUPPLY IS [*] OFF THEIR RESPECTIVE LIST PRICES.
[*] Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
D-7.
<PAGE> 1
Confidential
DISTRIBUTION AGREEMENT
This Distribution Agreement (the "Agreement") is entered as of
, 1997 by and between Com21, Inc. ("Com21"), a Delaware corporation,
with its principal place of business at 750 Tasman Drive, Milpitas, California
95035 and Philips Public Telecommunication Systems ("Philips"), a division of
Philips Electronics Australia Ltd., an Australian corporation, with its
principal place of business at Monash Gateway, 745 Springvale Road, Mulgrave,
VIC 3170 Australia.
RECITALS
1. Com21 intends to enable and drive development of broadband
services through high speed delivery of information over Hybrid Fiber Coax
("HFC") cable networks.
2. Com21 is developing cable modems based on subscriber
equipment technology related to broadband services over HFC cable networks and a
headend distribution system for use in such cable networks.
3. Philips Broadband Networks, part of Philips Electronics,
N.V. is involved in the data over cable market, through its Affiliate (defined
below), Philips, as a systems integrator and distributor of an end-to-end
product solution.
4. Philips wishes to be a distributor of Com21 data cable
modems and Com21 headend distribution systems in the Territory (defined below)
and serve as the marketing and technical lead-house for such distribution with
involvement of other entities within the Philips Broadband Networks
organization, including Affiliates of Philips' national sales organizations and
value added resellers.
AGREEMENT
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS.
1.1 "Affiliate" means any entity directly or indirectly controlling,
controlled by or under common control with that party where control means the
ownership or control, directly or indirectly, of more than fifty percent (50%)
of all of the voting powers of the shares (or other securities or rights)
entitled to vote for the election of directors or other governing authority or
otherwise having power to control such entity's general activities, but only for
so long as such ownership or control shall continue.
1.2 "Com21 Cable Modem" means the Com21 subscriber-end data over cable
modem, as described in Exhibit A (Com21 Products) attached hereto.
1.3 "Com21 End User" means an End User who has purchased or been quoted
a Com21 Product directly from Com21.
Distribution Agreement
1
<PAGE> 2
Confidential
1.4 "Com21 Headend" means the headend controller unit developed by
Com21, as described in Exhibit A (Com21 Products).
1.5 "Com21 Products" means collectively the Com21 Cable Modem, Com21
Headend and Com21 Software.
1.6 "Com21 Software" means the Com21 Network Management Applications
Programs in object code form and related documentation provided by Com21, as
described in Exhibit A (Com21 Products) and firmware contained in the Com21
Products.
1.7 "Effective Date" means the date this Agreement is executed by the
last party to execute this Agreement as indicated below.
1.8 "End User" means a cable owner or operator, multiple systems
operator, program provider or any holding company or affiliate thereof.
1.9 "First Level Support" means the class of service provided to End
Users in which technical support staff is competent to answer technical
inquiries regarding the Com21 Products, perform remedial hardware determination
and installation and configuration support of the Com21 Products, identify the
cause of a problem, replicate the problem at either the End User site or
Phillips test facility, and implement a solution for a problem which is not the
result of an Error (as such term is defined in Exhibit D). In the case of an
Error, the technical staff is competent to identify the source of the Error and
create a reproducible test case and document the details of the Error for
escalation to Com21.
1.10 "Territory" means the world, excluding the Republic of South Korea
and the Democratic Peoples' Republic of Korea (North Korea).
2. APPOINTMENT; TERRITORY; COM21 PRODUCTS.
2.1 Appointment. Subject to all the terms and conditions of this
Agreement, Com21 hereby appoints Philips for the term of this Agreement as a
non-exclusive distributor of the Com21 Products only within the Territory. Com21
Products distributed by Philips for further distribution may be distributed only
through subdistributors who have been pre-approved in writing by Com21 and who
are bound in writing to all the restrictions on Philips contained in this
Agreement. Com21 agrees not to distribute Com21 Products directly to any End
User located outside of North America to whom Philips has previously supplied a
Com21 Product; provided that Com21 shall not be restricted from distributing
Com21 Products to (a) any original equipment manufacturer or (b) any End User
that objects to obtaining the Com21 Products from Philips for reasons relating
to service or support despite Com21's good faith efforts to encourage such End
User to purchase the Com21 Products from Philips. Nothing in this Agreement,
however, shall be construed as limiting in any manner Com21's marketing or
distribution activities within North America or its marketing activities or
appointment of other dealers, distributors, licensees or agents anywhere in the
world.
2.2 Territorial Restrictions. Philips may distribute Com21 Products
only to persons and entities located and taking delivery within the Territory.
Philips acknowledges and
Distribution Agreement
2
<PAGE> 3
Confidential
understands that Com21 has granted Dacom International and Dacom, Inc. exclusive
rights to distribute the Com21 Products in the Republic of South Korea and, when
distribution becomes legally permissible, in the Democratic Peoples' Republic of
Korea (North Korea) (the "Excluded Territory") pursuant to that certain
Distribution and Manufacturing License Agreement by and among Com21, Dacom
International and Dacom, Inc. dated June 26, 1996. No distribution of a Com21
Product shall be made by Philips, any Affiliate or subdistributor to any person
or entity where Philips knows or has reason to believe that the ultimate end
user of such Com21 Product is located within the Excluded Territory and any such
distribution will result in immediate termination of this Agreement.
2.3 Com21 Products. Com21 reserves the right to change, modify or
discontinue any Com21 Product in its sole discretion at any time. Com21 shall
have the right to discontinue any Com21 Product in its sole discretion, provided
that Com21 makes available to Philips a functionally similar product. Any such
modified, changed or functionally similar product shall be a Com21 Product
hereunder. Com21 will notify Philips as soon as practicable, but in no event
less than ninety (90) days, of any plans to discontinue a Com21 Product.
Following such notice, Com21 and Philips will discuss the customer and business
impact of such Com21 Product discontinuation. Com21 will use commercially
reasonable efforts to fulfill all orders by Philips, accepted by Com21, of the
discontinued Com21 Product.
2.3.1 New Com21 Products. Com21 will use commercially
reasonable efforts to notify Philips of the development of any update,
enhancement or improvement of a Com21 Product or a new Com21 Product (each, a
"New Com21 Product"). Com21 will, in its sole discretion, provide Philips beta
versions of New Com21 Products when Com21 first makes such beta versions
available for distribution. Each New Com21 Product will be made generally
available to Philips as a Com21 Product, subject to the terms and conditions
hereof, at the same time as such Com21 Product is made generally available in
the United States by Com21. The Com21 Product list as per Exhibit A will be
maintained with all New Com21 Products.
2.3.1.1 Test Products. Com21 agrees to provide to
Philips, for no longer than four (4) months, as a bailee, one (1) unit of each
New Com21 Product to perform qualification testing. All New Com21 Products
furnished by Com21 to Philips under this Section 2.3.1.1 (Test Products)
("Bailed Property") shall: (i) be clearly marked or tagged as Com21's property;
(ii) be and remain personal property and not become a fixture to real property;
(iii) be subject to inspection by Com21 at any time; (iv) be used only for
qualification testing by Philips; (v) be kept free of liens and encumbrances;
(vi) be kept separate from other materials, tools or property of or held by
Philips; (vii) not be modified in any manner by Philips; and (viii) shall be
stored in a safe place and environment. In the event Philips uses the Bailed
Property for any purpose other than to conduct qualification testing as
specified herein without Com21's prior written consent, Philips agrees to
purchase such Bailed Property at Com21's list price for such Bailed Property.
Com21 shall retain all rights, title and interest in and to the Bailed Property
and Philips agrees to treat and maintain the Bailed Property with at least the
same degree of care as Philips uses with respect to its own valuable equipment.
Philips shall bear all risk of loss or damage to the Bailed Property until it is
returned to Com21. Upon Com21's request, Philips shall promptly return and
deliver all Bailed Property to Com21 in good condition, normal wear and tear
excepted, without cost to Com21 (exclusive of freight costs); Com21 shall
determine the manner and procedure for returning the Bailed Property and
Distribution Agreement
3
<PAGE> 4
Confidential
shall pay the corresponding freight costs. Philips waives any legal or equitable
right it may have to withhold the Bailed Property and Philips agrees to execute
all documents or instruments evidencing Com21's ownership of the Bailed Property
as Com21 may from time to time request.
2.4 Software License. The appointment granted in Section 2.1
(Appointment) above includes a non-exclusive, non-transferable,
non-sublicensable (except as provided in Section 2.4.1 below) license to (i) use
the Com21 Software solely to operate and support Com21 Cable Modems and Com21
Headends and (ii) distribute the Com21 Software, but only for use with Com21
Cable Modems and Com21 Headends, subject to the terms and conditions set forth
in this Agreement. All copies of the Com21 Software and of any software or
firmware contained in the Com21 Products are licensed for distribution only and
not sold.
2.4.1 Distribution Restrictions. No distribution or license of
the Com21 Software by Philips shall be made except pursuant to an enforceable
written agreement (an "End-User License Agreement") signed by the end-user
customer that is at least as protective of Com21 and its rights as Com21's
standard end-user software license agreement, set forth in Exhibit B (Com21
End-User Software License Agreement) attached hereto. Notwithstanding the
foregoing, Philips may include additional terms and/or conditions in an End-User
License Agreement, but has no obligation hereunder to do so, provided that such
additional terms or conditions do not diminish Com21's protections or rights as
provided under the Com21 End-User Software License Agreement.
3. INTEROPERABILITY OF OTHER PRODUCTS WITH COM21 SOFTWARE.
3.1 Development by Com21 of Open APIs. Com21 agrees to use commercially
reasonable efforts to undertake and complete development of open application
programming interfaces ("APIs") for the Com21 Software.
3.2 Development of Interoperable Products. Philips shall have the
unrestricted right to develop software that operates with the Com21 Software
through the APIs ("Philips Software Applications"). Notwithstanding the
foregoing, Philips is not entitled to receive any source code or source
documentation to the Com21 Software, except as expressly provided in this
Section 3.2. Com21 hereby grants Philips a non-exclusive right, subject to all
the terms and conditions of this Agreement, to reproduce and use the APIs to
develop Philips Software Applications. Com21 agrees to make available to Philips
specifications to facilitate development by Philips of external network
management systems, systems management systems and subscriber management
software that are interoperable with the Com21 Software ("Interoperable
Software"). If Com21 and Philips decide to undertake development of any
Interoperable Software or API jointly, then Com21 agrees to permit Philips to
use the Com21 Software source code solely for the limited purpose of such joint
development under terms and conditions to be set forth in a separate written
agreement and executed by the parties.
Distribution Agreement
4
<PAGE> 5
Confidential
4. OWNERSHIP.
4.1 Com21. As between the parties, Com21 retains and shall exclusively
own all title to, and except as expressly and unambiguously licensed herein, all
rights and interest in the Com21 Software, any and all APIs for the Com21
Software (by whomever produced, but excluding Philips Software Applications and
Interoperable Software developed solely by or on behalf of Philips), any other
software or firmware contained in the Com21 Products, documentation, all
modifications, improvements and derivative works (by whomever produced) of the
foregoing and all proprietary and intellectual property rights throughout the
world in the foregoing. Subject to Section 4.2, Philips hereby makes any
assignment necessary to accomplish the foregoing ownership provision. Com21 will
have the exclusive right to, and, at Com21's expense, Philips agrees to assist
Com21 in every proper way (including, without limitation, becoming a nominal
party) to, evidence, record and perfect the assignment and to apply for and
obtain recordation of, and from time to time enforce, maintain and defend, such
proprietary rights. Philips will execute all documents Com21 may reasonably
request for such purposes.
4.2 Philips. As between the parties, Philips shall own all right, title
and interest in and to its products (including, without limitation, software and
documentation), Interoperable Software and Philips Software Applications
developed solely by or on behalf of Philips, all modifications, improvements and
derivative works (by whomever produced) of the foregoing and all proprietary and
intellectual property rights throughout the world in the foregoing. Com21 shall
have no right nor acquire any right whatsoever under this Agreement in any
intellectual property of Philips. Subject to Section 4.1, Com21 hereby makes any
assignment necessary to accomplish the foregoing ownership provision. Philips
will have the exclusive right to, and, at Philips' expense, Com21 agrees to
assist Philips in every proper way (including, without limitation, becoming a
nominal party) to, evidence, record and perfect the assignment and to apply for
and obtain recordation of, and from time to time enforce, maintain and defend,
such proprietary rights. Com21 will execute all documents Philips may reasonably
request for such purposes.
5. SUPPLY TERMS.
5.1 Forecasts. Commencing as soon as practical, but in no event less
than sixty (60) days prior to the first date in which Philips' distribution of a
Com21 Product is projected to occur, Philips shall deliver to Com21 rolling
twelve (12) month forecasts, in writing and updated each calendar quarter, of
Philips' anticipated quantity requirements and shipment dates ("Shipment Dates")
for such Com21 Product. Com21 may reject any forecast submitted by Philips
hereunder in which the forecasted quantity of a Com21 Product exceeds by one
hundred fifty percent (150%) Philips' average forecasted quantity of such Com21
Product during the most recent six (6) month period. If a required forecast is
not submitted for a Com21 Product, the immediately preceding forecast for that
calendar quarter shall become the new forecast. Philips acknowledges that Com21
will use such forecasts to plan manufacturing output of the Com21 Products,
however, Com21 acknowledges that such forecasts are not binding and do not
commit Philips to purchase any quantity of Com21 Products.
5.2 Purchase Orders. Philips shall order Com21 Products from Com21 by
Distribution Agreement
5
<PAGE> 6
Confidential
submitting a written purchase order (an "Order"), at least ninety (90) days
prior to the applicable Shipment Date. Each Order shall identify the Com21
Products and model numbers in the quantities ordered, Shipment Date(s), shipping
instructions and any export/import information required to enable Com21 to fill
the order. Philips shall not submit any order in an amount less than TWO
THOUSAND DOLLARS (US$2,000); provided, however, Philips shall use its best
commercially reasonable efforts to ensure that each order submitted to Com21,
except orders of spare parts and emergency orders, is in an amount of not less
than TWENTY THOUSAND DOLLARS (US$20,000). Com21 shall accept or reject Orders
received from Philips within five (5) days of receipt of such order (the "Order
Acceptance Date"). Com21 shall have no liability to Philips with respect to any
Order which is not accepted by Com21, provided that Com21 shall not reject any
Order which is made in accordance with all of the terms of this Agreement, where
the quantity of units of a Com21 Product ordered does not exceed one hundred
fifty percent (150%) of Philips' average forecasted quantity of such Com21
Product during the most recent six (6) month period and Com21 has not rejected
such forecast.
5.3 Supply of Com21 Products. Notwithstanding the provisions of Section
5.2, during the term of this Agreement, subject to the other terms and
conditions hereof, Com21 shall use its commercially reasonable efforts, and
insofar as practical and consistent with Com21's then current lead time
schedule, shipping schedule, access to supplies on acceptable terms and
allocation of available products and capacity among Com21 customers, to fill (by
full or partial shipment), Philips' Orders accepted by Com21 (i) for forecasted
quantities of Com21 Products within eight (8) weeks following the Order
Acceptance Date and (ii) for unforecasted quantities of Com21 Products not more
than twelve (12) weeks following the Order Acceptance Date. Com21 will use its
commercially reasonable efforts to ship such Com21 Products in shorter intervals
and, whenever possible, Com21 will fill Philips' Orders with Com21 Products held
by Com21 in inventory, provided Com21 has no outstanding obligation to supply
such Com21 Products to a third party.
5.3.1 Supply of Common Components. Following the first
shipment of "commercial grade" Com21 Products, Com21 will use commercially
reasonable efforts to establish and maintain a reasonable quantity of Com21
Product parts or components, to be mutually agreed upon by Com21 and Philips,
for shipment to Philips on a rush basis.
5.4 Delivery. Com21 Products are delivered F.O.B. Com21's plant or
other place of shipment and will be shipped by a freight forwarder specified by
Philips.
5.5 Order Changes; Rescheduling. Philips may, without charge, increase
an Order for any particular Com21 Product provided that Philips gives prior
written notice thereof. Com21 will use commercially reasonable efforts to
accommodate Philips for any Order increase. Cancellation or rescheduling of an
Order for a Com21 Product shall be effective only with prior written notice
received by Com21 and, to the extent Com21 has incurred costs and/or expenses
(excluding general administration and management costs) due to such cancellation
or rescheduling, shall be subject to charges not to exceed the charges set forth
in the following schedule (charges are based on the price of the portion of the
Order that is changed or cancelled), provided Com21 is unable to sell such Com21
Products within a reasonable period of time despite Com21's commercially
reasonable efforts. If an Order is rescheduled for shipment more than one
hundred twenty (120) days after the originally scheduled Shipment
Distribution Agreement
6
<PAGE> 7
Confidential
Date, or if it is rescheduled twice, it will be deemed cancelled.
<TABLE>
<CAPTION>
Notice Period
Before Cancellation Rescheduling
Scheduled Shipment Charge Charge
------------------ ------ ------
<S> <C> <C>
0 to 30 days [*] [*]
31 to 60 days [*] [*]
60 days and more [*] [*]
</TABLE>
5.6 Rejection of Com21 Products in Case of Nonconformity.
5.6.1 Philips may reject any portion of any shipment of Com21
Products which is not conforming in all material respects with the
specifications set forth in Com21's published data sheets applicable to the part
numbers set forth in Exhibit A (Com21 Products). In order to reject a shipment,
Philips must (i) give written notice to Com21 of Philips' rejection of the
shipment within fourteen (14) days of receipt together with a detailed written
indication of the reasons for such rejection and (ii) obtain a Return Materials
Authorization ("RMA") number from Com21. After notice of rejection is given,
Philips shall cooperate with Com21 in determining whether such rejection is
justified. If no such notice of rejection is timely received by Com21, Philips
shall be deemed to have accepted such shipment of Com21 Products.
5.6.2 Com21 shall specify its preferred shipping method for
returned Com21 Products and Com21 shall pay all transportation and insurance
charges for properly rejected Com21 Products and Philips shall be entitled to a
credit in the amount of the purchase price of properly rejected Com21 Products
to be applied to future orders. Com21 shall notify Philips promptly as
reasonably possible whether Com21 accepts Philips' basis for rejection.
5.6.3 Whether or not Com21 accepts Philips' basis for
rejection, Com21 shall use its reasonable efforts, at Philips' request, to
provide replacement Com21 Products which shall be purchased by Philips as
provided herein.
5.7 Prices. Prices of Com21 Products to Philips payable by Philips are
those set forth on Com21's then current price list [*]. Notwithstanding the
foregoing, for Com21 Cable Modems that Philips purchases from Com21 for sale to
End Users located in North America, [*]
(i) [*] during the period in which Philips purchases
up to [*] units of the Com21 Cable Modem in
aggregate worldwide;
(ii) [*] during the period in which Philips purchases
more
Distribution Agreement
[*] Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
7
<PAGE> 8
Confidential
than [*] but less than [*] units of the Com21
Cable Modem in aggregate worldwide; or
(iii) [*] during the period in which Philips purchases
more than [*] units of the Com21 Cable Modem in
aggregate worldwide.
The purchase price to Philips of Com21 Headends purchased by Philips for sale to
End Users located in North America shall be [*]
Com21 shall advise Philips of the then current price of Com21
Products to Philips for sales by Philips to End Users in North America in
accordance with the provisions of this Section 5.7 and Com21 shall use its good
faith efforts to provide Philips with price updates within seven (7) business
days after prices are quoted by Com21. Notwithstanding anything to the contrary
in this Agreement, the foregoing provisions of this Section 5.7 will be
applicable to all New Com21 Products listed in Exhibit A, as amended.
5.7.1 Price Changes. Com21 shall have the right, in its sole
discretion, from time to time or at any time, to change the prices of the Com21
Products with ninety (90) days' prior written notice for price increases. New
prices will apply to all shipments made after such notice period. Orders placed
by Philips within the notice period shall not exceed one hundred fifty percent
(150%) of Philips' average per Order quantities during the previous six (6)
month period of Com21 Products affected by the increase, although Orders in
excess of such quantities may be made but shall be subject to the new increased
price. In the event of any price decrease, Com21 will provide Philips with a
credit towards future orders equal to the difference between (i) the price paid
by Philips for the Com21 Products affected by the decrease that remain in
Philips' inventory upon the effective date of the decrease (not including Com21
Products obtained more than three (3) months before the decrease and Com21
Products obtained more than six (6) months before a price decrease during the
first year of the term of the Agreement) and (ii) the decreased price for the
same amount of such Com21 Products. Prior to any Com21 announcement of a price
decrease and upon Com21's request, Philips shall disclose to Com21 in writing
Philips' inventory of Com21 Products.
[*] In the event, during the term of this Agreement, Com21
enters into an agreement of similar scope with a third party [*]
Distribution Agreement
[*] Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
8
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Confidential
5.8 Payment of Purchase Orders. Payment of all Orders shall be made in
U.S dollars by wire transfer to the bank account designated below or such other
bank and account as may be designated by Com21 in writing from time to time.
Terms of payment will be net thirty (30) days from Shipment Date or invoice
date, whichever is later, unless Com21 at any time determines that Philips'
credit is not satisfactory, in which case payment terms shall be by letter of
credit satisfactory to Com21. No part of any payment payable to Com21 hereunder
may be reduced due to any counterclaim, set-off, adjustment or other right which
Philips might have against Com21, any other party or otherwise.
Designated Bank: Silicon Valley Bank
3003 Tasman Drive
Santa Clara, California 95050
Telephone: (408) 654-7400
Routing Number: 121140399
Beneficiary: Com21, Inc.
Account No.: 0272683175
Federal Tax I.D. No.: 94-3201698
5.8.1 Taxes; Late Fees. Philips will pay, indemnify and hold
Com21 harmless from all charges including, without limitation, transportation
charges, any sales, use, excise, ad valorem, import, export, value-added or
similar tax, or other tax or duty not based upon Com21's net income and all
government permit fees, license fees, customs fees and similar fees, duties and
other governmental assessments which Com21 may incur in connection with this
Agreement and the performance of Com21's or Philips' (or any Affiliate's)
obligations hereunder. Any amounts that are not paid on or before such payment
is due shall bear interest at a rate of one percent (1%) per month, calculated
on the number of days such payment is delinquent, or if less, the maximum amount
permitted by law. The foregoing shall in no way limit any other remedy available
to Com21.
6. PHILIPS COVENANTS AND REPRESENTATIONS.
Except as otherwise expressly and unambiguously provided
herein, Philips represents, warrants and agrees:
(i) to notify Com21 of any actual or potential governmental
action relevant to any Com21 Product as soon as Philips becomes aware of such
action;
(ii) not to modify, create any derivative work of, or include
in any other software or make any copies of the Com21 Software or any software
or firmware contained in the Com21 Products or copies or any portion thereof;
(iii) not to delete, alter, obscure, add to or fail to
reproduce in and on any Com21 Product the name of such Com21 Product and any
copyright or other notices appearing in or on any component, copy,
documentation, media, master or package materials provided by Com21 or which may
be required by Com21 at any time;
(iv) not to reverse assemble, decompile, reverse engineer or
otherwise
Distribution Agreement
9
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Confidential
attempt to derive the source code (or the underlying ideas, structure, sequence,
organization or algorithms) from the Com21 Software or copies of other software
contained in a Com21 Product or from any other information or allow others to do
any of the foregoing;
(v) to comply with good business practices and all laws and
regulations relevant to this Agreement or the subject matter hereof. In its
distribution efforts, Philips will use the then current names, marks and
designations used by Com21 for the Com21 Products (the "Marks") (but will not
represent or imply that it is Com21 or is a part of Com21). However, all
advertisements, promotional materials, packaging and anything else bearing a
Mark shall identify Com21 as the Mark owner and shall be subject to prior
written approval of Com21, which approval shall not be unreasonably withheld.
Philips agrees not to use or contest during or after the term of this Agreement
any Mark used by Com21 anywhere in the world (or any name, mark or designation
substantially similar thereto). In addition, during the term of this Agreement,
Philips shall cooperate with Com21 in its efforts to register the Marks. Philips
shall not apply to register any of the Marks without Com21's prior written
consent;
(vi) to keep Com21 informed as to any problems encountered
with the Com21 Products and any resolutions arrived at for those problems, and
to communicate promptly to Com21 any and all modifications, design changes or
improvements of the Com21 Products suggested by any customer, employee or agent.
Philips further agrees that Com21 shall have any and all right, title and
interest in and to any such suggested modifications, design changes or
improvements of the Com21 Products, without the payment of any additional
consideration therefor either to Philips, or its employees, agents or customers.
Philips further agrees that it will also promptly notify Com21 of any
infringement of any trademarks or other proprietary rights relating to the Com21
Products of which Philips becomes aware; and
(vii) to comply, to the extent applicable, with the U.S.
Foreign Corrupt Practices Act (regarding among other things, payments to
government officials) and all export laws, restrictions, national security
controls and regulations of the United States and all other applicable foreign
agencies and authorities, and not to export or re-export, or allow the export or
re-export of, any Com21 Product or any copy or direct product thereof (a) in
violation of any such restrictions, laws or regulations or (b) without all
required licenses and authorizations, to Cuba, Libya, North Korea, Iran, Iraq or
Rwanda or to any Group D:1 or E:2 country (or any national of such country)
specified in the then current Supplement No. 1 to part 740 of the U.S. Export
Administration Regulations (or any successor supplement or regulations). Philips
shall promptly execute any documents required by Com21 to comply with U.S.
export requirements or demonstrate to Com21 its compliance with such
requirements. Philips shall obtain and bear all expenses relating to any
necessary licenses and/or exemptions with respect to the export from the U.S. of
all Com21 Products, material or items deliverable by Com21 hereunder to any
location and shall demonstrate to Com21 compliance with all applicable laws and
regulations prior to delivery thereof by Com21.
7. MARKETING OF COM21 PRODUCTS. Philips shall use its commercially reasonable
efforts to successfully market the Com21 Products through existing and new
distribution channels, provide systems integration services for End Users and
provide First Level Support (including installation, training and other support)
to End Users on a continuing basis. Com21 will provide Philips with updated
information on product positioning,
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competitive products and other appropriate marketing tools as agreed upon by the
parties on an as needed basis. In connection with certain large sales
opportunities or presentations, Com21, upon Philips' request, will use
commercially reasonable efforts to provide Philips with technical and marketing
presales support, as mutually agreed by the parties. Each party shall bear its
own costs and expenses incurred in connection with its sales and marketing
efforts, unless otherwise agreed to in advance by both parties.
8. TRAINING AND SUPPORT OF COM21 PRODUCTS.
8.1 Training. Com21 will provide Philips personnel a total of two (2)
man days of sales training in connection with sales and marketing of the Com21
Products and ten (10) man days of technical training in connection with
installation and support of the Com21 Product per annum. Training will be
conducted at mutually agreeable times and locations; provided Philips shall pay
reasonable travel, lodging and meal expenses incurred by Com21 in connection
with providing technical training at a location other than Com21's facilities.
Each party shall bear its own sales and marketing training expenses including,
without limitation, travel, lodging and meal expenses.
8.2 Support. Com21 shall provide Support Services (as defined in
Exhibit D) to Philips for the Com21 Software pursuant to the terms and
conditions set forth in the Com21 Support Terms and Conditions in Exhibit D
hereto (Com21 Support Terms and Conditions). Philips shall have sole
responsibility for performing First Level Support of the Com21 Products. Philips
shall perform a reasonable technical investigation of all Support Services
issues and attempt to determine the cause of the problem before requesting Com21
to provide Support Services. In the event that Philips requests Com21 to perform
on-site support, then Com21 and Philips will mutually agree upon the corrective
action to be taken.
9. DEMONSTRATION COM21 PRODUCTS. Philips shall purchase from Com21 such Com21
Products comprising one (1) complete broadband modem system ("Demonstration
System") for Philips' internal use only. In addition, Philips shall be entitled
to purchase Com21 Products comprising up to four (4) additional Demonstration
Systems for internal use within the Philips Broadband Networks organization.
Such Demonstration Systems may be used at national and regional trade shows to
promote the Com21 Products and Philips' distribution and systems integration
services in connection with the Com21 Products, provided (i) the Demonstration
Systems are maintained in good working order and appearance and otherwise in a
manner which reflects favorably upon Com21 and (ii) the Demonstration Systems
are operated substantially in accordance with Com21's reasonable operating
guidelines. Such Com21 Products shall be of commercial grade, except that
Philips may elect to accept (a) a late beta version of the Com21 Software,
provided that modifications of such beta version of the Com21 Software prior to
commercial availability will be limited to updates and (b) beta versions of the
Com21 Cable Modem and the Com21 Headend, provided that Com21 will exchange each
such beta version for a commercial grade version when it becomes available. The
price of the Demonstration Systems shall be discounted from Com21's current
price list as set forth in Exhibit E hereto (Demonstration Systems Prices) and
shall include, without charge, one (1) copy of the Com21 Software for each
Demonstration System. Philips shall not obscure, remove, alter or add to any
trademark, logo, designation or label on or in any Com21 Product purchased under
this Section 9.
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10. WARRANTY; DISCLAIMER.
10.1 Com21 Products Standard Warranty. Com21 warrants only to Philips
for the period stated in the next paragraph and, in the case of clause (iv)
below, from the date of shipment to one (1) year following January 1, 2000 (the
"Warranty Period"), that:
(i) each Com21 Cable Modem and Com21 Headend shall be free
from material defects in design, manufacturing and materials;
(ii) the media provided by Com21 containing the Com21 Software
(but not the Com21 Software itself) is free from physical defects;
(iii) each Com21 Cable Modem and Com21 Headend will perform
substantially in accordance with Com21's published performance and functional
specifications for such Com21 Product; and
(iv) the use of dates prior to, after or including the year
2000 will not render a Com21 Product inoperative.
For Com21 Products shipped to End Users from Philips'
inventory, the Warranty Period applicable to such Com21 Products shall be one
(1) year from the date of shipment to the End User; provided that, in no event
shall the Warranty Period exceed fifteen (15) months from the original date of
shipment by Com21, and further provided such Com21 Products are included in a
written report, submitted by Philips to Com21 on a monthly basis, of Philips'
inventory of Com21 Products, specifying the shipment date, quantity shipped and
serial numbers of such Com21 Products. Com21 and Philips may, as required,
review the applicability of the fifteen (15)-month Warranty Period to reflect a
twelve (12)-month operational warranty in an efficient factory-to-customer
logistics operation.
The foregoing warranty above does not extend to any Com21
Product that (i) is modified or altered, (ii) is not maintained to Com21's
maintenance recommendations, (iii) is operated in a manner other than that
specified by Com21, (iv) has its serial number removed or altered, (v) is
treated with abuse, negligence or other improper treatment (including, without
limitation, use outside the recommended environment) or (vi) is used with or
operated with any product, the performance or functionality of which is affected
by the use of dates prior to, after or including the year 2000. Philips' sole
remedy with respect to any warranty set forth in this Section 10.1 is as stated
in Section 10.3 (Return of Com21 Products) below and, with respect to defects in
the Com21 Software other than as provided in the foregoing warranty, in the
Com21 Support Terms and Conditions in Exhibit D hereto. Philips is fully
responsible for satisfaction of its customers and will be responsible for all
claims, damages, settlements, expenses and attorneys fees incurred by Com21 with
respect to Philips' customers or their claims beyond Com21's above warranty
obligation to Philips, except to the extent that such warranty is expressly
prohibited by the law applicable to an agreement between Philips and an End User
or a Philips reseller and an End User governing the sale and purchase of the
Com21 Products.
EXCEPT TO THE EXTENT THE PROVISIONS OF THIS PARAGRAPH
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ARE EXPRESSLY PROHIBITED BY THE LAW APPLICABLE TO AN AGREEMENT BETWEEN PHILIPS
AND AN END USER OR A PHILIPS RESELLER AND AN END USER GOVERNING THE SALE AND
PURCHASE OF COM21 PRODUCTS, IN WHICH CASE THE WARRANTIES WITH RESPECT TO SUCH
COM21 PRODUCTS SHALL BE LIMITED TO THE MAXIMUM EXTENT PERMITTED BY SUCH LAW,
COM21 MAKES NO OTHER WARRANTIES WITH RESPECT TO THE COM21 PRODUCTS, OR ANY
SERVICES AND DISCLAIMS ALL OTHER WARRANTIES AND CONDITIONS, EXPRESS OR IMPLIED,
INCLUDING, WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE AND NON-INFRINGEMENT. FURTHER, COM21 DOES NOT WARRANT,
GUARANTEE OR MAKE ANY REPRESENTATIONS REGARDING THE USE, OR THE RESULTS OF THE
USE, OF THE COM21 PRODUCTS OR RELATED DOCUMENTATION IN TERMS OF CORRECTNESS,
ACCURACY, RELIABILITY OR OTHERWISE.
10.1.1 Product Reliability Failure. Com21 shall use its
commercially reasonable efforts to ensure that not greater than one percent (1%)
of the units of the Com21 Cable Modem delivered to Philips during any
consecutive rolling twelve (12) month period fail to comply with the above
warranty.
10.1.2 Excess Product Failure. "Excess Product Failure" shall
mean more than one percent (1%), but less than three percent (3%), of the units
of the Com21 Cable Modem delivered to Philips during any rolling twelve (12)
month period, or any other representative period, fail to comply with the above
warranty. In the event of an Excess Product Failure, the parties shall work
together in good faith to develop a corrective action program to be implemented
within a mutually agreeable timeframe.
10.1.3 Catastrophic Product Failure. "Catastrophic Product
Failure" shall mean greater than three percent (3%) of the units of the Com21
Cable Modem delivered to Philips during any rolling twelve (12) month period, or
any other representative period, fail to comply with the above warranty or in
the event of it being determined that any Com21 Product as delivered to Philips
by Com21 has a defect that causes or could cause injury to a person or
substantial property damage when such Com21 Product is used as specified in the
documentation provided by Com21 for such Com21 Product or in the event (i) a
government authority having jurisdiction over the distribution and use of the
Com21 Products orders a recall of the Com21 Products or (ii) Com21, Philips and
an End User all agree in writing to the return of all units of Com21 Products
delivered to such End User. In the case of a Catastrophic Product Failure,
Com21's obligations shall be, as soon as practicable, to propose a corrective
action plan to fix the failure of any affected unit of Com21 Cable Modem and to
implement this action plan upon Philips' acceptance thereof. If the action plan
is not acceptable to Philips, Philips can require Com21 to repair or replace, at
Com21's option, the affected units of Com21 Cable Modem. The repair or
replacement shall be done at mutually agreed-upon location(s); provided,
however, that costs of repair or replacement together with the shipping,
transportation and other costs of gathering and redisseminating such units of
the Com21 Cable Modem shall be borne by Com21. The parties agree to make
commercially reasonable efforts to complete the repair or replacement of all of
the affected units of Com21 Cable Modem within a reasonable time after written
notice of Catastrophic Product Failure by Philips to Com21.
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10.2 Com21 Products Extended Warranty. Philips may obtain an extended
warranty for the Com21 Cable Modem and Com21 Headend in accordance with the
terms and conditions set forth in Exhibit F (Com21 Products Extended Warranty).
10.3 Return of Com21 Products. Philips will handle and be responsible
for all warranty returns of Com21 Products from its direct and indirect
customers. Com21 Products obtained from Com21 which do not comply with the above
warranty and are returned to Philips during the Warranty Period (as shown by
appropriate documentation) will be repaired or replaced at Com21's option, at no
cost to Philips. Philips shall ensure that only Com21 Products that do not
comply with the above warranty are the basis of any warranty claim and that such
Com21 Products are promptly returned to Com21. Com21 will bear the cost of
freight and insurance of returned Com21 Products. All returned Com21 Products
must be in the original packaging and container, or other protective packaging,
which shall conspicuously bear the RMA number Philips obtains from Com21 prior
to return. In the event that a Com21 Product returned by Philips is determined
by Com21 to comply with the warranty, Philips shall reimburse the amount of
shipping and insurance charges incurred by Com21 and pay Com21 FIFTY DOLLARS
(US$50) for each returned Com21 Product in which no problem was found. If Com21
cannot, or determines that it is not practical to, repair or replace the
returned Com21 Product, the price therefor paid by Philips will be credited and
applied to future orders. Com21 will reimburse Philips for reasonable expenses,
which Com21 has pre-approved in writing, incurred and paid by Philips in
connection with performing repairs of Com21 Products returned during the
Warranty Period and Com21 will, upon request, provide Philips, at no expense,
with parts necessary for performing such repairs. In addition, Com21 will make
available to Philips repair parts for purchase at Com21's then current spare
parts prices. In the event of a breach by a Com21 Product of an implied
condition or warranty that may not be disclaimed or excluded under the law
applicable to the agreement between Philips and its End User or between a
Philips reseller and its End User governing the purchase and sale of such Com21
Product, Com21 agrees to indemnify Philips against any claim or damages solely
resulting from such breach; provided the breach is not caused by any action,
omission or intervention by Philips or such Philips reseller; further provided
that (i) the provisions of this paragraph are expressly prohibited by such law
and (ii) Philips or the Philips reseller has used its commercially best efforts
to limit the warranties and conditions applicable to such Com21 Product to the
maximum extent permitted under such law.
10.3.1 Out-of-Warranty Repairs. After expiration of the
Warranty Period, Com21 will repair Com21 Products on a time and materials basis
at prices and charges that are not higher than those provided by Com21 to third
parties. Com21 will warrant such out-of-warranty repair of Com21 Products for a
period of thirty (30) days from the date of repair.
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10.3.2 Repair or Replacement Turn Around Time. Com21 will use
commercially reasonable efforts to repair or replace defective units of the
Com21 Cable Modem and Com21 Headend, whether such repair or replacement is
in-warranty or out-of-warranty, and ship the repaired or replaced Com21 Product
to Philips within ten (10) business days, but in no event more than fifteen (15)
business days, after Com21's receipt of the defective Com21 Product. Failure of
the Com21 Software to comply with the warranty set forth in Section 10.1 (iv)
shall be deemed a "Critical Error" as defined in the Com21 Support Terms and
Conditions set forth in Exhibit D hereto and Com21 will correct such failure in
accordance with the terms for correcting Critical Errors specified therein.
Correction of other errors of the Com21 Software shall be performed by Com21
pursuant to the Com21 Support Terms and Conditions in accordance with the
priority level reasonably assigned to such errors by Philips.
11. CONFIDENTIALITY.
11.1 Confidential Information. Information of either party (the
"Disclosing Party") including, but not limited to, trade secrets, know-how,
inventions (whether patentable or not), ideas, improvements, works of
authorship, derivative works, modifications, product development plans,
forecasts, strategies, names and expertise of employees and consultants,
techniques, processes, algorithms, software programs, schematics, designs,
contracts, customer lists, financial information, sales and marketing plans and
all other business and technical information, which at the time of disclosure is
clearly designated as confidential, shall be the confidential information
("Confidential Information") of the Disclosing Party. In particular, but without
limitation, the Com21 Software source code and the source code of any software
and firmware contained in the Com21 Products shall be the Confidential
Information of Com21. In addition, the terms of this Agreement shall be the
Confidential Information of each party disclosed to the other party. Each party
recognizes the importance to the other of the other's Confidential Information.
In particular, Philips recognizes that the Com21 Software source code and other
of Com21's Confidential Information (and the confidential nature thereof) are
critical to the business of Com21 and that Com21 would not enter into this
Agreement without assurance that such technology and information and the value
thereof will be protected as provided in this Section 11.1 (Confidential
Information).
11.2 Confidentiality Obligations. Each party (the "Receiving Party")
acknowledges that in the course of the performance of this Agreement, it may
obtain the Confidential Information of the Disclosing Party. The Receiving Party
shall, at all times, both during the term of this Agreement and thereafter for a
period of five (5) years, keep in confidence as a fiduciary and take all
precautions the Receiving Party uses with respect to its confidential materials
of a similar nature. The Receiving Party shall not use the Confidential
Information of the Disclosing Party other than for the purpose of performing its
obligations under this Agreement or as expressly permitted under the terms of
this Agreement or by a separate written agreement.
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The Receiving Party shall take all reasonable steps to prevent unauthorized
disclosure or use of the Disclosing Party's Confidential Information and to
prevent it from falling into the public domain or into the possession of
unauthorized persons. The Receiving Party shall not disclose Confidential
Information of the Disclosing Party to any person or entity other than its
officers, employees, consultants and Affiliates who need access to such
Confidential Information in order to perform its obligations under this
Agreement and will protect the Disclosing Party's Confidential Information to
the same extent the Receiving Party protects its Confidential Information. In
addition, Com21 staff shall not disclose any of the purchasing price conditions
of this Agreement to any person, including Philips staff, associates and
customers worldwide except the following nominated officers: Garry McCarten,
Edwin Taits, David Torr, Neinhard Neuwirth, Jim Reynolds, Steve Mulvogue, Dieter
Brauer, Peter Gensch, and other officers as nominated by Garry McCarten or the
appropriate Philips senior manager. The Receiving Party shall immediately give
notice to the Disclosing Party of any unauthorized use or disclosure of
Disclosing Party's Confidential Information. The Receiving Party agrees to
assist the Disclosing Party to remedy such unauthorized use or disclosure of its
Confidential Information.
11.3 Exceptions to Confidential Information. Information that is in or
(through no improper action or inaction of the Receiving Party or any Affiliate,
agent or employee) enters the public domain shall not be Confidential
Information hereunder; provided, however, Confidential Information may include
information concerning the Receiving Party's use or manner of use of information
or data in the public domain. Without granting any right or license, the
Disclosing Party agrees that the obligations set forth in Section 11.2
(Confidentiality Obligations) above shall not apply to the extent that
Confidential Information includes information which the Receiving Party can
document (i) was rightfully in its possession or known by it prior to receipt
from the Disclosing Party, or (ii) was rightfully disclosed to it by another
person without restriction, or (iii) was independently developed without use of
any Confidential Information of the Disclosing Party by employees of the
Receiving Party who had no access to such information, or (iv) is or becomes
(through no improper action or inaction by the Receiving Party or any Affiliate,
agent, consultant or employee) generally available to the public.
Notwithstanding the foregoing, Philips shall not disclose qualification test
results for any Com21 Product except for the sole purpose of providing a
quotation, Request for Proposals (RFPs) or support relating to such Com21
Product. Philips shall not, nor permit any third party (including, without
limitation, End Users) to, publish such test results.
12. INFRINGEMENT; PRODUCT LIABILITY
12.1 Indemnification. Com21 shall defend, indemnify and hold Philips
and its officers, directors, employees and agents harmless from liability
arising from (a) infringement by the Com21 Products of any patent, copyright or
trademark and (b) the death of, or bodily injury to, any person or property
damage on account of use of a Com21 Product which is finally determined by a
court of competent jurisdiction to have been caused by a manufacturing defect,
materials defect or design defect of such Com21 Product, provided that (w) Com21
is promptly notified in writing of any and all threats, claims and proceedings
related thereto,
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(x) given reasonable assistance in connection therewith, (y)
has sole control over the defense and all negotiations for a settlement or
compromise, and (z) Com21's obligation under clause (a) shall not exceed the
amount in aggregate paid to it hereunder on account of Com21 Products sold by
Philips, during the twelve (12) month period prior to the date the cause of
action arose, to End Users located in the same country in which the infringement
occurred. Com21 will not be responsible for any settlement it does not approve
in writing. The foregoing obligation of Com21 does not apply to any liability
caused by Philips or any Philips Affiliate's negligence, recklessness or wilful
misconduct or with respect to any Com21 Product or portions or components
thereof (i) not supplied by Com21, (ii) made in whole or in part in accordance
to Philips' design specifications, where the infringement relates to such
specifications, (iii) which is modified after shipment by Com21, (iv) combined
with other products, processes or materials, (v) where Philips continues
allegedly infringing activity after being notified thereof or after being
informed of modifications that would have avoided the alleged infringement, (vi)
where Philips' use of the Com21 Product is incident to an infringement not
resulting primarily from the Com21 Product or is not strictly in accordance with
the licenses granted hereunder or (vii) used in a manner other than as specified
in the documentation provided by Com21 for such Com21 Product.
Philips will indemnify Com21 and its officers, directors, employees and
agents from all liability, damages, settlements, attorneys' fees and expenses
related to a claim excluded from Com21's indemnity obligation by the foregoing
sentence or any claims, liability or damages arising out of the actions or
inactions of Philips or of any Philips Affiliate under this Agreement,
including, without limitation, breach of any of Philips' warranties, obligations
or representations herein, or failure to protect Com21's ownership interest in
the Com21 Products in connection with the marketing or distribution of the Com21
Products. Similarly, Com21 will indemnify Philips and its officers, directors,
employees and agents from all liability, damages, settlements, attorneys' fees
and expenses related to any claims, liability or damages arising out of the
actions or inactions of Com21 or of any Com21 Affiliate under this Agreement,
including, without limitation, breach of any of Com21's warranties, obligations
or representations herein, except the warranties provided in Section 10.1 above.
THE FOREGOING IS IN LIEU OF ANY WARRANTIES OF NONINFRINGEMENT, WHICH ARE HEREBY
DISCLAIMED.
12.2 Infringement by Com21 Product. If a Com21 Product or any part
thereof becomes, or in Com21's opinion is likely to become, the subject of a
claim of infringement of a patent or copyright of a third party, Com21 shall, at
its option and expense, (i) procure for Philips or its End User the right to
continue using the Com21 Product or (ii) replace or modify the Com21 Product so
that it becomes non-infringing but remains functionally equivalent, which
Philips shall accept as full and complete satisfaction for any claims it might
have against Com21 arising from such infringement. Com21's exercise of any of
its obligations under this Section 12.2 (Infringement by Com21 Product) shall
not limit or exhaust its obligations of indemnification under Section 12.1 above
(Indemnification).
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13. TERM AND TERMINATION.
13.1 Term. This Agreement shall be effective for a period of three (3)
years commencing on the Effective Date, unless earlier terminated in accordance
with its terms. Thereafter, this Agreement shall be automatically renewed on its
anniversary dates for successive one (1) year terms subject to a party providing
written notice to the other party, no later than ninety (90) days prior to any
such anniversary date, of such party's intent not to renew in which event this
Agreement shall terminate at the end of the then current term. Philips
understands that after the date of termination, neither it nor any
subdistributor shall have any right whatsoever to continue as a dealer or
distributor or otherwise regardless of any undocumented continuation of the
relationship with Com21 or be entitled to any compensation in connection with
such termination. Upon termination of this Agreement, Com21 may elect in its
sole discretion, to cancel pending Orders, in which case, Com21 will repurchase
all of the entire remaining inventory of the then current versions of the Com21
Products held by Philips. Com21 shall pay Philips for all Com21 Products so
repurchased (if received in new and resalable condition) an amount equal to the
price paid by Philips to Com21. Absent such cancellation of pending Orders by
Com21, Philips shall have the right, for a period of six (6) months following
the effective date of termination, to distribute Com21 Products remaining in
inventory held by Philips and not repurchased by Com21.
13.2 Termination for Cause. This Agreement may be terminated by a party
for cause immediately by written notice upon the occurrence of any of the
following events:
(i) If the other ceases to do business, or otherwise
terminates its business operations; provided, however, that the acquisition of
all or substantially all of a party's stock, assets or business shall not be
grounds for termination of this Agreement; or
(ii) If the other shall fail to promptly secure or renew any
license, registration, permit, authorization or approval for this Agreement or
conduct its business in the manner contemplated by this Agreement or if any such
license, registration, permit, authorization or approval is revoked or suspended
and not reinstated within sixty (60) days; or
(iii) If the other breaches any material provision of this
Agreement and fails to cure such breach within thirty (30) days (10 days in the
case of a failure to pay) of written notice describing the breach; provided,
however, that a breach of the obligations set forth in Sections 11
(Confidentiality), 6(ii) or 6(iv) shall be grounds for immediate termination of
this Agreement by the non-breaching party; or
(iv) If the other becomes insolvent or seeks protection under
any bankruptcy, receivership, trust deed, creditors arrangement, composition or
comparable proceeding, or if any such proceeding is instituted against the other
(and not dismissed within ninety (90) days).
13.3 Obligations of Philips Upon Termination. Upon any termination of
this Agreement by Com21:
(i) Philips' obligations to pay all sums due hereunder shall
be accelerated
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and all such sums shall be due and payable on the effective date of termination
or expiration;
(ii) All licenses granted to Philips hereunder shall
immediately terminate, and Philips shall discontinue all use and distribution of
the Com21 Products, Com21 Software and Marks;
(iii) Philips may keep one (1) copy of the Com21 Software in
object code form to be used solely for support of its installed base of Com21
Products as of the date of termination and Philips shall have a limited license
only to the extent necessary for Philips to support the installed base of Com21
Products.
13.4 Other Obligations Upon Termination. Except as otherwise provided
in Section 13.3 (Obligations of Philips Upon Termination) above, upon
termination of this Agreement, each party shall, within fifteen (15) days of the
effective date of any termination of this Agreement, return to the other or
destroy all manifestations of the other party's Confidential Information and any
and all other materials in such party's possession which had been furnished to
it by the other party pursuant to this Agreement, and such party shall warrant
in writing to the other within thirty (30) days after termination or expiration
that all such materials have been returned or destroyed pursuant to this Section
13.4 (Other Obligations Upon Termination). Com21 agrees to provide Philips' End
Users, following expiration or any termination of this Agreement, with service
and support of the Com21 Products subject to the terms of a written agreement
between Com21 and each such End User. Com21 further agrees to honor, following
expiration or any termination of this Agreement, all then currently effective
warranties of the Com21 Products extended by Philips to End Users, provided such
warranties are of the same scope as those set forth in Section 10 of this
Agreement. Notwithstanding the foregoing, Com21 shall have no obligation under
any agreement between Philips and an End User for service or support of the
Com21 Products.
13.5 Survival. Termination of this Agreement shall not relieve Philips
from its obligations to pay Com21 any sums accrued hereunder. The parties agree
that their respective rights, obligations and duties under Sections 4
(Ownership), 5.8 (Payment of Purchase Orders), 5.8.1 (Taxes; Late Fees), 6
(Philips Covenants and Representations), 10.1 (Com21 Products Standard
Warranty), 10.3 (Return of Com21 Products), 11 (Confidentiality), 12
(Infringement, Product Liability), 13.3 (Obligations of Philips Upon
Termination), 13.4 (Other Obligations Upon Termination), 13.5 (Survival), 13.6
(No Liability for Termination), 13.8 (No Effect on End-Users), 13.9 (Termination
Not Sole Remedy), 14 (Limited Liability), 15 (Relationship of Parties), 16
(Assignment), 17 (Successors and Assigns), 18 (Source Code Escrow) and 19
(General) as well as any rights, obligations and duties which by their nature
extend beyond the termination or expiration of this Agreement shall survive any
termination or expiration of this Agreement.
13.6 No Liability for Termination. Each party understands that the
rights of termination hereunder are absolute. Neither party shall incur any
liability whatsoever for any damage, loss or expenses of any kind suffered or
incurred by the other (or for any compensation to the other) arising from or
incident to any termination of this Agreement by such party which complies with
the terms of this Agreement whether or not such party is aware of any such
damage, loss or expenses.
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13.7 Pending Orders. In the event of any termination, Com21 may elect
to continue or terminate any Order for Com21 Products then pending. In the event
Com21 elects to terminate an Order, Com21 shall ship the ordered Com21 Products
directly to the End User.
13.8 No Effect On End Users. Upon an End User acquiring a copy of the
Com21 Software pursuant to an End User License Agreement, the End User shall be
entitled to use that copy of the Com21 Software, subject to the terms and
conditions of the End-User License Agreement. The rights of End Users are
independent of this Agreement and, notwithstanding anything to the contrary
herein, will survive any termination of this Agreement for any reason
whatsoever.
13.9 Termination Not Sole Remedy. Termination is not the sole remedy
under this Agreement and, whether or not termination is effected, all other
remedies will remain available.
14. LIMITED LIABILITY.
EXCEPT PURSUANT TO CLAUSE (a), (b) or (d) BELOW AND NOTWITHSTANDING
ANYTHING TO THE CONTRARY HEREIN, NEITHER PARTY SHALL BE LIABLE IN ANY RESPECT
UNDER CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHERWISE FOR ANY INDIRECT,
SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES (INCLUDING BUT NOT LIMITED TO LOSS
OF PROFITS, LOST DATA OR COST OF CAPITAL) OR FOR COST OF SUBSTITUTE GOODS,
TECHNOLOGIES OR SERVICES.
FURTHERMORE, EXCEPT FOR (a) CASES IN WHICH PROVISIONS OF THIS SECTION
14 ARE PROHIBITED BY ANY LAWS WHICH GOVERNS ANY AGREEMENT BETWEEN PHILIPS AND
ANY END USER OR A PHILIPS RESELLER AND ANY END USER, (b) BREACH OF SECTION
6(ii), 6(vi) OR 11 HEREOF, (c) INDEMNIFICATION UNDER SECTION 12.1 AND PRODUCT
LIABILITY CLAIMS OR (d) ACTIONS OF PHILIPS BEYOND THE SCOPE OF THE LICENSES
GRANTED HEREUNDER, COM21 SHALL NOT BE LIABLE TO PHILIPS NOR PHILIPS LIABLE TO
COM21 IN EXCESS OF, IN THE CASE OF COM21, THE AGGREGATE AMOUNT RECEIVED FROM
PHILIPS HEREUNDER, AND IN THE CASE OF PHILIPS, THE AGGREGATE AMOUNT PAID OR
PAYABLE HEREUNDER, IN THE TWELVE (12) MONTH PERIOD PRIOR TO THE DATE THE CAUSE
OF ACTION AROSE.
15. RELATIONSHIP OF PARTIES. The parties hereto each expressly understand and
agree that Com21 and Philips and its Affiliates are independent contractors in
the performance of each and every part of this Agreement, each is solely
responsible for all of its employees and agents and its labor costs and expenses
arising in connection therewith. Each party (the "Indemnifying Party") is
responsible for and will indemnify the other (the "Indemnified Party") from any
and all claims, liabilities, damages, debts, settlements, costs, attorneys'
fees, expenses and liabilities of any type whatsoever that may arise on account
of the Indemnifying Party's or any activities of its Affiliates, employees or
agents (including, without limitation, direct and indirect subdistributors)
including, without limitation, providing unauthorized representations or
warranties (or failing to disclose all warranties and liabilities) to its
customers or breaching any
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term, representation or warranty of this Agreement. Each party is in no manner
associated with or otherwise connected with the actual performance of this
Agreement on the part of the other party, nor with such other party's employment
of other persons or incurring of other expenses. Except as expressly provided
herein, neither party shall have no right to exercise any control whatsoever
over the activities or operations of the other party.
16. ASSIGNMENT. This Agreement and the rights hereunder are not transferable or
assignable by Philips without the prior written consent of Com21, except an
assignment to Philips' parent corporation or an Affiliate thereof. Any attempted
assignment, delegation or other transfer, of this Agreement or of any rights or
obligations hereunder contrary to this Section 16 (Assignment) shall be a
material breach of this Agreement by Philips, shall be void and shall be of no
force or effect.
17. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of, and be
binding upon, the parties and their respective successors and assigns.
18. SOURCE CODE ESCROW. Upon Philips' request, Com21 shall, at Philips' expense,
maintain in escrow under the terms and conditions specified in the Source Code
Escrow Agreement in the form attached hereto as Exhibit G (Com21 Source Code
Escrow Agreement) the source code for the Com21 Software ("Deposit Materials").
Com21 shall update the Deposit Materials within ninety (90) days of the
commercial release of a new version of the Com21 Software. In the event of
termination by Philips pursuant to Section 13.2, Com21 is unable or unwilling to
perform its obligations of support of the Com21 Software for more than thirty
(30) consecutive days, provided Philips has purchased Support Services, or Com21
seeks protection under any bankruptcy or similar laws, and the trustee in
bankruptcy fails either to assume this Agreement within one twenty (120) days of
the date of filing of such bankruptcy petition or to perform this Agreement
within the meaning of Section 365(a)(4)(i) of the United States Bankruptcy Code
(the "Release Condition"), Philips shall be entitled to receive a copy of the
Deposit Materials only during the period that the Release Condition exists for
the sole purpose of correcting errors in the Com21 Software. If at any time the
Release Condition ceases to exist, Philips shall immediately destroy or return
all copies and portions of the Deposit Materials to the escrow agent and shall
notify the escrow agent and Com21 that it has done so.
19. GENERAL.
19.1 Amendment and Waiver. Except as otherwise expressly provided
herein, any provision of this Agreement may be amended and the observance of any
provision of this Agreement may be waived (either generally or any particular
instance and either retroactively or prospectively) only with the written
consent of the parties. However, it is the intention of the parties that this
Agreement be controlling over additional or different terms of any order,
confirmation, invoice or similar document, even if accepted in writing by the
parties, and that waivers and amendments shall be effective only if made by
non-pre-printed agreements clearly understood by the parties to be an amendment
or waiver.
19.2 Governing Law and Legal Actions. This Agreement shall be governed
by and construed under the laws of the State of California and the United States
of America without
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regard to conflicts of laws provisions thereof and without regard to the United
Nations Convention on Contracts for the International Sale of Goods. The sole
jurisdiction and venue for actions related to the subject matter hereof shall be
the courts having within their jurisdiction the location of Com21's principal
place of business. Both parties hereby consent and waive any venue objections to
the jurisdiction of such courts. The parties agree that process may be served in
the manner provided herein for giving of notices or otherwise as allowed by
California or federal law.
19.3 Attorneys' Fees. In any action or proceeding to enforce rights
under this Agreement, the prevailing party shall be entitled to recover all
court costs and reasonable attorneys' fees incurred, including such costs and
attorneys' fees incurred in enforcing and collecting any judgment.
19.4 Headings. Headings and captions are for convenience only and are
not to be used in the interpretation of this Agreement.
19.5 Notices. Any notice provided for or permitted under this Agreement
shall be sufficient only if personally delivered, sent by confirmed telex or
telecopy with written verification of successful transmission, delivered by a
major commercial international rapid delivery service with tracking capabilities
and written verification of receipt, mailed by certified or registered mail,
postage prepaid, return receipt requested to a party at the address set forth
below, or at such other place of which the other part(ies) has notified in
accordance with the provision of this Section 19.5 (Notices). If not received
sooner, notice by mail shall be deemed received five (5) days after deposit in
the U.S. or Australian mails.
If to Com21: Com21, Inc.
750 Tasman Drive
Milpitas, CA 95035
USA
Telecopy: (408) 953-9299
Attention: President
and copy to: Brobeck, Phleger & Harrison
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
USA
Telecopy: (650) 496-2885
Attention: Thomas Kellerman, Esq.
If to Philips Philips Public Telecommunication Systems
Monash Gateway
745 Springvale Road
Mulgrave
VIC 3170 Australia
Telecopy: 03-9574-3577
Attention: General Manager, ICC
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and copy to: Philips Legal Department
Philips Electronics Australia Limited, 16th Level
15 Blue Street
North Sydney NSW 2060
Australia
Telephone: 61 2 9925 3300
Telecopy: 61 2 9925 3259
Attention: The Manager
and copy to: Office of the General Counsel
Philips Electronics North American Corporation
100 East 42nd Street
New York, New York 10017
Telephone: (212) 850-5000
Telecopy: (212) 850-5515
19.6 Entire Agreement. This Agreement, including all exhibits to this
Agreement, constitutes the entire agreement between the parties relating to the
subject matter hereof and supersedes the Memorandum of Understanding dated
October 23, 1996 and all prior or simultaneous proposals, negotiations,
representations, conversations, discussions and agreements, whether written or
oral, among the parties and all past dealing or industry custom. In the event of
any conflict between the terms contained in this Agreement and the terms
contained in any exhibit hereto, the terms of this Agreement shall prevail.
19.7 Severability. If any provision of this Agreement is held by a
court of competent jurisdiction to be illegal, invalid or unenforceable, that
provision shall be limited or eliminated to the minimum extent necessary so that
this Agreement shall otherwise remain in full force and effect and enforceable.
19.8 Injunctive Relief. It is expressly agreed that a material breach
of this Agreement (a breach of Section 11.2 (Confidentiality Obligations) shall
be deemed a material breach of this Agreement) by a party would cause
irreparable harm to the non-breaching party and that a remedy at law would be
inadequate. Therefore, in addition to any and all remedies available at law, the
non-breaching party shall be entitled to seek an injunction or other equitable
remedies in all legal proceedings in the event of any threatened or actual
violations of any or all of the provisions hereof.
19.9 Remedies. Except as otherwise expressly stated in this Agreement,
the rights and remedies of a party set forth herein with respect to failure of
the other to comply with the terms of this Agreement (including, without
limitation, rights of termination of this Agreement) are not exclusive, the
exercise thereof shall not constitute an election of remedies and the aggrieved
party shall in all events be entitled to seek whatever additional remedies may
be available in law or in equity.
19.10 Force Majeure. A party shall not be liable for non-performance or
delay in performance (other than of obligations regarding payment of money or
confidentiality) caused
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by any event reasonably beyond the control of such party including, but not
limited to, wars, hostilities, revolutions, riots, civil commotion, national
emergency, strikes, lockouts or other labor disputes or shortages or inability
to obtain material or equipment, unavailability of supplies, compliance with
laws or regulations (including, without limitation, those related to
infringement), epidemics, fire, flood, earthquake, force of nature, explosion,
embargo, or any Act of God, or any law, proclamation, regulation, ordinance or
other act or order of any court, government or governmental agency; provided the
party claiming force majeure notifies the other party promptly after the force
majeure event has arisen; and further provided that the party claiming force
majeure relief shall resume performance hereunder once the force majeure event
has ended.
19.11 Allocation of Risk. The sections on limitation of liability,
indemnification, warranties and disclaimer of warranties allocate the risks in
the Agreement among the parties. This allocation is an essential element of the
basis of the bargain among the parties.
19.12 Publicity and Press Releases. None of the parties shall disclose
the terms of this Agreement without the prior approval of the other parties,
except that a party may disclose the terms of this Agreement where required by
law, provided that such party makes every reasonable attempt to obtain
confidential treatment or similar protection to the fullest extent available to
avoid public disclosure of the terms of this Agreement.
19.13 Compliance with Laws. Com21 and Philips each covenant that all of
its activities under or pursuant to this Agreement shall comply with all
applicable laws, rules and regulations. In particular, but without limitation,
Philips shall be responsible for obtaining all licenses, permits and approvals
which are necessary or advisable for sales of the Com21 Products within the
Territory and for the performance of its duties hereunder.
19.14 No Rights by Implication. No rights or licenses with respect to
the Com21 Products or Com21 Confidential Information are granted, other than
those rights expressly and unambiguously granted in this Agreement.
19.15 Construction of Agreement. This Agreement has been negotiated by
the respective parties hereto and their attorneys and the language hereof shall
not be construed for or against any party.
19.16 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. If this Agreement is
executed in counterparts, no signatory hereto shall be bound until all the
parties named below have duly executed or caused to be duly executed a
counterpart of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the dates set forth below effective as of the Effective Date.
COM21, INC. PHILIPS PUBLIC
TELECOMMUNICATION SYSTEMS
By: [SIG] By: [SIG]
------------------------------- ------------------------------
Name: William J. Gallagher Name: B. Adams
----------------------------- -----------------------------
Title: Vice President Title: Gen. Manager
---------------------------- ----------------------------
Date: 26 Nov 97 Date: 19 Nov 97
---------------------------- -----------------------------
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EXHIBIT A
COM21 PRODUCTS
MODEL NUMBER DESCRIPTION
SUBSCRIBER UNITS
CP1000 ComPORT Cable Modem - US - High Frequency Band
CP1100 ComPORT Cable Modem - Int'l - High Frequency Band
HEADEND UNITS
CC2100 ComCONTROLLER Ch/Sw/DPS/Tx/Rx/CC/EM (USD)
CC2110 ComCONTROLLER Ch/Sw/DPS/Tx/Rx/CC/EM (Int'l)
CC0101 ComCONTROLLER Tx RF Module
CC0100 ComCONTROLLER Transmit Main (US Domestic)
CC0110 ComCONTROLLER Transmit Main (International)
CC0200 ComCONTROLLER Receive Card (US Domestic)
CC0210 ComCONTROLLER Receive Card (International)
CC0300 ComCONTROLLER CC Card
CC0400 ComCONTROLLER 10BT Card (4K Addresses)
CC0401 ComCONTROLLER 10BT Card (8K Addresses)
CC0500 ComCONTROLLER ATM Switch (spare)
CC0600 ComCONTROLLER 110V/220V Power Supply (spare)
CC0700 ComCONTROLLER Mini-Chassis Backplane (spare)
CC0800 ComCONTROLLER Mini-Chassis Cabling, Assembly
CC0810 ComCONTROLLER Fan Assembly
CC0811 ComCONTROLLER Face Plate
SOFTWARE
CS3000 NMAPS Software License
CS0300 HCX System Software License (US)
CS0310 HCX System Software License (International)
SERVICES
CX9010 Off Site Support
CX9020 On Site Support
CX9030 Training (5 days)
CX9100 Extended Service Contract
DOCUMENTATION
CD8110 Technical Reference Manual
CD8120 Installation, Operation and Maintenance Manual
CD8140 NMAPS Command Reference Manual
CD8141 NMAPS Quick Reference Guide
CD8151 ComPORT Quick Reference Guide
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EXHIBIT B
END USER SOFTWARE LICENSE AGREEMENT
This End User Software License Agreement ("Agreement") is entered
into as of the date last written below ("Effective Date") by and between Com21,
a Delaware corporation, having its principal place of business at 750 Tasman
Drive, Milpitas, California 95035 ("Com21") and the undersigned end user, having
a principal place of business at the address set forth below ("License")
1. DEFINITIONS.
a. "Documentation" means the end user documentation
provided by Com21 associated with the Software.
b. "Hardware" means, collectively, Com21's headend
controller unit, Com21's subscriber-end data over cable modem and/or voice over
cable modem and a central processing unit ("CPU") operating on a SUN platform
with HP OpenView software.
c. "Licensed Products" means, collectively, the Software
and the Documentation.
d. "Software" means, collectively, the version(s) of the
Com21 network management applications programs (the "NMAP Software"), Com21
cable modem image software and other software contained in any Hardware, in
object code form including updates, modifications or enhancements of such
programs that may be provided by Com21 in its sole discretion from time to time.
2. GRANT OF LICENSE.
Subject to all the terms and conditions of this Agreement, Com21
grants Licensee a non-exclusive, non-sublicensable, non-transferable right
("License") to use the Software only in accordance with the Documentation and
only in connection with the Hardware licensed or purchased by Licensee. Licensee
has no right to receive, use, examine, or modify any source code or design
documentation relating to the Software.
3. OWNERSHIP OF SOFTWARE.
As between the parties, Com21 retains all title to and ownership
of and, except as expressly and unambiguously licensed herein, all rights and
interest in the Licensed Products including all customizations, enhancements,
modifications, improvements, derivatives or other changes (by whomever produced)
and all copies and portions thereof, whether or not incorporated into or with
other software, and all intellectual property and proprietary rights anywhere in
the world therein. The License does not constitute a sale of the Software or any
portion or copy of it.
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4. RESTRICTIONS.
Except as reasonably required to use the Software with the
Hardware strictly in accordance with the License, copying or modification of the
Licensed Products or any portion thereof, including Software that has been
modified or incorporated into or with other software, is expressly forbidden.
Licensee shall not remove, alter, obscure or fail to reproduce all copyright,
trademark and other proprietary rights notices that appear in or on the Licensed
Products. Except to the extent expressly prohibited by applicable law, Licensee
shall not (and shall not allow any third party to) decompile, disassemble, or
otherwise reverse engineer or attempt to reconstruct or discover any source code
or underlying ideas, structure, sequence, organization, algorithms, file
formats, programming or interoperability interfaces of the Software or of any
files contained in or generated using the Software by any means whatsoever.
Further, Licensee shall not (i) load or use any portion of the NMAP Software on
or with more than one central processing unit or associated storage device, (ii)
provide, lease, lend or otherwise use or allow others to use the Software to or
for the benefit of third parties, (iii) except as specified in the
Documentation, modify, incorporate into or with other software or create a
derivative work of any part of the Software, (iv) load or use any portion of the
Software (whether or not modified or incorporated into or with other software)
on or with any machine or system other than the Hardware, (v) except if, as and
to the extent expressly authorized in the Documentation, transmit or use the
Software over a network, or (vi) disseminate performance information or analysis
(including, without limitation, benchmarks) from any source relating to the
Software.
5. TERMINATION OF LICENSE.
The License shall remain in effect for so long as Licensee's use
of the Licensed Products is in compliance with the terms and conditions of this
Agreement. Upon Licensee's failure to cure any material breach of this Agreement
or any other portion of the Agreement of which it is a part within thirty (30)
days of receiving notice of such breach from Com21 (or immediately upon notice
in the case of a breach of Section 4), this Agreement shall terminate
automatically. Upon termination, Licensee shall immediately cease all use of the
Licensed Product and return or destroy all copies of the Licensed Product and
all portions thereof (whether or not modified or incorporated with or into other
software) and so certify to Com21. Except for the License and except as
otherwise expressly provided herein, the terms of this Agreement shall survive
termination. Termination is not an exclusive remedy and all other remedies will
be available whether or not the License is terminated.
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6. LIMITED WARRANTY AND DISCLAIMER.
THE LICENSED PRODUCTS ARE PROVIDED "AS IS" WITHOUT WARRANTY OF
ANY KIND INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE. LICENSEE'S EXCLUSIVE REMEDY FOR ANY DEFECT IN
THE SOFTWARE SHALL BE AS PROVIDED UNDER COM21'S SOFTWARE SUPPORT TERMS AND
CONDITIONS TO THE EXTENT LICENSEE HAS PURCHASED COM21 SUPPORT SERVICES FOR THE
SOFTWARE. FURTHER, COM21 DOES NOT WARRANT, GUARANTEE, OR MAKE ANY
REPRESENTATIONS REGARDING THE USE, OR THE RESULTS OF THE USE, OF THE LICENSED
PRODUCTS IN TERMS OF CORRECTNESS, ACCURACY, RELIABILITY, OR THAT THE LICENSED
PRODUCTS ARE OR WILL BE ERROR-FREE.
This limited warranty does not affect or prejudice statutory
rights Licensee may have acquired in the country in which the Licensed Products
are being used.
7. LIMITATION OF REMEDIES AND DAMAGES.
TO THE MAXIMUM EXTENT PERMITTED UNDER APPLICABLE LAW, COM21 SHALL
NOT BE RESPONSIBLE OR LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF THIS
AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER THEORY FOR
(I) ANY INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, LOST PROFITS OR LOSS OR
INACCURACY OF DATA OR (II) COST OF PROCUREMENT OF SUBSTITUTE GOODS, SERVICES OR
TECHNOLOGY OR (III) ANY MATTER BEYOND ITS REASONABLE CONTROL. NOTHING IN THIS
AGREEMENT SHALL EXCLUDE OR RESTRICT COM21'S LIABILITY FOR DEATH OR PERSONAL
INJURY SOLELY CAUSED BY COM21'S WILLFUL MISCONDUCT OR GROSS NEGLIGENCE OR TO THE
EXTENT EXPRESSLY PROHIBITED UNDER APPLICABLE MANDATORY PRODUCT LIABILITY LAWS,
IF ANY.
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8. INDEMNIFICATION.
Com21 shall hold Licensee harmless from liability resulting from
infringement by the Software of any United States patent issued as of the date
sixty (60) days before delivery of the Software or any United States copyright,
provided Com21 is promptly notified of any and all threats, claims and
proceedings related thereto, given reasonable assistance and has sole control
over the defense and all negotiations for a settlement or compromise; Com21 will
not be responsible for any settlement it does not approve in writing. THE
FOREGOING CONSTITUTES COM21'S SOLE LIABILITY, AND LICENSEE'S SOLE REMEDY, IN THE
EVENT OF ANY INFRINGEMENT OF THIRD PARTY RIGHTS BY THE LICENSED PRODUCTS AND IS
IN LIEU OF ANY WARRANTIES OF NONINFRINGEMENT, WHICH ARE HEREBY DISCLAIMED TO THE
MAXIMUM EXTENT PERMITTED UNDER APPLICABLE LAW. The foregoing obligation of Com21
does not apply with respect to Software or portions or components thereof (i)
not supplied by Com21, (ii) made in whole or in part in accordance to Licensee's
specifications, (iii) which are modified after delivery by Com21, (iv) combined
with other products, processes or materials (excluding the Hardware) not
supplied by Com21, (v) where Licensee continues allegedly infringing activity
after being notified thereof or after being informed of modifications that would
have avoided the alleged infringement, or (vi) where Licensee's use of the
Software is incident to an infringement not resulting primarily from the
Software or is not strictly in accordance with the License; Licensee will
indemnify Com21 and its officers, directors, agents and employees from all
damages, settlements, attorneys' fees and expenses related to a claim of
infringement excluded from Com21's indemnity obligation by this sentence.
9. GOVERNMENT MATTERS.
Licensee shall comply with the U.S. Foreign Corrupt Practices Act
(regarding among other things, payments to government officials) and all export
laws, restrictions, national security controls and regulations of the United
States or other applicable foreign agency or authority, and not to export or
re-export, or allow the export or re-export of any Software or any copy or
direct product thereof in violation of any such restrictions, laws or
regulations or, without all required licenses and authorizations, to any Group
D:1 or E:2 country, including, without limitation, Cuba, Libya, North Korea,
Iran, Iraq, or Rwanda (or any national or such country) specified in the then
current Supplement No. 1 to Part 740 of the U.S. Export Administration
Regulations (or any successor supplement or regulations).
10. MISCELLANEOUS.
a. Assignment. The License and this Agreement are not
assignable or transferable by Licensee without the prior written consent of
Com21; any attempt to do so shall be void.
b. Notices. Any notice, report, approval or consent
required or permitted hereunder shall be in writing and will be deemed to have
been duly given if delivered personally, by international overnight courier
service with tracking capabilities and written confirmation or mailed by
first-class, registered or certified mail, postage prepaid to the respective
addresses of the parties as set herein (or such other address as a party may
designate by ten (10) days written notice).
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c. Waivers and Amendments. No failure to exercise, and no
delay in exercising, on the part of either party, any privilege, any power or
any rights hereunder will operate as a waiver thereof, nor will any single or
partial exercise of any right or power hereunder preclude further exercise of
any other right hereunder. Any waivers of or amendments to any provision of this
Agreement shall be effective only if made in writing clearly understood by both
parties to be an amendment or waiver and signed by a representative of the
respective parties authorized to bind the parties.
d. Severability. If any provision of this Agreement shall
be adjudged by any court of competent jurisdiction to be unenforceable or
invalid, that provision shall be limited or eliminated to the minimum extent
necessary so that this Agreement shall otherwise remain in full force and effect
and enforceable.
e. Governing Law; Attorneys' Fees. This Agreement shall be
deemed to have been made in, and shall be construed pursuant to the laws of the
State of California and the United States of America without regard to conflicts
of laws provisions thereof and without regard to the U.N. Convention on
Contracts for the International Sale of Goods. The sole and exclusive
jurisdiction and venue for any action or dispute relating to the subject matter
of this Agreement shall be the California state and U.S. federal courts having
within their jurisdiction the location of Com21 and each of the parties hereto
submits itself to the exclusive jurisdiction and venue of such courts for the
purpose of any such action or dispute and hereby waives any venue objection
thereto. The prevailing party in any action to enforce this Agreement shall be
entitled to recover costs and expenses including, without limitation, attorneys'
fees.
f. English Language. The original of this Agreement has
been written in English. Licensee hereby agrees to waive any right under the law
of the country in which the Software was initially licensed to have this
Agreement written in the native language.
g. Equitable Relief. The parties agree that a material
breach of this Agreement adversely affecting Com21's proprietary rights in the
Software would cause irreparable injury to Com21 for which monetary damages
would not be an adequate remedy and that the Com21 shall be entitled to
equitable relief in addition to any remedies it may have hereunder or at law.
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h. Entire Agreement. Both parties agree that this
Agreement is the complete and exclusive statement of the mutual understanding of
the parties and supersedes and cancels all previous written and oral agreements
and communications relating to the subject matter of this Agreement.
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date set forth below.
COM21, INC. [LICENSEE'S NAME]
By: [SIG] By: [SIG]
------------------------------- -------------------------------
Name: WILLIAM J. GALLAGHER Name: B. ADAMS
----------------------------- -----------------------------
Title: VICE PRESIDENT Title: GEN. MGR.
---------------------------- ---------------------------
Date: 26 NOV 97 Date: 19 NOV 97
---------------------------- -----------------------------
Address: 15 Blue Street
---------------------------
N. Sydney
---------------------------
NSW 2060
---------------------------
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EXHIBIT C
PRICE LIST
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EXHIBIT D
COM21 SUPPORT TERMS AND CONDITIONS
The following terms and conditions relate to and are incorporated into
the Agreement. Capitalized terms not defined in Section 1 below have the same
meaning as in the Agreement.
1. DEFINITIONS
Unless defined otherwise herein, capitalized terms used in these
Support Services Terms and Conditions shall have the same meaning as
set forth in the Agreement.
"Critical Error" means the Com21 Software crashes or a significant
number of End Users are unable to use the Com21 Software because of
replicatable Errors in the Com21 Software, causing significant End User
inconvenience or dissatisfaction.
"Error" means an error in the Com21 Software which significantly
degrades the Com21 Software's performance or function.
"Error Correction" means the use of commercially diligent efforts to
correct Errors.
"Fix" means the repair or replacement of object or executable code
versions of the Com21 Software to remedy an Error.
"Minor Error" means that a small number of End Users are experiencing a
replicatable Error in the Com21 Software that limits some functionality
of the Com21 Software or that Philips' technical support personnel,
after using commercially diligent efforts to provide a solution,
require Com21's assistance.
"Moderate Error" means End Users are able to use the Com21 Software but
a small number of End Users experience Errors in the Com21 Software
causing significant inconvenience to those End Users due to some loss
of functionality of the Com21 Software.
"Support Services" means Com21 support services as described in
Section 3.
"Telephone Support" means technical support telephone assistance
provided by Com21 to the Technical Support Contact during Com21's
normal business hours.
"Workaround" means a change in the procedures followed or data supplied
by Com21 to avoid an Error without substantially impairing use of Com21
Software by End Users.
2. COVERAGE
Subject to the terms hereof, Com21 will provide Support Services to
Philips for the Com21 Software.
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3. SUPPORT SERVICES
Support Services consist of Error Correction as specified in Section 6
hereof provided to the "Technical Support Contact" designated by
Philips as responsible for communications between the parties regarding
the Support Services hereunder. Upon detection of any Error, Philips
agrees to provide Com21 a listing of output and any other data, that
Com21 may reasonably request in order to reproduce the operating
conditions similar to those present when the Error occurred.
4. TERM AND TERMINATION
Support Services shall be provided without additional consideration for
a term of three (3) months commencing on the Effective Date (the
"Initial Term"), unless terminated by either party. Beyond the Initial
Term, Philips may purchase Support Services for a term of one (1) year
and renewable for additional one (1) year periods by providing Com21
written notice not later than thirty (30) days prior to expiration of
the current term for Support Services. Com21 may suspend or cancel
Support Services if Philips fails to make payment pursuant to the
Section titled "Fees and Payment" or breaches the Support Services
provisions and such breach is not remedied within thirty (30) days (15
days in the case of nonpayment) after Philips receives notice of the
breach.
5. FEES AND PAYMENT
For Support Services after the Initial Term, Philips shall pay Com21
the applicable Support Services fee as listed in the then-current Com21
price list. Support Services fees will be billed on an annual basis,
payable in advance. Philips shall be responsible for all taxes
associated with Support Services other than U.S. taxes based on Com21's
net income. Philips' payment is due within thirty (30) days of receipt
of Com21's invoice. In the event Philips fails to pay Com21 on the due
date, then to reinstate or renew Support Services (if allowed by
Com21), Philips must first pay Com21 the annual Support Services fee
and the reinstatement charge listed in the then-current Com21 price
list.
6. ERROR CORRECTION
Com21 shall exercise commercially diligent efforts to correct any Error
reported by Philips in the Com21 Software in accordance with the
priority level reasonably assigned to such Error by Philips.
a) Critical Errors. In the event of a Critical Error, Com21
will respond to Critical Errors by assigning a technician to
investigate the Error within four (4) hours from the time Philips
reports the Error to Com21. Com21 will provide Philips information and
a proposal for the correction of such Error no later than twenty-four
(24) hours from the time the Error was first reported to Com21. Com21
shall use in commercially reasonable efforts to provide a Workaround or
a Fix that solves or reduces the severity of the Error within
forty-eight (48) hours from the time Philips first reports the Error.
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b) Moderate Errors. In the event of a Moderate Error, Com21
will respond to all Moderate Errors by assigning a technician to
investigate such Error within four (4) hours from the time Philips
reports the Error to Com21. Com21 will provide a Workaround within
fourteen (14) days or will Fix the Error in a time frame to be agreed
upon by the parties.
c) Minor Errors. In the event of a Minor Error, Com21 will
respond to requests for information within eight (8) hours and, if
appropriate, use commercially diligent efforts to provide an upgrade of
the Com21 Software providing a Workaround or a Fix for the Error within
three (3) months of Philips' reporting of such Error.
If Com21 believes that a problem reported by Philips may not be due to
an Error in the Com21 Software, Com21 will so notify Philips. At that
time, Philips may (1) instruct Com21 to proceed with problem
determination at its possible expense as set forth below or (2)
instruct Com21 that Philips does not wish the problem pursued at its
possible expense. If Philips requests that Com21 proceed with problem
determination at its possible expense and Com21 determines that the
error was not due to an Error in the Com21 Software, Philips shall pay
Com21, at Com21' then-current and standard consulting rates, for all
work performed in connection with such determination, plus reasonable
related expenses incurred therewith. Philips shall not be liable for
(i) problem determination or repair to the extent problems are due to
Errors in the Com21 Software or (ii) work performed under this
paragraph in excess of its instructions or (iii) work performed after
Philips has notified Com21 that it no longer wishes work on the problem
determination to be continued at its possible expense (such notice
shall be deemed given when actually received by Com21). If Philips
instructs Com21 that it does not wish the problem pursued at its
possible expense or if such determination requires effort in excess of
Philips' instructions, Com21 may, at its sole discretion, elect not to
investigate the Error with no liability therefor.
7. EXCLUSIONS
Com21 shall have no obligation to support:
1) Com21 Software that has been altered, damaged or modified or
Com21 Software or any portion thereof has been incorporated
with or into other software; or
2) Com21 Software that is not the then current release or any
release which has been replaced by the then current release of
the same Com21 Software more than thirty (30) days after the
date of the current release; or
3) Problems in the Com21 Software that are caused by Philips'
negligence, abuse or misapplication, misuse or other causes
beyond the control of Com21.
Com21 shall have no liability for any changes in hardware which may be
necessary to use the Com21 Software.
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8. LIMITATION OF LIABILITY
Com21's liability for damages from any cause of action whatsoever
relating to Com21's agreement to provide Support Services shall be
limited to the amount paid by Philips for the Support Services for the
applicable year.
9. THESE TERMS AND CONDITIONS CONSTITUTE A SERVICE CONTRACT AND NOT A
WARRANTY FOR THE COM21 SOFTWARE. THE COM21 SOFTWARE AND ALL MATERIALS
RELATED TO THE COM21 SOFTWARE ARE SUBJECT EXCLUSIVELY TO THE WARRANTIES
SET FORTH IN THE AGREEMENT. THIS EXHIBIT IS AN ADDITIONAL PART OF THE
AGREEMENT AND DOES NOT CHANGE OR SUPERSEDE ANY TERM OF THE AGREEMENT
EXCEPT TO THE EXTENT UNAMBIGUOUSLY CONTRARY THERETO.
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EXHIBIT E
DEMONSTRATION SYSTEM
<TABLE>
<CAPTION>
MODEL NUMBER DESCRIPTION VERSION PRICE
SUBSCRIBER UNITS
<S> <C> <C> <C>
CP1000 ComPORT Cable Modem - US - High Frequency Band US [*]
CP1100 ComPORT Cable Modem - Int'l - High Frequency Band INTERNATIONAL [*]
HEADEND UNITS
CC2100 ComCONTROLLER Ch/Sw/DPS/Tx/Rx/CC/EM (USD) US [*]
CC2110 ComCONTROLLER Ch/Sw/DPS/Tx/Rx/CC/EM (Int'l) INTERNATIONAL [*]
NMAPS
CS3100 Network Management and Provisioning Station Software US [*]
CS3000 Network Management and Provisioning Station Software INTERNATIONAL [*]
SOFTWARE
CS0300 HCX System Software License US [*]
CS0310 HCX System Software License INTERNATIONAL [*]
</TABLE>
[*] Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
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EXHIBIT F
COM21 PRODUCTS EXTENDED WARRANTY
[LOGO[
COMMUNICATIONS FOR THE 21ST CENTURY
Com21 Warranty and Service Policy
Document 280-0050-00
Version 1.0
April 22, 1998
Approvals:
- ---------------------------- ---------------------------------
Buck Gee (Marketing) Bill Gallagher (Sales)
- ---------------------------- ---------------------------------
Mike Gordon (Support) Dave Robertson (Finance)
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PURPOSE
This document summarizes the terms and conditions of Com21 Warranty and Service
offerings for Com21 hardware and software products.
HARDWARE WARRANTIES
STANDARD HARDWARE WARRANTY POLICY
Com21 warrants that the hardware portion of the ComCONTROLLER and
ComPORT products will materially conform to the specifications
applicable to such product and will be free from material defects in
materials and workmanship under normal and proper use for one (1) year
from the date of Com21's shipment. Com21's sole liability under this
warranty is, at the option of Com21, to repair or replace a Com21
hardware product that does not conform with the foregoing warranty.
This warranty shall not apply any damage or defect arising as a result
of neglect, improper installation, alteration, accident, or improper
use of a Com21 hardware product. This warranty is specifically in lieu
of, and Com21 disclaims, all other warranties, express or implied,
including, without limitation, any warranty for merchantability,
fitness for a particular purpose and non-infringement. Com21 will not
be liable for any incidental or consequential damages or for the cost
of substitute goods, services or technology.
OTHER POLICY TERMS:
- ComCONTROLLER and ComPORT products are covered for twelve (12)
months from date of Com21's shipment at no charge.
- $50 no trouble found charge for units that are returned, but
are determined by Com21 to conform with the warranty.
- Philips pays shipping charges to Com21; Com21 pays return
shipping charges unless no trouble found, then reseller pays
return shipping charges unless otherwise agreed by Com21.
- Com21 sends the repaired or replaced hardware units to
reseller within fifteen (15) working days after Com21's
receipt of the defective products covered under warranty
unless otherwise agreed.
- A Com21 Return Material Authorization number must be obtained
from Com21 Technical Support for all warranty and non-warranty
repairs prior to return of hardware products.
POST-WARRANTY HARDWARE EQUIPMENT SUPPORT
After expiration of the one (1)-year hardware warranty period,
Com21 will repair Com21 hardware products on a time and
materials basis on the terms and at the prices shown in the
"Com21 Services" Section. Com21 will warrant such
out-of-warranty repair of Com21 hardware products for a period
of ninety (90) days from the date of Com21's shipment to
reseller unless otherwise agreed too.
COMPORT EXTENDED WARRANTY
The ComPORT extended warranty extends standard hardware
warranty for ComPORT cable modems and power supply for an
additional twenty-four (24) months. The
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price is [*] per modem at time of purchase or [*] if purchased
before the standard hardware warranty expires. This extended
warranty cannot be renewed or further extended.
COMCONTROLLER EXTENDED WARRANTY
ComCONTROLLER extended warranty can be purchased for any
ComCONTROLLER product or sub-system and it extends standard
hardware warranty for an additional twenty-four (24) months.
The warranty price is [*] of the Com21 list price of the
ComCONTROLLER product or sub-system, if the warranty is
purchased at time of purchase, and is [*], if the warranty is
purchased within the twelve (12) month standard hardware
warranty period. This extended warranty cannot be renewed or
further extended.
ORDER NUMBER AND PRICE OF HARDWARE WARRANTIES:
<TABLE>
<CAPTION>
Order
Number Description Price
------ ----------- -----
<S> <C> <C>
CX9500 ComPORT Extended Warranty (Time of purchase). Not [*]
renewable. No discounts are available. [*]
CX9550 ComPORT Extended Warranty (Within 12 months). Not [*]
renewable. No discounts are available. [*]
CX9510 ComCONTROLLER Extended Warranty (Time of purchase). [*]
Not renewable. No discounts are available. [*]
CX9560 ComCONTROLLER Extended Warranty (Within 12 months). [*]
Not renewable. No discounts are available. [*]
</TABLE>
SOFTWARE WARRANTY, SUPPORT AND MAINTENANCE CONTRACTS
COM21'S SOFTWARE WARRANTY
The warranty period for software media is ninety (90) days. The Com21
software products are provided "as is" without warranty of any
kind, including, without limitation, any warranty of
merchantability, fitness for a particular purpose and
non-infringement. Further, Com21 does not warrant, guarantee, or
make any representations regarding the use, or the results of the
use, of the licensed Com21 software products in terms of
correctness, accuracy, reliability, or that the licensed products
are or will be error free unless otherwise agreed to by Com21.
SOFTWARE SUPPORT POLICY
Com21 will provide telephone technical support for the current shipping
version of the Com21 software and its immediate prior release. For
example, if Com21 is shipping NMAPS v2.3, then Com21 would provide
telephone support for NMAPS v2.3 and version 2.2. If a customer was
still using NMAPS v2.1, Com21 would not provide support except to
instruct the customer that it must upgrade to the current shipping
version, which in this case would be v2.3, and then Com21 could
determine if the customer's problem was resolved by the current
shipping release or if error still exists. If the error is not
resolved by the current shipping release, then Com21 would then
provide technical support to resolve or mitigate the error.
Com21 will respond to Critical Errors by assigning a technician to
investigate the error within four (4) hours from the time customer
reports the error to Com21. Com21 will provide customer information
and a proposal for the correction of such error no later than
twenty-four (24) hours from the time the error was first reported
to Com21. Com21 will use commercially reasonable efforts to provide
a Workaround within forty-eight (48) hours from the time customer
first reports the Error.
Com21 will use its commercially reasonable efforts to provide a
Workaround for moderate or
[*] Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
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Confidential
minor errors within forty-eight (48) hours from the time customer
first reports the error to Com21, patches, i.e., software which
corrects or removes a reproducible anomaly or "bug", will not be
provided for these type of Errors. Com21 will use in commercially
reasonable efforts to correct and/or fix moderate or minor errors
in the next update or upgrade of the Com21 software.
SOFTWARE MAINTENANCE CONTRACTS AND UPGRADES*
Maintenance contracts for Com21 software have a twelve (12)-month term
beginning on the date of shipment by Com21, renewable annually.
Com21 encourages its resellers to purchase software maintenance for the
Com21 software. The benefits of annual software maintenance are
no-charge upgrades including all new product features to all major
releases of the Com21 software and all maintenance releases during
the twelve (12) month term of the maintenance contract. If
purchased separately, the combined cost of these upgrades and
maintenance release will be more than the annual price of software
maintenance.
Com21 encourages its resellers to offer customers the extended software
maintenance program with all others of Com21 software. The two
examples below illustrate the difference in price for maintenance
of the Com21 software with and without the extended software
maintenance program in place.
A) If a customer purchases a software maintenance contract at
time of purchase of Com21 software, the price will be [*] of
the list price of NMAPS and [*] of the list price of the
System software (per ComController). Once the customer has
purchased maintenance, it must purchase maintenance for all
subsequent purchases of software and ComCONTROLLER units in
order for such software and ComCONTROLLER units to be covered
under the maintenance program. For example, if a customer
purchases NMAPS, one ComCONTROLLER including the System
software and maintenance on 9/1/97, the software is covered
until 8/31/98. If the customer purchases a new ComCONTROLLER
including System software on 12/1/97, it must purchase the
maintenance for the System software. As a result, the NMAPS
and System software that was purchased on 9/1/97 will be
covered by the maintenance contract until 8/31/98 and the
System software purchased on 12/1/97 will be covered by the
maintenance contract until 11/30/98. If software maintenance
is purchased after the date of purchase of the Com21 software,
but within ninety (90) days, then the price is [*] of the list
price of the Com21 software for which maintenance is
purchased.
B) A customer that does not purchase maintenance will receive
maintenance (bug-fix) releases but not any upgrade or new
feature of any component of the Com21 ComUNITY Access system.
For example, an upgrade would be NMAPS or the System software
moving from 2.1 to 2.2 or from 2.2 to 2.3. an example of a
maintenance release would be moving from version 2.1 to 2.1.1.
Under this scenario, if a customer purchased a new upgrade, it
would pay [*] of the list price of the upgrade. Although for
one upgrade, this price is less than the annual fee for
maintenance purchasing two or more upgrades separately per
year will cost more than the annual maintenance fee. Com21 is
currently planning to release at least
- --------
* MAJOR RELEASE: A comprehensive software release that has significant new
features to provide additional functionality or performance.
MAINTENANCE RELEASE: Periodic revisions to major releases which may
include performance improvements, support for new hardware,
new software features, and/or bug fixes.
[*] Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
F-4
<PAGE> 43
Confidential
two upgrades annually, who has purchased NMAPS v2.1 and does
not purchase the upgrade to v2.2 charged [*] for the upgrade
from v2.1 to v2.3.
ORDER NUMBER AND PRICE FOR SOFTWARE MAINTENANCE PRODUCTS:
<TABLE>
<CAPTION>
Order Number Description Price
- ------------ ----------- -----
<S> <C> <C>
TBD (CX9200) ComUNITY Access Software Maintenance contract; [*]
TBD (CX9201) ComUNITY Access Software Maintenance contract; [*]
TBD (CX9202) ComUNITY Access Software Maintenance contract; [*]
TBD (CX9203) ComUNITY Access Software Maintenance contract; [*]
</TABLE>
SERVICE OFFERINGS
Standard Service Policy
At no charge, Com21 offers the following support to resellers.
- (M-F) 7AM to 7PM PST telephone support, after hours message
support.
- Next business day response.
- On site support requires a customer PO, minimum charge for a
service call is [*].
- ----------------
[*] Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
F-5
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Confidential
EXHIBIT G
SOURCE CODE ESCROW DEPOSIT AGREEMENT
Account Number
This Source Code Escrow Deposit Agreement including any Exhibits
and Addenda ("Agreement") is effective this day of , 19 , by and
between Escrow Holder ("Escrow Holder"), ("Licensor") and ("Licensee")
.
Notices to Licensor, Licensee and Escrow Holder should be sent to
the parties as identified in the attached Exhibit A.
WHEREAS, Licensor and Licensee have or will enter into a contract
dated _______, 199_ (the "Distribution Agreement");
WHEREAS, Licensor and Licensee desire this Technology Escrow
Agreement to be supplementary to said contract pursuant to 11 U.S.C. Section
365(n);
WHEREAS, availability of or access to certain proprietary data
relating to the proprietary technology and other materials is critical to
Licensee in the conduct of its business;
WHEREAS, Licensor has deposited or will deposit with Escrow
Holder the related proprietary data to provide for retention and controlled
access for Licensee under certain specified conditions:
NOW THEREFORE, for good and valuable consideration, the receipt
of which is hereby acknowledged, and in consideration of the promises, mutual
covenants and conditions contained herein, the parties hereto agree as follows:
1. Licensor Deposit Account. Following the execution of this
Agreement and the payment of the set-up and deposit fees to Escrow Holder,
Escrow Holder shall open a "Deposit Account" for Licensor. The opening of the
account means that Escrow Holder shall establish an account ledger in the name
of the Licensor and that Licensor shall receive renewal notices as provided in
Section 7. Unless and until Licensor makes an Initial Deposit with Escrow
Holder, Escrow Holder shall have no obligation to Licensor except as defined by
this Section.
2. Initial Deposit. The "Initial Deposit" will consist of all
material initially supplied by Licensor to Escrow Holder as specified by an
accompanying document called a "Description of Deposit Materials" hereinafter
referred to as an Exhibit B. Escrow Holder shall issue to Licensor and Licensee
a copy of the initial Exhibit B within ten (10) days of acceptance by Escrow
Holder of the Initial Deposit.
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Confidential
3. Deposit Changes. The Licensor will keep the Deposit updated
with supplemental or replacement materials ("Deposit Changes") to the extent
required by the License Agreement.
(a) Supplemental Deposit. A "Supplemental Deposit" will include
any materials added to the Deposit. Licensor will submit any Supplemental
Deposit accompanied by an Exhibit B. Within ten (10) days of acceptance by
Escrow Holder of such Supplemental Deposit, Escrow Holder shall notify Licensor
and Licensee by issuing a copy of the Exhibit B.
(b) Replacement Deposit. "Replacement Materials" replace the
existing Deposit defined by Exhibit B(s). Licensor will submit any Replacement
Materials accompanied by an Exhibit B. Within ten (10) days of acceptance by
Escrow Holder of such Replacement Materials, Escrow Holder shall notify Licensor
and Licensee by issuing a copy of the Exhibit B. Escrow Holder will destroy or
return to Licensor all materials that are replaced by the Replacement Materials.
4. Deposit Inspection. Upon the receipt of the Initial Deposit
materials and any Deposit Changes, Escrow Holder will visually match the listed
items on the Exhibit B to the labeling of such materials. Escrow Holder shall
not be responsible for verifying the contents or validating the accuracy of
Licensor's labeling. Acceptance of the Deposit will occur only when Escrow
Holder concludes that the Deposit Inspection is complete; which conclusion shall
not be unreasonably withheld.
5. License Registration Account. Following the execution of this
Agreement and the payment of the set-up, deposit and registration fee to Escrow
Holder, Escrow Holder shall open a "Registration Account" for Licensee. The
opening of the Registration Account means that Escrow Holder shall establish an
account ledger in the name of the Licensee and that Licensee shall receive
renewal notices as provided in Section 7. Unless and until Licensor makes an
Initial Deposit of Materials with Escrow Holder, Escrow Holder shall have no
obligation to Licensee except as defined by this section.
6. Deposit Obligations of Confidentiality. Escrow Holder agrees
to establish a receptacle in which it shall place the Deposit (meaning the
Initial Deposit, Supplemental Deposits and Replacement Deposits to the extent
then applicable) and shall put the receptacle under the control of one or more
of its officers, selected by Escrow Holder, whose identity shall be available to
Licensor and Licensee at all times. Escrow Holder shall exercise a professional
level of care in carrying out the terms of this Agreement.
Escrow Holder acknowledges Licensor's assertion that the Deposit
shall contain proprietary data of Licensor and that Escrow Holder has an
obligation to preserve and protect that confidentiality.
Escrow Holder may duplicate the Deposit only as necessary to
preserve and safely store the Deposit, and to provide copies thereof, as
authorized herein, to Licensee. Escrow Holder shall reproduce on all copies of
the Deposit made by Escrow Holder any proprietary or confidentiality notices
contained in the Deposit originally deposited with it by Licensor.
G-2
<PAGE> 46
Except as expressly provided in this Agreement, Escrow Holder
agrees that it shall not divulge, disclose, otherwise make available to third
parties, or make any use whatsoever of the Deposit, or of any information
provided to it by Licensor in connection with this Agreement, without the
express prior written consent of Licensor. This obligation will continue
indefinitely notwithstanding termination of this Agreement.
7. Term of Agreement. This Agreement will have an initial term of
one year, commencing on the effective date of this Agreement. This Agreement may
be renewed for additional one-year periods upon receipt by Escrow Holder of the
specified renewal fees. In the event that the renewal fees are not received
within thirty (30) days prior to the expiration date, Escrow Holder shall so
notify Licensor and Licensee of the thirty (30) day expiration period. If the
renewal fees are not received within the subsequent thirty (30) days, this
Agreement will expire without further notice and without liability of Escrow
Holder to the parties of this Agreement. Licensee has the right to pay renewal
fees and other related fees. In the event Licensee pays the renewal fees and
Licensor is of the opinion that any necessary condition for renewal is not met,
Licensor may so notify Escrow Holder, and Licensee in writing. The resulting
dispute will be resolved pursuant to the dispute resolution process defined in
Section 12.
8. Expiry. Except as otherwise expressly provided in this
Agreement, upon non-renewal or other termination of this Agreement, all duties
and obligations of Escrow Holder to Licensor and Licensee will terminate. If
Licensor requests the return of the Deposit, Escrow Holder shall return the
Deposit to Licensor only after all outstanding invoices and the deposit return
fees are paid. If the fee(s) are not received by the anniversary date of this
Agreement, Escrow Holder shall, at its option, destroy or return the Deposit to
Licensor.
9. Filing for Release of Deposit by Licensee. Upon notice to
Escrow Holder by Licensee (in the form of an affidavit or declaration by an
officer of Licensee) of the occurrence of a release condition as defined in
Section 10, and payment of the filing for release fee, Escrow Holder shall so
notify Licensor by certified mail with a copy of the notice from the Licensee.
If Licensor provides contrary instruction within ten (10) working days of the
mailing of the notice to Licensor, Escrow Holder shall not deliver the Deposit
to the Licensee except as provided below.
"Contrary instruction" means the filing of an affidavit or
declaration with Escrow Holder by an officer of Licensor stating that a Release
Condition has not occurred, or has been cured. Escrow Holder will send a copy of
the affidavit or declaration by certified mail to the Licensee who is filing for
the release of the Deposit materials. Upon receipt of contrary instruction,
Escrow Holder shall not deliver a copy of the Deposit and shall continue to
store the Deposit until otherwise directed by Licensor and Licensee jointly, or
until resolution of the dispute pursuant to Section 12.
10. Release of Deposit to Licensee. Release conditions are those
conditions specified for release of escrow in Section 18 of the Distribution
Agreement.
If after following the procedure in Section 9, Escrow Holder does
not receive
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<PAGE> 47
contrary instruction from Licensor, Escrow Holder is authorized to release the
Deposit, or if more than one Licensee is registered to the Deposit, a copy of
the Deposit, to the Licensee filing for release following receipt of any fees
due to Escrow Holder.
11. Conditions for Use Following Release. Following a release as
provided in Section 10, Licensee shall have the non-exclusive right to use the
released material only to support and maintain the Com21 Software and to
distribute error corrections (in object code form only) to then current
end-users thereof for use in their licensed configurations. Additionally,
Licensee shall be required to maintain the confidentiality of the released
materials and technology in accordance with the terms of the License Agreement.
12. Disputes. In the event of a dispute as to which this section
applies, Escrow Holder shall so notify Licensor and Licensee in writing. Such
dispute will be settled by arbitration (which arbitration shall be binding for
purposes of this Agreement only) [in accordance with the rules of the American
Arbitration Association (AAA). Licensor and Licensee will each select one
arbitrator and a third arbitrator will be selected unanimously by the two
arbitrators selected by the parties. If the two arbitrators selected by the
parties are unable to select the third arbitrator within ten (10) days of the
appointment of the two arbitrators, the parties consent to the selection of the
third arbitrator by the AAA administrator.
13. Indemnification. Licensor and Licensee agree to defend and
indemnify Escrow Holder and hold Escrow Holder harmless from and against all
claims, actions and suits, whether in contract or in tort, and from and against
any and all liabilities, losses, damages, costs, charges, penalties, counsel
fees, and other expenses of any nature (including, without limitation,
settlement costs) incurred by Escrow Holder as a result of performance of this
Agreement except in the event of a judgment or arbitration decision which
specified that Escrow Holder acted with gross negligence or willful misconduct.
14. Audit Rights. Escrow Holder agrees to keep records of the
activities undertaken and materials prepared pursuant to this Agreement.
Licensor and Licensee will be entitled at reasonable times, during normal
business hours and upon reasonable notice to Escrow Holder, during the term of
this Agreement to inspect the records of Escrow Holder with respect to this
Agreement.
Licensor or Licensee will be entitled, upon reasonable notice to
Escrow Holder and during normal business hours, at the facilities designated by
Escrow Holder, accompanied by a designated employee of Escrow Holder, to inspect
the physical status and condition (but not contents) of the Deposit. The Deposit
may not be changed by Licensor or Licensee during the audit.
15. Designated Representative. Licensor and Licensee each agree
to designate one individual to receive notices from Escrow Holder and to act on
behalf of Licensor and Licensee respectively with respect to the performance of
their obligations as set forth in this Agreement and to notify Escrow Holder
immediately, in the manner stipulated in Exhibit A, in the event of any change
from one Designated Representative to another.
16. General. Subject to the terms of this Agreement, Escrow
Holder may
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act in reliance upon any written instruction, instrument, or signature
reasonably believed to be genuine and may assume that any person giving any
written notice, request, advice or instruction in connection with or relating to
this Agreement has been duly authorized to do so. Escrow Holder is not
responsible for failure to fulfill its obligations under this Agreement due to
causes beyond its control.
This Agreement is to be governed by, and construed in accordance
with the laws of the State of California, without regard to conflicts of laws
provisions thereof.
Except for the License Agreement, this Agreement, including the
Exhibits and Addenda hereto, constitutes the entire Agreement between the
parties concerning the subject matter hereof, and will supersede all previous
communications, representations, understandings, and agreements, either oral or
written, between the parties. Licensor and Licensee acknowledge that Escrow
Holder has no knowledge of the terms and conditions contained in the License
Agreement and that Escrow Holder's only obligations shall be as set forth herein
or in any other writing signed by Escrow Holder, Licensor and Licensee.
If any provision of this Agreement is held by any court to be
invalid or unenforceable, that provision will be limited or severed from this
Agreement to the minimum extent necessary so that this Agreement shall otherwise
remain in full force and effect and enforceable.
17. Fees. All service fees will be due in full at the time of the
request for service. Renewal fees will be due in full upon the receipt of
invoice unless otherwise specified by the invoice. For the purpose of annual
renewal fees the effective date of this Agreement will be the anniversary date.
Invoiced fees must be paid within sixty (60) days of receipt of invoice or
Escrow Holder may terminate this Agreement. If payment is not timely received by
Escrow Holder, Escrow Holder shall have the right to accrue and collect interest
at the rate of one and one-half percent per month (18% per annum) from the date
of invoice for all later payments, or, if lower, the maximum rate allowed by
law.
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All fees will be those specified in Escrow Holder's standard
Schedule of Fees in effect at the time of renewal, or request for service,
except as otherwise agreed. For any increase in Escrow Holder's standard fees,
Escrow Holder shall notify Licensor and Licensee at least ninety (90) days prior
to any renewal of this Agreement. For any service not listed on the Schedule of
Fees, Escrow Holder shall provide a quote prior to rendering such service.
Dated:
------------- ------------------------------
Licensor
By: [SIG]
---------------------------
WILLIAM J. GALLAGHER
-----------------------------
(Print Name)
VICE PRESIDENT
-----------------------------
Title
Dated:
------------- ------------------------------
Licensor
By: [SIG]
---------------------------
B. ADAMS
-----------------------------
(Print Name)
GEN. MANAGER
-----------------------------
Title
Dated:
------------- ------------------------------
ESCROW HOLDER
By:
---------------------------
-----------------------------
(Print Name)
-----------------------------
Title
G-6
<PAGE> 50
Confidential
EXHIBIT A
TO
SOURCE CODE ESCROW AGREEMENT
Account Number
Notices to Licensor Regarding
Agreement Terms and Conditions Invoices should
should be addressed to: be addressed to:
Licensor: Com21, Inc. __________________
Address: 750 Tasman Drive __________________
Milpitas, CA 95035 __________________
Designated __________________ __________________
Representative: __________________ __________________
Phone: __________________ __________________
Notices to Licensee Regarding
Agreement Terms and Conditions Invoices should
should be addressed to: be addressed to:
Licensee: Philips Public Tele-
communication Systems __________________
Address: Monash Gateway __________________
745 Springvale Road __________________
Mulgrave
VIC 3170
Australia
Designated __________________ __________________
Representative: __________________ __________________
Phone: __________________ __________________
G-7
<PAGE> 51
Confidential
All requests from Licensor or License to change the designated representative
must be given in writing and signed by an officer of Licensor or Licensee as the
case may be.
Invoice Inquiries
All Contracts, Deposit Materials and Remittance of
and Official Notifications to Fees to Escrow Holder
Escrow Holder should be should be addressed to:
addressed to:
___________________________________ _________________________________
___________________________________ _________________________________
___________________________________ _________________________________
G-8
<PAGE> 52
Confidential
EXHIBIT B
Description of Deposit Materials
Deposit Account Number___________________________________________________
Deposit Account Name_____________________________________________________
Licensor, pursuant to a Deposit Agreement, hereby deposits the below described
materials into the above referenced Deposit Account by providing them to Escrow
Holder. The Deposit Type is: (check box that applies)
Initial Deposit Supplemental Replacement
If Replacement then Destroy Deposit or Return Deposit
If no Deposit Type has been checked the materials will be deemed to be an
Initial or Supplemental Deposit.
DEPOSIT MATERIALS
Name _____________________________________ Version _____________________________
Date _________________________ CPU/OS ______________ Compiler __________________
Application ____________________________________________________________________
Utilities needed________________________________________________________________
Special operating instructions__________________________________________________
________________________________________________________________________________
Item Description Media Quantity
I certify that the above described
materials were delivered/sent to
the Escrow Holder: Receipt of the materials
acknowledged.
By ______________________________ By ______________________________
Name ____________________________ Name ____________________________
Title ___________________________ Title ___________________________
For _____________________________ For Escrow Holder
Date ____________________________ Date ____________________________
G-9
<PAGE> 1
EXHIBIT 16.1
April 24, 1998
Securities and Exchange Commission
Washington, DC 20549
Ladies and Gentlemen:
We were previously principal accountants for Com21, Inc. (a development
stage company) and, under the date of January 10, 1997, we reported on the
balance sheets of Com21, Inc. as of December 31, 1996 and 1995, and the related
statements of operations, stockholders' equity (deficit), and cash flows for the
years then ended and for the period from June 29, 1992 (inception) to December
31, 1996. In November 1997, our appointment as principal accountants was
terminated. We have read Com21, Inc.'s statements included under the caption
"Change in Independent Auditors" of Form S-1 dated March 17, 1998, as amended
April 24, 1998, and we agree with such statements, except that we are not in a
position to agree or disagree with Com21, Inc.'s statement that Com21, Inc. had
not consulted with Deloitte & Touche LLP regarding accounting principles prior
to retaining Deloitte & Touche LLP, nor are we in a position to agree or
disagree with Com21, Inc.'s statement that the change in independent auditors
was approved by resolution of the Board of Directors.
Very truly yours,
/s/ KPMG Peat Marwick LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Amendment No. 1 to Registration Statement No.
333-48107 of Com21, Inc. on Form S-1 of our report dated January 16, 1998 (March
10, 1998 as to the first through fifth paragraphs of Note 11; April 22, 1998 as
to the last two paragraphs of Note 11; and , 1998 as to the sixth
paragraph of Note 11) appearing in the Prospectus, which is part of the
Registration Statement.
We also consent to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.
San Jose, California
, 1998
---------------------------
The financial statements of Com21, Inc. included in the Prospectus have
been adjusted to give effect to the one-for-two reverse common and convertible
preferred stock split which is to occur upon the effectiveness of the
Registration Statement. The above consent is in the form which will be signed by
Deloitte & Touche LLP upon consummation of such reverse split, which is
described in the sixth paragraph of Note 11 to the financial statements, and
assuming that, from April 22, 1998 to the date of such reverse split, no other
events shall have occurred that would affect the accompanying financial
statements or notes thereto.
DELOITTE & TOUCHE LLP
San Jose, California
April 22, 1998
